SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10/A
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12 (b) OR 12 (g) OF THE SECURITIES EXCHANGE ACT OF 1934
LUMENON INNOVATIVE LIGHTWAVE TECHNOLOGY, INC.
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(Exact Name of Registrant as Specified in its Charter)
Delaware 98-0213257
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
9060 Ryan Avenue, Dorval, (QC), Canada H9P 2M8
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(Address of Principal Executive offices) (Zip Code)
Registrant's telephone number, including area code (514) 631-0023
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Securities to be registered pursuant to Section 12 (b) of the Act:
Title of Each Class Name Of Each Exchange On Which
To Be So Registered Each Class Is To Be Registered
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None N/A
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Securities to be registered pursuant to Section 12 (g) of the Act:
Common Stock, $.001 par value
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ITEM 1. BUSINESS.
Overview
Lumenon Innovative Lightwave Technology, Inc. ("Lumenon" or the "Company") is a
development stage company that designs, develops, and has commenced the
manufacture of 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. Lumenon
is jointly developing its 8, 16 and 32-channel DWDM devices for use in the DWDM
market pursuant to a teaming agreement (the "Teaming Agreement") with Molex
Incorporated ("Molex"). (See "Material Agreements Agreement with Molex" for a
description of the terms of the Teaming Agreement.) DWDM is a technology that
permits the transmission of multiple sources of information and data
simultaneously over a single optic fiber. Companies 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. Lumenon's DWDM products, integrated optic devices in the form of hybrid
glass circuits on silicon chips, have been designed and developed to allow
providers such as AT&T to greatly increase their information carrying capacity
on existing fiber at significantly lower cost than other conventional DWDM
products. Lumenon has the capacity to manufacture up to 20 devices per day in
its existing pilot facility. As a development stage company, to date, Lumenon
has not generated product revenues and does not anticipate generating product
revenues until mid-2000. Lumenon's plan of operations for calendar year 2000 is
focused on finalizing its jointly developed products and bringing them to market
through Molex under the terms of its Teaming Agreements. For a more complete
description of the Company's plan of operations, see "--Plan of Operations". See
also "Risk Factors" regarding the risks the Company will face in its growth and
in the manufacture and marketing of its products.
Lumenon makes DWDM products in the form of an "optical chip" on silicon through
a licensed sol-gel manufacturing process, for which patent protection is
presently being sought under the laws of the United States and Canada. Lumenon
acquired its rights to the sol-gel process under a license agreement with Ecole
Polytechnique and McGill University expiring in October 2017. (See "Material
Agreements - Agreement with Polyvalor and McGill University" for a description
of the terms of such agreement.) The Company is perfecting the materials and
processes for its DWDM products in its existing pilot facility in preparation
for the expansion of production. Under the Teaming Agreement, the Company will
produce and deliver to Molex up to a maximum of 400 units per month, upon
satisfactory testing of such devices commencing in July 2000. All of the
Company's production of the jointly developed products (the 8, 16 and 32-channel
DWDM devices) for the first year is reserved for Molex, and thereafter Molex
will have the option to purchase all of such products at fair market value for
the succeeding three year period. The Company anticipates making sales of its
products to customers other than Molex after the first year of production. 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 this form and its
licensed process will allow it to provide low cost, high volume manufacturing of
high quality DWDM technology and devices that will be preferred over other
presently available industry DWDM technologies, such as micro-optic thin film or
fiber filters. 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 DWDM chip; (iii) fewer steps
are required in the optical chip
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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 the "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, local, metropolitan, business call (enterprise) and access
markets, where bandwidth or information carrying capacity, is critical. The cost
of installation of DWDM technology is significantly lower than that of
installation of new fiber to add capacity, which latter installation includes
costs associated with construction, purchases of rights of way, work and
regulatory permits and weather delays.
The functional currency of the Company is the Canadian dollar. All amounts
presented in this Form 10 in Canadian currency are identified as such. Other
amounts are expressed in United States dollars.
Industry Background
Survey data on the size of the global and North American DWDM markets vary
somewhat from source to source, though all surveys point to the fact that the
DWDM market is large and growing. 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,
Pirelli, Nortel Networks Corp., NEC and Fujitsu. Several of these systems
manufacturers (Lucent, Ciena, Alcatel, Pirelli and NEC) also manufacture DWDM
products. Other DWDM component suppliers include, but are not limited to,
JDS-Uniphase Corp., Photonic Integration Research Incorporated (PIRI), Gould,
E-Tek Dynamics, Inc., Instruments SA, Corning OCA, Ditech Communications Corp.,
DiCon, Sumimoto, 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 Pirelli, Hitachi
Ltd. and Nortel.
Optical fiber networks have been widely deployed by telecommunications service
providers for both domestic and international carriage. However, recent
increases in information traffic, growing competition and increased demand for
reliability at lower cost have required carriers to enhance the service they
provide. With 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.
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Unprecedented Growth of Information Traffic
The growth in information traffic is largely attributable to the widening use of
the Internet, increased use of distributed computing, e-mail, e-commerce, video
conferencing, telecommuting, audio transmission and networking. 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.
Changes in Demands of Traffic
The telecommunications industry is now seeing traffic change from voice to
data-dominated traffic as 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.
Competition
Widespread telecommunications industry deregulation in the United States has
resulted in increased competition among service providers and, as some industry
analysts believe, 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. Some analysts believe that in the future end-users will be less
tolerant of service interruptions. Network carriers have responded by
introducing fiber optic networks that can tolerate 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 (see diagram below) require twice the fiber capacity
of non-ring systems. These system designs therefore place greater bandwidth
demand on existing fiber networks.
[Graphic omitted. Depiction of ring architecture of fiber optic system
illustrating redundant pathways.]
Other capacity constraints on fiber optic networks include technologies such as
digital subscriber lines (DSL), which promise higher optical network access
speeds to businesses and residences. When speeds in excess of a megabit are more
widely accessible, they will 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. Dense Wavelength
Division Multiplexing 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 is a method that
allows different wavelengths of light (that is, different colors or channels of
information) to be added to the optical fiber, which means more (dense)
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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 and to use one of three kinds of DWDM
devices presently available: circuits that have been etched into chips,
dielectric filters or fiber Bragg gratings. Existing DWDM devices require that
the wavelength channels be transmitted through large component parts, reducing
the service providers' flexibility in network design and performance
capabilities. The advantage of the Company's newly developed DWDM technology, as
an alternative, is its ability to increase the capacity of information on
existing fiber through a less costly and less labor intensive process and in
small component parts (if desired). (See the "Overview" section, third
paragraph, last sentence, and the "Business Strategy"section, fourth paragraph
of this Item 1. for information concerning the costs of and differences between
the Company's DWDM technology and other DWDM technology and alternative capacity
solutions.)
Lumenon, through its licensed manufacturing process called PHASIC(TM), expects
to be able to accommodate low cost, high volume production of optical chips.
PHASICTM stands for Photonic Hybrid Active Silica Integrated Circuit, which
refers to the materials and processes Lumenon uses to produce its DWDM devices
in the form of an integrated optical circuit on silicon microchips similar to
those used in computers. 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 proprietary "hybrid
glasses" (a glass-polymer solution) for making its AWG and a simplified
manufacturing process for creating its optical circuits on silicon. The hybrid
glass can be used to print (through light) circuits on chips 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 introduce 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, 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 calendar year 2000 is focused on finalizing its
8, 16 and 32 channel DWDM devices and bringing them to market by mid-2000 under
the Teaming Agreement. Over the next five months, product development at
Lumenon's existing pilot facility, which is capable of producing up to 20 chips
per day, will focus on four aspects: (i) defining processing sequences and
conditions (wafer coating, photolithography, etc.) that distinguish fabrication
of 8 channel from 16 and 32 channel DWDM devices, (ii) use of this information
to guide the selection and implementation of automation of equipment for higher
volume manufacturing of these devices in a larger manufacturing facility
(described below) planned for operation in mid-2000, (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 its optical
chips. The Company plans (i) to complete the construction of its larger
manufacturing facility by mid-2000, which will be capable of producing up to 500
units per day in 2001 and up to 1,000 units per day in 2002, (ii) to increase
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its work force to approximately 175 persons to fully staff this facility, and
(iii) to commence marketing activities for its DWDM products. (See
"--Manufacturing"and Item 3. Description of Properties for information in
respect of the proposed facility.) For more detailed description of the
Company's future plans and the products to be developed and manufactured, see
the "Business Strategy" and "Technology and Products" sections of this Item 1.
The Company is a development stage company that has not had product revenues to
date and is thus subject to numerous risks, including risks associated with
product development, growth, manufacturing and competition. See "Risk Factors"
generally.
Research and Development
Research and development activities for the first three months of calendar year
2000 will be centered on finalizing the packaging of Lumenon's DWDM products,
specifically the 8, 16 and 32-channel DWDM devices and optimizing their
manufacture. Lumenon intends to unveil its initial products at the Optical Fiber
Conference (OFC) to be held in Baltimore in March 2000. After launch of its
products, Lumenon will apply its capabilities to product improvements, which
will include finalizing manufacturing processes, refining of product format
(including packaging) and device testing. The Company will also focus on
developing new products that it judges to be of value to the photonics market.
See, "Risk Factors - Difficulties Inherent in New Product Development," "Short
Product Lifecycles; Declining Average Selling Prices and Fluctuating Industry
Conditions," and "Weakness in Intellectual Property Protection; Possible
Infringement by the Company" for those risks associated with the development of
the Company's products.
Manufacturing
Lumenon is finalizing negotiations with Liberty Sites Ltd., an industrial park
located in Ville St-Laurent, a suburb of Montreal, Canada for the lease and
construction of Lumenon's larger manufacturing facility. The planned 32,000
square foot manufacturing facility will feature materials preparation,
fabrication, packaging, optical test and quality control facilities. This larger
facility will house the Company's corporate infrastructure and large-scale
production facilities for Lumenon's DWDM products. Upon completion of the
construction of the building, Lumenon will commence the internal construction of
the production facility, consisting of clean rooms and associated laboratories,
and will install manufacturing equipment. See "Risk Factors - Substantial Future
Capital Needs; Uncertainty of Additional Funding" for risks related to
financing, constructing and equipping the new facility and "Manufacturing and
Assembly Risks; Yield Risks" for risks associated with the Company's manufacture
of its products.
The Company's existing pilot facility has a capacity of 20 units per day and
will be used for manufacturing until the second larger facility is operational.
Once the larger facility is operational, it is Lumenon's intention to
reconfigure the existing pilot facility as an R&D facility with an ancillary
production capability.
Employee Growth
As of January 17, 2000, Lumenon had 25 employees in Corporate, R&D and
Operations. Over the next 12 months, Lumenon intends to increase the corporate
team by up to three persons to a final strength of eight. The existing R&D team
of 16 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 be required to increase its manufacturing
component to approximately 70 persons to meet a production rate of 500 units a
day over fiscal year 2001, and to 135 persons to reach a production rate of
1,000 units a day in fiscal year 2002. Most of the employees that Lumenon will
hire will be technicians trained for a few
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months prior to full production. The remainder of the operations staff is
intended to increase to 20 persons, including marketing and sales persons, a
human resources staff and additional 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 175 employees by 2001. See
"Risk Factors - Possible Inability to Manage Growth" and "Dependence upon Key
Personnel; Need to Hire Additional Qualified Personnel" for risks the Company
may face in hiring and retaining additional personnel.
Business Strategy
The Company believes that there is a commercial incentive for introducing DWDM
technology in the form of compact or miniature optical chips that are
manufactured in high volumes in a cost-effective manner for service providers
who desire to lower overall costs while enhancing their services.
Currently, optical chips in the so-called "array waveguide grating" (AWG) format
are used in DWDM technology. Companies that use the AWG format like PIRI,
Kymata, Siemens and Lumenon make DWDM devices that 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 vacuum
deposition process called "flame hydrolysis deposition" (FHD). 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 thermal process that may require six or
more hours to complete. 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.
The DWDM devices produced by Lumenon differ in composition and method of
fabrication. Lumenon's AWG devices are made of different materials (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 or miniature chips (measuring
smaller 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 more 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 costly 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. Additionally,
another method of producing DWDM technology, Chemical Vapor Deposition (CVD), is
being explored by another company, Lightwave Microsystems.
Lumenon's goal is to provide high quality, low cost DWDM devices. The Company
selected its PHASICTM process because it believes that high volume manufacturing
methods similar to those used by the
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microelectronics manufacturing industry are necessary to meet telecommunications
customer demands for high volume, low cost and reliability. The Company believes
that its materials, design tools and process give it a technological edge that
will allow it to cut component costs, resulting in higher yield optical chip
production, similar to the results created when the microelectronics industry
lowered costs in manufacturing integrated circuits. See the "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.
Lumenon intends to market 4, 8, 16, 32 and 64-channel DWDM products that it has
designed. The Company has begun producing, testing and manufacturing a limited
number of 8-channel product devices with production and testing of its 16 and 32
channel product devices to be completed by June 2000. In addition, the Company
intends to offer services based on the Company's 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. Services may include product troubleshooting,
product repair, product improvement and adaptation to client needs. The
Company's DWDM products may be subjected to a variety of industry applicable
reliability performance tests that can be met and sustained by the Company's
technology. DWDM products may be "feature-packed" in reference to size,
reliability, performance, additional optical functionality (like Bragg gratings)
combined with cost effectiveness. Because the 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 intends to provide
fiber connected or pig-tailed DWDM products to the telecommunications market,
which includes long distance, local, metropolitan, business call and access
markets.
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, but 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" - "Difficulties Inherent in New Product Development,"
"Competition," and "Short Product Lifecycles; Declining Average Selling Prices
and Fluctuating Industry Conditions."
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To implement its strategy, the Company intends to:
Establish Technology Leadership
There are three primary multiplexer component technologies currently used in
DWDM: thin film filters (Thin Filters), fiber Bragg gratings (Bragg Gratings)
and array waveguides (AWG). According to a recent 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 the smallest 1998 market share of
19%.
The Company believes that the three variables discussed below in detail will
determine the relative successes of the competing technologies - (i)
manufacturing cost per channel, (ii) size of the optical component and (iii)
suitability to high volume manufacture, and it believes that its products, which
are based on Waveguide technology, will enjoy an advantage in each case:
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. In other words, there is little increase in the
cost of manufacturing a 8-channel, 16-channel or other channel DWDM AWG chip
because the circuits and optical channels are all created in the same step.
Whereas, for Thin Filter and Bragg Gratings technology, 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 the AWG technology. However, 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 competitors in their composition and
method of fabrication. See the "Business Strategy" section, third and fourth
paragraphs regarding the difference in the manufacturing and methods of
fabrication used by the Company.
Size of Optical Components. Planar waveguide technology products are
significantly smaller than those produced by competing technologies. Smaller
devices are important because of space limitations in metropolitan area networks
(MANS), local area networks (LANS) and office systems, markets in which the
Company anticipates greatly increased demand for optical chips, especially its
chips whose designs are flexible, modular and scalable for the creation of small
custom-made devices measuring 5cm x 5cm for example.
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, such as Bragg Grating or Thin Filters. 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 waveguide
technology, should permit lower cost production and higher product yield.
The Company's DWDM devices differ from other waveguide DWDM devices in several
ways. The Company's AWG devices are made from different materials (hybrid
sol-gel glass), which start out as fluids. This gives the Company the advantage
of being able to use spin-coating and dip-coating methods to cover silicon
wafers, rather than vacuum deposition techniques. The Company's glasses are made
at temperatures about 1,000oC lower than those used in FHD chip production. This
has the advantage of energy savings and much greater choice in the range of
substrates e.g., glass, plastic, that might be used in the future to support
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DWDM devices. Lumenon's DWDM optical chips are created by photolithography
directly in the hybrid sol-gel 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.
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. (See, "Material Agreements Agreements with Molex" for more detail
regarding such agreement). 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 a maximum of 400 units per month of Lumenon's 8, 16 and
32-channel DWDM production for the first 12 months, at gross cost to Lumenon
plus 25%. The average revenue per unpackaged chip sold for the first year of
production is currently estimated by the Company at approximately US $1,000
(CDN$1,470). After the first 12-month period, Molex has the option to purchase
all of Lumenon's 8, 16 and 32-channel DWDM production at fair market value for
the succeeding three-year period. This arrangement will provide a firm customer
base for the Company's early production. The Company is presently testing its
8-channel devices and will complete testing of its 16 and 32 channel devices in
the first half of calendar 2000. The Company also proposes to establish
relationships with other telecommunications equipment manufacturers and with
manufacturers in other industries with potential applications for its optical
chips.
Target Metropolitan Area, Local Area and Office Environments
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.
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 will be required to expand beyond its existing pilot facility to a
full scale manufacturing facility, with a production capability of 1,000 chips
per day. The Company is finalizing negotiations for the lease of the 32,000
square foot facility discussed above to be constructed and equipped for
production beginning in 2001. The Company estimates the necessary funding for
such expansion to be approximately US$20 million (CDN$29 million) and is
actively investigating potential sources for such funding. The Company plans to
produce chips at the rate of 20 per day in July 2000 and to increase its
capacity to 500 chips per day in 2001 and to 1,000 per day in 2002.
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Technology and Products
Lumenon has begun making 8, 16 and 32-channel waveguide DWDM devices in the form
of a miniature optical chip and has completed the design of its 4 and 64-channel
DWDM devices. The suite of phased AWG (array wageguide gratings) DWDM devices
are referred to as the [lambda]-PLEXTM family.
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
(greater than 500(0)C) otherwise used in the industry. The Company believes it
is the only producer of compact or miniature Waveguide 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. To keep costs down and volume production up, the Company uses
conventional photolithography (also known as photomicrolithography) or an
imprinting 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 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 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
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of valuable customized products. For example, in the planar lightwave 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 lightwave
market opportunities in high volume at lower cost. See the "Business Strategy"
section, fourth and seventh paragraphs, and the "Technology and Products -
Platform Material Techology" section, first paragraph of this Item 1. 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 presently consists of 16 persons employed full
time to perform the following functions: materials and formulation (formulating
and purifying chemical processing)(2 scientists and 2 technologists),
microfabrication (making the devices)(2 engineers, 1 scientist, 1 technologist),
theory and design (4 engineers), testing and packaging (2 engineers, 1
scientist, 1 technologist). This team has pioneered the development of "optical
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 triune 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 scientists with extensive experience and expertise in the
industry.
Advanced Software Design Tools
The Company uses both proprietary and industry standard design tools to create
its DWDM products. Lumenon has developed in-house theories and software
algorithms for creating product designs such as the Company's complex phased
Waveguide devices for DWDM. The Company is unaware of any commercially available
design packages that compete with the Company's software capability. Whether or
not other companies 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 optical 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 uses the services of ADTEK Corporation to provide turnkey
photomask service utilizing state-of-the-art resolution e-beam writing
equipment, which allows the Company to concentrate its resources on the design
of products, instead of creating and maintaining an in-house mask shop.
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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 optical 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 DWDM devices in a pilot
microfabrication facility custom- designed to meet its product performance
objectives. The capacity of this existing pilot facility is 20 DWDM chips per
day. The Company began producing its 8-channel large and small format optical
chip DWDMs with 200 GHz and 100 GHz channel spacing in early 1999. Collectively,
these DWDM devices belong to Lumenon's [lambda]-PLEXTM-TC-N family of DWDM
chips. As of January 2000, Lumenon does not sell a finished product in the open
market, as its entire first year of production of 8, 16 and 32-channel DWDM
devices has been reserved for Molex under the Teaming Agreement. The current
generation of 8-channel devices is undergoing testing, with 16 and 32-channel
models to follow by the end of June 2000. Upon completion of testing,
satisfactory to Molex, the 8-channel devices manufactured to date will be
delivered to Molex for its use or for resale and distribution. As each channel
device completes its testing phase to the satisfaction of Molex, it will be
delivered to Molex. The Company has also entered development and test phases for
pigtailing optical fiber to its DWDM devices, and for housing its optical chips
in hermetic, semi-hermetic and non-hermetic packages.
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 conduct, equip and staff a full
scale production facility. The Company anticipates increasing its manufacturing
capacity from 20 chips per day in its existing facility to 500 chips per day in
2001 and 1,000 per day in 2002 in the new facility it proposes to construct and
equip. The Company estimates the cost of such an initiative at US$20 million and
is actively exploring potential sources of funding. There are a variety of risks
associated with the construction and operation of a new facility, see "Risk
Factors - Manufacturing and Assembly Risks; Yield Risks, - Substantial Future
Capital Funds; Uncertainty of Additional Financing."
Proprietary Rights
Lumenon's future success and ability to compete are dependent, in part, upon its
licensed 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 registered in the name of Ecole
Polytechnique and McGill University under the terms of its License Agreement,
which expires in October 2017. (See, "Material Agreements - Agreement with
Polyvalor and McGill University" for a description of the terms of such
agreement.) The three patents are:
1. Title: "Solvent-assisted lithographic process using
photosensitive sol-gel derived glass for depositing ridge
AWG on silicon"
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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: United States, Canada
Status: Allowed Pending: the patent has been accepted by the
Patent and Trademark Office of the United State
Department of Commerce and shall be issued upon
submission of an issue fee
2. 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
Status: Pending: the patent was filed in early July 1999 and is
awaiting review and comment. The priority date for filing
of the patent application in other countries is July 1,
2000.
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
production of products, but is relevant and being sought
for later generation products planned for production.
Country: United States
Status: Pending Provisional: the patent is pending but is
incomplete and the priority date for filing the completed
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.
The Company does not presently intend to seek patent protection elsewhere,
because of the size of the potential United States and Canadian markets and
because it is uncertain whether patents in other countries would provide
significant additional protection.
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 - Weakness in Intellectual Property
Protection; Possible Infringement."
Lumenon's rights under the License Agreement expire in October 2017. It does not
believe that the rights granted it thereunder will be of significant value after
that date.
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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. Molex operates 49 plants in 21 countries and offers
approximately 100,000 products through a network of direct salespeople and
authorized distributors. The Molex Agreements include a Teaming Agreement, a
Stock Purchase Agreement, a Stock Restriction Agreement and a Registration
Rights Agreement.
Under the Teaming Agreement, 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 8, 16 and 32-channel DWDM production of Lumenon at gross cost plus 25%
for the first 12 months of production, up to a maximum number of 400 units per
month. 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. After the first
12-month period, Molex will have the option to purchase all of Lumenon's 8, 16
and 32-channel DWDM production at fair market value for the succeeding
three-year period. See - "Risk Factors - Dependence on Strategic Relationships;
Customer Concentration" for the risks associated with the Company's dependence
on Molex and "Business Strategy," sixth and seventh
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paragraphs, 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 (the "Common Stock") 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 is scheduled for March 2000 for an
additional 1,500,000 shares of Common Stock. The second closing is contingent
upon Lumenon's progress in proving its technology and its ability to manufacture
and deliver certain DWDM devices. 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 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 DWDM's technology. The warrant expires in June
2001 and the shares are issuable as Molex performs the services provided for
under the terms of the Teaming Agreement. All rights relating to the warrant
will be extinguished if Molex elects not to proceed with the second closing
under the Stock Purchase Agreement.
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,
or if Molex elects not to proceed with the second closing under the Stock
Purchase Agreement. The Stock Restriction Agreement will also terminate if the
Teaming Agreement is terminated.
The net proceeds of the issuance 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.
In December 1999, Lumenon and Molex began negotiation for the investment by
Molex of an additional US$3 million in the Company's Common Stock subject to
certain contingencies. The negotiations are expected to be complete in the near
future. The proceeds will be used to finance in part Lumenon's planned
manufacturing facility. See Item 3. Property. for more detailed disclosure
regarding such facility.
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 exclusive 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. 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. To
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date, QPS Technology Inc. has not demonstrated any desire or capability to
utilize the license for production of any related technology or products.
Lumenon will pay a royalty of 5% on gross sales, up to a maximum cumulative
amount of $2,377,717 (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.
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, Pirelli Cables and Systems, 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
Previously, the solution to increasing the capacity of service providers in the
industry was to add or lay additional fiber at large costs or to use one of the
three existing technologies, the Thin Filters, Bragg Gratings and AWG to expand
the information carrying capacity of existing fiber. However, the advantage of
the Company's DWDM devices produced by its PHASIC(TM) technology, as an
alternative, is its ability to increase the capacity of information on existing
fiber through a less costly and less labor intensive process. See the "Business
Strategy" section, fourth paragraph, and under "Establish Technology Leadership"
section, first, second and third paragraphs of this Item 1. for the differences
between the Company's technological devices and those manufactured using
competing technologies.
There are several competitors producing DWDM products on the market, but Lumenon
believes that it will distinguish itself from the competition by offering the
most cost-effective choice, while retaining high performance standards.
Manufacturers of DWDM systems that use DWDM devices include Lucent Technologies,
Ciena, Alcatel, Pirelli, Nortel, NEC and Fujitsu. Several of these systems
manufacturers (Lucent, Ciena, Alcatel, Pirelli and NEC) also manufacture DWDM
products. Other DWDM component suppliers include, but are not limited to,
JDS-Uniphase, Photonic Integration Research Incorporated (PIRI), Gould, E-Tek
Dynamics, Instruments SA, Corning OCA, Ditech, DiCon, Sumimoto, and Bosch.
Examples of emerging companies are 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 at lower cost than that offered by competing technologies. 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, giving it a significant cost-performance advantage overall. For
example, Photonic Integration Research Incorporated (PIRI) uses the more
complicated method, "Flame
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Hydrolysis Deposition" (FHD) which, requires very high temperature processing
(greater than 1000oC) to create a glass soot or dust on silicon which is then
thermally consolidated, and methods such as reactive ion etching and multi-level
masks and resists are used to make its product. Other DWDM devices, like Bragg
filters or Thin Filters, must be cascaded (linked together) to achieve higher
channel counts to multiplex more information. Depending on the channel count,
this method of cascading can give rise to DWDM devices housed in environments
that for comparison may be half the size of a refrigerator. The optical 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 optical components
markets related to optical networking than that of other competitors. This
broader range of products may include optical chips that can be used for
interconnection, power division and combination in personal computers, where
price sensitivity is an issue. 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 optical chip
manufacturing through the Company's low-temperature, lower cost processing of
miniaturized chips and its customization of products. See the "Business
Strategy" section, fourth and sixth paragraphs, 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
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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.
Sales, Marketing and Technical Support
The Company is party to an agreement with Molex which reserves the Company's
first year of production for Molex and also provides the Company with access to
Molex's global distribution network. The Company will initially rely on this
relationship for the marketing and distribution of its jointly developed
products. This reliance on Molex poses an operating risk to the Company. See,
"Risk Factors - Dependence on Strategic Relationship; Customer Concentration."
In the event that this relationship changes and Molex is no longer able to
provide Lumenon access to Molex's distribution network, Lumenon would sell its
products through a combination of manufacturers' representatives, stocking
representatives and distributors. Manufacturers' representatives would service
the North American market. Outside North America, the Company would engage
stocking representatives who would normally act as distributors, but may also
act occasionally as commissioned representatives with respect to large volume
orders. The Company plans to develop an international network that would include
offices in North America, Europe, Asia-Pacific, Latin and South America. The
Company would develop relationships with new distributors and representatives;
however, the Company is unable to predict the extent to which these distributors
and representatives would be successful in marketing and selling the Company's
products.
The Company presently markets its developing products 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
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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.
Research and Development
The Company's research and development group focuses on developing new DWDM
products and may in the future focus on enhancing its existing products or
developing new products not related directly to DWDM. Product development input
will be obtained from customers, strategic partnership arrangements, and through
the Company's participation in industry organizations.
As of January 17, 2000, the Company's research and development staff consisted
of 16 employees, all of whom are located in Dorval, Quebec and most of whom hold
science, engineering or other advanced technical degrees. The Company's gross
research and development expenditures from inception to June 30, 1999 and during
the quarter ended September 30, 1999 were US$141,900 (CDN$208,879) and
US$252,750 (CDN$370,819) respectively. The research and development expenses,
net of research tax credits, during the period from inception to June 30, 1999
were partially offset by government tax incentives in the aggregate amount of
US$23,244 (CDN$34,218) and of US$23,988 (CDN$35,193) during the quarter ended
for the period from inception to September 30, 1999. The Company expects that it
will commit substantial resources to research and development in the future.
Lumenon aggressively pursues government funding for research and development and
contracts with local universities for research and development assistance.
History of Company
Lumenon's principal place of business is located adjacent to Montreal
International Airport - Dorval at 9060 Ryan Avenue, Dorval, Quebec. 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.
Risk Factors
Investment in the Company's securities involves a substantial degree of risk,
should be regarded as speculative and should be considered only by persons who
can reasonably afford a loss of their entire investment. Stockholders and
prospective investors should carefully consider, in addition to the other
information contained in this Form, the following factors relating to the
Company and its business.
20
<PAGE>
Risks of a Development Stage Company
Lumenon was founded in 1998. It is a development stage company and, to date, has
not generated revenues from sales of its products. Accordingly, the Company's
operating history provides no basis for evaluating the Company and its
prospects. The Company must, among other things, successfully develop and
commercialize its products, respond to competitive developments, attract, retain
and motivate qualified personnel, expand its operations and market and sell
products incorporating its technology in volume and at profitable prices to
achieve or sustain significant revenues or profitability.
The Company's future will depend on its ability to develop and commercialize
products based upon its licensed technologies. The Company's first product, the
DWDM optical chip, has only recently entered pilot production in limited
quantities and the Company expects to make only limited shipments of chips in
2000. Even if the Company's products appear to be promising at commercial
launch, they may not achieve market acceptance, may be difficult or diseconomic
to produce in large volumes, fail to achieve expected performance levels, have a
price level that is unacceptable in the industry or be precluded from
commercialization by the proprietary rights of others.
Projected Future Losses
The Company expects to invest considerable resources in developing and marketing
new products. It anticipates that its operating expenses will increase
substantially in the foreseeable future as it continues to develop its
technology and products, increases its sales and marketing activities, and
expands its assembly operations. It also anticipates that it will not recognize
revenues from product sales before the second quarter of 2000. The Company
therefore expects to incur losses for the balance of 2000. The extent of future
losses and the time required to achieve profitability, if achieved at all, is
highly uncertain. Moreover, if profitability is achieved, the level of such
profitability cannot be predicted and may vary significantly from quarter to
quarter.
Difficulties Inherent in New Product Development
The Company's business, financial condition and results of operations will
depend on its ability to become a key supplier of products to the photonics
industry. The Company's target markets are intensely competitive and
characterized by rapidly changing technology, evolving industry standards and
declining average selling prices. The Company must anticipate the features and
functionality that its original equipment manufacturer ("OEM") customers and
their end-user customers will demand, incorporate those features and
functionality into products that meet the exacting design requirements of such
customers, price its products competitively, and introduce products to its OEM
customers within the limited window of market demand. The success of new product
introductions is dependent on several factors, including proper new product
definition, the timely completion and introduction of new product designs, the
ability of OEM customers to effectively design and implement the manufacture of
new displays that incorporate the Company's products, the quality and
performance of new products, the differentiation of new products from those of
the Company's competitors and market acceptance of the Company's and its OEM
customers' products.
New products are generally incorporated into an OEM customer's product or system
at the design stage. Design wins, which can often require significant
expenditures by a vendor such as the Company, may
21
<PAGE>
precede the generation of volume sales, if any, by a year or more, thus the
Company may not produce design wins and such design wins may not result in
significant future revenues due to the related expenditure.
Short Product Lifecycles; Declining Average Selling Prices and Fluctuating
Industry Conditions
The Company's target markets are subject to continuous, rapid technological
change, including evolving industry standards, frequent introduction of new
products, anticipated and unanticipated decreases in average selling prices and
fierce price competition. Such conditions often result in short product life
cycles and require the timely introduction of new products and substantial
expenditures for ongoing research and development activities. To compete
successfully, the Company must bring its products to market in a timely fashion
and at competitive prices, continue to enhance and improve its products, and
successfully develop and introduce new products that meet evolving industry
standards and changing needs of end users. Competitive pricing pressures from
other technologies may lead to lower margins than expected. As the markets for
its products continue to develop and competition increases, the Company
anticipates that product life cycles will shorten and average selling prices
will decline. In particular, average selling prices and, in some cases, gross
margins for the Company's products will decline as the Company's products
mature. Thus, the Company will need to introduce new products to maintain
average selling prices and low product costs.
The Company will be required to enhance its products and to develop and
introduce on a timely basis new products that address the evolving needs of its
customers. The development of new products and the incorporation of new or
enhanced technologies into the Company's products in the future, even if
successful, may require greater development time and expense than anticipated by
the Company. Because of the complexity of its products and the associated
assembly processes, the Company could experience delays from time to time in
completing development and introduction of its products, which could adversely
affect the success of those products.
Manufacturing and Assembly Risks; Yield Risks
The assembly of the Company's products is a complex process, requiring a clean
room and precision assembly equipment. Minute levels of contaminants in the
assembly environment, defects in cells, difficulties in the assembly process or
other factors can cause a significant number of chips to be nonfunctional or
have unacceptable defects. Many of these problems are difficult to detect and
time consuming or expensive to remedy.
The Company has never assembled products in commercial quantities. The Company
may encounter difficulties in scaling up production of its products relating to,
among other things, quality control and assurance, component supply and
availability of qualified personnel.
The Company's reliance on its own assembly facility to assemble its products
could involve significant risks, including potential lack of adequate capacity,
technical difficulties and events limiting production, such as fires or other
damage to production facilities. Furthermore, if demand for the Company's
products increases, the Company will need to expand assembly capacity by
building another facility in an alternative location and by relying on contract
manufacturers. Building another facility will require a substantial capital
outlay and will involve the risks inherent in any manufacturing endeavor,
including poor production yields, technical difficulties with process control,
and events limiting production. As a result of one or more of the foregoing
factors, the Company could experience significant yield problems.
22
<PAGE>
Dependence on Equipment Suppliers and Contract Manufacturers
The Company relies on outside suppliers for certain equipment to be used in its
manufacturing process. The Company does not maintain long-term agreements with
any of such suppliers. If equipment material to the manufacturing process were
to malfunction, the Company would at a minimum experience delays in the shipment
of its products and could be required to qualify an alternative source of
supply. Delays in shipment could result in the loss of customers, limitations or
reductions in the Company's revenues and other adverse effects on the Company's
operating results.
The Company may rely on contract manufacturers for the development, manufacture
and supply of certain components of its products. Risks associated with the
Company's potential dependence upon third party manufacturing relationships
include reduced control over delivery schedules, lack of quality assurance, poor
manufacturing yields and high costs, potential lack of adequate capacity during
periods of excess demand, unavailability or interruption of access to certain
process technologies and potential misappropriation of the Company's
intellectual property. There can be no assurance the Company will be able to
enter into such manufacturing contracts on commercially reasonable terms, if at
all, or that the Company's current or future contract manufacturers will meet
the Company's requirements for quality, quantity or timeliness. If the supply of
any such components is interrupted, components from alternative suppliers and
contract manufacturers may not be available in sufficient volumes within
required time frames, if at all, to meet the Company's production needs.
Dependence on Strategic Relationships; Customer Concentration
The Company's initial marketing strategy is dependent upon the efforts of Molex.
Termination of the Molex Agreements or the Company's failure to secure
additional partners could materially and adversely affect the Company's
business, financial condition and the results of operations. For the foreseeable
future, the Company intends to market its products to only a limited number of
leading OEM customers. The Company will rely on its OEM customers to develop
their own systems, creating demand for the Company's products. OEM customers,
including Molex, may be expected to exert considerable leverage in negotiating
purchases from the Company. The Company anticipates sales to OEM customers to be
made on lower margins and on other less favorable terms, such as marketing
exclusivity, milestone requirements and onerous cancellation provisions. The
telecommunications equipment industry is dominated by a small number of large
companies and has undergone considerable consolidation. Continued consolidation
would further reduce the number of potential customers in that industry.
Competition
The photonics industry is highly competitive and is presently characterized by
price erosion, declining gross margins, rapid technological change and product
obsolescence. The Company expects such conditions to continue as existing
technologies are refined and as new technologies enter the marketplace. The
Company's 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 the Company. The Company's competitors include both companies
already manufacturing large volumes of products based on established
technologies, as well as companies selling emerging technological solutions.
Potential competitors include the Company's own customers, which may determine
to manufacture products competitive with those of the Company, rather than
purchasing the Company's products. There can be no assurance that potential
competitors have not
23
<PAGE>
developed or will not develop comparable or superior technology and products.
(See Item 1. "Business - Competition.")
Possible Inability to Manage Growth
The Company's success will depend on the expansion of its operations and the
effective management of growth, which will place a significant strain on the
Company's management, operations and financial resources. In particular, once
the Company begins volume assembly of its products, the Company's operations are
anticipated to expand substantially. To achieve its business objectives, the
Company will be required to invest in additional engineering, manufacturing,
marketing, sales, administrative and management personnel, as well as additional
equipment, facilities, information technology and other infrastructure. The
Company will also be required to continue to implement and improve its
management, operational and financial systems, procedures and controls, and to
expand, train and manage its employee base. Because the Company has had little
experience with the assembly, marketing or sale of its current and planned
products in large quantities, there can be little assurance that the Company
will be able to expand its business rapidly enough or manage this growth in a
manner adequate to successfully commercialize its technology. In particular,
there can be no assurance that the Company will be able to expand its employee
base or physical infrastructure adequately to meet the needs of its expanded
operations, or that the Company's management, operational and financial systems,
procedures and controls will be adequate to maintain and effectively manage
future growth. Inaccuracies in the Company's forecasts of market demand could
result in insufficient or excessive assembly facilities and excessive fixed
expenses for its operations.
Dependence Upon Key Personnel; Need to Hire Additional Qualified Personnel
The Company's success will depend to a significant degree upon the continued
services of key management, technical, and scientific personnel, including Dr.
S. Iraj Najafi, the Company's President and Chief Executive Officer, Dr. Mark
Andrews, the Company's Chief Technical Officer, and Dr. Chia-Yen Li, the
Company's Chief Operating Officer. In addition, the Company's success will
depend on its ability to attract and retain additional management and other
highly skilled personnel. Currently, the Company is seeking to hire, among other
employees, skilled engineers to operate, improve and refine the Company's
assembly process. The Company's competitors for qualified personnel are often
long-established, highly profitable companies and the process of hiring such
qualified personnel is often lengthy. The Company's management and other
employees may voluntarily terminate their employment with the Company at any
time. The Company does not currently maintain key-man life insurance on any of
its personnel. (See Item 5. "Directors and Executive Officers.")
Substantial Future Capital Needs; Uncertainty of Additional Funding
The Company anticipates that it will require substantial additional funding over
the next several years to develop its technology, commercialize its products and
to expand assembly capacity. In particular, the Company anticipates requiring
approximately US$20 million to construct and equip a high volume assembly
facility and upgrade its existing facility. The Company's capital needs will
depend on a number of factors, including, but not limited to, the number of new
product development programs the Company undertakes, the rate at which the
Company develops and commercializes its technologies and products and expands
its assembly processes, the response of competitors, the level of customer and
end-user acceptance of the Company's products, competing technological
developments and changes in market demand. In addition, if the Company
experiences delays in the development or commercialization of its technology and
products,
24
<PAGE>
its capital needs may increase substantially, and it may be required to expend
capital resources faster than projected.
The Company expects to raise additional working capital primarily from the
following sources: (i) sales of equity or debt securities, (ii) equipment
leasing and other secured debt financing, and (iii) manufacturing and other
strategic partners. If the Company raises additional funds through the
incurrence of debt, it may become subject to restrictive financial covenants and
its interest obligations will increase. If the Company raises additional funds
through the issuance of equity, the holders of the Company's equity securities
may experience substantial dilution.
No assurance can be given that additional funding will be available on
commercially reasonable terms, or at all. Failure to obtain sufficient funding
may require the Company to delay or abandon some or all of its anticipated
expenditures, to curtail its operations significantly, to sell assets, or to
license to third parties potentially valuable technologies that the Company
currently plans to commercialize itself, all of which will adversely affect the
Company's ability to compete.
Lack of Sales and Marketing Experience
The Company has no experience in marketing, selling and distributing its
products. The Company's future profitability will depend on its ability to
develop an effective sales force. Competition for employees with sales and
marketing experience is intense. There can be no assurance that the Company will
be able to attract and retain qualified salespeople or that the Company will be
able to build an effective sales and marketing organization.
Risks of International Sales and Operations
The Company expects that international sales will account for a significant
portion of the Company's total revenues. International sales and operations are
subject to a number of risks, including the imposition of government controls,
export license requirements, restrictions on the export of critical technology,
political and economic instability or conflicts, trade restrictions, changes in
tariffs and taxes, challenges to patents and other intellectual property rights,
difficulties in staffing and managing international operations, problems in
establishing or managing distributor relationships and general economic
conditions. In addition, as the Company expands its international operations, it
may be required to invoice its sales in local currencies, the value of which may
fluctuate in relation to the Canadian and U.S. dollars.
Weaknesses in Intellectual Property Protection; Possible Infringement by the
Company
The patent positions of technology companies, including the Company, are
uncertain and involve complex legal and factual questions. In addition, the
coverage claimed in a patent application can be significantly reduced before the
patent is issued. There can be no assurance that the Company's patent
applications will result in patents being issued or that any issued patents will
provide protection against competitive technologies or will be held valid if
challenged or circumvented. Others may independently develop products similar to
those of the Company or design around or otherwise circumvent patents issued to
the Company.
There can be no assurance that others will not assert claims against the Company
that result in litigation. Litigation, regardless of its outcome, would result
in significant cost to the Company as well as diversion
25
<PAGE>
of management time. If any of the Company's products were found to infringe any
third party patent, and such patent were determined to be valid, the Company
could be prevented from practicing the subject matter claimed in its patents or
be required to obtain licenses from the patent owners or to redesign its
products or processes to avoid infringement. There can be no assurance that such
licenses would be available or, if available, would be on terms acceptable to
the Company or that the Company would be successful in any attempt to redesign
its products or processes to avoid infringement. In addition, the Company could
suffer significant monetary damages.
In addition to patent rights, the Company also relies on trade secret and
copyright law, and employee and third-party nondisclosure agreements to protect
its intellectual property rights in its products and technology. There can be no
assurance that these agreements and measures will provide meaningful protection
of the Company's trade secrets, copyrights, know-how, or other proprietary
information in the event of any unauthorized use, misappropriation or disclosure
or that others will not independently develop substantially equivalent
proprietary technologies. Litigation to protect the Company's trade secrets or
copyrights would result in significant cost to the Company as well as diversion
of management time.
The laws of certain foreign countries do not protect the Company's intellectual
property rights to the same extent as do the laws of the United States. There
can be no assurance that the Company will be able to protect its intellectual
property in such markets.
Burdens of Compliance with Environmental Regulations
The Company's operations and assembly processes are subject to certain federal,
state and local environmental protection laws and regulations. These laws and
regulations relate to the Company's 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. The
Company has implemented procedures to effect compliance with these laws and
regulations. The Company has also initiated safety programs, including training
of personnel on safe storage and handling of hazardous materials and wastes. The
Company believes that it is in compliance in all material respects with
applicable environmental regulations. Environmental laws and regulations,
however, may become more stringent over time and there can be no assurance that
the Company's failure to comply with either present or future regulations will
not subject the Company to significant litigation expenses, compliance expenses
or fines, or production suspensions.
Continued Control by Insiders
As of the date hereof, the Company's management, Molex, Polyvalor and McGill
University collectively own approximately 60.35% of the Company's outstanding
Common Stock. Such stockholders 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 of the Company that may be favorable to other
stockholders or causing a change of control of the Company that may not be
favored by other stockholders.
Under the Molex Agreements, Molex will acquire the non exclusive right to
manufacture and sell the 8, 16 and 32 channel devices in the event of a change
in the control of the Company. In addition, under the Stock Restriction
Agreement with Molex, Molex has rights of first refusal with respect to any sale
of stock by certain stockholders of the Company. Such rights of Molex may have
the effect of delaying or preventing
26
<PAGE>
a change in control of the Company that may be favorable to stockholders other
than Molex. (See Item 1. "Business - Material Agreements - Agreements with
Molex.")
Potential Anti-Takeover Provisions
Certain provisions of the Company's Certificate of Incorporation and By-Laws and
of Delaware law could have the effect of making it more difficult for another
party to acquire or of discouraging another party from attempting to acquire the
Company. For example, the Certificate of Incorporation and By-Laws permit the
Company 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 the Company has no present plans to issue Preferred Stock,
its issuance could have the effect of delaying, deterring or preventing a change
of control and could make it more difficult for holders of Common Stock to
effect certain corporate actions, including the replacement of incumbent
directors and the completion of transactions approved by incumbent directors.
Additionally, any such issuance of Preferred Stock may have preference over and
negatively affect the rights of the holders of Common Stock. Furthermore, the
board of directors is divided into three classes, only one of which is elected
each year.
Outstanding Options and Warrants
As of February 1, 2000, the Company had outstanding options to purchase an
aggregate of 2,457,500 shares of Common Stock at a weighted average exercise
price of US$3.87 per share and outstanding warrants to purchase an aggregate of
3,467,211shares of Common Stock at a weighted average exercise price of US$1.98
per share. The exercise of outstanding options and warrants will dilute the then
current stockholders' ownership of Common Stock, and any sales in the public
market of shares acquired upon such exercise could adversely affect prevailing
prices of the Common Stock. Moreover, the terms on which the Company would be
able to obtain additional equity capital could be adversely affected, because
the holders of options and warrants can be expected to exercise them at a time
when the Company would in all likelihood be able to obtain needed capital on
terms more favorable than those provided by such securities.
No Dividends
The Company has never paid any dividends on its Common Stock and does not
anticipate paying such dividends in the foreseeable future. Any future earnings
of the Company will be used to finance its growth.
Possible Volatility in Market Price for Common Stock
The market price of the Common Stock has undergone both a significant increases
and significant decreases in the past several months. Such market price could be
subject to significant future fluctuations in response to various factors and
events including among others, the depth and liquidity of the trading market for
the Common Stock, quarter-to-quarter variations in the Company's operating
results and the correlation of such results with the expectations of
stockholders and the investment community, the introduction of the Company's
products and conditions in the Company's industry. In addition, from time to
time, the public markets, and in particular the share of high technology
companies, have experienced broad price and volume fluctuations that often have
been unrelated to the operating performance of issuers.
27
<PAGE>
ITEM 2. FINANCIAL INFORMATION.
Selected Financial Information
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, 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. The selected financial data for the three months
ended September 30, 1999 and for the period from inception through September 30,
1988 presented below were derived from unaudited financial statements of the
Company, which in the opinion of management of the Company, reflect all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of results for interim periods. Operating results for interim
periods are not necessarily indicative of results to be expected for the full
fiscal year. Unless otherwise indicated, all dollar amounts in this Form 10 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 (the "Transition Period").
28
<PAGE>
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
December 31, June 30, December 31, June 30,
1998 1999 1998 1999
---- ---- ---- ----
(in U.S. dollars) (in Canadian dollars)
<S> <C> <C> <C> <C>
Current Assets $360,673 $1,388,885 $552,912 $2,044,584
Capital Assets -- 1,013,852 -- 1,492,495
Total Assets 360,832 2,409,531 553,155 3,547,080
Liabilities 77,853 681,054 119,349 1,002,582
Stockholders' 282,979 1,728,477 433,806 2,544,498
Equity
</TABLE>
<TABLE>
<CAPTION>
September 30, September 30, September 30, September 30,
1998 1999 1998 1999
---- ---- ---- ----
(Unaudited) (Unaudited)
(in U.S. dollars) (in Canadian dollars)
<S> <C> <C> <C> <C>
Current Assets $471,878 $3,028,006 $720,086 $4,442,496
Capital Assets -- 1,319,980 -- 1,936,591
Total Assets 471,878 4,354,804 720,086 6,389,088
Liabilities 16,035 425,232 24,469 623,871
Stockholders' 455,843 3,929,572 695,617 5,765,217
Equity
</TABLE>
<TABLE>
<CAPTION>
From Inception
to December Six Months From Inception Six Months
31, Ended to December 31, Ended
1998 June 30, 1999 1998 June 30, 1999
-------------- -------------- --------------- ---------------
(in U.S. dollars) (in Canadian dollars)
<S> <C> <C> <C> <C>
Revenues - Interest $ 5,133 $ 796 $ 7,869 $ 1,172
Research and
Development
Expenditures (1) 8,018 110,299 12,291 162,370
Net Loss 187,547 509,171 287,509 749,551
Loss Per Share (2) $ 0.02 $ 0.03 $ 0.03 $ 0.04
</TABLE>
<TABLE>
<CAPTION>
Three Months Three Months Three Months Three Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
1998 1999 1998 1999
---- ---- ---- ----
(Unaudited) (Unaudited)
(in U.S. dollars) (in Canadian dollars)
<S> <C> <C> <C> <C>
Revenues - $ -- $ 11,066 $ -- $ 16,235
Interests
Research and
Development
Expenditures (1) -- 228,762 335,626
Net Loss 38,346 658,464 58,516 966,058
Loss Per Share (2) $ 0.002 $ 0.031 $ 0.004 $ 0.046
</TABLE>
- --------
(1) Amounts shown are net of investment tax credits.
(2) As of September 30, 1998, December 31, 1998, June 30, 1999 and
September 30, 1999, the Company had 16,455,000, 16,455,000, 20,215,000
and 22,274,253 issued and outstanding shares respectively. The Company
has never paid dividends on its Common Stock.
At September 30, 1998, December 31, 1998, June 30, 1999 and September 30, 1999,
the exchange rate between the Canadian dollar and the US dollar were CDN$1.526,
CDN$1.533, CDN$1.472 and CDN$1.467 to US$1.00, respectively, based on the rate
as of each date issued by the Bank of Canada.
29
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Forward-Looking Statements and Uncertainty of Financial Projections
Forward-looking statements in this Form 10 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) technology changes; (iii) market acceptance of the Company's
products; (iv) the ability to attract and retain qualified personnel; (v)
changes in the Company's development plans; (vi) inventory levels and practices
of the Company's customers; (vii) larger than expected fluctuations in demand
for the Company's products; (viii) general economic conditions; (ix) economic
and business conditions specific to the display market; and (x) the other
factors referenced in this Form 10.
Results of Operations
The Company is a Development Stage Enterprise, which has not, during the periods
presented in the Summary Financial Information above, realized any revenues from
operations. Interest income was earned during the six-month period ending June
30, 1999 on the cash and short-term investments received from the private
placements of the Company. The Company's overall loss for the six-month period
ended June 30, 1999 amounted to US$509,171 (CDN$749,551) or US$0.03 (CDN$0.04)
per share, compared to US$187,547 (CDN$287,509), or US$0.02 (CDN$0.03) per share
for the year ended December 31, 1998. The increase in the loss for the six-month
period ended June 30, 1999 is mainly due to the fact that the Company has
established its activities in its current location, including the incurrence of
costs associated with hiring some of its workforce and payment of rent charges.
The Company expects to start generating operating revenues in the third quarter
of its fiscal year 2000.
For the three months ended September 30, 1999, the Company's overall loss was
US$658,464 (CDN$966,058) or US$0.031 (CDN$0.046) per share, compared to
US$38,346 (CDN$58,516), or US$0.002 (CDN$0.004) per share for the three-month
period ended September 30, 1998. The increase in the loss is due to the fact
that as of September 30, 1998, the Company was not yet engaged in operations
(its activities being limited to financing activities), as opposed to the
quarter ending September 30, 1999 where the Company had an existing operation
consisting of a team of 15 employees, a facility, a teaming agreement with
Molex.
For the period from inception to September 30, 1999, the Company's overall loss
was US$1,365,452 (CDN$2,003,118).
Costs and Expenses
Research and development expenditures , net of research tax credits, have been
US$118,656 (CDN$174,661) from the inception of the Company's operations to June
30, 1999. These research and development
30
<PAGE>
expenditures have been incurred to prepare the Company's licensed technology for
commercial production. During the six-month period ending June 30, 1999 most of
the Company's workforce has been hired.
During the three-month period ended September 30, 1999, research and development
expenses, net of research tax credits, have been US$228,762 (CDN$335,626),
including US$132,810 (CDN$194,852) as per the Teaming Agreement. During this
period, the Company has developed a new DWDM design and has adapted materials
and processes accordingly.
From its inception (in 1998), the Company has been engaged in capital raising,
developmental and organizational activities. During the six-month period ending
June 30, 1999 as well as during the quarter ended September 30, 1999, the
Company has made a significant investment in staffing and equipment. These
investments and costs are being financed mainly through proceeds of private
placements completed during the six-month period ending June 30, 1999 (gross
proceeds of US$1,982,086 (CDN$2,917,905)). From July to December 1999, the
Company raised an additional US$5,676,000 (CDN$8,396,574) through private
placements.
General and administrative expenses (including foreign exchange and interest
expenses) were US$1,634,838 (CDN$1,518,107) from inception of the Company to
September 30, 1999. From inception of the Company to December 31, 1998, general
and administrative expenses amounted to US$184,669 (CDN$283,087) and consisted
mainly of costs related to the creation of the Company, its organization and its
capital raising. During the six-month period ending June 30, 1999, general and
administrative expenses totaled US$399,668 (CDN$588,353). The charges for this
period mainly consist of the salaries to an increased number administrative
personnel and related expenses to manage the increased activities of the
Company. The increase from prior levels was due principally to the Company's
move to new premises during this period, which included costs related to rent
(US$24,169 (CDN$35,579)) and office charges (US$22,346 (CDN$32,896)).
During the quarter ending September 30, 1999, general and administrative
expenses (including foreign exchange and interest expenses) were US$440,768
(CDN$646,667) and consisted mainly of salaries of the technical and
administrative employees of the Company and the costs of operating the increased
activities of the Company. General and administrative expenses in the quarter
ending September 30, 1999 are greater than those of the quarter ending September
30, 1998 (US$38,346 (CDN$58,516)).
Liquidity and Capital Resources
During the six-month period ended June 30, 1999, Lumenon issued 2,260,000 units
at a price of US$0.50 (CDN$0.74) per unit (excluding Molex shares). Each unit
comprised one share of its Common Stock and one warrant for the purchase of one
additional share at a price of US$0.90 (CDN$1.32) per share, of which warrants
to purchase 1,050,000 shares expire on August 23, 2001 (550,000 of these
1,050,000 warrants were exercised in November 1999) and warrants to purchase
1,210,000 shares expire on August 23, 2000.
In March 1999, the Company issued US$200,000 (CDN$294,400) principal amount of
its 10% Convertible Notes (the "Notes"). Each US$1,000 (CDN$1,472) principal
amount of the Notes was initially convertible into Common Stock at US$0.50
(CDN$0.74) per share. Upon conversion of the Notes, the holder thereof was
entitled to receive for each US$1,000 (CDN$1,472) principal amount thereof
warrants to purchase 1,000 additional shares of Common Stock at US$0.90
(CDN$1.32) per share before September 30, 2001. These notes were converted in
accordance with their term in September 1999.
In June 1999, the Company issued 1,500,000 shares of Common Stock, 1,666,667
cash common stock purchase warrants and 5,800,000 service common stock purchase
warrants to Molex under the Molex Agreements, for a cash consideration of
US$750,000 (CDN$1,104,000). Each cash common stock purchase
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warrant entitled Molex to acquire one share of Common Stock at a price of
US$0.90 (CDN$1.32) on or before August 1, 2001. These warrants were exercised on
November 15, 1999. Each service common stock purchase warrant entitles Molex to
receive one share of Common Stock for services rendered under the Molex
Agreements. (See Item 1. "Business - Material Agreements - Agreements with
Molex.")
In July 1999, Lumenon issued 960,000 units of its capital at a price of US $1.00
(CDN$1.47) per unit. Each unit was comprised one share of Common Stock and one
warrant for the purchase of one additional share at a price of US$1.50
(CDN$2.21) per share before June 2001.
In September 1999, Lumenon issued 407,000 additional units at a price of US$4.00
(CDN$5.89) per unit. Each unit was comprised one share of Common Stock and one
warrant for the purchase of one additional share at a price of US$6.00
(CDN$8.83) per share before September 2000. Of these warrants, 125,000 were
exercised in October 1999.
In September 1999, Lumenon issued 400,000 additional units of its capital stock
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 (CDN
$1.32) per share before September 30, 2001. Lumenon issued an additional 30,000
units for US$15,000 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.
In November 1999, Lumenon issued 21,500 units at a price of US$7.00 (CDN$10.27)
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 (CDN$13.20) per share
before September 30, 2000.
In November 1999, Lumenon issued 10,000 additional units at a price of US$10.50
(CDN$15.40) 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
(CDN$22.74) per share before October 31, 2000.
In November 1999, Molex exercised its warrants to acquire 1,666,667 shares at a
price of US$0.90 per share for total proceeds of US$1,500,000.
Additionally, warrants to acquire a total of 725,00 shares were exercised in the
three month period ended December 31, 1999 for total proceeds of US$1,295,000.
On December 7, 1999 Lumenon entered into an agreement with a private investor
for the investment of an additional US$2 million in the Company's Common Stock
at a price of US$23.25 per share. This investor will also receive one half of a
common share purchase warrant per share 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. This private placement closed on January 12, 2000
and the Company has issued the related shares.
The Company has made significant investments in property and equipment during
the six-month period ending June 30, 1999. The Company invested US$1,013,852
(CDN$1,492,495) in additional capital assets, consisting of investments in
laboratory equipment (US$844,250) (CDN$1,242,820), leasehold improvement
(US$130,295) (CDN$191,807), computer equipment and software (US$27,342)
(CDN$40,250) and office equipment and fixtures (US$11,968) (CDN$17,618). During
the three month period ended September 30,
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1999, the Company invested US$364,647 (CDN$534,960) in additional capital
assets. Depreciation of US $61,930 (CDN$90,864) has been charged to expenses.
As of June 30 and September 30 1999, the Company's cash and cash equivalents
were US$1,170,346 (CDN $1,722,871) and US$805,596 (CDN$1,182,177) respectively.
As of September 30, 1999, the Company also had US$1,900,000 (CDN$2,787,300) of
term deposits. The maturity date for the term deposit is January 18, 2000 and it
may be used without restriction. At September 30, 1999, the market value
approximates the carrying value. The net proceeds from the private placements
should, in management's estimation, be sufficient to meet the Company's
financial needs to at least the end of 2000, excluding significant capital
expenditures such as increasing production capacity. The Company plans to seek
additional capital in order to increase its production capacity (See - "Future
Developments" below.) The Company has no financial obligations of significance
as at June 30, 1999 other than operating lease commitments for its existing
premises of US$3,912 (CDN$5,758) per month and employment agreements.
The Company does not believe that inflation has had a significant impact on its
results of operations.
Future developments
In September 1999, the Company initiated the planning of the expansion of its
eventual manufacturing capacity to 500 chips per day in 2001 and to 1,000 chips
per day in 2002 from the existing capacity of 20 chips per day. (See Item 1.
"Business - Plan of Operations.")
Impact of Year 2000
The "Year 2000" issue results from the use in computer hardware and software of
two digits rather than four digits to define the applicable year. When computer
systems must process dates both before and after January 1, 2000, two-digit year
"fields" may create processing ambiguities that can cause errors and system
failures. The results of these errors may range from minor undetected errors to
complete shutdown of an affected system. These errors or failures may have
limited effects, or the effects may be widespread, depending on the computer
chip, system or software, and its location and function. The effects of the Year
2000 problem are exacerbated because of the interdependence of computer and
telecommunications systems throughout the world. Because of this
interdependence, the failure of one system may lead to the failure of many other
systems even though the other systems are themselves "Year 2000 compliant."
The Company relies heavily on Information Technology ("IT") systems and other
systems and facilities such as telephones, building access control systems and
heating and ventilation equipment ("non-IT") systems. If the Company's or
significant third parties' IT and/or non-IT systems do not adequately or
accurately process or manage day or date information beyond the year 1999, there
could be a material adverse impact on the Company's operations. The Company has
asked its third party suppliers for assurances and/or compliance statements in
regard to the products and services supplied. The Company has, to the extent
possible, obtained assurances from its significant third party suppliers of
products and systems to assure that the products and systems supplied to the
Company are Year 2000 compliant. The Company has not validated the accuracy of
such assurances.
The extent and magnitude of the Year 2000 problem as it will affect the Company,
both before and for some period after January 1, 2000, are difficult to predict
or quantify for a number of reasons. Among the most important are lack of
control over systems that are used by third parties who are critical to the
Company's operation, including the Company's significant customers and vendors,
dependence on third party software
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<PAGE>
vendors to deliver Year 2000 upgrades in a timely manner, and the uncertainty
surrounding how others will deal with liability issues raised by Year 2000
related failures. Therefore it is very difficult for the Company to assess the
most reasonably likely worst case scenario in the event that any Year 2000
problems arise. However, given the Company's stage of development and the fact
that all of its equipment has been recently acquired and has been guaranteed as
Year 2000 compliant, the Company feels that risks associated with Year 2000
issues are minimal. The Company has successfully completed a review of both IT
and non-IT systems to determine that they were Year 2000 compliant. The Company
has not tracked the individual year 2000 costs to date, as any costs would most
likely be attributable to a third party supplier and not the Company. The
Company's historical and estimated costs of remediation directly related to
fixing Year 2000 issues are not material, nor are the costs of replacement of
non-compliant systems. Because the Company's Year 2000 project costs were not
material, they have not been segregated. There has been no deferment of projects
due to the Company's Year 2000 efforts. Given the current state of the Company's
development, the only risk that can be reasonably related to Year 2000 issues
would be problems with potential clients, namely Molex. The Company has
requested assurances from Molex that its systems are Year 2000 compliant and
have been successfully tested. The Company has received such assurance from
Molex. In these circumstances, the Company does not believe that it would be
appropriate to create a contingency plan and has no intention of doing so.
As of February 1, 2000, the Company has not experienced any difficulties or
delays as a result of Year 2000.
In the worst case scenario, the Company would experience supply problems from
its third party suppliers, and thereafter, upon seeking alternate suppliers find
them to be unreliable. However, the Company has no essential supplier that
cannot easily be replaced. At worst, the Company would experience a short delay.
The Company presently has no revenues and does not expect to generate any until
the second half of 2000, thus such delay would not have a material impact on the
Company.
Foreign Currency Transactions
Because the Canadian dollar is the primary currency in the economic environment
in which the Company operates, the Canadian dollar is its functional currency.
Accordingly, monetary amounts maintained in currencies other than the Canadian
dollar (principally short-term investments) are provided, in the financial
statements of the Company, for convenience of reference only and are based on
the closing exchange rate at September 30, 1998, December 31, 1998, June 30,
1999 and September 30, 1999, which were CDN $1.526, CDN$1.533, CDN$1.472 and
US$1.467 per US dollar, respectively. The rate stated is from the Bank of Canada
for each respective date.
The effects of foreign currency remeasurement are reported in current operations
and have been immaterial to date.
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<PAGE>
ITEM 3. DESCRIPTION OF PROPERTY.
Lumenon's corporate and technical headquarters are located in Dorval, near
Montreal, Canada. The facility consists of an aggregate of 7,149 square feet.
Approximately 70% of the space is occupied by its laboratory and software
development facility and the remainder by its offices.
The existing facility has a capacity of 20 units per day which will be used to
manufacture products until the second facility is operational. Once the second
facility is operational, it is Lumenon's intention to reconfigure the existing
facility as an R&D facility with an ancillary production capability
The lease for such headquarters is for a period of five years ending in January
2004, with annual rent in the amount of US$3.12 (CDN$4.59) net per square foot,
or US$22,305 (CDN$32,814) in the aggregate. Taxes and expenses are estimated at
US$1.27 (CDN$1.87) per square foot per year, US$9,082 (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 September 30, 1999, the Company had spent US$290,063
(CDN$425,523) on leasehold improvements to construct and equip these premises.
The Company believes that this facility is adequate for its business in its
present stage of development.
Lumenon is finalizing negotiations with Liberty Sites Ltd., an industrial park
located in Ville St-Laurent, a suburb of Montreal, Canada regarding the lease
and construction of Lumenon's second larger manufacturing facility. The planned
32,000 square foot manufacturing facility will feature materials preparation,
fabrication, packaging, optical testing and quality control facilities. This
facility will house the Company's corporate headquarters and large scale
production facilities for Lumenon's DWDM product line. Upon completion of the
construction of the building, Lumenon can commence the internal construction of
the production facility, including the clean rooms and associated laboratories
and install the manufacturing equipment. It is anticipated that the larger
facility should be operational at the rate of 500 units per day in 2001.
Additional equipment and staff should bring the facility to its full capacity of
1,000 units per day by 2002.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The voting securities of the Company outstanding as of January 17, 2000
consisted of 24,551,189 shares of Common Stock. The following table sets forth
information concerning ownership of Common Stock as of January 17, 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, 9060 Ryan Avenue,
Dorval, (QC), Canada H9P 2M8. 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.
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<PAGE>
<TABLE>
<CAPTION>
Number of Shares
Directors, Nominees, Executive of Common Stock Beneficially
Officers and 5% Stockholders Owned (1) Percentage
------------------------------ ------------------------ ----------
<S> <C> <C>
Dr. S. Iraj Najafi............................. 5,237,500(2) 21.3%
Najafi Holding Inc. ........................... 5,037,500 20.5%
Dr. Mark P. Andrews............................ 4,887,500(3) 19.9%
Andrewma Holding Inc........................... 4,687,500 19.1%
Anthony L. Moretti(4)(5)....................... 4,666,667(4) 12.9%
Molex Incorporated(5).......................... 4,666,667(6) 12.9%
Denis N. Beaudry(7)............................ 1,500,000(7) 6.1%
Dr. Chia-Yen Li................................ 25,000(8) (9)
Vincent Belanger............................... 1,000(10) (9)
Reginald J.N. Ross............................. 50,000(11) (9)
Pierre-Paul Allard............................. -(12) --
All Directors and Executive Officers as a 14,817,667(13) 60.4%
Group..........................................
</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 January 17, 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 January 17, 2000
have been exercised or converted.
(2) Includes (i) 200,000 shares of Common Stock issuable upon exercise of
options held by Dr. Najafi and (ii) 5,037,500 shares owned by Najafi
Holdings Inc., of which Dr. Najafi is the sole shareholder.
(3) Includes (i) 200,000 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) 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 Mr.
Moretti.
(5) The address of Molex and Mr. Moretti is 2222 Wellington Court, Lisle,
Illinois 60532.
(6) Does not include (i) 5,800,000 shares of Common Stock issuable upon
exercise of outstanding services common stock purchase warrants.
(7) 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
represent the shares beneficially owned by Polyvalor and McGill. They
do not include 50,000 shares of Common Stock
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<PAGE>
issuable upon exercise of options held by Mr. Beaudry. The address of
Polyvalor is 3744 Jean Brillant Street, Montreal, (QC), Canada H3T 1P1.
The address of McGill is 3550 University Street, Montreal, (QC), Canada
H3A 2A7.
(8) Represents 25,000 shares of Common Stock issuable upon exercise of
options held by Dr. Li. Does not include 225,000 shares issuable upon
exercise of such options.
(9) Less than 1%.
(10) Does not include 300,000 shares of Common Stock issuable upon exercise
of options held by Mr. Belanger.
(11) Does not include 250,000 shares of Common Stock issuable upon exercise
of options held by Mr. Ross.
(12) Does not include 50,000 shares of Common Stock issuable upon exercise
of options held by Mr. Allard.
(13) Includes an aggregate of 425,000 shares of Common Stock issuable upon
exercise of options.
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS.
The directors and executive officers of Lumenon and their positions with the
Company are:
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
Anthony L. Moretti 48 Director
Denis N. Beaudry 56 Director
Pierre-Paul Allard 40 Director
Dr. Chia-Yen Li 37 Chief Operating Officer
Vincent Belanger 33 Chief Financial Officer and Treasurer
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
37
<PAGE>
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 has been on leave from Ecole Polytechnique since
September 1998 and shall remain on leave until January 2001. He may extend his
leave of absence from the Ecole Polytechnique 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 has developed new
photonic glasses and polymers. Dr. Andrews has been an Assistant Professor and
currently is an Associate Professor at McGill University and spends
approximately 50% of his time on the affairs of the Company. Dr. Andrews does
expect to take a leave of absence from McGill University 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).
Anthony L. Moretti became a Director in December 1999. Mr. 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, Mr. Moretti
worked as an 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.
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 the intellectual property of
the Ecole Polytechnique. 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 consisted 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.,
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. 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
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<PAGE>
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.
Vincent Belanger joined the Company in June 1999 as Chief Financial Officer and
Treasurer. 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
Corporate of 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, 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.
Mr. 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 under a certain License Agreement.
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 Mr. Moretti were elected as Class III directors.
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<PAGE>
ITEM 6. COMPENSATION OF OFFICERS AND DIRECTORS.
Compensation of Directors
No remuneration or directors' fees were paid to directors of the Company during
the year ended June 30, 1999, with the exception of reimbursement of expenses.
During the fiscal year ended June 30, 1999, the three non-employee directors
were granted the following options to purchase Common Stock:
Denis M. Beaudry was granted an option to acquire 50,000
shares at a price of US$1.00 (CDN $1.47) per share vesting
over two years in equal tranches of 25,000, exercisable for a
period of two years after their vesting dates of May 21, 2000
and May 21, 2001, respectively.
Anthony L. Moretti was granted an option to acquire 50,000
shares at a price of US$23.00 (CDN$33.74) per share vesting
over two years in equal tranches of 25,000, exercisable for a
period of two years after their vesting dates of December 7,
2000 and December 7, 2001, respectively.
Pierre-Paul Allard was granted an option to acquire 50,000
shares at a price of US$23.00 (CDN$33.74) per share vesting
over two years in equal tranches of 25,000, exercisable for a
period of two years after their vesting dates of December 7,
2000 and December 7, 2001, respectively.
The Board of Directors will determine the remuneration of the directors and
officers of the Company during the current and subsequent fiscal years.
Executive Compensation
The following table sets forth, for the periods indicated, all compensation
awarded to, earned by or paid to the chief executive officer of the Company (the
"CEO") and the other executive officers of the Company (collectively, the "Named
Executive Officers"). (See Item 2. "Financial Information" for information in
respect of the exchange ratio of Canadian and U.S. dollars.)
40
<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>
S. Iraj Najafi 1999(3) $36,798 - 200,000
Chief Executive Officer and 1998 31,311 - -
President
Mark P. Andrews 1999(3) $20,663 - 200,000
Secretary 1998 12,394 - -
Vincent Belanger 1999(3) - - 300,000
</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 for
any named individual in respect of any such period.
(3) Represents solely the Transition Period.
Employment Agreements
Dr. Chia-Yen Li is employed by the Company as Chief Operating Officer of its
Montreal facility 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$84,918.48 (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 disposes of his shares of Common Stock, (iii) if he commits
certain acts constituting cause or (iv) 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.
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$84,918.48 (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,
41
<PAGE>
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 disposes of his shares of Common Stock, (iii) if he commits
certain acts constituting cause or (iv) 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 Corporate
Development and Chief of Strategic Operations pursuant to an employment
agreement effective for a term of five years. The agreement provides for an
initial base salary of US$84,918.48 (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 Mr. Ross disposes of his shares of Common
Stock, (iii) if Mr. Ross commits certain acts constituting cause or (vi) if Mr.
Ross 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
shall not exceed 5% of the total of the issued and outstanding shares and the
maximum number of common shares which may be issued under the Plan shall not
exceed 10% of the number of shares outstanding. The option price per share for
common stock which are the subject of any option shall be 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
shall not exceed 10 years from the date the option is granted. The 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 2,457,500 shares of the Company's common
stock have been granted and were outstanding under the Plan as of January 17,
2000.
The following table sets forth certain information regarding stock option grants
under the Company's Stock Incentive Option Plan (the only stock option plan of
the Company) to the Named Executive Officers during and subsequent to the
Transition Period. The Company has never granted any stock appreciation rights.
No stock options were granted by the Company to the Named Executive Officers
prior to the Transition Period.
42
<PAGE>
Option Grants During and Subsequent to the Transition Period
<TABLE>
<CAPTION>
Individual Grants
Potential realizable
% of Total value at assumed
Number of Options annual rares of stock
Securities Granted to Exercise price appreciation for
Underlying Employees of Base option term
Option in-Fiscal Price 5% 10%
Name Granted Year ($/share) Expiration Date ($) $
- ------------------------------------------ ------------------------------------- ------------------------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
S. Iraj Najafi 200,000(1) 10.0% $1.00 May 21, 2001 210,000 220,500
Mark Andrews 200,000(1) 10.0% $1.00 May 21, 2001 210,000 220,500
Vincent Belanger 60,000 (2) 15.0% $1.00 May 21, 2002 63,000 66,150
60,000 (3) May 21, 2003 63,000 66,150
60,000 (4) May 21, 2004 63,000 66,150
60,000 (5) May 21, 2005 63,000 66,150
60,000 (6) May 21, 2006 63,000 66,150
Chia-Yen Li 25,000 (7) 12.5% $1.00 January 20, 2002 26,250 27,563
25,000 (8) July 21, 2002 26,250 27,563
25,000 (9) January 21, 2003 26,250 27,563
25,000 (10) July 21, 2003 26,250 27,563
25,000 (11) January 21, 2004 26,250 27,563
25,000 (12) July 20, 2004 26,250 27,563
25,000 (13) January 20, 2005 26,250 27,563
25,000 (14) July 20, 2005 26,250 27,563
25,000 (15) January 20, 2006 26,250 27,563
25,000 (16) July 21, 2006 26,250 27,563
Reginald J.N. 50,000 (17) $13.00 December 1, 2001 52,500 55,126
Ross 50,000 (18) December 1, 2002 52,500 55,126
50,000 (19) December 1, 2003 52,500 55,126
50,000 (20) December 1, 2004 52,500 55,126
50,000 (21) December 1, 2005 52,500 55,126
50,000 (22) December 1, 2006 52,500 55,126
</TABLE>
- ---------------------
(1) These options vested on May 21, 1999
(2) These options vest on May 21, 2000
(3) These options vest on May 21, 2001
(4) These options vest on May 21, 2002
(5) These options vest on May 21, 2003
(6) These options vest on May 21, 2004
(7) These options vest on January 21, 2000
(8) These options vest on July 21, 2000
43
<PAGE>
(9) These options vest on January 21, 2001
(10) These options vest on July 21, 2001
(11) These options vest on January 21, 2002
(12) These options vest on July 21, 2002
(13) These options vest on January 21, 2003
(14) These options vest on July 21, 2003
(15) These options vest on January 21, 2004
(16) These options vest on July 21, 2004
(17) These options vest on December 1, 1999 and may be exercised
(18) These options vest on December 1, 2000
(19) These options vest on December 1, 2001
(20) These options vest on December 1, 2002
(21) These options vest on December 1, 2003
(22) These options vest on December 1, 2004
Option Exercises and Option Values
The following table provides information related to options exercised
by the Named Executive Officers and the number of and value of options held by
the Named Executive Officers on January 14, 2000.
<TABLE>
<CAPTION>
Securities Aggregate
Acquired Value Value of Unexercised in the
on Realized Unexercised Options as at money options as at
Name Exercise ($) January 14, 2000 (#) January 14, 2000 ($)
------ --------- ----- ---------------------- ---------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
S. Iraj Najafi, --- --- 200,000 --- $3,806,000 ---
Mark Andrews --- --- 200,000 --- 3,806,000 ---
Vincent --- --- --- 300,000 --- $5,709,000
Belanger
Chia-Yen Li, --- --- 25,000 225,000 $475,750 $4,281,750
Reginald J.N. --- --- 50,000 250,000 351,500 1,757,500
Ross
</TABLE>
Other compensation plans
The company has no pension plan or other compensation plans for its executive
officers or directors.
ITEM 7. 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,
44
<PAGE>
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.
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. Under the Teaming Agreement, 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 agreed to
purchase 3,000,000 shares of Common Stock at a price of US$0.50 (CDN$0.74) 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 is scheduled for 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 (CDN$1.32) per share, which was exercised in November 1999. In addition,
the Company issued to Molex a Services Common Stock Purchase Warrant for
5,800,000 shares of Common Stock in exchange for certain services to be rendered
by Molex to the Company under the Teaming Agreement, expiring in June 2001 and
the shares are issuable as Molex performs the services provided for under the
terms of the Teaming Agreement. 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. Mr. Moretti, an officer of
Molex Fiber Optics Inc., is a director of the Company.
On December 3, 1999 Lumenon entered into an agreement with Molex for the
investment of an additional US$3 million in the Company's Common Stock at a
price of US$23.19 per share. Molex will also receive one half of a common share
purchase warrant per share purchased. Each of these warrants can be exercised to
acquire one share of Common Stock at a price of US$29.00 per share before
December 3, 2000. The closing of this private placement is expected to occur in
January 2000 upon completion of the legal documentation.
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$2,377,000 (CDN$3,500,000) over the term of the License Agreement.
Additionally, the Company issued 750,000 shares of Common Stock to each of
Polyvalor and McGill University.
ITEM 8. LEGAL PROCEEDINGS.
There is no action, suit, proceeding, or investigation pending or to the
Company's knowledge threatened against the Company, including any investigation
of any governmental authority or body.
45
<PAGE>
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON
EQUITY AND OTHER STOCKHOLDER MATTERS.
The Common Stock of the Company has been quoted on the Over The Counter Bulletin
Board (OTCBB) from July 27, 1998 through January 19, 2000. The following table
sets out the high and low bid prices of the Common Stock during the periods
indicated. Such prices reflect inter-dealer prices, without retail mark-up,
mark-down or commissions and may not necessarily represent actual transactions.
High ($) Low ($)
-------- -------
1998 3rd quarter (from July 27th) $ 4.00 $0.63
4th quarter $ 1.50 $0.25
1999 1st quarter $ 1.56 $0.25
2nd quarter $ 3.50 $0.44
3rd quarter $14.25 $1.63
4th quarter (to December 31st) $49.00 $3.50
1st quarter (to January 19th) $30.00 $12.78
As of January 19, 2000, pending effectiveness of this Registration Statement on
Form 10, the Common Stock ceased to be traded on the OTCBB and began to be
traded in the over-the-counter market. The closing price of the Common Stock on
February 8, 2000, as reported by the National Quotation Bureau in the Pink
Sheets was $23.00.
Upon certification by the Securities and Exchange Commission to the National
Association of Securities Dealers, Inc. that this Registration Statement is
effective, Lumenon will use its best efforts to reinstate trading on the OTC
Bulletin Board and to continue its NASDAQ listing application and process. No
assurances can be given that the Registration Statement will become effective or
that the NASDAQ listing application will be accepted.
According to information furnished to the Company by the transfer agent for the
Common Stock, as of January 19, 2000, there were 78 holders of record of the
Common Stock, including depositories.
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.
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES.
In July 1998, under a reorganization and acquisition plan, (i) Lumenon acquired
the outstanding stock of LILT in consideration of the issuance of 12,200,000
shares of Common Stock to the former shareholders of LILT and (ii) Lumenon
acquired the outstanding stock of Dequet Capital, Inc. ("Dequet") in
consideration of the issuance of 4,000,000 shares of Common Stock to the former
stockholders of Dequet. The shares issued in connection with the acquisition of
Lumenon were issued to the six former shareholders of LILT, Najafi Holding,
Inc., Andrewma Holding, Inc., Touam Holding, Inc., SurfaceTech, Polyvalor and
McGill University in reliance upon the exemption provided in Section 4(2) of the
Securities Act of 1933, as amended
46
<PAGE>
(the "Securities Act"), were deemed by the Company to be "restricted securities"
within the meaning of Rule 144 under the Securities Act and were appropriately
legended and restricted as to subsequent transfer. The shares issued in
connection with the acquisition of Dequet were issued to the former stockholders
of Dequet under the exemption provided in Rule 504 of Regulation D under the
Securities Act for a total consideration of $540,000. No underwriter was
involved in either such transaction.
During the six-month period ended June 30, 1999, Lumenon issued an aggregate of
2,260,000 Units at a price of US$0.50 per unit to investors (excluding Molex).
Each Unit comprised one share of Common Stock and one warrant for the purchase
of one additional share of Common Stock at a price of US$1.00 per share, of
which warrants to purchase 1,050,000 shares expire on August 23, 2001 (550,000
of these 1,050,000 warrants have been exercised) and warrants to purchase
1,210,000 shares expire on August 23, 2000. The securities were offered and sold
to the following entities and individuals under the exemption provided in
Section 4(2) of the Securities Act: Manitex Capital Inc., a Canadian venture
capital company, Pinetree Capital Corp., a Canadian venture capital company, a
group of Canadian investors investing through a confidential trust, and a group
of Canadian investors investing through Groome Capital.com, Inc., an investment
banking firm. Each such individual or entity was an accredited investor (as such
term is defined in Rule 501 of Regulation D under the Securities Act) or
otherwise a sophisticated investor or employed a purchaser's representative
having knowledge and experience in financial and business matters, each being
capable of evaluating the merits and risks of its investment and each having had
the opportunity to ask questions and receive answers concerning the terms and
conditions of the offering and to obtain additional information from the
Company, necessary to make an informed investment decision. All such securities
were deemed by the Company to be restricted securities and were appropriately
legended and restricted as to subsequent transfer. No underwriter was involved
in any such transaction.
In March 1999, the Company issued US$200,000 principal amount of its 10%
Convertible Notes (the "Notes") to Brant Investments Limited Global Securities
Services, a Canadian entity and an accredited investor within the meaning of
Rule 501 of Regulation D under the Securities Act. Each US$1,000 principal
amount of the Notes was initially convertible into common stock at US$0.50 per
share. Upon conversion of the Notes, the holder thereof is entitled to receive
for each US$1,000 principal amount thereof warrants to purchase 1,000 additional
shares of Common Stock at US$0.90 per share with a term of 30 months. The
securities were offered and sold pursuant to the exemption provided in Section
4(2) of the Securities Act. All of the Notes were deemed by the Company to be
restricted securities and were appropriately legended and restricted as to
subsequent transfer. Groome Capital.com, Inc. ("Groome") acted as underwriter in
connection with such placement. The notes were converted in September 1999 in
accordance with their terms.
In June 1999, the Company issued 1,500,000 shares of Common Stock, 1,666,667
cash common stock purchase warrants and 5,800,000 service common stock purchase
warrants to Molex under the Molex Agreements, for a cash consideration of
US$750,000. Each cash common stock purchase warrant entitles Molex to acquire
one share of Common Stock at a price of US$0.90 on or before August 1, 2001.
These 1,666,667 cash common stock purchase warrants were exercised in November
1999. Each service common stock purchase warrant entitles Molex to receive one
share of Common Stock for services rendered under the Molex Agreements. (See
Item 1. "Business - Material Agreements - Agreements with Molex.") The
securities were offered and sold in reliance on the exemption provided in
Section 4(2) of the Securities Act and solely to an accredited investor, Molex,
within the meaning of Rule 501 of Regulation D under the Securities Act. No
underwriter was involved in such transaction.
47
<PAGE>
In July 1999, the Company 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 of Common Stock at a price of US$1.50 per share before
June 2001. The securities were offered and sold in reliance on the exemption
provided in Section 4(2) of the Securities Act and solely to accredited
investors (as such term is defined in Rule 501 of Regulation D of the Securities
Act) or otherwise to sophisticated investors or to investors employing a
purchaser representative having knowledge and experience in financial and
business matters, each being capable of evaluating the merits and risks of its
investment and each having had the opportunity to ask questions and receive
answers concerning the terms and conditions of the offering and to obtain
additional information from the Company necessary to make and informed
investment decision. All such securities were deemed by the Company to be
restricted securities and were appropriately legended and restricted as to
subsequent transfer. No underwriter was involved in such transactions.
In September 1999, the Company 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 of Common Stock at a price of US$6.00
per share before September 2000. The securities were offered and sold in
reliance on the exemption provided in Section 4(2) of the Securities Act and
solely to accredited investors (as such term is defined in Rule 501 of
Regulation D of the Securities Act), or otherwise to sophisticated investors or
to investors employing a purchaser representative having knowledge and
experience in financial and business matters, each being capable of evaluating
the merits and risks of its investment and each having had the opportunity to
ask questions and receive answers concerning the terms and conditions of the
offering and to obtain additional information from the Company necessary to make
and informed investment decision. All such securities were deemed by the Company
to be restricted securities and were appropriately legended and restricted as to
subsequent transfer. Groome acted as underwriter in connection with such
placement. 125,000 of the warrants were exercised in October 1999.
In September 1999, the Company issued 400,000 additional units to holders of the
Notes, Brant Investments Limited Global Securities Services upon the full
conversion of its Notes. Each unit comprised one share of Common Stock and one
warrant for the purchase of one additional share of Common Stock at a price of
US$0.90 per share before September 30, 2001. The securities were offered and
sold solely to in reliance on the exemption provided in Section 4(2) of the
Securities Act and solely to accredited investors (as such term is defined in
Rule 501 of Regulation D of the Securities Act) or otherwise to sophisticated
investors or to investors employing a purchaser representative having knowledge
and experience in financial and business matters, each being capable of
evaluating the merits and risks of its investment and each having had the
opportunity to ask questions and receive answers concerning the terms and
conditions of the offering and to obtain additional information from the Company
necessary to make an informed investment decision. All such securities were
deemed by the Company to be restricted securities and were appropriately
legended and restricted as to subsequent transfer. Groome acted as underwriter
in connection with the placement of the Notes and their conversion, and upon
conversion of such notes, Groome exercised its option to purchase an additional
30,000 units for US$15,000 and exercised the 30,000 warrants included in the
Units for US$27,000 in December 1999.
In November 1999, Lumenon issued 21,500 units at a price of US$7.00 (CDN$10.27)
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 (CDN$13.20) per share
before September 30, 2000. The securities were offered and sold solely in
reliance on the exemption provided in Section 4(2) of the Securities Act and
solely to Ghaemi Holdings, a Canadian holding company, and an accredited
investor within the meaning of Rule 501 of Regulation D under the Securities
Act. All such securities were deemed by the Company to be restricted securities
and
48
<PAGE>
were appropriately legended and restricted as to subsequent transfer. No
underwriter was involved in such transaction.
In November 1999, Lumenon issued 10,000 additional units at a price of US$10.50
(CDN$15.40) 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
(CDN$22.74) per share before October 31, 2000. The securities were offered and
sold in reliance on the exemption provided in Section 4(2) of the Securities Act
and solely to Groupe Huot Inc., a Canadian holding company, and an accredited
investor within the meaning of Rule 501 of Regulation D under the Securities
Act. All such securities were deemed by the Company to be restricted securities
and were appropriately legended and restricted as to subsequent transfer. No
underwriter was involved in such transaction.
In November 1999, Molex exercised its warrants to acquire 1,666,667 shares at a
price of US$0.90 per share for total proceeds of US$1,500,000. Molex is an
accredited investor within the meaning of Rule 501 of Regulation D under the
Securities Act and the Company relied upon the exemption provided in Section
4(2) of the Securities Act. All such securities were deemed by the Company to be
restricted securities and were appropriately legended and restricted as to
subsequent transfer. No underwriter was involved in such transaction.
Additionally, warrants to acquire a total of 755,000 shares were exercised in
the three-month period ended December 31, 1999 for total proceeds of
US$1,295,000. These warrants were issued in prior transactions described above.
All such securities were deemed by the Company to be restricted securities and
were appropriately legended and restricted as to subsequent transfer. No
underwriter was involved in such transaction.
In December 1999, Lumenon entered into an agreement to issue 86,022 additional
units at a price of US$23.25 (CDN$34.11) per unit. Each unit comprised one share
of Common Stock and a warrant for the purchase of one half of an additional
share at a price of US$30.00 (CDN$44.01) per share before December 7, 2000. The
shares were issued on January 12, 2000. The securities were offered and sold
solely in reliance on the exemption provided in Section 4(2) of the Securities
Act and solely to Terima a.v.v., a British Virgin Islands holding company, and
an accredited investor within the meaning of Rule 501 of Regulation D under the
Securities Act. All such securities were deemed by the Company to be restricted
securities and were appropriately legended and restricted as to subsequent
transfer. No underwriter was involved in such transaction.
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED.
The capital stock being registered is Common Stock, US$.001 par value.
Authorized and Outstanding Capital Stock
The Company's authorized capital stock consists of 100,000,000 shares of Common
Stock, US$.001 par value, of which 24,551,189 were issued and outstanding as of
January 17, 2000, and 5,000,000 shares of Preferred Stock, US$.001 par value, of
which no shares have been issued.
49
<PAGE>
Common Stock
Holders of Common Stock are entitled to one vote per share on all matters to be
voted upon by stockholders. The shares of Common Stock have no preemptive or
conversion rights, no redemption or sinking fund provisions and are not liable
for further call or assessment. The outstanding shares of Common Stock are fully
paid and non-assessable. Subject to the rights of the holders of Preferred Stock
from time to time outstanding, the holders of Common Stock are entitled to
receive ratably such dividends, if any, as may be declared from time to time by
the Board of Directors out of funds legally available for payment. Such
dividends may be paid in cash, property, or shares of Common Stock. 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.
Preferred Stock
The Board of Directors is expressly authorized to provide for the issuance of
all or any shares of the Preferred Stock, in one or more series, and to fix for
each such series such voting powers, full or limited, or no voting powers, and
such designations, preferences and relative, participating, optional or other
special rights and such qualifications, limitations or restrictions thereof as
shall be stated and expressed in the resolution or resolutions adopted by the
Board of Directors providing for the issue of each such series and as may be
permitted by General Corporation Law of the State of Delaware (the "DGCL"). The
number of authorized shares of Preferred Stock may be increased (but not above
the number of authorized shares of the class) or decreased (but not below the
number of shares thereof then outstanding). Without limiting the generality of
the foregoing, the resolutions providing for issuance of any series of Preferred
Stock may provide that such series shall be superior or rank equally or junior
to any other series of Preferred Stock, to the extent permitted by law. Except
as provided in the Molex Agreements, no vote of the holders of the Preferred
Stock or Common Stock will be required in connection with the designation or the
issuance of any shares of any series of any Preferred Stock authorized by and
complying with the conditions herein.
Warrants and Options
As of January 17, 2000, there are warrants outstanding to purchase 3,467,211
shares of the Company's Common Stock. Of these warrants, 2,110,000 can be
exercised at a price of US$0.90, 960,000 can be exercised at a price of US$1.50,
322,700 can be exercised at a price of US$6.00, 21,500 can be exercised at a
price of US$9.00, 10,000 can be exercised at a price of US$15.50 and 43,011 can
be exercised at a price of US$29.00.
A total of 2,500,000 shares of Common Stock are currently authorized for grant
under the Company's Stock Option Plan. As of January 17, 2000, there were
options outstanding pursuant to the Stock Option Plan to purchase an aggregate
of 2,457,500 shares of Common Stock at exercise prices ranging from US$1.00 to
US$23.00 per share. A total of 92,500 shares of Common Stock remained available
for future grant. No options have been exercised under the Stock Option Plan as
of January 17, 2000.
Under the Molex Agreement, the Company is committed to issue 1,500,000 shares of
Common Stock at US$0.50 per share to Molex and 5,800,000 additional shares upon
the exercise of the service common stock purchase warrants. (See Item 1.
"Business - Material Agreements - The Molex Agreements.")
50
<PAGE>
Contractual Rights
The Company has entered into the Molex Agreements pursuant to which Molex has
certain preemptive rights with respect to the sale by the Company of additional
shares of its capital stock, together with certain rights that could prevent a
change in control of the Company. (See Item 1. "Business - Material Agreements
The Molex Agreements.")
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
As permitted by the DGCL, the Company's Certificate of Incorporation, as
amended, limits the personal liability of a director to the Company for monetary
damages for breach of fiduciary duty of care as a director. Liability is not
eliminated for (i) any breach of the director's duty of loyalty to the Company
or its stockholders, (ii) acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law, (iii) unlawful payment of
dividends or stock purchases or redemptions pursuant to Section 174 of the DGCL,
or (iv) any transaction from which the director derived an improper personal
benefit.
The Company's Certificate of Incorporation and By-Laws provide that the Company
shall indemnify any person who was or is a party or is threatened to be made a
party to any threatened, pending or completed action, suit or proceeding by
reason of the fact that he is or was a director, officer, employee or an agent
of the Company or is or was serving at the request of the Company as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, against all expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by him in connection with the defense or settlement of such action, suit or
proceeding, to the fullest extent and in the manner set forth in and permitted
by the DGCL, as from time to time in effect, and any other applicable law, as
from time to time in effect. Such right of indemnification is not be deemed
exclusive of any other rights to which such director, officer, employee or agent
and shall inure to the benefit of the heirs, executors and administrators of
each such person.
The Company proposes to enter into indemnity agreements with its directors and
executive officers. The indemnity agreements will provide that the Company shall
indemnify such directors and executive officers from and against any and all
liabilities, costs and expenses, amounts of judgments, fines, penalties and
amounts paid in settlement of or incurred in defense of any settlement in
connection with any threatened, pending or completed claim, action, suit or
proceeding in which such persons are a party (other than a proceeding or action
by or in the right of the Company to procure a judgment in its favor), or which
may be asserted against them by reason of their being or having been an officer
or director of the Company (the "Losses"), unless it is determined that such
directors and executive officers did not act in good faith and for a purpose
which they reasonably believed to be in, or in the case of service to an entity
related to the Company, not opposed to, the best interests of the Company and,
in the case of a criminal proceeding or action, that they had reasonable cause
to believe that their conduct was unlawful. The indemnity agreements will also
provide that the Company shall indemnify such directors and executive officers
from and against any and all Losses that they may incur if they are a party to
or threatened to be made a party to any proceeding or action by or in the right
of the Company to procure a judgment in its favor, unless it is determined that
they did not act in good faith and for a purpose that they reasonably believed
to be in, or, in the case of service to an entity related to the Company, not
opposed to, the best interests of the Company, except that no indemnification
for Losses shall be made in respect of (i) any claim, issue or matter as to
which they shall have been adjudged to be liable to the Company or (ii) any
threatened or pending action to
51
<PAGE>
which they are a party or are threatened to be made a party that is settled or
otherwise disposed of, unless and only to the extent that any court in which
such action or proceeding was brought determines upon application that, in view
of all the circumstances of the matter, they are fairly and reasonably entitled
to indemnity for such expenses as such court shall deem proper. Such
indemnification will be in addition to any other rights to which such officers
or directors may be entitled under any law, charter provision, by-law,
agreement, vote of shareholders or otherwise.
The Company maintains a $5,000,000 directors and officers liability insurance
policy.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of an action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act of 1933 and will be governed by the final adjudication of such issue.
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Items 2 and 15.
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
KPMG LLP has served as the independent accountant for LILT since such
corporation's inception. Under applicable accounting rules and policies, LILT is
deemed to be the acquirer of the Company. Since such acquisition, KPMG LLP has
served as the independent accountant of the Company.
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements:
Consolidated Financial Statements of Lumenon Innovative Lightwave
Technology, Inc. (a Development Stage Enterprise) - six-month
period ended June 30, 1999 and periods from inception (March 2,
1998) to December 31, 1998 and to June 30, 1999.
Consolidated Financial Statements (Unaudited) of Lumenon
Innovative Lightwave Technology, Inc. (a Development Stage
Enterprise) - three-month period ended September 30, 1999 and
1998 and period from inception (March 2, 1998) to September 30,
1999.
(b) 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.
52
<PAGE>
*3.1 Amended and Restated Certificate of Incorporation of Lumenon Innovative
Lightwave Technology, Inc.
*3.2 Amended and Restated By-Laws.
*4.1 Specimen Certificate for Shares of Common Stock.
*4.2 Lumenon Innovative Lightwave Technology, Inc. Stock Option Incentive
Plan.
*4.3 Form of Lumenon Innovative Lightwave Technology, Inc. Warrant to
Acquire Shares of Common Voting Stock.
10.1 Licence Agreement by and between Polyvalor and McGill University and
Lumenon Innovative Lightwave Technology, Inc.
*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.
*10.3 Stock Purchase Agreement between Molex Incorporated, Lumenon Innovative
Lightwave Technology, Inc., and LILT Canada, Inc., dated May 19, 1999.
*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.
*10.5 Registration Rights Agreement between Lumenon Innovative Lightwave
Technology, Inc. and Molex Incorporated, dated June 21, 1999.
*21 Subsidiaries of the Registrant.
23 Consent of KPMG, LLP.
27 Financial Data Schedule(s).
27.1 Six months ended June 30, 1999
27.2 Three months ended September 30, 1999
- -----------------
* Previously filed.
53
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the registrant has duly caused this amendment to the registration
statement to be signed on its behalf by the undersigned, thereto duly
authorized.
LUMENON INNOVATIVE LIGHTWAVE TECHNOLOGY INC.
(Registrant)
By:/s/ S. Iraj Najafi
------------------------------------------------------
February 9, 2000 S. Iraj Najafi, President and Chief Executive Officer
54
<PAGE>
Consolidated Financial Statements of
LUMENON INNOVATIVE LIGHTWAVE TECHNOLOGY, INC.
(a Development Stage Enterprise)
Six-month period ended June 30, 1999 and periods from
inception (March 2, 1998) to December 31, 1998 and to
June 30, 1999
<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, 1999 and December 31, 1998
and the consolidated statements of operations, cash flows and stockholders'
equity 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, 1999. 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, 1999 and December 31, 1998 and the consolidated results of its
operations and cash flows 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,
1999, in accordance with generally accepted accounting principles in the United
States.
/s/ KPMG LLP
- -----------------
KPMG LLP (signed)
Chartered Accountants
Montreal, Canada
September 3, 1999
<PAGE>
LUMENON INNOVATIVE LIGHTWAVE
TECHNOLOGY, INC.
(a Development Stage Enterprise)
Consolidated Financial Statements
Six-month period ended June 30, 1999 and periods from inception (March 2, 1998)
to December 31, 1998 and to June 30, 1999
Financial Statements
Consolidated Balance Sheets............................................ 1
Consolidated Statements of Operations.................................. 2
Consolidated Statements of Cash Flows.................................. 3
Consolidated Statements of Stockholders' Equity........................ 4
Notes to Consolidated Financial Statements............................. 5
<PAGE>
LUMENON INNOVATIVE LIGHTWAVE
TECHNOLOGY, INC.
(a Development Stage Enterprise)
Consolidated Balance Sheets
June 30, 1999 and December 31, 1998
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
June 30, June 30, December 31,
1999 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------------
(US$) (CAN$) (CAN$)
(Note 2 (a))
Assets
Current assets:
<S> <C> <C> <C>
Cash and cash equivalents $ 1,170,346 $ 1,722,871 $ 529,670
Sales tax receivable 161,360 237,539 21,093
Research tax credits receivable 23,244 34,218 2,149
Prepaid expenses 33,935 49,956 -
- ----------------------------------------------------------------------------------------------------------------------------------
1,388,885 2,044,584 552,912
Property and equipment (note 4) 1,013,852 1,492,495 -
Other assets 6,794 10,001 243
- ----------------------------------------------------------------------------------------------------------------------------------
$ 2,409,531 $ 3,547,080 $ 553,155
- ----------------------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 355,671 $ 523,550 $ 71,349
Accrued liabilities 122,463 180,312 48,000
Convertible promissory notes (note 5) 202,920 298,720 -
- ----------------------------------------------------------------------------------------------------------------------------------
681,054 1,002,582 119,349
Stockholders' equity:
Share capital (note 6) 20,603 30,330 24,802
Additional paid-in capital 2,312,614 3,404,408 696,513
Deposit on subscription of shares (note 9) 99,735 146,820 -
Accumulated deficit (704,475) (1,037,060) (287,509)
- ----------------------------------------------------------------------------------------------------------------------------------
1,728,477 2,544,498 433,806
Commitments (note 7 and 8)
Subsequent event (note 9)
- ----------------------------------------------------------------------------------------------------------------------------------
$ 2,409,531 $ 3,547,080 $ 553,155
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
On behalf of the Board:
______________________ Director
______________________ Director
-1-
<PAGE>
LUMENON INNOVATIVE LIGHTWAVE
TECHNOLOGY, INC.
(a Development Stage Enterprise)
Consolidated Statements of Operations
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Six months Six months From From
ended ended inception to inception to
June 30, June 30, December 31, June 30,
1999 1999 1998 1999
- ------------------------------------------------------------------------------------------------------------------------------------
(US$) (CAN$) (CAN$) (CAN$)
note 2 (a))
<S> <C> <C> <C> <C>
Revenues - interest $ 796 $ 1,172 $ 7,869 $ 9,041
Expenses:
Research and development:
Salaries and fringe
benefits 110,484 162,644 14,440 177,084
Training 4,616 6,795 - 6,795
External research 16,983 25,000 - 25,000
Research tax credits (21,784) (32,069) (2,149) (34,218)
- ------------------------------------------------------------------------------------------------------------------------------------
110,299 162,370 12,291 174,661
General and administrative:
Compensation cost
(note 6 (b)) 163,762 241,058 - 241,058
Professional fees 74,774 110,092 124,793 234,885
Salaries and fringe
benefits 42,544 62,629 115,016 177,645
Rent 24,169 35,579 21,235 56,814
Office 22,346 32,896 3,428 36,324
Promotion 21,979 32,355 5,094 37,449
Travel 15,927 23,446 19,077 42,523
(Gain) loss on foreign
exchange 12,802 18,846 (7,348) 11,498
Other 12,227 18,000 - 18,000
Communication 9,138 13,452 1,792 15,244
- ------------------------------------------------------------------------------------------------------------------------------------
399,668 588,353 283,087 871,440
- ------------------------------------------------------------------------------------------------------------------------------------
Net loss $ 509,171 $ 749,551 $ 287,509 $ 1,037,060
- ------------------------------------------------------------------------------------------------------------------------------------
Net loss per share $ 0.03 $ 0.04 $ 0.03
- ------------------------------------------------------------------------------------------------------------------------------------
Weighted average number
of shares outstanding 17,480,967 17,480,967 8,723,182
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
-2-
<PAGE>
LUMENON INNOVATIVE LIGHTWAVE
TECHNOLOGY, INC.
(a Development Stage Enterprise)
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Six months Six months From From
ended ended inception to inception to
June 30, June 30, December 31, June 30,
1999 1999 1998 1999
- ------------------------------------------------------------------------------------------------------------------------------------
(US$) (CAN$) (CAN$) (CAN$)
(Note 2 (a))
Cash flows from:
Operations:
<S> <C> <C> <C> <C>
Net loss $ (509,171) $ (749,551) $ (287,509) $ (1,037,060)
Adjustment for item not
involving cash:
Compensation cost
(note 6 (b)) 163,762 241,058 - 241,058
Change in operating assets
and liabilities:
Sales tax receivable (147,042) (216,446) (21,093) (237,539)
Research tax credits
receivable (21,786) (32,069) (2,149) (34,218)
Prepaid expenses (33,938) (49,956) - (49,956)
Accounts payable and
accrued liabilities 397,088 584,513 119,349 703,862
- ------------------------------------------------------------------------------------------------------------------------------------
(151,087) (222,451) (191,402) (413,853)
Financing:
Proceeds from issuance of
common shares 1,877,754 2,764,297 372 2,764,669
Cash from the acquisition of a
subsidiary - - 814,322 814,322
Share issue expenses (198,323) (291,932) (93,379) (385,311)
Deposit on subscription of shares 99,735 146,820 - 146,820
Proceeds from issuance of
convertible promissory notes 202,920 298,720 - 298,720
- ------------------------------------------------------------------------------------------------------------------------------------
1,982,086 2,917,905 721,315 3,639,220
Investments:
Additions to property
and equipment (1,013,852) (1,492,495) - (1,492,495)
Additions to other assets (6,631) (9,758) (243) (10,001)
- ------------------------------------------------------------------------------------------------------------------------------------
(1,020,483) (1,502,253) (243) (1,502,496)
- ------------------------------------------------------------------------------------------------------------------------------------
Increase in cash and cash
equivalents 810,516 1,193,201 529,670 1,722,871
Cash and cash equivalents,
beginning of period 359,830 529,670 - -
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents,
end of period $ 1,170,346 $ 1,722,871 $ 529,670 $ 1,722,871
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
-3-
<PAGE>
LUMENON INNOVATIVE LIGHTWAVE
TECHNOLOGY, INC.
(a Development Stage Enterprise)
Consolidated Statements of Stockholders' Equity
Periods from inception (March 2, 1998) to June 30, 1999
(in Canadian dollars)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Additional
paid-in Accumulated
Shares Par value capital deficit Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <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)
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 option grant - - 241,058 - 241,058
Loss for the period - - - (749,551) (749,551)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance as at June 30, 1999 20,215,000 30,330 3,404,408 (1,037,060) 2,397,678
before deposit on
subscription of shares
Deposit on subscription
of shares (note 9) 146,820
- ------------------------------------------------------------------------------------------------------------------------------------
Balance as at June 30, 1999 $ 2,544,498
- ------------------------------------------------------------------------------------------------------------------------------------
US dollars (note 2 (a))
Balance as at June 30, 1999
before deposit on
subscription of shares $ 20,603 $2,312,614 $ (704,475) $ 1,628,742
Deposit on subscription of shares 99,735
- ------------------------------------------------------------------------------------------------------------------------------------
Balance as at June 30, 1999 $ 1,728,477
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
-4-
<PAGE>
LUMENON INNOVATIVE LIGHTWAVE
TECHNOLOGY, INC.
(a Development Stage Enterprise)
Notes to Consolidated Financial Statements
Six-month period ended June 30, 1999 and periods from inception (March 2, 1998)
to December 31, 1998 and to June 30, 1999 (in Canadian dollars)
- --------------------------------------------------------------------------------
1. ORGANIZATION AND BUSINESS ACTIVITIES:
Lumenon Innovative Lightwave Technology, Inc. ("Lumenon"), a shell
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, 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 develop products
related to the Dense Wavelength Division Multiplexing market and other
photonics markets. 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 9).
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 Innovative Lightwave Technology, Inc. and the accounts of
LILT Canada Inc. 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, 1999, which was $1.472 Canadian dollar per
US dollar.
-5-
<PAGE>
LUMENON INNOVATIVE LIGHTWAVE
TECHNOLOGY, INC.
(a Development Stage Enterprise)
Notes to Consolidated Financial Statements, Continued
Six-month period ended June 30, 1999 and periods from inception (March 2, 1998)
to December 31, 1998 and to June 30, 1999 (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.
(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 annual rates:
-----------------------------------------------------------
Assets Rate
-----------------------------------------------------------
Computer equipment and software 3 years
Office equipment and fixtures 5 years
Leasehold improvements Term of lease
Laboratory and pilot plant equipment 3 and 10 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 expenditures:
Research expenditures, net of research tax credits, if any, are
expensed as incurred. Research tax credits earned on eligible
research expenses incurred in Canada are accounted for as a
reduction of research and development expenses.
The costs of intangibles that are purchased from others for use in
research and development activities and that have no alternative
future uses are considered research and development costs at the
time of acquisition and are expensed as incurred.
-6-
<PAGE>
LUMENON INNOVATIVE LIGHTWAVE
TECHNOLOGY, INC.
(a Development Stage Enterprise)
Notes to Consolidated Financial Statements, Continued
Six-month period ended June 30, 1999 and periods from inception (March 2, 1998)
to December 31, 1998 and to June 30, 1999 (in Canadian dollars)
- --------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(f) Foreign exchange:
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. The Canadian dollar
is the functional currency of the Corporation.
(g) Income taxes:
The Corporation uses the asset and liability method of accounting
for income taxes. Under the asset and liability 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 income in the
period that includes the enactment date.
(h) Comprehensive income:
Effective January 1, 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 has no impact on the Corporation's net income or
stockholders' equity.
(i) Stock option plan:
The Company 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, in accounting for its fixed plan stock options. 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.
-7-
<PAGE>
LUMENON INNOVATIVE LIGHTWAVE
TECHNOLOGY, INC.
(a Development Stage Enterprise)
Notes to Consolidated Financial Statements, Continued
Six-month period ended June 30, 1999 and periods from inception (March 2, 1998)
to December 31, 1998 and to June 30, 1999 (in Canadian dollars)
- --------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(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 exceed 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. The fully diluted loss per
share has not been disclosed because the effect of common shares
issuable upon the exercise of options and warrants is antidilutive.
(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.
3. THE MOLEX AGREEMENTS:
(a) Under the terms of a Stock Purchase Agreement dated May 19, 1999:
Molex Incorporated (Molex), a Delaware corporation, 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 and the second closing will take place
in March 2000 for an additional 1,500,000 common shares. The second
closing is contingent on the progress made by Lumenon proving out
its technology and its ability to manufacture and deliver certain
devices.
-8-
<PAGE>
LUMENON INNOVATIVE LIGHTWAVE
TECHNOLOGY, INC.
(a Development Stage Enterprise)
Notes to Consolidated Financial Statements, Continued
Six-month period ended June 30, 1999 and periods from inception (March 2, 1998)
to December 31, 1998 and to June 30, 1999 (in Canadian dollars)
- --------------------------------------------------------------------------------
3. THE MOLEX AGREEMENTS (CONTINUED):
(a) Under the terms of a Stock Purchase Agreement dated May 19, 1999
(continued):
Lumenon granted to Molex a Services Common Stock Purchase Warrant to
receive 5,800,000 common shares. The warrant expires in June 2001
and is subject to Molex fulfilling its obligations pursuant to a
Teaming Agreement. Value of the shares issued will be recorded as
Molex fulfills such obligations (see (c) thereafter). In addition,
if Molex elects not to proceed with the second closing referred to
above, all rights related to the warrant will be extinguished except
to the extent of expenses incurred under the Teaming Agreement.
Lumenon granted to Molex a Cash Common Stock Purchase Warrant to
purchase 1,667,667 common shares at a price of $1.32 (US$0.90) per
share. The warrant expires in September 2001 and is subject to Molex
fulfilling its obligations pursuant to a Teaming Agreement. In
addition, if Molex elects not to proceed with the second closing
referred to above, all rights related to the warrant will be
extinguished.
(b) Under the terms of a Stock Restriction Agreement dated June 21, 1999:
No primary stockholders can sell any share to competitors of Molex
without Molex's prior consent. The agreement includes Right of First
Refusal and Preemptive rights except that Lumenon can issue
6,000,000 units (one common share and a warrant for the purchase of
one common share at a price not less than $1.32 (US$0.90) per share)
at a price not less than $0.74 (US$0.50) per unit to raise capital
within 24 months.
Certain rights or restrictions might be terminated upon completion
of a Public Sale, a Public Offering as defined in the agreement, or
if Molex elects not to proceed with the second closing referred to
above. In addition, this agreement will terminate if Molex does not
purchase common shares under the Cash Common Stock Purchase Warrant
within a certain period as per the agreement, or if the teaming
agreement is terminated.
-9-
<PAGE>
LUMENON INNOVATIVE LIGHTWAVE
TECHNOLOGY, INC.
(a Development Stage Enterprise)
Notes to Consolidated Financial Statements, Continued
Six-month period ended June 30, 1999 and periods from inception (March 2, 1998)
to December 31, 1998 and to June 30, 1999 (in Canadian dollars)
- --------------------------------------------------------------------------------
3. THE MOLEX AGREEMENTS (CONTINUED):
c) Under the terms of a Teaming Agreement dated May 19, 1999:
Lumenon and Molex agreed to jointly develop certain products related
to the Dense Wavelength Division Multiplexing market and other
photonics markets. Under the terms of the agreement, Molex is
committed to contribute $1,840,000 (US$1,250,000) in services
towards the development of the products. Subject to Lumenon proving
out its technology and its ability to manufacture and deliver
certain devices, Molex is committed to purchase the entire
production of Lumenon for the first twelve months with a maximum
number of units per month. After the twelve-month period, Molex will
have the option to purchase all production of Lumenon at fair market
value. Under certain circumstances, Molex may have the right to
manufacture all components of the devices in return of a royalty of
25% of gross cost of Molex. At June 30, 1999, no cost was incurred
under this agreement.
4. PROPERTY AND EQUIPMENT:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
June 30, 1999
Accumulated Net book
Cost depreciation value
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
- --------------------------------------------------------------------------------------------------------------
</TABLE>
All capital assets were purchased during the six-month period ended June
30, 1999 and installation was completed in July 1999. No depreciation was
recorded as at June 30, 1999.
5. CONVERTIBLE PROMISSORY NOTES:
The convertible promissory notes bear interest at 10% and are convertible
into 400,000 common shares at the option of the holders. In addition, upon
conversion, the Corporation shall issue 400,000 common share purchase
warrants for the purchase of 400,000 common shares at a price of $1.32
(US$0.90) per share to be exercised before September 2001. The principal
amount not converted into common shares is due September 1999.
-10-
<PAGE>
LUMENON INNOVATIVE LIGHTWAVE
TECHNOLOGY, INC.
(a Development Stage Enterprise)
Notes to Consolidated Financial Statements, Continued
Six-month period ended June 30, 1999 and periods from inception (March 2, 1998)
to December 31, 1998 and to June 30, 1999 (in Canadian dollars)
- --------------------------------------------------------------------------------
6. SHARE CAPITAL:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
June 30, December 31,
1999 1998
- ----------------------------------------------------------------------------------------------------
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:
<S> <C> <C>
20,215,000 common shares (1998 - 16,455,000) $ 30,330 $ 24,802
- ----------------------------------------------------------------------------------------------------
</TABLE>
(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).
During the six-month period ended June 30, 1999, the Corporation
issued 3,760,000 common shares for a cash consideration of
$2,764,297 (US$1,880,000).
(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 will be
determined by the Board of Directors. The plan contemplates that a
maximum of 2,500,000 common shares may be optioned under the stock
option plan. In addition, no optionee shall hold options to purchase
more than 5% of the number of shares issued and outstanding at any
one time. The subscription price for each share covered by an option
shall be established by the Board of Directors but such price shall
not be lower than the fair market value at the date of grant.
Options granted have to be exercised over a period not exceeding ten
years. At June 30, 1999, 830,000 outstanding options are exercisable
and 1,100,000 outstanding options vest over a period of two to five
years.
-11-
<PAGE>
LUMENON INNOVATIVE LIGHTWAVE
TECHNOLOGY, INC.
(a Development Stage Enterprise)
Notes to Consolidated Financial Statements, Continued
Six-month period ended June 30, 1999 and periods from inception (March 2, 1998)
to December 31, 1998 and to June 30, 1999 (in Canadian dollars)
- --------------------------------------------------------------------------------
6. SHARE CAPITAL (CONTINUED):
(b) Stock option plan (continued):
(i) Changes in outstanding options for the year were as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
Number Exercise price per share
---------------------------------------------------------------------------------------------------
<S> <C> <C>
Options outstanding, January 1, 1999 - $ -
Granted 1,860,000 1.47 (US$1.00)
Granted * 80,000 0.74 (US$0.50)
--------------------------------------------------------------------------------------------------
Options outstanding, June 30, 1999 1,940,000
--------------------------------------------------------------------------------------------------
</TABLE>
* A holder of 30,000 options has the right to receive
30,000 warrants for the purchase of 30,000 additional
common shares at a price of $1.32 (US$0.90) per share
before September 2001.
(ii) Stock-based compensation:
The Corporation applies APB Opinion 25, Accounting for Stock
Issued to Employees, in accounting for its stock option plan.
Compensation cost of $241,058 (1998 - nil) for stock options
granted to non-employees has been recognized in the financial
statements for 1999. 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>
------------------------------------------------------------------------------------------
Six months From From
ended inception to inception to
June 30, December 31, June 30,
1999 1998 1999
------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net loss As reported $ 749,551 $ 287,509 $ 1,037,060
Pro-forma 1,120,362 287,509 1,407,871
------------------------------------------------------------------------------------------
</TABLE>
-12-
<PAGE>
LUMENON INNOVATIVE LIGHTWAVE
TECHNOLOGY, INC.
(a Development Stage Enterprise)
Notes to Consolidated Financial Statements, Continued
Six-month period ended June 30, 1999 and periods from inception (March 2, 1998)
to December 31, 1998 and to June 30, 1999 (in Canadian dollars)
- --------------------------------------------------------------------------------
6. SHARE CAPITAL (CONTINUED):
(b) Stock option plan (continued):
(ii) Stock-based compensation (continued):
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: 1999 - risk-free
interest rate of 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
1999 was $0.87 (US$0.59) (1998 - nil).
The effects of applying SFAS 123 for the pro-forma disclosures
are not representative of the effects expected on reported net
earnings in future years since valuations are based on highly
subjective assumptions about the future, including stock price
volatility and exercise patterns.
(c) Warrants:
During the six-month period ended June 30, 1999, the Corporation
issued warrants to purchase 9,727,667 common shares as follows:
- --------------------------------------------------------------------------------
Expiry date Exercise price per share
- --------------------------------------------------------------------------------
1,210,000 warrants August 2000 $ 1.32 (US$0.90)
2,717,667 August 2001 1.32 (US$0.90)
5,800,000 August 2001 0.74 (US$0.50)
- --------------------------------------------------------------------------------
9,727,667
- --------------------------------------------------------------------------------
Exercise price per share of the 5,800,000 warrants has been
determined at fair value at the time of the agreement. The rights of
certain warrants granted to Molex can be extinguished upon certain
circumstances (see note 3).
-13-
<PAGE>
LUMENON INNOVATIVE LIGHTWAVE
TECHNOLOGY, INC.
(a Development Stage Enterprise)
Notes to Consolidated Financial Statements, Continued
Six-month period ended June 30, 1999 and periods from inception (March 2, 1998)
to December 31, 1998 and to June 30, 1999 (in Canadian dollars)
- --------------------------------------------------------------------------------
7. LICENSE AGREEMENT:
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
telecommunication, 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 as defined in the agreement until October 2017.
8. Commitments:
(a) LILT leases premises under an operating lease agreement that expires
in January 2004. The lease contains a renewal option for a period of
five years at the end of the initial term and requires the
Corporation to pay all executory costs such as maintenance and
insurance. Rental payments under the terms of this lease are secured
by a prepayment of $6,500 and a pledge of $45,600 on the
universality of equipment in the leased premises.
Minimum lease payments under operating lease agreements for premises
and telephone equipment for the next five fiscal years are as follows:
- --------------------------------------------------------------------------------
2000 $ 69,100
2001 69,100
2002 69,100
2003 69,100
2004 40,300
- --------------------------------------------------------------------------------
(b) Under the terms of an agreement for the construction of the pilot
plant and the purchase of related equipment, the Corporation is
committed to pay $303,000.
9. SUBSEQUENT EVENT:
In July 1999, the Corporation issued 960,000 common shares at a price of
$1.47 (US$1.00) per share of which $146,820 was received before year-end
and 960,000 warrants for the purchase of 960,000 additional common shares
at a price of $2.21 (US$1.50) per share before June 2001. Effective
September 2, 1999, the Corporation issued 407,000 common shares at a price
of $5.89 (US$4.00) per share and 407,000 warrants for the purchase of
407,000 additional shares at a price of $8.83 (US$6.00) per share before
September 2000.
-14-
<PAGE>
LUMENON INNOVATIVE LIGHTWAVE
TECHNOLOGY, INC.
(a Development Stage Enterprise)
Notes to Consolidated Financial Statements, Continued
Six-month period ended June 30, 1999 and periods from inception (March 2, 1998)
to December 31, 1998 and to June 30, 1999 (in Canadian dollars)
- --------------------------------------------------------------------------------
10. INCOME TAXES:
Details of the components of income taxes are as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
June 30, December 31,
1999 1998
- ----------------------------------------------------------------------------------------------------------
Net loss:
<S> <C> <C>
US operations $ 241,058 $ -
Canadian operations 508,493 287,509
- ----------------------------------------------------------------------------------------------------------
749,551 287,509
Basic income tax rate 38% 38%
- ----------------------------------------------------------------------------------------------------------
Computed income tax recovery 284,829 109,253
Adjustment in income taxes resulting from:
Loss carryforwards and unclaimed
deductions not recognized 193,227 109,253
Compensation cost not deductible for tax purposes 91,602 -
- ----------------------------------------------------------------------------------------------------------
$ - $ -
- ----------------------------------------------------------------------------------------------------------
</TABLE>
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 are presented
below:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
June 30, December 31,
1999 1998
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Scientific research and experimental development $ 79,420 $ 4,500
Non-capital losses 228,000 104,000
Investment tax credits 280,000 -
Less valuation allowance (587,420) (108,500)
- -----------------------------------------------------------------------------------------------
$ - $ -
- -----------------------------------------------------------------------------------------------
</TABLE>
-15-
<PAGE>
LUMENON INNOVATIVE LIGHTWAVE
TECHNOLOGY, INC.
(a Development Stage Enterprise)
Notes to Consolidated Financial Statements, Continued
Six-month period ended June 30, 1999 and periods from inception (March 2, 1998)
to December 31, 1998 and to June 30, 1999 (in Canadian dollars)
- --------------------------------------------------------------------------------
10. INCOME TAXES (CONTINUED):
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 in making this assessment. 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, 1999, LILT, the Canadian Corporation, had accumulated
scientific research and experimental expenditures and other unclaimed
deductions which are available to reduce future years' taxable income.
Details of the available deductions are as follows:
- --------------------------------------------------------------------------------
Federal Provincial
- --------------------------------------------------------------------------------
Research and development expenditures,
without time limitation $ 209,000 $ 209,000
Losses carried forward:
Expiring 2006 600,000 600,000
- --------------------------------------------------------------------------------
In addition, research tax credits, not recorded in the accounts and
available to reduce future Federal income taxes payable, amount to
$280,000 and expire in 2009.
11. FINANCIAL INSTRUMENTS:
(a) Foreign currency risk management:
Options and warrants are exercisable in US dollars and convertible
promissory notes are payable in such currency. Ultimate proceeds
upon exercise of options and warrants as well as payments of
promissory notes may vary due to fluctuations in the value of the
Canadian dollar relative to the US currency.
-16-
<PAGE>
LUMENON INNOVATIVE LIGHTWAVE
TECHNOLOGY, INC.
(a Development Stage Enterprise)
Notes to Consolidated Financial Statements, Continued
Six-month period ended June 30, 1999 and periods from inception (March 2, 1998)
to December 31, 1998 and to June 30, 1999 (in Canadian dollars)
- --------------------------------------------------------------------------------
11. FINANCIAL INSTRUMENTS (CONTINUED):
(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 credit worthiness of all new
parties. The Corporation determines an allowance for doubtful
accounts to reflect specific risks.
(c) Fair values:
The following table presents the carrying amounts and estimated fair
values of the Corporation's financial instruments at June 30, 1999
and December 31, 1998. 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, December 31,
1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
amount value amount value
- ------------------------------------------------------------------------------------------------------------------------------------
Financial assets:
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 1,722,871 $1,722,871 $ 529,670 $ 529,670
Sales tax receivable 237,539 237,539 21,093 21,093
Financial liabilities:
Accounts payable 523,550 523,550 71,349 71,349
Accrued liabilities 180,312 180,312 48,000 48,000
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.
-17-
<PAGE>
LUMENON INNOVATIVE LIGHTWAVE
TECHNOLOGY, INC.
(a Development Stage Enterprise)
Notes to Consolidated Financial Statements, Continued
Six-month period ended June 30, 1999 and periods from inception (March 2, 1998)
to December 31, 1998 and to June 30, 1999 (in Canadian dollars)
- --------------------------------------------------------------------------------
11. FINANCIAL INSTRUMENTS (CONTINUED):
(c) Fair values (continued):
The following method and assumption were used to estimate the fair
value of each class of financial instruments:
Cash and cash equivalents, sales tax receivable, accounts payable,
accrued liabilities and convertible promissory note: The carrying
amounts approximate fair value because of the short maturity of
these instruments.
12. UNCERTAINTY DUE TO THE YEAR 2000 ISSUE:
The Year 2000 Issue arises because many computerized systems use two
digits rather than four to identify a year. Date-sensitive systems may
recognize the year 2000 as 1900 or some other date, resulting in errors
when information using year 2000 dates is processed. In addition, similar
problems may arise in some systems which use certain dates in 1999 to
represent something other than a date. The effects of the Year 2000 Issue
may be experienced before, on, or after January 1, 2000, and, if not
addressed, the impact on operations and financial reporting may range from
minor errors to significant systems failure which could affect an entity's
ability to conduct normal business operations. It is not possible to be
certain that all aspects of the Year 2000 Issue affecting the Corporation,
including those related to the efforts of customers, suppliers, or other
third parties, will be fully resolved.
-18-
<PAGE>
Consolidated Financial Statements of
(Unaudited)
LUMENON INNOVATIVE LIGHTWAVE TECHNOLOGY, INC.
(a Development Stage Enterprise)
Three-month period ended September 30, 1999 and 1998 and
period from inception (March 2, 1998) to September 30,
1999
<PAGE>
LUMENON INNOVATIVE LIGHTWAVE
TECHNOLOGY, INC.
(a Development Stage Enterprise)
Consolidated Financial Statements
(Unaudited)
Three-month period ended September 30, 1999 and 1998 and
period from inception (March 2, 1998) to September 30, 1999
Financial Statements
Consolidated Balance Sheets........................................... 1
Consolidated Statements of Operations................................. 2
Consolidated Statements of Cash Flows................................. 3
Notes to Consolidated Financial Statements............................ 4
<PAGE>
LUMENON INNOVATIVE LIGHTWAVE
TECHNOLOGY, INC.
(a Development Stage Enterprise)
Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
September 30, September 30, June 30,
1999 1999 1999
- ----------------------------------------------------------------------------------------
(US$) (CAN$) (CAN$)
(note 5)
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 805,596 $ 1,182,177 $ 1,722,871
Term deposit 1,900,000 2,787,300 --
Sales tax receivable 254,938 374,029 237,539
Research tax credits receivable 49,164 72,130 34,218
Prepaid expenses 18,308 26,860 49,956
- ----------------------------------------------------------------------------------------
3,028,006 4,442,496 2,044,584
Property and equipment 1,319,980 1,936,591 1,492,495
Other assets 6,818 10,001 10,001
- ----------------------------------------------------------------------------------------
$ 4,354,804 $ 6,389,088 $ 3,547,080
- ----------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 323,546 $ 474,699 $ 523,550
Accrued liabilities 101,686 149,172 180,312
Convertible promissory notes -- -- 298,720
- ----------------------------------------------------------------------------------------
425,232 623,871 1,002,582
Stockholders' equity:
Share capital 22,754 33,383 30,330
Additional paid-in capital 5,272,143 7,734,952 3,404,408
Deposit on subscription of shares -- -- 146,820
Accumulated deficit (1,365,325) (2,003,118) (1,037,060)
- ----------------------------------------------------------------------------------------
3,929,572 5,765,217 2,544,498
Subsequent events (note 4)
- ----------------------------------------------------------------------------------------
$ 4,354,804 $ 6,389,088 $ 3,547,080
- ----------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
On behalf of the Board:
______________________ Director
______________________ Director
-1-
<PAGE>
LUMENON INNOVATIVE LIGHTWAVE
TECHNOLOGY, INC.
(a Development Stage Enterprise)
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
Three months Three months Three months From
ended ended ended inception to
September 30, September 30, September 30, September 30,
- ----------------------------------------------------------------------------------------------------
1999 1999 1998 1999
- ----------------------------------------------------------------------------------------------------
(US$) (CAN$) (CAN$) (CAN$)
(note 5)
<S> <C> <C> <C> <C>
Revenues - interest $ 11,066 $ 16,235 $ -- $ 25,276
Expenses:
Research and development 252,750 370,819 -- 579,698
Research tax credits (23,988) (35,193) -- (69,411)
----------------------------------------------------------------------------------------------
228,762 335,626 -- 510,287
General and administrative
expenses 394,051 578,126 63,840 1,438,019
(Gain) loss on foreign
exchange 37,461 54,961 (5,373) 66,459
Interest expense 9,256 13,580 49 13,629
----------------------------------------------------------------------------------------------
669,530 982,293 58,516 2,028,394
- ----------------------------------------------------------------------------------------------------
Net loss $ 658,464 $ 966,058 $ 58,516 $ 2,003,118
- ----------------------------------------------------------------------------------------------------
Net loss per share $ 0.031 $ 0.046 $ 0.004
- ----------------------------------------------------------------------------------------------------
Weighted average number
of shares outstanding 21,116,992 21,116,992 15,398,478
- ----------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
-2-
<PAGE>
LUMENON INNOVATIVE LIGHTWAVE
TECHNOLOGY, INC.
(a Development Stage Enterprise)
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Three months Three months Three months From
ended ended ended inception to
September 30, September 30, September 30, September 30,
- --------------------------------------------------------------------------------------------------------------------
1999 1999 1998 1999
- --------------------------------------------------------------------------------------------------------------------
(US$) (CAN$) (CAN$) (CAN$)
(note 5)
<S> <C> <C> <C> <C>
Cash flows from:
Operations:
Net loss $ (658,464) $ (966,058) $ (58,516) $(2,003,118)
Adjustment for items not
involving cash:
Depreciation 61,930 90,864 -- 90,864
Compensation cost -- -- -- 241,058
Warrants issued for services 132,805 194,852 -- 194,852
Change in operating assets and liabilities:
Sales tax receivable (93,028) (136,490) -- (374,029)
Research tax credits
receivable (25,840) (37,912) (9,791) (72,130)
Prepaid expenses 15,742 23,096 (21,235) (26,860)
Accounts payable and
accrued liabilities (54,519) (79,991) 24,469 623,871
Advance to shareholder -- -- (24,500) --
--------------------------------------------------------------------------------------------------------------
(621,374) (911,639) (89,573) (1,325,492)
Financing:
Proceeds from issuance of
common shares 2,716,250 3,985,282 372 6,896,771
Cash from the acquisition of a
subsidiary -- -- 814,322 814,322
Share issue expenses (199,071) (292,077) (60,561) (677,388)
Proceeds from issuance of
convertible promissory notes -- -- -- 298,720
--------------------------------------------------------------------------------------------------------------
2,517,179 3,693,205 754,133 7,332,425
Investments:
Additions to property
and equipment (364,647) (534,960) -- (2,027,455)
Purchase of term deposit (1,900,000) (2,787,300) -- (2,787,300)
Additions to other assets -- -- -- (10,001)
--------------------------------------------------------------------------------------------------------------
(2,264,647) (3,322,260) -- (4,824,756)
- --------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash
and cash equivalents (368,842) (540,694) 664,560 1,182,177
Cash and cash equivalents,
beginning of period 1,174,438 1,722,871 -- --
- --------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents,
end of period $ 805,596 $ 1,182,177 $ 664,560 $ 1,182,177
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
-3-
<PAGE>
LUMENON INNOVATIVE LIGHTWAVE
TECHNOLOGY, INC.
(a Development Stage Enterprise)
Notes to Consolidated Financial Statements
Three-month periods ended September 30, 1999 and 1998 and period from inception
(March 2, 1998) to September 30, 1999
(in Canadian dollars)
- --------------------------------------------------------------------------------
In the opinion of management, the accompanying unaudited interim financial
statements, prepared in accordance with US generally accepted accounting
principles, contain all adjustments (consisting of normal recurring
accruals) necessary to present fairly the Corporation's financial position
as at September 30, 1999, June 30, 1999 its results of operations and cash
flows for the three months ended September 30, 1999 and 1998 and from
inception to September 30, 1999.
While management believes that the disclosures presented are adequate to
make the information not misleading, these consolidated financial
statements and notes should be read in conjunction with the Corporation's
Consolidated Financial Statements at June 30, 1999.
1. Organization and business activities:
Lumenon Innovative Lightwave Technology, Inc. ("Lumenon"), a shell
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, 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 develop products
related to the Dense Wavelength Division Multiplexing market and other
photonics markets.
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 2 and 4).
-4-
<PAGE>
LUMENON INNOVATIVE LIGHTWAVE
TECHNOLOGY, INC.
(a Development Stage Enterprise)
Notes to Consolidated Financial Statements, Continued
Three-month periods ended September 30, 1999 and 1998 and period from inception
(March 2, 1998) to September 30, 1999
(in Canadian dollars)
- --------------------------------------------------------------------------------
2. The Molex agreements:
(a) Under the terms of a Stock Purchase Agreement:
Molex Incorporated (Molex), a Delaware corporation, 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 and the second closing will take place
in March 2000 for an additional 1,500,000 common shares. The second
closing is contingent on the progress made by Lumenon proving out
its technology and its ability to manufacture and deliver certain
devices.
Lumenon granted to Molex a Services Common Stock Purchase Warrant to
receive 5,800,000 common shares. The warrant expires in June 2001
and is subject to Molex fulfilling its obligations pursuant to a
Teaming Agreement. Value of the shares issued will be recorded as
Molex fulfills such obligations (see (c) thereafter). In addition,
if Molex elects not to proceed with the second closing referred to
above, all rights related to the warrant will be extinguished except
to the extent of expenses incurred under the Teaming Agreement.
Lumenon granted to Molex a Cash Common Stock Purchase Warrant to
purchase 1,666,667 common shares at a price of $1.32 (US$0.90) per
share. The warrant was exercised in November 1999.
(b) 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 Right of First
Refusal and Preemptive rights except that Lumenon can issue
6,000,000 units (one common share and a warrant for the purchase of
one common share at a price not less than $1.32 (US$0.90) per share)
at a price not less than $0.74 (US$0.50) per unit to raise capital
within 24 months from the date of the agreement.
Certain rights or restrictions might be terminated upon completion
of a Public Sale, a Public Offering as defined in the agreement, or
if Molex elects not to proceed with the second closing referred to
above. In addition, this agreement will terminate if Molex does not
purchase common shares under the Cash Common Stock Purchase Warrant
within a certain period as per the agreement, or if the teaming
agreement is terminated.
-5-
<PAGE>
LUMENON INNOVATIVE LIGHTWAVE
TECHNOLOGY, INC.
(a Development Stage Enterprise)
Notes to Consolidated Financial Statements, Continued
Three-month periods ended September 30, 1999 and 1998 and period from inception
(March 2, 1998) to September 30, 1999
(in Canadian dollars)
- --------------------------------------------------------------------------------
2. The Molex agreements (continued):
(c) Under the terms of a Teaming Agreement:
Lumenon and Molex agreed to jointly develop certain products related
to the Dense Wavelength Division Multiplexing market and other
photonics markets. Under the terms of the agreement, Molex is
committed to provide services towards the development of the
products. Subject to Lumenon proving out its technology and its
ability to manufacture and deliver certain devices, Molex is
committed to purchase the entire production of Lumenon for the first
twelve months with a maximum number of units per month. After the
twelve-month period, Molex will have the option to purchase all
production of Lumenon at fair market value. Under certain
circumstances, Molex may have the right to manufacture all
components of the devices in return of a royalty of 25% of gross
cost of Molex. At September 30, 1999, an amount of $194,852 was
recorded under research and development expenses (see note 3 (v)).
3. Share capital:
- --------------------------------------------------------------------------------
September 30, June 30,
1999 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:
22,274,253 common shares
(June 30, 1999 - 20,215,000) $ 33,383 $ 30,330
- --------------------------------------------------------------------------------
During the three-month period ended September 30, 1999, the Corporation
concluded the following share capital transactions:
(a) Issue of shares:
(i) The Corporation issued 960,000 common shares for a cash
consideration of $1,420,674 (US$960,000). For each common
share issued, the Corporation issued one warrant for the
purchase of one additional share at a price of $2.21 (US$1.50)
per share before June 2001. Of the US$1,420,674, US$146,820
was received prior to June 30, 1999;
-6-
<PAGE>
LUMENON INNOVATIVE LIGHTWAVE
TECHNOLOGY, INC.
(a Development Stage Enterprise)
Notes to Consolidated Financial Statements, Continued
Three-month periods ended September 30, 1999 and 1998 and period from inception
(March 2, 1998) to September 30, 1999
(in Canadian dollars)
- --------------------------------------------------------------------------------
3. Share capital (continued):
(a) Issue of shares (continued):
(ii) The Corporation issued 407,000 common shares for a cash
consideration of $2,388,927 (US$1,628,000). For each common
share issued, the Corporation issued one warrant for the
purchase of one additional share at a price of $8.80 (US$6.00)
per share before September 2000;
(iii) The Corporation issued 30,000 common shares for a cash
consideration of $22,500 (US$15,000) pursuant to the exercise
of options;
(iv) The Corporation converted its promissory notes into 400,000
common shares with a value of $300,000 (US$200,000) upon
conversion. The Corporation issued 400,000 warrants for the
purchase of 400,000 common shares at a price of $1.32
(US$0.90) per share to be exercised before September 2001 as
per the terms of the agreement;
(v) Under the terms of a stock purchase agreement, the Corporation
granted a Services Common Stock Purchase Warrant to receive
5,800,000 common shares. At September 30, 1999, an amount of
$194,854 was recorded under research and development expenses
as 262,253 common shares are issuable to Molex, at a price of
$0.74 (US$0.50) per share.
(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 will be
determined by the Board of Directors. The plan contemplates that a
maximum of 2,500,000 common shares may be optioned under the stock
option plan. In addition, no optionee shall hold options to purchase
more than 5% of the number of shares issued and outstanding at any
one time. The subscription price for each share covered by an option
shall be established by the Board of Directors but such price shall
not be lower than the fair market value at the date of grant.
Options granted have to be exercised over a period not exceeding ten
years. At September 30, 1999, 800,000 outstanding options are
exercisable and 1,195,000 outstanding options vest over a period of
two to five years.
-7-
<PAGE>
LUMENON INNOVATIVE LIGHTWAVE
TECHNOLOGY, INC.
(a Development Stage Enterprise)
Notes to Consolidated Financial Statements, Continued
Three-month periods ended September 30, 1999 and 1998 and period from inception
(March 2, 1998) to September 30, 1999
(in Canadian dollars)
- --------------------------------------------------------------------------------
3. Share capital (continued):
(b) Stock option plan (continued):
(i) Changes in outstanding options for the year were as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
-------------------------------------------------------------------------------------------
Number Exercise price per share
-------------------------------------------------------------------------------------------
Options outstanding, January 1, 1999 - $ -
Granted 1,860,000 1.47 (US$1.00)
Granted 80,000 0.74 (US$0.50)
-------------------------------------------------------------------------------------------
Options outstanding, June 30, 1999 1,940,000
Granted 85,000 2.94 (US$2.00)
Exercised (30,000) 1.47 (US$1.00)
-------------------------------------------------------------------------------------------
Options outstanding, September 30, 1999 1,995,000
-------------------------------------------------------------------------------------------
</TABLE>
(ii) Stock-based compensation:
The Corporation applies APB Opinion 25, Accounting for Stock
Issued to Employees, in accounting for its stock option plan.
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>
---------------------------------------------------------------------------------------------
Three months Three months From
ended ended inception to
September 30, September 30, September 30,
1999 1998 1999
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net loss As reported $ 966,058 $ 58,516 $ 2,003,118
Pro-forma 1,003,110 58,516 2,410,981
---------------------------------------------------------------------------------------------
</TABLE>
-8-
<PAGE>
LUMENON INNOVATIVE LIGHTWAVE
TECHNOLOGY, INC.
(a Development Stage Enterprise)
Notes to Consolidated Financial Statements, Continued
Three-month periods ended September 30, 1999 and 1998 and period from inception
(March 2, 1998) to September 30, 1999 (in Canadian dollars)
- --------------------------------------------------------------------------------
3. Share capital (continued):
(b) Stock option plan (continued):
(ii) Stock-based compensation (continued):
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
rate of 5.5%, dividend yield of 0%, expected volatility of
90%, and expected life of 3 to 5 years. The per share weighted
average fair value of stock options granted during the
three-month period was $0.91 (US$0.62).
The effects of applying SFAS 123 for the pro-forma disclosures
are not representative of the effects expected on reported net
earnings in future years since valuations are based on highly
subjective assumptions about the future, including stock price
volatility and exercise patterns.
(c) Warrants:
The following warrants are outstanding at September 30, 1999:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Expiry date Exercise price per share
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1,210,000 warrants August 2000 $ 1.32 (US$0.90)
407,000 September 2000 8.80 (US$6.00)
40,700 September 2000 8.80 (US$6.00)
960,000 June 2001 2.20 (US$1.50)
2,716,667 August 2001 1.32 (US$0.90)
5,537,747 August 2001 0.74 (US$0.50)
400,000 October 2001 1.32 (US$0.90)
30,000 October 2001 1.32 (US$0.90)
- -----------------------------------------------------------------------------------------------
11,302,114
- -----------------------------------------------------------------------------------------------
</TABLE>
Exercise price per share of the 5,537,747 warrants has been
determined at fair value at the time of the agreement. The rights of
certain warrants granted to Molex can be extinguished upon certain
circumstances (see note 2).
-9-
<PAGE>
LUMENON INNOVATIVE LIGHTWAVE
TECHNOLOGY, INC.
(a Development Stage Enterprise)
Notes to Consolidated Financial Statements, Continued
Three-month periods ended September 30, 1999 and 1998 and period from inception
(March 2, 1998) to September 30, 1999
(in Canadian dollars)
- --------------------------------------------------------------------------------
4. Subsequent events:
Following the three-month period ended September 30, 1999, the Corporation
concluded the following transactions:
(a) Issue of shares:
The Corporation issued 21, 500 units at a price of $10.27 (US$7.00)
per unit. Each unit was comprised of one share and one warrant for
the purchase of one additional share at a price of $13.20 (US$9.00)
per share before September 2000.
The Corporation issued 10,000 units at a price of $15,40 (US$10.50)
per unit. Each unit was comprised of one share and one warrant for
the purchase of one additional share at a price of $22.74 (US$15.50)
per share before October 2000.
(b) Exercise of warrants:
In November 1999, 2,371,667 warrants were exercised in exchange for
2,371,667 common shares at a value of $4,066,524 (US$2,772,000).
(c) Options:
Under the terms of a stock option incentive plan, the Corporation
granted 412,500 options to purchase common shares to employees and
directors at prices varying from $11.74 (US$8,00) to $33.74
(US$23.00), vesting over a period of two to five years.
The Corporation granted 50,000 options to a consultant to purchase
common shares at a price of $33.74 (US$23.00) per share, vesting
over a period of two years.
50,000 options were exercised in exchange for 50,000 common shares
at a value of $36,675 (US$25,000).
(d) Agreements:
In December 1999, the Corporation entered into an agreement with
Molex in connection with the issuance of common shares at $34.00 (US
$23.19) per share for an aggregate of $4,445,000 (US $3,000,000).
Molex will receive also one half common share purchase warrant per
share purchased to be exercised before December 2000 at a price of
$43.00 (US $29.00).
-10-
<PAGE>
LUMENON INNOVATIVE LIGHTWAVE
TECHNOLOGY, INC.
(a Development Stage Enterprise)
Notes to Consolidated Financial Statements, Continued
Three-month periods ended September 30, 1999 and 1998 and period from inception
(March 2, 1998) to September 30, 1999
(in Canadian dollars)
- --------------------------------------------------------------------------------
4. Subsequent events (continued):
(d) Agreements (continued):
The Corporation also entered into an agreement with a private
investor in connection with the issuance of common shares at $34.45
(US $23.25) per share for an aggregate of $2,963,000 (US
$2,000,000). The private investor will receive also one half common
share purchase warrant per share purchased to be exercised before
December 2000 at a price of $44.50 (US $30.00).
5. Functional currency and convenience translation:
The functional currency of the Corporation is the Canadian dollar.
US dollar amounts presented on the balance sheets, statements of
operations and cash flows are provided for convenience of reference only
and are based on the closing exchange rate at September 30, 1999, which
was $1.467 Canadian dollar per US dollar.
6. Commitments:
Under employment agreements, the Corporation is committed to pay to
certain employees an aggregate of $375,000 per year for the next five
years.
-11-
LICENSE AGREEMENT
BY AND BETWEEN: POLYVALOR, Societe en commandite, hereinafter
represented by its General Partner, Polyvalor inc.,
having its principal place of business at 3744,
Jean-Brillant Street, 6th floor, Montreal (Quebec);
H3T 1P1;
(hereinafter referred to as "Polyvalor");
AND: MCGILL UNIVERSITY-THE ROYAL INSTITUTION FOR THE
ADVANCEMENT OF LEARNING, having its place of business
at 3550, University Street, Montreal (Quebec), H3A2A7;
(hereinafter referred to as "McGill")
(Polyvalor and McGill being collectively referred to as the "Licensor")
AND: LUMENON INNOVATIVE LIGHTWAVE TECHNOLOGIES INC., having
its place of business at 481, Victoria, Westmount
(Quebec), H3Y 2R3;
(hereinafter referred to as "Licensee")
WHEREAS Licensor is the owner of valuable Know-How (as hereinafter
defined) relating to integrated optical components for Dense Wavelength Division
Multiplexing ("DWDM") and Plastic Optical Fibre ("POF") devices for
telecommunication, data communications and sensor applications;
WHEREAS Licensor is the owner of Patents (as hereinafter defined);
WHEREAS Licensor wishes to grant unto Licensee and Licensee wishes to
acquire from Licensor an exclusive Patent and Know-How License as to enable
Licensee to produce, sell, distribute and promote Products (as hereinafter
defined) throughout the world (the "Territory").
NOW, THEREFORE, IN CONSIDERATION OF THE MUTUAL COVENANTS AND AGREEMENTS
HEREIN CONTAINED, IT IS HEREBY COVENANTED AND AGREED BY AND BETWEEN THE PARTIES
HERETO AS FOLLOWS:
<PAGE>
DWDM/POF Licence Agreement Page 2
- --------------------------------------------------------------------------------
SECTION I - DEFINITIONS
1.1 In this Agreement,
1.1.1 "Patents" shall mean an Invention of M. Amir Farfad, Mark P. Andrews
and S. Iraj Najafi entitled "Solvent-assisted lithographic process
using photosensitive sol-gel derived glass for depositing ridge
waveguides on silicon" as more particularly described in a patent
application therefor filed in the Canadian Patent Office on October 10,
1997 under No. 2,218,273 and in the U.S. Patent and Trademark Office on
October 10, 1997 under No.08/948,511 as well as all improvements
referred to in section 5.1 and all patent applications which may be
filed in relation thereto in the Territory and all patents which may
issue therefrom and any continuation, extension, division, revalidation
, reissue or other combination or renewal of same;
1.1.2 "Know-How" shall mean all the present technical knowledge and
accumulated experience acquired by Licensor and its predecessors in
title under the supervision of Mark P. Andrews and/or S. Iraj Najafi as
a result of research, practical experience or otherwise, in the design,
manufacture, production, and/or use of integrated optical components
for DWDM and POF devices for telecommunication, data communications and
sensor applications including, without limiting the generality of the
foregoing: ideas, unpatented inventions, processes, manufacturing
procedures, methods, designs and data;
1.1.3 "Product" shall mean any product produced, sold or distributed by
Licensee embodying or using the Patents or the Know-How;
1.1.4 "Contract Year" shall mean that period of time commencing on the
Effective Date (as defined in section 10.1) and ending on December
31st, 1999 and any subsequent calendar year.
SECTION II - GRANT OF LICENSE
2.1 Subject only to the license granted to OPS Technology Inc. ("QPS") on
May 4, 1998, Licensor hereby grants unto Licensee, the latter hereby
accepting, the exclusive license to use the Patents and/or the Know-How
to manufacture, produce , sell and distribute Products in the Territory
and for no other purpose.
2.2 For so long as this Agreement shall remain in effect, Licensor
undertakes and agrees that it will not distribute or sell, now will it
grant to any party other than QPS any other right or license to
manufacture, produce, import, distribute, sell or otherwise deal in
Products or parts thereof anywhere in the Territory.
<PAGE>
DWDM/POF Licence Agreement Page 3
- --------------------------------------------------------------------------------
2.3 However, it is understood that the Licensor and Ecole Polytechnique
shall have the right to use and to allow its students, professors,
staff and other researchers affiliated therewith and those of their
affiliates to use the Patents and Know-How but only for research and
teaching purposes.
2.4 Notwithstanding the above, it is understood that the Patents and
Know-How are licensed on an "as is basis". Except as otherwise
expressly set forth in this Agreement, McGill and Polyvalor make no
representations and extend no warranties of any kind, either expressed
or implied, including but not limited to warranties of merchantability
fitness for any particular purpose and validity of the Patents or the
Know-How.
SECTION III - CONSIDERATION
3.1 As consideration for the entering into of this Agreement and for the
rights granted herein, Licensee undertakes and agrees to:
3.1.1 pay to each of The Office of Technology Transfer of McGill and
Polyvalor a licensing fee of $5,000.00 payable upon signature of this
agreement;
3.1.2 pay to each of McGill and Polyvalor a royalty at the rate of two and
one half percent (2.5%) of Licensee's total gross sales and those of
any sub-licensee to dealers, distributors and users of any products and
services up to cumulative total royalty of $1,750,000 for each of
McGill and Polyvalor;
3.1.3 to issue to each of McGill and Polyvalor or their nominee(s) 750,000
publicly traded common shares of Licensee. However, McGill and
Polyvalor agree that such share will be subject to a hold period of up
to one year. Such hold period shall not be more unfavourable to McGill
and Polyvalor than the one imposed on the other shareholders of
Licensee which have similar shareholdings in Licensee. As long as
Licensor remains the beneficial owner of at least 500,000 common shares
of Licensee. Licensor shall have the right, to have one of its
representatives to be advised of and attend all board meetings as an
observer. If requested by Licensor, Licensee shall cause its
shareholders to appoint Licensor's representative as a director of
Licensee. In the event Licensor appoints a director, Licensee shall
obtain and pay for director liability insurance covering such director.
In addition, Licensor shall have the same rights to subscribe
additional common shares, to receive warrants and options for such
common shares and to be issued convertible debentures or other
securities of Licensee as the principal shareholders, officers and
directors of Licensee.
3.2 As used herein, the term "gross sales" mean the gross amount charged by
Licensee to its customers, less all sales, use or other similar taxes
paid or payable by Licensee in connection with such sales, quantity and
cash discounts actually allowed and credits for returned goods,
<PAGE>
DWDM/POF Licence Agreement Page 4
- --------------------------------------------------------------------------------
cancelled sales or bad debts. In the event such sales are made to an
entity which is directly or indirectly controlled by Licensee or
related to Licensee in any way, "gross sales" for such sales shall be
deemed to be the gross sales price charged by Licensee for identical
products or services sold in the same period to similar customers not
so related or controlled to or by Licensee. If there are no such other
sales, then the "gross sales" shall be the gross sales price of such
related and/or controlled customers of Licensee to their customers.
3.3 For the purpose of computing when royalties pursuant to the provisions
of section 3.1.2 are due, a "gross sale" shall be deemed to have
occurred on the date on which the Licensee issues, in the ordinary
course of trade, an invoice to a customer with respect to the wares or
services referred to in section 3.1.2.
3.4 For the purposes of this section the term "License" includes any and
all allowed sub- licensees.
3.5 All such royalties shall be paid quarterly within thirty (30) days
after the end of each calendar quarter, and shall be accompanied by a
report reflecting the quantities of Products, produced and sold by
Licensee during each such quarter and such other information as
Licensor may reasonably require to substantiate the royalties due and
payable by Licensee hereunder.
3.6 If the payment of any royalties is delayed for any reason, interest
shall accrue on the unpaid principal amount of such royalties from and
after the date on which the same became due pursuant to this Section at
a rate equal four percent (4%) over the prime rate of interest charged
from time to time by the Laurentian Bank to its most credit-worthy
customers. This shall not be interpreted as giving the Licensee a right
not to pay on time under section 3.5.
3.7 In order that the royalties payable hereunder may be accurately
determined, and the statements provided for hereinabove be verified,
Licensee undertakes and agrees to keep full, clear, accurate and
complete books and records relating to its operations under this
Agreement, to be kept available for at least three (30 years from the
end of the financial year during which a sale was reported to Licensor.
All of the said records and books of Licensee shall be open at all
reasonable times and upon a five (5) day notice during business hours
for inspection and audit by any duly authorized representative or
representatives of Licensor, at the latter's expense, to ascertain the
accuracy of the royalty payments made hereunder by Licensee or claimed
to be due hereunder by Licensor, provided however, that if there shall
have been an error in favour of Licensee in excess of two percent (2%)
in computing royalties for the period audited, all reasonable expenses
in connection with such inspection and audit shall be borne by and paid
for by Licensee.
<PAGE>
DWDM/POF Licence Agreement Page 5
- --------------------------------------------------------------------------------
3.8 Licensor shall hold strictly confidential and secret, and shall not
disclose and information concerning royalty payments or any information
learned in the course of any inpection or audit of the records and
accounts of Licensee, except as required by law or when it is necessary
for Licensor to reveal such information in order to enforce its rights
pursuant to the provisions of this Agreement.
3.9 Upon the demand of Licensor, but not more than once during any calendar
year, Licensee shall at its expense furnish to Licensor a detailed
statement by an independent Chartered Accountant, attesting to the
royalties due and payable hereunder as of Licensee's last fiscal year
end.
3.10 Receipt or acceptance by Licensor of any statement furnished pursuant
to this Agreement or any sum paid hereunder shall not preclude Licensor
from questioning the correctness thereof at any time during the period
three (3) years from receipt thereof but not thereafter, and in the
event that any mistake is discovered in any such statement or payment,
and Licensee is appraised thereof, Licensee shall immediately rectify
same.
3.11 Licensee shall allocate and pay Licensor all royalties payable
hereunder separately for each country and all required statements to be
provided to Licensor hereunder by Licensee shall be separate and
distinct with respect to each country.
3.12 All monetary amounts stated herein shall refer to the lawful currency
of Canada and all payments to Licensor hereunder shall be in Canadian
dollars based upon the foreign exchange rate existing upon the date of
payment to Licensee.
SECTION IV - MARKETING AND SALES PROMOTIONS
4.1 Licensee shall use its best efforts to develop, manufacture, produce,
promote, sell and distribute the Product in accordance with the terms
and conditions set forth in this Agreement.
SECTION V - DEVELOPMENTS AND IMPROVEMENTS
5.1 If during the term of this Agreement, Licensor shall develop new
improvements and/or additional know-how pertaining to DWDM or POF,
Licensor shall forth with supply Licensee with complete details
thereof. Licensee shall have a period of thirty (30) days from the
receipt of such details to notify Licensor in writing of its intentions
to obtain a license for the use of such improvements and/or Know-how.
Failure to respond shall be deemed a refusal. The parties agree to
negotiate in good faith the terms and conditions of such licence.
Licensor agrees not to disclose such details until the first of: i)
termination of licence
<PAGE>
DWDM/POF Licence Agreement Page 6
- --------------------------------------------------------------------------------
negotiations or ii) six (6) months have elapsed since the date on which
the details where disclosed to Licensee.
5.2 If during the term of this Agreement, Licensee shall develop
independently new improvements to the Product and/or additional
know-how pertaining to the design, manufacture, production or use of
the Product, Licensee shall supply Licensor with complete details
thereof including details relating to all intellectual property rights
and any other rights relating to same. Licensee shall be the sole owner
of all of the above. Licensor as well as Ecole Polytechnique shall have
a perpetual paid-up non-exclusive license to use such improvements for
the purposes set forth in section 2.3 once adequate patent protection
is filed for.
SECTION VI - PATENTS
6.1 Licensor shall, at the reasonable request of Licensee, diligently file
and prosecute applications for the Patents for the strongest protection
reasonably available, maintain the Patents in force and transmit
promptly to the Licensee a copy of all applications, Patents and
official communications to and from any Patent Office as soon as
received. Licensee shall bear the fees and disbursements for the
preparation, filing, prosecution and maintenance of such applications
and Patents.
6.2 In the event Licensor refuses to file or prosecute a patent application
when requested by Licensee pursuant to section 6.1, intends not to file
or prosecute an application prior to a statutory or other deadline,
intends not to maintain a patent in force when so requested by Licensee
pursuant to Section 6.1 or fails to do any of the above, Licensor must
notify Licensee at least thirty (30) days prior to such deadline, and
Licensee may, in the name of the Licensor, file or prosecute such
application or maintain such Patent.
SECTION VII - INFRINGEMENT
7.1 Licensee agrees to notify Licensor, in writing, of any acts of
infringement or violation of the Patents immediately after any such
acts are brought to its attention or it has otherwise acquired
knowledge thereof. The parties agree to consult with each other as to
how to respond to each infringement or violation of the Patents. If the
parties jointly conclude that legal action should be taken with respect
to such infringement or violation, Licensor and Licensee shall promptly
and diligently prosecute such action. In such event, each shall pay the
following proportion of all costs and expenses and receive the same
proportion of all recoveries and awards with respect to said action:
Licensor: 5%
Licensee: 95%
<PAGE>
DWDM/POF Licence Agreement Page 7
- --------------------------------------------------------------------------------
7.2 In the event Licensee advises Licensor that it will not participate in
such legal action, the Licensor shall be free to prosecute such action
as Licensor may deem advisable and in that connection, Licensee shall
assist Licensor in all reasonable ways and at all reasonable times, and
Licensor shall have the right to use the name of Licensee as a party to
the proceedings, either solely or jointly with Licensor's own name,
provided that Licensor shall pay all costs and expenses and in such an
event, Licensor shall be entitled to receive all recoveries and awards
in connection with such proceedings.
7.3 In the event Licensor advises Licensee that it will not participate in
such legal action, the Licensee shall be free to prosecute such action
as Licensee may deem advisable and in that connection, Licensor shall
assist Licensee in all reasonable ways and at all reasonable times, and
Licensee shall have the right to use the name of Licensor as a party to
the proceedings, either solely or jointly with Licensee's own name,
provided that Licensee shall pay all costs and expenses and in such an
event, Licensee shall be entitled to receive all recoveries and awards
in connection with such proceedings.
7.4 In the event that any suit, action, or other proceeding shall be
brought against Licensee involving any claim of patent infringement
based upon Licensee's manufacture and/or use, or sale of any Product:
7.4.1 Licensee shall promptly send to Licensor a copy of all proceedings
which have been served in such suit, action or other proceeding;
7.4.2 in the defence of any such claim, Licensor will cooperate fully with
Licensee, and will, from time to time, make available to Licensee all
relevant records, papers, information, samples, specimens and other
similar material;
7.4.3 should such suit, action or other proceeding relate to any Product
produced, sold or distributed by Licensee or method used by any user
thereof embodying or using the Patents or the Know-How and should
independent patent counsel acceptable to Licensor and to Licensee be of
the opinion that such Product or method constitute a clear infringement
of one or more of the claims mentioned in such suit, action or other
proceeding which has not been settled to the full exoneration of
Licensee six (6) months after the date of service thereof upon the
Licensee, Licensee shall have, as its sole recourse, the right to
terminate this Agreement upon written notice to Licensor.
7.5 Licensee and Licensor agree not to contest the ownership or validity of
the Patents either directly or indirectly in any way whatsoever.
<PAGE>
DWDM/POF Licence Agreement Page 8
- --------------------------------------------------------------------------------
SECTION VIII - MAINTENANCE OF STANDARDS
8.1 All Products shall be manufactured, sold and advertised in compliance
with all applicable governmental laws, rules and regulations as well as
those of applicable certification agencies such as CSA and UL. Licensee
shall cause truthful and accurate labelling regarding the care,
maintenance and use of the Products, where applicable, to be affixed to
such Products.
SECTION IX - SUB-LICENSE AND ASSIGNMENT
9.1 Licensee shall not sub-license the rights and license granted pursuant
to the terms of this Agreement, except under the following conditions:
9.2 such sub-license shall terminate not later than on the date of
termination of this Agreement, whenever and for whatever cause such
agreement may be terminated;
9.2.1 Licensee will remain liable for the payment of the full royalty
required to be paid hereunder, aggregating all of the gross sales of
Licensee and such sub-licensees;
9.2.2 such sub-license shall require the sub-licensee to comply with all of
the terms, covenants and provisions of this Agreement other than the
payment of royalties of fees to Licensor as if it was the Licensee
under this Agreement;
9.2.3 save as other wise specified herein, Licensee will remain responsible
for the performance of all the terms, covenants and provisions of this
Agreement.
9.3 Licensee shall not have the right to assign the rights and license
granted pursuant to this Agreement, without the consent of Licensor,
which consent may not be unreasonably withheld. However, Licensor's
consent shall not be required if such assignment is made in the context
of a corporate reorganization and Licensor remains jointly and
severally responsible for the performance of all the terms, covenants
and provisions of this agreemently such assignee.
SECTION X - TERM OF AGREEMENT
10.1 The Effective Date of this Agreement and its obligations shall be the
day following the last closing of the proposed issue of up to US
$5,000,000 special warrants by private placement as specified in the
confidential information memorandum dated October 23, 1998. In the
event such closing does not occur prior to May 31, 1999, Licensor shall
have no further obligations under this Agreement which shall then be
deemed to never have existed.
10.2 This Agreement shall endure and continue in force and effect from the
Effective Date until October 10, 2017 unless previously terminated in
accordance with the provisions of this Agreement.
<PAGE>
DWDM/POF Licence Agreement Page 9
- --------------------------------------------------------------------------------
SECTION XI - TERMINATION
11.1 The occurrence of any one or more of the Following events shall
constitute a default under this Agreement.
11.1.1 if any payment on account of the royalty is not made on due day;
11.1.2 Licensee institutes proceedings seeking relief under a bankruptcy law
or any similar law, or consents to entry of an order for relief against
it in any bankruptcy or insolvency proceeding or similar proceeding, or
files a petition for or consent or answer consenting to reorganization
or other relief under any bankruptcy act or other similar law, or
consents to the filing against it of any petition for the appointment
of a receiver, liquidator, assignee, trustee, sequestrator (or other
similar official) of it or of any substantial part of its property, or
makes an assignment or a proposal for the benefit of creditors, or
admits in writing its inability to pay its debts as they become due, or
takes any action in furtherance of the foregoing;
11.1.3 the calling of a meeting of creditors, appointment of a committee of
creditors or liquidating agents, or offering of a composition or
extension to creditors by, for or of Licensee;
11.1.4 if Licensee or Licensor breaches materially any other provision of this
Agreement.
11.2 In the event of a default specified in sub-paragraph 11.1.1 which is
not corrected within thirty (30) days of written notice of such
default, Licensor thereafter shall have the right to immediately
terminate this Agreement. In the event of defaults specified in
sub-paragraph 11.1.2. or 11.1.3, Licensor will have the right to
immediately terminate this Agreement without notice.
11.3 In the event of a default specified in sub-paragraph 11.1.4 which is
not corrected within sixty (60) days of receipt of written notice
specifying the respect in which the defaulting party has breached this
Agreement, the other party shall have the right to immediately
terminate this Agreement.
11.4 No assignee for the benefit of creditors, receiver, liquidator,
sequestrator, trustee in bankruptcy, sheriff or any other officer of
the court or official charged with taking over custody of Licensee's
assets or business shall have any right to continue to use the Patents
or the Know-How.
11.5 Termination of this Agreement shall not release Licensee from any
payments or obligations due and payable or accrued to Licensor or
rescind any payment made or paid by Licensee
<PAGE>
DWDM/POF Licence Agreement Page 10
- --------------------------------------------------------------------------------
to Licensor hereunder prior to the time such termination becomes
effective nor release Licensee from those obligations hereunder which
survive termination.
11.6 Furthermore, termination of this Agreement prior to the expiration of
its term shall be without prejudice to any other rights which Licensor
may have against Licensee, including, without limitation, damages for
breach to the extent that same may be recoverable.
11.7 In the event of the expiration or termination of this Agreement for any
reason, the Licensee and all allowed sub-licensees shall cease all use
of the Patents and the Know-How. Notwithstanding the foregoing, the
Licensee and its allowed sub-licensees shall the right:
11.7.1 for a period not exceeding three (3) months from the date of expiration
or termination, to complete the manufacture of Product components,
accessories and supplies which are in the process of manufacture at the
date of expiration or termination;
11.7.2 for a period not exceeding three (3) months from the date of expiration
or termination, to sell Products or parts thereof which are in its
possession, custody or control at the date of expiration or termination
or are made under the authority of section 11.7.1; and
11.7.3 complete the performance of services relating to Products if such
services were contracted for prior to the date of expiration or
termination.
SECTION XII - REPRESENTATIONS AND WARRANTIES OF THE LICENSOR
12.1 Licensor hereby represents and warrants unto Licensee that:
12.1.1 it is the owner of all rights, title, property, benefit and interest in
and to the Patents[ ] and that it has every legal right to enter into
this Agreement and to perform the terms and conditions hereof or its
part to be performed, fee of any encumbrances whatsoever;
12.1.2 it has made proper application in Canada for the Patent under No.
2,218,273 and in the US under No. 08/948,511.
12.1.3 it has entered no relationship or agreement, written or oral, expressed
or implied, inconsistent with the provisions of this Agreement except
for the license with QPS referred to in section 2.1;
12.1.4 Licensor has not received any notice that the manufacture, sale or use
any part of the Product by Licensee will constitute an infringement of
any patents or other proprietary rights owned by any third party;
<PAGE>
DWDM/POF Licence Agreement Page 11
- --------------------------------------------------------------------------------
12.1.5 Licensor has made no investigations as to the matters set forth in
sub-paragraph 12.1.4 Licensee agrees that Licensor will not be charged
with constructive knowledge of any such infringement.
SECTION XIII - INDEMNIFICATION
13.1 Licensee shall indemnify and save and hold harmless Licensor from any
liabilities, claims, causes of action, suits, damages and expenses
(including reasonable attorney's fees and expenses) which Licensor is
or becomes liable for, or may incur, or be compelled to pay or pay by
reason of any acts, whether of omission or commission, that may be
committed or suffered by Licensee or any of its servants, agents or
employees in connection with Licensee's performance under the terms of
this Agreement or arising out of the use of any part of the Products
manufactured by or on behalf of or sold by Licensee. Licensee and/or
its sub-contractors and allowed sub-licensees shall assume all warranty
obligations to their customers in respect of such Products, and
Licensor shall have no liability either to Licensee, any allowed
sub-licensee or their respective customers in respect of such warranty
obligations.
SECTION XIV - ARBITRATION
14.1 Any dispute arising out of the present agreement shall be submitted to
the determination of a single arbitrator to be appointed in accordance
with provisions of the Quebec Code of Civil Procedure and his
determination of such matter shall be final and binding on both parties
and shall not be subject to appeal by either party. The fees and
expenses of the arbitrator, shall be borne equally by the parties.
SECTION XV - NOTICES
15.1 Any notice, demand, consent or other communication to be given in
connection with this Agreement (collectively and individually the
"Notice") shall be in writing and addressed to its addressee at the
address stated above or such addresses as a party may specify from time
to time by Notice.
15.2 Notices may be delivered by hand, overnight courier service (e.g.,
FEDEX, DHL) registered or certified mail or fax and shall be deemed to
have been received as follows:
15.2.1 If delivered by hand: at the time of delivery to a person
who appears reasonably to be in
charge.
<PAGE>
DWDM/POF Licence Agreement Page 12
- --------------------------------------------------------------------------------
15.2.2 If sent by fax: at the time of
confirmed transmission provided a
confirmation copy is sent by airmail
or registered or certified mail
within twenty-four (24) hours after
the transmission.
15.2.3 If sent by registered or certified mail or by overnight courier service:
at the time of delivery or of
attempted delivery in the case
delivery cannot be completed due to
no fault of the sender.
15.3 If the time of such deemed receipt as provided in paragraph 15.2 hereof
is not during the customary hours of business, the Notice shall be
deemed to have been received at 10:00 a.m. at the place of delivery on
the first customary day of business thereafter.
SECTION XVI - GENERAL PROVISIONS
16.1 Interpretation. The parties hereto hereby declare that it is their
intention that the provisions of the Agreement apply fairly and without
detriment to the interest of any of them. [ ] Any inconsistency which
may exist between any terms and conditions of this document and that of
any related agreement shall be resolved in favour of the terms and
conditions of this document, unless such related agreement contains a
specific mention that such terms and conditions are not applicable.
16.2 Preamble. The preamble to this Agreement forms an integral part hereof.
16.3 Headings. Headings are for reference purposes and do not in any way
affect interpretation of this Agreement.
16.4 Entire Agreement. This Agreement and the memorandum referred to in
section 10.1 set forth the entire Agreement and understanding between
the parties with respect to the subject matter of this Agreement and
merges, supersedes and cancels all prior discussions, representations,
inducements, promises, undertakings, understandings, agreements or
otherwise, whether oral, in writing or otherwise, between the parties
with respect to such subject matter. Without limiting the generality of
the foregoing, no oral explanation or oral information provided by the
parties hereto, or any of them, shall alter the meaning or
interpretation of this Agreement. There are no statements, terms,
conditions, undertakings, representation, warranties or collateral
agreements still in force or effect which have not been embodied in
this Agreement. This Agreement may be altered, modified or amended only
by a written document signed by all the parties.
16.5 Further Agreements and Actions. The parties agree to cooperate with
each other and execute and deliver such further or other documents and
assurances and do such other acts as may, from time to time, reasonably
be required or deemed useful by the other party to protect the
<PAGE>
DWDM/POF Licence Agreement Page 13
- --------------------------------------------------------------------------------
Patents or to effectively carry out or better evidence or perfect the
full intent and meaning of this Agreement or to otherwise give effect
to the provisions of this Agreement the party requesting any such act
shall reimburse the other party complying with such request for the
full cost of perform such act. Licensee agrees to assume all reasonable
costs relating thereto.
16.6 Independent Contractors. Each party is an independent contractor and
does not have any power (nor will it represent itself as having any
power) to in any way enter into commitments or contracts, assume
obligations, give any warranties, make any representation or incur
liability of any kind in the name of the other party or on behalf of
the other party or to otherwise bind or obligate the other or to assume
or create any expressed or implied obligation or responsibility on
behalf of the other or in the other's name. Nothing in this Agreement
shall construed to create a relationship of partners, joint venturers,
fiduciaries, master-servant, agency or other similar relationship
between the parties.
16.7 Waiver in Writing. No waiver of any breach of any term or provision
hereof shall be effective or binding unless made in writing and signed
by the party purporting to give the same and, unless other wise
provided, shall be limited to the specific breach waived.
16.8 Use of name. Licensee undertakes not to use the name of Polyvalor,
Ecole Polytechnique, McGill or any of their faculties or affiliates in
any brochure, catalogue, advertisement, notice, memorandum, prospectus
or other communications unless required by law or regulatory
authorities having jurisdiction without having previously obtained the
written consent of such person(s) which shall not be unreasonably
withheld.
16.9 Successors & Assigns. Subject to the provisions of section IX, this
Agreement shall enure to the benefit of and be binding upon the heirs,
executors, administrators, successors and permitted assigns of the
parties.
16.10 Applicable Law. This Agreement shall be governed, construed and
enforced in accordance with the laws in force in the Province of Quebec
and those of Canada applicable therein except for Patent matters which
shall be governed by the laws of the relevant country. Any disputes
arising under this Agreement, shall be subject to the exclusive
jurisdiction of the Courts of the Province of Quebec and both parties
hereby irrevocably attorn to the jurisdiction of the Courts of such
province.
16.11 Language. This Agreement has been drafted in the English language at
the request of the parties. A la demande des parties, cette convention
a ete redigee en langue anglaise.
<PAGE>
DWDM/POF Licence Agreement Page 14
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IN WITNESS WHEREOF, the parties have signed.
EXECUTED AT MONTREAL, QUEBEC, this __ day of __, 1998.
POLYVALOR INC.
Per: /s/ Dennis A. Beaudry
----------------------------------------
Name: Denis A. Beaudry
Title: President Directeul-General
MCGILL UNIVERSITY
Per: /s/ Alex Nauarre
----------------------------------------
Name: Alex Nauarre
Title: Director
LUMENON INNOVATIVE LIGHTWAVE
TECHNOLOGIES INC.
Per: /s/ Najafi /s/ M. Andrews
----------------------------------------
Name: Najafi M. Andrews
Title: President Vice President
CONSENT OF INDEPENDENT AUDITORS
To the Board of Directors
Lumenon Innovative Lightwave Technology, Inc.
We consent to the use in the Registration Statement (Form 10) of Lumenon
Innovative Lightwave Technology, Inc. (the "Corporation") of our report,
incorporated herein, on our audits of the consolidated financial statements of
the Corporation as at June 30, 1999 and December 31, 1998 and for the six-month
period ended June 30, 1999 and the periods from inception (March 2, 1998) to
December 31, 1998 and to June 30, 1999. We also consent to the reference to our
firm under item 14 in such Registration Statement.
KPMG LLP
Chartered Accountants
Montreal, Canada
February 10, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM LUMENON
INNOVATIVE LIGHTWAVE TECHNOLOGY INC. CONSOLIDATED FINANCIAL STATEMENTS AS OF
JUNE 30, 1999 AND IS QUALIFIED ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED
FINANCIAL STATEMENTS.
</LEGEND>
<CURRENCY> CDN
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1.472
<CASH> 1,170,346
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 184,604
<PP&E> 1,013,852
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,409,531
<CURRENT-LIABILITIES> 681,054
<BONDS> 0
<COMMON> 20,603
0
0
<OTHER-SE> 1,707,874
<TOTAL-LIABILITY-AND-EQUITY> 2,409,531
<SALES> 0
<TOTAL-REVENUES> 796
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 509,967
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (509,171)
<INCOME-TAX> 0
<INCOME-CONTINUING> (509,171)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (509,171)
<EPS-BASIC> (.03)
<EPS-DILUTED> (.02)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM LUMENON
INNOVATIVE LIGHTWAVE TECHNOLOGY INC. CONSOLIDATED FINANCIAL STATEMENTS AS OF
DECEMBER 31, 1998 AND IS QUALIFIED ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED
FINANCIAL STATEMENTS.
</LEGEND>
<CURRENCY> CDN
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1.533
<CASH> 345,512
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 360,673
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 360,832
<CURRENT-LIABILITIES> 77,853
<BONDS> 0
<COMMON> 16,179
0
0
<OTHER-SE> 266,800
<TOTAL-LIABILITY-AND-EQUITY> 360,832
<SALES> 0
<TOTAL-REVENUES> 5,133
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 192,680
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (187,547)
<INCOME-TAX> 0
<INCOME-CONTINUING> (187,547)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (187,547)
<EPS-BASIC> (.02)
<EPS-DILUTED> (.02)
</TABLE>
