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 in limited quantities of components 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 jointly develops certain of its components for use in the DWDM
market. (See - "Material Agreements".) 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
components, integrated optics 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 components.
Lumenon makes DWDM components in the form of an "optical chip" on silicon
through a licensed proprietary sol-gel manufacturing process. Lumenon has
acquired its rights to the sol-gel process under a license agreement with Ecole
Polytechnique and McGill University. (See - "Material Agreements Agreement with
Polyvalor and McGill University.") The Company is perfecting the materials and
processes for its DWDM components in its existing pilot facility in preparation
for its launch into commercial production, which is planned for April 2000.
Presently, the Company manufactures a limited number of components under the
terms of an agreement with Molex Incorporated ("Molex"). Upon satisfactory
testing of such components they will be delivered to Molex. (See - "Material
Agreements - Agreements with Molex.") To the knowledge of the Company, there are
no other manufacturers of DWDM components 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 proprietary
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 manufacturing process, which reduces the likelihood of
manufacturing defects; and (iv) as the optical chip's channel count grows, the
chip's cost does not increase proportionally. (See - "Business Strategy" and
"Technology and Products".)
Lumenon has focused on developing and producing DWDM components 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.
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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 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 components 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 components. 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.
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.
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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) 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 -
"Overview", third paragraph, last sentence and "Business Strategy", fourth
paragraph.)
Lumenon, through its licensed proprietary 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 components 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-
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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 components. 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 products and bringing them to market. Over the next
six months, product development for low volume manufacturing at Lumenon's
existing pilot facility 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 components in a larger
manufacturing facility 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 build out of its larger
manufacturing facility by mid -2000, which will be capable of producing, in
stages, up to 1,000 units a day, (ii) to increase the work force to
approximately 175 persons to fully staff this facility, and (iii) to commence
marketing activities for its DWDM products.
Research and Development
Research and development activities for the first three months of calendar year
2000 will be centered on finalizing the packaging of products 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.
Manufacturing
During January 2000, Lumenon intends to finalize 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 manufacturing
facility. The planned 32,000 square foot manufacturing facility will feature
materials preparation, fabrication, packaging, optical test and quality control
facilities. This facility will house the Company's corporate infrastructure and
large-scale production facilities for Lumenon's DWDM product line. Upon
completion of the construction of the building, Lumenon will commence the
internal construction of the production facility, consisting of
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clean rooms and associated laboratories, and install manufacturing equipment.
(See - "Risk Factors - Substantial Future Capital Needs; Uncertainty of
Additional Funding.")
The Company's existing pilot facility has a capacity of 20 units per day and
will be used for manufacturing until the second facility is operational. Once
the second 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 2000, and to 135 persons to reach a production rate of
1,000 units a day in fiscal year 2001. Most of the employees that Lumenon will
hire will be technicians trained for a few 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.
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 components that perform in a similar way.
However, DWDM components can differ both in composition and method of
fabrication depending on how they are processed.
AWG DWDM components made by PIRI, Kymata and Siemens use a high temperature
vacuum deposition process called "flame hydrolysis deposition" (FHD). This
method uses 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 components produced by Lumenon differ in composition and method of
fabrication. Lumenon's AWG components 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 components are
created by photolithography directly in the hybrid sol-gel glass avoiding vacuum
film deposition, and
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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 components or miniature chips (measuring smaller than 5 cm x 5
cm) than those produced by FHD. Smaller components 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 allows it
to make AWG components 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. (See "Technology and Products.")
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 components. The Company
selected its PHASICTM process because it believes that high volume manufacturing
methods similar to those used by the microelectronics manufacturing industry are
necessary to meet telecommunications customer demands for high volume, 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 - "Industry Background" in relation to the current
needs of the market and "Risk Factors," generally.)
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. (See "Technology and
Products - Manufacturing.") 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
technology may be subjected to a variety of industry applicable reliability
performance tests which 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 components, 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 components from a Platform Technology it can use similar materials and
processes to produce devices related generally to the DWDM industry and optical
internetworking or 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 components 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
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meet their specific needs. (See - "Technology and Products - Platform Material
Technology and Advanced Software Design Tools and "Risk Factors," generally.")
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. Bragg Gratings are the most expensive technology and had the
smallest 1998 market share, 19%. Thus, the use of Thin Filters and AWGs are a
cheaper cost alternative than Bragg Gratings.
The DWDM components produced by Lumenon differ from other waveguide DWDM
components in several ways. The Company's AWG 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 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 components also
permit manufacturers of DWDM systems to make more compact products.
The Company believes that there are three variables that 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 distinguisable from those of its competitors in their composition and method
of fabrication. (See - "Business Strategy," second and third paragraphs and
"-Establish Technology Leadership," second paragraph.)
Size of Optical Components. Planar waveguide technology products are
significantly smaller than those produced by competing technologies. Smaller
components are important because of space limitations in
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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 components 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.
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"). 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
components 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. During January 2000, the Company intends to finalize
negotiations for the lease of a 32,000 square foot facility 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
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investigating potential sources for such funding. The Company expects to produce
chips at the rate of 20 per day in April 2000 and to increase its capacity to
500 chips per day in 2001 and to 1,000 per day in 2002.
(See - "Plan of Operations.")
Technology and Products
Lumenon has begun making 8, 16 and 32-channel waveguide DWDM components in the
form of a miniature optical chip and has completed the design of its 4 and
64-channel DWDM components. The suite of phased array waveguide DWDM components
are referred to as the [lambda]-PLEXTM family.
The Company uses a solution or liquid sol-gel process to produce its DWDM
optical components. 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 components using a
low temperature sol-gel process for its hybrid glass on silicon. (See -
"Overview," second paragraph and "Business Strategy," third and fourth
paragraphs.) The licensed proprietary 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 proprietary "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 components, resulting in greater
adaptability and increased options within the performance of a DWDM system. This
technology permits the manufacture of customized components 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 2 to
3 year lead time over the industry competition that might arise in the
production of optical chips from hybrid glasses. (See - "Risk Factors,"
generally.) 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
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product, making the material cost-competitive with silica or polymers.
Additionally, the methodology used to manufacture such products avoids complex
and costly processing and etching sequences, thereby reducing production costs.
Through the use of the Platform Technology, the Company will, in the future, be
able to target products for a customer's product line by supplying a variety of
valuable customized components. For example, in the planar lightwave circuit
market, Lumenon can market its products to meet the broadest possible range of
applications. These applications might on the one hand call for material
properties very similar to those of glass. On the other hand, 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 - "Business Strategy," fourth and seventh paragraphs and
"Technology and Products - Platform Material Technology," first paragraph.)
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 components 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 components. 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
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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.
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 components and
devices 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 device
components 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 will manufacture its DWDM components in a pilot microfabrication
facility custom-designed to meet its product performance objectives. The
capacity of its existing pilot facility is 20 DWDM chips (components) 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 17, 2000, Lumenon does not sell a finished product
commercially in the open market. The entire first year production of 8, 16 and
32-channel DWDMs devices has been reserved for Molex, which has agreed to
purchase the Company's production of up to 400 units per month. (See - "Material
Agreements - Agreements with Molex"). 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
proprietary 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
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Polytechnique and McGill University. (See - "Material Agreements - Agreement
with Polyvalor and McGill University".) The three patents are:
1. Title: "Solvent-assisted lithographic process using
photosensitive sol-gel derived glass for depositing
ridge AWG on silicon"
Use: intellectual property 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
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
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
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.
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.
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.
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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. (See - "Risk Factors -
Weakness in Intellectual Property Protection; Possible Infringement.")
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" and see also, - "Business Strategy", sixth and seventh
paragraphs and "Technology and Products - Manufacturing" regarding the future
production and marketing of 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.
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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 components.
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 new manufacturing
facility. (See - "Plan Of Operations").
Agreement with Polyvalor and McGill University
Lumenon entered into a license agreement (the "License Agreement") with
Polyvalor, a Canadian limited partnership, as represented by its General
Partner, Polyvalor Inc., and McGill University (together, Polyvalor and McGill
University are referred to as the "Licensor") pursuant to which Lumenon acquired
the right to produce, sell, distribute and promote products derived from using
the patents and know-how, as such terms are defined in the License Agreement, of
the Licensor. These patents and know-how are based on the work of Dr. Iraj
Najafi at Ecole Polytechnique and Dr. Mark Andrews at McGill University and
their respective team of collaborators. Lumenon will pay a royalty of 5% on
gross sales, up to a maximum cumulative amount of $2,377,717 (CDN$3,500,000) to
the Licensor until October 2017. Polyvalor is a company created by Ecole
Polytechnique for the purpose of commercializing the technology in which
Polytechnique has an interest.
Customer Relations
In addition to the relationship created under the Molex Agreements, the
manufacture of DWDM components 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
components and throughout the entire life-cycle of
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its products. (See, generally, "Industry Background.") This will allow the
Company to foster a strong commitment to service, and to gain insights into its
customers' future plans and needs, identify emerging industry trends and
consequently deliver high-performance, cost-effective products with wide market
appeal.
Competition
There are several competitors producing DWDM components 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 components include Lucent
Technologies, Ciena, Alcatel, Pirelli, Nortel, NEC and Fujitsu. Several of these
systems manufacturers (Lucent, Ciena, Alcatel, Pirelli and NEC) also manufacture
DWDM components. 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 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 components, 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 components 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 components 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 components. (See
- - "Business Strategy," fourth, fifth and seventh paragraphs and "Risk Factors,"
generally.)
Previously, the solution to increasing the capacity of service providers in the
industry was to add or lay additional fiber or use one of the three existing
technologies, the Thin Filters, Bragg Gratings and AWG. However, the advantage
of the Company's 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. (See "Overview", third paragraph, last sentence and
"Business Strategy," fourth paragraph.)
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. (See - "Industry Background" and "Risk
Factors," generally.)
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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,
components or technologies that are similar to or may be substituted for the
Company's products and, this may diminish purchases of the Company's products.
A number of Lumenon's current and potential competitors have longer operating
histories, greater name recognition, access to larger customer bases and
significantly greater financial, technical, marketing and other resources than
the Company. As a result, they may be able to adapt more quickly to new or
emerging technologies and changes in customer requirements or to devote greater
resources to the promotion and sale of their products. In addition, current and
potential competitors may determine, for strategic reasons, to consolidate, to
lower the price of their products substantially or to bundle their products with
other products. Current and potential competitors have established or may
establish financial or strategic relationships among themselves or with existing
or potential customers, resellers or other third parties. Accordingly, it is
possible that new competitors or alliances among competitors could emerge and
rapidly acquire significant market share. Increased competition may result in
price reductions, reduced gross margins and loss of market share.
Lumenon believes that its ability to compete successfully depends on a number of
factors, both within and outside of its control. Such factors include including
the price, performance and quality of the Company's and its competitors'
products, the timing and success of new product and feature introductions by the
Company, its customers and its competitors, the emergence of new standards in
the optical communications industry, the development of technical innovations,
the availability of raw materials, the efficiency of production, the rate at
which the Company's customers design the Company's products into their products,
the number and nature of the Company's competitors in a given market, the
assertion of intellectual property rights and general market and economic
conditions.
Sales, Marketing and Technical Support
The Company has entered into 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. Over the next 12 months, the
Company will hire additional internal marketing personnel and sales personnel to
assist with the Company's expansion. (See - "Plan of Operations - Employee
Growth".) 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
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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.
Lumenon believes that providing its clients with comprehensive product service
and support is critical to maintaining a competitive position in the optical
communications market. (See - "Industry Background.") The Company's practice
will be to work closely with its customers to monitor the performance of its
product designs and to provide application design support and assistance. The
Company will also provide a valuable technical resource for consulting on
photonic component trends and implementations. Technical data will be provided
to customers through the Company's applications engineers, technical marketing
and factory applications engineers and, if necessary, product designers and
architects or system designers. Local field support will be provided in person
or by telephone.
Lumenon intends to provide support at crucial stages of product development.
During the design phase, the Company may sell software simulation models of each
photonic component or device, to allow customers to simulate the performance of
the product in their entire system before committing to it. In the future, the
Company may also offer a line of evaluation modules, which are subsystems that
are representative of a typical customer design. These modules would enable
customers to evaluate the device, as well as hardware design and software
development functions, without significant development effort on their part,
thereby facilitating rapid time-to-market. Lumenon believes that close contact
with these customers will allow the Company to tailor its products to the market
and technical needs defined by key OEMs. Understanding its customers' particular
problems enables the Company to design and develop solutions in its next
generation of products.
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
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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.
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 proprietary 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.
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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 components 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 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.
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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.
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 timeframes, if at all, to meet the Company's production needs.
21
<PAGE>
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 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.
22
<PAGE>
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, 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
23
<PAGE>
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 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.
24
<PAGE>
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 components 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 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
harm 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.
25
<PAGE>
Outstanding Options and Warrants
As of January 17, 2000, the Company had outstanding options to purchase an
aggregate of 2,407,500 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.
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").
26
<PAGE>
SELECTED FINANCIAL DATA
December 31, June 30, December 31, June 30,
1998 1999 1998 1999
------------ -------- ------------ --------
(in U.S. dollars) (in Canadian dollars)
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
September 30, September 30, September 30, September 30,
1998 1999 1998 1999
------------- ------------- ---------------------------
(Unaudited) (Unaudited)
(in U.S. dollars) (in Canadian dollars)
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
27
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<TABLE>
<CAPTION>
From Inception Six Months From Inception Six Months
to December 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>
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)
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
- -----------------
(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.
28
<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 expenditures have been incurred to
prepare the Company's proprietary technology for commercial
29
<PAGE>
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.
30
<PAGE>
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 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.
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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, 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
appproximates 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 from the existing
capacity of 20 chips per day. (See Item 1.
"Business - Plan of Operation.")
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
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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 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 January 17, 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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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.
During January 2000, Lumenon intends to finalize 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 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 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.
Number of Shares
Directors, Nominees, Executive of Common Stock Beneficially
Officers and 5% Stockholders Owned (1) Percentage
------------------------------ ---------- ----------
Dr. S. Iraj Najafi............... 5,237,500(2) 21.3%
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Number of Shares
Directors, Nominees, Executive of Common Stock Beneficially
Officers and 5% Stockholders Owned (1) Percentage
------------------------------ ---------- ----------
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 Officer 14,817,667(13) 60.4%
as a Group.......................
- ------------------------------------
(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 issuable
upon exercise of options held by Mr. Beaudry. The address of
Polyvalor is 3744 Jean Brillant Street,
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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 associate editor of Optical Engineering. Dr. Najafi is a
member of the International Society for Optical
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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 1995, Dr. Li was a Visiting Scholar at the Optical Services
Center of the University of Arizona where he
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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
long history of over 20 years in information technology project and program
management both within the industry and the Department of National Defense. 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. From August 1998 to May 1999,
Mr. Ross was Program Manager for SpaceBridge Networks Corporation. Prior to
August of 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. (Provide occupation for the last five years)
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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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.)
SUMMARY COMPENSATION TABLE
Annual Long-Term
Compensation Compensation
Name and Principal Position Year(1) Salary(2) Bonus # of Options
- --------------------------- ---- ------ ----- ------------
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
-------
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(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, 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,
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(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 2,407,500 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.
Option Grants During and Subsequent to the Transition Period
Individual Grants
<TABLE>
<CAPTION>
Potential realizable
value at assumed
annual rates of stock
% of Total price appreciation for
Number of Options option term
Securities Granted to Exercise -----------------------
Underlying Employees of Base
Option in Fiscal Price 5% 10%
Name Granted(#) Year ($/share) Expiration Date ($) ($)
---- ---------- ---- --------- --------------- --- ---
<S> <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
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
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
ChiaYen 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
(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
42
<PAGE>
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 Belanger -- -- -- 300,000 -- $5,709,000
ChiaYen Li, -- -- 25,000 225,000 $ 475,750 $4,281,750
Reginald J.N. Ross -- -- 50,000 250,000 351,500 1,757,500
</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,
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
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<PAGE>
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 knowhow, as such terms are defined in the License
Agreement, of the Licensor. Using a proprietary solgel process of the Licensor,
Lumenon will design and develop integrated optical components 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$3,500,000) over the term of the License Agreement.
Additionally, the Company issued 750,000 shares of Common Stock to each of
Polyvalor and McGill University.
ITEM 8. LEGAL PROCEEDINGS.
There is no action, suit, proceeding, or investigation pending or to the
Company's knowledge threatened against the Company, including any investigation
of any governmental authority or body.
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE
REGISTRANT'S COMMON EQUITY AND OTHER
STOCKHOLDER MATTERS.
The Common Stock of the Company has been quoted on the Over The Counter Bulletin
Board (OTCBB) since July 27, 1998. The following table sets out the high and low
bid prices of the Common Stock during the periods indicated. Such prices reflect
interdealer prices, without retail markup, markdown or commissions and may
not necessarily represent actual transactions.
High ($) 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
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<PAGE>
1st quarter (to January 14th) $ 30.00 $19.81
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.
The closing price of the common shares of the Company on the OTCBB on January
14, 2000 was US$20.03.
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 (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 based on the stated exemption:
ENTITY/INDIVIDUAL EXEMPTION
- --------------------------------------------------------------------------------
Manitex Capital Inc., a venture not a "U.S. Person," within the meaning of
capital company Rule 902 under the Securities Act in
"offshore transactions" within the meaning
of Rule 902
Pinetree Capital Corp., a venture a "U.S. Person," within the meaning of Rule
capital company not 902 under the Securities Act in "offshore
transactions" within the meaning of Rule 902
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<PAGE>
A group of Canadian investors, not a "U.S. Person," within the meaning of
investing through a confidential Rule 902 under the Securities Act in
trust "offshore transactions" within the meaning
of Rule 902
A group of Canadian investors, not a "U.S. Person," within the meaning of
investing through Rule 902 under the Securities Act in
Groome Capital.com, Inc., "offshore transactions" within the meaning
brokerage firm of Rule 902
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. 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
entirely to one non-U.S. person in an offshore transaction as such terms are
defined in Rule 902 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.
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 solely to five non-U.S. persons
in offshore transactions through a confidential trust, all such persons being
Canadian, and to one U.S. person, Xavier F. Clairardin, a former director of the
Company, in reliance upon the exemption provided under 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 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 solely
46
<PAGE>
to five or fewer non-U.S. persons as such term is defined in Rule 902 of the
Securitiess Act. 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 one non U.S. person in an offshore transaction, as such terms are
defined in Rule 902 of the Securitiess Act. 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 to Ghaemi
Holdings, a Canadian holding company, a non-U.S. person in an offshore
transaction, as such terms are defined in Rule 902 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.
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 solely to Groupe Huot Inc., a Canadian holding company, a non-U.S. person
in an offshore transaction, as such terms are defined in Rule 902 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.
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 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
with non-U.S. persons in offshore transactions. 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$44.01) per share before December 7, 2000. The
shares were issued on January 12, 2000. The securities were offered and sold
solely to Terima a.v.v., a British Virgin Islands holdings company, a non-U.S.
person in an offshore transaction as such terms are defined in Rule 902 of the
Securitiess Act. All such securities were deemed by the Company to be restricted
securities and were appropriately legended and restricted as to subsequent
transfer. No underwriter was involved in such transaction.
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<PAGE>
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE
REGISTERED.
The capital stock being registered is Common Stock, US$.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.
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 nonassessable. 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.
48
<PAGE>
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 2,407,500 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.")
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 ByLaws 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
49
<PAGE>
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 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, bylaw, agreement, vote of shareholders or
otherwise.
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.
50
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ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements:
Consolidated Financial Statements of Lumenon Innovative
Lightwave Technology, Inc. (a Development Stage Enterprise)
sixmonth 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) threemonth 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
whollyowned subsidiaries, dated July 7, 1998.
*3.1 Amended and Restated Certificate of Incorporation of Lumenon
Innovative Lightwave Technology, Inc.
*3.2 Amended and Restated ByLaws.
*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 whollyowned 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.
51
<PAGE>
*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.
52
<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
----------------------------------------------------
January 21, 2000 S. Iraj Najafi, President and Chief Executive Officer
53
<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-
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.
/s/KPMG LLP
KPMG LLP
Chartered Accountants
Montreal, Canada
January 21, 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
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>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FORM 10 FOR THE THREE MONTH PERIOD ENDED SEPTEMBER 30, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUN-30-1999
<PERIOD-END> SEP-30-1999
<CASH> 805,596
<SECURITIES> 1,900,000
<RECEIVABLES> 322,410
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,028,006
<PP&E> 1,319,980
<DEPRECIATION> 61,930
<TOTAL-ASSETS> 4,354,804
<CURRENT-LIABILITIES> 425,232
<BONDS> 0
<COMMON> 22,754
0
0
<OTHER-SE> 3,906,818
<TOTAL-LIABILITY-AND-EQUITY> 4,354,804
<SALES> 0
<TOTAL-REVENUES> 11,066
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 669,530
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (658,464)
<INCOME-TAX> 0
<INCOME-CONTINUING> (658,464)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (658,464)
<EPS-BASIC> (.03)
<EPS-DILUTED> (.02)
</TABLE>
