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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended June 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
LIGHTPATH TECHNOLOGIES, INC.
(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, NE 87109
Albuquerque, New Mexico (ZIP Code)
(Address of principal executive offices)
Registrant's telephone number, including area code:
(505)342-1100
Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
Common stock, $.01 par value
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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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Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. X
The registrant's operating revenue for its most recent fiscal year.
$673,677
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The aggregate market value of the registrant's voting stock held by
non-affiliates (based on the closing sale price of the registrant's Common Stock
on the Nasdaq Small Cap Market, and for the purpose of this computation only, on
the assumption that all of the registrant's directors and officers are
affiliates) was approximately $21,496,000 on August 15, 1997.
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 2,799,986 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
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Class Outstanding at August 15, 1997
DOCUMENTS INCORPORATED BY REFERENCE
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Portions of the Registrant's Proxy Statement for the 1997 Annual Meeting of
Stockholders are incorporated by reference into Part III of this report.
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LightPath Technologies, Inc.
Form 10-KSB
Index
Item Page
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Part I
Description of Business 2
Description of Property 10
Legal Proceedings 10
Submission of Matters to a Vote of Security Holders 10
Part II
Market for Common Equity and Related Stockholder Matters 11
Management's Discussion and Analysis or Plan of Operations 12
Financial Statements 14
Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 14
Part III
Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act 15
Executive Compensation 16
Security Ownership of Certain Beneficial Owners and Management 16
Certain Relationships and Related Transactions 16
Exhibits and Reports on Form 8-K 17
Index to Financial Statements F-1
Signatures 18
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PART I
Item 1. Description of Business.
General
LightPath Technologies, Inc. ("LightPath" or the "Company") produces
GRADIUM(R) glass and performs research and development on future GRADIUM glass
applications. 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 tasks traditionally
performed by multi-element conventional lens systems. The Company believes that
GRADIUM glass lenses provide advantages over conventional lenses for certain
applications. By reducing optical aberrations, the Company believes that GRADIUM
glass lenses can provide sharper images, higher resolution, less image
distortion, a wider usable field of view and a smaller focal spot size. By
reducing the number of lenses in an optical system, the Company believes that
GRADIUM glass can provide more efficient light transmission and greater
brightness, lower production costs, and a simpler, smaller product. While the
Company believes that other researchers have sought to produce optical quality
lens material with the properties of GRADIUM glass, the Company is not aware of
any other person or firm that has developed a repeatable manufacturing process
for producing such material on a prescribable basis. LightPath has been issued
thirteen patents and has pending filed patent applications related to its
materials composition, product design and fabrication processes for the
production of GRADIUM glass products. The Company continues to develop new
GRADIUM glass materials with various refractive index and dispersion profiles,
whole value added lens systems for a variety of optical applications, and
multiplexers and interconnects for the telecommunications field.
LightPath was incorporated under Delaware law in June 1992 as the
successor to LightPath Technologies Limited Partnership, a New Mexico limited
partnership (the "Partnership"), formed in 1989, and its predecessor, Integrated
Solar Technologies Corporation, a New Mexico corporation ("ISOTEC"), organized
in 1985. The Company's initial objective in 1985 was to improve solar energy
technology by creating an optical material that could efficiently bend light
from varying angles in order to track the path of the sun across the sky. In
1987, the Company realized that its early discoveries had much broader
application, and expanded its focus to imaging optics applications. On February
22, 1996, the Company completed an initial public offering ("IPO") of 1,840,000
units, each unit consisting of one share of Class A common stock, one Class A
warrant and one Class B warrant at a price of $5.00 per unit.
Since its inception in 1985 until June 1996, the Company was classified
as a development stage enterprise that engaged in basic research and
development. During fiscal year 1997, the Company's operational focus begin to
shift to product development and sales. The Company believes that most of its
product sales prior to fiscal year 1997 have been to persons evaluating the
commercial application of GRADIUM glass or using the products for research and
development. During 1997 numerous prototypes for production orders were
completed. In addition, catalog sales of standard profiles were received. The
Company is offering standard, computer-based profiles of GRADIUM glass that
engineers can use for product design. The current focus of the technology
department's development efforts has been to expand application of GRADIUM
products 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 range of existing product applications, and upgrade the
proprietary material design software and optical design tools to facilitate
product design.
LightPath has developed a patented process for producing an optical
quality material, GRADIUM glass, with an "axial" gradient refractive index
(i.e., the index gradient runs parallel to the optical lens axis, rather than
perpendicular or "radial"). The designated curve is achieved by the controlled
combination of multiple glass molecule densities. Moving forward through the
GRADIUM material, each point along the light's pathway is slightly more dense
than points just past, so the light is pulled into a sculpted curve using smooth
"gravity shifts" or density gradients frozen into the glass structure at the
time of manufacturing. To accurately prescribe the most efficient profile curve
that light should follow within the glass, LightPath has developed a set of
proprietary software design tools. Using these tools, characteristics of the
light, the material, the path's profile and the actual
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results upon leaving the glass can be precisely modeled. The Company can
accurately measure and tolerance the profile within the glass and then measure
the light's spot, focus or energy power when it hits its destination. GRADIUM
glass lenses can be produced across a large diameter range (currently
2mm-100mm). Growth in the Company's manufacturing capabilities has lead to
improved yield and automation making the goal of competitively priced GRADIUM a
reality. Unlike aspheres, GRADIUM glass lenses can be finished using
conventional spherical surface grinding and polishing techniques. Each piece of
GRADIUM glass can possess the properties of multiple conventional optical
glasses combined into one, thus allowing a simple spherical lens to correct
spherical aberrations or perform more complicated "multi-element lens system"
functions with a single lens.
By reducing optical aberrations, GRADIUM glass lenses can provide
sharper images, higher resolution, less image distortion, a wider usable field
of view and a smaller focal spot size than traditional lenses. By reducing the
number of lenses in an optical system, GRADIUM glass should provide more
efficient light transmission and greater brightness, lower production costs, and
a simpler, smaller and lighter product. Although the Company's present GRADIUM
glass products are designed for monochromatic applications (e.g., lasers), the
Company is also developing GRADIUM glass for high performance white light
applications such as endoscopes. GRADIUM glass's unique properties will allow
the Company to develop products for markets that emphasize performance, as well
as markets that emphasize efficiency by reducing conventional lens count or as a
substitute for more expensive aspheres.
Business Strategy
The Company believes that GRADIUM glass can potentially be marketed for
use in most optics and optoelectronics products. In an attempt to more rapidly
establish initial sales volume, the Company has emphasized laser products that
it believes may have the greatest immediate commercial impact with the least
initial investment. Generally, optical designers can substitute GRADIUM glass
components included in the Company's standard line for existing laser lens
elements. Lasers are presently used extensively in a broad range of consumer and
commercial products, including fiber optics, robotics, wafer chip inspection,
bar code reading, document reproduction and audio and video compact disc
machines. Because GRADIUM glass can concentrate light transmission into a much
smaller focal spot than conventional lenses, the Company believes and customers
test results confirm that GRADIUM glass has the ability to improve laser
performance. The Company's strategy will be to target key laser market niches
and establish the necessary products and partnership alliances to sell into
Europe and Asia as well as the U.S. market. During fiscal year 1997 the Company
established relationships with six foreign distributors and a Silicon Valley
manufacturer representative which the Company believes will enable it to rapidly
establish a presence in foreign and domestic markets. In addition to laser
applications, the Company, through its printed and Internet on-line catalog,
provides a standard line of GRADIUM glass lenses for broad-based sales to
optical designers developing particular systems for original equipment
manufacturers ("OEMs") or in-house products.
Because complex systems contain many optical components, and GRADIUM
glass lenses can be utilized to reduce the number of lens elements in such
systems, the Company believes that GRADIUM glass lenses can simplify the design
and improve the performance of complex optical systems. However, design and
production of an optical product is a lengthy process, and it could take years
for producers to redesign complex optical systems using GRADIUM glass,
reconfigure the product housing, re-engineer the assembly process and commence
commercial quantity orders for GRADIUM glass components. Accordingly, the
Company intends to focus its long-term marketing efforts on emerging niche
industries, such as multimedia and telecommunications, that are designing for
next-generation optical systems, and performance driven industries, such as
medical instruments, that are seeking to optimize performance of existing
optical products.
The Company believes OEM relationships may improve the Company's
technology base by evolving into more sophisticated development and products,
although there can be no assurances in this regard. The Company's existing OEM
relationships include the development of prototype lenses for a leading
manufacturer of endoscopes, camera television lenses and the optimization of a
high performance riflescope for a gunsight manufacturer.
Optoelectronics technologies represent an overlap of photonics and
electronics and are key enables of "Information Age" technologies, such as
fiberoptic communications, optical data storage, laser printers, digital
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imaging, and sensors for machine vision and environmental monitoring. The
Company has targeted various optoelectronic industry market niches and is
currently developing additional GRADIUM glass products and key strategic
alliances with technology and marketing partners to design, build and sell next
generation integrated components and devices. The Company believes that GRADIUM
glass can provide industry wide solutions to optoelectronic problems associated
with light gathering, packaging and alignment.
As part of its marketing strategy, the Company is engaged in
promotional and educational activities concerning GRADIUM glass intended to
familiarize and educate optical engineers from the numerous, high performance
optics markets with GRADIUM glass and its properties. The Company presently has
five standard profiles of GRADIUM glass that engineers can use for product
design, and is continuing to develop more profiles. In addition, using
customers' designs, the Company intends to provide the lenses or lens blanks
with the profiles necessary to perform the desired function.
The Company's existing GRADIUM glass profiles are compatible with established
software design programs utilized by optical designers, enabling designers to
integrate GRADIUM glass into their designs. While this enables designers to
incorporate GRADIUM glass into their product design, the Company must increase
familiarity with GRADIUM glass so that designers will utilize GRADIUM glass in
their designs. If a standard GRADIUM glass profile is not suited for a specific
design, LightPath may create a custom GRADIUM glass profile for the customer.
The Company's objective is that optical designers will learn from Company
provided information that GRADIUM glass can provide them with additional
flexibility and design freedom to create optical products more efficiently and
with enhanced performance.
Sales and Marketing
The Company's primary marketing objectives are to sell catalog and
custom lenses or lens blanks to specific OEM customers, end-user product
developers and manufacturers, universities, government and foreign distributor
markets. The Company's limited revenues and financing prior to the IPO had been
applied primarily to research and development; consequently, LightPath and
GRADIUM glass were largely unknown. During fiscal year 1997, promotion of the
Company's products through the Internet, trade advertising in industrial
magazines and participation in numerous domestic and foreign trade shows has
increased interest and awareness of its products, which has resulted in lens
sales.
The optics industry is characterized by extensive product diversity and
varying levels of product maturity. Products range from consumer (e.g., cameras,
copiers) to industrial (e.g., lasers), from products where the lenses are the
central feature (e.g., telescopes, microscopes) to products incorporating lens
components (e.g., robotics, semiconductor production equipment). As a result,
the market for the Company's products is highly segmented and no single
marketing approach will allow the Company to access all available market
segments. Accordingly, the Company will selectively focus in specific laser and
optoelectronic niches that provide the best opportunity for market penetration.
Although the same design constraints and technological shortcomings of
conventional optical technology and materials restrict all optical products, the
Company believes that its proprietary manufacturing processes as well as the
high quality associated with GRADIUM glass results in a competitive advantage
over other glass products currently available in the Company's targeted markets.
The Company believes a key element to achieving acceptance in any market will be
the development of lens prototypes specifically designed for use in each
industry targeted by the Company's sales efforts.
Lens sales for fiscal year 1997 were $199,524, five times the 1996
level, and included approximately ninety customers representing a variety of
industrial and government accounts. This increase in lens sales is primarily due
to sales of lenses for wafer chip inspection and laser 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 market attention. Because the optics industry is highly fragmented the
Company utilizes distributors and the Internet as vehicles for broader promotion
of GRADIUM glass. During fiscal year 1997, the Company formalized relationships
with six industrial, optoelectronics and medical component distributors in
Japan, the United Kingdom, Germany, Israel, Canada and Italy. The "Light.Net" is
the Company's Internet web site where interested persons may presently obtain
information on the Company and GRADIUM glass, and order products from the
Company's catalog. In addition, the Company has developed a computer-based
instructional program to answer frequently asked questions about GRADIUM glass
and provide technical information about product applications for customers,
suppliers and interested individuals. The Company has placed, and will continue
to place, print media advertisements in various trade magazines and to
participate in appropriate domestic and foreign trade shows.
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The Company continues to develop a network of selected independent
optical engineering firms which it has named LightPath-Design!(TM) Centers, to
promote the sale of GRADIUM glass products. Presently, eight optical engineering
firms provide such optical design services and support. The Company's objective
is to refer potential customers that inquire about GRADIUM glass (on the
Light.Net or otherwise) to such firms in the customers' geographic location in
an effort to promote the use of GRADIUM glass in the design of the customers'
optical systems. LightPath-Design!(TM) Centers are a strategic alliance between
the Company and optical engineering firms owned and operated by third parties.
The Company plans to market GRADIUM glass through relationships with
OEMs for the production of specific prototype lenses to be incorporated into the
manufacturer's proprietary products. LightPath has entered into an agreement
with Karl Storz GMBH & Co. ("Storz"), a major endoscope manufacturer, for the
development of lenses for endoscopy instruments. Endoscopes are used to observe
diagnostic or surgical procedures in vivo (within the body), substantially
reducing surgical costs. Pursuant to the terms of the agreement, the Company has
designed and delivered GRADIUM glass materials with profiles specified by Storz,
and Storz has produced prototype instruments incorporating the GRADIUM glass
materials. Under the 1994 agreement the Company has received in excess of
$500,000 representing minimum royalty payments during the prototype development
stage in exchange for an exclusive license from the Company to the GRADIUM
design developed for Storz. Although Storz is not obligated to order commercial
quantities of GRADIUM glass products, and may terminate the agreement without
entering into a production phase, the Company anticipates production orders in
1998. In the fourth quarter of 1997, the Company received a production order
from Storz of 500 lenses for use in tests for future production runs. The
Company's relationship will yield significant revenues in the future only if
Storz sells commercial quantities of the GRADIUM glass endoscopes. The Company
granted Storz an exclusive worldwide license to use GRADIUM glass materials in
the production of endoscopes, as well as the right to use the Company's
tradenames in connection with the sale of such endoscopes. The exclusive license
provides for royalties based on actual sales as well as certain additional
minimum royalties payables should Storz commence commercial production.
The Company has also begun initial marketing of GRADIUM for use in
gunsight lenses. In fiscal year 1996, LightPath designed a prototype for a
military contractor, for a more rugged, high performance, gunsight lens system.
The Company believes that the GRADIUM glass prototype has demonstrated greater
ruggedness and imperviousness to harsh environmental conditions than that
provided by glass components of existing systems. The contractor is seeking
next-stage U.S. government funding before continuing the project. LightPath has
also developed a prototype lens for a commercial gunsight manufacturer that is
considering incorporating a GRADIUM glass lens in its gunsight. The Company has
recently prepared production quantity pricing for this OEM but to date, has not
received any production orders for commercial quantities of this product. In
February 1997, The Fuji Photo Optical Co., Ltd. ("Fuji"), which is a subsidiary
of Fuji Photo Film Co., signed an agreement with LightPath for the exclusive
right to use GRADIUM glass in a new generation of television camera lenses.
After an initial eight-month development period for which the Company received
$25,000, Fuji will have the right to engage in a long-term license and purchase
agreement for commercial use of these lenses. The Company has also developed
prototype lenses for wafer chip inspection, a F-Theta laser lens series, lenses
for CCD cameras, television cameras, and other military/aerospace OEMs and
government research labs.
LightPath has entered into strategic alliances with other companies to
quickly enter into the optoelectronics and solar energy markets. In February
1997, the Company contracted with a manufacturer representative in the Silicon
Valley to work directly with local OEM's to increase our presence in the
optoelectronics industry. In June 1997, the Company announced it had joined with
Invention Machine Corporation (IMC) to form a joint venture company, LightChip,
Inc. (LightChip) to develop, manufacture and market the next generation of
wavelength division multiplexing (WDM) systems for use by telecommunication
carriers, CATV companies, local area networks (LAN) and wide area networks (WAN)
system integrators. Industry analyst's predict the WDM market to grow from $100
million in revenues in 1995 to $12 billion by 2005. IMC will provide their
proprietary invention and engineering methodology software while the Company
will provide its GRADIUM glass technology and R&D capabilities to LightChip.
LightChip was unfunded at June 30, 1997, and is currently seeking capital to
fund WDM development and take advantage of this predicted market growth.
LightPath owns 51% of LightChip and will manage the new company until it is
funded. In addition, the Company entered into a joint development agreement with
Eagle Optoelectronics to build a prototype of a DWDM (dense wavelength division
multiplexer) by early 1998. A GRADIUM dispersive element enables the
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DWDM transceiver which is used for short-haul LAN and WAN computer networks.
Eagle's DWDM avoids the need for precision wavelength control by dynamically
adjusting to the sources and enabling a computer workstation to process multiple
data streams each with different protocols such as ETHERNET and ATM
simultaneously. The Company has previously been successful in developing
solutions for WDM systems. In 1997, with funding from a federal government
contract, the Company solved two WDM problems in network applications; 1) the
huge dynamic range of wavelength separations involved in various systems and 2)
the vulnerability of optoelectronics packaging due to the involvement of free
space optical interconnects and of edge-coupling schemes. By employing GRADIUM
microlenses for a tunable WDM, the Company was able to solve both problems. The
Company expects to obtain funding for Phase II of this project with Radiant
Research Inc. and the Microelectronics Research Center, University of Texas,
during the first or second quarter of fiscal year 1998.
The Company entered into a strategic alliance with DR Technologies,
Inc. (DR) in 1997. Under the agreement both companies will jointly identify
Government research and development programs relating to applications of GRADIUM
technologies and related products. The strategic alliance was an expansion of
the Company's October 1996 subcontract with DR to create a graded index solar
concentrator packaged into a compact panel that can provide electrical power for
orbiting space satellites. The Company received $225,000 in fiscal year 1997 for
the GRADIUM glass and subsequent polymer materials used in the project. The
companies are now working to secure Phase III funding for this project,
currently estimated to be $4 to $5 million. Under the strategic alliance, the
companies intend to pursue Department of Defense SBIR and STTR programs, which
currently fund $500 million each year in early-stage R&D projects. Jointly the
companies will also pursue $24.6 million in funds for two, four-year programs
for the Defense Advanced Research Projects Agency, to develop "conformal
optics", optics which conform to design specifications of aircraft and missiles.
Competition
The market for optical components is highly competitive and highly
fragmented. The Company competes with manufacturers of conventional spherical
lens products and optical components, providers of aspherical lenses and optical
components and producers of optical quality glass. To a lesser extent, the
Company competes with developers of radial gradient lenses and optical
components. Many of these competitors have greater financial, manufacturing,
marketing and other resources than the Company.
Manufacturers of conventional lenses and optical components include
industry giants such as Eastman Kodak Corporation, Nikon, Olympus Optical
Company, Carl Zeiss and Leica AG. In addition to being substantial producers of
optical components, these entities are also some of the primary customers for
such components, incorporating them into finished products for sale to
end-users. Consequently, these competitors have significant control over certain
markets for the Company's products. In addition, although these companies do not
manufacture axial gradient lenses, and the Company believes that it has a
substantial technological lead in this field, in light of their substantial
resources, these companies could pursue development of axial gradient products.
In addition, the Company's products compete with other products currently
produced by these manufacturers.
Because the Company also sells GRADIUM glass blanks for final
fabrication to customers, it competes directly with producers of homogenous
optical quality glass such as Schott Glaswerke of Germany and Hoya Corporation
of Japan. These manufacturers are continually seeking to improve the materials
available for lenses and optical components. Due to their substantial resources,
they also might be expected to try to develop products more directly competitive
with GRADIUM glass and/or impede market opportunities for the Company's sale of
GRADIUM glass materials although they also are current or potential suppliers to
the Company.
Manufacturers of aspherical lenses and optical components provide
significant competition for the Company in providing products that improve the
shortcomings of conventional lenses. Aspherical lens system manufacturers
include Eastman Kodak Corporation, Olympus Optical Company, Gel-Tech, Inc., Hoya
Corporation and U.S. Precision Lens. The use of aspherical surfaces provides the
optical designer with a powerful tool in correcting spherical aberrations and
enhancing performance in state-of-the-art optical products. But the nonspherical
surfaces of glass "aspheres" are difficult to fabricate and test, are limited in
diameter range and induce light scatter. Plastic molded aspheres, on the other
hand, allow for high volume production, but primarily are limited to low-tech
consumer products that do not place a high demand on performance (such as
plastic lenses in disposable cameras). Molded plastic aspheres appear in
products that stress weight, size and
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cost as their measure of success. Molded glass aspheric technology requires high
volume production to be cost-effective because hand polishing is too time
consuming. Despite these drawbacks, aspherical lenses presently have significant
commercial acceptance.
To a lesser extent, the Company competes with manufacturers of other
gradient index lens materials. Currently, processes to produce gradient index
materials include ion-exchange, chemical vapor deposition (CVD) and Sol-Gel, all
of which produce small radial gradient index rods with limited applications.
Manufacturers using these processes include Nippon Sheet Glass, Olympus Optical
Company and Gradient Lens Corporation. The Company believes that these processes
are limited by the small refractive index change achievable (typically, greater
than 0.05), the small skin depth of the gradient region (typically greater than
3 mm), the lack of control of the shape of the resultant gradient profile,
limited glass compositions, and high per unit manufacturing costs.
Another potentially competitive technology being pursued by certain
researchers is diffractive optics, a process that etches microscopic patterns on
the surface of a homogenous lens to correct spherical aberrations. Because
diffraction alters the lens surface, optical coatings cannot be applied to
minimize light scatter and maximize light transmission. However, this process
has the potential to compete with both aspheres and GRADIUM glass in certain
applications, and complement GRADIUM glass in others.
Manufacturing
LightPath has rapidly progressed from limited production capabilities
prior to April 1996 to a full scale manufacturing organization in its 13,300
square foot facility currently leased in Albuquerque. In the larger facility,
the Company has begun to implement its plans for a high-volume blank and lens
manufacturing plant by purchasing appropriate equipment, expanding and training
a production work force and implementing process controls. Although the Company
has not produced high volumes of GRADIUM glass lenses, it believes that the
present manufacturing facility can produce in excess of 1.5 million lens blanks
per year depending on product size and mix. The Company has benefited from the
scale-up of the manufacturing process due to yield efficiencies and reduced unit
production costs. As a result of the Company's recent purchase of five larger,
more sophisticated furnaces, milling machines and metrology equipment, the
Company believes that continued production efficiencies will be realized. The
new furnaces allow production of multiple boules that are over four times as
large as the Company's initial 8-inch boules. All of the furnaces are equipped
with real time process monitoring and feedback systems. Automation of certain
assembly processes, including core drilling and metrology, are resulting in
further cost savings and quality improvements. The Company believes that low
manufacturing costs will be a crucial to its long-term success.
The Company presently uses subcontractors for finishing lenses and
intends to continue to do so. The Company has purchased a limited amount of lens
finishing equipment for finishing prototype lenses and for rapid turnaround of
small volume orders. To date, the Company has qualified and licensed thirteen
finishers (GRADIUM Fabrication Centers) of which three are offshore in Asia.
Qualification of additional offshore finishers to augment the Company's strategy
of maximizing cost efficiencies will continue to be a top manufacturing
priority. The Company entered into a strategic alliance with Hikari Glass Co.,
Ltd. of Japan, ("Hikari" is a 40% owned subsidiary of Nikon), to develop a
continuous flow manufacturing process, currently used by Hikari for high-end
optical lenses, as a possible second source for GRADIUM glass production and to
increase the presence of GRADIUM glass in Hikari's established Asian markets.
The implementation of Statistical Process Controls has allowed the
Company to eliminate costly manual testing operations. The Company believes the
ability to maintain consistently high quality at the manufacturing stage
represents a significant asset and distinctive characteristic of the Company's
production capabilities. LightPath has protected its proprietary methods of
repeatable high quality manufacturing by patent disclosures and internal trade
secret controls. Since present GRADIUM glass lenses have spherical surfaces,
lens finishing costs will continue to be considerably less expensive than most
aspheric lenses. As a result of the Company's manufacturing efficiencies,
GRADIUM lenses are generally price competitive with conventional homogenous
lenses. In those cases where a GRADIUM lens may be more expensive, the lens
price may be offset by GRADIUM glass's ability to reduce the number of lens
elements and/or to increase the performance and functionality of the complete
optical system. The Company is now able to use standard, off-the-shelf base
glass to produce its GRADIUM glass lenses. Base glasses are manufactured by a
number of major glass manufacturers, such as Schott Glaswerke and Hoya
Corporation and the Company believes that a satisfactory
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supply of glass will continue to be available at reasonable prices, although
there can be no assurances in this regard.
Patents and Other Proprietary Intellectual Property
The Company's policy is to protect its technology by, among other
things, patents, trade secrets, trademarks and copyrights. As of June 1997, the
Company had thirteen issued U.S. patents, four foreign patents and had filed
applications for four additional U.S. patents and two foreign patents. Patents
have been issued and/or patent applications have been filed in the areas of
glass composition, gradient geometries, production processes and product design.
The first of the Company's issued patents expires in 2006; the remainders expire
at various times through 2014. Patent applications corresponding to LightPath's
U.S. applications have been filed in the patent offices in Europe and Japan
pursuant to the Patent Cooperation Treaty ("PCT"). Under the PCT, a patent
applicant may file one patent application and have it acknowledged as an
accepted filing in as many member nations to the PCT as the applicant elects.
In addition to patent protection, certain process inventions, lens
designs and innovations are retained as trade secrets. A key feature of GRADIUM
glass is that, once fabricated, it does not reveal its formula upon inspection
and cannot be reverse-engineered. LightPath(R) is now registered as a service
mark in the United States and GRADIUM (R) is a registered trademark. Trademark
registrations for LightPath(TM) and LightChip(TM) are currently pending in the
United States. The Company intends to register these trademarks in key foreign
jurisdictions, as well.
There can be no assurance that any issued patents owned by the Company
will afford adequate protection to the Company or not be challenged,
invalidated, infringed or circumvented, or that patent applications relating to
the Company's products or technologies that it may license in the future or file
itself will result in patents being issued, or that any rights granted
thereunder will provide competitive advantages to the Company. There can be no
assurance that patents owned or licensed by the Company and issued in one
jurisdiction will also issue in any other jurisdiction. Furthermore, there can
be no assurance that the validity of any of the patents would be upheld if
challenged by others in litigation or that the Company's activities would not
infringe patents owned by others. No such challenges have been made to date.
Further, there can be no assurance that others have not independently
developed or will not independently develop and patent similar or superior
products and/or technologies, duplicate any of the Company's products or
technologies or design around the Company's patents. There can be no assurance
that patents issued to others will not adversely affect the development or
commercialization of the Company's products or technologies. The Company does
not have a policy of patent infringement liability coverage for costs or damages
relating to claims of infringement. The Company could incur substantial costs in
defending itself in suits brought against it or any of its licensees, or in
suits in which the Company may assert its patent or patents in which it may have
rights against others or in suits contesting the validity of a patent. Any such
proceedings would be protracted. In addition, there can be no assurance that the
Company could be successful in defending its patent rights in any future
infringement action. If the outcome of any such litigation is adverse to the
Company's interests, the Company's business may be materially adversely
affected.
The Company is not aware of its products and/or processes infringing
any U.S. or foreign patent rights of any other party. There can be no assurance,
however, that all United States and any foreign patents or patent applications
that may pose a risk of infringement have been identified. Patent applications
in the United States are maintained in secrecy until the patent is issued. The
Company could incur substantial costs in defending itself in infringement
litigation brought by others, or in prosecuting infringement claims against
third parties. An adverse party claiming patent or copyright infringement might
assert claims for substantial damages or seek to obtain an injunction or other
equitable relief, which could effectively block the ability of the Company to
make, use distribute and sell products.
The Company relies on trade secrets and proprietary know-how, which it
seeks to protect, in part, by confidentiality agreements with its employees,
consultants and customers. However, there can be no assurance that the Company's
confidentiality agreements, when in place, will not be breached or that the
Company would have adequate remedies for any breach. Some of the confidentiality
agreements that the Company relies upon will expire in the next few years. There
can be no assurance that others will not independently develop technology or
processes substantially equivalent to or better than the Company's technology or
processes, or
8
<PAGE>
that the Company's trade secrets will not otherwise become disclosed to or
independently discovered by its competitors.
Environmental and Government Regulation
Emissions and waste from the Company's present manufacturing process
are at such low levels that no special environmental permits or licenses are
required. In the future, the Company may need to obtain special permits for
disposal of increased waste by-products. The glass materials utilized by the
Company contain lead and other toxic elements in a stabilized molecular form.
However, the high temperature diffusion process results in low-level emission of
such elements in gaseous form. If production reaches a certain level, the
Company believes that it will be able to efficiently recycle certain of its raw
material waste, thereby reducing disposal levels. The Company believes that it
presently is in compliance with all material federal, state and local laws and
regulations governing its operations and has obtained all material licenses and
permits necessary for the operation of its business.
There are no federal, state or local regulations that restrict the
manufacturing and distribution of GRADIUM glass materials. Certain end-user
applications will require that the complete optical systems receive government
approval, such as Federal Drug Administration approval for use in endoscopy. In
these cases, the Company will generally be involved on a secondary level and the
license and approval process will be the responsibility of the OEM customer.
Research and Development
From August 1985 through June 1996, the Company has been engaged in
basic research and development that has resulted in the discovery of GRADIUM
glass and the proprietary processes for fabricating GRADIUM glass lenses. This
research included theoretical development of the mathematical formulas for
accurately defining GRADIUM glass, development and refinement of the
prescribable, repeatable fabrication process, and development of the software
modeling tools and metrology. The Company shipped its first GRADIUM glass
products in May 1994. The Company intends to continue fundamental materials
research, process and production optimization, and the development of new glass
compositions to create different "families" and geometries of GRADIUM glass
materials to be offered to customers. "Families" of glass are various base glass
compounds comprised of different elements. Variation of refractive index can be
accomplished by using different elements in glass. Further development is
necessary to produce GRADIUM glass materials for high performance, white light
applications (such as high performance microscopes and other products where
sensitive color discrimination is critical). The Company will continue to
upgrade the material design modeling software and optical design tools to
facilitate product design.
The Company's initial product line is lead-based. The Company currently
is developing a barium-based product line, and may in the future conduct
development regarding lanthanum-based products. Optical elements of lanthanum or
barium may be used with lead-based glass to correct or reduce certain chromatic
aberrations. From within these families, a specific range of refractive indices
and dispersive properties is selected for each specific profile, providing an
inventory of GRADIUM glass profiles for a diverse range of applications.
A LightPath employee at DR Technologies is currently performing the
development of GRADIUM polymer and acrylic materials. These materials are used
in conformal options, optics that conform to design specifications of aircraft
and missiles, where more aerodynamic shapes are required. The Company is also
working to expand its product line to optoelectronics, the areas of multiplexers
and interconnects for the telecommunications field. See further discussion of
these strategic alliances under "Sales and Marketing".
The Company expended or incurred expenditures for research and
development for the two years ended June 30, 1997 and 1996 of $796,937 and
$83,074, respectively. Research and development expenditures were significantly
less in 1996 due to personnel reductions and declining activity as a result of
the Company's lack of operating capital. The Company plans to expend
approximately $700,000 for research and development during fiscal 1998 which
could increase depending upon Government contracts or awards for which the
Company has applied.
9
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Employees
The Company currently has twenty-nine full-time employees and expects
to hire at least eight additional employees in the next twelve months, including
manufacturing, technical design and engineering, administrative and sales
personnel. Eight of the Company's present employees are engaged in management,
administrative and clerical functions, seven in research and development, seven
in production and seven in sales and marketing. In order to maintain low
overhead expenses, the Company intends to continue its current practice of
utilizing outside consultants, where appropriate, in addition to hiring
additional full-time personnel. None of the Company's employees are represented
by labor unions.
Item 2. Description of Property
The Company leases its principal offices in Albuquerque, New Mexico,
which are used to house all of its operations, including research, product
design and development, production and all administrative operations. The 13,300
square foot facility is located in a business and research park. The Company is
obligated to make monthly rental payments of $6,500 (increasing to $6,900 in
year four) on a five year lease which expires April 2001.
Item 3. Legal Proceedings
On July 31, 1995, a former employee commenced a lawsuit against the
Company for deferred compensation, reimbursable expenses and damages totalling
$114,672 in the Superior Court of Arizona, County of Pima. On September 22,
1995, an additional suit was filed in the same court, by the employee, alleging
wrongful discharge and damages in an unspecified amount. The Company settled
both of the lawsuits in May 1996, for approximately $75,000, the majority of
which was deferred wages the Company had accrued in the prior year.
On April 24, 1995, another former employee commenced a lawsuit in the
U.S. District Court, Tucson, against the Company alleging that he was unlawfully
terminated in retaliation for his efforts to secure unpaid wages for himself and
co-workers. He also filed a complaint with the National Labor Relations Board
(the "NLRB"). The NLRB found in favor of LightPath on the merits of the claim.
The former employee terminated the suit in the U.S. District Court in October
1996 following the discovery phase.
On January 9, 1996, a former consultant filed a lawsuit against the
Company in Arizona Superior Court, County of Pima, alleging that the Company
owed him additional fees in the amount of $25,600 plus interest. The former
consultant terminated the suit in December 1996 following the discovery phase.
The Company is involved in other various legal actions arising in the
normal course of business. After taking into consideration legal counsel's
evaluation of such actions, management is of the opinion that their outcome will
not have a material effect on the Company's financial statements.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
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PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
The Company's Class A Common Stock has been quoted on the National
Association of Securities Dealers Automated Quotation ("Nasdaq") Small Cap
Market system under the symbol LPTHA since February 22, 1996.
The Company estimates there were approximately 300 holders of record and
approximately 1300 beneficial holders on August 15, 1997. The Company has not
paid dividends in the past and does not intend to pay dividends in the
foreseeable future. Declaration of dividends will be at the discretion of the
Board of Directors.
The following table sets forth the range of high and low bid prices for the
Class A Common Stock for the periods indicated, as reported by Nasdaq, the
principal system on which such securities are quoted.
Class A
Fiscal Year Ending Common Stock
June 30, 1996 High Low
------------- ---- ---
February 22, 1996 to
March 31, 1996 $ 5 $ 4
Quarter ended June 30, 1996 $ 6.5 $ 4.63
June 30, 1997
-------------
Quarter ended September 30, 1996 $ 6.50 $ 4.75
Quarter ended December 31, 1996 $ 7.00 $ 4.13
Quarter ended March 31, 1997 $ 7.25 $ 4.25
Quarter ended June 30, 1997 $ 6.13 $ 4.25
From June 30, 1996 through July 25, 1997, the Company issued an
aggregate of 180 shares of Series A Convertible Preferred Stock (the "Series A
Stock") and 320,000 attached Class C warrants. The Series A Stock has a stated
value and liquidation preference of $10,000, plus an 8% per annum premium. The
holders of the Series A Stock are not entitled to vote or to receive dividends.
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.
All of the Series A Stock, Class C Warrants and Class D Warrants were
issued to accredited investors in a private placement 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 o legends thereon noting such restrictions, and written disclosure of
such restrictions were made prior to issuance of the securities.
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Item 6. Management's Discussion and Analysis or Plan of Operation.
General
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.
From August 1985 through June 1996, the Company was a development stage
company engaged in research and development relating to the discovery and
patenting of GRADIUM glass and its manufacture. The Company began to recognize
revenues from product sales in the fiscal year 1995. The Company believes that
most of its product sales in 1996 were to persons evaluating the commercial
application of GRADIUM glass or using the products for research and development.
During fiscal year 1997, the Company received many orders for production
prototypes, and booked significant catalog sales of standard lenses. Since its
inception, the Company has sustained cumulative losses of approximately $24
million. These losses have resulted from substantial expenditures in connection
with research and development and general and administrative expenses, including
legal and professional fees. During this development stage period, the Company
and its predecessors raised approximately $16 million of private investment
capital for basic research and development and other operating expenses. An
additional $1.8 million was raised from the sale of preferred stock in June and
July 1997. See "Market for Common Equities and Related Stockholder Matters".
Results of Operations
Year ended June 30, 1997 ("1997") compared with the year ended June 30, 1996
("1996")
Revenue totaled $673,677 for 1997, an increase of approximately
$474,000 over 1996. This growth in revenues was attributable to increases in
both development and license sales as well as lens sales, as the Company's
business began to shift from primarily research and development stage activities
towards manufacturing and sales of its GRADIUM glass products. Development fee
and license sales increased $307,000 which included $35,000 from OEM Karl Storz
for their endoscopy development agreement, $25,000 from Fuji for an exclusive
evaluation option, which expires in October 1997, for television camera lenses,
and $247,000 from government funded subcontracts for the development of methods
and products utilizing solar energy to allow satellites to produce their own
power and the next generation of multiplexing devices used in conjunction with
optical fiber. The Company also experienced $166,000 growth in lens sales to
industrial and government accounts. At June 30, 1997, the Company had
approximately $120,000 in lens back orders which it intends to ship during the
first quarter of fiscal year 1998.
In 1997 the cost of sales for product sales was 76% versus 56% in 1996.
The increase in 1997 is due to costs associated with prototype production,
catalog lens finishing incurred at a higher rate due to low volume and greater
facility overhead. It is anticipated that with increased volume the cost of lens
finishing for catalog lens orders will continue to decrease. In addition, the
cost of glass raw material has decreased since year end and refinement of the
manufacturing process continues to improve yield and reduce the manufacturing
cycle time. Administrative costs during 1997 increased $1,010,036 or 56% over
1996, primarily due to the addition of personnel in sales and marketing,
administration and operations, along with increased overhead in these areas as a
result of an expected scale-up of operations. Research and development costs
increased from $83,074 in 1996 to $796,937 in 1997. In 1997, the research
department staff added additional staff members to continue the Company's
research and development efforts in the area of new glass families and
optoelectronic applications. There were no costs related to unearned
compensation from incentive stock options during 1997 representing a decrease of
$867,642 from 1996.
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Investment income increased approximately $39,000 in 1997 due to the
interest earned on temporary investments. Interest expense decreased
approximately $394,000 during the 1997 as compared to the prior year due
primarily to the conversion of debt to equity in conjunction with the completion
of the IPO.
Net loss of $2,998,290 for 1997 was an increase of $83,385 from 1996
due to increases in selling, general and administrative costs of $1,010,036, and
$713,863 in research and development expenses. These increases were partially
offset by the increased gross margin of $339,987, a decrease of $867,642 in
unearned compensation and the increase in other income of $432,885. Net loss per
share of $1.09 was an improvement of $.89 from 1996 due to increased gross
margin of $.12, decrease in unearned compensation of $.31 and the increase in
other income of $.16, offset by the increase in selling, general and
administrative costs of $.37 and research and development expenses of $.26. The
remaining $.93 gain was due to the increase in weighted average common shares
due to the IPO.
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 $7,200,00. In June 1997 the Company began a preferred stock
private placement which generated net proceeds of approximately $1,600,000 when
completed on July 25, 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 profit 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. Cash required for operating and
research activities in fiscal 1997 and 1996 were approximately $2,900,000 and
$2,300,000, respectively. Included in the cash requirements is $700,000 to
continue its research and development efforts in fiscal year 1998, while
$796,937 was incurred in fiscal year 1997. Cash expenditures for capital and
patents cost capitalized were $771,634 in fiscal year 1997. The majority of the
capital expenditures were used for equipment to expand its manufacturing
facilities. During fiscal 1998, the Company projects approximately $500,000 will
be expended for capital equipment and patent protection.
The Company believes that projected product sales and proceeds from the
Series A Convertible Preferred Stock private placement 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 have
increased five times since fiscal 1996, 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's outstanding shares of Class E common stock have the
characteristics of escrowed shares; therefore, such shares owned by key
officers, employees, directors or consultants of the Company are subject to
variable plan compensation accounting. In the event the Company attains any of
the earnings thresholds of the Company's Class A common stock or meets certain
minimum market prices required for conversion of Class E common stock into Class
A common stock, the Company will be required to recognize compensation expense
during the periods in which the stated criteria for conversion are probable of
being met.
Effective April 1, 1996, the Company relocated and entered into a five
year lease agreement for a 13,300 square foot manufacturing and office facility
in Albuquerque, New Mexico at a monthly cost of
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$6,500 for the first three years, increasing to $6,900 monthly in the last two
years. No significant costs were incurred due to the relocation. The Company
incurred capital expenditures of approximately $770,000 in fiscal year 1997 and
$280,000 from the date of the IPO through June 30, 1996. Additional capital
expenditures of approximately $500,000, primarily intended for manufacturing and
administrative equipment are planned for the Company during the 1998 fiscal
year.
The Company has not been significantly impacted by inflation in 1997
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.
Recent Accounting Pronouncements
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.
In June 1997, the Financial Accounting Standards Board issued Statement
No. 130, Reporting Comprehensive Income, which is effective for fiscal years
beginning after December 15, 1997. SFAS 130 establishes standards for reporting
and display of comprehensive income, and its components (revenues, expenses,
gains, and losses) in a full set of general purpose financial statements.
Management believes the application of Statement 130 will not have a material
effect on the Company's future financial statements.
Item 7. Financial Statements
The responses to this item are submitted in a separate section of this
Annual Report on Form 10-KSB. See Index to the Financial Statements on page F-1.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
KPMG Peat Marwick LLP ("KPMG") are the principal accountants of
LightPath. In July 1996, the Board of Directors of the Company voted on the
recommendation of the Company's management to retain KPMG to serve as the
Company's principal accountants and to dismiss Ernst & Young LLP at the
conclusion of the June 30, 1996 reporting period. Ernst & Young was notified of
the dismissal in August 1996. The Company obtained shareholder ratification for
the selection of KPMG at the annual meeting on September 30, 1996.
In April 1996, the Company relocated its corporate headquarters to
Albuquerque, New Mexico from Tucson, Arizona. Ernst & Young does not have an
Albuquerque office. The Board believes that the change to KPMG, which has an
Albuquerque office, will be more convenient and efficient for the Company.
There were no disagreements with Ernst & Young LLP on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, and such firm's report on the Company's financial statements
did not contain an adverse opinion or disclaimer of opinion and was not modified
as to audit scope, or accounting principles. The audit report for 1996 and 1995
contained explanatory language as to the uncertainty of the Company as a going
concern. Additionally, Ernst & Young LLP's management letter related to their
audit of the June 30, 1996 financial statements contained no comments regarding
material weaknesses. The management letter related to the June 30, 1995
financial statements contained certain comments regarding material weaknesses
noted. These particular comments related to the Company's internal controls in
its accounting and financial reporting systems and information systems. The
Company agreed to the inclusion of the explanatory language and the material
weaknesses which management resolved subsequent to June 30, 1995.
14
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PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with section 16(a) of the Exchange Act.
Directors and Executive Officers
The Directors and Executive Officers of the Company, and their
respective ages and positions with the Company, are as follows:
Name Age Position
---- --- --------
Leslie A. Danziger 44 Chairman and President
Donald E. Lawson 46 Executive Vice President,
Chief Operating Officer,
Treasurer and Secretary
Louis P. Wagman 55 Executive Vice President
and Secretary through
June 25, 1997
Milton Klein, M.D. (1) 49 Director
Louis Leeburg (2) 43 Director
Haydock H. Miller, Jr. (1) 72 Director
- ---------------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
Leslie A. Danziger has been Chairman of the Company since its
incorporation in June 1992, and has also held the position of President since
August 1995. Ms. Danziger was a partner or executive officer of the Company's
predecessors from 1985 until incorporation of the Company. Ms. Danziger is a
founder of the Company and a co-inventor of the first two LightPath patents. She
has developed and guided the execution of the Company's long-term business
strategies and the development and commercialization of the Company's
technologies. From 1974 to 1979 she served as an Executive Vice President of
COS, Inc., and from 1979 to 1982 she served as Executive Vice President of
Arctic Communications Corporation. Both of these communication consulting firms
developed tools designed to assist clients in resolving conflicts relating to
economic development, land use and natural resource issues. Ms. Danziger
attended the University of Texas. Ms. Danziger is married to Joel C. Goldblatt,
the Company's Vice President of Strategic Planning and Communications, and is
the sister-in-law of Milton Klein, M.D., and a Director of the Company.
Donald E. Lawson has been Executive Vice President of the Company since
May 5, 1995, Treasurer since September 1995 and Secretary since June 1997. Mr.
Lawson has also served as the Company's Chief Operating Officer since June 1995
and is responsible for the Company's financial activities, manufacturing, sales,
research and development, and intellectual property management. From 1991 to
1995, Mr. Lawson served as Vice President, Operations for Lukens Medical
Corporation, a medical device manufacturer. From 1980 to 1990, Mr. Lawson served
in various capacities, including Production Superintendent, for Ethicon, Inc., a
division of Johnson & Johnson and a manufacturer of medical products. Mr. Lawson
received a B.B.A. degree in Finance from Texas A & M University.
Louis P. Wagman was an Executive Vice President of the Company from May
1992 and as its Secretary from October 1992 until his mutually agreed upon
resignation effective June 25, 1997. Mr. Wagman was responsible for the
Company's strategic alliances and licensing and new business development. From
1991 until the time he joined the Company, Mr. Wagman performed management
consulting services for various firms, including the Company. From 1989 to 1991,
Mr. Wagman was President and Chief Executive Officer of Photometrics, Ltd., a
supplier of advanced electronic imaging equipment for scientific and industrial
applications. From 1977 to 1989, he served as Vice President and General Manager
of four different companies engaged in the design and manufacture of high-tech
diagnostic, testing and service equipment: Princeton Gamma-Tech, Sun Electric
Corporation, Sensors/Dynatech and KLT Industries. During the previous
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<PAGE>
eleven years, Mr. Wagman was an executive with Bendix Corporation. Mr. Wagman
received a B.S. degree in Electronics Engineering from George Washington
University and an M.B.A. with distinction from the University of Michigan.
Milton Klein, M.D. has served as a Director of the Company since its
inception. Dr. Klein is principally involved in medically related uses for
LightPath GRADIUM glass materials. In March 1992 Dr. Klein organized the
Company's group of scientific advisors to explore the use of the Company's
technology in endoscopic equipment, microscopy and related medical optical
systems. Dr. Klein specializes in cardiology and from 1982 to the present has
been a Clinical Associate Professor of Medicine at The Baylor College of
Medicine, Houston, Texas. He is a Fellow of the American College of Cardiology
and the American College of Physicians. Dr. Klein received a B.S. degree from
McGill University and a M.D. from the University of California in San Diego. Dr.
Klein is the brother-in-law of Leslie A. Danziger.
Louis Leeburg has served as a Director of the Company since May 1996.
Since 1993 Mr. Leeburg has been with the investment firm, Jay A. Fishman, Ltd.
From December 1988 until August 1993 he was the Vice President, Finance of The
Fetzer Institute, Inc. From 1980 to 1988 he was in financial positions with
different organizations with an emphasis in investment management. Mr. Leeburg
was an audit manager for Price Waterhouse & Co. until 1980. Mr. Leeburg received
a B.S. in accounting from Arizona State University. Mr. Leeburg is a member of
Financial Foundation Officers Group and the treasurer and trustee for the John
E. Fetzer Memorial Trust Fund and the John E. Fetzer ILM Trust Fund, affiliated
with a significant stockholder of the Company.
Haydock H. Miller, Jr. has served as a Director of the Company since
January 1993. Since that time he has advised the Company on administrative,
management and financial matters. Mr. Miller served as an executive with the
Aluminum Company of America (ALCOA) from 1949 until his retirement in 1983. Mr.
Miller received a B.A. degree from Yale University. His last position with ALCOA
was Manager of Organization Analysis, an internal consulting group for all ALCOA
departments and divisions prior hereto he was Manager for salaried job
evaluations for ALCOA and its subsidiaries and immediately before that, was
Superintendent of several ALCOA plants, concentrating on quality control and
production techniques, and consultant to its operations in the United Kingdom.
Since 1983, Mr. Miller has been an independent management consultant.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors, and persons who own more than 10% of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
("SEC"). Officers, directors and greater than 10% stockholders are required by
SEC regulation to furnish the Company with copies of all Section 16(a) forms
they file. Based solely upon a review of the copies of such forms furnished to
the Company, or written representations that no Forms 5 were required, the
Company believes that during the year ended June 30, 1997, all Section 16(a)
filing requirements applicable to its officers, directors and greater than 10%
beneficial owners were complied with.
Item 10. Executive Compensation.
The information required under this item will be set forth in the
Company's proxy statement to be filed with the Securities and Exchange
Commission on or before September 16, 1997 and is incorporated herein by
reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The information required under this item will be set forth in the
Company's proxy statement to be filed with the Securities and Exchange
Commission on or before September 16, 1997 and is incorporated herein by
reference.
Item 12. Certain Relationships and Related Transactions.
The information required under this item will be set forth in the
Company's proxy statement to be filed with the Securities and Exchange
Commission on or before September 16, 1997 and is incorporated herein by
reference.
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Item 13. Exhibits and Reports on Form 8-K.
a) Exhibits
Exhibit
Number Description
------ -----------
3.1 Certificate of Incorporation of Registrant, as amended 1
3.2 Certificate of Designations filed November 10, 1995 with 1
the Secretary of State of the State of Delaware
3.3 Bylaws of Registrant 1
3.4 Certificate of Designation filed July 9, 1997 with the 4
Secretary of State of the State of Delaware 9.0 Form of
Voting Trust Agreement dated January 10, 1996, among certain
stockholders of the Registrant
10.1 Employment Agreement between Registrant and Leslie A. 1
Danziger
10.2 Employment Agreement between Registrant and Louis P. Wagman 1
10.3 Employment Agreement between Registrant and Donald E. Lawson 1
10.4 Product Development and License Agreement between Registrant 1
and Karl Storz GMBH & Co. dated December 22, 1994
10.6 Omnibus Incentive Plan 2
10.7 Directors Stock Option Plan 2
11 Computation of Net Loss Per Share 4
16 Letter from Ernst & Young LLP on change in Certifying 3
Accountant
23.1 Consent of KPMG Peat Marwick LLP 4
23.2 Consent of Ernst & Young LLP 4
27 Financial Data Schedule 4
1. The exhibit was filed as an exhibit to the Company's Registration Statement
on Form SB-2 (File No: 33-80119) and are incorporated herein.
2. The exhibit was filed as an exhibit to the Company's Registration Statement
on Form S-8 (File No: 333-23515 and 333-23511, respectively) dated March 18,
1997 and are incorporated herein.
3. The exhibit was filed as an exhibit to the Company's Form 8-k/A No.1 dated
September 3, 1996 and is incorporated herein.
4. Filed herewith.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarterly period ended
June 30, 1997.
17
<PAGE>
LightPath Technologies, Inc.
Index to Financial Statements
Report of KPMG Peat Marwick LLP, Independent Auditors .......................F-2
Report of Ernst & Young LLP, Independent Auditors ...........................F-3
Audited Financial Statements
Balance Sheet................................................................F-4
Statements of Operations.....................................................F-5
Statements of Stockholders' Equity (Deficit).................................F-6
Statements of Cash Flows.....................................................F-7
Notes to Financial Statements................................................F-8
F-1
<PAGE>
Report of KPMG Peat Marwick LLP, Independent Auditors
Board of Directors
LightPath Technologies, Inc.
We have audited the accompanying balance sheet of LightPath Technologies, Inc.,
as of June 30, 1997, and the related statements of operations, stockholders'
equity (deficit), and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the finanical statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the finanical statements referred to above present farly, in all
material respects, the financial position of LightPath Technologies, Inc., as of
June 30, 1997, and the results of its operations and its cash flows for the year
then ended in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As more fully described in the notes
to the financial statements, the Company's recurring losses from operations and
resulting continued dependence on external sources of capital raise substantial
doubt about its ability to continue as a going concern. Management's plans in
regard to these matters are also described in the notes. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
KPMG Peat Marwick LLP
Albuquerque, New Mexico
August 1, 1997
F-2
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
Board of Directors
LightPath Technologies, Inc.
We have audited the accompanying statements of operations, stockholders' equity
(deficiency in net assets), and cash flows of LightPath Technologies, Inc., for
the year ended June 30, 1996. These financial statements are the responsibility
of LightPath Technologies, Inc.'s management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the finanical statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the finanical statements referred to above present fairly, in
all material respects, the financial position of LightPath Technologies, Inc.,
for the year ended June 30, 1996, in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that LightPath
Technologies, Inc., will continue as a going concern. As more fully described in
the notes, since inception, the Company has incurred substantial losses related
to its formation, research and development, and operating activities. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are also described
in the notes. The financial statements do not include any adjustments to reflect
the possible future effects on the recoverability and classification of assets
or the amounts and classification of liabilities that may result from the
outcome of this uncertainty.
Ernst & Young LLP
Tucson, Arizona
August 2, 1996
F-3
<PAGE>
LightPath Technologies, Inc.
Balance Sheet
June 30,
1997
------------
Assets
Current assets:
Cash and cash equivalents $ 993,505
Trade accounts receivable 167,258
Inventories (Note 2) 251,914
Advances to employees and related parties 2,865
Prepaid expenses and other 38,604
------------
Total current assets 1,454,146
Property and equipment - net (Note 3) 764,897
Intangible assets - net (Note 4) 490,272
------------
Total assets $ 2,709,315
============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued liabilities $ 325,571
Accrued payroll and benefits 255,878
------------
Total current liabilities 581,449
Note payable to stockholder (Note 5) 30,000
Commitments and contingencies (Note 11)
Redeemable common stock (Note 9)
Class E-1 - performance based and redeemable common stock
1,449,942 shares issued and outstanding 14,499
Class E-2 - performance based and redeemable common stock
1,449,942 shares issued and outstanding 14,499
Class E-3 - performance based and redeemable common stock
966,621 issued and outstanding 9,666
Stockholders' equity (Notes 6,8,9 and 12)
Preferred stock, $.01 par value; 5,000,000 shares authorized;
Issued 45 Series A Convertible shares, $450,000 liquidation
preference 1
Common stock:
Class A, $.01 par value, voting; 34,500,000 shares authorized;
2,766,185 shares issued and outstanding 27,662
Additional paid-in capital 19,244,055
Accumulated deficit (17,212,516)
------------
Total stockholders' equity 2,059,202
------------
Total liabilities and stockholders' equity $ 2,709,315
============
See accompanying notes.
F-4
<PAGE>
LightPath Technologies, Inc.
Statements of Operations
Year Ended June 30
1997 1996
--------------------------
Revenues
Product development fees $ 474,153 $ 167,000
Lenses and other 199,524 33,444
--------------------------
Total revenues 673,677 200,444
Costs and expenses
Cost of goods sold 151,809 18,563
Selling, general and administrative 2,828,651 1,818,615
Research and development 796,937 83,074
Amortization of unearned compensation -- 867,642
--------------------------
Total costs and expenses 3,777,397 2,787,894
--------------------------
Operating loss (3,103,720) (2,587,450)
Other income(expense)
Investment income 110,044 71,003
Interest expense (4,614) (398,458)
--------------------------
Net loss $(2,998,290) $(2,914,905)
==========================
Net loss per share $ (1.09) $ (1.98)
==========================
Number of shares used in per share calculation 2,755,001 1,471,006
==========================
See accompanying notes.
F-5
<PAGE>
LightPath Technologies, Inc.
Statements of Stockholders' Equity (Deficit)
<TABLE>
<CAPTION>
Class A
Common Stock
Preferred ------------------- Additional Treasury
Stock Number of Paid-in Stock Unearned Accumulated
Amount Shares Amount Capital Amount Compensation Deficit Total
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at June 30, 1995 $ -- 729,659 $ 7,297 $ 7,186,982 $(190,000) $(867,642) $(11,299,321) $(5,162,684)
Issuance of common stock, net -- 1,842,547 18,425 7,198,089 -- -- -- 7,216,514
Common stock issued for services -- 182 2 4,990 -- -- -- 4,992
Common stock issued for debt conversion -- 152,418 1,524 4,294,880 -- -- -- 4,296,404
Sales of treasury stock -- -- -- -- 185,000 -- -- 185,000
Amortization of unearned compensation -- -- -- -- -- 867,642 -- 867,642
Warrants issued with bridge loans -- -- -- 62,500 -- -- -- 62,500
Retirement of common and 191,083 shares -- (2,615) (26) (54,863) 5000 -- -- (49,889)
treasury stock
Net loss -- -- -- -- -- -- (2,914,905) (2,914,905)
-----------------------------------------------------------------------------------------
Balances at June 30, 1996 $ -- 2,722,191 $ 27,222 $18,692,578 -- -- $(14,214,226) $ 4,505,574
Issuance of 45 shares Series A
convertible preferred stock, net 1 -- -- 391,453 -- -- -- 391,454
Issuance of common stock -- 775 8 4,072 -- -- -- 4,080
Common stock issued for services -- 46,289 463 255,798 -- -- -- 256,261
Retirement of common stock -- (3,070) (31) (99,846) -- -- -- (99,877)
Net loss -- -- -- -- -- -- (2,998,290) (2,998,290)
-----------------------------------------------------------------------------------------
Balances at June 30, 1997 $ 1 2,766,185 $ 27,662 $19,244,055 -- -- $(17,212,516) $ 2,059,202
=========================================================================================
</TABLE>
See accompanying notes.
F-6
<PAGE>
LightPath Technologies, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended
June 30
------------------------------
1997 1996
------------------------------
<S> <C> <C>
Operating activities
Net loss $(2,998,290) $(2,914,905)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 205,397 86,875
Accretion of bridge notes -- 213,568
Services provided for common stock 256,261 5,000
Write-off abandoned patent applications -- 1,895
Amortization of unearned compensation -- 867,642
Changes in operating assets and liabilities:
Receivables, advances to employees, related parties (132,178) 44,399
Inventories (185,728) (66,186)
Prepaid expenses and other 44,005 (49,688)
Accounts payable and accrued expenses (54,995) (510,561)
------------------------------
Net cash used in operating activities (2,865,528) (2,321,961)
Cash flows from investing activities
Property and equipment additions (520,397) (269,057)
Costs incurred in acquiring patents (251,237) (49,962)
------------------------------
Net cash used in investing activities (771,634) (319,019)
Cash flows from financing activities
Proceeds from notes payable -- 40,000
Payments on notes payable -- (314,511)
Repayments of convertible notes payable -- (162,500)
Proceeds from bridge loans -- 1,285,433
Repayments of bridge loans -- (1,250,000)
Proceeds from sales of common stock 4,080 7,216,514
Repurchase of common stock (100,000) (40,000)
Proceeds from sales of Convertible Series A preferred stock, net 391,454 --
Proceeds from sales of treasury stock -- 190,000
------------------------------
Net cash provided by financing activities 295,534 6,964,936
------------------------------
Net increase (decrease) in cash and cash equivalents (3,341,628) 4,323,956
Cash and cash equivalents at beginning of period 4,335,133 11,177
------------------------------
Cash and cash equivalents at end of period $ 993,505 $ 4,335,133
==============================
Supplemental disclosure of cash flow information:
Class A common stock issued for services $ 256,261 $ 4,992
Debt and interest converted into Class A common stock -- 4,296,404
Class E common stock issued (retired) (123) 9,613
</TABLE>
See accompanying notes.
F-7
<PAGE>
LightPath Technologies, Inc.
Notes to Financial Statements
June 30,1997
Organization
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.
Basis of Presentation
The Company has incurred substantial losses since inception. During fiscal year
1996 the Company completed an initial public offering ("IPO") to raise
additional capital to further fund research, development and commercialization
of GRADIUM glass with the objective of developing products that will achieve
market acceptance. Management believes that product sales in 1998 and the net
proceeds from a private placement completed in July 1997 will be sufficient to
finance the Company's working capital requirements for fiscal year 1998.
However, without sales of the GRADIUM glass products, there is substantial doubt
about the ability of the Company to continue as a going concern. The financial
statements do not include any adjustments to reflect the recoverability and
classification of assets or the amounts and classifications of liabilities that
may result from the outcome of this uncertainty.
1. Summary of Significant Accounting Matters
Cash and cash equivalents consist of cash in the bank and temporary investments
with maturities of ninety days or less when purchased.
Inventories which consists principally of raw materials, lenses and components
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.
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.
F-8
<PAGE>
LightPath Technologies, Inc.
Notes to Financial Statements - Continued
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.
Revenue recognition occurs from sales of product or product development, upon
shipment.
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.
F-9
<PAGE>
LightPath Technologies, Inc.
Notes to Financial Statements - Continued
2. Inventories
The components of inventories include the following:
June 30,1997
Finished goods and work in process $153,629
Raw materials 98,284
--------
Total inventories $251,913
========
3. Property and Equipment
Property and equipment consist of the following:
June 30,1997
Manufacturing equipment $ 910,083
Computer equipment and software 236,864
Furniture and fixtures 113,801
Leasehold improvements 104,369
----------
1,365,117
Less accumulated depreciation 600,220
----------
$ 764,897
==========
4. Intangible Assets
Intangible assets consist of the following:
June 30,1997
Patents and trademarks granted $244,653
Patent applications in process 285,083
--------
529,736
Less accumulated amortization 39,464
--------
$490,272
========
5. Note Payable To Stockholder
At June 30, 1997, the Company has a note payable to a stockholder of $30,000,
which bears interest at 10.28%, payable monthly. The stockholder has agreed to
make repayment of the remaining balance contingent upon the Company meeting the
conditions for conversion of the Class E-1 common stock into Class A common
stock .
In February 1996, in conjunction with the IPO, certain other debtholders agreed
to convert approximately $3.3 million in principal, accrued interest and other
payables into shares of Class A and Class E common stock at a conversion price
of $5.50 per share.
Interest of $4,614 and $58,023 was paid in 1997 and 1996, respectively.
F-10
<PAGE>
LightPath Technologies, Inc.
Notes to Financial Statements - Continued
6. Deferred Employee Salaries
In November 1993, the Company implemented a plan for the deferral of a portion
of all employees' salaries. The salaries not paid were accrued as a continuing
obligation of the Company. As of June 30, 1997 and 1996, the total deferred
amounts were $201,825 and $211,470, respectively. Additionally, in November
1995, key officers of the Company agreed to convert $350,000 of their deferred
amounts into Class E common stock at an average conversion price of $1 per
share. Key officers and employees of the Company have agreed to make repayment
of the June 30, 1997 deferred balance plus the $26,130 balance of an accrued
liability for a director contingent upon the Company meeting the conditions for
conversion of the Class E-1 common stock into Class A common stock.
7. Income Taxes
Temporary differences between the net operating losses for financial reporting
and income tax purposes primarily relate to the use of the cash method of
accounting and deferral of research and development and start-up expenses for
tax purposes. Research and development and start-up expenses will be deductible
over a five year period commencing with the fiscal year June 30, 1997.
For financial reporting purposes a valuation allowance of $4,981,000 has been
recognized to offset the Company's deferred tax assets. The valuation allowance
has increased by $1,214,000 and $692,000 during the years ended June 30, 1997
and 1996, respectively, as a result of increased deferred tax assets created
principally by the operating losses and the deferral of research and development
and start-up expenses.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts reported for income tax purposes. Significant
components of the Company's deferred tax assets at June 30, 1997 are as follows:
Deferred tax assets:
Start-up expenses, net $ 2,387,000
Research and development expenses 527,000
Net operating loss carryforwards 2,214,000
Research and development credits 150,000
Other deferred deductions (297,000)
-----------
Total deferred tax assets 4,981,000
Valuation allowance for deferred tax assets (4,981,000)
-----------
$ --
===========
The reconciliation of income tax attributable to operations computed at the U.S.
federal statutory tax rates is a difference equal to the federal statutory rate
given that the annual losses resulted in no tax benefits.
At June 30, 1997, the Company has net operating loss carryforwards for federal
income tax purposes of approximately $5 million which will begin to expire in
2009 if not previously utilized. The Company also has research and development
credit carryforwards of approximately $150,000 which will begin to expire in
2009, if not previously utilized. Approximately $1 million of the net operating
loss carryforward and the majority of the research and development credits are
subject to certain limitations of the Internal Revenue Code which restrict their
annual utilization.
8. Employee and Director Stock Option Plans
At June 30, 1997 the Company has three stock based compensation plans which are
described below. The Company applies APB Opinion No. 25 and related
Interpretations in accounting for its plans. Prior to becoming a public company,
the Company's management valued options granted based on the cash transactions
price of the Company's common stock during the period of grant. Certain of the
grants, prior to 1995, were at less than fair market value and the Company
recorded total unearned compensation in
F-11
<PAGE>
LightPath Technologies, Inc.
Notes to Financial Statements - Continued
the year of grant which was amortized over the vesting periods. The unamortized
balance of unearned compensation of $867,642 was charged to expense in the first
quarter of fiscal 1996 when the vesting of all options outstanding was
accelerated due to the approval by the stockholders of an underwriting
agreement. No compensation costs have been recognized for its fixed stock
options plans where fair market value equalled the option price at the date of
grant.
In June 1992, the Company implemented the Omnibus Incentive Plan (the "Incentive
Plan"), and the Directors Stock Option Plan (the "Directors Plan"). The
Company's common stock which has been reserved for awards under the Incentive
Plan and the Directors Plan were increased in 1997 to an aggregate of 325,000
and 75,000 shares, respectively.
The Incentive Plan authorizes the Company to grant various awards using common
stock, and cash to officers and other key employees of the Company. To date only
incentive stock options have been issued under the plan with a vesting period of
four years. The term of the options granted under the Incentive Plan cannot
exceed ten years for all option holders except stockholders with 10% or more of
the Company's stock for which the term is five years after the date of grant.
Options issued prior to the IPO are bundled into an option for the purchase of
one share of Class A common stock, 1.5 shares each of Class E-1 and E-2 common
stock and one share of Class E-3 common stock. Options under the Incentive Plan
available for grant at June 30, 1997 were 95,525 shares of Class A common stock.
The Directors Plan which was modified in 1997, authorizes the Company to grant
awards to certain eligible nonemployee directors of the Company using common
stock. Under the plan formula: i) each of the current nonemployee directors will
receive options to purchase 3,000 shares of the Company's common stock at the
date of each annual meeting of stockholders; and ii) on the date an individual
first becomes a nonemployee director, they will receive options to purchase
10,000 shares of the Company's common stock which vest ratably over a three year
period. Each option granted under the Directors Plan will be granted at a price
equal to the fair market value of such shares on the date the options are
granted with a term of ten years. Options issued prior to the IPO are bundled
into an option for the purchase of one share of Class A common stock, 1.5 shares
each of Class E-1 and E-2 common stock and one share of Class E-3 common stock.
Options under the Director Plan available for grant at June 30, 1997 were 49,500
shares of Class A common stock.
In addition, the Company has issued nonqualified options to certain directors
and consultants to the Company not covered by the Incentive or Directors Plan.
The Company did not issue any nonqualified options in 1997 or 1996. Options
issued prior to the IPO are bundled into an option for the purchase of one share
of Class A common stock, 1.5 shares each of Class E-1 and E-2 common stock and
one share of Class E-3 common stock.
A summary of the status of the stock option plans as of June 30, 1997 and 1996
and changes during the years ended is presented below:
Incentive Directors
Shares under option: Plan Plan Nonqualified
------------------------------------------------------------------
Outstanding at June 30, 1995 64,293 3,500 51,303
Granted at $5.00 55,000 -- --
Exercised -- -- --
Lapsed or canceled (16,909) -- (1,609)
-------- -------- --------
Outstanding at June 30, 1996 102,384 3,500 49,694
Granted at $5.00 to $6.06 128,000 22,000 --
Exercised -- -- --
Lapsed or canceled (909) -- --
-------- -------- --------
Outstanding at June 30, 1997 229,475 25,500 49,694
======== ======== ========
Options exercisable:
June 30, 1997 93,475 15,500 49,694
F-12
<PAGE>
LightPath Technologies, Inc.
Notes to Financial Statements - Continued
The following table summarizes information about fixed stock options outstanding
at June 30, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ---------------------------------------------------------------------------------------------------------------------
Range of Number Weighted-Avg. Number
Exercise outstanding at Remaining Weighted-Avg. Exercisable at Weighted-Avg.
Prices June 30,1997 Contractual Life Exercise Price June 30, 1997 Exercise Price
- ---------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C>
$ 5 to 15 286,764 8.5 Years $ 5.60 128,764 $ 5.70
$25 to 40 12,658 6.3 $35.71 12,658 $35.71
$41 to 55 5,247 6.2 $44.44 5,247 $44.44
------------------ ------------------
$ 5 to 55 304,669 8.4 $ 7.52 146,669 $ 9.68
================== ==================
</TABLE>
Had compensation costs for the Company's stock based compensation plans been
determined consistent with FASB Statement No. 123, the Company's net loss would
have been increased to the pro froma amounts indicated below:
1997 1996
---- ----
Net loss, as reported ($ 2,998,290) ($ 2,914,905)
Net loss, pro forma ($ 3,056,290) ($ 2,925,905)
Net loss per share, as reported ($ 1.09) ($ 1.98)
Net loss per share, pro forma ($ 1.11) ($ 1.99)
The weighted-average fair value of options granted during the year ended June
30, 1997 was $2.47. The fair value of each incentive option grant is estimated
on the date of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions used for grants in 1997: dividend yield
of 0%; expected volatility of 75%; risk free interest rate of 8%; and expected
lives of 2 years.
9. Stockholders' Equity
The Company completed an IPO on February 22, 1996 for the sale of 1,840,000
units at an initial public offering price of $5.00. Each unit consisted of one
share of Class A common stock, one Class A warrant and one Class B warrant.
Common and Preferred Stock
The Company's common stock and preferred stock consists of the following:
o Authorized 34,500,000 shares of Class A common stock, $.01 par value. The
stockholders of Class A common stock are entitled to one vote for each
share held.
o Authorized 2,000,000 shares of Class E-1 common stock, $.01 par value. The
stockholders of Class E-1 common stock are entitled to one vote for each
share held. Each Class E-1 share will automatically convert into one share
of Class A common stock in the event that (i) the Company's income before
provision of income taxes and extraordinary items or any charges which
result from the conversion of the Class E common stock is equal to or
exceeds $8,000,000 in fiscal 1997, 1998 or 1999, or is at least $10,300,000
in fiscal 2000; or (ii) the Company's bid price per share of Class A common
stock averages in excess of $12.50 (subject to adjustment for stock splits)
for 30 consecutive business days through August 22, 1997, or (iii) the bid
price per share of Class A common stock averages in excess of $16.75
(subject to adjustment for stock splits) for 30 consecutive business days
during the period from August 22, 1997 through February 22, 1999, or
F-13
<PAGE>
LightPath Technologies, Inc.
Notes to Financial Statements - Continued
(iv) the Company is acquired by or merged with or into another entity
during any of the periods referred to in (ii) or (iii) and as a result
thereof holders of the Class A common stock of the Company receive per
share consideration (after giving effect to the conversion of the Class E-1
common stock) equal to or greater than the respective bid price amounts set
forth in (ii) or (iii) above, respectively, as applicable.
o Authorized 2,000,000 shares of Class E-2 common stock, $.01 par value. The
stockholders of Class E-2 common stock are entitled to one vote for each
share held. Each Class E-2 share will automatically convert into one share
of Class A common stock in the event that (i) the Company's income before
provision of income taxes and extraordinary items or any charges which
result from the conversion of the Class E common stock is equal to or
exceeds $10,900,000 in fiscal 1997, 1998 or 1999, or is at least
$14,000,000 in fiscal 2000; or (ii) the Company is acquired by or merged
with or into another entity during any of the periods referred to below and
as a result thereof holders of the Class A common stock of the Company
receive per share consideration (after giving effect to the conversion of
the Class E-1 and Class E-2 common stock) equal to or greater $18.00
through August 22, 1997, or $23.00 during the period from August 22, 1997
through February 22, 1999.
o Authorized 1,500,000 shares of Class E-3 common stock, $.01 par value. The
stockholders of Class E-3 common stock are entitled to one vote for each
share held. Each Class E-3 share will automatically convert into one share
of Class A common stock in the event that (i) the Company's income before
the provision of income taxes and extraordinary items or any charges which
result from the conversion of the Class E common stock is equal to or
exceeds $28,000,000 in fiscal 1997, 1998, 1999 or 2000; or (ii) 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, E-2 and E-3 common stock) equal to or greater
than $30.00 through August 22, 1997, or $40.00 during the period from
August 22, 1997 through February 22, 1999.
The shares of Class E common stock will be redeemed on September 30, 2000
by the Company for $.0001 per share and will be canceled by the Company
without further obligation to the stockholders if such earnings levels and
market price targets are not achieved.
The Class E common stock performance shares have the characteristics of
escrowed shares; therefore, such shares owned by key officers, employees,
directors or consultants of the Company are subject to variable plan
compensation accounting. In the event the Company attains any of the
earnings thresholds or the Company's Class A common stock meets certain
minimum market prices required for the conversion of Class E common stock
by such stockholders, the Company will be required to recognize
compensation expense in the periods in which the stated criteria for
conversion are probable of being met.
o 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 45 Series A
totaling $450,000, less issuance costs of $58,546 resulted in net proceeds
of $391,454, at June 30, 1997. An additional 135 shares Series A totaling
$1,350,000 were sold in July 1997, resulting in proceeds of $1,195,000, net
issuance costs of $155,000.
The Series A Convertible Preferred Stock has a stated value and liquidation
preference of $10,000, plus an 8% per annum premium. The holders of the
Series A Convertible Preferred Stock are not entitled to vote or to receive
dividends. Each share of Series A Convertible Preferred 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.
F-14
<PAGE>
LightPath Technologies, Inc.
Notes to Financial Statements - Continued
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
Each Class A warrant entitles the holder to purchase one share of Class A common
stock and one Class B warrant at an exercise price of $6.50 until February 2001.
Each Class B warrant entitles the holder to purchase one share of Class A common
stock at an exercise price of $8.75 until February 2001. At June 30, 1997
1,840,000 Class A and 1,840,000 Class B warrants were exercisable and
outstanding. The warrants are redeemable by the Company on 30 day's written
notice at a redemption price of $.05 per warrant if the closing price of the
Class A common stock for any 30 consecutive trading days ending within 15 days
of the notice averages in excess of $9.10 per share for Class A warrants and
$12.25 per share for Class B warrants. All Class B warrants must be redeemed if
any are redeemed. During fiscal year 1997, all of the Class A common stock
underlying the Class A and Class B warrants were registered and contractual
restrictions on trading expired.
Class C and Class D warrants were issued in connection with the private
placement of Series A Convertible Preferred Stock which was completed by July
25, 1997. A total of 320,000 Class C 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 $5.63 until July 2000. A total of 64,000 Class D
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
lessor of $5.63 or the average closing bid price for the Company's Class A
common stock for the five day period preceding the conversion date, until July
2002. The Company is required to register the Class A common stock underlying
the Class C and Class D warrants within 120 days of the closing.
10. Pension Plan
The Company implemented a defined contribution plan on January 1, 1997 covering
substantially all employees. Annual discrectionary contributions are made by the
Company to match a portion of the funds the employee contributes. No Company
contributions were made to this plan in the fiscal year ended June 30, 1997.
11. Commitments and Contingencies
The Company has operating leases for office equipment and office space.
Effective April 1, 1996 Company has entered into a 5 year lease (with a three
year renewal option) agreement for a 13,300 square foot manufacturing and office
facility in Albuquerque, New Mexico. Rent expense recognized for the years ended
June 30, 1997 and 1996 was $96,889 and $55,640 respectively. Commitments under
noncancelable operating leases are $91,400 for 1998; $92,600 for 1999; $96,200
for 2000; and $74,400 for 2001.
The Company has three year employment agreements, which expire in November 1998,
with two current officers which provide for payment of salaries in 1998 and 1999
of $270,000 and $112,500 respectively. The Company has outstanding purchase
commitments for approximately $113,000 at June 30, 1997 for lens finishing and
costs associated with product marketing.
The Company is involved in other various legal actions arising in the normal
course of business. After taking into consideration legal counsel's evaluation
of such actions, management is of the opinion that their outcome will not have a
significant effect on the Company's financial statements.
F-15
<PAGE>
LightPath Technologies, Inc.
Notes to Financial Statements - Continued
12. Related Party Transactions
During the fiscal year ended June 30, 1997, a current and a former director of
the Company, provided legal and consulting services to the Company for which
they billed the Company approximately $92,000. In addition, the Company was
provided consulting services by companies which are stockholders of the Company,
for which they billed approximately $16,000. The Company retained the legal
services of a stockholder for licensing work performed during fiscal 1997 for
$65,000 of which $31,000 was paid in cash and approximately $34,000 in Class A
common stock. An additional $22,500 will be spent under the terms of this
agreement in fiscal 1998. The company paid $45,000 to an employee and
stockholder for product designs which the Company has subsequently applied for
patent protection.
In June 1996, the Company entered into an agreement with Invention Machine
Corporation (IMC) for a benchmarking and prediction analysis of technologies
related to LightPath's proprietary process for the manufacturing of GRADIUM
glass. Under the terms of the agreement the Company paid IMC a total of $24,000
in cash and upon completion of the project in December 1996, issued 40,000
shares of unregistered Class A common stock at market price at grant, with a
fair value of $222,511. In June 1997 the Company entered into a joint venture
agreement with IMC to create LightChip Inc., to develop and manufacture
wavelength division multiplexing (WDM) systems for use by telecommunication
carriers, and network system integrators. LightPath will own 51% of LightChip
Inc., which had not been funded at June 30, 1997.
13. Supplemental Net Loss Per Share Information
On February 22, 1996 the Company completed an IPO upon which shares of common
stock were issued due to the conversion of certain accounts payable, accrued
liabilities, payables to related parties, notes payable, convertible notes
payable and bridge loans into Class A common stock and shares of Class E common
stock. Had the conversion occurred on July 1, 1995 the earnings per share
amounts for 1996 would have been as follows:
1996
----
Actual $ (1.98)
Adjustments .07
------------
Supplemental $ (1.91)
============
F-16
<PAGE>
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/ Leslie A. Danziger September 2, 1997
-----------------------------------------
Leslie A. Danziger Date
Chairman and President
In accordance with the Exchange Act, this report has been signed below by the
following person on behalf of the registrant and in the capacities and on the
dates indicated.
/s/ Leslie A. Danziger September 2, 1997
- ------------------------------------------
Leslie A. Danziger
Chairman and President
/s/ Donald E. Lawson September 2, 1997
- ------------------------------------------
Donald E. Lawson
Chief Operating Officer, Secretary and Treasurer
<TABLE>
<CAPTION>
<S> <C>
/s/Milton Klein, M.D. September 2, 1997 /s/ Louis Leeburg September 2, 1997
- ------------------------------------------ -------------------------------------
Milton Klein, M.D Louis Leeburg
Director Director
</TABLE>
/s/ Haydock H. Miller Jr. September 2, 1997
- -----------------------------------------------
Haydock H. Miller Jr.
Director
18
Exhibit 3.4
CERTIFICATE OF DESIGNATION OF SERIES A PREFERRED STOCK
OF LIGHTPATH TECHNOLOGIES, INC.
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 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 A issue of Preferred Stock:
RESOLVED, that two hundred and fifty (250) of the five million
(5,000,000) authorized shares of Preferred Stock of the Company shall be
designated Series A 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 A Preferred
Stock (the "Series A Preferred Stock") and the number of shares constituting the
Series A Preferred Stock shall be two hundred and fifty (250). The Series A
Preferred Stock shall be offered at a purchase price of Ten Thousand Dollars
($10,000) per share (the "Original Series A Issue Price"), with an eight percent
(8%) per annum accretion rate as set forth herein.
Section 2. Rank. The Series A 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 A 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 A Preferred Stock of whatever subdivision
(collectively, with the Common Stock, "Junior Securities"); and (iv) on parity
with any class or series of capital stock of the Company hereafter created
specifically ranking by its terms on parity with the Series A 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 A Preferred Stock will bear no
dividends, and the holders of the Series A Preferred Stock ("Holders") shall not
be entitled to receive dividends on the Series A 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 A Preferred Stock shall be entitled to receive,
immediately after any distributions to Senior Securities required by the
Company's Certificate of 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 A Issue Price for each outstanding share of Series A
Preferred Stock and (ii) an amount equal to eight percent (8%) of the Original
Series A 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 A Preferred Stock from the Company, the escrow agent
first had in its possession funds representing full payment for the shares of
Series A 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 A 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 A
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 A 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.
<PAGE>
(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 A
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 A 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 A Preferred Stock shall have conversion rights as follows
(the "Conversion Rights"):
(a) Right to Convert. The record Holder of the Series A
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 A 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 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 A 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
A Preferred Stock from the Company, the escrow agent first had in its
possession funds representing full payment for the shares of Series A
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 A 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 June 20, 1997, which is $5.625 (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 A 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
<PAGE>
amount of the Series A 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 A 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 A 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 A Preferred Stock that occurs
pursuant to the offering of the Series A Preferred Stock by the Company.
For purposes hereof, any Holder which acquires shares of Series A
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 the number of shares of
Series A Preferred Stock acquired by such Holder from its Transferor bears to
the total number of shares of Series A 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 A
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 A Preferred Stock stating that the Holder elects to
convert, which notice shall specify the Date of Conversion, the number of shares
of Series A 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 A 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 A 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-
<PAGE>
issue such lost or stolen Preferred Stock Certificates if Holder
contemporaneously requests the Company to convert such Series A 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
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 A 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 A 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 A
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 A Preferred Stock being redeemed. If the Company
elects to redeem, on the Termination Date, the Company shall send to the Holders
of outstanding Series A Preferred Stock notice (the "Automatic Redemption
Notice") via facsimile of its intent to effect an Automatic Redemption of the
outstanding Series A 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 A Preferred Stock shall send their
certificates representing the Series A 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 A 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 A 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 A
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
<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 A 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 A 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 A 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 A Preferred
Stock shall thereafter have the right to receive upon conversion of Series A
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 A
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 A 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 A 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 A 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 A 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 A Preferred
Stock submitted for conversion, the Company shall redeem from among the Series A
Preferred Stock submitted by the various shareholders for conversion on the
applicable date, a pro-rata amount from each such Holder so submitting Series A
Preferred Stock for conversion.
(i) Redemption Price Upon Receipt of a Notice of
Conversion. The redemption price of Series A 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 A Preferred Stock submitted for
conversion at the address and facsimile number of such Holder appearing in the
Company's register for the Series A 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 A Preferred Stock submitted for conversion and
the applicable redemption price.
<PAGE>
(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 A 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 A Preferred Stock having an aggregate Stated Value (as
defined below) of at least Two Hundred Fifty Thousand Dollars ($250,000). If the
Company elects to redeem some, but not all, of the Series A Preferred Stock, the
Company shall redeem a pro-rata amount from each Holder of the Series A
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 A 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%
30 months and 1 day to 36 months following Last Closing Date 115%
For purposes hereof, "Stated Value" shall mean the Original Series A
Issue Price (as defined in Section 1)) of the shares of Series A 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 A Preferred Stock selected for redemption, at the
address and facsimile number of such Holder appearing in the Company's Series A
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 A 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 A
Preferred Stock which it is otherwise entitled to convert, including Series A
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).
<PAGE>
(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 A 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 A Preferred Stock
Certificates so redeemed to the Company or its Transfer Agent, and the 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 A 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 A 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
<PAGE>
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 A 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 A 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 A 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 A
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 A 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 which the Conversion Price
is calculated. Holders of the Series A 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 A
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 A 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 A Preferred Stock or any securities so as to affect adversely the
Series A Preferred Stock;
(b) create any new class or series of stock having a
preference over or on parity with the Series A Preferred Stock with respect to
Distributions (as defined in Section 2 above) or increase the size of the
authorized number of Series A 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 A 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 A 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 A Preferred
Stock, pursuant to subsection (a) above, so as to affect the Series A Preferred
Stock, then the Company will deliver notice of such approved change to the
Holders of the Series A 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 A Preferred Stock, as amended.
Section 9. Status of Converted or Redeemed Stock. In the event any
shares of Series A 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 A
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 A 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 (1,000,000)
shares of Class A Common Stock (the "Reserved Amount")
<PAGE>
solely for the purpose of effecting the conversion of the Series A 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 A Preferred Stock, and
issuance of the shares of Class A Common Stock in 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 A 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 A Preferred Stock, and exercise of
the Common Warrants.
(c) Reduction of Reserved Amount Under Certain Circumstances.
Prior to complete conversion of all Series A 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 A 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 A 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 A
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 A Preferred Stock shall be allocated to the remaining Holders, pro rata
based on the number of Series A 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;
"Damages Amount" means the Original Series A Issue Price for each share
of Series A 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 A 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
<PAGE>
to issue Class A Common Stock in satisfaction of all conversions of Series A
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 A
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 A Preferred Stock for
any reason, then the Conversion Price for the affected Series A 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.
(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 A 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 A
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
<PAGE>
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 A 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 A 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 A 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 A 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;
(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 A 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 A 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;
<PAGE>
(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. In the event the
Company is not able to pay all amounts due and payable with respect to all
Series A 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 July 9, 1997
------------
/s/ Donald E. Lawson
------------------------------------------
Donald E. Lawson, Executive Vice President
Exhibit 11
LightPath Technologies, Inc.
Computation of Net Loss Per Share
For the Year Ended June 30
--------------------------
1997 1996
--------------------------
Weighted average common shares outstanding 2,755,001 1,462,155
Conversion of convertible notes -- 8,851
Total weighted average common shares and common --------------------------
equivalent shares outstanding 2,755,001 1,471,006
==========================
Net loss $(2,998,290) $(2,914,905)
Weighted average common shares and common
equivalent shares outstanding
2,755,001 1,471,006
Net loss per common and common equivalent shares $ (1.09) $ (1.98)
==========================
Exhibit 23.1
Consent of KPMG Peat Marwick LLP, Independent Auditors
The Board of Directors
LightPath Technologies, Inc.
We consent to incorporation by reference in the registration statements (No.'s
333-23511 and 333-23515) on Form S-8 of LightPath Technologies, Inc. of our
report dated August 1, 1997, relating to the balance sheet of LightPath
Technologies, Inc. as of June 30, 1997, and the related statements of
operations, stockholders' equity (deficit), and cash flows for the year then
ended, which report appears in the June 30, 1997, annual report on Form 10-KSB
of LightPath Technologies, Inc..
Our report dated August 1, 1997, contains an explanatory paragraph that states
that the Company has suffered recurring losses from operations and is dependent
on outside sources of capital, which raise substantial doubt about its ability
to continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of that uncertainty.
KPMG Peat Marwick LLP
Albuquerque, New Mexico
September 12, 1997
Exhibit 23.2
Consent of Ernst & Young LLP, Independent Auditors
We consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 333-23511 and No. 333-23515) pertaining to the Amended and
Restated Directors Stock Option Plan and Amended Omnibus Incentive Plan of
LightPath Technologies, Inc. of our report dated August 2, 1996, with respect to
the statements of operations, stockholders' equity (deficiency in net assets),
and cash flows of LightPath Technologies, Inc. for the year ended June 30, 1996,
included in the Annual Report (Form 10KSB) for the year ended June 30, 1997.
Ernst & Young LLP
Tucson, Arizona
September 12, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Article 5 of Regulation S-X
This schedule contains summary financial information extracted from the Form
10-KSB for the year ended June 30, 1997 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Jun-30-1997
<PERIOD-END> Jun-30-1997
<EXCHANGE-RATE> 1
<CASH> 993,505
<SECURITIES> 0
<RECEIVABLES> 167,258
<ALLOWANCES> 0
<INVENTORY> 251,914
<CURRENT-ASSETS> 1,454,146
<PP&E> 1,365,117
<DEPRECIATION> 600,220
<TOTAL-ASSETS> 2,709,315
<CURRENT-LIABILITIES> 581,449
<BONDS> 0
0
1
<COMMON> 27,662
<OTHER-SE> 19,244,055
<TOTAL-LIABILITY-AND-EQUITY> 2,709,315
<SALES> 199,524
<TOTAL-REVENUES> 673,677
<CGS> 151,809
<TOTAL-COSTS> 151,809
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,614
<INCOME-PRETAX> (2,998,290)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,998,290)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,998,290)
<EPS-PRIMARY> (1.09)
<EPS-DILUTED> 0
</TABLE>
