SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-27977
LUMENON INNOVATIVE LIGHTWAVE TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
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Delaware 98-0213257
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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8851 Trans-Canada Highway
Ville St.-Laurent
Quebec, Canada H4S 1Z6
(Address and zip code of principal executive offices)
514-331-3738
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 Par Value
-----------------------------
(Title of Class)
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 [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
As of August 31, 2000, the aggregate market value of the
Registrant's Common Stock held by non-affiliates of the Registrant was
US$335,200,412 which value, solely for the purposes of this calculation excludes
shares held by the Registrant's officers, directors, and their affiliates. Such
exclusion should not be deemed a determination or an admission by the Registrant
that all such individuals are, in fact, affiliates of the Registrant.
The number of shares of the Registrant's Common Stock issued and
outstanding as of August 31, 2000 was 34,752,039.
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LUMENON INNOVATIVE LIGHTWAVE TECHNOLOGY, INC.
TABLE OF CONTENTS
PART I Page No.
--------
Item 1. Business..........................................................3
Item 2. Properties.......................................................28
Item 3. Legal Proceedings................................................28
Item 4. Submission of Matters to a Vote of Security Holders..............29
PART II
Item 5. Market for Registrant's Common Stock and Related Security
Holder Matters...................................................29
Item 6. Selected Financial Data..........................................31
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................32
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.......35
Item 8. Financial Statements and Supplementary Data......................35
Item 9. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure..............................35
PART III
Item 10. Directors and Executive Officers of the Registrant...............36
Item 11. Executive Compensation...........................................38
Item 12. Security Ownership of Certain Beneficial Owners and Management...41
Item 13. Certain Relationships and Related Transactions...................42
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K.........................................................44
Signatures..................................................................F-1
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PART I
ITEM 1. BUSINESS
Overview
Lumenon Innovative Lightwave Technology, Inc. ("Lumenon" or the
"Company") is a development stage company that designs and develops products
related to the Dense Wavelength Division Multiplexing ("DWDM") market and other
optical (photonic) segments of the global telecommunications and data
communications optical networking markets. DWDM is a technology that permits the
transmission of multiple sources of information and data simultaneously over a
single optic fiber. DWDM allows network operators to remove an entire class of
equipment in their emerging, high-capacity, data-backbone networks. Lumenon is
developing and manufacturing devices for use in the DWDM market pursuant to a
teaming agreement (the "Teaming Agreement") with Molex Incorporated ("Molex").
(See "Material Agreements - Agreements with Molex" for a description of the
terms of the Teaming Agreement.)
Lumenon's plan of operations for fiscal year 2001 is focused on
finalizing the development of its 8, 16 and 32 channel DWDM devices and bringing
them to market by year-end. Over the next twelve months, product development
will focus on four aspects:
(i) defining processing sequences and conditions (wafer coating,
photolithography, etc.) for DWDM devices;
(ii) implementing automation equipment for manufacturing of these
devices in our new manufacturing facility;
(iii) establishing quality control criteria for the Company's
processes and operations; and
(iv) upgrading its on-site DWDM packaging and fiber pigtailing
capability for the Company optical chips.
The Company plans to (i) finalize the construction of the clean room
in its new manufacturing facility, with the capacity of producing up to 500
devices per day in 2001 and up to 1,000 units per day in 2002, (ii) increase its
work force to approximately 175 persons to fully staff this facility, and (iii)
launch marketing activities for its DWDM products. See "--Manufacturing" and
Item 2. "Properties," for information in respect of the new manufacturing
facility. For more detailed description of the Company's future plans and its
products, see the "--Plan of Operations," "Business Strategy" and "Technology
and Products" sections of this Item 1. As a development stage company, to date,
Lumenon has not generated product revenues and does not anticipate generating
product revenues until 2001. It is subject to numerous risks, including risks
associated with product development, growth, manufacturing and competition. See
"Risk Factors" regarding the risks the Company will face in its growth and in
the manufacture and marketing of its products.
Service providers like AT&T and MCI WorldCom are creating fiber
optic networks to transmit large quantities of data and information at high
speeds to accommodate the demand for applications such as the Internet, e-mail,
and electronic commerce. Such service providers desire to increase the capacity
of their networks to carry and deliver more information at high speeds without
the additional costs of having to install new fiber optic cable. DWDM products
allow providers to greatly increase their information carrying capacity on
existing fiber at significantly lower cost. Existing DWDM products use the
following technologies: thin film filters ("Thin Filters"), fiber Bragg gratings
("Bragg Gratings") or array waveguides ("AWG"). DWDM is a technology that allows
multiple wavelengths of light (the information carrier) to be transported on a
single fiber optical strand, increasing the carrying capacity of optical fiber
and transmitting information at the speed of light. The multiplexing component
of the DWDM allows different wavelengths of light (that is, different colors or
channels of information) to be added to the optical fiber, which means more
(dense) channels or communication pathways are added to existing optical fiber
for simultaneous transport. To date, the solution to resolve capacity constraint
has been to add or lay additional fiber in the ground or to use one of
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three kinds of DWDM devices presently available. The devices can be circuits
that have been etched into chips (AWG), Thin Filters or Bragg Gratings. See
"Business Strategy, -- Establish Technology Leadership" for a detailed
description of the three principal competing DWDM technologies. The use of DWDM
technologies to add capacity is significantly less costly than that of the
installation in the ground of new fiber, which installation method includes
costs associated with construction, purchases of rights of way, work and
regulatory permits and weather delays.
Lumenon makes DWDM products in the form of an AWG "optical chip" on
silicon through a patented sol-gel manufacturing process. Lumenon acquired its
rights to the sol-gel process under a license agreement with Ecole Polytechnique
and McGill University. (See "Material Agreements - Agreement with Polyvalor and
McGill University" for a description of the terms of such agreement.) To the
knowledge of the Company, there are no other manufacturers of DWDM products on
silicon using a sol-gel manufacturing process. Lumenon has chosen an optical
chip form for its product development because it believes that its licensed
process will allow it to provide high volume and high quality DWDM devices.
These devices will address market demand that cannot be fully served by other
devices manufactured with competing technologies. The bases for the Company's
belief are: (i) lower capital investment in equipment for the sol-gel process,
because there is no need for vacuum thin film deposition and vacuum coating
technology; (ii) less manual labor (piece-work assembly) is required to make the
AWG chip; (iii) fewer steps are required in the optical chip manufacturing
process, which reduces the likelihood of manufacturing defects; and (iv) as the
optical chip's channel count grows, the chip's cost does not increase
proportionally. (See "Business Strategy" and "Technology and Products" sections
of this Item 1. for a description of the Company's products and its strategy for
such products.)
Lumenon has focused on developing and producing DWDM devices and
products because DWDM technology offers a bandwidth solution to a potentially
large market, the telecommunications market. The telecommunications market
includes long distance, metropolitan, and access. Bandwidth or information
carrying capacity is critical in each segment. DWDM is in a nascent stage for
the metropolitan and access markets.
The functional currency of the Company is the Canadian dollar. All
amounts presented in Canadian currency herein are identified as such. Other
amounts are expressed in United States dollar.
Industry Background
Survey data on the size of the global and North American DWDM
markets vary from source to source. What is common to all surveys is the fact
that the DWDM market is large and growing at a compound annual growth rate of
approximately 50%. The U.S. market for DWDM systems in 1995 stood at
approximately US$50 million. According to Laser Focus World, the North American
DWDM market reached US$1.3 billion and the global market for DWDM systems grew
to US$2.2 billion in 1998. Communications Industry Researchers, Inc., an
industry authority, reports that DWDM and related optical technologies will grow
to a market of US$7.6 billion by 2003. Manufacturers of DWDM systems that use
DWDM devices include Lucent Technologies, Inc., Ciena Corp., Alcatel, Cisco,
Nortel Networks Corp., NEC and Fujitsu. Several of these systems manufacturers
(Lucent, Ciena, Alcatel, and NEC) also manufacture DWDM products. Other DWDM
component suppliers include, but are not limited to, JDS-Uniphase Corp., Gould,
Instruments SA, Corning OCA, Ditech Communications Corp., DiCon, Sumitomo, and
Bosch. Large companies like AT&T Corp. and MCI WorldCom Inc. are part of the
DWDM market. AT&T has used equipment supplied by Lucent Technologies, while MCI
has used DWDM equipment supplied by Hitachi Ltd. and Nortel.
Unprecedented Growth of Information Traffic
The telecommunications industry has experienced the shift in traffic
from voice to data-dominated. Computers increasingly process and send more
information across networks with greater speed and in greater quantity than the
quantity for which voice-centered networks were designed. New data-handling
protocols have been introduced to handle data more efficiently. New data
communications equipment has been designed and created to route and switch data
transmission at very high speeds.
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The popularity and increased usage of the Internet, new users and
applications are putting pressure on the existing network capacity and
performance of service providers. Service providers are continually in need of
network improvements and increases in their available bandwidth in order to stay
competitive. They are looking for ways to optimize their investment in their
existing network and a low cost solution to increase capacity. Optical fiber
networks are widely deployed by telecommunications service providers for
domestic and international carriage. Recent increases in information traffic,
growing competition and increased demand for reliability at lower cost have
required carriers to enhance the service they provide. Part of the solution has
been the deployment of DWDM systems.
The flow of traffic has also increased by the growing capacity and
processing speed of data communications equipment, like Asynchronous Transfer
Mode (ATM) switches and Internet Protocol (IP) routers and the development of
high bandwidth network access technologies, such as cable modems, hybrid fiber
coaxial architectures and digital subscriber lines. According to Ryan, Hankin &
Kent, a leading market researcher, Internet traffic will increase from 350,000
tera bytes per month at the end of 1999 to over 15 million tera bytes per month
in 2003.
Competition
Widespread telecommunications industry deregulation in the United
States has resulted in increased competition among service providers. Some
industry analysts believe this has increased the need for greater bandwidth
capacity on networks. As carriers seek to differentiate themselves from
competitors, they have emphasized high capacity technology to sell their
services.
Reliability
Consumers and generators of information are becoming more dependent
on network reliability. End-users are less and less tolerant of service
interruptions. Network carriers have responded by introducing fiber optic
networks that can overcome cable cuts or other equipment failure between two
points. These networks frequently utilize a "ring architecture" in which routes
are linked in a ring configuration, permitting rerouting of traffic along the
reverse path of the ring in the event of a service interruption occasioned by a
fiber optic cable cut or other equipment failure. Ring architectures require
twice the fiber capacity of non-ring systems. These system designs therefore
place greater bandwidth demand on existing fiber networks.
Other capacity drivers
Other capacity drivers on fiber optic networks include technologies
such as digital subscriber lines (DSL). DSL promises higher access speeds to
residences and businesses. With potential speeds in excess of a megabit, this
will continue to impose additional strain (demand for bandwidth) on the optical
network backbone. According to W. Carter, an industry analyst, such constraints
can be resolved by utilizing DWDM technology.
PHASIC(TM) Process
Lumenon's manufacturing process is called PHASIC(TM). PHASICTM
stands for Photonic Hybrid Active Silica Integrated Circuit, which refers to the
materials and processes Lumenon uses to produce its devices in the form of an
integrated optical circuit on silicon microchips similar to those used in
computers. For DWDM devices, the optical circuit consists of a collection of
micron size array waveguide gratings (AWG) that have been arranged to combine
(multiplex) or separate (demultiplex) light at the telecommunications wavelength
near 1.55 microns. More specifically, the Company uses hybrid glasses for making
its AWG and a simplified manufacturing process for creating its optical circuits
on silicon. The "hybrid glass" (a glass-polymer solution) can be used to print
(through light) circuits on chips
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without the costly vacuum etching process and the use of manual labor for
assembly of micro-optic devices. The Company expects to be the first to
commercialize hybrid glasses for use in integrated optics.
The optical chip has an optical circuit on it analogous to the
micro-electronic circuit that is produced on silicon microchips used in
computers. Optical circuits can be made with 4, 8, 16, 32, 40, 64 and more
channels to transport different optical signals (light) carried at different
wavelengths. Light signals are combined and separated on the optical chip by
taking advantage of the differences in the length of the individual waveguides
in the AWG. These path differences translate into optical phase differences.
This means that light of a given wavelength (a given optical channel) can be
combined with others for input to an optical fiber (multiplexing). With the same
device, light can also be separated for output to individual optical fibers
(demultiplexing). This technology simplifies the process while providing a
product and technology that can be adapted to the industry's changing needs.
Plan of Operations
Lumenon's plan of operations for fiscal year 2001 is to get its
plant and volume production up and running in order to produce 8, 16, 32 and 40
channel DWDM devices and bring them to market. Volume production will be
realized by (i) completing the construction of its facility and setting up its
manufacturing infrastructures, (ii) defining processing sequences and conditions
(wafer coating, photolithography, etc.) that distinguish fabrication of devices,
(iii) staffing up and investing in the training of its employees, (iv)
implementing a frame work for quality control and reliability testing, (v)
expanding its DWDM packaging and fiber pigtailing capability, (vi) broadening
its product portfolio, and (vii) securing its supply chain.
Research and Development
Research and development activities for fiscal year 2001 will be
centered on finalizing the packaging of Lumenon's DWDM products and optimizing
their manufacturing processes. The Company will also focus on developing new
products that it judges to be of value to the photonics market. See "Risk
Factors - Risks Relating to Our Business," second, third, and thirteenth risk
factors for those risks associated with the development of the Company's
products.
Manufacturing
At the end of June 2000, Lumenon moved its headquarters to a site
located in Ville St-Laurent, a suburb of Montreal, Canada. The 53,427
square-foot facility has a 34,400 square foot manufacturing facility that
features materials preparation, fabrication, packaging, optical test and quality
control facilities for Lumenon's DWDM products. Lumenon has commenced the
internal construction of the production facility, consisting of cleanrooms and
associated laboratories, and has ordered the needed manufacturing equipment. See
"Risk Factors - Risks Relating to Our Business," fourth risk factor for risks
associated with the Company's manufacture of its products. The Company's
existing R&D facility, located in Dorval, Quebec, will be used for prototyping
once the manufacturing facility is operational.
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Employee Growth
Lumenon currently has 90 employees. Over the past 12 months Lumenon
has increased the corporate team to a complement of 7. The existing R&D team of
27 meets current requirements and will be increased at a measured pace as new
requirements are identified. Most of Lumenon's personnel growth will be within
the operations team, which will require an increase in its manufacturing
component of approximately 75 hourly employees and 25 specialists/technicians to
meet the current sales forecasts for fiscal 2001 and first quarter of fiscal
2002. Headcount growth thereafter will be highly dependant on volume
requirements and will be primarily focused on hourly employees. Most of the
manufacturing employees that Lumenon will hire will be fully trained in a few
months. The remainder of the Company's administrative staff is intended to
increase by 35 persons within marketing and sales, engineering, accounting and
administrative staff. Combined with the employees remaining at the Dorval pilot
facility, the total employee count is anticipated to be in the range of 225
employees by the end of fiscal 2001. See "Risk Factors - Risks Relating to Our
Business," - ninth and tenth risk factors.
Business Strategy
The Company believes that there is a substantial market for its AWG
devices for DWDM systems. This market may be best supplied using AWG, which
provides high channel counts in a single compact device.
Optical chips in AWG format are currently used in DWDM systems.
Companies that produce the AWG format are PIRI (a subsidiary of JDS Uniphase),
Kymata, Siemens and Lumenon. These AWG devices perform in a similar way.
However, DWDM devices can differ both in composition and method of fabrication
depending on how they are processed. AWG DWDM devices made by PIRI, Kymata and
Siemens use a high temperature (greater than 1,000oC) vacuum deposition process
called "flame hydrolysis deposition" (FHD). This method of manufacturing optical
chips uses a repetition of step by step processing to achieve final composition
of a device. See "Business Strategy - Establish Technology Leadership" for more
detailed information concerning FHD processing.
The AWG DWDM devices produced by Lumenon differ in composition and
method of fabrication. Lumenon's AWG devices are made of hybrid sol-gel glass.
They are made by spin- or dip coating of fluids and at temperatures about
1,000oC lower than those used in FHD. The devices are created by
photolithography directly in the hybrid sol-gel glass avoiding vacuum film
deposition, and they have optical properties that can be changed over a broader
range than those provided by commercial forms of FHD. The latter difference
allows Lumenon to make smaller DWDM devices (measuring less than 5 cm x 5 cm)
than those produced by FHD. Smaller devices permit manufacturers of DWDM systems
to make more compact products so their systems can be deployed in locations
where space is limited, providing greater design flexibility. The difference in
the materials and method of fabrication used by Lumenon also allows it to make
AWG devices more simply (through a simplified process), using less equipment,
faster and in larger quantities per unit of processing time than FHD component
manufacturers. The Company believes, at present, that no other manufacturer
utilizes the sol-gel method in the commercial production of optic devices for
use in the DWDM market.
Lumenon's goal is to provide high quality, cost effective and high
volume DWDM devices. The Company developed its PHASICTM process because it
believes that high volume manufacturing methods similar to those used by the
microelectronics manufacturing industry are necessary to meet telecommunications
customer demands for high volume and reliability. The Company believes that its
materials, design tools and process give it a technological edge that will allow
it to improve yield in optical chip production. See "Industry Background"
section of this Item 1. in relation to the current needs of the market and "Risk
Factors," generally, detailing the potential risks the Company faces in
producing its products at lower cost and in greater volume.
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The Company has begun producing and testing a limited number of
product devices with the intention to market 4, 8, 16, 32 and 40 DWDM product.
In addition, the Company intends to offer services based on its capability to
design new customized DWDM devices according to specific client needs. These
needs may include, among others, channel count, channel spacing, central
wavelength and optical loss characteristics. Because Lumenon's DWDM is created
on a silicon substrate, there is the potential for product enhancement by
combining other features e.g., lasers, on the same silicon substrate.
Lumenon's products will address existing demand, and create
conditions for expanded use of its devices and families of devices, by utilizing
its technology and expertise for existing and new product development in a
client-specific manner. For example, the Company is presently targeting an
existing DWDM market that has for the most part, very specific needs. Because
the Company manufactures its DWDM devices from a Platform Technology, it can use
similar materials and processes to produce both devices related generally to the
DWDM industry and optical internetworking and customized devices for the DWDM
industry. Examples include optical chips for selectively adding or dropping
wavelengths (channels) and optical cross-connects. Because the technology is a
Platform, the Company can expand from its DWDM chip, building into new kinds of
optical chip products beyond DWDM. The Company believes that customers may
favorably view the idea of having optical devices that are all related to one
another through a common (generic) technology. Photonics is a nascent industry
and the Company believes that it will be necessary to work with customers
closely to meet their specific needs. See, "Technology and Products - Platform
Material Technology and Advanced Software Design Tools" regarding the ability of
the Company's Platform Technology to be combined with other products and devices
to create new products, including custom made products. In such a competitive
industry, the Company faces many risks including market acceptance of its
products and its ability to adapt its products to technological change, see
"Risk Factors - Risks Relating to Our Business," - second, third and eighth risk
factors.
To implement its strategy, the Company intends to:
(i) Establish Technology Leadership
There are three primary multiplexer component technologies currently
used in DWDMs: thin film filters (Thin Filters), fiber Bragg gratings (Bragg
Gratings) and array waveguides (AWG). According to a report in Laser Focus World
Supplement, "WDM Solutions," in 1998, Thin Filters held a 26% share of the DWDM
market. AWG captured market share from Thin Filters in 1998, representing 47% of
the DWDM market with Bragg Gratings having a market share of 19%. Within the
industry, AWG technology currently provides the least costly manufacturing
alternative to expanding existing capacity over that of Thin Filter and Bragg
Gratings technology.
In existing AWG technology, a "flame hydrolysis deposition" (FHD)
method, is used to manufacture DWDM components and devices. This method employs
a hydrogen-oxygen nozzle flame to burn the desired combinations of gases of
silicon tetrachloride, phosphorous oxychlorides, chlorides of phosphorous, boron
or germanium, for example, that may be transported by a gas like argon to a
heated silicon wafer surface. Combustion of the gases produces a glass soot on
the surface of a silicon substrate. The soot is melted and consolidated at high
temperature (greater than 1,000oC) in a lengthy thermal process. The procedure
is repeated at least three times to achieve the final composition. The second
coating step is usually followed by a series of coating and vacuum etching steps
used to create the AWG component. In some cases, a thin section of polymer (a
half wave plate) is inserted into the array waveguide section to desensitize the
device to the polarization state of the light.
Thin Filters use one-millimeter square glass windows coated with
multi-layers of metal oxide. This layered structure is used to pass through some
wavelengths of light and reflect others in transferring information or data.
These windows act as an optical filter when many are assembled together with
lenses and appropriate input an output filters. Then, together they can
selectively separate wavelengths of light for transmission of information. In
this way, the Thin Filter device acts in the same capacity as a mutliplexer
device.
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Bragg Gratings act as micro optical filters. The grating spacing is
selected in such a way that it allows some wavelengths of light to pass through
the filter and reflects other wavelengths of light. When Bragg Gratings are
created in optical fiber and fibers are assembled together in a structure like
an interferometer, the Bragg Gratings assembly acts in the same capacity as a
multiplexer device.
The Company believes that the following three variables, discussed
in detail below, will determine the relative successes of the above competing
technologies:
(1) Chip manufacturing cost per channel,
(2) Size of the optical component and
(3) Suitability to high volume manufacture.
Lumenon believes that its products, which are based on AWG
technology, will enjoy an advantage in each case.
Chip Manufacturing Cost Per Channel. In AWG technology, cost does
not scale with an increase in the number of channels per chip because all
channels are created simultaneously or in parallel. There is little increase in
the cost of manufacturing an 8-channel, 16-channel or other channel AWG DWDM
chip because the circuits and optical channels are all created in the same step.
In contrast, in Thin Filter and Bragg Gratings technologies, additional channels
must be added sequentially (one at a time), increasing the complexity of the
task and adding time and cost to the process. Thus, the current manufacturing
cost per channel is lower for AWG technology than for the Thin Filter and Bragg
Gratings technologies. The cost of making an AWG DWDM component will depend on
the method and materials used. The Company's products are distinguishable from
those of its AWG competitors in their composition and method of fabrication. The
Company believes that simple one-mask manufacturing process should be cost
effective and will be suitable for high volume and high yield manufacturing.
Size of Optical Components. AWG technology products are
significantly smaller than those produced by competing technologies. This may
prove an advantage where space is at a premium.
Suitability to High Volume Manufacture. The Company's manufacturing
process is simpler, because the complexity of the process does not increase
linearly with an increase in the number of channels per chip, as is the case
with competing technologies. The Company anticipates that as optical chip
technology matures, customer demand and competition will drive down the price of
chips. The Company's low temperature manufacturing process, which distinguishes
it from other producers utilizing the AWG technology, should permit lower cost
production and higher product yield.
The Company's AWG DWDM devices differ from other waveguide DWDM
devices in composition and its method of fabrication. The Company's AWG devices
are made from different materials (its hybrid glass) and through a different
method of fabrication (its low temperature sol-gel process). The use of hybrid
glass and the sol-gel processing gives the Company the advantage of being able
to use spin-coating and dip-coating manufacturing methods to cover silicon
wafers, rather than vacuum deposition techniques. The Company's hybrid glasses
are made at temperatures about 1,000oC lower than those used in FHD chip
production. This gives the Company an energy saving advantage and provides a
greater choice in the range of substrates e.g., glass, plastic that might be
used in the future to support DWDM devices and future product development.
Lumenon's DWDM optical chips are created by photolithography directly in the
hybrid glass. This avoids complex post-processing sequences in which chemical
resists and masks must be used in conjunction with vacuum reactive ion etching
methods to create the AWG for the DWDM. The properties of the hybrid glass
materials can be altered so that the glasses have properties that are more like
those of plastics or inorganic glasses or properties that are intermediate
between plastics and glasses. This permits hybrid glasses to be adapted into
more commercially usable and compact or miniature forms than those produced by
FHD. Smaller DWDM devices also permit manufacturers of DWDM systems to make more
compact products.
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(ii) Leverage Existing Customer Relationship and Develop New
Relationships
In May 1999, the Company entered into a Teaming Agreement with
Molex, a global manufacturer of electronic, electrical and fiber optic
interconnection products and systems. The Teaming Agreement was amended on March
3, 2000 (See "Material Agreements - Agreements with Molex"). Under the Teaming
Agreement, the Company and Molex agreed to jointly develop 8, 16 and 32-channel
DWDM products for sale to Molex and distribution and marketing by Molex to other
customers. Subject to testing of the Lumenon technology and proof of its
manufacturing capability, Molex is committed to purchase 400 units per month for
the first 12 months, and has the option to purchase 50% of Lumenon's DWDM
production. This arrangement should provide a firm customer base for the
Company's early production. The Company also proposes to establish relationships
with telecommunications equipment manufacturers and with manufacturers in other
industries with potential applications for its devices.
(iii) Target Long Distance, Metropolitan Area and Access Markets
The Company believes that much of the potential expansion of the
markets for its products will occur not in long distance telecommunications, but
in new markets, such as metropolitan area, local area and office environments.
This is a result of technological advances and the potential to reduce
manufacturing costs. The Company has chosen to target these market segments for
DWDM technology because combined, they are anticipated by Pioneer Consulting, an
industry authority, to account for market growth from US $200 million in 1998 to
approximately US$1 billion in 2003.
(iv) Expand Manufacturing Capability
The Company's prospective customers are expected to require high
volumes of products manufactured to high quality standards at gradually
decreasing prices. The Company is currently expanding beyond its existing
Research and Development facility to a full scale manufacturing facility, with a
production capability of 500 devices per day. The Company is finalizing the
completion of the 34,400 square foot manufacturing facility for production
beginning in 2001.
Technology and Products
The Company uses a solution or liquid sol-gel process to produce its
DWDM optical devices. Sol-gel processing converts molecules of
silicon-containing compounds into a network of glasses. The Company produces its
glass at temperatures below 200(0)C, which is considerably lower than the
temperatures otherwise used in the FHD process. The Company believes it is the
only producer of compact AWG DWDM devices using a low temperature sol-gel
process for its hybrid glass on silicon. The licensed low-temperature sol-gel
process allows films of glass to be dip-coated or spin-coated onto silicon
substrates in large quantities and at greater speed than vacuum coating. The
Company uses conventional photolithography (also known as
photo-microlithography), which is a method to "print" optical circuits and
devices directly into its hybrid glasses. The glass also contains a second
monomer (an organic component) that can be polymerized when it is exposed to
light in the ultra-violet end of the spectrum. Polymerization creates the
optical AWG that comprises the DWDM technology. A pattern of the AWG is made by
projecting an image of the pattern, exposing a patterned mask (an optical mask)
to ultra-violet light. The light passes through the patterned openings of the
mask and "writes" or "projects" the image directly into the micron-thin hybrid
glass film on a silicon substrate. The procedure is similar to the way
photographs are printed in a darkroom.
Platform Material Technology
Lumenon's licensed "hybrid glass" technology combines the features
of inorganic silica glass and organic polymeric materials in a single matrix
(material glass platform), which the Company refers to as its Platform
Technology. The "hybrid glass" provides a more flexible material for use in the
design, fabrication and manufacturing of devices, resulting in greater
adaptability and increased options within the performance of a DWDM system. This
technology permits the manufacture of customized devices to meet a customer's
specific needs. DWDM devices may
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be required to meet certain performance standards established by regulatory
groups. Lumenon's DWDM technology can be adapted to meet such performance
standards.
Lumenon believes it is the only producer to introduce a sol-gel
technology for integrated optics that combines both polymer and glass material
platforms in a single material base for integrated optics devices on silicon,
using polymer photolithographic manufacturing methods long accepted by the
semiconductor and microelectronics industries adapted by the Company to produce
hybrid silica glass integrated optics devices. Based on its own experience in
the research and development of the Platform Technology, the Company believes
that it has a two-to three-year lead-time over the industry competition that
might arise in the production of optical chips from hybrid glasses. See the
"Risk Factors" section below for the risks that the Company will encounter in
efforts to compete successfully in its industry. The materials used to formulate
the hybrid glasses are custom designed and readily available "off-the-shelf"
products supplied by well-known manufacturers like Dow Corning, Aldrich Chemical
and Ciba Specialty Chemicals Ltd. Because the quantity of material used to make
a device is very small (the films are less than 20 microns thick), the cost of
the materials is less than 5% of the total cost of the DWDM product, making the
material cost-competitive with silica or polymers. Additionally, the methodology
used to manufacture such products avoids complex and costly processing and
etching sequences, thereby reducing production costs. Through the use of the
Platform Technology, the Company will, in the future, be able to target products
for a customer's product line by supplying a variety of valuable customized
products. For example, in the photonic circuit market, Lumenon can market its
products to meet the broadest possible range of applications. These applications
might call for material properties very similar to those of glass.
Alternatively, these applications might require material properties similar to
those of organic polymers. Neither polymers nor silica alone are as flexible or
adaptable as a hybrid glass. Further, other target products that could be
produced and utilized in the telecommunications long-haul networks are Optical
Add-Drop Multiplexers, Optical Cross Connects and Photonic Switches, which can
create more transparent all-optical networks and replace many synchronous
optical network ("SONET") sub-systems. The Company believes that the relative
simplicity of its PHASICTM process, using hybrid glasses, will enable Lumenon to
fabricate optical chips across the broadest range of photonic market
opportunities in high volume. See also "Business Strategy" for information
relating to the characteristics of the Company's manufacturing process.
Technological Leadership
Lumenon has assembled a team of scientists, engineers and
technologists with broad expertise in materials formulation, photonic device
design, hybrid glass integrated optics circuit fabrication, product definition,
and industrial process engineering. This team has pioneered the development of
"photonic chips on silicon" based on proprietary formulations of hybrid glasses
and the creation of software design tools and processing knowledge, privileged
to Lumenon. The Company's technical structure comprises software
development/optical circuit design, materials formulation, and process
engineering. This combination of attributes should allow Lumenon to evolve as a
significant provider of integrated optics products to the photonic industry,
including local area networks and future Home Network applications.
Lumenon has also created a Technical Advisory Board to advise the
Company on photonic market trends and technology and to assist in the
development of an optical information technology "roadmap" for the Company's
benefit. This board consists of three external scientists with extensive
experience and expertise in the industry.
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Advanced Software Design Tools
The Company uses both proprietary and industry standard design tools
to create its DWDM devices. Lumenon has developed in-house theories and software
algorithms for creating product designs such as the Company's complex AWG for
DWDM. The Company is unaware of any commercially available design packages that
compete with the Company's software capability. Whether or not other entities
have developed software design tools of quality competitive with that of Lumenon
has no impact on the business of the Company, which uses its software in a
manner uniquely adapted to the photonic materials and processes it has
developed. The Company has also obtained licenses for industry standard computer
aided design (CAD) and beam propagation method (BPM) software to model or design
selected performance features of simpler devices, such as couplers and
splitters.
The Company has built a library of design tools and designed
elements that can be used in modular form to assemble more complex device
structures (multi-functional devices on a chip). Lumenon's technical marketing
and design application engineers have a broad knowledge of integrated optics
device systems design (architectures) and their integration in subsystems and
systems. With such expertise, the Company will be able to develop photonic chip
products that are flexible, modular and designed to be deployed in existing and
future networks and for use in modern data and telecommunications equipment.
This modular approach facilitates the re-use of complex functional DWDM devices
in new and customized designs, reducing Lumenon's DWDM product development
cycles. The Company believes that a large library of complex functions is
required to compete effectively in the market, especially in terms of cost and
length of development cycles.
Manufacturing
Lumenon has commenced the manufacture of its prototype devices in a
custom-designed pilot microfabrication facility located at Dorval, Quebec. The
capacity of this existing pilot facility is 20 DWDM chips per day. As of August
2000, Lumenon does not sell a finished product in the open market. The current
generation of chips is being used for development and test phases. This includes
the development of solutions for pigtailing optical fiber to the DWDM chips, and
for hermetic, semi-hermetic and non-hermetic packaging.
Lumenon relies largely on its own processes for the manufacture of
its products. In order to meet the projected demand for high volume, low cost
photonic chip production, the Company will be required to equip and staff a full
scale production facility. The Company anticipates developing a manufacturing
capacity to 500 devices per day in 2001 and 1,000 per day in 2002 in the new
facility. There are a variety of risks associated with the operation of a new
facility, see "Risk Factors - Risks Relating to Our Business," - fourth risk
factor.
Proprietary Rights
Lumenon's future success and ability to compete are dependent, in
part, upon its licensed and owned technology. The Company relies in part on
patent, trade secret, trademark and copyright law to protect its intellectual
property. The Company is the licensee of three patent applications under the
terms of a License Agreement, which expires in October 2017. (See, "Material
Agreements - Agreement with Polyvalor and McGill University" for a description
of the terms of this License Agreement) These three patent applications are:
1. Title: "Solvent-assisted lithographic process using
photosensitive sol-gel derived glass for depositing
ridge waveguides on silicon"
Use: Intellectual property relating to the Company's
sol-gel process used to make the Company's optical
circuit devices on a broad range of substrates,
including silicon through simplified
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photolithographic processes and wet etching techniques,
which is fundamental to the success of the Company's
manufacturing process.
Country: United States
Assignee:McGill University Status: Allowed and issued as
patent No. 6,054,253 on April 25, 2000.
2. Title: "Solvent-assisted lithographic process using
photosensitive sol-gel derived glass for depositing
ridge waveguides on silicon"
Use: Intellectual property relating to the Company's
sol-gel process used to make the Company's optical
circuit devices on a broad range of substrates,
including silicon through simplified photolithographic
processes and wet etching techniques, which is
fundamental to the success of the Company's
manufacturing process.
Country: Canada
Assignee:None
Status: Pending. The next step in this patent
application is to file the request for examination.
3. Title: "Self-processing of diffractive optical
components in hybrid sol-gel glasses"
Use: Intellectual property used to make diffraction
gratings in hybrid glass without the need for device
development steps, which is not material to the
Company's present manufacture of products, but is
relevant and being sought for later generation products
planned for production.
Country: United States
Assignee:None
Status: Pending Provisional: the patent application is
pending but is incomplete and the priority date for
filing the complete patent application in the United
States and for extending the patent application in other
countries is October 26, 2000. The Company is presently
in the process of finalizing the application.
Lumenon has also filed the following patent applications:
4. Title: "On-substrate cleaving of sol-gel waveguide"
Use: Intellectual property used to make optical coupling
between glass fiber and optical circuit device
waveguides, which is not material to the Company's
present production of products, but is relevant and
being sought for later generation products planned for
production.
Country: United States
Owner: Co-ownership between Lumenon and Paul Coudray
Status: Pending: the patent was filed on July 1st 1999
and is awaiting review and comments from the examiner.
The priority date for filing of the patent application
in other countries was July 1st, 2000.
5. Title: "Sol gel film coating process using chilled
solution"
Use: Intellectual property used to make a sol gel film
where the thickness and roughness of resulting film are
improved by dispensing a chilled sol gel solution
instead of conventionally dispensing such a sol gel at
room temperature. Lumenon presently uses this technology
in its manufacturing process.
Country: Canada
Status: Pending Informal: the patent application is
pending but is informal and the priority date for filing
the complete patent application in Canada and for
extending the patent application in other countries is
July 28, 2001.
6. Title: "Flattening the response of a planar wavelength
division multiplexer using a Y-junction"
Use: Intellectual property used to flatten the response
of a planar wavelength division multiplexer
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through a Y-junction. Lumenon presently uses this
technology in its manufacturing process.
Country: Canada
Status: Pending Informal: the patent application is
pending but is informal and the priority date for filing
the complete patent application in Canada and for
extending the patent application in other countries is
August 4, 2001.
There can be no assurance that any patents will be issued under the
Company's current or future patent applications or that any issued patents will
not be invalidated, circumvented, challenged or licensed to others. In addition,
there can be no assurance that the rights granted under any such patents will
provide competitive advantages to the Company. There can be no assurance that
any patents issued to the Company will be adequate to safeguard and maintain the
Company's proprietary rights, to deter misappropriation or to prevent an
unauthorized third party from copying the Company's technology, designing around
the patents owned by the Company or otherwise obtaining and using the Company's
products, designs or other information. In addition, there can be no assurance
that others will not develop technologies that are similar or superior to the
Company's technology, see "Risk Factors - Risks Relating to Our Business,"
thirteenth risk factor.
Lumenon also relies on confidentiality agreements to protect its
proprietary rights. It is the Company's policy to require employees and
consultants and, when possible, suppliers, to execute confidentiality agreements
upon the commencement of their relationships with the Company. Litigation may be
necessary to enforce the Company's intellectual property rights and to protect
the Company's trade secrets, and there can be no assurance that such efforts
will be successful. The Company's inability to protect its proprietary rights
effectively would have a material adverse effect on the Company's business,
financial condition and results of operations.
Many participants in the photonics and related communications
industries have a significant number of patents and have frequently demonstrated
a readiness to commence litigation based on allegations of patent and other
intellectual property infringement. Although the Company is not aware of any
claim of infringement or misappropriation against the Company, there can be no
assurance that third parties will not assert such claims in the future with
respect to the Company's current or future products. The Company expects that
companies will increasingly be subject to infringement claims as the number of
products and competitors in the Company's industry segment grows and the
functionality of products in different industry segments overlaps. Responding to
such claims, regardless of merit, could cause product shipment delays or require
the Company to enter into royalty or licensing arrangements. Any such claims
could also lead to time-consuming, protracted and costly litigation that would
require significant expenditures of time, capital and other resources by the
Company and its management. Moreover, no assurance can be given that any
necessary royalty or licensing agreement will be available or that, if
available, such agreement could be obtained on commercially reasonable terms.
Material Agreements
Agreements with Molex
On May 19 and June 21, 1999, Lumenon entered into several agreements
(the "Molex Agreements") with Molex (NASDAQ: MOLX), based in Lisle, Illinois.
Molex is a 60-year-old global manufacturer of electronic, electrical and fiber
optic interconnection products and systems, switches, value-added assemblies,
and application tooling. The
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Molex Agreements include a Teaming Agreement, a Stock Purchase Agreement, a
Stock Restriction Agreement and a Registration Rights Agreement. The Teaming
Agreement was amended on March 3, 2000.
Under the Teaming Agreement, as amended, Lumenon and Molex agreed to
jointly develop 8, 16 and 32-channel DWDM products for use in the DWDM market
and other photonics markets. Subject to Lumenon testing and proving its
technology and its ability to manufacture and deliver certain devices, Molex is
committed to purchase the entire DWDM production of Lumenon for the first 12
months of production, up to 400 units per month. Molex also has the option to
buy 50% of the remaining chip production. After the first 12-month period, Molex
will have the option to purchase 50% of Lumenon's DWDM production for the
succeeding three-year period. Any product sold by Lumenon to Molex will be
priced at Lumenon's gross cost. In addition, Molex will pay to Lumenon 30% of
the profits obtained on final products built from the chips supplied during the
first twelve months, and thereafter 50% of the profits from sales of
functionally unmodified packaged products and 30% of the profits from sales of
other final products. Lumenon is free to package and sell any remaining
products, with all profits going to Lumenon. However, Lumenon cannot sell
unpackaged chips for telecommunication applications, except for special order or
exploratory purposes, without written agreement from Molex. In the event Lumenon
is unable to supply Molex on a timely basis with a commercially reasonable
quantity of the devices (which may trigger termination of the Teaming Agreement)
or in the event there is a change of control of Lumenon, Molex has the
non-exclusive right to manufacture all components of the devices in return for a
royalty of 25% of Molex's gross cost. See - "Risk Factors - Risks Relating to
Our Business," sixth risk factor for the risks associated with the Company's
dependence on Molex and "Business Strategy" and "Technology and Products -
Manufacturing" in this Item 1. regarding future production and marketing plans
for the Company's products.
Under the Stock Purchase Agreement, Molex agreed to purchase
3,000,000 shares of the Common Stock of Lumenon at a price of US$0.50 per share
in two stages. The first closing was held on June 21, 1999 for 1,500,000 shares
of Common Stock and the second closing was held in March 2000 for an additional
1,500,000 shares of Common Stock. Lumenon also issued to Molex a warrant to
purchase 1,666,667 additional shares of Common Stock at a price of US$0.90 per
share, which was exercised on November 15, 1999.
In addition, Lumenon issued Molex a Services Common Stock Purchase
Warrant (the "Services Warrant") to receive 5,800,000 additional shares of
Common Stock in exchange for certain services to be rendered by Molex to Lumenon
under the Teaming Agreement as part of the development of Lumenon's technology.
These shares were issued in 2000 as Molex performed services.
Under the Stock Restriction Agreement, certain stockholders of
Lumenon have agreed not to sell their respective shares of the Company to a
competitor of Molex without Molex's prior consent. This agreement includes a
right of first refusal and certain preemptive rights in favor of Molex, except
that Lumenon can, without Molex's consent, issue up to 6,000,000 units
(comprising one common share and a warrant for the purchase of one common share
at a price of not less than US$0.90 per share) at a price not less than US$0.50
per unit to raise capital within the 24-month period ending in June 2001. The
Stock Restriction Agreement also requires the consent of Molex for certain
extraordinary actions relating to the governance of the Company and its
operations. Certain rights or restrictions contained in the Stock Restriction
Agreement terminate upon completion of a Public Sale or a Public Offering, as
defined in the agreement. The Stock Restriction Agreement will also terminate if
the Teaming Agreement is terminated.
The net proceeds of the issuances of stock to Molex were added to
the Company's working capital and are being used in part to accelerate the
commercialization of the Company's DWDM products.
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Agreement with Polyvalor and McGill University
Lumenon entered into a license agreement (the "License Agreement")
with Polyvalor, a Canadian limited partnership, as represented by its General
Partner, Polyvalor Inc. and McGill University (together, Polyvalor and McGill
University are referred to as the "Licensor") pursuant to which Lumenon acquired
the right to produce, sell, distribute and promote products derived from using
the patents and know-how (as such terms are defined in the License Agreement) of
the Licensor subject only to the license granted to QPS Technology Inc. in May
1998. To date, QPS Technology Inc. has not demonstrated any desire or capability
to utilize its license for production of any related technology or products.
These patents and know-how are based on the work of Dr. Iraj Najafi at Ecole
Polytechnique and Dr. Mark Andrews at McGill University and their respective
team of collaborators. Lumenon will pay a royalty of 5% on gross sales, up to a
maximum cumulative amount of US$2,367,104 (CDN$3,500,000) to the Licensor until
October 2017 at which time the License Agreement will expire. The Company does
not believe that the rights granted it thereunder will be of significant value
after that date. If this is not the case, the Company would seek to extend the
term of the License Agreement. Polyvalor is a company created by Ecole
Polytechnique for the purpose of commercializing the technology in which
Polytechnique has an interest.
In connection with the License Agreement, the Company issued to each
of McGill University and Polyvalor 750,000 shares of the Common Stock and
granted them jointly the right to nominate one director to the Company's Board
of Directors.
Agreement with Polaroid
Lumenon has entered into an agreement dated July 21, 2000 with
Polaroid Corporation for the irrevocable non-exclusive license of certain
patents held by Polaroid in connection with AWG. Lumenon agreed to pay to
Polaroid an initial licensing fee of US $395,000 (CDN$584,047). In addition
Lumenon will pay royalties on the net selling price of its products, at an
annual rate of 5% for aggregate net selling prices of five million US dollars,
3.5% for aggregate net selling prices over five and up to forty million US
dollars, and 1.75% for aggregate net selling prices over forty million US
dollars, for each year of the agreement.
Convertible Note Financing
On July 25, 2000, the Company consummated the purchase by two
institutional investors (the "Purchasers") of US$35,000,000 (CDN$51,751,000)
aggregate principal amount of convertible notes due July 25, 2005 (the "Notes").
The Notes bear interest at the per annum rate of 7 1/2%, which is payable upon
the earlier to occur of the repayment or conversion of the Notes. The Notes are
convertible from and after issuance into shares of Common Stock at a price equal
to the average of the closing bid prices of the Common Stock for the five
consecutive trading days ending immediately prior to conversion, but in no event
less than US$7.00 nor more than US$25.00 per share (unless a default under the
Notes shall have occurred). Commencing 30 months after the issuance of the
Notes, the Company may require their conversion provided certain specified
Common Stock pricing and trading volume criteria and certain resale and market
criteria are satisfied. The Notes provide for various events of default, which
would entitle their holders to require the immediate repayment of the Notes,
together with an additional default amount. The holders of the Notes may also
require their repayment, together with an additional redemption amount, upon
certain extraordinary events, such as a merger, a sale of all or substantially
all assets and a change of control.
The proceeds of sale of the Notes are being used in part to complete
the buildout of the Company's new manufacturing facility. Such proceeds will
also be used to pursue the Company's overall growth strategy and to finance its
research and development program.
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In connection with the financing, the Company issued to the
Purchasers five year warrants (the "Investor Warrants") to purchase an aggregate
of 5,000,800 shares of Common Stock, vesting 18 months after issuance, based
upon the volume weighted average price of the Common Stock (the "Volume Weighted
Average Price") during the five consecutive trading days preceding vesting. If
the Volume Weighted Average Price is equal to or less than US$30.00, then the
exercise price will be US$10.00. If the Volume Weighted Average Price is more
than US$30.00, but less than US$70.00, then the exercise price will be the sum
of US$10.00, plus one-half of the excess over US$30.00. If the Volume Weighted
Average Price is more than US$70.00, then the exercise price will be US$30.00.
The number of shares of Common Stock issuable upon exercise of the Investor
Warrants and the exercise price of the Investor Warrants are subject to
adjustment upon the occurrence of certain dilutive issuances of the Company's
securities. In the event of a default under the Notes or in certain other
obligations of the Company to the Purchasers, vesting of the Investor Warrants
may be accelerated.
The Company agreed with the Purchasers that for a period of 180 days
after the issuance of the Notes, it would not, without the prior consent of the
Purchasers, obtain additional equity or equity-linked financing and that for a
further period of 180 days, should it propose to engage in any equity or
equity-linked financing, it would offer the Purchasers the opportunity to
provide such financing upon the terms and conditions proposed. Such agreement is
not applicable to business combinations or firm commitment public offerings. The
Company also agreed to submit for the approval of its stockholders prior to
November 30, 2000 the agreements under which the Notes and Investor Warrants
were issued.
The Company also agreed with the Purchasers to register for resale
under the Securities Act of 1933, as amended, 8,800,000 shares of Common Stock
issuable upon conversion of the Notes and exercise of the Investor Warrants. The
registration is to be effected as promptly as is practicable.
Customer Relations
In addition to the relationship created under the Molex Agreements,
the manufacture of DWDM products implies that the Company will work in close
association with DWDM system manufacturers. Examples of these manufacturers are
Nortel Networks, Cisco, Alcatel, Lucent Technologies, and Ciena. Lumenon
believes that it will be important to its success to work with customers
directly to meet performance requirements in the design of its DWDM products and
devices throughout the entire life cycle of its products. This will allow the
Company to foster a strong commitment to service, and to gain insights into its
customers' future plans and needs, identify emerging industry trends and
consequently deliver high-performance, cost-effective products with wide market
appeal.
Competition
There are several competitors producing DWDM products on the market.
Lumenon believes that it will distinguish itself from the competition by
producing DWDMs in high volume, while retaining high performance standards.
Manufacturers of DWDM systems that may use AWG devices include Lucent
Technologies, Ciena, Alcatel, Cisco, Nortel, NEC and Fujitsu. Several of these
systems manufacturers (Lucent, Ciena, Alcatel, and NEC) also manufacture DWDM
products. Other DWDM component suppliers include, but are not limited to,
JDS-Uniphase, Gould, Instruments SA, Corning OCA, Ditech, DiCon, Sumitomo, Bosch
Kymata Ltd., Lightwave Microsystems Corp. (LMC), and Bookham Technology Limited.
Lumenon believes that it can compete effectively because it will be capable of
manufacturing its products in high volumes and in a cost effective manner. The
Company has developed materials and processes that use volume coating and
optical circuit fabrication processes that it believes are simpler than those of
its competitors. The photonic chip approach adopted by Lumenon offers the
advantage of compactness at the larger channel counts since there is no need to
cascade. Lumenon's compact devices will allow manufacturers of DWDM systems more
flexibility with the design of more compact products. Moreover, Lumenon believes
that its Platform Technology will allow it to produce a broader range of
products in the photonic components markets related to optical networking than
that of other competitors. This broader range of products may include photonic
chips that can be used for interconnection, power division and combination in
personal computers, where price sensitivity is an issue.
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Lumenon believes that it is in a strong position to become a technological
leader in the industry by introducing its new processes and by defining industry
standards for volume photonic chip manufacturing through the Company's
low-temperature, low cost processing of compact chips and its customization of
products. See the "Business Strategy" section of the Item 1. and the "Risk
Factors" section generally for risks relating to the Company's technology and
efforts to become a technology leader.
The Company expects competition to increase in the future from
existing competitors and from companies that may enter the Company's existing or
future markets, with similar or substitute solutions that may be less costly or
provide better performance or features than the Company's products. To be
successful in the future, Lumenon must continue to respond promptly and
effectively to changing customer performance, feature and pricing requirements,
technological change and competitors' innovations. The Company is reliant upon
its licensed sol-gel manufacturing process under the terms of its License
Agreement, described more fully in "Material Agreements - Agreement with
Polyvalor and McGill University," for the development and production of its
products.
The photonics industry has been marked by the emergence of start-up
companies offering products at the component, sub-system and systems levels.
Larger companies have been aggressive in acquiring start-ups for preferred
competitive technological edge, to circumvent issues of increasing technological
complexity, and to accelerate time-to-market product introduction, avoiding the
cost and delay that would otherwise be inherent in in-house development. To
date, no acquisition offers have been made to the Company nor are any
anticipated by the Company in the foreseeable future. The Company's success will
depend on its customers' acceptance of outsourcing as an alternative to in-house
development by larger companies. Many of Lumenon's potential customers have
substantial technological capabilities and financial resources. These customers
may currently be developing, or may in the future decide to develop or acquire,
products or technologies that are similar to or may be substituted for the
Company's products and, this may diminish purchases of the Company's products.
A number of Lumenon's current and potential competitors have longer
operating histories, greater name recognition, access to larger customer bases
and significantly greater financial, technical, marketing and other resources
than the Company. As a result, they may be able to adapt more quickly to new or
emerging technologies and changes in customer requirements or to devote greater
resources to the promotion and sale of their products. In addition, current and
potential competitors may determine, for strategic reasons, to consolidate, to
lower the price of their products substantially or to bundle their products with
other products. Current and potential competitors have established or may
establish financial or strategic relationships among themselves or with existing
or potential customers, resellers or other third parties. Accordingly, it is
possible that new competitors or alliances among competitors could emerge and
rapidly acquire significant market share. Increased competition may result in
price reductions, reduced gross margins and loss of market share.
Lumenon believes that its ability to compete successfully depends on
a number of factors, both within and outside of its control. Such factors
include including the price, performance and quality of the Company's and its
competitors' products, the timing and success of new product and feature
introductions by the Company, its customers and its competitors, the emergence
of new standards in the optical communications industry, the development of
technical innovations, the availability of raw materials, the efficiency of
production, the rate at which the Company's customers design the Company's
products into their products, the number and nature of the Company's competitors
in a given market, the assertion of intellectual property rights and general
market and economic conditions.
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Sales, Marketing and Technical Support
The Company is party to an agreement with Molex that reserves most
of the Company's first year of production for Molex and also provides the
Company with access to Molex's global distribution network. This reliance on
Molex poses an operating risk to the Company. See, "Risk Factors - Risks
Relating to Our Business," sixth risk factor. In the event that this
relationship changes and Molex is not able to provide Lumenon access to Molex's
distribution network, Lumenon will be selling its products directly through its
in house selling and marketing. The Company plans to develop an international
network that would include offices in North America, Europe, and Asia-Pacific.
The Company presently promotes its developing product line in trade
journals to generate advance interest. Over the next 12 months, the Company will
hire additional internal marketing and sales personnel to assist with the
Company's efforts. See the "Plan of Operations - Employee Growth" section of
this Item 1. regarding the Company's plans for additional hiring.
Lumenon believes that providing its clients with comprehensive
product service and support is critical to maintaining a competitive position in
the optical communications market. (See - "Industry Background.") The Company's
practice will be to work closely with its customers to monitor the performance
of its product designs and to provide application design support and assistance.
The Company will also provide a valuable technical resource for consulting on
photonic component trends and implementations. Technical data will be provided
to customers through the Company's applications engineers, technical marketing
and factory applications engineers and, if necessary, product designers and
architects or system designers. Local field support will be provided in person
or by telephone.
Lumenon intends to provide support at crucial stages of product
development. During the design phase, the Company may sell software simulation
models of each photonic component or device, to allow customers to simulate the
performance of the product in their entire system before committing to it. In
the future, the Company may also offer a line of evaluation modules, which are
subsystems that are representative of a typical customer design. These modules
would enable customers to evaluate the device, as well as hardware design and
software development functions, without significant development effort on their
part, thereby facilitating rapid time-to-market. Lumenon believes that close
contact with these customers will allow the Company to tailor its products to
the market and technical needs defined by key OEMs. Understanding its customers'
particular problems enables the Company to design and develop solutions in its
next generation of products.
History of Company
Lumenon's principal place of business is located in the Montreal
suburb of Ville St. Laurent. The Company was incorporated in the state of
Delaware in February 1996 under the name of WWV Development, Inc. In July 1998,
under an acquisition plan, the Company acquired all of the issued and
outstanding shares of Lumenon Innovative Lightwave Technology, Inc., a Canadian
corporation ("LILT") founded in March 1998 by Professor S. Iraj Najafi of the
Ecole Polytechnique, Montreal (an engineering school), and Professor Mark P.
Andrews of McGill University, Montreal. Upon consummation of the acquisition
plan, the Company changed its name from WWV Development, Inc. to Lumenon
Innovative Lightwave Technology, Inc. As consideration for such acquisition, the
Company issued 12,200,000 shares of Common Stock to the shareholders of LILT,
which resulted in a change in control of the Company. Under applicable
accounting rules and policies, LILT is deemed the acquiring corporation and the
financial information contained herein is that of LILT, as consolidated with
Lumenon.
20
<PAGE>
RISK FACTORS
The purchase of our common stock involves a high degree of risk; you should
regard it as speculative and you should consider it only if you can reasonably
afford a loss of your entire investment. You should carefully consider, in
addition to the other information contained in this prospectus, the following
risk factors relating to the Company and its business before deciding to invest
in our common stock.
Risks Relating to Our Financial Condition
We are a development stage company.
We were founded in 1998. We are a development stage company and, to
date, have not had any revenues from sales of our products. Our operating
history provides no basis for evaluating us and our prospects. We must, among
other things, successfully develop and commercialize our products, meet
competition, attract, retain and motivate qualified employees, expand our
operations and market and sell products using our technology in volume to have
significant revenues and to be profitable.
Our future will depend on our ability to develop, manufacture and
commercialize products based upon our licensed proprietary technologies. Our
first product, the DWDM optical chip, has only recently entered production in
limited quantities and we expect to make only limited shipments of the prototype
chips in 2000. Even if our products appear promising when introduced, potential
customers may not accept them, they may be difficult to produce in large volumes
at an acceptable cost, fail to perform as expected, cost too much or be barred
from production by the proprietary rights of others.
We project future losses.
We expect to spend considerable sums to develop and market our new
products. We expect our operating expenses to increase as we develop our
technology and products, increase our sales and marketing activities and expand
our assembly operations. We will not have revenues from product sales before
2001. The amount that we will lose and when, if ever, we will have profits is
highly uncertain. If we become profitable, we do not know how much we will earn
and our profits may vary significantly from quarter to quarter.
Risks Relating to Our Business
We have limited working capital; we may be unable to obtain funding to meet our
future capital needs.
We will require substantial additional funding over the next several
years to develop our technology, to broaden and commercialize our products and
to expand assembly capacity. Our capital needs will depend on a number of
factors, including:
o How many new products we develop
o How fast we develop and commercialize our technologies and
products and expand our assembly operations
o The response of competitors
o The level of acceptance of our products
o Competing technological developments
o Changes in market demand.
In addition, if we develop or commercialize our technology and
products more slowly than we expect, we may need substantially more funding, and
we may be required to spend our cash faster than we currently plan.
21
<PAGE>
We expect to raise additional working capital primarily from the
following sources:
o Sales of equity or debt securities
o Equipment leasing and other secured debt financing
o Manufacturing and other strategic partners.
If we borrow funds, we may become subject to restrictive financial
covenants and our interest obligations will increase. If we issue more stock,
our present stockholders may experience substantial dilution.
We do not know whether additional funding will be available on
favorable terms, or at all. If it is not, we may have to delay or abandon some
or all of our anticipated expenditures, to curtail our operations significantly,
to sell assets, or to license to third parties potentially valuable technologies
that we currently plan to commercialize ourselves.
The market for our products requires us to adapt to rapid technological change
and to continue new product development.
We must become a key supplier of components to the photonics
industry to be successful. Our target markets are highly competitive and are
marked by rapidly changing technology and industry standards and declining
average selling prices. We must:
o Anticipate what our clients and their end-users will need and
demand in the manufacture of products, both for general industry
use and specific custom-made usage
o Incorporate those anticipated features and functions into our
products
o Meet specific and exacting design requirements
o Price our products competitively
o Introduce our products at the right time to meet market demand.
The success of our new products will depend on many factors, including:
o The proper product definition
o The timely completion and introduction of designs
o The ability of our customers to incorporate our product into
theirs
o The quality and performance of our products
o The differentiation of our products from those of our
competitors
o The acceptance of our products and those of our customers.
Our products are generally incorporated into our customers' products at the
design stage. Even if our products are accepted by our customers, their products
may not be commercially successful.
22
<PAGE>
The market for our products is characterized by short product lifecycles,
declining average selling prices and fluctuating industry conditions.
Our target markets are subject to continuous, rapid technological
change, including changing industry standards, frequent introduction of new
products, anticipated and unanticipated decreases in average selling prices and
fierce price competition. This means that the life cycle of a product we make
may be short, we must introduce new products on a timely basis and we must spend
a great deal to develop new products. Other competing technologies may force us
to sell our products at lower prices than we expect. Thus, we will need to
introduce new products to compete effectively and to maintain our selling
prices. This may require greater development time and expense than we presently
anticipate. We could experience delays in introducing new products because they
are complex.
Our products have certain risks in their manufacture and assembly.
The assembly of our chips is a sophisticated process, requiring a
clean room and precision assembly equipment. Very small amounts of contaminants
in assembly, defects in components, difficulties in the assembly process or
other factors can cause a significant number of chips to be nonfunctional or to
have unacceptable defects. Many of these problems are difficult to find and
require much time and/or expense to fix.
We have never assembled large amounts of products. It may be
difficult for us to do this.
Using our own plant could involve significant risks, including lack
of adequate capacity, technical difficulties and events limiting production,
such as fires or other damage. Furthermore, if demand for our products
increases, we will have to build another facility and may have to rely on
contractors to manufacture our products for us. Building another facility will
cost a great deal and will involve the risks found in all manufacturing,
including poor production yields, technical difficulties and events limiting
production.
The manufacture of our products involves complex and precise
processes. Changes in our manufacturing processes or those of our suppliers, or
their inadvertent use of defective materials, could significantly reduce our
manufacturing yields and product reliability. Because the majority of our
manufacturing costs are relatively fixed, manufacturing yields are critical to
our results of operations. Lower than expected production yields could delay
product shipments and impair our gross margins. We may not obtain acceptable
yields in the future.
Because we plan to introduce new products and product enhancements
regularly, we must effectively transfer production information from our research
and development department to our manufacturing group and coordinate our efforts
with those of our suppliers to rapidly achieve volume production. If we fail to
effectively manage this process or if we experience delays, disruptions or
quality control problems in our manufacturing operations, our shipments of
products to our customers could be delayed.
We are dependent on equipment suppliers and contract manufacturers.
We rely on outside suppliers for certain equipment to be used in our
manufacturing process. We do not maintain long-term agreements with any of them.
If important manufacturing equipment were to malfunction, we would, at a
minimum, experience delays in the shipment of our products and could be required
to find another manufacturer. Delays in shipment could result in the loss of
customers and reductions in our revenues.
We may rely on third party manufacturers for certain components of
our products. Risks associated with our potential dependence upon third party
manufacturing relationships include:
o Reduced control over delivery schedules
23
<PAGE>
o Lack of quality assurance
o Poor manufacturing yields and high costs
o Potential lack of adequate capacity during periods of excess
demand
o Potential misappropriation of our intellectual property.
We do not know if we will be able to enter into third party
manufacturing contracts on favorable terms, if at all, or that our current or
future third party manufacturers will meet our requirements for quality,
quantity or timeliness.
Dependence on Strategic Relationship.
We have entered into certain agreements with Molex pursuant to
which, among other things, we are to jointly develop certain products. The
agreements with Molex contain certain restrictions on our ability to sell our
products and grant to Molex preferential rights to acquire our products at
favorable prices. See "Business-Material Agreements."
There will be a small number of customers for our products.
For the foreseeable future, we intend to market our products to only
a limited number of leading original equipment manufacturer ("OEM") customers.
We will rely on our OEM customers to develop their own systems, creating demand
for our products. OEM customers may be expected to exert considerable leverage
in negotiating purchases from us. The telecommunications equipment industry, a
principal industry customer, is dominated by a small number of large companies
with few optical components suppliers. Existing suppliers could exert pressure
to keep out new entrants.
The market for our products is very competitive; our competition may be able to
more effectively develop and market their products.
The photonics industry is highly competitive and is marked by rapid
technological change and product obsolescence. We expect such conditions to
continue.
Our competitors include large companies that have substantially
greater financial, technical, marketing, distribution and other resources,
broader product lines, greater name recognition and longer standing
relationships with customers than we do. Our competitors include both companies
already manufacturing large volumes of products based on established
technologies, as well as companies selling emerging technological solutions.
Potential competitors could also include our own customers, which may decide to
manufacture products competitive with ours, rather than purchasing our products.
Potential competitors may develop technology and products comparable or superior
to ours.
We do not know if we can effectively manage the growth of our business.
Our success will depend on the expansion of our operations and the
effective management of growth, which will place a significant strain on our
management, operations and financial resources. In particular, once we begin
volume assembly of our products, our operations are anticipated to expand
substantially. To achieve our plan, we must hire and train additional
engineering, manufacturing, marketing, sales, administrative and management
personnel, and buy additional equipment, facilities, information technology and
other infrastructure. We must also continue to develop our management,
operational and financial systems, procedures and controls. Because we have had
little history with the assembly, marketing or sale of our products in large
quantities, we do not know if we will be able to expand our business rapidly
enough or adequately manage this growth. If we do not accurately predict demand
for our products, we may have too much or too little production capacity. If we
overestimate demand, we may incur fixed production expenses that are excessive.
24
<PAGE>
We are dependent on key personnel; we need to attract, train and retain
additional qualified personnel.
Our success will depend to a significant degree upon the continued
services of key management, technical, and scientific personnel, including Dr.
S. Iraj Najafi, our President and Chief Executive Officer, Dr. Mark Andrews, our
Chief Technical Officer, and Dr. Chia-Yen Li, our Chief Operating Officer. We do
not currently maintain key-man life insurance on any of our personnel.
Our success will also depend on our ability to attract, train and
retain additional management and other highly skilled personnel. Currently, we
are seeking to hire skilled engineers for our assembly process. Our competitors
for qualified personnel are often long-established, highly profitable companies
and the process of hiring qualified personnel is often lengthy. Our management
and other employees may voluntarily leave us at any time.
We lack sales and marketing history and may not be able to retain qualified
salespeople.
We have no history in marketing, selling and distributing our
products. Our future profitability will depend on our ability to develop an
effective sales force. Competition for employees with sales and marketing
experience is intense. We do not know if we will be able to attract and retain
qualified salespeople or if we can build an effective sales and marketing
organization.
We are subject to additional risks related to international sales and
operations.
We expect that international sales will account for a significant
portion of our total revenues. International sales and operations are subject to
a number of risks, including:
o Imposition of government controls
o Export license requirements
o Restrictions on the export of critical technology
o Political and economic instability or conflicts
o Trade restrictions, changes in tariffs and taxes
o Challenges to patents and other intellectual property rights
o Difficulties in staffing and managing international operations
o Problems in establishing or managing distributor relationships
o General economic conditions.
In addition, as we expand our international operations, we may be
required to invoice our sales in local currencies, the value of which may
fluctuate in relation to the Canadian and U.S. dollars.
We lack patent protection of our products.
The patent positions of technology companies, including ours, are
uncertain and involve complex legal and factual questions. In addition, the
coverage claimed in a patent application can be significantly reduced before a
patent is issued. We do not know if our patent applications will result in
patents being issued or that any patents issued to us will provide protection
against competing technologies or will be held valid if challenged. Others may
independently develop products similar to ours or design around or otherwise
avoid patents issued to us.
25
<PAGE>
Others may assert claims against us that will result in litigation.
Litigation, regardless of its outcome, would result in significant cost to us,
as well as diversion of management time. If we were to infringe upon a valid
patent, we might have to change our products or obtain licenses from the patent
owners. We do not know if such licenses would be available on terms favorable to
us or that we would be successful in any attempt to change our products or
processes to avoid infringement. In addition, we could be liable for significant
monetary damages.
We also rely on trade secret and copyright law, and employee and
third-party nondisclosure agreements to protect our intellectual property
rights. We can not be sure whether agreements and measures will provide
meaningful protection of our trade secrets, copyrights, know-how, or other
proprietary information in the event of infringement by others or that others
will not independently develop similar technologies.
The laws of certain foreign countries do not protect our
intellectual property rights to the same extent as do the laws of the United
States. Our intellectual property may be at additional risk in such markets.
We must comply with environmental regulations, which could be costly.
Our operations and assembly processes are subject to certain
federal, provincial and local environmental protection laws and regulations.
These relate to our use, handling, storage, discharge and disposal of certain
hazardous materials and wastes, the pre-treatment and discharge of process waste
waters and the control of process air pollutants. We have put into place
procedures to comply with these laws and regulations. We also have safety
programs, including training of personnel on safe storage and handling of
hazardous materials and wastes. We believe that we are in compliance in all
material respects with applicable environmental regulations. Environmental laws
and regulations, however, may become more stringent over time. If we fail to
comply with either present or future regulations, we may have significant
expenses and may be subject to fines and production halts.
Corporate Governance Risks
We are controlled by insiders, which may prevent a change of control or other
corporate transactions.
As of the date hereof, our management, Molex, Polyvalor and McGill
University collectively own in excess of 50% of our outstanding common stock.
Together, they determine the composition of the Board of Directors and will be
able to determine the outcome of corporate actions requiring stockholder
approval. This ability may have the effect of delaying or preventing a change in
control that may be favorable to other stockholders or causing a change of
control that may not be favorable to by other stockholders.
Under the agreements with Molex, Molex will acquire the
non-exclusive right to manufacture and sell certain jointly developed optical
chip products in the event we have a change in control. Molex also has rights of
first refusal with respect to any sale of stock by certain of our stockholders.
Such rights of Molex may have the effect of delaying or preventing a change in
control that may be favorable to stockholders other than Molex.
26
<PAGE>
Certain provisions of our corporate documents and state law may prevent or
hinder a change of control.
Certain provisions of our certificate of incorporation and by-laws
and of Delaware law could make it more difficult for another party to acquire us
or discourage another party from attempting to acquire us. For example, our
certificate of incorporation and by-laws permit us to issue preferred stock with
rights senior to the common stock in respect of voting and dividend rights and
rights upon liquidation without any further vote or action by stockholders, and
provide for a classified Board of Directors. Although we have no present plans
to issue preferred stock, the issuance of preferred stock could have the effect
of delaying, deterring or preventing a change of control and could make it more
difficult for holders of our common stock to take certain corporate actions,
including the replacement of incumbent directors. Additionally, any such
preferred stock may have preference over and harm the rights of the holders of
common stock.
We have a significant number of outstanding warrants and options, which could
adversely affect the price of our common stock and our ability to sell
additional common stock.
As of June 30, 2000, we had outstanding options to purchase a total
of 2,277,150 shares of common stock at a weighted average exercise price of
US$9.97 per share and outstanding warrants to purchase an aggregate of 3,091,211
shares of our common stock at a weighted average exercise price of US$2.05 per
share. Subsequent to June 30, 2000, we issued the Notes and the Investor
Warrants. The exercise of outstanding options and warrants and the conversion
notes of the Notes will dilute the then current stockholders' ownership of
common stock. Sales in the public market of common stock acquired upon such
exercise of options and warrants could depress the price of our common stock.
The holders of options and warrants can be expected to exercise them at a time
when we would be able to sell common stock on terms more favorable than those
provided by such options and warrants. This may adversely affect our ability to
sell common stock.
Other Risks
We do not pay dividends.
We have never paid any dividends on our common stock. We do not
anticipate paying such dividends in the foreseeable future. We will use any
future earnings to finance our growth.
The market price of our common stock may increase or decrease significantly.
The market price of our common stock has both increased and
decreased significantly. Such market price could be subject to significant
future changes in response to various factors and events including:
o The depth and liquidity of the trading market for the common
stock
o Quarter-to-quarter variations in our operating results
o The correlation of operating results with the expectations of
stockholders and the investment community
o The introduction of our products
o Conditions in our industry.
In addition, from time to time, the public markets, and in
particular the shares of high technology companies, have experienced broad price
and volume fluctuations that often have been unrelated to the operating
performance of issuers.
27
<PAGE>
We can give no assurances that our forward looking statements will be correct.
Certain forward-looking statements, including statements regarding
our expected financial position, business and financing plans are contained in
this prospectus or are incorporated in documents annexed as exhibits to this
prospectus. These forward-looking statements reflect our views with respect to
future events and financial performance. The words, "believe," "expect," "plans"
and "anticipate" and similar expressions identify forward-looking statements.
Although we believe that the expectations reflected in such forward-looking
statements are reasonable, we can give no assurance that such expectations will
prove to have been correct. Important factors that could cause actual results to
differ materially from such expectations are disclosed in this prospectus. All
subsequent written and oral forward-looking statements attributable to us are
expressly qualified in their entirety by the cautionary statements. We caution
readers not to place undue reliance on these forward-looking statements, which
speak only as of their dates. We undertake no obligations to publicly update or
revise any forward-looking statements, whether as a result of new information,
future events or otherwise.
Currency Exchange Rates
All dollar amounts stated in this Form 10-K are in U.S. dollars,
except where otherwise specifically indicated. The following table sets forth,
for the dates indicated, the rates at the specific date for the Canadian dollar
per one U.S. dollar, each expressed in Canadian dollars and based on the noon
buying rate in New York City for cable transfers in Canadian dollars as
certified for customs purposes by the Federal Reserve Bank of New York:
Fiscal Year Ended June 30
1998 1999 2000
---- ---- ----
Rate at end of period 1.4717 1.5070 1.4798
Average rate during the period 1.4178 1.5105 1.4732
High of the period 1.4721 1.5770 1.5079
Low for the period 1.3690 1.4512 1.4350
On August 31, 2000, the noon buying rate in the New York City for
cable transfers in Canadian dollars as certified for customs purposes by the
Federal Reserve Bank of New York was CDN$1.4720 = US$1.00.
ITEM 2. PROPERTIES
Lumenon's corporate and technical headquarters are located in Ville
St. Laurent, near Montreal, Canada in a facility of approximately 53,000 square
feet. Approximately 64% of the space will be occupied by Lumenon's cleanroom and
manufacturing areas and the remainder by its offices.
The lease for the Ville St. Laurent facility is for a period of
twelve years ending in July 31 2012, with annual rent in the amount of US$7.10
(CDN$10.50) net per square foot, or US$379,483 (CDN$561,103) in the aggregate
for each of the first six years. Thereafter, the annual rent is US$426,612
(CDN$630,789). Operating expenses, including all expenses incurred by the
landlord of such facility in connection with the operation, maintenance, repair
and replacement of the exterior of the facility and all insurance with respect
to the facility, and auxiliary structures and improvements on the land are
estimated to be US$2.84 (CDN$4.20) per square foot for the first year,
US$151,762 (CDN$224,396) in the aggregate. Lumenon has the option to renew the
lease for an additional period of five years at a rate equal to the then current
market price for comparable space. The construction of the building was
completed in July 2000. Lumenon is currently completing the internal
construction of the production facility, including the clean rooms and
associated laboratories and installing manufacturing equipment. It is
anticipated that the production facility should be operational at the rate of
500 units per day in 2001. Additional equipment and staff should bring this
facility to its full capacity of 1,000 units per day by 2002.
Lumenon's Dorval facility has an existing capacity of 20 units per
day and will be used to manufacture products until the Ville St. Laurent
facility is operational. Once the second facility is operational, it is
Lumenon's intention to reconfigure the Dorval facility as an R&D facility with
an ancillary production capability. The lease for such facility is for a period
of five years ending in January 2004, with annual rent in the amount of US$3.10
(CDN$4.59) net per square foot, or US$22,193 (CDN$32,814) in the aggregate.
Taxes and expenses are estimated at US$1.26 (CDN$1.87) per square foot per year,
US$9,042 (CDN $13,369) in the aggregate. Lumenon has the option to renew the
lease for an additional period of five years at a rate equal to the then current
market price for comparable space in the same building. As of June 30, 2000, the
Company had spent US$287,788 (CDN$425,523) on leasehold improvements to
construct and equip the Dorval facility.
The Company believes that the Ville St. Laurent and Dorval
facilities will be adequate for its business as is proposed to be conducted
until at least the Spring of 2002.
ITEM 3. LEGAL PROCEEDINGS
The Company is not currently involved in any material legal
proceedings. From time to time, however, it may be subject to claims and
lawsuits arising in the normal course of business.
28
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON STOCK AND RELATED SECURITY
HOLDER MATTERS
The Company's Common Stock has been traded on the NASDAQ National
Market under the symbol "LUMM" since April 13, 2000. From July 27, 1998 (the day
on which trading in the Common Stock commenced) through January 19, 2000, the
Common Stock was quoted on the Over The Counter Bulletin Board ("OTCBB"). From
January 19, 2000 to March 8, 2000, pending the effectiveness of the Company's
Registration Statement on Form 10, trading in the Common Stock was reported by
the National Quotation Bureau in the Pink Sheets. From March 9, 2000 through
April 12, 2000, the Common Stock was quoted on the OTCBB. The following table
sets out the high and low bid prices of the Common Stock during the calendar
year periods indicated. Such prices through April 12, 2000 reflect inter-dealer
prices, without retail mark-up, markdown or commissions and may not necessarily
represent actual transactions.
High Low
---- ---
1998
----
Third Quarter (from July 27th).................... $4.00 $0.63
Fourth Quarter.................................... $1.50 $0.25
1999
----
First Quarter..................................... $1.56 $0.25
Second Quarter.................................... $3.50 $0.44
Third Quarter..................................... $14.25 $1.63
Fourth Quarter.................................... $49.00 $3.50
2000
----
First Quarter..................................... $51.00 $14.16
Second Quarter.................................... $51.00 $9.13
Third Quarter (to August 31st).................... $28.50 $14.50
29
<PAGE>
Holders
As of August 31, 2000, there were 96 holders of record, including
depositories, of the Company's Common Stock.
Dividends
The Company has never declared or paid any cash dividends on its
Common Stock and presently anticipates that all future earnings, if any, will be
retained for the development of its business. The payment of future dividends
will be at the discretion of the Company's Board of Directors and will depend
upon, among other things, future earnings, capital requirements, the financial
condition of the Company, and general business conditions.
Recent Sales of Unregistered Securities
The following unregistered securities were issued by the Company
during the quarter ended June 30, 2000:
<TABLE>
<CAPTION>
Number of Shares Offering/
Date of Description of Sold/Issued/Subject Exercise
Sale/Issuance Securities Issued To Options or Warrants Price Per Share
------------- ----------------- ---------------------- ---------------
<S> <C> <C> <C>
April 14, 2000 Warrants to purchase shares of Common Stock 26,000 US$6.00
to Groome Capital. com, Inc., an accredited
investor
May 8, 2000 Warrants to purchase shares of Common Stock 150,000 US$0.90
issued to Lavery, de Billy as nominee for
accredited investors
May 19, 2000 Warrants to purchase shares of Common Stock 200,000 US$0.90
issued to Lavery, de Billy as nominee for
accredited investors
Various Shares issued to Molex, and accredited investor 5,800,000 US$26.38
upon the exercise of the Services Warrant
</TABLE>
The issuance of these securities was exempt from registration
pursuant to Section 4(2) of the Securities Act of 1933, as amended, as
transactions by the Company not involving a public offering. All such securities
were deemed
30
<PAGE>
by the Company to be restricted securities and were appropriately legended and
restricted as to subsequent transfer. No underwriter was involved in such
transactions.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial data for the
Company for the periods indicated, derived from financial statements prepared in
accordance with generally accepted accounting principles in the United States
that have been audited by KPMG LLP, Montreal, Canada, for the periods ending
June 30, 2000, June 30, 1999 and December 31, 1998. The data set forth below
should be read in conjunction with the Company's financial statements and notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere herein. Unless otherwise indicated,
all dollar amounts in this Form 10-K are expressed in United States dollars.
The Company changed its fiscal year end to June 30, effective in
1999. Amounts reported for fiscal year 1999 are for the six months ended June
30, 1999.
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
December 31, June 30, June 30, June 30,
1998 1999 2000 2000
------------ -------- -------- --------
(in Canadian dollars) (in U.S. dollars)
<S> <C> <C> <C> <C>
Current Assets $ 552,912 $2,044,584 $ 6,058,929 $4,097,745
Capital Assets -- 1,492,495 4,602,682 3,112,865
Total Assets 553,155 3,547,080 12,199,898 8,250,978
Liabilities 119,349 1,002,582 1,606,715 1,086,645
Stockholders' 433,806 2,544,498 10,314,497 6,975,853
Equity
</TABLE>
<TABLE>
<CAPTION>
Fiscal Year From Inception Fiscal Year
Ended to December 31, Six Months Ended Ended
June 30, 2000 1998 June 30, 1999 June 30, 2000
------------- -------------- ---------------- -------------
(in Canadian dollars) (in U.S. dollars)
<S> <C> <C> <C> <C>
Research and
Development $148,091,681 $ 12,291 $ 162,370 $218,968,358
Expenditures (1)
General and
Administrative (2) 3,323,130 290,435 569,507 4,913,579
Other Income (Loss) 216,301 15,217 (17,674) 319,823
Net Loss 151,198,510 287,509 749,551 223,562,114
Loss Per Share (2) $ 5.95 $ 0.03 $ 0.04 $ 8.80
</TABLE>
--------------------------
(1) Amounts shown are net of tax credits and grants and
include non-cash expenses resulting from the issuance of
Common Stock upon exercise of the Services Warrant (see
"Management's Discussion and Analysis of Financial
Condition and Results of Operations").
(2) Including depreciation of US$604,369 (CDN$893,620) for
the year ended June 30, 2000 and none before.
(3) As of December 31, 1998, June 30, 1999 and June 30,
2000, the Company had 16,455,000, 20,215,000 and
32,970,039 issued and outstanding shares, respectively.
The Company has never paid dividends on its Common
Stock.
31
<PAGE>
At December 31, 1998, June 30, 1999 and June 30, 2000, the exchange
rate between the Canadian dollar and the US dollar were CDN$1.533, CDN$1.472 and
CDN$1.4786 to US$1.00, respectively, based on the rate as of each date issued by
the Bank of Canada.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements and Uncertainty of Financial Projections
Forward-looking statements are not based on historical information
but relate to future operations, strategies, financial results or other
developments. Forward-looking statements are necessarily based upon estimates
and assumptions that are inherently subject to significant business, economic
and competitive uncertainties and contingencies, many of which are beyond the
Company's control and many of which, with respect to future business decisions,
are subject to change. These uncertainties and contingencies can affect actual
results and could cause actual results to differ materially from those expressed
in any forward-looking statements made by, or on behalf of, the Company. Such
uncertainties include, among others, the following: (i) competition and the
pricing and mix of products offered by the Company and its competitors; (ii)
difficulties of few product development; (iii) technology changes; (iv) market
acceptance of the Company's products; (v) the ability to attract and retain
qualified personnel; (vi) changes in the Company's development plans; (vii)
larger than expected fluctuations in demand for the Company's products; (viii)
general economic conditions; (ix) economic and business conditions specific to
the photonics market; and (x) the other risk factors referenced in this Form
10-K.
From inception (March 2, 1998) to December 31, 1998, activities were
mainly oriented to the organization of the Company. Due to the change of
year-end, figures of 1999 reflect a six-month period. During that period,
highlights of the activities are represented by certain financial arrangements
entered into in conenction with the construction of the pilot plant and the
acquisition of related capital assets. This management's discussion and analysis
focuses on year ended June 30, 2000 compared to the period from inception to
June 30, 1999.
Results of Operations
The Company is a Development Stage Enterprise, which has not, during
the periods presented in the Selected Financial Data above, realized any
revenues from operations.
Research and development expenses in 2000, net of tax credits and
grants, were US$148,091,681 (CDN$218,968,358). Of these costs, US$147,003,070
(CDN$217,358,739) are non-cash expenses resulting from the issuance of Common
Stock in consideration of certain services rendered by Molex under the terms of
the Teaming Agreement. In connection with such agreement, the Company issued to
Molex an aggregate of 5,800,000 shares upon the exercise of the Services Warrant
granted to Molex under the Teaming Agreement. These expenses were recorded at
the average monthly market price of the shares issued during the period in which
the services were rendered. The Services Warrant has been exercised in full as
of June 30, 2000.
The Company's research and development expenditures, other than
those recorded under the Services Warrant, net of tax credits and grants, were
US$1,088,611 (CDN$1,609,619) during the twelve-month period ended June 30, 2000,
compared to US$118,655 (CDN$174,661) for the period from inception to June 30,
1999, an increase of US$969,956 (CDN$1,434,958). From inception to June 30,
1999, the Company incurred little research and development expenses because it
was not yet engaged in full operations. At June 30, 2000, the Company had an
existing operation consisting of a sizeable research and development group, a
facility and an expansion project underway. During the year ended June 30, 2000,
Lumenon designed new DWDM and WWDM products, developed materials and processes
and produced prototype devices.
32
<PAGE>
General and administrative expenses were US$2,718,761
(CDN$4,019,959) in 2000, compared to US$584,200 (CDN$859,942) for the period
from inception to June 30, 1999, an increase of US$2,134,561 (CDN$3,160,017).
The charges for the period from inception to June 30, 1999, consist mainly of
salaries as a result of the increased number of administrative personnel and
related expenses to manage the Company's expansion project and the increase in
activities resulting from such project. In 2000, the Company has, during the
year, built a corporate structure consisting of teams in Corporate Finance,
Research and Development, Manufacturing, Business Development and Corporate
Development.
Other income, net of interest expense, consisting of interest on
cash and term deposits and gain on foreign exchange, earned during the year
ended June 30, 2000 amounted to US$216,301 (CDN$319,823) compared to a loss of
US$1,669 (CDN$2,457) for the period from inception to June 30, 1999, an increase
of US$217,970 (CDN$322,280). The increase is due to the fact that the Company
had more cash on hand during fiscal 2000 than in the preceding period as a
result of capital raised through private placements and the exercise of warrants
and options and because of a favorable variation in the exchange rate between
the Canadian and the US dollar.
As a result of the above, the Company's overall loss for the year
ended June 30, 2000 amounted to US$151,198,510 (CDN$223,562,114) or US$5.95
(CDN$8.80) per share, compared to US$704,524 (CDN$1,037,060) for the period from
inception to June 30, 1999.
Financial Condition, Liquidity and Capital Resources
From its inception to June 30, 1999, the Company had been engaged in
capital raising, developmental and organizational activities and construction of
its pilot plant. During the year ended June 30, 2000, the Company made
significant investments in staffing and equipment. These investments and costs
have been financed mainly through proceeds of private placements, the exercise
of warrants issued in such private placements and the exercise of options. In
2000, the Company realized net proceeds of US$9,213,670 (CDN$13,623,333) from
these sources.
In July 1999, Lumenon issued 960,000 units at a price of US$1.00 per
unit. Each unit comprised one share of Common Stock and one warrant for the
purchase of one additional share at a price of US$1.50 per share before June
2001.
In September 1999, Lumenon issued 407,000 additional units at a
price of US$4.00 per unit. Each unit comprised one share of Common Stock and one
warrant for the purchase of one additional share at a price of US$6.00 per share
before September 2000. Of these warrants, 125,000 were exercised in October
1999.
In September 1999, Lumenon issued 400,000 additional units to
holders of the convertible notes issued in March 1999 upon the full conversion
of their notes. Each unit comprised one share of Common Stock and one warrant
for the purchase of one additional share at a price of US$0.90 per share before
September 30, 2001. Lumenon issued an additional 30,000 units for US$15,000
(CDN$22,179) to the underwriter who had placed the securities upon conversion of
the notes into units. The warrants included in the units issued to the
underwriter were exercised in December 1999 for proceeds of US$27,000
(CDN$39,922).
In November 1999, Lumenon issued 21,500 units at a price of US$7.00
per unit. Each unit comprised one share of Common Stock and one warrant for the
purchase of one additional share at a price of US$9.00 per share before
September 30, 2000.
In November 1999, Lumenon issued 10,000 additional units at a price
of US$10.50 per unit. Each unit comprised one share of Common Stock and one
warrant for the purchase of one additional share at a price of US$15.50 per
share before October 31, 2000.
33
<PAGE>
In November 1999, Molex exercised warrants issued to it in June 1999
to acquire 1,666,667 shares at a price of US$0.90 per share for total proceeds
of US$1,500,000 (CDN$2,217,900).
In January 2000, Lumenon issued 86,022 additional units at a price
of US$23.25 per unit for a total consideration of US$2,000,000 (CDN$2,957,200).
Each unit comprised one share of Common Stock and one half of a common share
purchase warrant per share of Common Stock purchased. Each of these warrants can
be exercised to acquire one half share of Common Stock at a price of US$30.00
per share before December 7, 2000.
The second closing under the Stock Purchase Agreement with Molex,
which was subject to Lumenon proving out its technology and its ability to
manufacture and deliver certain devices, took place in March 2000 and resulted
in the issuance of 1,500,000 common shares for cash consideration of US$750,000
(CDN$1,108,950).
Options to acquire a total of 742,850 shares were exercised during
the twelve-month period ended June 30, 2000 for total proceeds of US$742,850
(CDN$1,098,378).
Additionally, warrants to acquire a total of 2,747,667 (including
1,666,667 shares issued to Molex upon exercise of its warrants) shares were
exercised in the twelve-month period ended June 30, 2000 for total proceeds of
US$3,348,000 (CDN$4,950,352).
The funds raised through the above financing activities have been
partially offset by operating activities amounting to US$3,641,421
(CDN$5,384,204). The Company has disbursed US$1,974,110 (CDN$2,918,919) in
property and equipment during the twelve-month period ended June 30, 2000 and
made deposits of US$1,031,495 (CDN$1,525,168) on lease agreement and equipment
ordered.
At June 30, 2000, the Company had cash on hand of US$761,113
(CDN$1,125,382). In addition, the Company had US$2,907,891 (CDN$4,299,608) in
term deposits with maturity dates no later than August 23, 2000 and with no
restriction in their use. At June 30, 2000, the market value approximated the
carrying value.
The above balances in cash and term deposits, along with proceeds
from a financing of a US$35,000,000 (CDN$51,751,000) five-year convertible note
on July 25, 2000 (see "Material Agreements - Financing Agreements" in Item 1),
should, in management's estimation, be sufficient to meet the Company's
financial needs to at least December 31, 2001, excluding unforeseen significant
capital expenditures. The Company has no financial obligations of significance
as at June 30, 2000 other than operating lease commitments for its existing
premises and equipment, and employment agreements. Minimum lease payments under
operating lease agreements for premises and equipment for the next twelve months
amount to US$661,773 (CDN$978,497).
The Company does not believe that inflation has had a significant
impact on its results of operations.
Subsequent Event
On July 25, 2000, the Company sold US$35,000,000 (CDN$51,751,000)
aggregate principal amount of convertible notes due July 25, 2005 to two
institutional investors (see "Material Agreements - Financing Agreements" in
Item 1 for a detailed description).
34
<PAGE>
Foreign Currency Transactions
Because the Canadian dollar is primary in the economic environment
in which the Company operates, the Canadian dollar is its functional currency.
Accordingly, amounts presented in US dollars are provided, for convenience of
reference only and are based on the closing exchange rate at December 31, 1998,
June 30, 1999 and June 30, 2000, which were CDN$1.533, CDN$1.472 AND CDN $1.4786
per US dollar, respectively. The rate stated is from the Bank of Canada for each
respective date.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
The Company is exposed to immaterial levels of market risks with
respect to changes in foreign currency exchange rates. Market risk is the
potential loss arising from adverse changes in market rates and prices, such as
foreign currency exchange rates. To the extent that the Company consummates
financings outside of Canada, the Company receives proceeds in currency other
than the Canadian dollar. Most of the Company's operating expenses are incurred
in Canadian dollars. Thus, the Company's results of operations will tend to be
adversely affected if there is a strong Canadian dollar. The Company does not
enter into derivatives or other financial instruments for trading or speculative
purposes, nor does it enter into financial instruments to manage and reduce the
impact of changes in foreign currency exchange rates.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Financial Statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
35
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The directors and executive officers of Lumenon as of June 30, 2000
and their positions with the Company were:
Name Age Position
---- --- --------
Dr. S. Iraj Najafi 46 Director, Chief Executive Officer and President
Dr. Mark P. Andrews 48 Director, Vice President, Chief Technical Officer
and Secretary
Dr. Anthony L. Moretti 48 Director
Denis N. Beaudry 56 Director
Pierre-Paul Allard 40 Director
Guy Brunet 48 Director
Gilles Marcotte 61 Director
Pierre-Andre Roy 59 Director
Dr. Chia-Yen Li 38 Chief Operating Officer
Vincent Belanger 33 Vice President-Finance and
Chief Financial Officer
Reginald J.N. Ross 39 Vice President of Corporate Development
Dr. Iraj Najafi joined the Company in July 1998 as Director,
President and Chief Executive Officer. He was a co-founder of LILT Canada Inc.,
a wholly-owned subsidiary of the Company in 1998, with Dr. Mark Andrews. Dr.
Najafi received B.Sc and M.Sc. Degrees in physics from Shiraz University and a
Ph.D. in Physics from the Ecole Centrale in Paris. After two years of
postdoctoral research at the University of Florida, Gainesville, Dr. Najafi
joined the Department of Electrical Engineering at the Ecole Polytechnique in
Montreal in 1986, as a researcher and subsequently as professor, where he
developed an international reputation as a pioneer in glass integrated optics.
He also founded the Photonics Research Group at the Ecole Polytechnique. Dr.
Najafi has co-authored more than 300 articles, patents, book chapters and books
and taken a leadership role in over 25 international conferences. He has been a
guest editor for Applied Optics and associate editor of Optical Engineering. Dr.
Najafi is a member of the International Society for Optical Engineering (SPIE)
and has been elected a Fellow of the SPIE. Dr. Najafi is on leave from Ecole
Polytechnique until January 2001. He may extend his leave for an additional two
years.
Dr. Mark P. Andrews joined the Company in July 1998 as Director,
Vice President, Chief Technical Officer and Secretary of the Company. He was a
co-founder of LILT Canada Inc. Dr. Andrews received his Ph.D. in physical
inorganic chemistry from the University of Toronto. In 1984, Dr. Andrews joined
the staff of AT&T Bell Laboratories (now Lucent Technologies) as a Principal
Investigator in the Materials Research Division where his research focused on
the study of non-linear optical properties of polymer composites. In 1990, he
joined the Department of Chemistry at McGill University, where he developed new
photonic glasses and polymers. Dr. Andrews has been an Assistant Professor and
currently is an Associate Professor at McGill University, from which he took a
leave of absence from commencing February 1, 2000 in order to devote all of his
time to the growth of the Company. He is a member of the Materials Research
Society and the International Society for Optical Engineers (SPIE).
Dr. Anthony L. Moretti became a Director in December 1999. Dr.
Moretti has been employed in various executive capacities with Molex Fiber
Optics Inc., Chicago, Illinois, since 1997. He is currently
Director-Optoelectronic Development, Molex Fiber Optics Inc, a subsidiary of
Molex. Prior to working at Molex, Dr. Moretti worked as an
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<PAGE>
independent consultant for high tech companies from 1994 to 1997 and prior
thereto was the Technical Director of Amoco Corporation's research laboratory,
which designed and developed optical AWG devices.
Mr. Denis N. Beaudry became a Director in June 1999. Mr. Beaudry is
President of Polyvalor, Montreal, Quebec, Canada, a limited partnership formed
by the Ecole Polytechnique for the purpose of commercializing its intellectual
property. Since 1984, he has occupied the position of Director of the Centre de
Developpement Technologique of the Ecole Polytechnique whose sphere of
activities includes technology transfer, licensing of technology and software,
joint creation with private industry of laboratories and research centers,
strategic alliances, research partnerships, industrial chairs and the emergence
of high technology enterprises. In 1998, he joined Polyvalor as President and
General Manager. His role consists of enhancing the value of research results
for commercial use by means of start-up of high-tech companies in which
Polyvalor holds a participation or interest. Mr. Beaudry was President of the
Quebec Association of University Research Directors in 1992, and is at present a
member of the Board of Directors of the Centre des Technologies Textiles, the
College Rosemont, the Corporation de Financement de l'Institut de Cardiologie de
Montreal, the Centre de Technologies du Gaz Naturel, the Corporation Commerciale
de Materiaux Composites, the Centre de Developpement Rapide de Produits et de
Procedes, and the firms Sinlab Inc., BioSyntech Inc., a biopharmaceutical
company, Phytobiotech Inc., Polyplan Inc., Odotech Inc. and COESI Inc.
Mr. Pierre-Paul Allard became a Director in December 1999. Mr.
Allard is General Manager of Cisco Systems, Canada, a subsidiary of Cisco
Systems Inc., an Internet infrastructure firm. Mr. Allard has been employed in
various executive capacities with Cisco since 1993.
Dr. Chia-Yen Li joined the Company in August 1999 as Chief Operating
Officer. Dr. Li received his Ph.D. in Materials Science and Engineering from the
University of California in Los Angeles (UCLA). Dr. Li has 10 years of
experience in the development of sol-gel materials for photonics. From August
1994 to August 1995, Dr. Li was a Visiting Scholar at the Optical Services
Center of the University of Arizona where he conducted research on integrated
optical devices and materials on a short-term basis. From August 1995 to July
1997, Dr. Li was a Staff Scientist at NZ Applied Technologies, researching
federally funded projects relating to photonics materials and devices. From July
1997 until joining the Company, Dr. Li was a Senior Scientist at MicroTouch
Systems Incorporated, which is a supplier of touch and pen sensitive input
systems, including touchscreens and electronic whiteboards. Dr. Li was in charge
of designing and implementing manufacturing processes on behalf of MicroTouch.
Mr. Vincent Belanger joined the Company in June 1999 as Chief
Financial Officer and Treasurer. In August 2000, he was elected to the
additional office of Vice President-Finance. Mr. Belanger is a chartered
accountant. From 1989 until September 1998, Mr. Belanger was employed in the
corporate finance department of KPMG LLP, one of the world's leading
professional advisory firms, in Montreal. From September 1998 until joining the
Company, Mr. Belanger was employed as Vice President Finances and Corporate
Controller of Viper International Holdings Ltd., a holding company established
for the purpose of making acquisitions.
Mr. Reginald Ross joined the Company in November 1999 as the Vice
President of Corporate Development and Chief of Strategic Operations. Mr. Ross
has a B.Eng (Electrical) from Royal Military College of Canada and is both a
Professional Engineer (Ontario) and a Certified Project Management Professional.
Mr. Ross has a history of over 20 years in information technology project and
program management both within the industry and the Department of National
Defense of Canada. From September 1999 through December 1999, Mr. Ross was an
independent consultant assisting companies in the information technology
industry, focusing on optics and photonics. From June 1999 to September 1999, he
was Chief Executive Officer and President of Fiberview Technologies Limited, a
company producing optical systems devices; from August 1998 to May 1999, Mr.
Ross was Program Manager for SpaceBridge Networks Corporation, a company
providing broadband satellite communications systems; and prior to August 1998,
Mr. Ross was a communications officer in the Department of National Defense
retiring at the rank of Major. Through his recent experience as a consultant and
executive, Mr. Ross also brings considerable expertise in strategic analysis,
planning and executive management within the high-tech start-up environment.
37
<PAGE>
Mr. Pierre-Andre Roy became a Director in May 2000. Mr. Roy studied
Administration and Accounting at Laval University (Quebec City) and at Ecole des
Hautes Etudes Commerciales (Montreal). Mr. Roy joined Bombardier Inc. in 1980 as
Vice President of Finance and Administration in its Mass Transit Division. In
1987, he became Controller for Bombardier's Transportation Equipment Group and
then became Controller for Bombardier Inc. In 1989, Mr. Roy joined Bombardier's
Aerospace Group as Vice President of Finance where he was also responsible for
Information Technologies and Sales Financing activities. In 1992, he was
promoted to President and General Manager of the Aerospace Group's Amphibious
Aircraft Division. In 1993, Mr. Roy assumed the role of President and COO for
Bombardier Capital. From 1995 to 1996, he served in a dual role as President of
Bombardier Capital and Treasurer of the holding corporation, Bombardier Inc. Mr.
Roy relinquished his position as Treasurer in May 1996 to focus on developing
Bombardier Capital business interests. He retired in February 2000.
Mr. Guy Brunet became a Director in March 2000. Mr. Brunet has been
an Investment Advisor for RBC Dominion Securities Wood Gundy and Richardson
Greenshields, investment banking firms, for over twenty years.
Mr. Gilles Marcotte became a Director in March 2000. He has a MSc.
degree in Commerce at the University of Sherbrooke and is a Fellow Chartered
Accountant. He was a partner at KPMG and its predecessor firms since 1979 and
retired in 1998 at the age of 58. Prior to retirement, he was Partner-in-charge
of KPMG's Quebec City office and has been on the Board of Directors of KPMG
Canada. Mr. Marcotte sits on the Board of Directors of a number of companies and
is President of the Quebec Symphony Orchestra and Caisse Populaire Desjardins of
Charlesbourg. Mr. Marcotte also chairs Lumenon's Audit Committee.
Dr. Moretti is the nominee of Molex which, under the Molex
Agreements, has the right to appoint one nominee to the Board of Directors. Mr.
Beaudry is the nominee of Polyvalor and McGill University, which jointly have
the right to appoint one nominee to the Board of Directors. There are no family
relationships among directors and executive officers.
Commencing with the 1999 annual meeting of stockholders (held on
December 7, 1999), directors were divided into three classes, with the initial
term of office of (i) Class I to expire at the 2000 annual meeting of
stockholders, (ii) Class II to expire at the 2001 annual meeting of
stockholders, and (iii) Class III to expire at the 2002 annual meeting of
stockholders. Commencing with the 2000 annual meeting of stockholders, directors
elected to succeed those directors whose terms then expire will be elected for a
term of office to expire at the third succeeding annual meeting of stockholders
after their election. At the 1999 annual meeting of stockholders, Dr. Najafi and
Mr. Allard were elected as Class I directors, Mr. Beaudry was elected as a Class
II director and Dr. Andrews and Dr. Moretti were elected as Class III directors.
Messrs. Roy, Brunet and Marcotte, each of whom was elected by the Board of
Directors subsequent to the 1999 Annual Meeting of stockholders, were designated
as a Class I director, a Class II director and a Class III director,
respectively.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth, for the periods indicated, all
compensation awarded to, earned by or paid to the chief executive officer
("CEO"). No other executive officer of the Company received compensation in
excess of US$100,000 in 2000.
38
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
---------
Annual Compensation Compensation
------------------- ------------
Name and Principal Position Year(1) Salary(2) Bonus # of Options
--------------------------- ------- --------- ----- ------------
<S> <C> <C> <C> <C>
S. Iraj Najafi 2000 US$121,736 - -
Chief Executive Officer and President 1999(3) US$36,798 - 200,000
1998 US$31,311 - -
</TABLE>
------------------------
(1) The Company commenced operations in 1998.
(2) Certain of the executive officers of the Company routinely receive
other benefits from the Company, the amounts of which are customary
in the Company's industry. The Company has concluded, after
reasonable inquiry, that the aggregate amounts of such benefits
during each of the periods reflected in the table above did not
exceed the lesser of US$50,000 (CDN$73,600) or 10% of the
compensation set forth above in respect of any such period.
(3) Represents solely the six-month period ended June 30, 1999.
Compensation of Directors
No remuneration or directors fees were paid to directors of the
Company during the year ended June 30, 2000, with the exception of reimbursement
of expenses. During the fiscal year ended June 30, 2000, non-employee directors
were granted the following options to purchase Common Stock:
Guy Brunet was granted an option to acquire 50,000 shares at a price
of US$28.00 per share vesting over two years in equal tranches of
25,000, exercisable for a period of two years after their vesting
dates of March 28, 2001 and March 28, 2002, respectively.
Gilles Marcotte was granted an option to acquire 50,000 shares at a
price of US$28.00 per share vesting over two years in equal tranches
of 25,000, exercisable for a period of two years after their vesting
dates of March 28, 2001 and March 28, 2002, respectively.
The Board of Directors will determine the remuneration of the
directors and officers of the Company during the current and subsequent fiscal
years.
Employment Agreements
Dr. Chia-Yen Li is employed by the Company as Chief Operating
Officer pursuant to an employment agreement effective August 1, 1999 for a term
of five years. The agreement provides for an initial base salary of US$84,539
(CDN$125,000) annually. The Company also granted Dr. Li an option to acquire up
to 250,000 shares of Common Stock. Throughout the employment period and for a
period of three years thereafter, the agreement restricts Dr. Li's ability to
engage in activities competitive with those of the Company. In addition,
throughout the employment period and for a period of two years thereafter, Dr.
Li has agreed that he will not solicit any person employed by the Company to
leave the Company, or employ or solicit for employment any person who is
employed by the Company. The agreement may be terminated by the Company (i) in
the event of the bankruptcy, liquidation, or dissolution of the Company, (ii) if
Dr. Li commits certain acts constituting cause or (iii) if he is in material
breach of the agreement. Dr. Li may terminate the employment agreement upon
three months' prior written notice to the Company.
39
<PAGE>
Vincent Belanger is employed by the Company as Chief Financial
Officer pursuant to an employment agreement effective June 14, 1999 for a term
of five years. The agreement provides for an initial base salary of US$84,539
(CDN$125,000) annually. The Company also granted Mr. Belanger an option to
acquire up to 300,000 shares of Common Stock. Throughout the employment period
and for a period of three years thereafter, the agreement restricts Mr.
Belanger's ability to engage in activities competitive with those of the
Company. In addition, throughout the employment period and for a period of two
years thereafter, Mr. Belanger has agreed that he will not solicit any person
employed by the Company to leave the Company, or employ or solicit for
employment any person who is employed by the Company. The agreement may be
terminated by the Company (i) in the event of the bankruptcy, liquidation, or
dissolution of the Company, (ii) if Mr. Belanger commits certain acts
constituting cause or (iii) if he is in material breach of the agreement. Mr.
Belanger may terminate the employment agreement upon one month's prior written
notice to the Company.
Reginald J.N. Ross is employed by the Company as the Vice President
of Corporate Development and Chief of Strategic Operations pursuant to an
employment agreement effective December 1, 1999 for a term of five years. The
agreement provides for an initial base salary of US$84,539 (CDN$125,000)
annually. The Company also granted Mr. Ross an option to acquire up to 300,000
shares of Common Stock. Throughout the employment period and for a period of
three years thereafter, the agreement restricts Mr. Ross' ability to engage in
activities competitive with those of the Company. In addition, throughout the
employment period and for a period of two years thereafter, Mr. Ross has agreed
that he will not solicit any person employed by the Company to leave the
Company, or employ or solicit for employment any person who is employed by the
Company. The agreement may be terminated by the Company (i) in the event of the
bankruptcy, liquidation, or dissolution of the Company, (ii) if he commits
certain acts constituting cause or (iii) if he is in material breach of the
agreement. Mr. Ross may terminate the employment agreement upon one month's
prior written notice to the Company.
Stock Options
The Company has created a stock option plan (the "Plan") for its key
employees, its Directors and officers and certain consultants. The Plan is
administered by the Board of Directors of the Company. The Board may from time
to time designate individuals to whom options to purchase shares of common stock
of the capital stock of the Company may be granted and the number of shares to
be optioned to each. The total number of common shares to be optioned to any one
individual may not exceed 5% of the total of the issued and outstanding shares.
The option price per share for common stock that is the subject of any option is
fixed by the Board when such option is granted and cannot involve a discount to
the market price at the time the option is granted. The period during which an
option is exercisable may not exceed 10 years from the date the option is
granted. Options may not be assigned or transferred and expire within a fixed
period from the termination of employment or death of the beneficiary. In the
event of certain basic changes in the Company, including a reorganization,
merger or consolidation of the Company, or the purchase of shares pursuant to a
tender offer for shares of Common Stock of the Company, in the discretion of the
Board, each option may become fully and immediately exercisable. Options
enabling their beneficiaries to acquire a total of 2,277,150 shares of the
Company's Common Stock were outstanding under the Plan as of June 30, 2000. The
number of shares of Common Stock as to which options may be granted under the
Plan has been increased from 2,500,000 to 6,000,000, subject to approval by
stockholders of the Company at the 2000 annual meeting of stockholders.
The Company has never granted any stock appreciation rights. No
stock options were granted by the Company to the Chief Executive Officer during
the fiscal year ended June 30, 2000.
Option Exercised and Option Values
The following table provides information related to options
exercised by the Chief Executive Officer and the number of and value of options
held by the Chief Executive Officer on June 30, 2000.
40
<PAGE>
<TABLE>
<CAPTION>
Securities Aggregate Value Value of Unexercised in the
Acquired Realized Unexercised Options as at money optionsas at
Name On Exercise ($) June 30, 2000 (#) June 30, 2000 ($)
---- ----------- --- ----------------- -----------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
<S> <C> <C>
S. Iraj Najafi 200,000 US$5,100,000 - - - -
(CDN$7,540,860)
</TABLE>
Other Compensation Plans
The Company has no pension plan or other compensation plans for its
executive officers or directors.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The voting securities of the Company outstanding as of June 30, 2000
consisted of 32,970,039 shares of Common Stock. The following table sets forth
information concerning ownership of Common Stock as of June 30, 2000 by (i) each
director, (ii) each executive officer, (iii) all directors and executive
officers as a group, and (iv) each person who, to the knowledge of the Company,
owned beneficially more than 5% of the Common Stock. Unless otherwise indicated,
the address of each such holder is in care of the Company, 8851 Transcanada
Highway, Ville Saint-Laurent, Quebec, Canada H4S 1Z6. Except as otherwise
indicated, and subject to applicable community property laws, each person has
sole investment and voting power with respect to the shares shown. Ownership
information is based upon information furnished by the respective holders and
contained in the Company's records.
<TABLE>
<CAPTION>
Number of Shares
Directors, Nominees, Executive of Common Stock Beneficially Percentage
Officers and 5% Stockholders Owned (1) -----------
----------------------------- ---------------
<S> <C> <C>
Dr. S. Iraj Najafi..................................... 5,037,500(2) 15.3%
Najafi Holding Inc.(2)................................. 5,037,500(2) 15.3%
Dr. Mark P. Andrews.................................... 4,812,500(3) 14.6%
Andrewma Holding Inc................................... 4,687,500 14.2%
Anthony L. Moretti(4).................................. 10,314,667(5) 31.3%
Molex Incorporated(4).................................. 10,314,667 31.3%
Denis N. Beaudry(6).................................... 50,000(6) (7)
Dr. Chia-Yen Li........................................ 55,650(8) (7)
Vincent Belanger....................................... 44,150(9) (7)
Reginald J.N. Ross..................................... 50,000(10) (7)
Guy Brunet............................................. -(11) --
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
Number of Shares
Directors, Nominees, Executive of Common Stock Beneficially Percentage
Officers and 5% Stockholders Owned (1) -----------
----------------------------- ---------------
<S> <C> <C>
Gilles Marcotte........................................ 1,000(11) --
Pierre-Paul Allard..................................... -(11) --
Pierre-Andre Roy....................................... - --
All directors and executive officers as a group........ 20,609,617(12) 62.0%
------------------------------------
</TABLE>
(1) A person is deemed to be the beneficial owner of voting securities
that can be acquired by such person within 60 days after June 30,
2000 upon the exercise or conversion of options, warrants or
convertible securities. Each beneficial owner's percentage ownership
is determined by assuming that options, warrants and convertible
securities that are held by such person (but not those held by any
other person) and that are exercisable or convertible within 60 days
after June 30, 2000 have been exercised or converted.
(2) Dr. Najafi is the sole stockholder of Najafi Holding Inc.
(3) Includes (i) 75,000 shares of Common Stock issuable upon exercise of
options held by Dr. Andrews and (ii) 4,687,500 shares owned by
Andrewma Holdings Inc., of which Dr. Andrews is the sole
shareholder.
(4) The address of Molex and Dr. Moretti is 2222 Wellington Court,
Lisle, Illinois 60532.
(5) Dr. Anthony L. Moretti is the representative of Molex on the
Company's Board of Directors. The shares reflected in the table
above represent the shares beneficially owned by Molex. They do not
include 50,000 shares of Common Stock issuable upon exercise of an
option held by Dr. Moretti.
(6) Denis N. Beaudry is the representative of Polyvalor ("Polyvalor"), a
Canadian limited partnership, and McGill University ("McGill"), on
the Company's Board of Directors. The shares reflected in the table
above do not include the shares beneficially owned by Polyvalor and
McGill as to which Mr. Beaudry disclaims beneficial ownership.
They do include 50,000 shares of Common Stock issuable upon exercise
of options held by Mr. Beaudry.
(7) Less than 1%.
(8) Includes 50,000 shares of Common Stock issuable upon exercise of
options held by Dr. Li. Does not include 200,000 shares issuable
upon exercise of additional options.
(9) Represents 44,150 shares of Common Stock issuable upon exercise of
options held by Mr. Belanger. Does not include 240,000 shares
issuable upon exercise of additional options.
(10) Represents 50,000 shares of Common Stock issuable upon exercise of
options held by Mr. Ross. Does not include 250,000 shares issuable
upon exercise of additional options.
(11) Does not include 50,000 shares of Common Stock issuable upon
exercise of options held by each of Mr. Brunet, Mr. Marcotte and Mr.
Allard.
(12) Includes (i) an aggregate of 269,150 shares of Common Stock issuable
upon exercise of options and (ii) 10,314,667 shares beneficially
owned by Molex.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On July 7, 1998, the Company entered into agreements with the
shareholders of LILT, including Najafi Holdings Inc., a company controlled by
Dr. S. Iraj Najafi, who has since become the Chief Executive Officer and a
director of the Company, and Andrewma Holdings Inc., a company controlled by Dr.
Mark Andrews, who has since become a Vice President and a director of the
Company, pursuant to which the Company acquired all of the issued and
outstanding shares of the capital stock of LILT in exchange for a total of
12,200,000 shares of Common Stock.
42
<PAGE>
On May 19 and June 21, 1999, the Company entered into several
agreements (the "Molex Agreements") with Molex. The Molex Agreements include a
Teaming Agreement, a Stock Purchase Agreement, a Stock Restriction Agreement and
a Registration Rights Agreement. The Teaming Agreement was amended in March
2000. Under the Teaming Agreement as amended, the Company and Molex agreed to
jointly develop certain DWDM products related to the DWDM market and other
photonics markets. Under the Stock Purchase Agreement, Molex purchased 3,000,000
shares of Common Stock at a price of US$0.50 per share in two stages. Lumenon
also issued to Molex a warrant to purchase 1,666,667 additional shares of Common
Stock at a price of US$0.90 per share, which was exercised in November 1999. In
addition, the Company issued the Services Warrant, which was exercised in full
during the past fiscal year to Molex. Under the Stock Restriction Agreement, (i)
the consent of Molex is required for certain extraordinary actions relating to
the governance of the Company and its operations and (ii) certain stockholders
of the Company have agreed not to sell their respective shares of the Company to
a competitor of Molex without Molex's prior consent. Dr. Moretti, an officer of
Molex Fiber Optics Inc., is a director of the Company.
The Company has entered into a license agreement (the "License
Agreement") with Polyvalor, a limited partnership, as represented by its General
Partner, Polyvalor Inc. and McGill University (together, Polyvalor and McGill
University referred to as the "Licensor") pursuant to which Lumenon acquired the
right through October 2017 to produce, sell, distribute and promote products
derived from using the patents and know-how, as such terms are defined in the
License Agreement, of the Licensor. Using a licensed sol-gel process of the
Licensor, Lumenon will design and develop integrated optical devices for DWDM
and Plastic Optical Fiber devices for the telecommunications and data
communications markets. Lumenon will pay a royalty of 5% on gross sales, up to a
maximum of US$2,367,104 (CDN$3,500,000) over the term of the License Agreement.
Additionally, the Company issued 750,000 shares of Common Stock to each of
Polyvalor and McGill University. Mr. Beaudry, an officer of Polyvalor, is a
director of the Company.
43
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) The following documents are filed as part of this Report:
(1) Financial Statements.
See index to financial statements, which appears on page F-1 herein.
(2) Exhibits.
2.1 Amended Plan of Reorganization, Merger and Acquisition
by which WWV Development, Inc. (a Delaware corporation)
acquired and merged into itself Lumenon Innovative
Lightwave Technology, Inc. (a Canadian federal
corporation), and acquired Dequet Capital, Inc. (a
Nevada corporation) as wholly-owned subsidiaries, dated
July 7, 1998 (incorporated by reference to the Company's
Registration Statement on Form 10, Exhibit 2.1).
3.1 Amended and Restated Certificate of Incorporation of
Lumenon Innovative Lightwave Technology, Inc.
(incorporated by reference to the Company's Registration
Statement on Form 10, Exhibit 3.1).
3.2 Amended and Restated By-Laws (incorporated by reference
to the Company's Registration Statement on Form 10,
Exhibit 3.2).
4.1 Specimen Certificate for Shares of Common Stock
(incorporated by reference to the Company's Registration
Statement on Form 10, Exhibit 4.1).
4.2 Lumenon Innovative Lightwave Technology, Inc. Stock
Option Incentive Plan (incorporated by reference to the
Company's Registration Statement on Form 10, Exhibit
4.2).
4.3 Form of Lumenon Innovative Lightwave Technology, Inc.
Warrant to Acquire Shares of Common Voting Stock
(incorporated by reference to the Company's Registration
Statement on Form 10, Exhibit 4.3).
4.4 Form of Convertible Note dated July 25, 2000
(incorporated by reference to the Company's Current
Report on Form 8-K, filed July 28, 2000, Exhibit 4.1).
4.5 Form of Stock Purchase Warrant, dated July 25, 2000
(incorporated by reference to the Company's Current
Report on Form 8-K, filed July 28, 2000, Exhibit 4.2).
10.1 License Agreement by and between Polyvalor and McGill
University and Lumenon Innovative Lightwave Technology,
Inc. (incorporated by reference to the Company's
Registration Statement on Form 10, Exhibit 10.1).
10.2 Teaming Agreement between Molex Incorporated and its
subsidiary Molex Fiber Optics, Inc., and Lumenon
Innovative Lightwave Technology, Inc. and its wholly
owned subsidiary LILT Canada Inc., dated May 19, 1999
(incorporated by reference to the Company's Registration
Statement on Form 10, Exhibit 10.2).
44
<PAGE>
10.3 Stock Purchase Agreement between Molex Incorporated,
Lumenon Innovative Lightwave Technology, Inc., and LILT
Canada, Inc., dated May 19, 1999 (incorporated by
reference to the Company's Registration Statement on
Form 10, Exhibit 10.3).
10.4 Stock Restriction Agreement between Molex Incorporated,
Lumenon Innovative Lightwave Technology, Inc., and LILT
Canada, Inc., Andrewma Holding, Inc., and Najafi Holding
Inc., dated June 21, 1999 (incorporated by reference to
the Company's Registration Statement on Form 10, Exhibit
10.4).
10.5 Registration Rights Agreement between Lumenon Innovative
Lightwave Technology, Inc. and Molex Incorporated dated
June 21, 1999 (incorporated by reference to the
Company's Registration Statement on Form 10, Exhibit
10.5).
10.6 Securities Purchase Agreement by and among Lumenon
Innovative Lightwave Technology, Inc., Capital Ventures
International and Castle Creek Partners LLC, dated July
25, 2000 (incorporated by reference to the Company's
Current Report on Form 8-K, filed July 28, 2000, Exhibit
10.1).
10.7 Registration Rights Agreement by and among Lumenon
Innovative Lightwave Technology, Inc., Capital Ventures
International and Castle Creek Partners LLC, dated July
25, 2000 (incorporated by reference to the Company's
Current Report on Form 8-K, filed July 28, 2000, Exhibit
10.2).
10.8 Agreement of Lease between Liberty Sites Ltd. and LILT
Canada, Inc., dated May 19, 2000.
10.9 License Agreement between Polaroid Corporation and LILT
Canada, Inc., a subsidiary of Lumenon Innovative
Lightwave Technology, Inc., dated July 21, 2000.
21 Subsidiaries of the Company (incorporated by reference
to the Company's Registration Statement on Form 10,
Exhibit 21).
23 Consent of KPMG, LLP.
27 Financial Data Schedule.
(B) Reports on Form 8-K filed in the fourth quarter of the period
covered by this Report.
None.
45
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Company has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
LUMENON INNOVATIVE LIGHTWAVE TECHNOLOGY, INC.
By: /s/ S. Iraj Najafi,
---------------------------------------
S. Iraj Najafi,
President and Chief Executive Officer
September 6, 2000
-----------------
Date
POWER OF ATTORNEY
Know all men by these presents, that each person whose signature
appears below hereby constitutes and appoints S. Iraj Najafi, Mark P. Andrews
and Vincent Belanger his true and lawful attorney-in-fact and agent, with full
power of substitution and resubstitution for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments to this Form
10-K and to file the same, with exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorney-in-fact and agent full power and authority to do and perform each
and every act and thing requisite and necessary to be done, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent or either of them, or their
or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Company and in the capacities and on the date indicated.
/s/ S. Iraj Najafi September 6, 2000
------------------------------------------ --------------------------
S. Iraj Najafi Date
President, Chief Executive Officer
and Director (Principal Executive Officer)
/s/ Mark P. Andrews September 6, 2000
------------------------------------------ --------------------------
Mark P. Andrews Date
Vice President, Chief Technical Officer,
Secretary and Director
F-1
<PAGE>
/s/ Anthony Moretti September 6, 2000
------------------------------------------ --------------------------
Anthony Moretti Date
Director
/s/ Denis N. Beaudry September 6, 2000
------------------------------------------ --------------------------
Denis N. Beaudry Date
Director
------------------------------------------ --------------------------
Pierre-Paul Allard Date
Director
/s/ Vincent Belanger September 6, 2000
------------------------------------------ --------------------------
Vincent Belanger Date
Vice President-Finance and
Chief Financial Officer (Principal Financial
and Accounting Officer)
/s/ Guy Brunet September 6, 2000
------------------------------------------ --------------------------
Guy Brunet Date
Director
/s/ Gilles Marcotte September 6, 2000
------------------------------------------ --------------------------
Gilles Marcotte Date
Director
/s/ Pierre-Andre Roy September 6, 2000
------------------------------------------ --------------------------
Pierre-Andre Roy Date
Director
F-2
<PAGE>
kpmg
LUMENON INNOVATIVE LIGHTWAVE
TECHNOLOGY, INC.
(a Development Stage Enterprise)
Consolidated Financial Statements
Year ended June 30, 2000, six-month period ended June 30, 1999 and periods from
inception (March 2, 1998) to December 31, 1998 and to June 30, 2000
Financial Statements
Consolidated Balance Sheets......................................... F-3
Consolidated Statements of Operations............................... F-4
Consolidated Statements of Cash Flows............................... F-5
Consolidated Statements of Stockholders' Equity..................... F-6
Notes to Consolidated Financial Statements.......................... F-7
F-1
<PAGE>
AUDITORS' REPORT TO THE SHAREHOLDERS
We have audited the consolidated balance sheets of Lumenon Innovative Lightwave
Technology, Inc. (the "Corporation") as at June 30, 2000 and June 30, 1999 and
the consolidated statements of operations, cash flows and stockholders' equity
for the year ended June 30, 2000, the six-month period ended June 30, 1999 and
for the periods from inception (March 2, 1998) to December 31, 1998 and to June
30, 2000. These financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the consolidated financial position of the Corporation as at
June 30, 2000 and June 30, 1999 and the consolidated results of its operations
and cash flows for the year ended June 30, 2000 and for the six-month period
ended June 30, 1999 and for the periods from inception (March 2, 1998) to
December 31, 1998 and to June 30, 2000, in accordance with accounting principles
generally accepted in the United States of America.
Chartered Accountants
Montreal, Canada
July 21, 2000, except as to note 11 (b)
which is as of July 25, 2000
F-2
<PAGE>
LUMENON INNOVATIVE LIGHTWAVE
TECHNOLOGY, INC.
(a Development Stage Enterprise)
Consolidated Balance Sheets
<TABLE>
<CAPTION>
==========================================================================================================================
June 30, June 30, June 30,
2000 2000 1999
--------------------------------------------------------------------------------------------------------------------------
(US$) (CAN$) (CAN$)
(note 2 (a))
<S> <C> <C> <C>
Assets
Current assets:
Cash $ 761,113 $ 1,125,382 $ 1,722,871
Term deposits 2,907,891 4,299,608 --
Interest and sales tax receivable 247,487 365,934 237,539
Research tax credits receivable 128,990 190,724 34,218
Prepaid expenses 52,264 77,281 49,956
--------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------
4,097,745 6,058,929 2,044,584
Deposits (note 7) 1,031,495 1,525,168 --
Property and equipment (note 4) 3,112,865 4,602,682 1,492,495
Other assets 8,873 13,119 10,001
--------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------
$ 8,250,978 $ 12,199,898 $ 3,547,080
==========================================================================================================================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 708,157 $ 1,047,082 $ 523,550
Accrued liabilities 150,615 222,700 172,812
Accrued vacation 68,918 101,902 7,500
Obligations under capital leases (note 5) 158,955 235,031 --
Convertible promissory notes -- -- 298,720
--------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------
1,086,645 1,606,715 1,002,582
Obligations under capital leases (note 5) 188,480 278,686 --
Stockholders' equity:
Share capital (note 6) 33,239 49,147 30,330
Additional paid-in capital (notes 3 and 6 (a)) 158,842,502 234,864,524 3,404,408
Deposit on subscription of shares -- -- 146,820
Accumulated deficit during the development
stage (151,899,888) (224,599,174) (1,037,060)
--------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------
6,975,853 10,314,497 2,544,498
Commitments (note 7)
Subsequent events (note 11)
--------------------------------------------------------------------------------------------------------------------------
$ 8,250,978 $ 12,199,898 $ 3,547,080
==========================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
On behalf of the Board:
______________________ Director
______________________ Director
F-3
<PAGE>
LUMENON INNOVATIVE LIGHTWAVE
TECHNOLOGY, INC.
(a Development Stage Enterprise)
Consolidated Statements of Operations
<TABLE>
<CAPTION>
====================================================================================================================================
Year Year Six-month From From
ended ended period ended inception to inception to
June 30, June 30, June 30, December 31, June 30,
2000 2000 1999 1998 2000
------------------------------------------------------------------------------------------------------------------------------------
(US$) (CAN$) (CAN$) (CAN$) (CAN$)
(note 2 (a))
<S> <C> <C> <C> <C> <C>
Expenses:
Research and development:
External research
(note 3) $ 147,019,020 $ 217,382,323 $ 25,000 $ -- $ 217,407,323
Internal research 1,270,292 1,878,253 169,439 14,440 2,062,132
Tax credits and grants (197,631) (292,218) (32,069) (2,149) (326,436)
-----------------------------------------------------------------------------------------------------------------------------
148,091,681 218,968,358 162,370 12,291 219,143,019
General and administrative 2,718,761 4,019,959 569,507 290,435 4,879,901
Depreciation 604,369 893,620 -- -- 893,620
-----------------------------------------------------------------------------------------------------------------------------
3,323,130 4,913,579 569,507 290,435 5,773,521
Other income (expenses):
Interest, net 160,257 236,956 1,172 7,869 245,997
Gain (loss) on foreign exchange 56,044 82,867 (18,846) 7,348 71,369
-----------------------------------------------------------------------------------------------------------------------------
216,301 319,823 (17,674) 15,217 317,366
------------------------------------------------------------------------------------------------------------------------------------
Net loss $ 151,198,510 $ 223,562,114 $ 749,551 $ 287,509 $ 224,599,174
====================================================================================================================================
Net loss per share:
Basic and diluted $ 5.95 $ 8.80 $ 0.04 $ 0.02
====================================================================================================================================
Weighted average number
of shares outstanding 25,415,601 25,415,601 17,480,967 14,972,188
====================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
LUMENON INNOVATIVE LIGHTWAVE
TECHNOLOGY, INC.
(a Development Stage Enterprise)
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
===================================================================================================================================
Year Year Six-month From From
ended ended period ended inception to inception to
June 30, June 30, June 30, December 31, June 30,
2000 2000 1999 1998 2000
-----------------------------------------------------------------------------------------------------------------------------------
(US$) (CAN$) (CAN$) (CAN$) (CAN$)
(note 2 (a))
<S> <C> <C> <C> <C> <C>
Cash flows from:
Operations:
Net loss $(151,198,510) $(223,562,114) $ (749,551) $ (287,509) $(224,599,174)
Adjustment for item not
involving cash:
Compensation cost
(note 6 (b) (ii)) 34,709 51,321 241,058 -- 292,379
Common shares issued
for services (note 3) 147,003,070 217,358,739 -- -- 217,358,739
Depreciation 604,369 893,620 -- -- 893,620
Change in operating assets and liabilities:
Interest and sales tax
receivable (86,836) (128,395) (216,446) (21,093) (365,934)
Research tax credits
receivable (105,847) (156,506) (32,069) (2,149) (190,724)
Prepaid expenses (18,480) (27,325) (49,956) -- (77,281)
Accounts payable and
accrued liabilities (note 9) 126,104 186,456 584,513 119,349 890,318
---------------------------------------------------------------------------------------------------------------------------
(3,641,421) (5,384,204) (222,451) (191,402) (5,798,057)
Financing:
Proceeds from issuance of
common shares 9,695,938 14,336,414 2,764,297 372 17,101,083
Cash from the acquisition of a
subsidiary -- -- -- 814,322 814,322
Share issue expenses (482,268) (713,081) (291,932) (93,379) (1,098,392)
Principal repayments of capital
lease obligations (60,736) (89,805) -- -- (89,805)
Deposit on subscription of shares -- -- 146,820 -- 146,820
Proceeds from issuance of
convertible promissory notes -- -- 298,720 -- 298,720
---------------------------------------------------------------------------------------------------------------------------
9,152,934 13,533,528 2,917,905 721,315 17,172,748
Investments:
Additions to property
and equipment (note 9) (1,974,110) (2,918,919) (1,492,495) -- (4,411,414)
Additions to other assets (2,109) (3,118) (9,758) (243) (13,119)
Deposits (1,031,495) (1,525,168) -- -- (1,525,168)
Purchase of term deposits (13,399,870) (19,813,048) -- -- (19,813,048)
Disposal of term deposits 10,491,980 15,513,440 -- -- 15,513,440
---------------------------------------------------------------------------------------------------------------------------
(5,915,604) (8,746,813) (1,502,253) (243) (10,249,309)
---------------------------------------------------------------------------------------------------------------------------------
(Decrease) increase in cash (404,091) (597,489) 1,193,201 529,670 1,125,382
Cash, beginning of period 1,165,204 1,722,871 529,670 -- --
---------------------------------------------------------------------------------------------------------------------------------
Cash, end of period $ 761,113 $ 1,125,382 $ 1,722,871 $ 529,670 $ 1,125,382
=================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
LUMENON INNOVATIVE LIGHTWAVE
TECHNOLOGY, INC.
(a Development Stage Enterprise)
Consolidated Statements of Stockholders' Equity
Periods from inception (March 2, 1998) to June 30, 2000
(in Canadian dollars)
<TABLE>
<CAPTION>
====================================================================================================================================
Additional Deposit on
paid-in Accumulated subscription
Shares Par value capital deficit of shares Total
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Issue of common shares
at inception 255,000 $ 372 $ -- $ -- $ -- $ 372
Issue of common shares 16,200,000 24,430 789,892 -- -- 814,322
Share issue expenses -- -- (93,379) -- -- (93,379)
Net loss for the period -- -- -- (287,509) -- (287,509)
------------------------------------------------------------------------------------------------------------------------------------
Balance as at December 31,
1998 16,455,000 24,802 696,513 (287,509) -- 433,806
Issue of common shares 3,760,000 5,528 2,758,769 -- -- 2,764,297
Share issue expenses -- -- (291,932) -- -- (291,932)
Compensation cost related to
stock options granted -- -- 241,058 -- -- 241,058
Net loss for the period -- -- -- (749,551) -- (749,551)
Deposit on subscription
of shares -- -- -- -- 146,820 146,820
------------------------------------------------------------------------------------------------------------------------------------
Balance as at June 30, 1999 20,215,000 30,330 3,404,408 (1,037,060) 146,820 2,544,498
Issue of common shares 12,755,039 18,817 232,121,876 -- (146,820) 231,993,873
Share issue expenses -- -- (713,081) -- -- (713,081)
Compensation cost related
to stock options granted -- -- 51,321 -- -- 51,321
Net loss for the period -- -- -- (223,562,114) -- (223,562,114)
------------------------------------------------------------------------------------------------------------------------------------
Balance as at June 30, 2000 32,970,039 $49,147 $ 234,864,524 $(224,599,174) $ -- $ 10,314,497
====================================================================================================================================
Balance as at June 30, 2000
in US dollars (note 2 (a)) 32,970,039 $33,239 $ 158,842,502 $(151,899,888) $ -- $ 6,975,853
====================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
LUMENON INNOVATIVE LIGHTWAVE
TECHNOLOGY, INC.
(a Development Stage Enterprise)
Notes to Consolidated Financial Statements
Year ended June 30, 2000 and six-month period ended June 30, 1999 and periods
from inception (March 2, 1998) to December 31, 1998 and to June 30, 2000 (in
Canadian dollars)
================================================================================
1. Organization and business activities:
Lumenon Innovative Lightwave Technology, Inc. ("Lumenon") was incorporated
in the State of Delaware in February 1996 under the name of WWV
Development Inc. as a shell company.
In July 1998, under an acquisition plan, Lumenon acquired LILT Canada Inc.
("LILT"), a Canadian corporation, by issuing 12,200,000 common shares to
the shareholders of LILT which resulted in the change in control of
Lumenon. Accordingly, LILT has been determined the acquiring corporation
and these consolidated financial statements present the results of
operations and cash flows of LILT since its inception, March 2, 1998.
Under the plan mentioned above, Lumenon issued 4,000,000 common shares to
acquire Dequet Capital, Inc., a Nevada corporation. Dequet Capital, Inc.'s
only asset was cash in the amount of $814,322 (US$540,000). This company
was subsequently dissolved.
The Corporation's principal business activity is to design, develop and
build integrated optic devices in the form of compact hybrid glass
circuits on silicon chips. Lumenon activities are performed through LILT,
in Canada. In 1999, its year-end has been changed from December 31, to
June 30.
The Corporation is subject to a number of risks, including successful
development and marketing of its technology and attracting and retaining
key personnel. In order to achieve its business plan, the Corporation
anticipates the need to raise additional capital (see notes 3 and 11).
2. Significant accounting policies:
These financial statements have been prepared by management in accordance
with accounting principles generally accepted in the United States. The
significant accounting principles are as follows:
(a) Consolidated financial statements and basis of presentation:
The consolidated financial statements include the accounts of
Lumenon and the accounts of LILT. All intercompany transactions and
balances have been eliminated.
US dollar amounts presented on the consolidated balance sheets,
consolidated statements of operations and cash flows are provided
for convenience of reference only and are based on the closing
exchange rate at June 30, 2000, which was $1.4786 Canadian dollar
per US dollar.
The functional currency of the Corporation is the Canadian dollar.
F-7
<PAGE>
LUMENON INNOVATIVE LIGHTWAVE
TECHNOLOGY, INC.
(a Development Stage Enterprise)
Notes to Consolidated Financial Statements, Continued
Year ended June 30, 2000 and six-month period ended June 30, 1999 and periods
from inception (March 2, 1998) to December 31, 1998 and to June 30, 2000 (in
Canadian dollars)
================================================================================
2. Significant accounting policies (continued):
(b) Cash and cash equivalents:
The Corporation considers all investments that are highly liquid
with an original maturity of three months or less and readily
convertible into cash to be cash equivalents. As at June 30, 2000
and 1999, there were no cash equivalents.
(c) Property and equipment:
Equipment and leasehold improvements are recorded at cost.
Depreciation and amortization are provided using the straight-line
method and the following periods:
====================================================================
Asset Period
--------------------------------------------------------------------
Computer equipment and software 3 years
Office equipment and fixtures 5 years
Leasehold improvements Term of lease
Laboratory and pilot plant equipment 3 years
====================================================================
(d) Other assets:
Other assets, consisting of license and patent costs, are recorded
at cost when acquired and are being amortized on a straight-line
basis over their economic useful lives or their legal terms of
existence, ranging between 10 and 20 years. The capitalized amount
with respect to those assets does not necessarily reflect their
present or future value and the amount ultimately recoverable is
dependent upon the successful commercialization of the related
products.
(e) Research and development costs:
Research and development costs and the cost of intangibles, that are
purchased from others for use in research and development activities
and that have no alternative future uses, are expensed as incurred.
Research tax credits on eligible research expenses incurred in
Canada are accounted for as a reduction of research and development
expenses.
F-8
<PAGE>
LUMENON INNOVATIVE LIGHTWAVE
TECHNOLOGY, INC.
(a Development Stage Enterprise)
Notes to Consolidated Financial Statements, Continued
Year ended June 30, 2000 and six-month period ended June 30, 1999 and periods
from inception (March 2, 1998) to December 31, 1998 and to June 30, 2000 (in
Canadian dollars)
================================================================================
2. Significant accounting policies (continued):
(f) Foreign exchange:
The Canadian dollar is the functional currency of the Corporation.
Foreign denominated monetary assets and liabilities are translated
at the rate of exchange prevailing at the balance sheet date.
Non-monetary assets and liabilities are translated at the rate of
exchange prevailing at the date of the transaction. Revenues and
expenses are translated at the monthly average exchange rate
prevailing during the period. Foreign exchange gains and losses are
included in the determination of net earnings.
(g) Income taxes:
The Corporation uses the asset and liability method of accounting
for income taxes. Under this method, deferred tax assets and
liabilities are recognized for the estimated future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax
bases. This method also requires the recognition of future tax
benefits such as net operating loss carryforwards, to the extent
that realization of such benefits is more likely than not. Deferred
tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax
rates is recognized in the statement of operations in the period
that includes the enactment date.
(h) Comprehensive income:
Since its inception on March 2, 1998, the Corporation adopted
Statement of Financial Accounting Standards No. 130, REPORTING
COMPREHENSIVE INCOME, which establishes new rules for the reporting
and display of comprehensive income and its components. The adoption
of this statement had no impact on the Corporation's net income or
stockholders' equity.
(i) Stock option plan:
The Corporation applies the intrinsic value-based method of
accounting prescribed by Accounting Principles Board ("APB") Opinion
no. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related
interpretations for stock options granted to employees. As such,
compensation expense would be recorded on the date of grant only if
the then current market price of the underlying stock exceeded the
exercise price.
F-9
<PAGE>
LUMENON INNOVATIVE LIGHTWAVE
TECHNOLOGY, INC.
(a Development Stage Enterprise)
Notes to Consolidated Financial Statements, Continued
Year ended June 30, 2000 and six-month period ended June 30, 1999 and periods
from inception (March 2, 1998) to December 31, 1998 and to June 30, 2000 (in
Canadian dollars)
================================================================================
2. Significant accounting policies (continued):
(i) Stock option plan (continued):
The Corporation applies FASB Statement 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION ("SFAS 123") for stock options granted to
non-employees. As such, compensation expense is recorded at the date
of grant, based on the fair value as at that date using the
Black-Scholes option - pricing model.
(j) Impairment of long-lived assets and long-lived assets to be disposed
of:
The Corporation accounts for long-lived assets in accordance with
the provisions of SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF
LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF. This
statement requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to
future net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of
the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair
value less costs to sell.
(k) Net loss per share:
Net loss per share is computed using the weighted average number of
shares outstanding during the period. Under the accounting for the
LILT transaction described in note 1, the 12,200,000 shares have
been considered to be outstanding on a retroactive basis for all
periods presented.
(l) Use of estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent liabilities at the date of
the financial statements and the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ
from those estimates.
F-10
<PAGE>
LUMENON INNOVATIVE LIGHTWAVE
TECHNOLOGY, INC.
(a Development Stage Enterprise)
Notes to Consolidated Financial Statements, Continued
Year ended June 30, 2000 and six-month period ended June 30, 1999 and periods
from inception (March 2, 1998) to December 31, 1998 and to June 30, 2000 (in
Canadian dollars)
================================================================================
3. The Molex agreement:
Under the terms of a Teaming Agreement, Lumenon and Molex Incorporated
("Molex") agreed to jointly develop certain products related to the Dense
Wavelength Division Multiplexing market and other photonic devices. Under
the terms of the agreement, Molex is committed to provide services towards
the development of the products. In connection therewith, Lumenon granted
to Molex a warrant to receive 5,800,000 common shares issuable as Molex
fulfills its obligations pursuant to the Teaming Agreement. For the year
ended June 30, 2000, an amount of $217,358,739 (US$147,003,070) was
recorded under research and development expenses and shares pursuant to
the warrant were issued (see note 6 (a) (vi)). Under the terms of this
agreement amended during 2000, Molex is committed to purchase a certain
number of photonic devices of Lumenon for the first twelve months. After
the twelve-month period, Molex will have the option to purchase up to 50%
of the excess capacity of Lumenon and both Lumenon and Molex will share
Molex's profit upon resale of those devices. Under certain circumstances,
Molex may have the right to manufacture all components of the devices in
return of a royalty as defined in the agreement.
4. Property and equipment:
==========================================================================
June 30, 2000
------------------------------------
Accumulated Net book
Cost depreciation value
--------------------------------------------------------------------------
Computer equipment and software $ 407,294 $ 45,756 $ 361,538
Office equipment and fixtures 198,002 13,506 184,496
Leasehold improvements 1,051,538 78,582 972,956
Laboratory and pilot plant equipment 3,839,468 755,776 3,083,692
--------------------------------------------------------------------------
$5,496,302 $ 893,620 $4,602,682
==========================================================================
Equipment held under capital leases for which the cost and net book value
amount to $603,522 (US$408,171) and $542,557 (US$366,940), respectively,
are included in laboratory and pilot plant equipment.
F-11
<PAGE>
LUMENON INNOVATIVE LIGHTWAVE
TECHNOLOGY, INC.
(a Development Stage Enterprise)
Notes to Consolidated Financial Statements, Continued
Year ended June 30, 2000 and six-month period ended June 30, 1999 and periods
from inception (March 2, 1998) to December 31, 1998 and to June 30, 2000 (in
Canadian dollars)
================================================================================
4. Property and equipment (continued):
==========================================================================
June 30, 1999
---------------------------------
Accumulated Net book
Cost depreciation value
--------------------------------------------------------------------------
Computer equipment and software $ 40,250 $ -- $ 40,250
Office equipment and fixtures 17,618 -- 17,618
Leasehold improvements 191,807 -- 191,807
Laboratory and pilot plant equipment 1,242,820 -- 1,242,820
--------------------------------------------------------------------------
$1,492,495 $ -- $1,492,495
==========================================================================
All property and equipment were purchased during the six-month period
ended June 30, 1999. No depreciation was recorded for the same period as
the installation was completed in July 1999.
5. Obligations under capital leases:
Future minimum lease payments under capital leases are as follows:
--------------------------------------------------------------------------
2001 $ 284,823
2002 175,726
2003 135,832
--------------------------------------------------------------------------
Total minimum lease payments 596,381
Less amount representing interest (at rates varying
from 11.75% to 18.85%) 82,664
--------------------------------------------------------------------------
Present value of net minimum capital lease payments 513,717
Current portion of obligations under capital leases 235,031
--------------------------------------------------------------------------
Long-term portion of obligations under capital leases $ 278,686
==========================================================================
F-12
<PAGE>
LUMENON INNOVATIVE LIGHTWAVE
TECHNOLOGY, INC.
(a Development Stage Enterprise)
Notes to Consolidated Financial Statements, Continued
Year ended June 30, 2000 and six-month period ended June 30, 1999 and periods
from inception (March 2, 1998) to December 31, 1998 and to June 30, 2000 (in
Canadian dollars)
================================================================================
6. Share capital:
==========================================================================
June 30, June 30,
2000 1999
--------------------------------------------------------------------------
Authorized:
1,000,000 preferred shares, par value of
US$0.001 per share
100,000,000 common shares, par value
of US$0.001 per share
Issued and outstanding:
32,970,039 common shares (1999 - 20,215,000) $ 49,147 $ 30,330
--------------------------------------------------------------------------
(a) Issue of shares:
As mentioned in note 1, Lumenon acquired LILT in 1998 under a
reorganization and acquisition plan by issuing 12,200,000 common
shares to the shareholders of that corporation. At the date of
acquisition, there were 255,000 outstanding common shares of Lumenon
at an amount of $372 (US$255). In addition, Lumenon issued 4,000,000
common shares to the shareholders of Dequet Capital, Inc. Assets of
the latter consisted of cash in the amount of $814,322 (US$540,000).
1999
----
During the six-month period ended June 30, 1999, the Corporation
entered into a Stock Purchase Agreement with Molex who agreed to
purchase from Lumenon 3,000,000 common shares at $0.74 (US$0.50) per
share in two transactions. The first closing was held in June 1999
for 1,500,000 common shares. In total, the Corporation issued
3,760,000 common shares during the period for a cash consideration
of $2,764,297 (US$1,880,000) along with warrants for the purchase of
3,926,667 common shares at a price of $1.32 (US$0.90) per share.
F-13
<PAGE>
LUMENON INNOVATIVE LIGHTWAVE
TECHNOLOGY, INC.
(a Development Stage Enterprise)
Notes to Consolidated Financial Statements, Continued
Year ended June 30, 2000 and six-month period ended June 30, 1999 and periods
from inception (March 2, 1998) to December 31, 1998 and to June 30, 2000 (in
Canadian dollars)
================================================================================
6. Share capital (continued):
(a) Issue of shares (continued):
2000
----
During the year ended June 30, 2000, the Corporation concluded the
following share capital transactions:
(i) 1,484,522 common shares were issued for a cash consideration
of $7,099,319 (US$4,843,500), of which $146,820 (US$99,297)
was received prior to June 30, 1999;
(ii) promissory notes were converted into 400,000 common shares
with a value of $298,720 (US$200,000);
(iii) in connection with the issuance of common shares referred to
in (i) and (ii), 1,912,211 warrants were issued to be
exercised at prices varying from $1.33 (US$0.90) to $44.36
(US$30.00) per share;
(iv) the second closing of the Stock Purchase Agreement with Molex,
which was subject to Lumenon proving out its technology and
its ability to manufacture and deliver certain devices, took
place in March 2000 for an additional 1,500,000 common shares
and related cash consideration of $1,093,125 (US$750,000);
(v) 3,570,517 common shares were issued upon exercise of warrants
and options for cash consideration of $6,103,916
(US$4,171,350);
(vi) 5,800,000 common shares were issued for services received from
Molex in the amount of $217,358,739 (US$147,003,070). Value of
the shares issued has been recorded as Molex fulfilled its
obligations pursuant to the Teaming Agreement (see note 3).
The transaction was accounted for by using the average market
price of the shares of the Corporation during the periods the
services were rendered by Molex.
Under the terms of a Stock Restriction Agreement, no primary
stockholders can sell any share to competitors of Molex without
Molex's prior consent. The agreement includes certain rights of
first refusal and preemptive rights except that Lumenon can issue
6,000,000 units to raise capital within 24 months from the date of
the agreement, being June 21, 1999. One unit is comprised of one
common share and a warrant for the purchase of one common share. The
common share can be sold at a price not less than $0.74 (US$0.50)
and the warrant can be exercised at a price not less than $1.33
(US$0.90) per share.
Certain rights or restrictions terminate upon completion of a Public
Sale or a Public Offering as defined in the agreement.
F-14
<PAGE>
LUMENON INNOVATIVE LIGHTWAVE
TECHNOLOGY, INC.
(a Development Stage Enterprise)
Notes to Consolidated Financial Statements, Continued
Year ended June 30, 2000 and six-month period ended June 30, 1999 and periods
from inception (March 2, 1998) to December 31, 1998 and to June 30, 2000 (in
Canadian dollars)
================================================================================
6. Share capital (continued):
(b) Stock option plan:
Under a stock option incentive plan established in May 1999, the
Corporation may grant options to purchase common shares to key
employees, directors, officers and service-providers. The terms,
number of common shares covered by each option as well as the
permitted frequency of the exercise of such options is determined by
the Board of Directors. The plan contemplates that a maximum of
4,000,000 common shares may be optioned under the stock option plan.
No optionee can hold options to purchase more than 5% of the number
of shares issued and outstanding at any time. The subscription price
for each share covered by an option is established by the Board of
Directors but such price shall not be lower than the market value at
the date of grant.
Options for the purchase of 3,190,000 common shares at a price
ranging from $1.47 (US$1.00) to $41.40 (US$28.00) per share have
been granted to June 30, 2000.
Options granted have to be exercised over a period not exceeding
seven years. At June 30, 2000, 1,031,650 outstanding options are
exercisable and 1,245,500 outstanding options vest over a period of
one to five years.
(i) Changes in outstanding options for the period were as follows:
<TABLE>
<CAPTION>
================================================================================
Weighted average
Number exercise price per share
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Options outstanding, January 1, 1999 - $ -
Granted 1,940,000 1.44 (US$0.98)
--------------------------------------------------------------------------------
Options outstanding, June 30, 1999 1,940,000
Granted 1,250,000 $ 25.41 (US$17.18)
Exercised (822,850) 1.40 (US$0.95)
Cancelled (90,000) 2.29 (US$1.56)
--------------------------------------------------------------------------------
Options outstanding, June 30, 2000 2,277,150
================================================================================
</TABLE>
F-15
<PAGE>
LUMENON INNOVATIVE LIGHTWAVE
TECHNOLOGY, INC.
(a Development Stage Enterprise)
Notes to Consolidated Financial Statements, Continued
Year ended June 30, 2000 and six-month period ended June 30, 1999 and periods
from inception (March 2, 1998) to December 31, 1998 and to June 30, 2000 (in
Canadian dollars)
================================================================================
6. Share capital (continued):
(b) Stock option plan (continued):
(ii) The following table summarizes significant ranges of
outstanding options as at June 30, 2000:
<TABLE>
<CAPTION>
================================================================================
Options outstanding Options exercisable
------------------------------------ ----------------------
Weighted Weighted Weighted
Range of average average average
exercise remaining exercise exercise
prices Options life price Options price
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$1.47 - $11.83 1,212,150 2.7 years $ 2.01 1,031,650 $ 1.47
$16.28 - $29.57 680,000 5.0 years 24.63 -- --
$32.53 - $41.40 385,000 3.6 years 36.41 -- --
================================================================================
</TABLE>
(iii) Stock-based compensation:
The Corporation applies APB Opinion 25, ACCOUNTING FOR STOCK
ISSUED TO EMPLOYEES, in accounting for its stock option plan.
The exercise price of all stock options is equal to the market
price of the stock at the date of grant and, accordingly, no
compensation cost has been recognized for stock options
granted to employees in the financial statements. Had
compensation cost for the Corporation's stock option plan been
determined based on the fair value at the grant dates for
awards under the plan consistent with the method of FASB
Statement 123, ACCOUNTING FOR STOCK-BASED COMPENSATION ("SFAS
123"), the Corporation's net loss would have been adjusted to
the pro-forma amounts indicated below:
<TABLE>
<CAPTION>
==========================================================================================================
Year Six-month From From
ended ended inception to inception to
June 30, June 30, December 31, June 30,
2000 1999 1998 2000
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net loss As reported $ 223,562,114 $ 749,551 $ 287,509 $ 224,599,174
Pro-forma 225,874,543 1,120,362 287,509 227,282,414
----------------------------------------------------------------------------------------------------------
Pro-forma
compensation $ 2,312,429 $ 370,811 $ - $ 2,683,240
==========================================================================================================
</TABLE>
US dollars
(note 2 (a)) As reported $ 151,198,510
Pro-forma 152,762,439
------------------------------------------------
$ 1,563,929
================================================
F-16
<PAGE>
LUMENON INNOVATIVE LIGHTWAVE
TECHNOLOGY, INC.
(a Development Stage Enterprise)
Notes to Consolidated Financial Statements, Continued
Year ended June 30, 2000 and six-month period ended June 30, 1999 and periods
from inception (March 2, 1998) to December 31, 1998 and to June 30, 2000 (in
Canadian dollars)
================================================================================
6. Share capital (continued):
(b) Stock option plan (continued):
(iii) Stock-based compensation (continued):
<TABLE>
<CAPTION>
=============================================================================
Year Six-month From
ended ended inception to
June 30, June 30, December 31,
2000 1999 1998
-----------------------------------------------------------------------------
<S> <C> <C> <C>
Pro-forma net loss per share:
Basic and diluted $ 8.89 $ 0.06 $ 0.02
U.S dollars 6.01
=============================================================================
</TABLE>
The fair value of each option grant was estimated on the date
of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions: risk-free interest of
approximately 5.8%, dividend yield of 0%, expected volatility
of 200% and expected life of 2 to 5 years (1999 - risk-free
interest rate of approximately 5.5%, dividend yield of 0%,
expected volatility of 90%, and expected life of 3 years). The
per share weighted average fair value of stock options granted
during 2000 and 1999 was $27.07 (US$18.31) and $0.87
(US$0.59), respectively.
Compensation costs of $51,321 (1999 - $241,058) for stock
options granted to non-employees have been recognized in the
financial statements.
(c) Warrants:
The following warrants are outstanding at June 30, 2000:
====================================================================
Warrants Expiry date Exercise price per share*
--------------------------------------------------------------------------------
1,060,000 August 2000 $ 1.33 (US$0.90)
296,700 September 2000 8.87 (US$6.00)
21,500 September 2000 13.12 (US$9.00)
10,000 October 2000 22.92 (US$15.50)
43,011 December 2000 34.00 (US$30.00)
760,000 June 2001 2.22 (US$1.50)
500,000 August 2001 1.33 (US$0.90)
400,000 October 2001 1.33 (US$0.90)
--------------------------------------------------------------------------------
3,091,211
--------------------------------------------------------------------------------
* The warrants are exercisable in US$.
F-17
<PAGE>
LUMENON INNOVATIVE LIGHTWAVE
TECHNOLOGY, INC.
(a Development Stage Enterprise)
Notes to Consolidated Financial Statements, Continued
Year ended June 30, 2000 and six-month period ended June 30, 1999 and periods
from inception (March 2, 1998) to December 31, 1998 and to June 30, 2000 (in
Canadian dollars)
================================================================================
7. Commitments:
(a) Under the terms of a license agreement entered into in July 1998,
Lumenon has the rights to produce, sell, distribute and promote
products derived from the know-how relating to integrated optical
components for Dense Wavelength Division Multiplexing and Plastic
Optical Fibre devices for telecommunications, data communications
and sensor applications. Lumenon is committed to pay a royalty of 5%
on gross sales up to a maximum amount of $3,500,000 (US$2,367,104)
until October 2017.
(b) The Corporation leases premises under operating lease agreements
that expire in January 2004 and July 2012. The first lease contains
a renewal option for a period of five years at the end of the
initial term. Those leases require the Corporation to pay all
executory costs such as maintenance and insurance. Rental payments
under the terms of these leases are secured by a deposit of $750,000
(US$507,000), of which $75,000 (US$50,700) is refundable per year.
In addition, the Corporation leases certain equipment under
operating leases. Minimum lease payments under operating lease
agreements for premises and equipment for the next five years and
thereafter are as follows:
====================================================================
2001 $ 978,497
2002 902,828
2003 866,462
2004 839,728
2005 802,300
Thereafter 6,211,447
--------------------------------------------------------------------
$ 10,601,262
====================================================================
F-18
<PAGE>
LUMENON INNOVATIVE LIGHTWAVE
TECHNOLOGY, INC.
(a Development Stage Enterprise)
Notes to Consolidated Financial Statements, Continued
Year ended June 30, 2000 and six-month period ended June 30, 1999 and periods
from inception (March 2, 1998) to December 31, 1998 and to June 30, 2000 (in
Canadian dollars)
================================================================================
7. Commitments (continued):
(c) The Corporation is committed to purchase equipment in the amount of
$4,377,917 (US$2,960,853), for which $775,168 (US$524,258) was
disbursed as at June 30, 2000 and recorded under deposits.
In addition, the Corporation is committed to acquire equipment
through capital leases in the amount of $1,133,485 (US$766,593).
Estimated future repayments including interest are as follows:
====================================================================
2001 $ 375,376
2002 462,780
2003 398,238
2004 55,133
--------------------------------------------------------------------
$ 1,291,527
====================================================================
(d) The following schedule shows the composition of total rental expense
for all operating leases:
====================================================================
Six-month
Year ended period ended
June 30, June 30,
2000 1999
-------------------------------------------------------------------
Minimum rental payments $ 78,168 $ 26,735
====================================================================
There was no rental agreement before the six-month period ended June
30, 1999.
F-19
<PAGE>
LUMENON INNOVATIVE LIGHTWAVE
TECHNOLOGY, INC.
(a Development Stage Enterprise)
Notes to Consolidated Financial Statements, Continued
Year ended June 30, 2000 and six-month period ended June 30, 1999 and periods
from inception (March 2, 1998) to December 31, 1998 and to June 30, 2000 (in
Canadian dollars)
================================================================================
8. Income taxes:
Details of the components of income taxes are as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------
Six-month From inception
Year ended period ended to
June 30, June 30, December 31,
2000 1999 1998
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net loss:
US operations $ 217,736,986 $ 241,058 $ -
Canadian operations 5,825,128 508,493 287,509
------------------------------------------------------------------------------------------------------
223,562,114 749,551 287,509
Less:
Compensation cost not deductible
for tax purposes 51,321 241,058 -
Expense related to the Teaming
Agreement no deductible for tax
purposes 210,510,490 - -
======================================================================================================
8,000,303 508,493 287,509
------------------------------------------------------------------------------------------------------
Basic income tax rate 38% 38% 38%
------------------------------------------------------------------------------------------------------
3,040,115 193,227 109,253
Adjustment in income taxes resulting from:
Loss carryforwards and unclaimed
deductions not recognized 3,040,115 193,227 109,253
------------------------------------------------------------------------------------------------------
$ - $ - $ -
======================================================================================================
</TABLE>
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of
the deferred tax assets will not be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable
income and tax planning strategies. Since the Corporation is a development
stage corporation, the generation of future taxable income is dependent on
the successful commercialization of its products and technologies.
At June 30, 2000, Lumenon and its subsidiary, LILT, the Canadian
Corporation, had accumulated scientific research and experimental
development expenditures and other unclaimed deductions which are
available to reduce future years' taxable income.
F-20
<PAGE>
LUMENON INNOVATIVE LIGHTWAVE
TECHNOLOGY, INC.
(a Development Stage Enterprise)
Notes to Consolidated Financial Statements, Continued
Year ended June 30, 2000 and six-month period ended June 30, 1999 and periods
from inception (March 2, 1998) to December 31, 1998 and to June 30, 2000 (in
Canadian dollars)
================================================================================
8. Income taxes (continued):
Details of the available deductions are as follows:
==========================================================================
<TABLE>
<CAPTION>
Lumenon LILT
---------------------------------
Federal Provincial
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Research and development expenditures,
without time limitation $ - $ 7,963,000 $ 8,394,000
Excess of net book value of property and
equipment over the undepreciated
capital cost - (2,944,569) (3,154,954)
Losses carried forward:
Expiring - 2006 - 315,000 358,000
- 2007 - 1,494,000 1,725,000
- 2020 2,175,000 - -
==========================================================================================================
</TABLE>
In addition, research tax credits, not recorded in the accounts and
available to reduce future Federal income taxes payable, amount to
$258,000 and $654,000 and expire in 2009 and 2010, respectively.
In accordance with Statement of Financial Accounting Standards No. 109,
ACCOUNTING FOR INCOME TAXES, the income tax effect of temporary
differences that give rise to the net deferred tax assets is presented
below:
<TABLE>
<CAPTION>
=================================================================================================
June 30, June 30,
2000 1999
-------------------------------------------------------------------------------------------------
<S> <C> <C>
Scientific research and experimental development $ 3,064,730 $ 79,420
Non-capital losses 1,415,000 228,000
Excess of net book value of equipment over
the undepreciated capital cost (1,137,866) -
Investment tax credits 912,000 280,000
Less valuation allowance (4,253,864) (587,420)
-------------------------------------------------------------------------------------------------
$ - $ -
=================================================================================================
</TABLE>
F-21
<PAGE>
LUMENON INNOVATIVE LIGHTWAVE
TECHNOLOGY, INC.
(a Development Stage Enterprise)
Notes to Consolidated Financial Statements, Continued
Year ended June 30, 2000 and six-month period ended June 30, 1999 and periods
from inception (March 2, 1998) to December 31, 1998 and to June 30, 2000 (in
Canadian dollars)
================================================================================
9. Supplemental cash flow disclosure:
Non-cash investing and financing activities:
Acquisition of property and equipment through capital leases amounts to
$603,522 (US$408,171) at June 30, 2000 (1999 - nil).
Capital expenditures of $481,366 (US$325,555) are included in accounts
payable at June 30, 2000 (1999 - nil).
10. Financial instruments:
(a) Foreign currency risk management:
Options and warrants are exercisable in US dollars and payable in
such currency. Ultimate proceeds upon exercise of options and
warrants may vary due to fluctuations in the value of the Canadian
dollar relative to the US currency.
(b) Credit risk:
Financial instruments that potentially subject the Corporation to
significant concentrations of credit risk consist principally of
short-term investments and accounts receivable.
The Corporation has investment policies that require placement of
short-term investments in financial institutions evaluated as highly
creditworthy.
In the normal course of business, the Corporation evaluates the
financial condition of the parties with which it contracts on a
continuing basis and reviews the creditworthiness of all new
parties. The Corporation determines an allowance for doubtful
accounts to reflect specific risks.
F-22
<PAGE>
LUMENON INNOVATIVE LIGHTWAVE
TECHNOLOGY, INC.
(a Development Stage Enterprise)
Notes to Consolidated Financial Statements, Continued
Year ended June 30, 2000 and six-month period ended June 30, 1999 and periods
from inception (March 2, 1998) to December 31, 1998 and to June 30, 2000 (in
Canadian dollars)
================================================================================
10. Financial instruments (continued):
(c) Fair values:
The following table presents the carrying amounts and estimated fair
values of the Corporation's financial instruments at June 30, 2000
and 1999. The fair value of a financial instrument is the amount at
which the instrument could be exchanged in a current transaction
between willing parties. Fair value estimates are made as of a
specific point in time using available information about the
financial instrument. These estimates are subjective in nature and
often cannot be determined with precision.
<TABLE>
<CAPTION>
==========================================================================================================
June 30, June 30,
2000 1999
----------------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
amount value amount value
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash $ 1,125,382 $ 1,125,382 $ 1,722,871 $ 1,722,871
Term deposits 4,299,608 4,299,608 - -
Interest and sales tax receivable 365,934 365,934 237,539 237,539
Financial liabilities:
Accounts payable 1,047,082 1,047,082 523,550 523,550
Accrued liabilities 324,602 324,602 180,312 180,312
Convertible promissory note - - 298,720 298,720
==========================================================================================================
</TABLE>
The carrying amounts shown in the table are included in the
consolidated balance sheet under the indicated captions.
The following method and assumption were used to estimate the fair
value of each class of financial instruments:
The carrying amounts approximate fair value because of the short
maturity of these instruments.
F-23
<PAGE>
LUMENON INNOVATIVE LIGHTWAVE
TECHNOLOGY, INC.
(a Development Stage Enterprise)
Notes to Consolidated Financial Statements, Continued
Year ended June 30, 2000 and six-month period ended June 30, 1999 and periods
from inception (March 2, 1998) to December 31, 1998 and to June 30, 2000 (in
Canadian dollars)
================================================================================
11. Subsequent events:
(a) On July 21, 2000, the Corporation entered into a non-exclusive
license agreement with a third party. The Corporation is committed
to pay an initial license fee of $584,047 (US$395,000) and royalties
on sales of products as defined in the agreement.
(b) On July 25, 2000, the Corporation closed a financing involving the
issuance of $51,751,000 (US$35 million) five-year convertible notes
bearing interest at 7.5% per annum. Interest is payable upon the
earlier to occur of the repayment or conversion of the notes. The
notes are convertible into the Corporation's common stock at a
conversion price based on the closing bid price of the common stock
at the time of conversion with a floor as $10.35 (US$7) and a
ceiling of $36.96 (US$25) and a floor of $10.35 (US$7). The
investors also received five-year common stock purchase warrants
entitling them to acquire a total of 5,000,800 shares at a price to
be established in 18 months; the investors will have the right to
purchase shares of Lumenon at a maximum price of $44.36 (US$30) per
share if Lumenon's shares are then traded at a value exceeding
$103.50 (US$70). If the stock price is between $44.36 (US$30) and
$103.50 (US$70), the price will be the then traded value of the
shares minus $44.36 (US$30), divided by two, plus $14.78 (US$10). If
the stock price is under $44.36 (US$30), the price will be $14.78
(US$10).
F-24
