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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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QUARTERLY REPORT FOR SMALL BUSINESS ISSUERS SUBJECT
TO THE 1934 ACT REPORTING REQUIREMENTS
FORM 10-QSB
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE REPORT OF 1934
For the transition period from ___________ to ____________
Commission file number 000-27548
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LIGHTPATH TECHNOLOGIES, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 86-0708398
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6820 Academy Parkway East, N.E. http://www.light.net 87109
Albuquerque, New Mexico (ZIP Code)
(Address of principal executive offices)
Registrant's telephone number, including area code:
(505)342-1100
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
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Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practical date:
Common Stock, Class A, $.01 par value 2,802,517 shares
Common Stock, Class E-1, $.01 par value 1,478,144 shares
Common Stock, Class E-2, $.01 par value 1,478,144 shares
Common Stock, Class E-3, $.01 par value 985,422 shares
- --------------------------------------- --------------
Class Outstanding at October 31, 1997
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<PAGE>
LightPath Technologies, Inc.
Form 10-Q
Index
Item Page
- ---- ----
Part I Financial information
Balance Sheets 2
Statements of Operations 3
Statements of Cash Flows 4
Notes to Financial Statements 5
Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Part II Other information
Legal Proceedings 10
Changes in Securities and Use of Proceeds 10
Defaults Upon Senior Securities 10
Submission of Matters to a Vote of Security Holders 11
Other Information 11
Exhibits and Reports on Form 8-K 11
Signatures 12
1
<PAGE>
LightPath Technologies, Inc.
Balance Sheets
<TABLE>
<CAPTION>
September 30, June 30,
1997 1997
------------ ------------
Unaudited
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 3,326,990 $ 993,505
Trade accounts receivable 187,269 167,258
Inventories 308,457 251,914
Advances to employees and related parties 35,162 2,865
Prepaid expenses and other 38,877 38,604
------------ ------------
Total current assets 3,896,755 1,454,146
Property and equipment - net 812,042 764,897
Intangible assets - net 496,807 490,272
Investment in LightChip, Inc. 14,040 --
------------ ------------
Total assets $ 5,219,644 $ 2,709,315
============ ============
Liabilities and Stockholders' Equity Current liabilities:
Accounts payable and accrued liabilities $ 306,421 $ 325,571
Accrued payroll and benefits 228,309 255,878
------------ ------------
Total current liabilities 534,730 581,449
Note payable to stockholder 30,000 30,000
Redeemable common stock:
Class E-1 - performance based and redeemable common stock
1,478,144 and 1,449,942, shares issued and outstanding at
September 30, 1997 and June 30, 1997, respectively 14,781 14,499
Class E-2 - performance based and redeemable common stock
1,478,144 and 1,449,942 shares issued and outstanding at
September 30, 1997 and June 30, 1997, respectively 14,781 14,499
Class E-3 - performance based and redeemable common stock
985,422 and 966,62, issued and outstanding at September 30, 1997
and June 30, 1997, respectively 9,854 9,666
Stockholders' equity:
Preferred stock, $.01 par value; 5,000,000 shares authorized;
Issued 180 Series A Convertible shares, 230 Series B Convertible shares, 4 1
$4,100,000 liquidation preference
Common stock:
Class A, $.01 par value; 34,500,000 shares authorized, voting
2,802,517 and 2,766,185, shares issued and outstanding at
September 30, 1997 and June 30, 1997, respectively 28,027 27,662
Additional paid-in capital 22,712,582 19,244,055
Accumulated deficit (18,125,115) (17,212,516)
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Total stockholders' equity 4,615,498 2,059,202
------------ ------------
Total liabilities and stockholders' equity $ 5,219,644 $ 2,709,315
============ ============
</TABLE>
See accompanying notes.
2
<PAGE>
LightPath Technologies, Inc.
Statements of Operations
Three Months Ended
September 30
Unaudited 1997 1996
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Revenues
Product development fees $ 18,400 $ 111,347
Lenses and other 147,719 12,123
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Total revenues 166,119 123,470
Costs and expenses
Cost of goods sold 83,442 12,687
Selling, general and administrative 849,799 662,750
Research and development 153,640 246,943
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Total costs and expenses 1,086,881 922,380
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Operating loss (920,762) (798,910)
Other income(expense)
Investment income 19,524 42,558
Interest expense (1,681) (777)
Equity in loss of LightChip, Inc. (9,680) --
----------- -----------
Net loss $ (912,599) $ (757,129)
=========== ===========
Net loss applicable to common shareholders (Note 4) $(1,183,348) $ (757,129)
=========== ===========
Net loss per share (Note 4) $ (.42) $ (.28)
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Number of shares used in per share calculation 2,796,866 2,735,287
=========== ===========
See accompanying notes.
3
<PAGE>
LightPath Technologies, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
Unaudited September 30,
1997 1996
----------- -----------
<S> <C> <C>
Operating activities
Net loss $ (912,599) $ (757,129)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 59,001 35,511
Services provided for common stock 18,408 110,419
Equity in loss of LightChip, Inc. 9,680 --
Changes in operating assets and liabilities:
Receivable, advances to employees, related parties (52,309) (104,731)
Inventories (56,543) (64,907)
Prepaid expenses and other (273) 42,188
Accounts payable and accrued expenses (46,719) (42,627)
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Net cash used in operating activities (981,354) (781,276)
Cash flows from investing activities
Property and equipment additions (102,681) (193,919)
Costs incurred in acquiring patents (10,000) (15,922)
Investment in LightChip, Inc. (23,720) --
----------- -----------
Net cash used in investing activities (136,401) (209,841)
Cash flows from financing activities
Proceeds from sales of Convertible Series A and
Series B preferred stock, net 3,272,835 --
Proceeds from sales of common stock options 178,405 --
Repurchase of common stock -- (100,000)
----------- -----------
Net cash provided by (used in) financing activities 3,451,240 (100,000)
----------- -----------
Net increase (decrease) in cash and cash equivalents 2,333,485 (1,091,117)
Cash and cash equivalents at beginning of period 993,505 4,335,133
----------- -----------
Cash and cash equivalents at end of period $ 3,326,990 $ 3,244,016
=========== ===========
Supplemental disclosure of cash flow information:
Class E common stock issued $ 752 --
</TABLE>
See accompanying notes.
4
<PAGE>
LightPath Technologies, Inc.
Notes to Financial Statements - Unaudited
Organization and Purpose
LightPath Technologies, Inc. (the Company) was incorporated in Delaware on June
15, 1992 as the successor to LightPath Technologies Limited Partnership formed
in 1989, and its predecessor, Integrated Solar Technologies Corporation formed
on August 23, 1985. The Company is engaged in the production of GRADIUM(R) glass
lenses and the research and development of additional GRADIUM applications.
During the period from August 23, 1985 to June 30, 1996 the Company was a
development stage company as defined in Statement of Financial Accounting
Standards No. 7 "Development Stage Enterprises". Planned principal operations
commenced during fiscal year 1997 and, accordingly, the Company is no longer
considered a development stage company.
GRADIUM glass is an optical quality glass material with varying refractive
indices, capable of reducing optical aberrations inherent in conventional lenses
and performing with a single lens, or fewer lenses, tasks performed by
multi-element conventional lens systems.
1. Summary of Significant Accounting Matters
The accompanying unaudited financial statements have been prepared in accordance
with the instructions to Article 10 of Regulation S-X and, therefore, do not
include all information and footnotes necessary for a fair presentation of
financial position, results of operations, and cash flows in conformity with
generally accepted accounting principles. These financial statements should be
read in conjunction with the Company's financial statements and related notes
included in the Form 10-KSB as filed with the Securities and Exchange Commission
on September 11, 1997.
The information furnished, in the opinion of management, reflects all
adjustments, which include normal recurring adjustments, necessary to present
fairly the results of operations of the Company for the three month periods
ended September 30, 1997 and 1996. Results of operations for interim periods are
not necessarily indicative of results which may be expected for the year as a
whole.
Cash and cash equivalents consist of cash in the bank and temporary investments
with maturities of ninety days or less when purchased.
Inventories are stated at the lower of cost or market, on a first-in, first-out
basis. Inventory costs include material, labor and manufacturing overhead.
Property and equipment are stated at cost and depreciated using the
straight-line method over the estimated useful lives of the related assets from
three to seven years.
Intangible assets consisting of patents and trademarks, are recorded at cost.
Upon issuance of the patent or trademark, these assets are being amortized on
the straight-line basis over the estimated useful lives of the related assets
from ten to seventeen years. The recoverability of carrying values of these
assets is evaluated on a recurring basis.
Investment consists of the Company's 51% ownership interest in LightChip Inc.,
which is accounted for under the equity method as the Company anticipates their
equity position to fall below 50% during the current fiscal year.
Income taxes are accounted for under the provisions of Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes, which requires an
asset and liability approach to financial accounting and reporting for income
taxes.
Deferred income tax assets and liabilities are computed for differences between
the financial statement and tax bases of assets and liabilities that will result
in taxable or deductible amounts in the future based upon enacted tax laws and
rates applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized. Income tax expense is
the tax payable or refundable for the period plus or minus the change in
deferred tax assets and liabilities during the period.
5
<PAGE>
LightPath Technologies, Inc.
Notes to Financial Statements - Unaudited
Revenue recognition occurs upon shipment of products or as earned under product
development agreements.
Research and development costs are expensed as incurred.
Stock based employee compensation is accounted for under the provision of APB
Opinion No. 25, Accounting for Stock Issued to Employees, which requires no
recognition of compensation expense when the exercise price of the employees
stock option equals the market price of the underlying stock on the date of
grant.
Pro forma information required by Statement of Financial Accounting Standards
No. 123, Accounting for Stock-Based Compensation, has been presented under the
fair value method using a Black-Scholes option pricing model.
Per share data is computed using the weighted average number of common shares
and common equivalent shares outstanding during each period. Restricted Class E
common shares and stock options for the purchase of Class E common shares are
considered contingently issuable and, accordingly, are excluded from the
weighted average number of common and common equivalent shares outstanding.
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, Earnings per Share, which is required to be adopted on December 31, 1997.
At that time, the Company will be required to change the method currently used
to compute earnings (loss) per share and to restate all prior periods. The
impact of Statement 128 on the calculation of earnings (loss) per share is not
expected to be material.
Management uses estimates and makes assumptions during the preparation of the
Company's financial statements that affect amounts reported in the financial
statements and accompanying notes. Such estimates and assumptions could change
in the future as more information becomes known, which in turn could impact the
amounts reported and disclosed herein.
Financial instruments of the Company are valued as required by Statement of
Financial Accounting Standards No. 107, Disclosures about Fair Values of
Financial Instruments. The carrying amounts of cash and cash equivalents, trade
accounts receivable, accounts payable and accrued liabilities, and notes payable
to stockholder approximate fair value.
Impairment of long-lived assets was adopted for the fiscal year 1997 by the
Company as required by Statement of Financial Accounting Standards No. 121,
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. In
the event that facts and circumstances indicate that the cost of intangible or
other assets may be impaired, an evaluation of recoverability would be
performed. If an evaluation is required, the estimated future undiscounted cash
flows associated with the asset would be compared to the asset's carrying amount
to determine if a write-down to market value or discounted cash flow value is
required. Adoption of this Statement did not have a material impact on the
Company's financial position, results of operations, or liquidity.
2. Inventories
The components of inventories include the following:
September 30,
1997
Finished goods and work in process $210,239
Raw materials 98,218
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Total inventories $308,457
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6
<PAGE>
LightPath Technologies, Inc.
Notes to Financial Statements - Unaudited
3. Stockholders' Equity
Authorized 5,000,000 shares of preferred stock; no par value. In June 1997 the
Board of Directors designated 250 shares as Series A Convertible Preferred
Stock; $.01 par value. The Company entered into a private placement transaction
which provided proceeds on the sale of 180 shares of Series A Preferred Stock
totaling $1,800,000, less issuance costs of approximately $203,711, resulted in
net proceeds of approximately $1,596,289 by the final closing date, July 25,
1997. In September 1997 the Board of Directors designated 300 shares as Series B
Convertible Preferred Stock; $.01 par value. The Company entered into a private
placement transaction which provided proceeds on the sale of 230 shares of
Series B Preferred Stock totaling $2,300,000, less issuance costs of
approximately $232,000 resulted in net proceeds of approximately $2,068,000 by
the final closing date, October 2, 1997.
The Series A and the Series B Convertible Preferred Stock has a stated value and
liquidation preference of $10,000 per share, plus an 8% per annum premium. The
holders of the Series A and Series B Convertible Preferred Stock are not
entitled to vote or to receive dividends. Each share of Series A and Series B
Convertible Preferred Stock is convertible into Class A common stock at the
option of the holder, with volume limitations during the first 9 months after
the final closing date, based on its stated value at the conversion date divided
by a conversion price. The conversion price is defined as the lesser of $5.625
and $7.2375 for the Series A and Series B Convertible Preferred Stock,
respectively, or 85% of the average closing bid price of the Company's Class A
common stock for the five days preceding the conversion date. The discount
provision in both the Series A and Series B Preferred Stock is recognized as an
imputed deemed dividend in the amount of $318,200 and $406,700, respectively,
reducing income available to common shareholders on a pro rata basis from the
date of issuance to the first date that conversion can occur.
Designations, rights, and preferences related to the remaining preferred shares
may be determined by the Board of Directors. The terms of any series of
preferred stock may include priority claims to assets and dividends and voting
or other rights.
Warrants
Class E and Class F warrants were issued in connection with the private
placement of Series B Convertible Preferred Stock which was completed by October
2, 1997. A total of 317,788 Class E warrants were granted to the preferred
stockholders which entitles the holder to purchase one share of Class A common
stock at an exercise price of $7.24 until September 2000. A total of 47,668
Class F warrants were granted to the placement agent which entitles the holder
to purchase one share of Class A common stock at an exercise price defined as
the lesser of $7.24 or the average closing bid price for the Company's Class A
common stock for the five day period preceding the conversion date, until
September 2002. The Company is required to register the Class A common stock
underlying the Series B Preferred Stock and the Class E and Class F warrants
within 120 days of the closing.
4. Net Loss Per Share
Net loss per common share is computed based upon the weighted average number of
common shares outstanding during the year. Common equivalent shares, consisting
of options, warrants and convertible preferred stock for all periods, were not
included in the computation as their effect was antidilutive. However, the eight
percent premium earned by the preferred shareholders in the period was added to
the net loss for computation purposes increasing the net loss per common share
by $.01. In addition, net loss applicable to common shareholders was increased
by an imputed deemed dividend in the amount of $238,650 or $.08 per share. The
imputed deemed dividend resulted from a discount provision included in the
Series A Preferred Stock issued on July 25, 1997. The unamortized imputed deemed
dividend on Series A and the imputed deemed dividend included in the Series B
Preferred Stock issued on October 2, 1997, will be recognized in subsequent
quarters.
7
<PAGE>
LightPath Technologies, Inc.
Management's Discussion and Analysis of Financial Condition
And Results of Operations
Results of Operations
- ---------------------
The Private Securities Litigation Reform Act of 1995 ("the Act")
provides a safe harbor for forward looking statements made by or on behalf of
the Company. All statements, other than statements of historical facts, which
address activities, events or developments that the Company expects or
anticipates will or may occur in the future, including such things as future
capital expenditures, growth, product development, sales, business strategy and
other such matters are forward-looking statements. These forward-looking
statements are based largely on the Company's expectations and assumptions and
are subject to a number of risks and uncertainties, many of which are beyond the
Company's control. Actual results could differ materially from the
forward-looking statements as a result of a number of factors, including, but
not limited to, the Company's early state of development, the need for
additional financing, and intense competition in various aspects of its
business. In light of these risks and uncertainties, all of the forward-looking
statements made are qualified by these cautionary statements and there can be no
assurance that the actual results or developments anticipated by the Company
will be realized.
Three months ended September 30, 1997, "1998" compared with three months ended
September 30,1996, "1997"
Revenues totaled $166,119 for the first quarter of 1998, an increase of
approximately $43,000 or 34% over 1997. The increase was attributable to an
increase of $136,000 in lens sales which was offset by a decrease of $93,000 in
product development/ license fees. The Company's increase in lens sales is
primarily due to sales for lasers, distributors and wafer chip inspection
markets. The Company's efforts in targeting laser applications, an area where
GRADIUM's lenses ability to increase the quality of YAG laser beams and reduce
the focal spot size, has received increasing market acceptance. The Company
filled a production order from Karl Storz for 500 lenses in July 1997 and
anticipates more significant production orders in 1998 after they have evaluated
their product. During the first quarter of 1998, the Company received a
production order for $80,000 in catalog lenses from a U.S. distributor for their
international catalog. The Company provided The Fuji Photo Optical Co., Ltd
("Fuji"), which is a subsidiary of Fuji Photo Film Co., GRADIUM profiles under
the terms of an exclusive agreement whereby Fuji will evaluate the lenses for
eight months. As we near the end of the evaluation period, Fuji will have the
right to engage in a long-term license and purchase agreement or negotiate an
extension with LightPath. Revenues for government funded subcontracts in the
area of solar energy totaled $18,000 for 1998 versus $111,000 in l997. The
Company had completed the two government sub-contracts during 1997 however, the
Company received an amendment to the original solar project during the first
quarter of 1998 which requires an additional $68,000 in services to be provided
during 1998. At September 30, 1997, a backlog of $160,000 existed for lens
sales. The Company's backlog on its current government projects is approximately
$50,000.
The Company continues to work with a number of OEM's towards the
completion of projects which may result in production orders for LightPath. The
Company added to its staff, hiring Vice President of Marketing and Sales. The
position's goal is to expand the Company's presence in traditional optics and
develop emerging markets such as optoelectronics, photonics and solar. The
Company formalized relationships with four additional foreign distributors in
1998 bringing its total to eight industrial, optoelectronic and medical
component distributors based around the globe. The Company believes these
distributors may create new markets for GRADIUM in their countries primarily in
the area of sales into the YAG laser market.
Cost of sales during the first quarter of fiscal year 1998 was 56% of
product sales, a significant decrease from the first quarter of fiscal year 1997
when cost of sales equaled product sales. The decrease was primarily due to
reductions in outside finishing expenses and more efficient production
techniques. It is anticipated that with increased volume and the increased
utilization of off-shore lens finishers, the cost of production could be
decreased further. Administrative costs increased $187,049, or 28% from 1997,
primarily due to the addition of personnel in sales and marketing,
administration and operations along with increased overhead in these areas. The
Company's public awareness campaign, through print advertising, web site and
trade shows continues to generate inquiries. Research and development costs
decreased $93,303 in 1998 versus 1997. During the first quarter of 1997, the
Company spent approximately $120,000 on a benchmarking and prediction analysis
of technologies related to the Company's proprietary processes in the
manufacturing of GRADIUM glass. These costs were not recurring. The research
department staff has increased to approximately 6 full time equivalents. The
focus of the development efforts has been to expand GRADIUM product lines to the
areas of multiplexers and interconnects for the telecommunications field, the
addition of the crown glass product line to supplement its existing flint
products, development of acrylic axial gradient material to extend the product
range, and upgrade the proprietary material design software and optical design
tools to facilitate product design.
8
<PAGE>
LightPath Technologies, Inc.
Management's Discussion and Analysis of Financial Condition
And Results of Operations
Investment income decreased approximately $23,000 in 1998 due to the
decrease in interest earned on temporary investments as cash levels declined.
Interest expense was not significant in 1998 or 1997. The Company funded its
portion of LightChip, Inc. ("LightChip") during 1998 and announced the hiring of
LightChip's CEO. The Company has accounted for the investment in LightChip under
the equity method and recognized a loss of $9,680 in 1998.
Net loss of $912,599 in 1998 was an increase of $155,470 from 1997 due
to reduced gross margin of $28,106, increases in selling, general and
administrative costs of $187,049 and the decrease in other income(expense) of
$33,618 which are offset by lower research and development costs of $93,303. Net
loss per share of $.42 was a decrease of $.14 of which $.09 was due to the
imputed deemed dividend and the 8% preferred stock premium on the Series A
Preferred Stock and the remaining $.05 decrease was due to reduced gross margin
of $.01, increase in selling, general and administrative costs of $.07 and the
decrease in other income of $.01 offset by research and development expenses of
$.04.
Financial Resources and Liquidity
- ---------------------------------
LightPath had financed its operations through private placements of
equity, or debt until February 1996 when the IPO generated net proceeds of
approximately $7,200,000. In July 1997 the Company completed a preferred stock
private placement which generated net proceeds of approximately $1,600,000. The
same group of investors entered into a second private placement in September
1997 which generated net proceeds of approximately $2,100,000 when completed on
October 2, 1997. The Company intends to continue to explore additional funding
opportunities in fiscal year 1998. The Company expects to continue to incur
losses until such time, if ever, as it obtains market acceptance for its
products at sale prices and volumes which provide adequate gross revenues to
offset its operating costs. The Company has budgeted operating and research cash
requirements for fiscal 1998 at $3,000,000 which is comparable to the actual
results for fiscal year 1997. Included in the cash requirements is $700,000 to
continue its research and development efforts in fiscal year 1998. For the first
quarter 1998, the Company exceeded the quarterly budget by approximately
$150,000 of which $25,000 was attributable to overages in research and
development expenditures. During fiscal 1998, the Company projects approximately
$500,000 will be expended for capital equipment and patent protection. During
the first quarter actual expenditures were $113,000. The majority of the capital
expenditures during the quarter were for additional computers and equipment to
expand its manufacturing facilities. The Company purchased its 51% share in
LightChip for $23,720. LightChip continues to work towards completion of bridge
financing and a significant equity investment in LightChip.
The Company believes that projected product sales and proceeds from the
Series A and Series B Convertible Preferred Stock private placements will be
sufficient to cover the fiscal 1998 operating and capital budget. The Company's
capital requirements after such period will be satisfied by revenues generated
from product sales. Such sales will depend on the extent that GRADIUM glass
becomes commercially accepted and the success of the Company's sales program in
generating sales sufficient to sustain its operations. Although lens sales for
the first quarter 1998 have increased ten times 1997 first quarter levels, there
can be no assurance that the Company will generate sufficient revenues to fund
its future operations and growth strategies. In addition, the Company may be
required to seek additional financing or alter its business plan in the event of
delays for commercial production orders or unanticipated expenses. The Company
currently has no credit facility with a bank or other financial institution.
There also can be no assurance that any additional financing will be available
if needed, or, if available, will be on terms acceptable to the Company. In the
event necessary financing is not obtained, the Company will be materially
adversely affected and have to cease or substantially reduce its operations. Any
commercial financing obtained by the Company in the future is likely to impose
certain financial and other restrictive covenants upon the Company and result in
additional interest expense. Further, any issuance of additional equity or debt
securities could result in further dilution to the existing investors.
The Company has not been significantly impacted by inflation due to the
nature of its product components and in prior years the Company was principally
engaged in basic research and development. The Company does not believe that
seasonality will have a significant impact on its business.
9
<PAGE>
LightPath Technologies, Inc.
PART II
-------
Item 1. Legal Proceedings
There have been no material developments in any other legal actions
since the Company's Form 10-KSB for the year ended June 30, 1997. LightPath is
subject to various claims and lawsuits in the ordinary course of business, none
of which are considered material to the Company's financial condition and
results of operations.
Item 2. Changes in Securities and Use of Proceeds
The issuance of Series A and Series B Convertible Preferred Stock
(collectively the "Preferred Stock") by the Company limits the rights of the
Company's Common Stock in the following manner. Each share of Preferred Stock
has a stated value and liquidation preference of $10,000, plus an 8% per annum
premium. The holders of the Preferred Stock are not entitled to vote or to
receive dividends. In the event of liquidation of the Company or a Liquidation
Event (as defined in the Certificate of Designation) holders of the Preferred
Stock are entitled to receive distributions prior to any distribution to holders
of the Company's Common Stock. Conversion of the Preferred Stock could
potentially have a material dilutive effect upon shares of Common stock
outstanding at the time of such conversion. A full description of the rights and
preferences of the Preferred Stock is set forth in Exhibit 3.2 to this Form
10-QSB.
The Company completed the private placement which began June 30, 1996
for an aggregate of 180 shares of Series A Convertible Preferred Stock (the
"Series A Stock") and 320,000 attached Class C warrants on July 25, 1997. Each
share of Series A Stock is convertible into Class A Common Stock at the option
of holder, with volume limitations during the first 9 months, based on its
stated value at the conversion date divided by a conversion price. The
conversion price is defined as the lesser of $5.625 or 85% of the average
closing bid price of the Company's Class A Common Stock for the five days
preceding the conversion date. Each Class C Warrant entitles the holder to
purchase one share of Class A Common Stock at $5.63 per share at any time
through July 2000. The gross amount received for the private placement of Series
A Stock was $1,800,000, less placement fees and related expenses resulting in
net proceeds of $1,586,454. In addition, the placement agent was granted 64,000
Class D warrants to purchase shares of the Company's Class A common stock at a
price of $5.63 per share at any time through July 2002.
The Company completed a private placement for an aggregate of 230
shares of Series B Convertible Preferred Stock (the "Series B Stock") and
317,788 attached Class E warrants on October 2, 1997. Each share of Series B
Stock is convertible into Class A Common Stock at the option of holder, with
volume limitations during the first 9 months, based on its stated value at the
conversion date divided by a conversion price. The conversion price is defined
as the lesser of $7.2375 or 85% of the average closing bid price of the
Company's Class A Common Stock for the five days preceding the conversion date.
Each Class E Warrant entitles the holder to purchase one share of Class A Common
Stock at $7.24 per share at any time through September 2000. The gross amount
received for the private placement of Series A Stock was $2,300,000, less
placement fees and related expenses resulting in net proceeds of approximately
$2,068,000. In addition, the placement agent was granted 47,668 Class F warrants
to purchase shares of the Company's Class A common stock at a price of $7.24 per
share at any time through September 2002.
All of the Preferred Stock, Class C, Class D, Class E and Class F
Warrants were issued to accredited investors in private placements pursuant to
Rule 506 of Regulation D promulgated under the Securities Act of 1933, as
amended. Restrictions have been imposed on the resale of such securities,
including the placement of legends thereon noting such restrictions, and written
disclosure of such restrictions were made prior to issuance of the securities.
Item 3. Defaults Upon Senior Securities
None
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LightPath Technologies, Inc.
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a) The following document is filed as an exhibit to this Form 10-QSB:
Exhibit 3.1 - Certificate of Designation, as amended, and
filed with the Secretary of State of Delaware on November 13,
1997
Exhibit 3.2 - Certificate of Designation filed with the
Secretary of State of Delaware on October 2, 1997
Exhibit 11 - Computation of Net Loss Per Share
Exhibit 27 - Financial Data Schedule
b) No reports on Form 8-K were filed under the Securities and Exchange
Act of 1934 during the quarter ended September 30, 1997.
11
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LightPath Technologies, Inc.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Report to be signed in its behalf by the
undersigned, thereunto duly authorized.
LIGHTPATH TECHNOLOGIES, INC.
By: /s/ Donald Lawson November 12, 1997
-------------------------------------
Donald Lawson Date
President and Treasurer
12
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
* * * * *
LIGHTPATH TECHNOLOGIES, INC., a corporation duly organized and existing
under the General Corporation Law of the State of Delaware (the "Company"), DOES
HEREBY CERTIFY:
FIRST: That pursuant to authority conferred upon the Board of Directors
of the Company by the Certificate of Incorporation, as amended (the "Certificate
of Incorporation"), and pursuant to the provisions of Section 141 of the General
Corporation Law of the State of Delaware, the Board of Directors of the Company,
at a meeting held September 11, 1997, duly resolved to adopt certain amendments
to the Certificate of Incorporation of the Company declaring said amendments to
be advisable and directed said amendments be presented at the 1997 annual
meeting of the stockholders of the Company for consideration thereof. The
resolutions setting forth the proposed amendments were as follows:
RESOLVED, That the Company's Certificate of Designations of
Class A Common Stock and Class E-1 Common Stock, Class E-2 Common
Stock, and Class E-3 Common Stock, dated November 9, 1995 ("Certificate
of Designations"), be amended by deleting Sections 3.E(2), 3.E(3) and 4
of the Certificate of Designations in their entirety and replacing them
with the following amended Sections 3.E(2), 3.E(3) and 4, respectively.
3.E(2) Each share of Class E-2 Common Stock will be
automatically converted into one share of Class A Common Stock, and the
holder thereof will receive a certificate representing the number of
shares of Class A Common Stock into which such class was converted, if,
and only if, one or more of the following conditions is/are met:
(a) the Minimum Pretax Income is at least $10.9
million during any of the fiscal years ending on June 30,
1997, 1998 or 1999: or
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(b) the Class E-1 Common Stock has been previously
converted into Class A Common Stock pursuant to paragraph (1)
above, and the Minimum Pretax Income is at least $10.9 million
during the fiscal year ending June 30, 2000; or
(c) the Minimum Pretax Income is at least $14.0
million during the fiscal year ending on June 30, 2000;
(d) the Class E-1 Common Stock has been previously
converted into Class A Common Stock pursuant to paragraph (1)
above, and the Minimum Pretax Income is at least $14.0 million
during the fiscal year ending June 30, 2001; or
(e) the Company is acquired by or merged with or into
another entity during either of the periods referred to below
and as a result thereof holders of the Class A Common Stock of
the Company (after giving consideration to the conversion of
the Class E-1 Common Stock and Class E-2 Common Stock) receive
per share consideration equal to or greater than: (i) $18.00
(subject to adjustment in the event of any stock splits,
reverse stock splits, or other similar events) during the
18-month period commencing February 22, 1996; or, (ii) $23.00
(subject to adjustment in the event of any stock splits,
reverse stock splits, or similar events) during the 18-month
period commencing August 22, 1997; or
(f) the Class E-1 Common Stock has been previously
converted into Class A Common Stock pursuant to paragraph (1)
above and the Company is acquired by or merged with or into
another entity during either of the periods referred to below
and as a result thereof holders of Class A Common Stock of the
Company receive per share consideration (after giving effect
to the conversion of the Class E-1 Common Stock and Class E-2
Common Stock) equal to or greater than: (i) $18.00 (subject to
adjustment in the event of any stock splits, reverse stock
splits, or other similar events) during the 30-month period
commencing February 22, 1996; or (ii) $23.00 (subject to
adjustment in the event of any stock splits, reverse stock
splits, or similar events) the 30-month period commencing
August 22, 1998.
3.E(3) Each share of Class E-3 Common Stock will be
automatically converted into one share of Class A Common Stock, and the
holder thereof will receive a certificate representing the number of
shares of Class A Common Stock into which such class was converted, if,
and only if, one or more of the following conditions is/are met:
(a) the Minimum Pretax Income is at least $28 during
any of the fiscal years ending June 30, 1997, 1998, 1999 and
2000; or
(b) the Class E-2 Common Stock has been previously
converted into Class A Common Stock pursuant to paragraph (2)
above and the Minimum Pretax
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Income amounts to at least $28.00 million during the fiscal
year ending June 30, 2001; or
(c) the Company is acquired by or merged with or into
another entity during either of the periods referred to below
and as a result thereof holders of Class A Common Stock of the
Company receive per share consideration (after giving effect
to the conversion of the Class E-1, Class E-2 and Class E-3
Common Stock) equal to or greater-than: (i) $30.00 (subject to
adjustment in the event of any stock splits, reverse stock
splits or similar events) during the 18-month period
commencing on February 22, 1996; or (ii) $40.00 (subject to
adjustment in the event of any stock splits, reverse splits or
similar events) during the 18-month period commencing August
22, 1997; or
(d) the Class E-2 Common Stock has been previously
converted into Class A Common Stock pursuant to paragraph (2)
above and the Company is acquired by or merged with or into
another entity during the periods referred to below and as a
result thereof holders of Class A Common Stock of the Company
receive per share consideration (after giving effect to the
conversion of the Class E-1, Class E-2 and Class E-3 Common
Stock) equal to or greater than: (i) $30.00 (subject to
adjustment in the event of any stock splits, reverse stock
splits or similar events) during the 30-month period
commencing February 22, 1996; or (ii) $40.00 (subject to
adjustment in the event of any stock splits, reverse splits or
similar events) during the 30-month period commencing August
22, 1998.
4. Redemption.
(a) If on September 30, 2001, none of the conditions to
conversion of the Class E-1 Common Stock, the Class E-2 Common Stock or
the Class E-3 Common Stock, as applicable, shall have been satisfied,
then such class or classes of Common Stock shall be redeemed by the
Company at a price per share of $.0001 and cancelled without further
obligation to the holder thereof. From and after September 30, 2001, in
the event that none of the conditions to conversion of the Class E-1
Common Stock, the Class E-2 Common Stock or the Class E-3 Common Stock,
as applicable, were satisfied at the respective applicable dates, there
shall exist no further right with respect to Class E Common Stock,
which is thereby cancelled, or with respect to any other cash, property
or securities previously issued with respect thereto.
(b) Solely for the purpose of issuance upon conversion of the
Class E-1, E-2 or E-3 Common Stock as herein provided, the Company
shall, at all times, reserve and keep available out of its authorized
but unissued shares of Class A Common Stock, such number of shares of
Class A Common Stock as are then issuable upon the conversion of all
outstanding shares of Class E Common Stock.
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FURTHER RESOLVED, That all other rights and restrictions set
forth in the Certificate of Designations shall remain unchanged and in
full force and effect.
SECOND: That thereafter, pursuant to resolution of its Board of
Directors, an annual meeting of the stockholders of said corporation was duly
called and held, at which meeting the necessary number of shares as required by
the General Corporation Law of the State of Delaware and the Certificate of
Incorporation and Bylaws of the Corporation were voted in favor of the
amendment.
THIRD: That said amendment was duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware.
4
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IN WITNESS WHEREOF, said LIGHTPATH TECHNOLOGIES, INC. has caused this
certificate to be signed by Donald Lawson, its vice President and Treasurer,
this 12th day of November, 1997.
LIGHTPATH TECHNOLOGIES, INC.
By: /s/ Donald Lawson
-----------------------------------
Donald Lawson
Vice President and Treasurer
5
Exhibit 3.2
CERTIFICATE OF DESIGNATION OF SERIES B PREFERRED STOCK
OF LIGHTPATH TECHNOLOGIES, INC. FILED OCTOBER 2, 1997
It is hereby certified that:
1. The name of the Company (hereinafter called the "Company") is
LightPath Technologies, Inc., a Delaware corporation.
2. The certificate of incorporation of the Company authorizes the
issuance of five million (5,000,000) shares of preferred stock, $.01 par value
per share, and expressly vests in the Board of Directors of the Company the
authority provided therein to issue any or all of said shares in one (1) or more
Series B and by resolution or resolutions to establish the designation and
number and to fix the relative rights and preferences of each series to be
issued.
3. The Board of Directors of the Company, pursuant to the authority
expressly vested in it as aforesaid, has adopted the following resolutions
creating a Series B issue of Preferred Stock:
RESOLVED, that three hundred (300) of the five million (5,000,000)
authorized shares of Preferred Stock of the Company shall be designated Series B
Preferred Stock, $.01 par value per share, and shall possess the rights and
preferences set forth below:
Section 1. Designation and Amount. The shares of such series shall have
a par value of $.01 per share and shall be designated as Series B Preferred
Stock (the "Series B Preferred Stock") and the number of shares constituting the
Series B Preferred Stock shall be three hundred (300). The Series B Preferred
Stock shall be offered at a purchase price of Ten Thousand Dollars ($10,000) per
share (the "Original Series B Issue Price"), with an eight percent (8%) per
annum accretion rate as set forth herein.
Section 2. Rank. The Series B Preferred Stock shall rank: (i) junior to
any other class or series of capital stock of the Company hereafter created
specifically ranking by its terms senior to the Series B Preferred Stock
(collectively, the "Senior Securities"); (ii) prior to all of the Company's
Class A, Class E-1, Class E-2, and Class E-3 Common Stock, all at a $.01 par
value per share ("Common Stock"); (iii) prior to any class or series of capital
stock of the Company hereafter created not specifically ranking by its terms
senior to or on parity with any Series B Preferred Stock of whatever subdivision
(collectively, with the Common Stock, "Junior Securities"); and (iv) on parity
with the Series A Preferred Stock and with any class or series of capital stock
of the Company hereafter created specifically ranking by its terms on parity
with the Series B Preferred Stock ("Parity Securities") in each case as to
distributions of assets upon liquidation, dissolution or winding up of the
Company, whether voluntary or involuntary (all such distributions being referred
to collectively as "Distributions").
Section 3. Dividends. The Series B Preferred Stock will bear no
dividends, and the holders of the Series B Preferred Stock ("Holders") shall not
be entitled to receive dividends on the Series B Preferred Stock.
Section 4. Liquidation Preference.
(a) In the event of any liquidation, dissolution or winding up
of the Company ("Liquidation Event"), either voluntary or involuntary, the then
Holders of shares of Series B Preferred Stock shall be entitled to receive,
immediately after any distributions to Senior Securities required by the
Company's Certificate of
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Incorporation or any certificate of designation, and prior in preference to any
distribution to Junior Securities but in parity with any distribution to Parity
Securities, an amount per share equal to the sum of (i) the Original Series B
Issue Price for each outstanding share of Series B Preferred Stock and (ii) an
amount equal to eight percent (8%) of the Original Series B Issue Price, per
annum, accruing daily, for the period that has passed since the date that, in
connection with the consummation of the purchase by Holder of shares of Series B
Preferred Stock from the Company, the escrow agent first had in its possession
funds representing full payment for the shares of Series B Preferred Stock (such
amount being referred to herein as the "Premium"). If upon the occurrence of
such event, and after payment in full of the preferential amounts with respect
to the Senior Securities, the assets and funds available to be distributed among
the Holders of the Series B Preferred Stock and Parity Securities shall be
insufficient to permit the payment to such Holders of the full preferential
amounts due to the Holders of the Series B Preferred Stock and the Parity
Securities, respectively, then the entire assets and funds of the Company
legally available for distribution shall be distributed among the Holders of the
Series B Preferred Stock and the Parity Securities, pro rata, based on the
respective liquidation amounts to which each such series of stock is entitled by
the Company's Certificate of Incorporation and any certificate(s) of designation
relating thereto.
(b) Upon the completion of the distribution required by
subsection 4(a), if assets remain in this Company, they shall be distributed to
holders of Junior Securities in accordance with the Company's Certificate of
Incorporation including any duly adopted certificate(s) of designation.
(c) At each Holder's option, a sale, conveyance or disposition
of all or substantially all of the assets of the Company or the effectuation by
the Company of a transaction or series of related transactions in which more
than fifty percent (50%) of the voting power of the Company is disposed of shall
be deemed to be a Liquidation Event as defined in Section 4(a); provided further
that (i) a consolidation, merger, acquisition, or other business combination of
the Company with or into any other publicly traded company or companies shall
not be treated as a Liquidation Event as defined in Section 4(a) but instead
shall be treated pursuant to Section 5(d) hereof, and (ii) a consolidation,
merger, acquisition, or other business combination of the Company with or into
any other non-publicly traded company or companies shall be treated as a
Liquidation Event as defined in Section 4(a). The Company shall not effect any
transaction described in subsection 4(c)(ii) unless it first gives thirty (30)
business days prior notice of such transaction during which time the Holder
shall be entitled to immediately convert any or all of its shares of Series B
Preferred Stock into Class A Common Stock at the Conversion Price, as defined
below, then in effect, which conversion shall not be subject to the conversion
restrictions set forth in Section 5(a).
(d) In the event that, immediately prior to the closing of a
transaction described in Section 4(c) which would constitute a Liquidation
Event, the cash distributions required by Section 4(a) or Section 6 have not
been made, the Company shall either: (i) cause such closing to be reasonably
postponed until such cash distributions have been made, (ii) cancel such
transaction, in which event the rights of the Holders of Series B Preferred
Stock shall be the same as existing immediately prior to such proposed
transaction or (iii) agree, and shall require that any successor company
resulting from a Liquidation Event agrees, to make such distributions as quickly
after the closing of such Liquidation Event as reasonably practicable, upon the
same terms and in the same amounts as the Company would have made if such
distribution was made immediately prior to the closing of such transaction.
Section 5. Conversion. Subject to Section 4(c) herein, the record
Holders of this Series B Preferred Stock shall have conversion rights as follows
(the "Conversion Rights"):
(a) Right to Convert. The record Holder of the Series B
Preferred Stock shall be entitled to convert, subject to the Company's right of
redemption set forth in Section 6(a) and the conversion restrictions herein
below, any or all the aggregate principal amount of the Series B Preferred Stock
on or after the date that is four (4) months after the Last Closing Date, as
defined below, at the office of the Company or its designated
2
<PAGE>
transfer agent (the "Transfer Agent"), into that number of fully-paid and
non-assessable shares of Class A Common Stock calculated in accordance with the
following formula (the "Conversion Rate"):
Number of shares of Class A Common Stock issued upon conversion of one
(1) share of Series B Preferred Stock =
(.08) (N/365) (10,000) + 10,000
-------------------------------
Conversion Price
where,
o N= the number of days between (i) the date that, in connection with
the consummation of the initial purchase by Holder of shares of Series
B Preferred Stock from the Company, the escrow agent first had in its
possession funds representing full payment for the shares of Series B
Preferred Stock for which conversion is being elected, and (ii) the
applicable Date of Conversion (as defined in Section 5(b)(iv) below)
for the shares of Series B Preferred Stock for which conversion is
being elected, and
o Conversion Price = the lesser of (x) 100% of the average Closing Bid
Price, as that term is defined below, of the Company's Class A Common
Stock for the five (5) trading days ending on September 24, 1997, which
is $7.2375 (the "Fixed Conversion Price"), or (y) 85% of the average
Closing Bid Price, as that term is defined below, of the Company's
Class A Common Stock for the five (5) trading days immediately
preceding the Date of Conversion, as defined below (the "Variable
Conversion Price"),
provided, however, that, unless otherwise indicated herein, beginning on the
date that is four (4) months following the Last Closing Date, as defined below,
the right of the Holder to convert into Class A Common Stock using the Variable
Conversion Price initially shall be limited to a maximum of twenty percent (20%)
of the aggregate principal amount of the Series B Preferred Stock issued to such
Holder, and for each one (1) month period which expires thereafter, the Holder
shall accrue the right to convert into Class A Common Stock an additional twenty
percent (20%) of the aggregate principal amount of the Series B Preferred Stock
issued to such Holder, (the number of shares that may be converted at any given
time using the Variable Conversion Price, in the aggregate, is referred to
hereinafter as the "Conversion Quota"); and provided, further, in the event that
the Holder elects not to convert its full Conversion Quota during any one (1)
month period, the unconverted amount shall be carried forward and added to the
Conversion Quota, and thereafter the Holder may, from time to time, convert any
portion of the Conversion Quota at the Variable Conversion Price; and provided,
further, that subsequent to the date that is nine (9) months following the Last
Closing Date, there shall be no restrictions on the number of shares of Series B
Preferred Stock that may be converted into Class A Common Stock using the
Variable Conversion Price; and provided, further, that a Holder can convert one
hundred percent (100%) of the Series B Preferred Stock, or any portion thereof,
into Class A Common Stock using the Fixed Conversion Price on or after the date
that is four (4) months after the Last Closing Date whether or not the Fixed
Conversion Price is less than the Variable Conversion Price.
As used herein, "Last Closing Date" shall mean the date of the last
closing of a purchase and sale of the Series B Preferred Stock that occurs
pursuant to the offering of the Series B Preferred Stock by the Company.
For purposes hereof, any Holder which acquires shares of Series B
Preferred Stock from another Holder (the "Transferor") and not upon original
issuance from the Company shall be entitled to exercise its conversion right as
to the percentages of such shares specified under Section 5(a) in such amounts
and at such times such that the number of shares eligible for conversion by such
Holder at any time shall be in the same proportion that
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<PAGE>
the number of shares of Series B Preferred Stock acquired by such Holder from
its Transferor bears to the total number of shares of Series B Preferred Stock
originally issued by the Company to such Transferor (or its predecessor
Transferor).
For purposes hereof, the term "Closing Bid Price" shall mean the
closing bid price of the Company's Class A Common Stock on the Nasdaq Small Cap
Market, or if no longer traded on the Nasdaq Small Cap Market, the closing bid
price on the principal national securities exchange or the over-the-counter on
which the Class A Common Stock is so traded and if not available, the mean of
the high and low prices on the principal national securities exchange or the
over-the-counter system on which the Class A Common Stock is so traded.
(b) Mechanics of Conversion. In order to convert Series B
Preferred Stock into full shares of Class A Common Stock, the Holder shall (i)
send via facsimile, on or prior to 11:59 p.m., New York City time (the
"Conversion Notice Deadline") on the Date of Conversion, a copy of the fully
executed notice of conversion ("Notice of Conversion") to the Company at the
office of the Company and to its designated transfer agent (the "Transfer
Agent") for the Series B Preferred Stock stating that the Holder elects to
convert, which notice shall specify the Date of Conversion, the number of shares
of Series B Preferred Stock to be converted, the applicable Conversion Price and
a calculation of the number of shares of Class A Common Stock issuable upon such
conversion (together with a copy of the front page of each certificate to be
converted) and (ii) surrender to a common courier for delivery to the office of
the Company or the Transfer Agent, the original certificates representing the
Series B Preferred Stock being converted (the "Preferred Stock Certificates"),
duly endorsed for transfer; provided, however, that the Company shall not be
obligated to issue certificates evidencing the shares of Class A Common Stock
issuable upon such conversion unless either the Preferred Stock Certificates are
delivered to the Company or its Transfer Agent as provided above, or the Holder
notifies the Company or its Transfer Agent that such certificates have been
lost, stolen or destroyed (subject to the requirements of subparagraph (i)
below). Upon receipt by the Company of a facsimile copy of a Notice of
Conversion, the Company shall immediately send, via facsimile, a confirmation of
receipt of the Notice of Conversion to Holder which shall specify that the
Notice of Conversion has been received and the name and telephone number of a
contact person at the Company whom the Holder should contact regarding
information related to the Conversion. In the case of a dispute as to the
calculation of the Conversion Rate, the Company shall promptly issue to the
Holder the number of Shares that are not disputed and shall submit the disputed
calculations to its outside accountant via facsimile within three (3) days of
receipt of Holder's Notice of Conversion. The Company shall cause the accountant
to perform the calculations and notify the Company and Holder of the results no
later than two business days from the time it receives the disputed
calculations. Accountant's calculation shall be deemed conclusive absent
manifest error.
(i) Lost or Stolen Certificates. Upon receipt by the
Company of evidence of the loss, theft, destruction or mutilation of any
Preferred Stock Certificates representing shares of Series B Preferred Stock,
and (in the case of loss, theft or destruction) of indemnity or security
reasonably satisfactory to the Company, and upon surrender and cancellation of
the Preferred Stock Certificate(s), if mutilated, the Company shall execute and
deliver new Preferred Stock Certificate(s) of like tenor and date. However, the
Company shall not be obligated to re-issue such lost or stolen Preferred Stock
Certificates if Holder contemporaneously requests the Company to convert such
Series B Preferred Stock into Class A Common Stock.
(ii) Delivery of Common Stock Upon Conversion. The
Company shall or shall cause the Transfer Agent to, no later than the close of
business on the second (2nd) business day (the "Deadline") after receipt by the
Company or the Transfer Agent of a facsimile copy of a Notice of Conversion and
receipt by Company or the Transfer Agent of all necessary documentation duly
executed and in proper form required for conversion, including the original
Preferred Stock Certificates to be converted (or after provision for security or
indemnification in the case of lost or destroyed certificates, if required),
issue and surrender to a common courier for either overnight or (if delivery is
outside the United States) two (2) day delivery to the Holder at the address of
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<PAGE>
the Holder as shown on the stock records of the Company a certificate for the
number of shares of Class A Common Stock to which the Holder shall be entitled
as aforesaid.
(iii) No Fractional Shares. If any conversion of the
Series B Preferred Stock would create a fractional share of Class A Common Stock
or a right to acquire a fractional share of Class A Common Stock, such
fractional share shall be disregarded and the number of shares of Class A Common
Stock issuable upon conversion, in the aggregate, shall be the next higher
number of shares.
(iv) Date of Conversion. The date on which conversion
occurs (the "Date of Conversion") shall be deemed to be the date set forth in
such Notice of Conversion, provided (i) that the advance copy of the Notice of
Conversion is sent via facsimile to the Company before 11:59 p.m., New York City
time, on the Date of Conversion, and (ii) that the original Preferred Stock
Certificates representing the shares of Series B Preferred Stock to be converted
are surrendered by depositing such certificates with a common courier, for
delivery to the Company or the Transfer Agent as provided above, as soon as
practicable after the Date of Conversion. The person or persons entitled to
receive the shares of Class A Common Stock issuable upon such conversion shall
be treated for all purposes as the record Holder or Holders of such shares of
Class A Common Stock on the Date of Conversion.
(c) Automatic Conversion or Redemption. Each share of Series B
Preferred Stock outstanding on the date which is three (3) years after the Last
Closing Date or, if not a business day, the first business day thereafter
("Termination Date") automatically shall, at the option of the Company, either
(i) be converted ("Automatic Conversion") into Class A Common Stock on such date
at the Conversion Rate then in effect (calculated in accordance with the formula
in Section 5(a) above), and the Termination Date shall be deemed the Date of
Conversion with respect to such conversion for purposes of this Certificate of
Designation, or (ii) be redeemed ("Automatic Redemption") by the Company for
cash in an amount equal to the Stated Value (as defined in Section 6(b)(i)
below) of the shares of Series B Preferred Stock being redeemed. If the Company
elects to redeem, on the Termination Date, the Company shall send to the Holders
of outstanding Series B Preferred Stock notice (the "Automatic Redemption
Notice") via facsimile of its intent to effect an Automatic Redemption of the
outstanding Series B Preferred Stock. If the Company does not send such notice
to Holder on such date, an Automatic Conversion shall be deemed to have
occurred. If an Automatic Conversion occurs, the Company and the Holders shall
follow the applicable conversion procedures set forth in this Certificate of
Designation; provided, however, that the Holders are not required to send the
Notice of Conversion contemplated by Section 5(b). If the Company elects to
redeem, each Holder of outstanding Series B Preferred Stock shall send their
certificates representing the Series B Preferred Stock to the Company within
five (5) days of the date of receipt of the Automatic Redemption Notice from the
Company, and the Company shall pay the applicable redemption price to each
respective Holder within five (5) days of the receipt of such certificates. The
Company shall not be obligated to deliver the redemption price unless the
certificates representing the Series B Preferred Stock are delivered to the
Company, or, in the event one or more certificates have been lost, stolen,
mutilated or destroyed, unless the Holder has complied with Section 5(b)(i). If
the Company elects to redeem under this Section 5(c) and the Company fails to
pay the Holders the redemption price within five (5) days of its receipt of the
certificates representing the shares of Series B Preferred Stock to be redeemed
as required by this Section 5(c), then an Automatic Conversion shall be deemed
to have occurred and, upon receipt of the Preferred Stock certificates, the
Company shall immediately deliver to the Holders the certificates representing
the number of shares of Class A Common Stock to which the Holders would have
been entitled upon Automatic Conversion.
(d) Adjustment to Conversion Rate.
(i) Adjustment to Fixed Conversion Price Due to Stock
Split, Stock Dividend, Etc. If, prior to the conversion of all of the Series B
Preferred Stock, the number of outstanding shares of Common Stock is increased
by a stock split, stock dividend, or other similar event, the Fixed Conversion
Price shall be
5
<PAGE>
proportionately reduced, or if the number of outstanding shares of Common Stock
is decreased by a combination or reclassification of shares, or other similar
event, the Fixed Conversion Price shall be proportionately increased.
(ii) Adjustment to Variable Conversion Price. If, at
any time when any shares of the Series B Preferred Stock are issued and
outstanding, the number of outstanding shares of Common Stock is increased or
decreased by a stock split, stock dividend, or other similar event, which event
shall have taken place during the reference period for determination of the
Conversion Price for any conversion of the Series B Preferred Stock, then the
Variable Conversion Price shall be calculated giving appropriate effect to the
stock split, stock dividend, combination, reclassification or other similar
event for all five (5) trading days immediately preceding the Date of
Conversion.
(iii) Adjustment Due to Merger, Consolidation, Etc.
If, prior to the conversion of all Series B Preferred Stock, there shall be any
merger, consolidation, exchange of shares, recapitalization, reorganization, or
other similar event, as a result of which shares of Class A Common Stock of the
Company shall be changed into the same or a different number of shares of the
same or another class or classes of stock or securities of the Company or
another entity or there is a sale of all or substantially all the Company's
assets or there is a change of control transaction not deemed to be a
liquidation pursuant to Section 4(c), then the Holders of Series B Preferred
Stock shall thereafter have the right to receive upon conversion of Series B
Preferred Stock, upon the basis and upon the terms and conditions specified
herein and in lieu of the shares of Class A Common Stock immediately theretofore
issuable upon conversion, such stock, securities and/or other assets which the
Holder would have been entitled to receive in such transaction had the Series B
Preferred Stock been converted immediately prior to such transaction, and in any
such case appropriate provisions shall be made with respect to the rights and
interests of the Holders of the Series B Preferred Stock to the end that the
provisions hereof (including, without limitation, provisions for the adjustment
of the Conversion Price and of the number of shares issuable upon conversion of
the Series B Preferred Stock) shall thereafter be applicable, as nearly as may
be practicable in relation to any securities thereafter deliverable upon the
exercise hereof. The Company shall not effect any transaction described in this
subsection 5(d)(iii) unless (a) it first gives at least thirty (30) days prior
notice of such merger, consolidation, exchange of shares, recapitalization,
reorganization, or other similar event (during which time the Holder shall be
entitled to convert its shares of Series B Preferred Stock into Class A Common
Stock) and (b) the resulting successor or acquiring entity (if not the Company)
assumes by written instrument the obligations of the Company under this
Certificate of Designation including this subsection 5(d)(iii).
(iv) No Fractional Shares. If any adjustment under
this Section 5(d) would create a fractional share of Class A Common Stock or a
right to acquire a fractional share of Class A Common Stock, such fractional
share shall be disregarded and the number of shares of Class A Common Stock
issuable upon conversion shall be the next higher number of shares.
Section 6. Redemption by Company.
(a) Company's Right to Redeem Upon Receipt of Notice of
Conversion. If the Variable Conversion Price of the Company's Class A Common
Stock is less than the Fixed Conversion Price (as defined in Section 5(a)), at
the time of receipt of a Notice of Conversion pursuant to Section 5(b), the
Company shall have the right, in its sole discretion, to redeem in whole or in
part any Series B Preferred Stock submitted for conversion at the Redemption
Rate (as defined below), immediately prior to and in lieu of conversion
("Redemption Upon Receipt of Notice of Conversion"). If the Company elects to
redeem some, but not all, of the Series B Preferred Stock submitted for
conversion, the Company shall redeem from among the Series B Preferred Stock
submitted by the various shareholders for conversion on the applicable date, a
pro-rata amount from each such Holder so submitting Series B Preferred Stock for
conversion.
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(i) Redemption Price Upon Receipt of a Notice of
Conversion. The redemption price of Series B Preferred Stock under this Section
6(a) shall be calculated as follows ("Redemption Rate"): 120% of the Stated
Value, where Stated Value shall have the same meaning as defined in Section
6(b)(i) below.
(ii) Mechanics of Redemption Upon Receipt of Notice
of Conversion. The Company shall effect each such redemption by giving notice of
its election to redeem, by facsimile, by 5:00 p.m. New York City time the next
business day following receipt of a Notice of Conversion from a Holder, and the
Company shall provide a copy of such redemption notice by overnight or two (2)
day courier, to (A) the Holder of the Series B Preferred Stock submitted for
conversion at the address and facsimile number of such Holder appearing in the
Company's register for the Series B Preferred Stock and (B) the Company's
Transfer Agent. Such redemption notice shall indicate whether the Company will
redeem all or part of the Series B Preferred Stock submitted for conversion and
the applicable redemption price.
(iii) Redemption Buy-In. If (i) subsequent to the
tender of a Notice of Conversion, but prior to its receipt of a Notice of
Redemption Upon Notice of Conversion, the Holder sells shares of Class A Common
Stock (the "Redemption Sold Shares") which such Holder anticipated receiving
upon such conversion, (ii) the Company effects a Redemption Upon Receipt of
Notice of Conversion with respect to such conversion, and (iii) the Holder
purchases (in an open market transaction), no later than the close of trading on
the trading day following its receipt of the Notice of Redemption Upon Notice of
Conversion, shares of Class A Common Stock to make delivery upon the sale of the
Redemption Sold Shares (a "Redemption Buy-In"), the Company shall pay such
Holder (in addition to the applicable Redemption Rate) the amount by which (x)
such Holder's total purchase price (including brokerage commission, if any) for
the shares of Class A Common Stock purchased in the Redemption Buy-In exceeds
(y) the net proceeds received by such Holder from the sale of the Redemption
Sold Shares. For example, if a Holder purchases shares of Class A Common Stock
having a total purchase price of $11,000 to cover a Redemption Buy-In with
respect to shares of Class A Common Stock sold for $10,000, the Company will be
required to pay such Holder $1,000. A Holder shall provide the Company written
notification (and trading records, if reasonably requested by the Company)
indicating any amounts payable to Holder pursuant to this Section.
(b) Company's Right to Redeem at its Election. At any time,
commencing twelve (12) months and one (1) day after the Last Closing Date, the
Company shall have the right, in its sole discretion, to redeem ("Redemption at
Company's Election"), from time to time, any or all of the Series B Preferred
Stock; provided (i) the Company shall first provide thirty (30) days advance
written notice as provided in subparagraph 6(b)(ii) below (which can be given
beginning thirty (30) days prior to the date which is twelve (12) months and one
(1) day after the Last Closing Date), and (ii) that the Company shall only be
entitled to redeem Series B Preferred Stock having an aggregate Stated Value (as
defined below) of at least Three Hundred Seventy-five Thousand Dollars
($375,000). If the Company elects to redeem some, but not all, of the Series B
Preferred Stock, the Company shall redeem a pro-rata amount from each Holder of
the Series B Preferred Stock.
(i) Redemption Price At Company's Election. The
"Redemption Price At Company's Election" shall be calculated as a percentage of
Stated Value, as that term is defined below, of the Series B Preferred Stock
redeemed pursuant to this Section 6(b), which percentage shall vary depending on
the date of Redemption at Company's Election (as defined below), and shall be
determined as follows:
Date of Notice of Redemption at Company's Election % of Stated Value
-------------------------------------------------- -----------------
12 months and 1 day to 18 months following Last Closing Date 130%
18 months and 1 day to 24 months following Last Closing Date 125%
24 months and 1 day to 30 months following Last Closing Date 120%
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30 months and 1 day to 36 months following Last Closing Date 115%
For purposes hereof, "Stated Value" shall mean the Original Series B
Issue Price (as defined in Section 1)) of the shares of Series B Preferred Stock
being redeemed pursuant to this Section 6(b), together with the accreted but
unpaid Premium (as defined in Section 4(a)).
(ii) Mechanics of Redemption at Company's Election.
The Company shall effect each such redemption by giving at least thirty (30)
days prior written notice ("Notice of Redemption At Company's Election") to (A)
the Holders of the Series B Preferred Stock selected for redemption, at the
address and facsimile number of such Holder appearing in the Company's Series B
Preferred Stock register and (B) the Transfer Agent, which Notice of Redemption
At Company's Election shall be deemed to have been delivered three (3) business
days after the Company's mailing (by overnight or two (2) day courier, with a
copy by facsimile) of such Notice of Redemption At Company's Election. Such
Notice of Redemption At Company's Election shall indicate (i) the number of
shares of Series B Preferred Stock that have been selected for redemption, (ii)
the date which such redemption is to become effective (the "Date of Redemption
At Company's Election") and (iii) the applicable Redemption Price At Company's
Election, as defined in subsection (b)(i) above. Notwithstanding the above,
Holder may convert into Class A Common Stock pursuant to Section 5, prior to the
close of business on the Date of Redemption at Company's Election, any Series B
Preferred Stock which it is otherwise entitled to convert, including Series B
Preferred Stock that has been selected for redemption at the Company's election
pursuant to this subsection 6(b); provided, however, that the Company shall
still be entitled to exercise its right to redeem upon receipt of a Notice of
Conversion pursuant to Section 6(a).
(c) Company Must Have Immediately Available Funds or Credit
Facilities. The Company shall not be entitled to send any Redemption Notice and
begin the redemption procedure under Sections 6(a) and 6(b) unless it has:
(i) the full amount of the redemption price in cash,
available in a demand or other immediately available account in a bank or
similar financial institution; or
(ii) immediately available credit facilities, in the
full amount of the redemption price with a bank or similar financial
institution; or
(iii) an agreement with a standby underwriter willing
to purchase from the Company a sufficient number of shares of stock to provide
proceeds necessary to redeem any stock that is not converted prior to
redemption; or
(iv) a combination of the items set forth in (i),
(ii) and (iii) above, aggregating the full
amount of the redemption price.
If the foregoing conditions of this Section 6(c) are satisfied and the
Company complies with Section 6(d) hereof, then any shares of Series B Preferred
Stock called for by a Redemption at Company's Election shall cease to be
outstanding for all purposes hereunder (including the right to convert or to
accrete additional Premium or to exercise any other right or privilege
hereunder) on the Date of Redemption at Company's Election and shall instead
represent the right to receive the Redemption Price at Company's Election
without interest from and after the Date of Redemption at Company's Election.
(d) Payment of Redemption Price.
(i) Each Holder submitting Preferred Stock being
redeemed under this Section 6 shall send their Series B Preferred Stock
Certificates so redeemed to the Company or its Transfer Agent, and the
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Company shall pay the applicable redemption price to that Holder within five (5)
business days of the Date of Redemption at Company's Election. The Company shall
not be obligated to deliver the redemption price unless the Preferred Stock
Certificates so redeemed are delivered to the Company or its Transfer Agent, or,
in the event one (1) or more certificates have been lost, stolen, mutilated or
destroyed, unless the Holder has complied with Section 5(b)(i).
(ii) If the Company elects to redeem pursuant to
Section 6(a) hereof, and the Company fails to pay Holder the redemption price
within the time frame as required by this Section 6(d), then the Company shall
issue shares of Class A Common Stock to any such Holder who has submitted a
Notice of Conversion in compliance with Section 5(b) hereof. The shares to be
issued to Holder pursuant to this provision shall be the number of shares
determined using a Conversion Price (as defined in Section 5 hereof) that equals
the lesser of (i) the Conversion Price on the date Holder sends its Notice of
Conversion to Company or Transfer Agent via facsimile or (ii) the Conversion
Price on the date the Transfer Agent issues Class A Common Stock pursuant to
this Section 6(d)(ii).
(e) Blackout Period. Notwithstanding the foregoing, the
Company may not either send out a redemption notice or effect a redemption
pursuant to Section 6(b) above during a Blackout Period (defined as a period
during which the Company's officers or directors would be prohibited from buying
or selling stock pursuant to the Securities Exchange Act of 1934, as amended,
because of their holding of material non-public information), unless the Company
shall first disclose the non-public information that resulted in the Blackout
Period; provided, however, that no redemption shall be effected until at least
ten (10) days after the Company shall have given the Holder written notice that
the Blackout Period has been lifted.
Section 7. Voting Rights. The Holders of the Series B Preferred Stock
shall have no voting power whatsoever, except as otherwise provided by the
General Corporation Law of the State of Delaware ("Delaware Law"), and no Holder
of Series B Preferred Stock shall vote or otherwise participate in any
proceeding in which actions shall be taken by the Company or the shareholders
thereof or be entitled to notification as to any meeting of the shareholders.
Notwithstanding the above, the Company shall provide Holder with
notification of any meeting of the shareholders regarding any major corporate
events affecting the Company. In the event of any taking by the Company of a
record of its shareholders for the purpose of determining shareholders who are
entitled to receive payment of any dividend or other distribution, any right to
subscribe for, purchase or otherwise acquire any share of any class or any other
securities or property (including by way of merger, consolidation or
reorganization), or to receive any other right, or for the purpose of
determining shareholders who are entitled to vote in connection with any
proposed sale, lease or conveyance of all or substantially all of the assets of
the Company, or any proposed liquidation, dissolution or winding up of the
Company, the Company shall mail a notice to Holder, at least ten (10) days prior
to the record date specified therein, of the date on which any such record is to
be taken for the purpose of such dividend, distribution, right or other event,
and a brief statement regarding the amount and character of such dividend,
distribution, right or other event to the extent known at such time.
To the extent that under Delaware Law the vote of the Holders of the
Series B Preferred Stock, voting separately as a class, is required to authorize
a given action of the Company, the affirmative vote or consent of the Holders of
at least a majority of the shares of the Series B Preferred Stock represented at
a duly held meeting at which a quorum is present or by written consent of a
majority of the shares of Series B Preferred Stock (except as otherwise may be
required under Delaware Law) shall constitute the approval of such action by the
class. To the extent that under Delaware Law the Holders of the Series B
Preferred Stock are entitled to vote on a matter with holders of Class A Common
Stock, voting together as one (1) class, each share of Series B Preferred Stock
shall be entitled to a number of votes equal to the number of shares of Class A
Common Stock into which it is then convertible using the record date for the
taking of such vote of stockholders as the date as of
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which the Conversion Price is calculated. Holders of the Series B Preferred
Stock also shall be entitled to notice of all shareholder meetings or written
consents with respect to which they would be entitled to vote, which notice
would be provided pursuant to the Company's by-laws and applicable statutes.
Section 8. Protective Provision. So long as shares of Series B
Preferred Stock are outstanding, the Company shall not without first obtaining
the approval (by vote or written consent, as provided by Delaware Law) of the
Holders of at least seventy-five percent (75%) of the then outstanding shares of
Series B Preferred Stock, and at least seventy-five percent (75%) of the then
outstanding Holders:
(a) alter or change the rights, preferences or privileges of
the Series B Preferred Stock or any securities so as to affect adversely the
Series B Preferred Stock;
(b) create any new class or series of stock having a
preference over or on parity with the Series B Preferred Stock with respect to
Distributions (as defined in Section 2 above) or increase the size of the
authorized number of Series B Preferred; or
(c) do any act or thing not authorized or contemplated by this
Designation which would result in taxation of the holders of shares of the
Series B Preferred Stock under Section 305 of the Internal Revenue Code of 1986,
as amended (or any comparable provision of the Internal Revenue Code as
hereafter from time to time amended).
In the event Holders of at least seventy-five percent (75%) of the then
outstanding shares of Series B Preferred Stock and at least seventy-five percent
(75%) of the then outstanding Holders agree to allow the Company to alter or
change the rights, preferences or privileges of the shares of Series B Preferred
Stock, pursuant to subsection (a) above, so as to affect the Series B Preferred
Stock, then the Company will deliver notice of such approved change to the
Holders of the Series B Preferred Stock that did not agree to such alteration or
change (the "Dissenting Holders") and Dissenting Holders shall have the right
for a period of thirty (30) business days to convert pursuant to the terms of
this Certificate of Designation as they exist prior to such alteration or change
(notwithstanding the holding requirements set forth in Section 5(a) hereof), or
continue to hold their shares of Series B Preferred Stock, as amended.
Section 9. Status of Converted or Redeemed Stock. In the event any
shares of Series B Preferred Stock shall be converted or redeemed pursuant to
Section 5 or Section 6 hereof, the shares so converted or redeemed shall be
canceled, shall return to the status of authorized but unissued Preferred Stock
of no designated series, and shall not be issuable by the Company as Series B
Preferred Stock.
Section 10. Preference Rights. Nothing contained herein shall be
construed to prevent the Board of Directors of the Company from issuing one (1)
or more series of Preferred Stock with dividend and/or liquidation preferences
junior to the dividend and liquidation preferences of the Series B Preferred
Stock.
Section 11. Authorization and Reservation of Shares of Common Stock.
(a) Authorized and Reserved Amount. The Company shall have
authorized and reserved and keep available for issuance one million five hundred
thousand (1,500,000) shares of Class A Common Stock (the "Reserved Amount")
solely for the purpose of effecting the conversion of the Series B Preferred
Stock, and exercise of the warrants to acquire Class A Common Stock (the "Common
Warrants") issued or to be issued to the Holders. The Company shall at all times
reserve and keep available out of its authorized but unissued shares of Class A
Common Stock a sufficient number of shares of Class A Common Stock to provide
for the full conversion of all outstanding Series B Preferred Stock, and
issuance of the shares of Class A Common Stock in
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connection therewith and the full exercise of the Common Warrants and issuance
of the shares of Class A Common Stock in connection therewith.
(b) Increases to Reserved Amount. Without limiting any other
provision of this Section 11, if the Reserved Amount for any three (3)
consecutive trading days (the last of such three (3) trading days being the
"Reservation Trigger Date") shall be less than one hundred twenty-five percent
(125%) of the number of shares of Class A Common Stock issuable upon conversion
of this Series B Preferred Stock, and exercise of the Common Warrants on such
trading days (a "Share Authorization Failure"), the Company shall immediately
notify all Holders of such occurrence and shall take action as soon as possible,
but in any event within sixty (60) days after a Reservation Trigger Date
(including, if necessary, seeking shareholder approval to authorize the issuance
of additional shares of Class A Common Stock) to increase the Reserved Amount to
one hundred fifty percent (150%) of the number of shares of Class A Common Stock
then issuable upon conversion of the Series B Preferred Stock, and exercise of
the Common Warrants.
(c) Reduction of Reserved Amount Under Certain Circumstances.
Prior to complete conversion of all Series B Preferred Stock the Company shall
not reduce the number of shares required to be reserved for issuance under this
Section 11 without the written consent of all Holders except for a reduction
proportionate to a reverse stock split effected for a business purpose other
than affecting the obligations of Holder under this Section 11, which reverse
stock split affects all shares of Class A Common Stock equally. Following
complete conversion of all the Series B Preferred Stock, the Company may, with
fifteen (15) days prior written notice to Holder, reduce the Reserved Amount to
one hundred twenty-five percent (125%) of the number of shares of Class A Common
Stock issuable upon the full exercise of the Common Warrants; provided, however,
that the Reserved Amount shall continue to be subject to increase pursuant to
Section 11 hereof.
(d) Allocation of Reserved Amount. Each increase to the
Reserved Amount shall be allocated pro rata among the Holders based on the
number of Series B Preferred Stock, and Common Warrants held by each Holder at
the time of the establishment of or increase in the Reserved Amount. In the
event a Holder shall sell or otherwise transfer any of such Holder's Series B
Preferred Stock, or Common Warrants, each transferee shall be allocated a pro
rata portion of such transferor's Reserved Amount. Any portion of the Reserved
Amount which remains allocated to any person or entity which does not hold any
Series B Preferred Stock shall be allocated to the remaining Holders, pro rata
based on the number of Series B Preferred Stock, and Common Warrants then held
by such Holders.
Section 12. Failure to Satisfy Conversions.
(a) Conversion Failure Payments. If, at any time, (x) a Holder
submits a Notice of Conversion (or is deemed to submit such notice pursuant to
Section 5(d) hereof), and the Company fails for any reason to deliver, on or
prior to the expiration of the Deadline ("Delivery Period") for such conversion,
such number of shares of Class A Common Stock to which such Converting Holder is
entitled upon such conversion, or (y) the Company provides notice to Holder at
any time of its intention not to issue shares of Class A Common Stock upon
exercise by Holder of its conversion rights in accordance with the terms of this
Certificate of Designation (each of (x) and (y) being a "Conversion Failure"),
then the Company shall pay to such Holder damages in an amount equal to the
lower of:
(i) "Damages Amount" X "D" X .005, and
(ii) the highest interest rate permitted by applicable law,
where:
"D" means the number of days beginning the date of the Conversion
Failure through and including the Cure Date with respect to such Conversion
Failure;
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"Damages Amount" means the Original Series B Issue Price for each share
of Series B Preferred Stock subject to conversion plus all accrued and unpaid
interest thereon as of the first day of the Conversion Failure.
"Cure Date" means (i) with respect to a Conversion Failure described in
clause (x) of its definition, the date the Company effects the conversion of the
shares of Series B Preferred Stock submitted for conversion and (ii) with
respect to a Conversion Failure described in clause (y) of its definition, the
date the Company undertakes in writing to issue Class A Common Stock in
satisfaction of all conversions of Series B Preferred Stock in accordance with
the terms of this Certificate of Designation.
The payments to which a Holder shall be entitled pursuant to this
Section are referred to herein as "Conversion Failure Payments." The parties
agree that the damages caused by a breach hereof would be difficult or
impossible to estimate accurately. A Holder may elect to receive accrued
Conversion Failure Payments in cash or to convert all or any portion of such
accrued Conversion Failure Payments, at any time, into Class A Common Stock at
the lowest Conversion Price in effect during the period beginning on the date of
the Conversion Failure through the Cure Date for such Conversion Failure. In the
event a Holder elects to receive any Conversion Failure Payments in cash, it
shall so notify the Company in writing no later than three (3) business days
after the Deadline and failure to so notify the Company, shall entitle the
Company, in its sole discretion, to elect to make such Conversion Failure
Payments in cash, Class A Common Stock or some combination of the two. In the
event a Holder elects to convert all or any portion of the Conversion Failure
Payments, such Holder shall indicate on a Notice of Conversion such portion of
the Conversion Failure Payments which such Holder elects to so convert in
accordance with this Section 12(a) and such conversion shall otherwise be
effected in accordance with provisions of Section 5.
(b) Buy-In Cure. Unless a Conversion Failure described in
clause (y) of Section 12(a) hereof has occurred with respect to such a Holder,
if (i) the Company fails for any reason to deliver during the Delivery Period
shares of Class A Common Stock to a Holder upon a conversion of the Series B
Preferred Stock and (ii) after the applicable Delivery Period with respect to
such conversion, a Holder purchases (in an open market transaction or otherwise)
shares of Class A Common Stock to make delivery upon a sale by a Holder of the
shares of Class A Common Stock (the "Sold Shares") which such Holder anticipated
receiving upon such conversion (a "Buy-In"), the Company shall pay such Holder
(in addition to any other remedies available to Holder) the amount by which (x)
such Holder's total purchase price (including brokerage commission, if any) for
the shares of Class A Common Stock so purchased exceeds (y) the net proceeds
received by such Holder from the sale of the Sold Shares. For example, if a
Holder purchases shares of Class A Common Stock having a total purchase price of
$11,000 to cover a Buy-In with respect to shares of Class A Common Stock sold
for $10,000, the Company will be required to pay such Holder $1,000. A Holder
shall provide the Company written notification indicating any amounts payable to
Holder pursuant to this Section 12.
(c) Adjustment to Conversion Price. If a Holder has not
received certificates for all shares of Class A Common Stock within five (5)
business days following the expiration of the Delivery Period with respect to a
conversion of any portion of any of such Holder's Series B Preferred Stock for
any reason, then the Conversion Price for the affected Series B Preferred Stock
shall thereafter be the lesser of (i) the Fixed Conversion Price on the
Conversion Date specified in the Notice of Conversion which resulted in the
Conversion Failure and (ii) the lowest Conversion Price in effect during the
period beginning on, and including, such Conversion Date through and including
the Cure Date. If there shall occur a Conversion Failure of the type described
in clause (y) of Section 12(a), then the Fixed Conversion Price with respect to
any conversion thereafter shall be the lowest Conversion Price in effect at any
time during the period beginning on, and including, the date of the occurrence
of such Conversion Failure through and including the Cure Date. The Conversion
Price shall thereafter be subject to further adjustment for any events described
in Section 5(d).
Section 13. Events of Default.
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(a) Holder's Option to Demand Prepayment. Upon the occurrence
of an Event of Default (as herein defined), each Holder shall have the right to
elect at any time and from time to time prior to the cure by Borrower of such
Event of Default to have all or any portion of such Holder's then outstanding
Series B Preferred Stock prepaid by the Company for an amount equal to the
Holder Demand Prepayment Amount (as herein defined).
(i) The right of a Holder to elect prepayment shall
be exercisable upon the occurrence of an Event of Default by such Holder in its
sole discretion by delivery of a Demand Prepayment Notice (as herein defined) in
accordance with the procedures set forth in this Section 13. Notwithstanding the
exercise of such right, the Holder shall be entitled to exercise all other
rights and remedies available under the provisions of this Certificate of
Designation and at law or in equity.
(ii) A Holder shall effect each demand for prepayment
under this Section 13 by giving at least two (2) business days prior to written
notice (the "Demand Prepayment Notice") of the date which such prepayment is to
become effective (the "Effective Date of Demand of Prepayment"), the Series B
Preferred Stock selected for prepayment and the Holder Demand Prepayment Amount
to the Borrower at the address and facsimile number provided in the stock
records of the Company, which Demand Prepayment Notice shall be deemed to have
been delivered on the business day after the date of transmission of Holder's
facsimile (with a copy sent by overnight courier to the Borrower) of such
notice.
(iii) The Holder Demand Prepayment Amount shall be
paid to a Holder whose Series B Preferred Stock are being prepaid within one (1)
business day following the Effective Date of Demand of Prepayment; provided,
however, that the Borrower shall not be obligated to deliver any portion of the
Holder Demand Prepayment Amount until one (1) business day following either the
date on which the Series B Preferred Stock being prepaid are delivered to the
office of the Borrower or the Transfer Agent, or the date on which the Holder
notifies the Borrower or the Transfer Agent that such Series B Preferred Stock
have been lost, stolen or destroyed and delivers the documentation required in
accordance with Section 5(b)(i) hereof.
(b) Holder Demand Prepayment Amount. The "Holder Demand
Prepayment Amount" means the greater of: (a) 1.3 times the Stated Value of the
Series B Preferred Stock for which demand is being made, plus all accrued and
unpaid interest thereon and accrued and unpaid Conversion Failure Payments (if
any) through the date of prepayment and (b) the product of (1) the highest price
at which the Class A Common Stock is traded on the date of the Event of Default
(or the most recent highest closing bid price if the Class A Common Stock is not
traded on such date) divided by the Conversion Price in effect as of the date of
the Event of Default, and (2) the sum of the Stated Value and all accrued and
unpaid Conversion Failure Payments (if any) through the date of prepayment.
(c) Events of Default. An "Event of Default" means any one of
the following:
(i) a Conversion Failure described in Section 12(a)
hereof;
(ii) a Share Authorization Failure described in
Section 11(b) hereof, if such Share Authorization Failure continues uncured for
ninety (90) days after the Reservation Trigger Date;
(iii) the Company fails, and such failure continues
uncured for three (3) business days after the Company has been notified thereof
in writing by a Holder, to satisfy the share reservation requirements of Section
11 hereof;
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(iv) the Company fails to maintain an effective
registration statement as required by Section 2, Section 3 and Section 6 of the
Registration Rights Agreement, between the Company and the Holder(s) (the
"Registration Rights Agreement") except where such failure lasts no longer than
three (3) consecutive trading days and is caused solely by failure of the
Securities and Exchange Commission to timely review the customary submission of
or respond to the customary requests of the Company;
(v) for three (3) consecutive trading days or for an
aggregate of ten (10) trading days in any nine (9) month period, the Class A
Common Stock (including any of the shares of Class A Common Stock issuable upon
conversion of the Series B Preferred Stock, and exercise of the Common Warrants)
is (i) suspended from trading on any of NASDAQ SmallCap, NMS, NYSE, AMEX or the
OTC Bulletin Board, or (ii) is not qualified for trading on at least one of
NASDAQ SmallCap, NMS, NYSE, AMEX or the OTC Bulletin Board;
(vi) the Company fails, and such failure continues
uncured for three (3) business days after the Company has been notified thereof
in writing by a Holder, to remove any restrictive legend on any certificate for
any shares of Class A Common Stock issued to a Holder upon conversion of any
Series B Preferred Stock, or exercise of any Common Warrant as and when required
by this Certificate of Designation, the Common Warrants, the Subscription
Agreement, between the Company and the Holder(s) (the "Subscription Agreement")
or the Registration Rights Agreement;
(vii) the Company breaches, and such breach continues
uncured for three (3) business days after the Company has been notified thereof
in writing by a Holder, any significant covenant or other material term or
condition of this Certificate of Designation, the Subscription Agreement, the
Common Warrants or the Registration Rights Agreement;
(viii) any representation or warranty of the Company
made herein or in any agreement, statement or certificate given in writing
pursuant hereto or in connection herewith (including, without limitation, the
Subscription Agreement and Registration Rights Agreement), shall be false or
misleading in any material respect when made;
(ix) the Company or any subsidiary of the Company
shall make an assignment for the benefit of its creditors, or apply for or
consent to the appointment of a receiver or trustee for it or for a substantial
part of its property or business, or such receiver or trustee shall otherwise be
appointed; or
(x) bankruptcy, insolvency, reorganization or
liquidation proceedings or other proceedings for relief under any bankruptcy law
or any law for the relief of debtors shall be instituted by or against the
Company or any subsidiary of the Company (and such proceedings shall continue
unstayed for thirty (30) days).
(d) Failure to Pay Damages Amount. If the Company fails to pay
the Holder Demand Prepayment Amount within five (5) business days of its receipt
of a Demand Prepayment Notice, then such Holder shall have the right, at any
time and from time to time prior to the payment of the Holder Demand Prepayment
Amount, to require the Company, upon written notice, to immediately convert (in
accordance with the terms of Section 5) all or any portion of the Holder Demand
Prepayment Amount, into shares of Class A Common Stock at the then current
Conversion Price, provided that if the Company has not delivered the full number
of shares of Class A Common Stock issuable upon such conversion within five (5)
business days after the Company receives written notice of such conversion, the
Conversion Price with respect to such Holder Demand Prepayment Amount shall
thereafter be deemed to be the at the lowest Conversion Price in effect during
the period beginning on the date of the Event of Default through the date on
which the Company delivers to the Holder the full number of freely tradable
shares of Class A Common Stock issuable upon such conversion.
14
<PAGE>
In the event the Company is not able to pay all amounts due and payable with
respect to all Series B Preferred Stock subject to Holder Demand Prepayment
Notices, the Company shall pay the Holders such amounts pro rata, based on the
total amounts payable to such Holder relative to the total amounts payable to
all Holders.
Signed on October 2, 1997
---------
/s/ Donald E. Lawson
------------------------------------------
Donald E. Lawson, Executive Vice President
LightPath Technologies, Inc.
Exhibit 11
----------
Computation of Net Loss Per Share
For the Three Months
Ended September 30
----------------------------
1997 1996
----------- -----------
Net loss $ (912,599) $ (757,129)
Preferred stock 8% premium (32,099) --
Imputed dividend on Series A Preferred Stock (238,650) --
----------- -----------
Net loss applicable to common shareholders $(1,183,348) $ (727,129)
----------- -----------
Weighted average common shares outstanding 2,796,866 2,735,287
=========== ===========
Net loss per common share $ (.42) $ (.28)
=========== ===========
13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM
10-QSB FOR THE THREE MONTH PERIOD ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. Dollar
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 3,326,990
<SECURITIES> 0
<RECEIVABLES> 187,269
<ALLOWANCES> 0
<INVENTORY> 308,457
<CURRENT-ASSETS> 3,896,755
<PP&E> 1,467,796
<DEPRECIATION> 655,754
<TOTAL-ASSETS> 5,219,644
<CURRENT-LIABILITIES> 534,730
<BONDS> 0
0
4
<COMMON> 28,027
<OTHER-SE> 22,712,582
<TOTAL-LIABILITY-AND-EQUITY> 5,219,644
<SALES> 147,719
<TOTAL-REVENUES> 166,119
<CGS> 83,442
<TOTAL-COSTS> 83,442
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,681
<INCOME-PRETAX> (912,599)
<INCOME-TAX> 0
<INCOME-CONTINUING> (912,599)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (912,599)
<EPS-PRIMARY> (.42)
<EPS-DILUTED> (.42)
</TABLE>
