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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
   FORM 10-Q
 
 (Mark One) þ                  Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
                      
For the Quarterly Period Ended March 31, 2005 OR o                   Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission File Number: 000-50798 Color Kinetics Incorporated  Delaware
(State or other jurisdiction of
incorporation or organization)
    
    04-3391805
(I.R.S. Employer
Identification No.)
 10 Milk Street, Suite 1100
Boston, Massachusetts 02108
(Address of principal executive offices) Telephone Number: (617) 423-9999
(Registrants telephone number, including area code) 
 Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days: Yes
þ     No o Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act): Yes o     No þ As of April 30, 2005,
there were 18,124,555 shares of the registrants Common Stock, $.001 par
value per share, outstanding.




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COLOR KINETICS INCORPORATED
FORM 10-Q
FOR THE THREE MONTHS ENDED MARCH 31, 2005
INDEX Page No.PART I. FINANCIAL INFORMATIONItem 1.
    
    Unaudited Condensed Consolidated Financial StatementsCondensed Consolidated Balance Sheets as of March 31, 2005 and December 31, 2004
    
    
    3Condensed Consolidated Statements of Income for the Three Months Ended March 31, 2005 and 2004
    
    
    4Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2005 and 2004
    
    
    5Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    10Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    17Item 4.
    
    Controls and Procedures
    
    
    17PART II. OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    17Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    18Item 3.
    
    Defaults Upon Senior Securities
    
    
    18Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    18Item 5.
    
    Other Information
    
    
    18Item 6.
    
    Exhibits
    
    
    18Signatures
    
    
    
    
    19Exhibit Index
    
    
    
    
    20EX-31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 - George G. MuellerEX-31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 - David K. JohnsonEX-32.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002EX-99.1 Form 8-K Filed April 29, 2005:  Change In Directors or Principal Officers
  2




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PART I. FINANCIAL INFORMATION 
 Item 1. Unaudited Condensed Consolidated Financial Statements Color Kinetics Incorporated 
 Condensed Consolidated Balance Sheets
 (In thousands, except per share data)
 March 31,
    
    
    December 31,2005
    
    
    2004ASSETSCURRENT ASSETS:Cash and equivalents
    
    $
    20,121
    
    
    $
    26,198Investments
    
    
    32,770
    
    
    
    29,022Restricted cash
    
    
    331
    
    
    
    604Accounts receivable, net of allowance for
doubtful accounts of approximately
$461 and $429 in 2005 and 2004, respectively
    
    
    5,882
    
    
    
    5,346Accounts receivable from related parties
    
    
    116
    
    
    
    31Inventory
    
    
    6,971
    
    
    
    4,730Prepaid expenses and other current assets
    
    
    1,593
    
    
    
    1,572Total current assets
    
    
    67,784
    
    
    
    67,503PROPERTY AND EQUIPMENTnet
    
    
    1,189
    
    
    
    1,147INVESTMENT IN JOINT VENTURE
    
    
    620
    
    
    
    557RESTRICTED CASHLong-term portion
    
    
    1,000
    
    
    
    1,000TOTAL ASSETS
    
    $
    70,593
    
    
    $
    70,207LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    1,946
    
    
    $
    1,681Accounts payable to related party
    
    
    41
    
    
    
    48Accrued expenses
    
    
    1,354
    
    
    
    1,458Accrued compensation
    
    
    903
    
    
    
    1,731Accrued restructuring
    
    
    400
    
    
    
    405Accrued warranty
    
    
    731
    
    
    
    860Deferred revenue
    
    
    441
    
    
    
    379Total current liabilities
    
    
    5,816
    
    
    
    6,562ACCRUED RESTRUCTURING
    
    
    532
    
    
    
    628COMMITMENTS AND CONTINGENCIESSTOCKHOLDERS EQUITY:Common stock, $0.001 par value
    
    
    18
    
    
    
    18Additional paid-in capital
    
    
    97,654
    
    
    
    97,059Accumulated other comprehensive loss
    
    
    (161
    )
    
    
    (122
    )Accumulated deficit
    
    
    (33,266
    )
    
    
    (33,938
    )Total stockholders equity
    
    
    64,245
    
    
    
    63,017TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    70,593
    
    
    $
    70,207
 See accompanying notes to unaudited condensed consolidated financial statements. 3




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Color Kinetics Incorporated 
 Condensed Consolidated
Statements of Income  (In thousands, except per share data)
 Three Months Ended March 31,2005
    
    
    2004REVENUES:Lighting systems (1)
    
    $
    9,639
    
    
    $
    6,758OEM and licensing
    
    
    1,877
    
    
    
    1,459Total revenues
    
    
    11,516
    
    
    
    8,217COST OF REVENUES:Lighting systems
    
    
    4,643
    
    
    
    3,366OEM and licensing
    
    
    901
    
    
    
    682Total cost of revenues
    
    
    5,544
    
    
    
    4,048GROSS PROFIT
    
    
    5,972
    
    
    
    4,169OPERATING EXPENSES:Selling and marketing
    
    
    2,420
    
    
    
    1,828Research and development
    
    
    1,032
    
    
    
    800General and administrative (2)
    
    
    2,227
    
    
    
    1,375Total operating expenses
    
    
    5,679
    
    
    
    4,003INCOME FROM OPERATIONS
    
    
    293
    
    
    
    166INTEREST INCOME
    
    
    339
    
    
    
    31EQUITY IN EARNINGS OF JOINT VENTURE
    
    
    40
    
    
    
    133NET INCOME
    
    $
    672
    
    
    $
    330EARNINGS PER SHARE:Basic
    
    $
    0.04
    
    
    $
    0.12Diluted
    
    $
    0.03
    
    
    $
    0.06WEIGHTED AVERAGE SHARES OUTSTANDING:Basic
    
    
    17,959
    
    
    
    2,804Diluted
    
    
    19,531
    
    
    
    5,191
   Three Months Ended March 31,2005
    
    
    2004(1) Includes revenues from a related party
    
    $
    1,265
    
    
    $
    880(2) Includes stock-based compensation
    
    $
    8
    
    
    $
    61
 See accompanying notes to unaudited condensed consolidated financial statements. 4




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Color Kinetics Incorporated 
 Condensed Consolidated
Statements of Cash Flows  (In thousands)
 Three Months Ended March 31,2005
    
    
    2004CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    672
    
    
    $
    330Adjustments to reconcile net income to cash from operating activities:Depreciation and amortization
    
    
    228
    
    
    
    182Loss on disposal of property and equipment
    
    
    3
    
    
    
    Stock-based compensation
    
    
    8
    
    
    
    61Equity in earnings of joint venture
    
    
    (40
    )
    
    
    (133
    )Changes in assets and liabilities:Accounts receivable
    
    
    (621
    )
    
    
    (463
    )Inventory
    
    
    (2,241
    )
    
    
    371Prepaid expenses and other current assets
    
    
    (21
    )
    
    
    (653
    )Restricted cash
    
    
    273
    
    
    
    145Accounts payable
    
    
    258
    
    
    
    110Accrued expenses
    
    
    (1,061
    )
    
    
    (262
    )Deferred revenue
    
    
    62
    
    
    
    190Accrued restructuring
    
    
    (101
    )
    
    
    (114
    )Cash flows from operating activities
    
    
    (2,581
    )
    
    
    (236
    )CASH FLOWS FROM INVESTING ACTIVITIES:Purchase of investments
    
    
    (3,810
    )
    
    
    Purchase of property and equipment
    
    
    (273
    )
    
    
    (143
    )Cash flows from investing activities
    
    
    (4,083
    )
    
    
    (143
    )CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from issuance of redeemable convertible preferred
stock - net of issuance costs
    
    
    
    
    
    
    13,003Proceeds from issuance of common stock
    
    
    587
    
    
    
    Cash flows from financing activities
    
    
    587
    
    
    
    13,003(DECREASE) INCREASE IN CASH AND EQUIVALENTS
    
    
    (6,077
    )
    
    
    12,624CASH AND EQUIVALENTSBeginning of period
    
    
    26,198
    
    
    
    5,686CASH AND EQUIVALENTSEnd of period
    
    $
    20,121
    
    
    $
    18,310
 See accompanying notes to unaudited condensed consolidated financial statements. 5




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Color Kinetics Incorporated 
 Notes to Unaudited Condensed Consolidated Financial Statements
 1. Nature of Business and Basis of Presentation Nature of Business Color Kinetics Incorporated, incorporated on September 15, 1997, is a pioneer
of intelligent solid-state lighting systems and technologies. We sell our products through our
direct sales force and network of manufacturers representatives and distributors. Basis of Presentation The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with the rules and regulations of the Securities and Exchange
Commission regarding interim financial reporting. Certain information and footnote disclosures
normally included in consolidated financial statements prepared in accordance with accounting
principles generally accepted in the United States of America (GAAP) have been condensed or
omitted in accordance with such rules and regulations. These condensed consolidated financial
statements should be read in conjunction with the annual audited consolidated financial statements
and notes thereto as of and for the year ended December 31, 2004 included in our Annual Report on
Form 10-K (File No. 000-50798) filed with the Securities and Exchange Commission. In the opinion of management, the accompanying unaudited condensed consolidated financial
statements reflect all adjustments, consisting only of normal recurring adjustments, necessary for
their fair presentation in conformity with GAAP. Our operating results for interim periods
presented are not necessarily indicative of the results that may be expected for the full year
ending December 31, 2005 or future periods. In light of recent views expressed by the Securities and Exchange Commission with respect to
accounting for auction rate securities (ARS), we have reclassified the accompanying December 31,
2004 condensed consolidated balance sheet so as to no longer report ARS as cash equivalents. We now
report ARS on our balance sheet as investments. The amount reclassified from cash and equivalents
to investments at December 31, 2004 was $3.0 million. The reclassifications to the prior period
financial statements did not affect our key financial indicators such as total cash and
investments, total assets, stockholders equity, revenues, income from operations, net income,
diluted earnings per share or cash flows from operating activities. In addition, we do not believe
a readers ability to understand other key aspects of our financial position or operations that
might be pertinent to an investment decision has been affected as a result of the
reclassifications. As a result, we believe the effects of these reclassifications are not material
to our previously issued consolidated financial statements. 2. Revenue Recognition We recognize revenues in connection with sales of our lighting systems and OEM products when all of
the following conditions have been met: (1) evidence exists of an arrangement with the customer,
typically consisting of a purchase order or contract; (2) our products have been delivered and risk
of loss has passed to the customer, which typically occurs when a product is shipped under our
customary terms, generally FOB shipping point; (3) the amount of revenue to which we are entitled
is fixed or determinable; and (4) we believe it is probable that we will be able to collect the
amount due to us from our customer. To the extent that one or more of these conditions is not
present, we delay recognition of revenue until all the conditions are present. We classify the
amount of freight that is invoiced to our customers as revenue, with the corresponding cost
classified as cost of revenues. We offer our lighting systems customers limited rights of return, which typically provide that
within 30 days of shipment products in unopened and saleable condition may, at our discretion, be
returned to us for refund, net of a 15% restocking fee. We also provide certain distributors with
limited stock rotation rights. Based on historical experience, we provide for potential returns
from customers through a sales return reserve. The reserve is evaluated and adjusted as conditions
warrant. An allowance for doubtful accounts is provided to reserve for credit losses as a result of
customers inability to pay. 3. Stock-Based Compensation We apply the intrinsic value method of accounting for stock options granted to employees, as well
as for common stock issued under our 2004 Employee Stock Purchase Plan (ESPP). We apply the fair
value method for stock options and awards granted to non-employees. In accordance with the intrinsic value method, we determine the compensation associated with stock
awards to employees as the difference, if any, between the fair value of the underlying common
stock on the date compensation is measured and the 6




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price an employee must pay to exercise the award. The measurement date for employee awards is
generally the date of grant. Under the fair value method, we determine the compensation associated
with stock awards to non-employees based on the estimated fair value of the award, measured using
either current market data or an established option pricing model. The measurement date for
non-employee awards is generally the date the performance of services is complete. Had we used the fair value method to measure compensation related to stock awards to employees,
with the measurement date generally being the date of grant, pro forma net income and pro forma
earnings per share would have been as follows (in thousands, except per share data): Three Months Ended March 31,2005
    
    
    2004Net income, as reported
    
    $
    672
    
    
    $
    330Add: stock-based compensation determined under
intrinsic value method for employee awards
    
    
    8
    
    
    
    Less: pro forma compensation expense related to
the ESPP
    
    
    (9
    )
    
    
    Less: pro forma stock-based compensation
expense related to option plans
    
    
    (366
    )
    
    
    (112
    )Pro forma net income
    
    $
    305
    
    
    $
    218Basic earnings per shareAs reported
    
    $
    0.04
    
    
    $
    0.12Pro forma
    
    $
    0.02
    
    
    $
    0.08Diluted earnings per shareAs reported
    
    $
    0.03
    
    
    $
    0.06Pro forma
    
    $
    0.02
    
    
    $
    0.04
 The fair value of options was estimated as of the date of grant using the Black-Scholes option
pricing model with the following weighted average assumptions: Three Months Ended March 31,2005
    
    
    2004ESPP (1):Risk-free interest rate
    
    
    2
    %
    
    
    Volatility
    
    
    69
    %
    
    
    Dividend yield
    
    
    0
    %
    
    
    Expected life in years
    
    
    0.6
    
    
    
    Stock Options:Risk-free interest rate
    
    
    3.7
    %
    
    
    3.1
    %Volatility
    
    
    64
    %
    
    
    0
    %Dividend yield
    
    
    0
    %
    
    
    0
    %Expected life in years
    
    
    4
    
    
    
    4
   (1)
    
    The ESPP was established in June 2004; accordingly, valuation factors are not applicable
prior to that date. The weighted average fair value of options granted during the three months ended March 31, 2005 and
2004 was $6.36 and $0.76, respectively. 7




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In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards No. 123R, Share-Based Payment(SFAS No. 123R). This Statement is a revision
of SFAS No. 123, Accounting for Stock-Based Compensation,and supersedes Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees,and its related implementation
guidance. SFAS No. 123R focuses primarily on accounting for transactions in which an entity
obtains employee services in share-based payment transactions. The Statement requires entities to
recognize compensation expense for awards of equity instruments to employees based on the
grant-date fair value of those awards (with limited exceptions). SFAS No. 123R is effective for the
first quarter of the first annual reporting period that begins after June 15, 2005. We are currently evaluating the two methods of adoption allowed by SFAS No. 123R: the
modified-prospective transition method and the modified-retrospective transition method. We
anticipate that adoption of SFAS No. 123R under either method will significantly increase the
amount of our stock-based compensation expense included in net earnings. In addition, SFAS No. 123R
requires that excess tax benefits related to stock-based compensation expense be reported as a
financing cash inflow rather than as a reduction of taxes paid in cash flow from operations. 4. Inventory Inventory is stated at the lower of cost (first-in, first-out method) or market and consists of the
following (in thousands): March 31,
    
    
    December 31,2005
    
    
    2004Finished goods
    
    $
    6,415
    
    
    $
    4,270Raw material components
    
    
    556
    
    
    
    460Total
    
    $
    6,971
    
    
    $
    4,730
 5. Warranty Reserve Our products are generally warranted against defects for 12 months following purchase. Reserves for
potential warranty claims are provided at the time of revenue recognition based on historical
claims experience, repair costs and current sales levels. Activity within the reserve was as
follows in the three months ended March 31, 2005 and 2004 (in thousands): 2005
    
    
    2004Balance, beginning of period
    
    $
    860
    
    
    $
    404Provisions in cost of revenues
    
    
    54
    
    
    
    84Expenditures
    
    
    (183
    )
    
    
    (7
    )Balance, end of period
    
    $
    731
    
    
    $
    481
 6. Earnings per Share Basic earnings per share is calculated using the weighted average number of common shares
outstanding. Diluted earnings per share is computed on the basis of the weighted average number of
common shares outstanding plus the effect of outstanding stock options, stock warrants, and
preferred stock using the treasury stock method. When such shares would be dilutive to the periods
presented, preferred shares converted to common shares in connection with our initial public
offering on June 22, 2004 were included in the weighted average computations of diluted earnings
per share until the date of actual conversion on an if-converted basis and in the weighted average
computations of basic earnings per share from the date of such conversion. For the three months ended March 31, 2005, outstanding stock options to purchase approximately
525,000 shares of common stock were excluded from the calculation of diluted earnings per share,
because including these options would be anti-dilutive. For the three months ended March 31, 2004,
outstanding stock options and potential shares from preferred stock conversions of approximately
7,600,000 shares were excluded from the calculation of diluted earnings per share, because
including these shares would be anti-dilutive. A reconciliation of shares used in the computation
of basic earnings per share and diluted earnings per share is as follows (in thousands): 8




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Three Months Ended March 31,2005
    
    
    2004Weighted average shares for basic computation
    
    
    17,959
    
    
    
    2,804Potential common shares from:Options
    
    
    1,132
    
    
    
    515Warrants
    
    
    440
    
    
    
    307Redeemable convertible preferred stock
    
    
    
    
    
    
    1,565Weighted average shares for diluted computation
    
    
    19,531
    
    
    
    5,191
 On a pro forma basis, earnings per basic share for the three months ended March 31, 2004 would have
been $0.02 per share if the conversion of preferred stock to common stock in connection with our
initial public offering had occurred at the beginning of the period in which such preferred shares
were outstanding. 7. Segment Information We operate in two distinct segments. These segments are identified by reference to the manner in
which our chief operating decision maker views the business, which is generally by the type of
customer each segment serves. The first segment is Lighting Systems, through which we offer
intelligent solid-state lighting systems under the Color Kinetics brand for installation in
lighting projects where their use has typically been specified by a designer or architect. The
second segment is OEM and Licensing, through which we offer a standard line of intelligent
solid-state lighting modules, custom components and other products that can be incorporated by
manufacturers in products sold under their own brands. Included also in the OEM and Licensing
segment is the licensing of our technology. Direct contribution margin includes direct costs normally associated with costs of good sold
determined using GAAP and additional direct costs, such as direct selling expenses, included in
other expense categories contained in the accompanying statements of operations. Based on available
information, we do not generate information regarding indirect costs by segment or assets or cash
flows by segment, and hence, such information is not provided below. The information set forth
below is prepared in accordance with the accounting principles referred to in Note 1, with the
exception that direct costs include some expenses normally allocated to different expense
categories in our consolidated statement of operations. There are no inter-segment transactions. The following tables set forth revenue and contribution margin from our reportable segments on an
interim basis (in thousands): Three Months Ended March 31, 2005
    
    
    2004Lighting
    
    
    OEM and
    
    
    
    
    
    
    Lighting
    
    
    OEM andSystems
    
    
    Licensing
    
    
    Total
    
    
    Systems
    
    
    Licensing
    
    
    TotalRevenues
    
    $
    9,639
    
    
    $
    1,877
    
    
    $
    11,516
    
    
    $
    6,758
    
    
    $
    1,459
    
    
    $
    8,217Cost of revenues
    
    
    4,643
    
    
    
    901
    
    
    
    5,544
    
    
    
    3,366
    
    
    
    682
    
    
    
    4,048Gross profit
    
    
    4,996
    
    
    
    976
    
    
    
    5,972
    
    
    
    3,392
    
    
    
    777
    
    
    
    4,169Other direct costs
    
    
    2,423
    
    
    
    246
    
    
    
    2,669
    
    
    
    1,759
    
    
    
    217
    
    
    
    1,976Direct contribution margin
    
    $
    2,573
    
    
    $
    730
    
    
    
    3,303
    
    
    $
    1,633
    
    
    $
    560
    
    
    
    2,193Reconciling items to income from
operations:Unallocated selling and marketing
    
    
    
    
    
    
    
    
    
    
    369
    
    
    
    
    
    
    
    
    
    
    
    292Unallocated research and development
    
    
    
    
    
    
    
    
    
    
    414
    
    
    
    
    
    
    
    
    
    
    
    360Unallocated general and administrative
    
    
    
    
    
    
    
    
    
    
    2,227
    
    
    
    
    
    
    
    
    
    
    
    1,375Income from operations
    
    
    
    
    
    
    
    
    
    $
    293
    
    
    
    
    
    
    
    
    
    
    $
    166
 8. Comprehensive Income 9




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Comprehensive income includes foreign currency translation gains and losses and unrealized gains
and losses on investments that have been excluded from net income and reflected instead as a
component of stockholders equity. The following table sets forth the calculation of comprehensive
income on an interim basis (in thousands): Three Months Ended March 31,2005
    
    
    2004Net income
    
    $
    672
    
    
    $
    330Foreign currency translation adjustments
    
    
    23
    
    
    
    18Unrealized holding losses on investments
    
    
    (62
    )
    
    
    Total comprehensive income
    
    $
    633
    
    
    $
    348
 9. Contingencies 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, 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 alleged that certain products of Super Vision,
including solid-state architectural lighting fixtures, pool lights and spa lights, infringes four
of the patents at issue in Super Visions declaratory judgment action; this complaint has been
amended to assert infringement of a fifth patent. Super Visions lawsuit in Florida was transferred by the court to the United States District Court
for the District of Massachusetts. Discovery has closed. Color Kinetics has moved for summary
judgment that its patents are infringed, are valid and are enforceable, and also moved for summary
judgment dismissing Super Visions claims for interference with prospective business relationships,
trade disparagement and defamation. Super Vision has moved for summary judgment of invalidity and
unenforceability. On April 19, 2005, Color Kinetics was granted its motion for summary judgment
regarding Super Visions claims against us for interference with prospective business
relationships, trade disparagement and defamation. 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 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 we have infringed the
High End patent and seeking damages of $10.5 million. Super Visions High End patent lawsuit was
subsequently transferred from Florida to the federal court in Massachusetts. 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. TIR Systems, Ltd. In December 2003, we filed a lawsuit against TIR Systems Ltd, a Canadian corporation, in the United
States District Court for the District of Massachusetts. In this litigation, we alleged that
certain products of TIR infringe three patents of Color Kinetics. The Complaint has been amended to
add a fourth patent. TIR has filed counterclaims seeking declarations that it does not infringe
and that the patents are invalid. We believe that these claims by TIR are without merit. The
present scheduling order specifies that all discovery is to be completed by February 2006 and
dispositive motions filed by April 2006. 
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations Cautionary Statements The Private Securities Litigation Reform Act of 1995 contains certain safe harbor provisions
regarding forward-looking statements. This Form 10-Q contains, and other information provided by
Color Kinetics Incorporated or statements made by our directors, officers or employees from time to
time may contain, forward-looking statements and information, which involve risks and
uncertainties. Actual future results may differ materially. Forward-looking statements include
statements concerning 10




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plans, objectives, goals, strategies, expectations, intentions, projections, developments, future
events, performance or products, underlying assumptions and other statements which are other than
statements of historical facts. In some cases, forward-looking statements are identified by
terminology such as may, will, should, expects, intends, plans, anticipates,
estimates, believes, contemplates, predicts, projects, continue and other similar
terminology or the negative of these terms. All such forward-looking statements, whether written or
oral, are expressly qualified by any cautionary statements which may accompany the forward-looking
statements, and by the cautionary statements set forth under the heading Factors That May Affect
Future Results in our Annual Report on Form 10-K for the year ended December 31, 2004 ,. Those
factors include, without limitation:  
    Our limited history of profitability, and the difficulty in evaluating the
likelihood of maintaining profitability;
    Whether there will be market acceptance of solid-state lighting in general, and
our solid-state lighting systems in particular;
    Whether advances in LED technology will continue;
    Our ability to respond effectively as new lighting technologies and market trends emerge;
    Incurrence of substantial costs or losses as a result of litigation or other
proceedings relating to patent and other intellectual property rights;
    Our ability to obtain and maintain patent protection for our technology and to
otherwise protect our intellectual property;
    Availability of critical components that we currently purchase from a small number of suppliers;
    Failure of our manufacturing partners to meet our requirements for quality, quantity and timeliness;
    Inability to increase production capacity for our products in a timely manner;
    Unavailability of one of our facilities;
    Whether demand for our intelligent white light products in the general lighting market will emerge;
    Our ability to compete effectively;
    Additional risks and volatility beyond those we currently face associated with
expansion of our OEM business;
    Our ability to manage our growth effectively;
    Significant costs to evaluate our internal control over financial reporting, and
our ability to avoid significant deficiencies or material weaknesses in our
internal controls;
    Changes in the accounting treatment of stock options;
    The loss of services of any members of our key management team;
    Our limited experience conducting business internationally;
    A reliance on a joint venture in Japan, Color Kinetics Japan, to distribute products in Japan;
    Defects in our products;
    Ability to obtain additional capital as needed;
    Volatility of the market price for our common stock;
    Securities class action litigation due to future stock price volatility; and
    Anti-takeover provisions in our charter documents and Delaware law which could
prevent or delay a change in control. You are urged to carefully consider those factors. In addition, there may be other factors which
are unknown at this time. We undertake no obligation to update any forward-looking statements we
make. Overview We design, market and license intelligent solid-state lighting systems. We outsource the
manufacture of our systems to contract manufacturers, primarily in Asia. We operate in two lines of
business:  
    Lighting systems:we offer intelligent solid-state lighting systems under the Color
Kinetics brand for installation in lighting projects where their use has typically been
specified by a designer or architect.
    OEM and licensing:we offer a standard line of intelligent solid-state lighting modules,
custom and basic components and other products that can be incorporated by manufacturers in
products sold under their own brands. We also license our technology. 11




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We sell our lighting systems and OEM products through our direct sales force and through
distributors and manufacturers representatives in North America, Asia, Europe, Latin America and
the Middle East. Licensing arrangements are handled through our direct sales force, often with the
involvement of our senior management. In a typical lighting systems sale, our direct sales force, in cooperation with a distributor or
manufacturers representative (or, outside North America, a dealer/distributor or VAR), works with
a lighting designer, architect or other specifier to have our system designed in to a particular
new construction or renovation project. Typically, this is followed by a bid process in which
pricing and other terms are negotiated with the project owner or owners representative. When
construction on the project has reached the appropriate stage, our product is shipped, typically to
an electrical equipment or lighting equipment distributor, which purchases the system from us and,
in turn, sells it to the project owner or its electrical contractor for installation. We refer smaller North American lighting systems orders (generally those having a value less than
$10,000), as well as all orders for specifically defined regions of the Canadian marketplace, to
our distributor Color Kinetics Distribution, Inc., (CKDI) which is not affiliated with Color
Kinetics. We sell our OEM products primarily through our direct sales force and, in certain cases,
manufacturers representatives or distributors with strong industry relationships and expertise in
a particular vertical market. In a typical OEM sales cycle, our direct sales personnel first work
with a manufacturer to qualify our systems for incorporation into one or more of its products.
Initially, the manufacturer may purchase only small quantities of our system. Once a product
incorporating our system is introduced and successfully marketed by our OEM customer, purchases of
our OEM products in larger volumes may occur. Our products are distributed in Japan by Color Kinetics Japan Incorporated (CK Japan), a joint
venture in which we hold a 50% equity interest. An unrelated third party holds the other 50%
interest. The terms of our distribution agreement with CK Japan are substantially similar to those
that we employ with unaffiliated distributors. We account for our investment in CK Japan using the
equity method of accounting, whereby we record our proportionate share of the income or loss earned
by the joint venture. We record revenue from sales to CK Japan as revenue from a related party. We
eliminate our profit associated with inventory we have sold to CK Japan that is held by it at the
end of the period. Because CK Japan uses the Japanese yen as its functional currency, we translate
the results of operations of CK Japan into United States dollars using the average rates of
exchange during the reporting periods. We also record on our balance sheet translation adjustments
reflecting the changes in CK Japans equity measured in dollars resulting from changes in exchange
rates. Description of Our Revenues, Costs and Expenses Our lighting systems revenues include amounts from the sale of our intelligent solid-state lighting
systems as well as any fees from our customers for applications engineering, integration or
technical support services we provide to assist them in specifying, designing, installing and
operating our systems. Our OEM and licensing revenues include amounts from the sale of our OEM products, license fees and
related fees attributable to the licensing of our proprietary technology, and fees for any
engineering support services that are requested by our OEM and licensing customers. Our cost of lighting systems revenues and cost of OEM and license revenues consist primarily of the
cost of the lighting products sold, including amounts paid to our contract manufacturers, the costs
of any components that we provide, other direct and indirect manufacturing support costs, shipping
and handling, tooling and provisions for product warranty, scrap and inventory obsolescence, as
well as overhead cost allocated to these activities. It may also include an allocation of salaries
and related benefits of engineering personnel when they provide engineering support services for
which we charge fees. Our selling and marketing expenses consist primarily of salaries, commissions, travel expense and
related benefits of personnel engaged in sales, product management and marketing activities,
commissions paid to our manufacturers representatives, costs of marketing programs and promotional
materials, trade show expenses and overhead cost related to these activities. Our research and development expenses consist primarily of salaries, bonuses and related benefits
of personnel engaged in research and development and product quality activities, out-of-pocket
product development costs, travel expenses and overhead cost related to these activities. Research
and development expenses are expensed as incurred. Our general and administrative expenses consist primarily of salaries, bonuses and related benefits
of personnel engaged in corporate administration, finance, human resources, information systems and
legal functions, outside legal expenses related to patent prosecution, patent litigation,
trademarks and general corporate matters, professional fees in connection with complying 12




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with the Sarbanes-Oxley Act of 2002, bad debt expense, other general corporate expenditures, and
overhead cost related to these activities. Critical Accounting Estimates We make estimates and assumptions in the preparation of our consolidated financial statements that
affect the reported amounts of assets and liabilities, revenues and expenses, and related
disclosures of contingent assets and liabilities. We base our estimates on historical experience
and various other assumptions that we believe to be reasonable under the circumstances. However,
actual results may differ from these estimates. We have identified the following critical accounting policies that require the use of significant
judgments and estimates in the preparation of our consolidated financial statements. This listing
is not a comprehensive list of all of our accounting policies. For further information regarding
the application of these and other accounting policies, see Note 1 in the Notes to Consolidated
Financial Statements included in Item 8 of our Annual Report on Form 10-K for the year ended
December 31, 2004. Revenue Recognition.We recognize revenues in connection with sales of our lighting systems and OEM
products when all of the following conditions have been met:  
    evidence exists of an arrangement with the customer, typically consisting of a purchase
order;
    our products have been delivered and risk of loss has passed to the customer, which
typically occurs when a product is shipped under our customary terms, generally FOB
shipping point;
    the amount of revenue to which we are entitled is fixed or determinable; and
    we believe it is probable that we will be able to collect the amount due us from our customer. To the extent that one or more of these conditions is not present, we delay recognition of revenue
until all the conditions are present. We classify the amount of freight invoiced to the customer as
revenue, with the corresponding cost classified as cost of revenues. We offer our lighting systems customers limited rights of return, which typically provide that
within 30 days of shipment products in unopened and saleable condition may, at our discretion, be
returned to us for refund, net of a 15% restocking fee. We also provide certain distributors with
limited stock rotation rights. Based on historical experience, we provide for potential returns
from customers through a sales return reserve. The reserve is evaluated and adjusted as conditions
warrant. Allowance for Doubtful Accounts.We estimate the uncollectibility of our accounts receivable and we
maintain allowances for estimated losses. This allowance is established using estimates that
management makes based on factors such as the composition of the accounts receivable aging,
historical bad debts, changes in payment patterns, customer creditworthiness and current economic
trends. If we used different estimates, or if the financial condition of our customers were to
deteriorate, resulting in an impairment of their ability to make payments, additional provisions
for doubtful accounts would be required and would increase bad debt expense. Product Warranty.We generally warrant our products against defects in materials and workmanship
for one year after sale and provide for estimated future warranty costs at the time revenues are
recognized. Warranty expense is based on historical claims experience, repair costs, and current
sales levels, as well as various other assumptions that we believe to be reasonable under the
circumstances. Should actual product failure rates differ from our estimates, revisions to the
estimated warranty liability would be required. Inventory Reserves.We state our inventories at the lower of cost or market, computed on a standard
cost basis, which approximates actual cost on a first-in, first-out basis, with market being
determined as the lower of replacement cost or net realizable value. We provide reserves equal to
the difference between the cost of the inventory and the estimated market value of our inventory
using estimates of their net realizable value that are based upon our assumptions about future
demand and market conditions. If actual market conditions are less favorable than those expected by
management, additional inventory reserves may be required. Accounting for Income Taxes.We account for income taxes using a liability approach. Our deferred
tax assets consist primarily of net operating loss and credit carryforwards, for which we have
provided a full valuation allowance, due to our limited 13




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operating history and the unlikelihood that we would realize those assets based on that history. To
the extent that we begin to generate significant taxable income, such that it becomes more likely
than not that these assets will be recoverable, we will reverse those valuation allowances through
income. To the extent that we are unable to operate profitably, our tax assets could expire
unutilized. The occurrence of certain events, such as significant changes in ownership interests in
Color Kinetics, could result in limitations on the amount of those assets that could be utilized in
any given year. Stock-Based Compensation.We have historically used the intrinsic value method to account for
stock-based compensation provided to employees and the fair value method to account for stock-based
compensation to non-employees, such as consultants and members of our advisory board. Under the
intrinsic value method, compensation associated with awards of stock or stock options is measured
as the difference between the price the employee must pay to exercise the award and the fair value
of our common stock on the date compensation is measured, which is generally the date of the award.
To date, most awards to employees have had exercise prices equal to the fair value of the common
stock on the date of award, and as a result no material compensation charges have been recorded for
awards to employees. Under the fair value method, compensation is measured using the estimated fair
value of an award, established either through the estimated value of the share of stock or, in the
case of options, through the use of an option pricing model, such as the Black-Scholes option
pricing model. We disclose the difference between the two methods in our notes to our consolidated
financial statements, and those differences have been significant. In addition, use of an option
pricing model invariably involves assumptions about future events, such as the volatility of the
underlying stock and the estimated life of an award. These assumptions are difficult to predict and
could generally result in changing levels of compensation expense for these awards in our financial
statements. In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards No. 123R, Share-Based Payment(SFAS No. 123R). This Statement is a revision
of SFAS No. 123, Accounting for Stock-Based Compensation,and supersedes Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees,and its related implementation
guidance. SFAS No. 123R focuses primarily on accounting for transactions in which an entity
obtains employee services in share-based payment transactions. The Statement requires entities to
recognize compensation expense for awards of equity instruments to employees based on the
grant-date fair value of those awards (with limited exceptions). SFAS No. 123R is effective for the
first quarter of the first annual reporting period that begins after June 15, 2005. We are currently evaluating the two methods of adoption allowed by SFAS No. 123R: the
modified-prospective transition method and the modified-retrospective transition method. We
anticipate that adoption of SFAS No. 123R under either method will significantly increase the
amount of our stock-based compensation expense. In addition, SFAS No. 123R requires that excess tax
benefits related to stock-based compensation expense be reported as a financing cash inflow rather
than as a reduction of taxes paid in cash flow from operations. Results of Operations The following table sets forth certain income and expense items as a percentage of total revenues
(or, in the case of our cost of lighting systems revenues and cost of OEM and licensing revenues,
as a percentage of the related revenues): Three Months EndedMarch 31,2005
    
    
    2004Revenues:Lighting systems
    
    
    84
    %
    
    
    82
    %OEM and licensing
    
    
    16
    
    
    
    18Total revenues
    
    
    100
    
    
    
    100Cost of revenues:Cost of lighting systems, as a percentage of lighting systems revenues
    
    
    48
    
    
    
    50Cost of OEM and licensing, as a percentage of OEM and licensing
revenues
    
    
    48
    
    
    
    47Total cost of revenues
    
    
    48
    
    
    
    49Gross profit
    
    
    52
    
    
    
    51Operating expenses:Selling and marketing
    
    
    21
    
    
    
    22Research and development
    
    
    9
    
    
    
    10General and administrative
    
    
    19
    
    
    
    17Total operating expenses
    
    
    49
    
    
    
    49Income from operations
    
    
    3
    
    
    
    2Interest income
    
    
    3
    
    
    
    Equity in earnings of joint venture
    
    
    
    
    
    
    2Net income
    
    
    6
    %
    
    
    4
    %
 14




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Revenues.Total revenues increased 40%, from $8.2 million in the first quarter of 2004 to $11.5
million in the first quarter of 2005. Lighting systems revenues increased 43%, from $6.8 million in the first quarter of 2004 to $9.6
million in the first quarter of 2005. Lighting systems revenues in the United States of America
and Canada increased 30%, from $4.3 million in the first quarter of 2004 to $5.5 million in the
first quarter of 2005. Lighting systems revenues in markets outside the United States of America
and Canada increased 64%, from $2.5 million in the first quarter of 2004 to $4.1 million in the
first quarter of 2004. The increase in lighting systems revenues for the first quarter of 2005 was primarily attributable
to increased worldwide market acceptance of our intelligent solid-state lighting systems, the
addition of new products to our product line in prior periods, and our ongoing efforts to expand
and support our network of North American manufacturers representatives and international
distributors. Sales in the Japanese market to CK Japan increased 44% to $1.3 million in the first
quarter of 2005 from $880,000 in the first quarter of 2004. Our OEM and licensing revenues increased 29%, from $1.5 million in the first quarter of 2004 to
$1.9 million in the first quarter of 2005. The increase in the first quarter of 2005 as compared to
the same period in 2004 was primarily attributable to increased product sales to an individual OEM
customer in the special event field, which accounted for $957,000 of first quarter 2005 revenues,
compared to $243,000 in the first quarter of 2004. Sales of our OEM pool products by an individual
OEM customer were $440,000 and $512,000 for the first quarters of 2005 and 2004, respectively. We
had agreements with 30 and 24 active OEM and licensing customers at March 31, 2005 and 2004,
respectively.
Revenues derived from sales of lighting systems products to CK Japan represented 11% of total
revenues in both the first quarter of 2005 and 2004. Revenues derived from sales of lighting systems products to CKDI represented 13% of total revenues
in both the first quarter of 2005 and 2004. We expect lighting systems revenues to increase during the remainder of 2005, based on our
expectation of further increases in worldwide market acceptance of our intelligent solid-state
lighting systems, as well as the addition of new products to our product line. To accelerate this
revenue growth, we have planned a worldwide expansion of our sales force and distribution channels.
We expect revenues for our OEM and licensing business unit from non-pool products to increase in
future periods as a result of having an increasing number of OEM and licensing customers who have
commenced, or are expected to commence during the remainder of 2005, commercial shipment of
products incorporating our technologies. For the remainder of 2005, we expect revenues from our
pool customer to decline primarily as a result of a change in our business arrangement with this
customer. For the majority of 2004, our customer purchased the entire pool light from us. We
currently have a new arrangement where our customer buys select components, which it assembles into
a completed pool light, and pays us a defined royalty rate. Though we will receive less revenue per
pool light sold by our customer, our margins are expected to be better, and we believe our customer
will be more competitively positioned versus other pool lighting alternatives. There can be no
assurance that we will be successful in achieving our forecasts and plans or that other factors
will not negatively impact our revenues. Gross Profit.Gross profit increased from $4.2 million in the first quarter of 2004 to $6.0 million
in the first quarter of 2005. The dollar increase was attributable primarily to increased sales and
to improved overall profit margins, partially offset by lower licensing revenues in the 2005
quarter. Gross profit as a percentage of revenues, or gross margin,
increased from 50.7% in the first
quarter of 2004 to 51.9% in the first quarter of 2005. Gross margin from lighting
systems increased from 50.2% in the first quarter of 2004 to 51.9% in
the first quarter of 2005. The increase in the first quarter of 2005 compared to the same period in
2004 was primarily attributable to reduced raw materials and product costs, an overall more
favorable product mix, and reduced operating costs associated with improved product quality. Gross
margin from lighting systems may vary from period to period depending on a number of factors, most
notably product mix, changes in material costs, and the timing of larger deals which, on average,
tend to have lower gross margins. Gross margin from our OEM and
licensing business decreased from 53.3% in the first quarter of 2004 to
52.0% in the first quarter of 2005. The decrease in gross margin was primarily attributable to shifts
in revenue mix. Licensing revenues in the first quarter of 2004 included a large upfront license
payment received in connection with a new licensing agreement signed in that period. Gross margin
for our OEM and licensing business may vary in future periods depending on the mix of OEM product
revenues and the relative percentage of licensing revenues. 15




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Selling and Marketing Expenses.Selling and marketing expenses increased 32% from $1.8 million in
the first quarter of 2004 to $2.4 million in the first quarter of 2005. The increase in dollar
amount was primarily attributable to an increase in payroll-related expenses of $348,000 due to
expansion of our sales force and hiring of additional product management personnel. Marketing
spending on trade shows and other related marketing programs increased by $116,000. As a
percentage of total revenues, sales and marketing expenses decreased from 22% in the first quarter
of 2004 to 21% in the first quarter of 2005. The decline in selling and marketing expense as a
percentage of revenues was attributable primarily to our revenue growth. We plan to further expand
our sales force and product management team with the hiring of additional personnel during 2005.
We expect our selling and marketing expenses to increase in dollar amount in subsequent periods. Research and Development Expenses.Research and development expenses increased 29%, from $800,000
in the first quarter of 2004 to $1.0 million in the first quarter of 2005. The increase was
primarily attributable to increases in our research and development headcount based both in our
Boston and China offices, as well as to increased spending on materials and supplies for new
product development and testing. As a percentage of total revenues, research and development
expenses decreased from 10% in the first quarter of 2004 to 9% in the first quarter of 2005. The
decrease in research and development expenses as a percentage of revenues was attributable
primarily to our revenue growth. We expect our research and development expenses to increase in
dollar amount in subsequent periods, as we devote additional resources to developing new products
and technologies and supporting scheduled new product introductions during the remainder of 2005. General and Administrative Expenses.General and administrative expenses increased 62%, from $1.4
million in the first quarter of 2004 to $2.2 million in the first quarter of 2005. Outside legal
expenses increased by $449,000, primarily as a result of increased activity in our pending
litigation, and, to a lesser extent, increased patent prosecution activities and increased
securities law services. Other costs related to being a public company, including outside
professional fees related to compliance with the Sarbanes-Oxley Act of 2002, accounted for $147,000
of the increase. The remaining increase in general and administrative expenses for the three month
period is primarily the result of increased personnel-related costs to support overall growth in
the business. The timing and extent of ongoing litigation activity related to defense of our
intellectual property rights could cause general and administrative expenses to increase or
decrease in future quarters. Interest Income.Interest income increased from $31,000 in the first quarter of 2004 to $339,000 in
the first quarter of 2005 due to higher average cash and cash equivalent balances as well as
improved investment yields in 2005. Equity in Earnings of Joint Venture.Equity in earnings of joint venture decreased from a $133,000
gain in the first quarter of 2004 to a $40,000 gain in the first quarter of 2005. The decrease was
due to a decrease in net income earned by CK Japan in the first quarter of 2005 compared to the
first quarter of 2004. The decrease in CK Japans net income was primarily attributable to higher
operating costs incurred by CK Japan in the 2005 period.. Provision for Income Taxes.We recorded no provision for income tax in either 2004 or 2005 due to
our net loss carryforward position. At December 31, 2004, we had net loss carryforwards available
to offset future taxable income of $26.8 million and federal research and development tax credit
carryforwards available to reduce future taxes payable of $656,000. Should it become more likely
than not that these assets will be recovered, we would remove the valuation allowance provided
against our net deferred tax assets, which would have the effect of reducing or eliminating our
provision for income tax and possibly creating a tax benefit to earnings. Liquidity and Capital Resources At March 31, 2005, we had $52.9 million in cash and equivalents and investments, representing a
decrease of $2.3 million compared to our $55.2 million balance of cash and equivalents and
investments at December 31, 2004. During the first three months of 2005, we used $2.6 million of cash for operating activities. The
increase in cash used for operating activities during the first quarter of 2005 as compared to the
same period in the prior year was primarily due to increased inventory purchases to meet expected
demand of certain products, as well as changes in our other operating assets and liabilities.
Net cash used in investing activities was $4.1 million during the first quarter of 2005, reflecting
$3.8 million used for purchase of investments, with the remaining $273,000 reflecting purchases of
property and equipment, primarily tooling and test equipment related to our product development
efforts and, to a lesser degree, computers for newly hired employees. Investments are composed of
a certificate of deposit from a bank, state and municipal obligations, U.S. Treasury obligations,
and investment-grade commercial paper. 16




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##### Table of Contents



Net cash provided by financing activities was $587,000 for the first quarter of 2005, attributable
to $434,000 in proceeds from the exercise of stock options and $153,000 of proceeds from the
issuance of common stock for our ESPP. For the first quarter of 2004, financing activities provided
cash of $13.0 million from issuance of redeemable convertible preferred stock, which was
subsequently converted to common stock in connection with our initial public offering in June 2004.
Our bank line of credit expired unused in September 2004. We presently have no plans to obtain
additional bank financing. We anticipate that our cash and equivalents and investments at March 31, 2005 will be sufficient to
fund our foreseeable cash requirements for at least the next twelve months. 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk Market risk to which we are subject consists of the risk of loss arising from adverse changes in
market interest rates and foreign exchange rates. Our joint venture, CK Japan, has entered into forward currency contracts to hedge anticipated
dollar denominated purchases of product from us. These contracts consist solely of forward
contracts to acquire dollars at a fixed yen rate. These contracts are reflected on the balance
sheet of CK Japan at current fair value and cover a notional amount of $6.9 million, settling at
various dates through 2010. Our exposure to these contracts is limited to the impact on our
proportional share of the income or loss of CK Japan. We have provided no guarantees with respect
to CK Japan, and as a result the maximum loss we would record with respect to our investment would
be the carrying value of that investment at any point in time. At March 31, 2005, our investment in
CK Japan was carried at $620,000. 
 Item 4. Controls and Procedures (a) Evaluation of disclosure controls and procedures. Our management, including our Chief Executive Officer and our Chief Financial Officer, carried out
an evaluation of the effectiveness of our disclosure controls and procedures as of the end the
period covered by this quarterly report. Based on this evaluation, our Chief Executive Officer and
Chief Financial Officer concluded that our disclosure controls and procedures were effective to
provide a reasonable level of assurance that the information required to be disclosed in the
reports filed or submitted by us under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the requisite time periods. (b) Changes in internal control over financial reporting. There were no changes in our internal control over financial reporting that occurred during the
last fiscal quarter that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting. 
 PART II. OTHER INFORMATION 
 Item 1. 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, 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 alleged that certain products of Super Vision,
including solid-state architectural lighting fixtures, pool lights and spa lights, infringes four
of the patents at issue in Super Visions declaratory judgment action; this complaint has been
amended to assert infringement of a fifth patent. 17




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Super Visions lawsuit in Florida was transferred by the court to the United States District Court
for the District of Massachusetts. Discovery has closed. Color Kinetics has moved for summary
judgment that its patents are infringed, are valid and are enforceable, and also moved for summary
judgment dismissing Super Visions claims for interference with prospective business relationships,
trade disparagement and defamation. Super Vision has moved for summary judgment of invalidity and
unenforceability. On April 19, 2005, Color Kinetics was granted its motion for summary judgment
regarding Super Visions claims against us for interference with prospective business
relationships, trade disparagement and defamation. 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 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 we have infringed the
High End patent and seeking damages of $10.5 million. Super Visions High End patent lawsuit was
subsequently transferred from Florida to the federal court in Massachusetts. 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. TIR Systems, Ltd. In December 2003, we filed a lawsuit against TIR Systems Ltd, a Canadian corporation, in the United
States District Court for the District of Massachusetts. In this litigation, we alleged that
certain products of TIR infringe three patents of Color Kinetics. The Complaint has been amended to
add a fourth patent. TIR has filed counterclaims seeking declarations that it does not infringe
and that the patents are invalid. We believe that these claims by TIR are without merit. The
present scheduling order specifies that all discovery is to be completed by February 2006 and
dispositive motions filed by April 2006. 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds No change. 
 Items 3. Defaults Upon Senior Securities None. 
 Item 4. Submission of Matters to a Vote of Security Holders None. 
 Item 5. Other Information None. 
 Item 6. Exhibits ExhibitNumber
    
    Description* 3.2
    
    Seventh Amended and Restated Certificate of Incorporation of Color Kinetics Incorporated* 3.4
    
    Second Amended and Restated By-Laws of Color Kinetics Incorporated31.1
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002  George G. Mueller31.2
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002  David K. Johnson32.1
    
    Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 200299.1
    
    Form 8-K Filed April 29, 2005: Change in Directors or Principal Officers
   *
    
    Incorporated by reference to the similarly numbered exhibit to our Registration Statement on Form
S-1, File No. 333-114386. 18




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: May 10, 2005
    COLOR KINETICS INCORPORATED(Registrant)By:
    /s/    George G. MuellerGeorge G. MuellerChief Executive Officer By:
    /s/    David K. JohnsonDavid K. JohnsonChief Financial Officer 19