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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
__________________
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the fiscal year ended June 30, 1998
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)
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<S> <C>
DELAWARE 86-0708398
(State or other jurisdiction of I.R.S. Employer
incorporation or organization) (Identification No)
6820 Academy Parkway East, NE HTTP://WWW.LIGHT.NET 87109
Albuquerque, New Mexico -------------------- (ZIP Code)
(Address of principal executive offices)
Registrant's telephone number, including area code:
(505)342-1100
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Class A Common stock, $.01 par value, Units,
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Class A Warrants and Class B Warrants
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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 ___
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.
$758,232
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 SmallCap 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 $14,443,000 on August 17, 1998.
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 3,427,656 shares
Common Stock, Class E-1, $.01 par value 1,490,311 shares
Common Stock, Class E-2, $.01 par value 1,490,311 shares
Common Stock, Class E-3, $.01 par value 993,533 shares
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Class Outstanding at August 17, 1998
DOCUMENTS INCORPORATED BY REFERENCE
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Portions of the Registrant's Proxy Statement for the 1998 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 13
Legal Proceedings 13
Submission of Matters to a Vote of Security Holders 13
Part II
Market for Common Equity and Related Stockholder Matters 14
Management's Discussion and Analysis of Financial Condition
and Results of Operations 15
Financial Statements 19
Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 19
Part III
Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act 20
Executive Compensation 22
Security Ownership of Certain Beneficial Owners and Management 22
Certain Relationships and Related Transactions 22
Exhibits and Reports on Form 8-K 23
Index to Financial Statements F-1
Signatures 24
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PART I
Item 1. Description of Business.
General
LightPath Technologies, Inc. ("LightPath" or the "Company") produces
GRADIUM(R) glass, utilizes other optical materials to manipulate light and
performs research and development for optical solutions in the fiber
telecommunications and traditional optics markets. 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 fourteen patents for GRADIUM glass products and
currently has numerous filed patent applications pending related to its GRADIUM
glass materials composition, product design and fabrication processes for
production. Additional patent applications have been filed for laser fusion
techniques. 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, interconnects and
cross-connects 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. The IPO resulted
in approximately $7.2 million of net proceeds, which were primarily used for
working capital, manufacturing equipment and repayment of bridge loans. During
fiscal year 1998, the Company completed three series of private placements of
its Series A, B and C Preferred Stock generating approximately $7.85 million in
gross proceeds, $7.2 million net of the offering costs. The preferred stock and
associated warrants are convertible into Class A common stock at the option of
the holder, for which 3,750,000 shares of Class A common have been stock
reserved. The Company intends to use these proceeds for general corporate
working capital purposes and the acquisition of equipment to accelerate the
Company's development, marketing and sales of optoelectronic products. In June
1997, the Company entered into a one year joint venture agreement with Invention
Machine Corp. to create LightChip, Inc. ("LightChip") of which the Company
acquired 51% of the outstanding voting stock. During 1998, LightChip began
operations as a development stage company which was funded by $46,000 from
founding shareholders and $890,000 from convertible bridge loan financing.
LightChip's business plan is to develop and manufacture wavelength division
multiplexing (WDM) systems which utilize GRADIUM glass for use by
telecommunication carriers, and network system integrators. Subsequent to June
30, 1998, LightChip issued phase one of $6.5 million of convertible preferred
stock to AT&T Ventures and LightPath, converted $890,000 of existing debt to
equity and received $510,000 from the exercise of warrants issued to debt
holders, thereby reducing the Company's voting interest in LightChip below 25%.
From its inception in 1985 until June 1996, the Company was classified
as a development stage enterprise that engaged in basic research and
development. During this stage the Company believes that most of its product
sales were to persons evaluating the commercial application of GRADIUM glass or
using
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the products for research and development. During fiscal year 1997, the
Company's operational focus begin to shift to product development and sales.
Numerous prototypes for production orders were completed. In addition, catalog
sales of standard lens profiles were received. The Company also began to offer
standard, computer-based profiles of GRADIUM glass that engineers use for
product design. During fiscal 1998, sales of lenses to the traditional optics
market continued with significant increases in sales of lenses used in the YAG
laser market, catalog and distributor sales and lenses used in the wafer
inspection markets. In fiscal year 1998, the Company also began to explore the
development of products for emerging markets such as optoelectronics, photonics
and solar due to the number of potential customers inquiries into the ability of
GRADIUM glass to solve optoelectronic problems, specifically in the areas of
fiber telecommunications. Advances made by LightChip with WDM equipment, which
utilizes GRADIUM glass, and the resolution of packaging and alignment issues by
the Company, led the Company to develop a strategy in 1998 to enter the
optoelectronic markets. See "Sales and Marketing - Optoelectronics and Fiber
Telecommunications". The Company's first passive optoelectronic product, a
single mode fiber collimator ("SMF"), was demonstrated in February 1998. The SMF
is a key element in all fiber optic systems, including WDM equipment. The SMF
straighten and make parallel, diverging light as it exits a fiber. The Company
is now offering, and has delivered for testing to potential customers, two
product levels, the collimating lens and the SMF. The Company believes that the
optoelectronic market for these entry level products, which is estimated by some
analysts to generate approximately $250 million in 1998 annual revenues, will be
the base for significant future revenue growth for the Company.
The current focus of the technology department's development efforts
has been to expand application of GRADIUM products to the areas of multiplexers,
interconnects and cross-connects for the telecommunications field, further
refinement of the crown glass product line to supplement its existing flint
products and further development of acrylic axial gradient material to extend
the range of existing product applications. Over the past two years the flint
GRADIUM glass family has been expanded to include crown glasses, titania
silicate glasses and polymer materials. LightPath has most recently developed a
process, for which a patent application has been filed, for splicing and
polishing of optical glasses. LightPath's original process patent is 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 GRADIUM glass 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" 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 direction of the light 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 1mm-100mm). Growth in the Company's manufacturing capabilities has
lead to improved yield and automation making the goal of competitively priced
GRADIUM glass and optoelectronic products a reality.
Business Strategy
The Company believes that GRADIUM glass and other optical materials can
potentially be marketed for use in most optics and optoelectronics products.
During 1998, the Company has organized its internal organization and marketing
focus with the intended purpose of serving two separate markets 1)
optoelectronics and fiber telecommunications and 2) traditional optics (e.g.
lasers, medical equipment, consumer optics etc.).
Optoelectronics and Fiber Telecommunications
Optoelectronics technologies consist of an overlap of photonics and
electronics and are key enablers of "Information Age" technologies, such as
fiber optic communications, optical data storage,
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laser printers, digital imaging, and sensors for machine vision and
environmental monitoring. Prior to 1998, the Company targeted various
optoelectronic industry market niches as potential purchasers of its GRADIUM
glass products. During 1998, the Company began the development of products for
the emerging optoelectronics markets, specifically in the areas of fiber
telecommunications. Utilizing advances made by the Company's subsidiary,
LightChip, with WDM equipment and the Company's resolution of packaging and
alignment issues, the Company demonstrated a passive optoelectronic product, the
single mode fiber collimator (SMF). The SMF is a key element in all fiber optic
systems, including WDM equipment. The SMF straighten and make parallel,
diverging light as it exits a fiber. The SMF is the logical starting point for
the Company's development of its new product line because it is a
common-denominator in the assembly of higher value devices used in fiber
communications such as Isolators and Optical Cross-Connects. The Company is now
offering two product levels, the collimating lens and the SMF. The collimating
lens can replace existing lenses with immediate improvements in performance,
repeatability and cost. The SMF offers superior performance in the areas of back
reflection and insertion loss. It is also more compact and the Company believes
it can be manufactured at a significantly lower cost than competitive collimator
products currently available in commercial quantities. Initial samples of the
SMF, a large beam collimator and collimating lenses have been delivered for
testing to potential customers. The development of these products is anticipated
to facilitate the Company's presence as a leader in this telecommunications
collimator market place, currently estimated to generate annual gross revenues
of $250 million. The Company is currently developing additional GRADIUM glass
optoelectronics products. Key strategic alliances with technology and marketing
partners to design, build and sell next generation integrated components and
devices may be considered by the Company in the future. However, the Company
does not currently have any agreements to enter into any strategic alliances for
this purpose.
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. WDM systems are needed by the telecommunications industry to
increase bandwidth due to ever increasing demands for information transmission.
WDM serve as data "traffic cops" by combining multiple light streams from
individual transmissions onto a single optical fiber. The Company formed
LightChip in order to serve the growing WDM market, which some industry analysts
have predicted to grow from $100 million in revenues in 1995 to $12 billion by
2005. During the first year of the joint venture, IMC provided their proprietary
invention and engineering methodology software while the Company provided its
GRADIUM glass technology and research and development capabilities to LightChip.
In fiscal 1998, LightChip secured $890,000 in seed funding which was used to
hire its President, develop its business plan, and develop its first free space
WDM model. Once the business plan was compete LightChip began to meet with
various venture capital funds to obtain equity financing sufficient to develop
and market their first WDM products. LightChip has successfully demonstrated a
WDM model and currently expects it will have prototypes available in early
calendar 1999. In September 1998, LightChip issued phase one of $6.5 million of
convertible preferred stock to AT&T Ventures and LightPath. In addition, the
$890,000 of initial seed funding was converted from debt to equity and the debt
holders exercised $510,000 in warrants. LightPath owned 51% of LightChip at June
30, 1998 and managed many of its administrative functions. Following the sale of
convertible preferred stock, LightPath's voting interest fell below 25% and
LightChip began to establish independent operations. LightPath will continue to
provide services and license the use of GRADIUM glass to LightChip. LightPath
anticipates revenue from LightChip due to the sale of GRADIUM glass for use in
its WDM products. In addition, the value of the Company's investment in
LightChip will increase in the future to the extent, if any, LightChip is able
to successfully market its core WDM products, although there can be no
assurances in this regard.
During fiscal 1998, the Company worked under a joint development
agreement with Eagle Optoelectronics to incorporate GRADIUM lenses into the new
photonics market segment of point-to-point free space communications optics.
These products are used in laser-to-laser communications to expand the bandwidth
of LAN and WAN computer networks and satellite-to-satellite communications.
Eagle's prototype tests demonstrated the ability of GRADIUM lenses to provide
high quality data transmission over long distances. The Company has received
orders from three customers for these unique optics and will continue to explore
opportunities within this photonics market.
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Traditional Optics
The Company initially emphasized laser products because it believed
GRADIUM lenses would have the greatest immediate commercial impact in laser
products with the least initial investment. In fiscal 1998, the Company's lens
sales increased 260% over fiscal 1997, with the majority of the increase from
sales of lenses used by YAG lasers. 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 the
current standard of laser performance. One of the Company's distributors,
Permanova Lasersystems AB of Sweden, completed a lengthy trial and testing
period on GRADIUM YAG lenses which they qualified into systems produced by
Rofin-Sinar GmbH, a major high-powered CO2 and YAG laser OEM headquartered in
Germany. The Company's growth strategy is to increase its emphasis on 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 1998,
the Company increased its established relationships with foreign distributors to
eight plus a Silicon Valley manufacturer representative. The Company believes
these distributors will enable it to establish and maintain a presence in
foreign and domestic markets without further investment in this product area.
In addition to laser applications, the Company, through its printed and
Internet on-line catalog, offers 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 industries, such as optoelectronics
and fiber 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
ability to develop more sophisticated technology development methods and
products, although there can be no assurances in this regard. Through one of the
Company's existing OEM relationships it is engaged in the development of
prototype lenses for a leading manufacturer of endoscopes and wafer chip
inspection. The Company will evaluate future OEM projects based on its
assessment of the OEM's ability to fund the design effort for the project and
the probability of an immediately favorable impact upon the Company's sales.
As part of its marketing strategy, the Company has provided 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 six standard
profiles of GRADIUM glass that engineers can use for product design, and is
continuing to develop more profiles. 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
existing product design, the Company must increase familiarity with GRADIUM
glass so that designers will incorporate GRADIUM glass in their original
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 to educate optical designers, through the
distribution of materials, that GRADIUM glass can provide them with additional
flexibility and design freedom to create optical products more efficiently and
with enhanced performance.
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Sales and Marketing
During fiscal 1998, the Company changed its primary marketing
objectives from sales to foreign distributor markets, catalog and custom lenses
or lens blanks to specific OEM customers, end-user product developers and
manufacturers to the development and marketing of passive components for the
optoelectronics segment of the telecommunications industry and laser based
products in the general optics product arena. The narrowing of the product focus
was a response to the Company's success in laser based products over the past
two years and the opportunity in the emerging optoelectronics market where the
Company believes it has two key advantages. First, the Company has been able to
develop patentable processes with optical materials that provide product
solutions. Second, the Company has developed packaging solutions to
optoelectronic products. Combining these elements the Company believes it has
the opportunity to enter into key optical telecommunication markets with
products that are enabling and cost effective.
The optics industry is characterized by extensive product
diversity and varying levels of product maturity. Product markets 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). Emerging technology markets require optics for the solutions to
bandwidth and data transfer issues in the demand to achieve an all optical
network. 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.
Following is a discussion of the two target markets for the Company.
Optoelectronics and Fiber Telecommunications
During fiscal 1997, LightPath entered into strategic alliances
with other companies in an effort to quickly enter into the optoelectronics
markets. In February 1997, the Company contracted with a manufacturer
representative in the Silicon Valley to work directly with local OEM's to
increase its 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 WDM systems for use by telecommunication carriers, CATV
companies, local area networks (LAN) and wide area networks (WAN) system
integrators. LightChip will serve the growing WDM market, which some industry
analysts predicted to grow from $100 million in revenues in 1995 to $12 billion
by 2005. For one year IMC provided its proprietary invention and engineering
methodology software while the Company provided its GRADIUM glass technology and
research and development capabilities to LightChip. During 1998 LightChip
received $890,000 in seed funding. In September 1998, LightChip issued phase one
of $6.5 million of convertible preferred stock to AT&T Ventures and LightPath.
In addition, the $890,000 of initial seed funding was converted from debt to
equity and the debt holders exercised $510,000 in warrants. LightChip has
successfully demonstrated a WDM model and currently expects it will have
prototypes available in early 1999. LightPath owned 51% of LightChip at June 30,
1998 and managed many of its administrative functions. Following the sale of
convertible preferred stock, LightPath's voting interest fell below 25% and
LightChip began to establish independent operations. LightPath will continue to
provide services and license the use of GRADIUM glass to LightChip. 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. Subsequent to year
end, Phase 2 total funds of $750,000 were awarded for continuation of the WDM
project, with performance over the next 2 years. The Company was awarded
$350,000 for Phase 2 in partnership with Radiant Research Inc. and the
Microelectronics Research Center, University of Texas
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In February 1998, utilizing WDM advances and the Company's resolution
of packaging and alignment issues, the Company demonstrated its first passive
optoelectronic product, the single mode fiber collimator ("SMF"). The SMF is a
key element in all fiber optic systems, including WDM equipment. The SMF
straighten and make parallel, diverging light as it exits a fiber. The SMF is
the logical starting point for the Company's development of its new product line
because it is a common-denominator in the assembly of higher value devices used
in fiber communications such as Isolators and Optical Cross-Connects. The target
market for the Company's two product levels, the collimating lens and the SMF,
is concentrated within several industry experts such as Lucent Technologies,
Corning OCA, JDS Fitel, E-Tek Dynamics and ALCOA Fujikura. The collimating lens
can replace existing lenses with immediate improvements in performance,
repeatability and cost. The SMF offers superior performance in the areas of back
reflection and insertion loss. It is also more compact and the Company believes
it can be manufactured at a significantly lower cost than competitive products
currently available. Both products are used in free space applications where
coupling to an optical fiber is required. The Company will develop these two
products into families of products as variations are made to meet specific
customer requirements. It is intended that the SMF will replace the collimating
lens sales over time and the Company's focus will be on the SMF assembly. Since
many of the Company's targeted customers currently assemble their own
collimators, the sales approach will be to highlight the SMF price/performance
ratio (value) and compare that to the customer's internal costs plus their lost
opportunity cost. The current market place for these initial optoelectronic
products is estimated by some analysts at $250 million in product sales.
In 1997, 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. During the development Eagle began to incorporate
GRADIUM lenses into the new photonics market segment of point-to-point free
space communications optics instead of DWDM. These products are used in
laser-to-laser communications to expand the bandwidth of LAN and WAN computer
networks and satellite-to-satellite communications. Eagle's prototype tests
demonstrated the ability of GRADIUM lenses to provide high quality data
transmission over long distances. The Company has received orders from three
customers for these unique optics.
Traditional Optics
Prior to the IPO, the Company's resources had been applied primarily to
research and development; consequently, LightPath and GRADIUM glass were not
introduced to the commercial market. 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
increased interest and awareness of its products, resulting in additional lens
sales. Lens sales for fiscal years 1998, 1997 and 1996 were $529,318, $199,524,
and $33,444, respectively, primarily generated by a variety of industrial and
government accounts. The recent increase in lens sales is primarily due to sales
of lenses for laser and wafer chip inspection markets. The Company's sales
efforts in targeting laser applications, an area where GRADIUM lenses' ability
to increase the quality of YAG laser beams and reduce the focal spot size, has
received market acceptance. The Company's major customer in fiscal 1998 was
Lumonics Corporation one of the largest YAG laser suppliers in the world. During
1998, the Company received an initial production order for GRADIUM YAG laser
lenses from one of its distributors, Permanova Lasersystems AB of Sweden. After
a lengthy trial and testing period GRADIUM YAG lenses qualified into systems
produced by Rofin-Sinar GmbH, a major high-powered CO2 and YAG laser OEM
headquartered in Germany. Because the optics industry is highly fragmented, the
Company utilizes distributors and the Internet as vehicles for broader promotion
of GRADIUM glass.
During fiscal years 1998 and 1997, the Company formalized relationships
with eight industrial, optoelectronics and medical component distributors
located in foreign countries and California. The Company's Internet web site
(www.light.net) is where interested persons may presently obtain information on
the Company and GRADIUM glass, and order products from the Company's catalog.
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. The Company has developed a network of selected independent
optical engineering firms to promote the sale of GRADIUM glass products.
Presently, eight optical engineering firms provide such optical design services
and support.
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The Company will continue to market GRADIUM glass through existing
relationships with OEMs for the production of specific prototype lenses to be
incorporated into the manufacturer's proprietary products. Future OEM
relationships will only be entered into based upon the OEM's ability to fund the
product design and the Company's assessment of its ability to achieve certain
economic criteria. 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 $600,000 representing minimum
royalty payments during the prototype development stage through the first
production year, 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 the second production year, the Company anticipates that
some production orders will occur in fiscal 1999. 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 payable
should Storz commence commercial production.
In prior years, the Company had begun initial marketing of GRADIUM for
use in gunsight lenses and LightPath designed prototypes gunsight lens system
for a military contractor and commercial gunsight manufacturers. The Company
believes that the GRADIUM glass prototypes demonstrated greater ruggedness and
imperviousness to harsh environmental conditions than that provided by glass
components of existing systems. However, the Company is not currently engaged in
marketing to this market as the contractor has not obtained additional U.S.
government funding to continue the project and the OEM had not ordered
production quantities. 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 and a
six-month extension, for which the Company received $50,000, Fuji has not
completed their technical testing of the lenses. Fuji is not willing to engage
in a long-term license until they have completed their technical review. The
technical review, which is being completed jointly by both parties, is scheduled
for completion in October 1998, at which time decisions will be made on the
future of the business relationship. During 1998, the Company entered into an
evaluation option for CCTV camera systems, with CHUGAI BOYEKI (AMERICA) CORP.
"CBC", which is a wholly-owned subsidiary of CHUGAI BOYEKI CO., Ltd., CBC for
which the Company received $40,000. When the option expired on June 30, 1998,
CBC elected not to enter into an exclusive long-term arrangement for lenses with
the Company. CBC management informed the Company that CBC's strategic direction
may shift. 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. The
Company believes a key element to achieving acceptance in various general optics
market will be the development of lens prototypes specifically designed for use
in each industry targeted, however, the Company will no longer develop these
prototypes without funding of their development effort by the OEM.
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
appropriate for 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
$68,000 and $247,000 in fiscal years 1998 and 1997, respectively, for the
GRADIUM glass and subsequent polymer materials used in the project. The U.S.
government determined Phase 3 funding was not required for this project as the
solar concentrator is ready for commercialization. The government invited
several large potential commercial users to review the solar concentrator at
meetings in June 1998. In addition, the Company has made several presentations
to potential customers. The Company will require a commercial partner or further
research funding for further work to continue. Under the strategic alliance, the
companies intend to pursue Department of Defense SBIR and STTR programs, which
currently fund up to $500 million each year in early-stage R&D projects. Jointly
the companies will also pursue $24.6 million in
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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. As of June 30, 1998, the companies had
not received any further funding from these programs.
Competition
Optoelectronics and Fiber Telecommunications
For the Company's initial products, the collimating lens and SMF, there
are currently only a handful of direct competitors. The majority of collimator
lenses are currently supplied by Nippon Sheet Glass ("NSG"). The collimator lens
is a separate business from NSG's primary product, automotive glass. The SMF
will compete against existing collimator assemblies which are produced by DiCon
Fiberoptics, Samsung Electronics, Wave Optics and Oz Optics. There also a number
of companies that assembe their own collimators such as Lucent Technologies.
These competitors all have greater financial, manufacturing, marketing and other
resources than the Company. The Company is aware of current research projects
which integrates optical technologies, such as existing planar waveguide
structures, which have the potential to replace some of the current collimator
applications. However, these products currently have inherent problems which
have made their wide spread usage unfeasible.
Optical cross-connects ("OXC") which perform high speed wavelength
routing, switching and conversion functions in an optical network are future
products of the Company. The Company believes the unique beam steering and self
focusing properties of GRADIUM glass will be key to development of OXC products
which overcome the cost and performance challenges of current technology. Today
switching is performed electronically. The Company is aware of current research
projects to develop other switching technologies, however all of these projects
are in the very early stages of development.
Wavelength division multiplexing (WDM) systems that LightChip will
produce will compete against a number of companies attempting to capture this
vast market. Currently three main technologies are utilized in the long haul WDM
market 1) fiber bragg grating produced by Ciena and Pirelli, 2) arrayed
waveguide grating produced by Lucent and PIRI and 3) reflective grating produced
by Instruments SA. None of these technologies is currently able to offer a
cost-effective method to accommodate a wide range of channel counts and
facilitate the migration of WDM systems into the metro and short haul markets.
The telecommunications marketplace is renowned for its product quality
and reliability demands. Every item must pass rigorous testing before being
designed into devices and systems. The Company must establish a reputation as a
quality supplier. The products must perform as claimed so that the customer will
not need to test after the initial qualification and the Company must be open to
continuous improvement of its products and processes. If the Company can pass
these tests it believes it will become a primary or second source supplier to
the industry. However, this industry is subject to, among other risks, intense
competition and rapidly changing technology, and there can be no assurances as
to the Company's ability to anticipate and respond to the demands and
competitive aspects of this industry.
Traditional Optics
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
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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 rapidly pursue development of axial
gradient products. In addition, the Company's products compete with other
products currently produced by these manufacturers. The Company sells small
amounts of GRADIUM glass blanks for final fabrication to customers, which sales
compete directly with those of other larger producers of homogenous optical
quality glass such as Schott Glaswerke of Germany and Hoya Corporation of Japan.
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 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, less
than 0.05), the small skin depth of the gradient region (typically less than 3
mm), the lack of control of the shape of the resultant gradient profile, limited
glass compositions, and high per unit manufacturing costs.
Manufacturing
LightPath has progressed from maintaining only limited production
capabilities prior to April 1996 to a full scale commercial manufacturing
operation in its 13,300 square foot facility in Albuquerque, which the Company
began to occupy in 1996. In the larger facility, the Company has built a lens
manufacturing plant through the purchase of appropriate equipment, expanding and
training a production work force and implementing process controls. The Company
believes that the present manufacturing facility can produce in excess of 2
million lens blanks per year depending on product size and mix. However, to
date, the Company has not manufactured its products in such quantities, as its
sales have not supported this scale of production. The Company's purchase of
five larger, more sophisticated furnaces, milling machines and metrology
equipment, generated further production efficiencies in fiscal 1998, in the form
of yield efficiencies and reduced unit production costs. 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 has purchased some of the equipment necessary
for the production of the SMF collimator during fiscal 1998, the remaining
equipment needed for anticipated 1999 sales have been ordered at a projected
cost of approximately $250,000. Once this equipment is in place, the Company
believes its facility will meet the capacity requirements of its recently
introduced and planned optoelectronics products for several years.
The Company believes that low manufacturing costs will be 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. The Company has qualified and licensed
numerous finishers to fabricate lenses, three of which are located 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
for the foreseeable future. The Company entered into a 1997 strategic alliance
with Hikari Glass Co., Ltd. of Japan
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("Hikari" is a 40% owned subsidiary of Nikon) to consider using Hikari as a
possible second source for GRADIUM glass production, as a possible source for
high-volume blank production, and to increase the presence of GRADIUM glass in
Hikari's established Asian markets and to develop a continuous flow
manufacturing process, currently used by Hikari for high-end optical lenses. The
Company and Hikari continued to work toward these goals in fiscal 1998 and have
plans to implement some of the goals during fiscal year 1999.
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. Quality control will be critical to bring
telecommunication products to market as the customers demand rigorous testing
prior to purchasing a product. LightPath has protected its proprietary methods
of repeatable high quality manufacturing by patent disclosures and internal
trade secret controls. Due to manufacturing techniques developed by the Company,
it believes the costs to produce the SMF will be considerably less expensive
than the current competition. 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 and use
of off-the-shelf base glass, GRADIUM lenses are generally price competitive with
conventional homogenous lenses. In those cases where a GRADIUM lens may be more
expensive than its competition, the Company believes the lens price may be
offset by GRADIUM glass' superior abilities to reduce the number of lens
elements and/or to increase the performance and functionality of the complete
optical system. Base optical materials are manufactured and supplied by a number
of major manufacturers, such as Hikari, Schott Glaswerke and Hoya Corporation
and the Company believes that a satisfactory supply of optical materials 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 1998, the
Company had fourteen issued U.S. patents, four foreign patents and had filed
numerous applications for additional U.S. patents and 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 remainder expire
at various times through 2015. 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 be issued 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
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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 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
currently 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 currently 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 was engaged in basic
research and development that 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's initial flint product line is lead-based. During the past two
years, the flint GRADIUM glass family has been expanded to include crown
glasses, titania silicate glasses and polymer materials. 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
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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.
A LightPath employee working with DR Technologies, successfully
completed the development of GRADIUM polymer and acrylic materials. These
materials may be used for solar concentrators used in space applications and for
conformal optics, 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 further into 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, 1998 and 1997 of $564,779 and
$796,937, respectively. During fiscal 1997, the Company issued shares of Class A
Common Stock valued at approximately $238,000 to perform a benchmarking and
prediction analysis of technologies related to the Company's proprietary
processes in the manufacturing of GRADIUM glass. These costs were not recurring.
The Company currently plans to expend approximately $500,000 for research and
development during fiscal 1999 which amount could increase depending upon
Government contracts or awards for which the Company has applied.
Employees
The Company currently has twenty-eight full-time employees, two of
which are currently dedicated full time to LightChip. The Company expects to
hire four to eight additional employees in the next twelve months, primarily
consisting of manufacturing and sales personnel. Six of the Company's present
employees are engaged in management, administrative and clerical functions, four
in research and development, eight in production and ten 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 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. Currently the Company
believes its present facilities are sufficient for its current and planned
business needs over at least the next two years.
Item 3. Legal Proceedings
The Company is involved in various legal actions arising in the normal
course of its 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 Nasdaq
SmallCap Market system under the symbol "LPTHA" since February 22, 1996.
The Company estimates there were approximately 300 holders of record
and approximately 2500 beneficial holders on August 17, 1998. 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. The quotation information
below reflect inter-dealer prices, without retail mark-up, mark-down or
commission, and may not represent actual transactions.
Class A
Fiscal Year Ending Common Stock
June 30, 1997 High Low
-------------- ----- ---
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
June 30, 1998
-------------
Quarter ended September 30, 1997 $ 8.44 $ 5.13
Quarter ended December 31, 1997 $10.44 $ 5.56
Quarter ended March 31, 1998 $ 7.69 $ 5.75
Quarter ended June 30, 1998 $ 9.00 $ 5.88
On July 25, 1997, the Company completed a private placement (which
began June 30, 1997) for an aggregate of 180 shares of Series A Convertible
Preferred Stock (the "Series A Stock") and 320,000 attached Class C warrants.
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 proceeds received for the private placement of
Series A Stock was $1,800,000, less placement fees and related expenses
resulting in net proceeds of approximately $1,596,000. 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.
On October 2, 1997, the Company completed a private placement for an
aggregate of 230 shares of Series B Convertible Preferred Stock (the "Series B
Stock") and 317,788 attached Class E warrants. Each share of Series B Stock is
convertible into Class A Common Stock at the option of holder, with volume
limitations during the first 9 months, based on its stated value at the
conversion date divided by a conversion price. The conversion price is defined
as the lesser of $7.2375 or 85% of the average closing bid price of the
Company's Class A Common Stock for the five days preceding the conversion date.
Each Class E Warrant entitles the holder to purchase one share of Class A Common
Stock at $7.24 per share at any time through September 2000. The gross proceeds
received for the private placement of Series B Stock was $2,300,000, less
placement fees and related expenses resulting in net proceeds of approximately
$2,064,000. In addition, the placement agent was granted 47,668 Class F warrants
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to purchase shares of the Company's Class A common stock at a price of $7.24 per
share at any time through September 2002.
On February 9, 1998, the Company completed a private placement for an
aggregate of 375 shares of Series C Convertible Preferred Stock (the "Series C
Stock") and 337,078 attached Class G warrants. Each share of Series C 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 $6.675 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
G Warrant entitles the holder to purchase one share of Class A Common Stock at
$6.68 per share at any time through February 2001. The gross proceeds received
for the private placement of Series C Stock was $3,750,000, less placement fees
and related expenses resulting in net proceeds of approximately $3,530,000. In
addition, the placement agent was granted 58,427 Class H warrants to purchase
shares of the Company's Class A common stock at a price of $6.68 per share at
any time through February 2003.
All of the Preferred Stock, Class C, Class D, Class E, Class F, Class G
and Class H Warrants were issued to accredited investors in private placements
pursuant to Rule 506 of Regulation D promulgated under the Securities Act of
1933, as amended. Restrictions have been imposed on the resale of such
securities, including the placement of legends thereon noting such restrictions,
and written disclosure of such restrictions was made prior to issuance of the
securities.
On February 25, 1998, the Board of Directors of the Company declared a
dividend distribution of a right to purchase (a "Right") one share of Series D
Participating Preferred Stock for each outstanding share of Class A Common
Stock, $0.01 par value (the "Common Shares"), of the Company. The dividend
became payable on May 1, 1998 (the "Record Date") to stockholders of record as
of the close of business on that date. Each Right entitles the registered holder
to purchase from the Company one one-hundredth of a share of Series D
Participating Preferred Stock, $.01 par value, of the Company (the "Preferred
Shares"), at a price of $35.00 per share, subject to adjustment (the "Purchase
Price") following the occurrence of certain events. The description and terms of
the Rights are set forth in a Rights Agreement (the "Rights Agreement"), dated
as of May 1, 1998 between the Company and Continental Stock Transfer & Trust
Company, as Rights Agent (the "Rights Agent"). A copy of the Rights Agreement,
including the Certificate of Designation, the form of Rights Certificate and the
Summary of Rights to Purchase Preferred Stock to be provided to stockholders of
the Company, was attached as Exhibit 1 to the Company's Registration Statement
filed on Form 8-A, dated April 28, 1998.
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The Private Securities Litigation Reform Act of 1995 ("the Act")
provides a safe harbor for forward looking statements made by or on behalf of
the Company. All statements in this "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and elsewhere in this Report,
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 stage of
development, the need for additional financing, intense competition in various
aspects of its business and other risks described in the Company's reports on
file with the Securities and Exchange Commission. In light of these risks and
uncertainties, all of the forward-looking statements made herein 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. The Company
undertakes no obligation to update or revise any of the forward looking
statements contained herein.
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Results of Operations
Year ended June 30, 1998 ("1998") compared with the year ended June 30, 1997
("1997")
Revenues totaled $758,000 for 1998, an increase of approximately
$85,000 or 13% over 1997. The increase was attributable to $330,000 in lens
sales, primarily for lasers, distributors and wafer chip inspection markets
which was offset by a decrease of $245,000 in product development/license fees.
During 1998, the majority of the Company's lens sales were from two of the
largest YAG lasers manufactures and suppliers in the world Lumonics Corporation
and Rofin-Sinar GmbH. Both companies have qualified GRADIUM YAG lenses into
systems they produce. The Company filled a production order from Karl Storz for
500 lenses and sold $80,000 in catalog lenses to a U.S. distributor for their
international catalog. Sales into the wafer inspection market slowed in early
1998 due to problems with the Asian economy, however, sizeable orders were
received in late 1998. During the fourth quarter of 1998, the Company charged
$116,000 to Karl Storz, for the first production year's minimum license fee. For
calendar year 1999, a minimum license fee of $250,000 will be due from Karl
Storz. During 1998, the Company entered into an evaluation option, which expired
June 30, 1998, with CHUGAI BOYEKI (AMERICA) CORP. "CBC", which is a wholly-owned
subsidiary of CHUGAI BOYEKI CO., Ltd., for which the Company received a $40,000
licensing fee. CBC elected not to enter into an exclusive arrangement for lenses
with the Company. The Company has negotiated with Fuji to retain an exclusive
agreement for television camera lenses after the April 1998 contract expired,
however, Fuji is still evaluating lens data and will not proceed until their
test process is complete. Revenues for government funded subcontracts in the
area of solar energy totaled $68,000 for 1998 versus $247,000 in 1997. Phase 2
funding for the solar energy subcontract concluded in 1998 and the government
has recommended that the product is ready for commercialization, thereby
eliminating Phase 3 funding. The Company has made several commercial
presentations in this area and has submitted several additional funding requests
to the U.S. government for solar projects. Subsequent to June 30, 1998, total
Phase 2 funds of $750,000 were awarded for continuation of an optoelectronic
project the Company had worked on in 1997. The Company's subcontract totals
$350,000 for the Phase 2 funding which will be completed over a 2 year period.
At June 30, 1998, a backlog of $141,000 existed for lens sales and $350,000 in
government project funding.
The first quarter of 1998 saw the addition of a Vice President of
Marketing and Sales whose responsibility is to expand the Company's presence in
traditional optics and develop emerging markets such as optoelectronics and
photonics. Customer inquiries into the ability of GRADIUM glass to solve
optoelectronic problems, (specifically in the areas of fiber
telecommunications), the unique properties of GRADIUM glass, resolution of
packaging and alignment issues by the Company and advances made by the Company's
subsidiary LightChip, led the Company to further develop its strategy for
optoelectronic products. GRADIUM glass is an enabling material for many
optoelectronic products and innovative laser fusion techniques developed by the
Company will provide its optoelectronics products certain competitive
advantages. Product development in the area of optoelectronics during the third
quarter of 1998 lead to the Company's first passive optoelectronic product, a
single mode fiber collimator (SMF), which was demonstrated at the Optical Fiber
Conference in February 1998. The SMF is a key element in all fiber optic
systems, including wavelength division multiplexing (WDM) equipment. The SMF
straighten and make parallel, diverging light as it exits a fiber. The Company
is now offering two product levels, the collimating lens and the SMF. The
collimating lens can replace existing lenses with immediate improvements in
performance, repeatability and cost. The SMF offers superior performance in the
areas of back reflection and insertion loss. It is also more compact and the
Company believes it can be manufactured at a significantly lower cost than the
competitive products currently available in commercial quantities. The SMF, a
large beam collimator and collimating lenses have been delivered for testing to
potential customers. The first scale-up production orders are expected in fall
1998. Based on the cost of the Company's prototypes and GRADIUM lenses, the
Company believes the profit margin in optoelectronics will equal or exceed the
margins historically experienced in the traditional optics markets. The
development of these products is anticipated to facilitate the Company's
presence as a leader in this emerging telecommunications optoelectronics market
place which is projected to exceed $10 billion in gross sales by the year 2000.
However, this industry is subject to, among other risks, intense competition and
rapidly changing technology, and there can be no assurances as to the Company's
ability to anticipate and respond to the demands and competitive aspects of this
industry.
16
<PAGE>
Although the Company has experienced significant growth and will continue to
serve the traditional optics customers, the Company intends to devote a
substantial portion of its resources and focus to the fiber telecommunications
and optoelectronics markets.
The Company continues to work with a number of OEM's towards the
completion of projects which may result in production orders for LightPath. The
Company formalized relationships with four additional foreign distributors in
1998 bringing its total to eight industrial, optoelectronic and medical
component distributors based around the globe. The Company believes these
distributors may create new markets for GRADIUM in their respective countries
primarily in the area of sales into the YAG laser market. As shown by the
distributor, Permanova Lasersystems AB of Sweden which completed a lengthy trial
and testing period of GRADIUM YAG lenses. The lenses are now qualified into
systems produced by Rofin-Sinar GmbH, a major high-powered CO2 and YAG laser OEM
headquartered in Germany.
In 1998, cost of sales was 55% of product sales, a significant decrease
from 1997, when cost of sales was 76% of product sales. The decrease was
primarily due to reductions in outside finishing expenses and more efficient
production techniques. It is anticipated that with increased volume and the
increased utilization of off-shore lens finishers, the cost of production could
be decreased further. Administrative costs increased $627,916, or 22% from 1997,
primarily due to the addition of personnel in sales and marketing,
administration, LightChip expenses and operations along with increased overhead
in these areas. The Company's public awareness campaign, through print
advertising, web site and trade shows continues to generate product inquiries.
Research and development costs decreased $232,158 in 1998 versus 1997. During
1997, the Company issued shares of Class A Common Stock valued at approximately
$238,000 to perform a benchmarking and prediction analysis of technologies
related to the Company's proprietary processes in the manufacturing of GRADIUM
glass. These costs were not recurring. Several of the research department staff
are being charged to LightChip and a portion of their costs are being reimbursed
by the subsidiary. The focus of the development efforts has been to expand
GRADIUM product lines to the areas of multiplexers and interconnects for the
telecommunications field, the addition of the crown glass product line to
supplement its existing flint products, and the development of acrylic axial
gradient material to extend the product range.
Investment income increased approximately $62,000 in 1998 due to the
increase in interest earned on temporary investments as cash levels increased
due to the 1998 private placements of convertible preferred stock. Interest
expense was not significant in 1998 or 1997. The Company funded its portion of
LightChip during 1998 and announced the hiring of LightChip's CEO. The Company
accounts for the investment in LightChip under the equity method and recognized
a loss of $23,720, until its share of net losses reduced the investment to zero.
During June 1998, the Company committed to purchase $1.25 million of LightChip
preferred stock thereby requiring the Company to recognize an additional
$921,662 of LightChip's loss in 1998.
Net loss of $4,331,290 in 1998 was an increase of $1,333,000 from 1997
of which $945,382 was recognition of LightChip's loss. The remaining increase of
$387,618 was due to an increase in gross margin of $191,685, a decrease in
product development fees of $245,239, and increases in selling, general and
administrative costs of $627,916 which are offset by lower research and
development costs of $232,158 and the increase in other income(expense) of
$61,694. Net loss applicable to common shareholders of $6,059,519 included
additional charges of $1,386,700 for the imputed dividend on preferred stock and
$311,529 for the 8% premium on the preferred stock. Net loss per share of $2.00
was an increase of $.91 of which $.31 was due to LightChip's loss and $.56 was
due to the imputed dividend and the 8% premium on the preferred stock.
Financial Resources and Liquidity
LightPath had previously financed its operations through private
placements of equity, or debt until February 1996 when the IPO generated net
proceeds of approximately $7,200,000. In July 1997, the Company completed a
preferred stock private placement which generated net proceeds of approximately
17
<PAGE>
$1,596,000. Some of the Series A Preferred Stock investors entered into two
additional private placements, the Series B Preferred Stock which generated net
proceeds of approximately $2,064,000 when completed on October 2, 1997 and the
Series C Preferred Stock which generated net proceeds of approximately
$3,530,000 when completed on February 9, 1998. The Company intends to continue
to explore additional funding opportunities in fiscal year 1999. Cash used in
operations for fiscal 1998 totaled approximately $3.6 million, an increase of
$750,000 from fiscal 1997, primarily due to administrative costs with the
addition of personnel in sales and marketing, administration and operations
along with increased overhead in these areas. The Company expects to continue to
incur losses until such time, if ever, as it obtains market acceptance for its
products at sale prices and volumes which provide adequate gross revenues to
offset its operating costs. During fiscal 1998, actual capital equipment and
patent protection expenditures were approximately $270,000 versus $772,000 in
fiscal 1997. Commitments for $250,000 of capital equipment are outstanding at
June 30, 1998. The majority of the capital expenditures during 1998 were for
additional computers and equipment to expand the Company's manufacturing
facilities.
The Company purchased its 51% of the voting stock of LightChip for
$23,720 in 1998. LightChip completed $890,000 of bridge financing in fiscal 1998
from a syndicated group of accredited investors. Subsequent to June 30, 1998,
LightChip obtained a significant equity investment of $6.5 million from the sale
of convertible preferred stock to LightPath ($1.25 million) and AT&T Ventures
($5.25 million). Phase one of the funding, approximately $3.8 million, occurred
in September 1998 and the balance is due at the next stage of product
development. In addition, debt holders of LightChip converted their balance to
preferred stock and exercised $510,000 of warrants as part of the equity
investment. As a result of these subsequent financings, the Company currently
controls less than 25% of LightChip's voting stock.
The Company believes that projected product sales and proceeds from the
sale of its Series C Convertible Preferred Stock will provide adequate working
capital into fiscal 1999 and the facilitation of a more rapid entrance into
optoelectronics development and sales. The Company intends to satisfy its fiscal
1999 obligation to purchase preferred stock in LightChip and capital
requirements by revenues generated from projected future product sales, and the
reduction of operating expenses. Such sales will depend on the extent that SMF,
collimating lenses and GRADIUM glass becomes commercially accepted and at levels
sufficient to sustain its operations. Although lens sales for 1998 have
increased 2.6 times 1997 levels, there can be no assurance that the Company will
generate sufficient revenues to fund its future operations and growth
strategies. In addition, the Company may be required to seek additional
financing to fund its obligation for LightChip 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's
business and results of operations will be materially adversely affected and the
Company may 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 $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 $225,000 in fiscal year 1998 and $770,000 in fiscal year 1997.
Additional capital expenditures of approximately $500,000, primarily intended
for manufacturing equipment are planned for the Company during the 1999 fiscal
year.
18
<PAGE>
Year 2000 Risks; Inflation; Seasonality
Some computer applications were originally designed to recognize
calendar years by their last two digits. As a result, calculations performed
using these truncated fields will not work properly with dates from the year
2000 and beyond. The Company has determined that its internal computer systems
and software products were produced in compliance with the Year 2000 issue and
no material remediation costs have been incurred or are expected to be incurred
by the Company. The Company has undertaken to confirm in writing whether the
internal business operations of third parties with whom it has a material
relationship will be affected by the Year 2000 issue. The Company's assessment
is not yet complete and the Company projects the assessment process will be
completed prior to March 31, 1999.
The Company has not been significantly impacted by inflation in 1998
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 seasonal factors will have a
significant impact on its business.
Recent Accounting Pronouncements
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.
The Financial Accounting Standards Board issued Statement No. 131,
Disclosures about Segments of Enterprise and Related Information, which is
effective for fiscal years beginning after December 15, 1997. SFAS 131
establishes reporting requirements for segments of a company's business.
Management intends to provide the required segment disclosures for the Company's
two market segments, traditional optics and optoelectronics markets when
required by SFAS 131.
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.
None
19
<PAGE>
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 45 Chairwoman
Donald E. Lawson 47 President, Chief Executive Officer,
Treasurer and Director
James L. Adler, Jr. 70 Director
Milton Klein, M.D. (1) 50 Director
Louis Leeburg (2) 44 Director
Haydock H. Miller, Jr. (1, 2) 73 Director
James A. Wimbush 62 Director
- ---------------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
Leslie A. Danziger has been Chairwoman of the Company since its
incorporation in June 1992, and has also held the position of CEO until April
1998, and President from August 1995 until October 1997. 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., a Director
of the Company.
Donald E. Lawson has served as a Director of the Company and has
been CEO since April 1998, and President since October 1997. He previously held
the positions of Executive Vice President 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.
James L. Adler Jr. has served as a Director of the Company since
October 1997. Since 1989 he has been a partner at the law firm of Squire Sanders
& Dempsey L.L.P., which has acted as general counsel to the Company since
February 1996. Mr. Adler was formerly a partner of Greenbaum, Wolff & Ernst, New
York City and of Storey & Ross, Phoenix, until the merger of the latter firm
with Squire Sanders & Dempsey L.L.P. in 1989. Mr. Adler is a corporate,
securities and international lawyer. Mr. Adler serves as President of the
Arizona Business Leadership Association, a member of the Arizona District Export
Council, as a Trustee of the
20
<PAGE>
Phoenix Committee on Foreign Relations, and as a member of the Phoenix Mayor's
Millenium 2000 Committee. He has previously served as Chairman of the
International Law Section of the Arizona State Bar Association and, by
gubernatorial appointments, as a Member of the Investment Committee of the
Arizona State Retirement System and as a Member and Chairman of the Investment
Committee of the State Compensation Fund. Mr. Adler graduated from Carleton
College, magna cum laude in 1949 and in 1952 from Yale Law School. He is a
member of the Arizona State Bar.
Milton Klein, M.D. has served as a Director of the Company since its
inception. 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. 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 early in the Company's development.
Louis Leeburg has served as a Director of the Company since May 1996.
Since 1997 Mr. Leeburg has been with The Kilday Group, a real estate development
company. From 1993 to 1997 he was affiliated 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.
James A. Wimbush has served as a Director of the Company since May
1998. He currently provides consulting services to venture capital groups and
small cap companies. From 1984 until 1995 he served as Chairman and CEO of
Lukens Medical Corporation, a medical device manufacturer. Prior to that he
spent twenty years with Ethicon, Inc., a manufacturer of medical products, the
Somerville, NJ division of Johnson & Johnson, concluding with four years as
President. Mr. Wimbush received a B.S. in Finance and attended graduate school
at Saint Louis University. He completed the Advanced Management Program at the
Harvard Graduate School of Business.
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, 1998, all Section 16(a)
filing requirements applicable to its officers, directors and greater than 10%
beneficial owners were complied with.
21
<PAGE>
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 21, 1998 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 21, 1998 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 21, 1998 and is incorporated herein by
reference.
22
<PAGE>
Item 13. Exhibits and Reports on Form 8-K.
a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C> <C>
3.1 Certificate of Incorporation of Registrant, as amended 1
3.2 Certificate of Designations filed November 10, 1995 with the
Secretary of State of the State of Delaware 1
3.3 Bylaws of Registrant 1
3.4 Certificate of Designation filed February 6, 1998 with the Secretary of
State of the State of Delaware 2
9.0 Form of Voting Trust Agreement dated January 10, 1996, among
certain stockholders of the Registrant 1
9.1 Rights Agreement dated May 1, 1998 3
10.1 Employment Agreement between Registrant and Leslie A. Danziger 1
10.3 Employment Agreement between Registrant and Donald E. Lawson *
10.4 Product Development and License Agreement between Registrant
and Karl Storz GMBH & Co. dated December 22, 1994 1
10.6 Omnibus Incentive Plan 4
10.7 Directors Stock Option Plan 4
10.8 Amended Omnibus Incentive Plan 5
11 Computation of Net Loss Per Share *
23.1 Consent of KPMG Peat Marwick LLP *
27 Financial Data Schedule *
</TABLE>
1. This exhibit was filed as an exhibit to the Company's Registration
Statement on Form SB-2 (File No: 33-80119) and is incorporated herein by
reference there to.
2. This exhibit was filed as an exhibit to the Company's Registration
Statement on Form S-3 (File No: 333-47905) dated March 13, 1998 and is
incorporated herein by reference there to.
3. This exhibit was filed as an exhibit to the Company's Registration
Statement on Form 8-A (File No: 000-27548, respectively) dated April 28,
1998 and is incorporated herein by reference there to.
4. This 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 is incorporated herein by reference there to.
5. This exhibit was filed as an exhibit to the Company's Registration
Statement on Form S-8 (File No: 333-41705) dated December 8, 1997 and is
incorporated herein by reference there to.
* Filed herewith.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarterly period
ended June 30, 1998.
23
<PAGE>
LightPath Technologies, Inc.
Index to Financial Statements
Report of KPMG Peat Marwick LLP, Independent Auditors .......................F-2
Audited Financial Statements
Balance Sheet................................................................F-3
Statements of Operations.....................................................F-4
Statements of Stockholders' Equity...........................................F-5
Statements of Cash Flows.....................................................F-6
Notes to Financial Statements................................................F-7
F-1
<PAGE>
Report of KPMG Peat Marwick LLP, Independent Auditors
The Board of Directors
LightPath Technologies, Inc.:
We have audited the accompanying balance sheets of LightPath Technologies, Inc.,
as of June 30, 1998 and 1997, and the related statements of operations,
stockholders' equity, and cash flows for the years 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 audits.
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 audits provide 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.,
as of June 30, 1998 and 1997, and the results of its operations and its cash
flows for the years 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 11, 1998, except for Note 15
which is as of September 9, 1998
F-2
<PAGE>
LightPath Technologies, Inc.
Balance Sheets
<TABLE>
<CAPTION>
June 30, June 30,
1998 1997
----------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 4,237,400 $ 993,505
Trade accounts receivable 256,491 167,258
Inventories (Note 2) 488,710 251,914
Advances to employees and related parties 38,560 2,865
Prepaid expenses and other 43,629 38,604
----------------------------
Total current assets 5,064,790 1,454,146
Property and equipment - net (Note 3) 723,838 764,897
Intangible assets - net (Note 4) 519,839 490,272
----------------------------
Total assets $ 6,308,467 $ 2,709,315
============================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued liabilities $ 190,530 $ 325,571
Accrued payroll and benefits (Note 7) 232,051 255,878
----------------------------
Total current liabilities 422,581 581,449
Accrued loss of LightChip, Inc. (Notes 5 and 15) 921,662 --
Note payable to stockholder (Note 6) 30,000 30,000
Commitments and contingencies (Note 13)
Redeemable common stock (Note 10)
Class E-1 - performance based and redeemable common stock
1,481,584 and 1,449,942 shares issued and outstanding
14,816 14,499
Class E-2 - performance based and redeemable common stock
1,481,584 and 1,449,942 shares issued and outstanding
14,816 14,499
Class E-3 - performance based and redeemable common stock
987,715 and 966,621 issued and outstanding
9,877 9,666
Stockholders' equity (Notes 9 and 10)
Preferred stock, $.01 par value; 5,000,000 shares authorized;
Series A convertible shares, 49 and 45 issued and outstanding,
Series B convertible shares, 126 and 0 issued and outstanding,
Series C convertible shares, 361 and 0 issued and outstanding,
$5,360,000 liquidation preference at June 30, 1998 5 1
Common stock:
Class A, $.01 par value, voting; 34,500,000 shares authorized;
3,330,607 and 2,766,185 shares issued and outstanding
33,306 27,662
Additional paid-in capital 28,103,439 19,244,055
Accumulated deficit (23,242,035) (17,212,516)
----------------------------
Total stockholders' equity 4,894,715 2,059,202
----------------------------
Total liabilities and stockholders' equity $ 6,308,467 $ 2,709,315
============================
</TABLE>
See accompanying notes
F-3
<PAGE>
LightPath Technologies, Inc.
Statements of Operations
<TABLE>
<CAPTION>
Year Ended June 30
1998 1997
----------------------------
<S> <C> <C>
Revenues
Lenses and other $ 529,318 $ 199,524
Product development fees 228,914 474,153
----------------------------
Total revenues 758,232 673,677
Costs and expenses
Cost of goods sold 289,918 151,809
Selling, general and administrative 3,456,567 2,828,651
Research and development 564,779 796,937
----------------------------
Total costs and expenses 4,311,264 3,777,397
----------------------------
Operating loss (3,553,032) (3,103,720)
Other income(expense)
Investment income 172,341 110,044
Interest expense (5,217) (4,614)
Equity in loss of LightChip, Inc. (Note 5) (945,382) --
----------------------------
Net loss $(4,331,290) $(2,998,290)
============================
Net loss applicable to common shareholders (Note 11) $(6,029,519) $(2,998,290)
============================
Basic and diluted net loss per share (Note 11) $ (2.00) $ (1.09)
============================
Number of shares used in per share calculation 3,010,861 2,755,001
============================
</TABLE>
See accompanying notes.
F-4
<PAGE>
LightPath Technologies, Inc.
Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Class A
Common Stock
Preferred ------------------- Additional
Stock Number of Paid-in Accumulated
Amount Shares Amount Capital Deficit Total
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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
Issuance of 135 shares Series A, 230 shares
Series B and 375 shares Series C convertible
preferred stock, net 7 -- -- 6,798,598 -- 6,798,605
Issuance of common stock -- 3,588 36 26,289 -- 26,325
Exercise of stock options -- 46,994 470 251,397 -- 251,867
Exercise of warrants -- 46,890 469 78,287 -- 78,756
Issuance of common stock upon conversion of
131 shares Series A, 104 shares Series B and
14 shares Series C convertible preferred stock
to common stock (3) 456,853 4,568 (4,565) -- --
Common stock issued for services 10,097 101 11,149 -- 11,250
Imputed dividend on Series A, Series B and
Series C convertible preferred stock -- -- -- 1,386,700 (1,386,700) --
8% premium on Series A, Series B and Series
C convertible preferred stock -- -- -- 311,529 (311,529) --
Net loss -- -- -- -- (4,331,290) (4,331,290)
------------------------------------------------------------------------------
Balances at June 30, 1998 $ 5 3,330,607 $ 33,306 $ 28,103,439 $(23,242,035) $ 4,894,715
==============================================================================
</TABLE>
See accompanying notes.
F-5
<PAGE>
LightPath Technologies, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended
June 30
--------------------------
1998 1997
--------------------------
<S> <C> <C>
Operating activities
Net loss $(4,331,290) $(2,998,290)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 280,807 205,397
Services provided for common stock 11,250 256,261
Equity in loss of LightChip 945,382 --
Changes in operating assets and liabilities:
Receivables, advances to employees, related parties (124,928) (132,178)
Inventories (236,796) (185,728)
Prepaid expenses and other (5,025) 44,005
Accounts payable and accrued expenses (158,868) (54,995)
--------------------------
Net cash used in operating activities (3,619,468) (2,865,528)
Cash flows from investing activities
Property and equipment additions (223,663) (520,397)
Costs incurred in acquiring patents (45,652) (251,237)
Investment in LightChip (23,720) --
--------------------------
Net cash used in investing activities (293,035) (771,634)
Cash flows from financing activities
Proceeds from sales of Convertible Series A, Series B and Series C
preferred stock, net 6,798,605 391,454
Proceeds from exercise of common stock options and warrants 331,468 --
Proceeds from issuance of common stock 26,325 4,080
Repurchase of common stock -- (100,000)
--------------------------
Net cash provided by financing activities 7,156,398 295,534
--------------------------
Net increase (decrease) in cash and cash equivalents 3,243,895 (3,341,628)
Cash and cash equivalents at beginning of period 993,505 4,335,133
==========================
Cash and cash equivalents at end of period $ 4,237,400 $ 993,505
==========================
Supplemental disclosure of cash flow information:
Class A common stock issued for services $ 11,250 $ 256,261
Class E common stock issued (retired) $ 845 $ (123)
</TABLE>
See accompanying notes.
F-6
<PAGE>
LightPath Technologies, Inc.
Notes to Financial Statements
June 30, 1998
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 other optical materials and performs research and development for
optical solutions for the fiber telecommunications and traditional optics
market. 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 and enabling technology for
emerging markets such as optoelectronics and telecommunications.
Basis of Presentation
The Company has incurred substantial losses since inception. During fiscal year
1996 the Company completed an initial public offering ("IPO") and in fiscal year
1997 and 1998 the Company issued three private placements of convertible
preferred stock 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 intends to
utilize the net proceeds from a private placement completed in February 1998 and
cash flows from projected product sales to finance the Company's working capital
and other requirements for fiscal year 1999. However, without the increased
sales of GRADIUM glass and optoelectronic 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.
Investments consists of the Company's 51% ownership interest in LightChip Inc.
(LightChip) which is accounted for under the equity method. The Company's voting
interest fell below 25% subsequent to June 30, 1998 due to a private placement
of equity by LightChip. See Note 15.
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-7
<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 products upon shipment or as earned
under product development agreements. During fiscal 1998, approximately $135,000
of lens sales were derived from one YAG laser customer.
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 The Company adopted Statement of Financial Accounting Standards
No. 128 (FAS 128), Earnings per Share, on December 31, 1997. The impact of FAS
128 on the calculation of earnings (loss) per share was not material, however,
all prior period amounts were restated to conform to FAS 128. See Note 11.
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.
Fair values of financial instruments of the Company are disclosed 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 is accounted for under the provisions of
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 fair value is required.
2. Inventories
The components of inventories include the following at June 30:
1998 1997
Finished goods and work in process $ 362,176 $ 153,629
Raw materials 126,534 98,285
----------------------------
Total inventories $ 488,710 $ 251,914
============================
F-8
<PAGE>
LightPath Technologies, Inc.
Notes to Financial Statements - Continued
3. Property and Equipment
Property and equipment consist of the following at June 30:
1998 1997
Manufacturing equipment $1,050,518 $ 910,083
Computer equipment and software 294,361 236,864
Furniture and fixtures 123,176 113,801
Leasehold improvements 117,227 104,369
--------------------------
1,585,282 1,365,117
Less accumulated depreciation 861,444 600,220
--------------------------
$ 723,838 $ 764,897
==========================
4. Intangible Assets
Intangible assets consist of the following at June 30:
1998 1997
Patents and trademarks granted $ 309,385 $ 244,653
Patent applications in process 266,003 285,083
--------------------------
575,388 529,736
Less accumulated amortization 55,549 39,464
--------------------------
$ 519,839 $ 490,272
==========================
5. Investment in LightChip, Inc.
During fiscal 1998, the Company applied the equity method of accounting to its
$23,720 cash investment in LightChip, a development stage company, until its
share of net losses were reduced to zero at which time the Company discontinued
applying the equity method of accounting. In June 1998, the Company committed to
purchase $1.25 million of LightChip convertible preferred stock thereby
requiring the Company to recognize a loss of $921,662 for substantially all of
LightChip's losses during fiscal 1998.
Summarized financial information of LightChip as of and for the period ended
June 30, 1998 follows:
LightChip Inc. June 30,
Summarized financial information 1998
----
Assets $ 152,155
===========
Liabilities and Equity
Convertible debt $ 890,000
Other liabilities 183,817
-----------
Total liabilities $ 1,073,817
Shareholders' Equity $ 46,045
Accumulated deficit (967,707)
-----------
Total shareholders' equity $ (921,662)
-----------
Total liabilities and shareholders' equity $ 152,155
===========
For fiscal 1998
Net loss during development stage $ (967,707)
===========
F-9
<PAGE>
LightPath Technologies, Inc.
Notes to Financial Statements - Continued
6. Note Payable To Stockholder
At June 30, 1998 and 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 accept 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. Interest of $5,217 and $4,614 was paid in 1998 and 1997,
respectively.
7. 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, 1998 and 1997, the total deferred
amounts were $153,435 and $201,825, respectively. Key officers and employees of
the Company have agreed to make repayment of the June 30, 1998 deferred balance
plus the $7,950 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.
8. 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 previously
capitalized for tax purposes will be amortized over a five year period
commencing July 1, 1996.
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 are as follows at
June 30:
Deferred tax assets: 1998 1997
----------- -----------
Start-up expenses, net $ 1,792,000 $ 2,387,000
Research and development expenses 685,000 527,000
Net operating loss carryforwards 3,894,000 2,214,000
Research and development credits 193,000 150,000
Other (233,000) (297,000)
--------------------------
Total deferred tax assets 6,331,000 4,981,000
Valuation allowance for deferred tax assets (6,331,000) (4,981,000)
--------------------------
$ -- $ --
==========================
The valuation allowance has increased by $1,350,000 and $1,214,000 during the
years ended June 30, 1998 and 1997, 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 for tax purposes.
The reconciliation of income tax attributable to operations computed at the U.S.
federal statutory tax rates and the actual tax provision of zero results from
the increased valuation allowance. At June 30, 1998, the Company has net
operating loss carryforwards for federal income tax purposes of approximately
$10 million which will begin to expire in 2009 if not previously utilized. The
Company also has research and development credit carryforwards of approximately
$193,000 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.
F-10
<PAGE>
LightPath Technologies, Inc.
Notes to Financial Statements - Continued
9. Employee and Director Stock Option Plans
At June 30, 1998 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. No compensation
costs have been recognized for its fixed stock options plans where fair market
value of the underlying stock equaled 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 1998 to an aggregate of 1,825,000
and 75,000 shares, respectively.
The Incentive Plan authorizes the Company to grant various awards using common
stock, and cash to officers, key employees and consultants of the Company. To
date only incentive stock options have been issued under the plan with an
average 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, 1998 were
960,026 shares of Class A common stock.
The Directors Plan 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 the underlying stock 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, 1998 were 3,500 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 Plans.
The Company did not issue any nonqualified options in 1998 or 1997. 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.
F-11
<PAGE>
LightPath Technologies, Inc.
Notes to Financial Statements - Continued
A summary of the status of the stock option plans as of June 30, 1998 and 1997
and changes during the years ended is presented below:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Weighted-Avg.
Incentive Directors Exercise
Shares under option: Plan Plan Nonqualified Price
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at June 30, 1996 102,384 3,500 49,694 $9.30
Granted 128,000 22,000 - $5.62
Exercised - - - -
Lapsed or canceled (909) - - $5.50
-----------------------------------------------------------------
Outstanding at June 30, 1997 229,475 25,500 49,694 $7.52
Granted 698,000 49,000 - $7.62
Exercised 41,701 3,000 2,293 $5.44
Lapsed or canceled (20,800) - - $5.68
=================================================================
Outstanding at June 30, 1998 864,974 71,500 47,401 $7.61
=================================================================
Options exercisable:
June 30, 1998 221,374 34,836 47,401 $8.34
</TABLE>
The following table summarizes information about fixed stock options outstanding
at June 30, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ---------------------------------------------------------------------------------------------------------
Weighted-Avg.
Range of Number Remaining Number
Exercise outstanding at Contractual Weighted-Avg. Exercisable at Weighted-Avg.
Prices June 30, 1998 Life Exercise Price June 30, 1998 Exercise Price
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 5 to 15 968,263 9.0 Years $ 7.13 287,999 $ 6.75
$25 to 40 12,658 5.3 $35.71 12,658 $ 35.71
$41 to 55 2,954 4.4 $45.60 2,954 $ 45.60
--------------- -----------------
$ 5 to 55 983,875 8.9 $ 7.61 303,611 $ 8.34
=============== =================
</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 forma amounts indicated below:
1998 1997
---- ----
Net loss applicable to common shareholders,
as reported $(6,029,519) $(2,998,290)
Net loss applicable to common shareholders,
pro forma $(6,707,519) $(3,056,290)
Basic and diluted net loss per share, as
reported $(2.00) $(1.09)
Basic and diluted net loss per share, pro
forma $(2.23) $(1.11)
The weighted-average fair value of options granted during the years ended June
30, 1998 and 1997 was $4.05 and $2.47, respectively. 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 fiscal 1998: dividend yield of 0%; expected volatility of 75%; risk
free interest rate of 7% (8% for fiscal 1997); and expected lives of 3 years (2
years for fiscal 1997).
F-12
<PAGE>
LightPath Technologies, Inc.
Notes to Financial Statements - Continued
10. 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 Stock - the Company's common 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 approximately $8.7 million in fiscal 1999, or is at
least $11.2 million in fiscal 2000; or (ii) the Company's 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 (iii) the
Company is acquired by or merged with or into another entity during the
period referred to in (ii) 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)
above.
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 $12 million in fiscal 1999, or is at least $15
million 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 than $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 $30 million in fiscal 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 $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 pretax minimum
performance milestones are increased proportionately with the issuance
of additional shares of common stock or convertible securities after the
IPO. The above milestones have been adjusted to reflect stock issuances
during the year ended June 30,1998.
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
F-13
<PAGE>
LightPath Technologies, Inc.
Notes to Financial Statements - Continued
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.
Preferred Stock -the Company's preferred stock consists of the following:
Authorized 5,000,000 shares of preferred stock. In June 1997, the Board of
Directors designated 250 shares as Series A Convertible Preferred Stock; $.01
par value. The Company entered into a private placement transaction which
provided proceeds on the sale of 180 shares of Series A Preferred Stock totaling
$1,800,000, less issuance costs of approximately $204,000, resulting in net
proceeds of approximately $1,596,000 by the final closing date, July 25, 1997.
In September 1997, the Board of Directors designated 300 shares as Series B
Convertible Preferred Stock; $.01 par value. The Company entered into a private
placement transaction which provided proceeds on the sale of 230 shares of
Series B Preferred Stock totaling $2,300,000, less issuance costs of
approximately $232,000 resulting in net proceeds of approximately $2,064,000 by
the final closing date, October 2, 1997. In January 1998, the Board of Directors
designated 500 shares as Series C Convertible Preferred Stock; $.01 par value.
The Company entered into a private placement transaction which provided proceeds
on the sale of 375 shares of Series C Preferred Stock totaling $3,750,000, less
issuance costs of approximately $215,000 resulting in net proceeds of
approximately $3,530,000 by the final closing date, February 9, 1998.
The Series A, Series B and the Series C Convertible Preferred Stock has a stated
value and liquidation preference of $10,000 per share, plus an 8% per annum
premium. The holders of the Series A, Series B and Series C Convertible
Preferred Stock are not entitled to vote or to receive dividends. Each share of
Series A, Series B and Series C Convertible Preferred Stock is convertible into
Class A common stock at the option of the holder, with volume limitations during
the first 9 months after the respective final closing date, based on its stated
value at the conversion date divided by a conversion price. Approximately
457,000 shares of Class A Common Stock was issued upon the conversion of 131
shares of Series A Preferred Stock, 104 shares of Series B Preferred Stock and
14 shares of Series C Preferred Stock during fiscal 1998. The conversion price
is defined as the lesser of $5.625, $7.2375 and $6.675 for the Series A, Series
B and Series C Convertible Preferred Stock, respectively, or 85% of the average
closing bid price of the Company's Class A common stock for the five days
preceding the conversion date. The discount provision in each of the Series A,
Series B and Series C Preferred Stock is recognized as an imputed dividend in
the amount of $318,200, $406,700, and $661,800, respectively, increasing net
loss applicable to common shareholders on a pro rata basis from the date of
issuance to the first date that conversion can occur.
Designations, rights, and preferences related to the remaining preferred shares
may be determined by the Board of Directors. The terms of any series of
preferred stock may include priority claims to assets and dividends and voting
or other rights.
Warrants
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, 1998
2,667,759 Class A and 1,851,241 Class B warrants were exercisable and
outstanding. During fiscal 1998, 11,251 shares of Class A common stock were
issued upon the conversion of Class A warrants. 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. All of the Class A common stock
underlying the Class A and Class B warrants is registered and contractual
restrictions on trading have 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
F-14
<PAGE>
LightPath Technologies, Inc.
Notes to Financial Statements - Continued
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. Class E and F, and Class G and H warrants were issued in
connection with the private placements of the Series B Convertible Preferred
Stock which was completed by October 2, 1997 and the Series C Preferred Stock
issued on February 9, 1998 respectively. A total of 317,788 Class E warrants
were granted to the Series B preferred stockholders which entitles the holder to
purchase one share of Class A common stock at an exercise price of $7.24 until
September 2000. A total of 47,668 Class F warrants were granted to the placement
agent which entitles the holder to purchase one share of Class A common stock at
an exercise price defined as $7.24. A total of 337,078 Class G warrants were
granted to the Series C preferred stockholders which entitles the holder to
purchase one share of Class A common stock at an exercise price of $6.68 until
February 2000. A total of 58,427 Class H 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 $6.68. Approximately 36,000 shares of Class A
common stock were issued upon the conversion of 135,639 Class C, Class D and
Class H warrants during fiscal 1998. The Company registered the resale of the
Class A common stock underlying the Series A, Series B, and Series C Preferred
Stock and the associated warrants on individual Form S-3's which became
effective during fiscal 1998.
11. Net Loss Per Share
Basic net loss per common share is computed based upon the weighted average
number of common shares outstanding during each period presented. The
computation of Diluted net loss per common share does not differ from the basic
computation because potentially issuable securities would be anti-dilutive. The
following outstanding securities were not included in the computation of diluted
earnings per share at June 30, 1998, (approximate): Class A common stock options
984,000, private placement warrants 1,009,000, IPO warrants 4,519,000, 900,000
Class A shares reserved for the convertible preferred stock and the Class E
common stock that is automatically converted into Class A common stock upon
attainment of certain performance criteria (see Note 10). However, the eight
percent premium earned by the preferred shareholders of $311,529 was added to
the net loss for computation purposes for the year ended June 30, 1998. In
addition, net loss applicable to common shareholders was increased by an imputed
dividend in the amount of $1,386,700 for the year ended June 30, 1998. The
imputed dividend resulted from a discount provision included in the Series A
Preferred Stock issued on July 25, 1997, the Series B Preferred Stock issued on
October 2, 1997 and the Series C Preferred Stock issued on February 9, 1998. The
imputed dividend has been fully amortized by June 30, 1998.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
Loss Shares Per Share
Year Ended June 30, (Numerator) (Denominator) Amount
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1998
- ----
Net loss $(4,331,290)
Less: Preferred Stock Premium (311,529)
Imputed dividend on Series A, Series B
and Series C Preferred Stock (1,386,700)
Basic and Diluted EPS
Net loss applicable to common shareholders $(6,029,519) 3,010,861 $(2.00)
1997
- ----
Net loss $(2,998,290)
Basic and Diluted EPS
Net loss applicable to common shareholders $(2,998,290) 2,755,001 $(1.09)
</TABLE>
F-15
<PAGE>
LightPath Technologies, Inc.
Notes to Financial Statements - Continued
12. Pension Plan
The Company implemented a defined contribution plan on January 1, 1997 covering
substantially all employees. Annual discretionary 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 years ended June 30, 1998 and
1997.
13. Commitments and Contingencies
The Company has operating leases for office equipment and office space.
Effective April 1, 1996, the 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, 1998 and 1997 was $113,407 and $96,889 respectively.
Commitments under noncancelable operating leases are $95,000 for 1999; $98,500
for 2000; and $76,500 for 2001.
The Company has employment agreements, which expire in November 1998 and April
2001, with two officers which provide for payment of salaries of $194,500 in
1999 and $132,000 thereafter. The Company has outstanding purchase commitments
for approximately $408,000 at June 30, 1998 for manufacturing equipment, lens
finishing and advertising.
The Company is involved in 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.
14. Related Party Transactions
During the fiscal years ended June 30, 1998 and 1997, current directors (or
their firms) of the Company, provided legal and consulting services to the
Company for which they billed the Company approximately $145,000 and $92,000,
respectively. In addition, the Company retained the legal services of a
stockholder for licensing work performed during fiscal 1998 and 1997 valued at
$11,250 and $65,000, respectively, of which a portion in each year was paid for
in Class A common stock. The Company paid $45,000, in fiscal 1997, to an
employee and stockholder for product designs which the Company has subsequently
applied for patent protection.
In June 1997 the Company entered into a one year Strategic Alliance Agreement
with Invention Machine Corporation to create LightChip to develop and
manufacture wavelength division multiplexing systems for use by
telecommunication carriers, and network system integrators. Under the terms of
the agreement, LightChip has utilized office equipment, office space and some
personnel at no charge from LightPath, estimated value of these contributed
services is approximately $137,000 for the fiscal year 1998. In addition,
LightChip reimbursed LightPath for personnel, services and working capital
provided during fiscal year 1998 totaling approximately $161,000, of which
$10,446 is outstanding at June 30, 1998.
15. Subsequent Event
In September 1998, LightChip completed a private placement of convertible
preferred stock with AT&T Ventures and LightPath for an amount totaling
$5,250,000 and $1,250,000, respectively. Approximately 60% of the funds were
received in September, the balance is due upon completion of product design
requirements. Each share of preferred stock was issued at $.30 per share, 8% per
annum dividend if declared, noncumulative and a liquidation preference equal to
the purchase price plus any declared but unpaid dividends. Each share of
LightChip preferred stock is convertible into one share of common stock (i) at
the option of the holder, (ii) the consent of the majority of the outstanding
preferred stock or (iii) an initial public offering if gross proceeds from the
offering exceed 5 times that paid by the preferred stock holders.
F-16
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has
duly caused this Report to be signed on its behalf by the undersigned, thereunto
duly authorized.
LIGHTPATH TECHNOLOGIES, INC.
By: /s/ Donald E. Lawson September 2, 1998
---------------------------------------
Donald E. Lawson Date
Chief Executive Officer, President
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
<TABLE>
<S> <C> <C>
/s/ Donald E. Lawson September 2, 1998
- ------------------------------------------
Donald E. Lawson
Chief Executive Officer, President and Treasurer, Director
(Principal Executive Officer and Principal Financial Officer)
/s/ Leslie A. Danziger September 2, 1998 /s/ James Adler Jr. September 2, 1998
- -------------------------------------------- ----------------------------------------------
Leslie A. Danziger James Adler Jr.
Chairwoman of the Board Director
/s/ Milton Klein, M.D. September 2, 1998 /s/ Louis Leeburg September 2, 1998
- -------------------------------------------- ----------------------------------------------
Milton Klein, M.D. Louis Leeburg
Director Director
/s/ Haydock H. Miller Jr. September 2, 1998 /s/ James A. Wimbush September 2, 1998
- -------------------------------------------- ----------------------------------------------
Haydock H. Miller Jr. James A. Wimbush
Director Director
</TABLE>
24
Exhibit 10.3
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into as
of this 19th day of April, 1998, between LIGHTPATH TECHNOLOGIES, INC., a
Delaware corporation (the "Company"), and Donald E. Lawson (the "Executive").
RECITALS
A. The Company is engaged, among other things, in the development,
production and marketing of GRADIUM(TM)optical lenses and related products. The
Executive has substantial experience and expertise in managing and operating the
business of the Company.
B. The Company desires to retain the services of the Executive as its
President, Chief Executive Officer and Treasurer, and the Executive desires and
is willing to continue employment with the Company in such capacity.
C. The Company and the Executive desire to embody the terms and
conditions of the Executive's employment in a written agreement, which will
supersede all prior agreements of employment, whether written or oral, between
the Company and the Executive, pursuant to the terms and conditions hereinafter
set forth.
NOW, THEREFORE, in consideration of their mutual covenants and other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties agree as follows:
ARTICLE 1
DEFINITIONS
For purposes of this Agreement, the following terms shall have the
following meanings:
1.1 "Cause" shall mean a termination of the Executive's employment
during the Term which is a result of (i) the Executive's felony conviction, (ii)
the Executive's willful and detrimental disclosure to third parties of material
trade secrets or other material confidential information related to the business
of the Company and its subsidiaries, or (iii) the Executive's willful and
continued failure substantially to perform the Executive's duties with the
Company (other than any such failure resulting from the Executive's incapacity
due to physical or mental illness or any such actual or anticipated failure
resulting from a resignation by the Executive for Good Reason) after a written
demand for substantial performance is delivered to the Executive by the Board,
which demand specifically identifies the manner in which the Board believes that
the Executive has not substantially performed his duties, and which performance
is not substantially corrected by the Executive within ten (10) days of receipt
of such demand. For purposes of the previous sentence, no act or failure to act
on the Executive's part shall be deemed "willful" unless done, or omitted to be
done, by the Executive not in good faith and without reasonable belief that the
Executives action or omission was in the best interest of the Company.
Notwithstanding the foregoing, the Executive shall not be deemed to have been
terminated for Cause unless and until there shall have been delivered to the
Executive a copy of a resolution duly adopted by the affirmative vote of not
less than three-fourths (3/4ths) of the entire membership of the Board at a
meeting of the Board called and held for such purpose (after reasonable notice
to the Executive and an opportunity for the Executive, together with his
counsel, to be heard before the Board), finding that in the good faith opinion
of the Board the Executive was guilty of conduct set forth above in clause (i),
(ii) or (iii) of the first sentence of this section and specifying the
particulars thereof in detail.
1.2 "Change in Control" shall mean a change in control of the Company
of a nature that would be required to be reported in response to Item 6(e) of
Schedule 14A of Regulation 14a promulgated under the Exchange Act, whether or
not the Company is then subject to such reporting requirement; provided,
however, that, anything in this Agreement to the contrary notwithstanding, a
Change in Control shall be deemed to have occurred if:
<PAGE>
(a) any individual, partnership, firm, corporation, association,
trust, unincorporated organization or other entity or person, or any syndicate
or group deemed to be a person under Section 14(d)(2) of the Exchange Act, is or
becomes the "beneficial owner" (as defined in Rule l3d-3 of the General Rules
and Regulations under the Exchange Act), directly or indirectly, of securities
of the Company representing forty percent (40%) or more of the combined voting
power of the Company's then outstanding securities entitled to vote in the
election of directors of the Company;
(b) during any period of two (2) consecutive years (not including
any period prior to the execution of this Agreement) individuals who at the
beginning of such period constituted the Board and any new directors, whose
election by the Board or nomination for election by the Company's stockholders
was approved by a vote of at least three-fourths (3/4ths) of the directors then
still in office who either were directors at the beginning of the period or
whose election or nomination for election was previously so approved (the
"Incumbent Directors"), cease for any reason to constitute a majority thereof;
(c) there occurs a reorganization, merger, consolidation or other
corporate transaction involving the Company (a "Transaction"), in each case,
with respect to which the stockholders of the Company immediately prior to such
Transaction do not, immediately after the Transaction, own more than fifty (50%)
of the combined voting power of the Company or other corporation resulting from
such Transaction;
(d) all or substantially all of the assets of the Company are
sold, liquidated or distributed; or
(e) there is a "change in control" of the Company within the
meaning of Section 280G of the Code of Regulations.
1.3 "Code" shall mean the Internal Revenue Code of 1986, as amended,
and any successor provisions thereto.
1.4 "Common Stock" shall mean shares of any class of common stock of
the Company.
1.5 "Disability" shall mean (i) the Executive's incapacity due to
physical or mental illness which causes him to be absent from the full-time
performance of his duties with the Company for three (3) consecutive months or
for ninety (90) days or more in any twelve month (12) period, and (ii) the
Executive's failure to return to full-time performance of his duties for the
Company within thirty (30) days after written Notice of Termination due to
Disability is provided by the Company to the Executive. Any question as to the
existence of the Executive's Disability upon which he and the Company cannot
agree shall be determined by a qualified independent physician selected by the
Executive (or, if the Executive is unable to make such selection, such selection
shall be made by any adult member of the Executives immediate family), and
approved by the Company. The determination of such physician made in writing to
the Company and to the Executive shall be final and conclusive for all purposes
of this Agreement.
1.6 "Good Reason" shall mean a resignation of the Executive's
employment during the Term as a result of any of the following:
(a) A meaningful and detrimental alteration in the Executive's
position, his titles, or the nature or status of his responsibilities (including
the Executive's reporting responsibilities) from those previously in effect;
(b) A reduction by the Company in the Executive's annual Base
Salary as set forth herein or as the same may be increased from time to time
thereafter, except pursuant to a salary reduction program as described in
Section 3. 1, or, a failure by the Company to increase the Executive's salary at
a rate commensurate with that of other key executives of the Company;
(c) The failure by the Company to continue in effect any
compensation plan in which the Executive participates unless an equitable
arrangement (embodied in an ongoing substitute or alternative plan) has been
made with respect to such plan or the failure by the Company to continue the
Executive's participation therein
2
<PAGE>
on at least as favorable a basis, both in terms of the amount of benefits
provided and the level of the Executive's participation relative to other
participants;
(d) The failure by the Company to continue to provide the
Executive with fringe benefits and arrangements (including, without limitation,
life insurance, health, medical, dental, accident and disability plans and
programs, income tax services, car allowances and other fringe benefits) at
least as favorable in the aggregate to those fringe benefits and arrangements
that the Executive previously enjoyed, or the failure by the Company to provide
the Executive with the number of paid vacation days to which the Executive is
entitled on the basis of years of service with the Company in accordance with
the Company's normal vacation policy previously in effect.
(e) Any termination of the Executive's employment which is not
effected pursuant to the terms of this Agreement; or
(f) A material breach by the Company of the provisions of this
Agreement; provided, however, that an event described in the above clauses,
shall not constitute Good Reason unless it is communicated by the Executive to
the Company in writing and is not corrected by the Company in a manner which is
reasonably satisfactory to the Executive (including full retroactive correction
with respect to any monetary matter) within ten (10) days of the Company's
receipt of such written notice from the Executive.
1.7 "Involuntary Termination" shall mean (i) the Executives termination
of employment by the Company and its subsidiaries during the Term other than for
Cause or Disability or (ii) the Executives resignation of employment. with the
Company and its subsidiaries during the Term for Good Reason.
1.8 "Retirement" shall mean normal retirement at age 65 or in
accordance with retirement rules generally applicable to the Company's senior
executives.
ARTICLE 2
DUTIES AND TERM
2.1 Employment.
(a) The Executive shall have such duties and responsibilities as
shall be assigned to the Executive from time to time by the Board of Directors
of the Company (the "Board") in the Executive's capacity as the President, Chief
Executive Officer and Treasurer of the Company and as is consistent with the
Bylaws of the Company.
(b) During the period of his employment hereunder, the Executive
shall devote substantially all of his business time, attention, skill and
efforts to the faithful performance of his duties hereunder; provided, however,
that the Executive may serve or continue to serve on the board of directors or
hold other offices or positions in companies or organizations if they involve no
conflict of interest with the interests of the Company and may engage in
customary professional activities which in the judgment of the Board will not
materially affect the performance by the Executive of his duties hereunder. The
Executive has disclosed to the Board all material business ventures in which he
is currently involved, and, subject to approval by the Board (after written
notice to the Board), may in the future have other business investments and
participate in other business ventures which may, from time to time, require
portions of his time, but shall not interfere with his duties hereunder.
2.2 Term. The term of this Agreement shall commence on the date first
written above and shall continue, unless sooner terminated, for a period of
three (3) years (the "Initial Term"). Thereafter, the term of this Agreement
shall automatically be extended for successive one (1) year periods ("Renewal
Terms") unless either the Board or the Executive gives written notice to the
other at least ninety (90) days prior to the end of the Initial Term or any
Renewal Term, as the case may be, of its or his intention not to renew the term
of this Agreement. The Initial Term and any Renewal Terms of this Agreement
shall be collectively referred to as the "Term."
3
<PAGE>
ARTICLE 3
COMPENSATION
3.1 Base Salary. Subject to the further provisions of this Agreement,
the Company shall pay the Executive during the Term of this Agreement a base
salary at an annual rate of not less than $132,000 (the "Base Salary"). In
addition, each year on the anniversary of this Agreement, the Executive will
receive an incentive stock option to purchase no less than 50,000 shares of the
Company's Class A Common Stock, 50% of which will vest immediately upon grant
and the remaining 50% of which will vest on the date which is twelve (12) months
from the date of grant. All of such options shall be issued pursuant to the
terms and conditions of the Company's then existing stock option plans, adopted
for such purpose. The Base Salary shall be reviewed at least annually by the
Board and the Board may, in its discretion, increase the Base Salary. The Base
Salary of the Executive shall not be decreased at any time during the term of
this Agreement from the amount of Base Salary then in effect, except in
connection with across-the-board salary reductions similarly affecting all
senior executives of the Company. Participation in deferred compensation,
discretionary bonus, retirement, stock option and other employee benefit plans
and in fringe benefits shall not reduce the Base Salary payable to the Executive
under this Section 3. 1. The Base Salary under this Section 3.1 shall be payable
by the Company to the Executive not less frequently than monthly.
3.2 Discretionary Bonuses. Subject to the further provisions of this
Agreement, during the Term of this Agreement the Executive shall be entitled to
participate in an equitable manner with all other senior executives of the
Company in such discretionary bonuses, including, but not limited to, bonuses
provided pursuant to any management bonus plan that the Company may adopt (based
upon the performance of the participant and the Company), as may be authorized
and declared by the Board to the Company's senior executives. Nothing in this
section shall be deemed to limit the ability of the Executive to be paid and
receive discretionary bonuses from the Company, based solely on the Executive's
performance, without regard to the payment of discretionary bonuses to any other
officers of the Company.
3.3 Participation in Retirement and Employee Benefit Plans: Fringe
Benefits. The Executive shall be entitled to participate in all plans of the
Company relating to stock options, stock purchases, pension, thrift, profit
sharing, life insurance, hospitalization and medical coverage, disability,
travel or accident insurance, education or other retirement or employee benefits
that the Company has adopted or may adopt for the benefit of its senior
executives. In addition, the Executive shall be entitled to participate in any
other fringe benefits, such as club dues and fees of professional organizations
and associations, which are now or may become applicable to the Company's senior
executives, and any other benefits which are commensurate with the duties and
responsibilities to be performed by the Executive under this Agreement. The
Executive shall, during the Term of his employment hereunder, continue to be
provided with benefits at a level which shall in no event be less in any
material respect than the benefits available to the Executive as of the date of
this Agreement. Notwithstanding the foregoing, the Company may terminate or
reduce benefits under any benefit plans and programs to the extent such
reductions apply uniformly to all senior executives enabled to participate
therein, and the Executive's benefits shall be reduced or terminated
accordingly.
3.4 Vacation. The Executive shall be entitled to a vacation during each
year of the employment term, without diminution of his/her salary in accordance
with the Company's current vacation policy.
ARTICLE 4
TERMINATION OF EMPLOYMENT
4.1 Death or Retirement of Executive. This Agreement shall
automatically terminate upon the death or Retirement of the Executive.
4.2 By the Executive. The Executive shall be entitled to terminate this
Agreement by giving written notice to the Company:
(a) at least ninety (90) days prior to the end of the Initial Term
or any Renewal Term of this Agreement;
4
<PAGE>
(b) for Good Reason prior to a Change of Control;
(c) for Good Reason following a Change of Control; and
(d) at any time without Good Reason.
4.3 By the Company. The Company shall be entitled to terminate this
Agreement by giving written notice to the Executive:
(a) at least ninety (90) days prior to the end of the Initial Term
or any Renewal Term of this Agreement,
(b) in the event of the Executive's Disability;
(c) for Cause; and
(d) at any time without Cause.
4.4 Date of Termination. Any termination of the Executive's employment
by the Company or by the Executive during the Term shall be communicated by a
notice of termination to the other party hereto (the "Notice of Termination").
The Notice of Termination shall indicate the specific termination provision in
this Agreement relied upon and shall set forth in reasonable detail the facts
and circumstances claimed to provide a basis for termination of his employment
under the provision so indicated. The date of termination of employment with the
Company and its subsidiaries (the "Date of Termination") shall be determined as
follows: (i) if the Executive's employment is terminated for Disability, thirty
(30) days after a Notice of Termination is given (provided that the Executive
shall not have returned to the full-time performance of duties during such
thirty (30) day period), (ii) if employment is terminated by the Company in an
Involuntary Termination, five (5) days after the date the Notice of Termination
is received by the Executive and (iii) if the Executives employment is
terminated by the Company for Cause, the later of the date specified in the
Notice of Termination or ten (10) days following the date such notice is
received by the Executive. If the basis for the Executives Involuntary
Termination is the Executive's resignation for Good Reason, the Date of
Termination shall be ten (10) days after the date your Notice of Termination is
received by the Company. The Date of Termination for a resignation of employment
other than for Good Reason shall be the date set forth in the applicable notice,
which shall be no earlier than twenty (20) days after the date such notice is
received by the Company.
ARTICLE 5
COMPENSATION UPON TERMINATION OF EMPLOYMENT
5.1 Upon Termination for Death by the Company for Cause or by the
Executive Without Good Reason. If the Executive's employment is terminated by
reason of the Executive's death or Disability, by the Company for Cause or by
the Executive without Good Reason, the Company shall:
(a) pay the executive (or his estate or beneficiaries) any Base
Salary which has accrued but which has not been paid as of the termination date
(the "Accrued Base Salary");
(b) reimburse the Executive (or his estate or beneficiaries) for
expenses incurred by him prior to the date of termination which are subject to
reimbursement pursuant to applicable Company policies then in effect (the
"Accrued Reimbursable Expenses");
(c) provide to the Executive (or his estate or beneficiaries) any
accrued and vested benefits required to be provided by the terms of any
Company-sponsored benefit plans or programs (the "Accrued Benefits"), together
with any benefits required to be paid or provided in the event of the
Executive's death or Disability under applicable law;
5
<PAGE>
(d) pay the Executive (or his estate or beneficiaries) any
discretionary bonus with respect to a prior fiscal year which has accrued and
been earned but has not been paid (the "Accrued Bonus"); and
(e) allow the Executive (or his estate or beneficiaries) to
exercise all vested, unexercised stock options outstanding at the termination
date in accordance with the terms of the plans and agreements pursuant to which
such options were issued.
5.2 Upon Termination at Expiration of Term. If the Executive's
employment is terminated upon the expiration of the Term of this Agreement, the
Company shall:
(a) pay the Executive the Accrued Base Salary;
(b) pay the Executive the Accrued Reimbursable Expenses;
(c) pay the Executive the Accrued Benefits;
(d) pay the Executive the Accrued Bonus;
(e) pay the Executive his Base Salary, as and when the same would
have been paid to the Executive pursuant to Section 3.1 had the termination not
occurred, for a period of three (3) months following the termination date; and
(f) allow the Executive the right to (i) exercise all vested,
unexercised stock options in accordance with Section 5. 1 (e); and (ii) exercise
all unvested stock options owned by the Executive that would otherwise have
vested within one (1) year following the termination date at the time(s) set
forth in the plans and agreements pursuant to which such options were issued in
accordance with the terms (except the vesting terms) of the plans and agreements
pursuant to which such options were issued.
5.3 Upon Termination by the Company Without Cause or by the Executive
for Good Reason Prior to a Change of Control. If the Executive's employment is
terminated by the Company without Cause or by the Executive for Good Reason, in
each case prior to a Change of Control, the Company shall:
(a) pay the Executive the Accrued Base Salary;
(b) pay the Executive the Accrued Reimbursable Expenses;
(c) pay the Executive the Accrued Benefits;
(d) pay the Executive the Accrued Bonus;
(e) pay the Executive his Base Salary, as and when the same would
have been paid to the Executive pursuant to Section 3.1 had the termination not
occurred, until the first to occur of (i) the employment of the Executive in a
senior executive position with another company at a comparable compensation
level; or (ii) twelve (12) months following the termination date; provided,
however, than in no event shall the Base Salary paid to the Executive pursuant
this Section 5.3(e) be for less than three (3) months;
(f) pay the Executive on or prior to the thirtieth (30th) day
following the Date of Termination a lump sum payment equal to the average of all
annual performance bonuses paid to the Executive for the three (3) fiscal years
immediately preceding the fiscal year in which the termination occurs (or if
less than three (3), the average of the two (2) and if less than two (2), the
amount of his single Annual Bonus) (the "Lump Sum Bonus Payment"); and
(g) maintain in full force and effect, for the continued benefit
of the Executive and his eligible beneficiaries, until the first to occur of (i)
his attainment of comparable benefits upon alternative employment or (ii) twelve
(12) months following the termination date, the employee benefits pursuant to
Company-sponsored benefit plans, programs or other arrangements in which the
Executive was entitled to
6
<PAGE>
participate immediately prior to such termination, but only to the extent that
the Executive's continued participation is permitted under the general terms and
provisions of such plans, programs and arrangements; and
(h) allow the Executive the right to exercise in full all unvested
stock options granted to him in accordance with the terms (except the vesting
terms with respect to the accelerated options) of the plans and agreements
pursuant to which such options were issued.
5.4 Upon Termination by the Company Without Cause or by the Executive
for Good Reason Following a Change of Control. If, following a Change of
Control, the Executives employment is terminated by the Company or by the
Executive for Good Reason, the Company shall:
(a) pay the Executive the Annual Base salary;
(b) pay the Executive the Accrued Reimbursable Expenses;
(c) pay the Executive the Accrued Benefits, including that
described in Section 5.3(g), above;
(d) pay the Executive the Accrued Bonus;
(e) pay the Executive a lump sum payment on or prior to the
thirtieth (30th) day following the Date of Termination in an amount equal to the
lessor of (i) 2.99 times the sum of (x) the Executive's Base Salary in effect
immediately prior to the time such termination occurs; and (y) the Lump Sum
Bonus Payment, and (ii) an amount, the present value of which shall not exceed
2.99 times the Executive's "base amount," as such term is defined in Section
28OG of the Internal Revenue Code of 1986, as amended (the "Code"), and the
regulations promulgated thereunder; and
(f) accelerate the vesting of a unexercised and unexpired stock
options granted to the Executive and allow the Executive the right to exercise
in full, within twelve (12) months from the Date of Termination, any such
outstanding options in accordance with the terms (except the vesting terms with
respect to accelerated options) of the plans and/or agreements pursuant to which
such options were issued.
ARTICLE 6
DISABILITY
If the Employee becomes partially disabled for any reason, and thereby
prevented from performing his duties hereunder on a full-time basis, at the end
of the first three (3) months of such partial disability, the Employees salary
shall be adjusted as the Employer shall determine appropriate under the
circumstances, with this services to thereafter be rendered on a part-time basis
to the Employer. However, such salary shall not be reduced by more than fifty
percent (50%) of the Employee's then compensation per annum.
If the Employee shall become permanently disabled for any reason, and
thereby prevented from performing any duties hereunder whatsoever, at the end of
the first three (3) months of such disability, the Employee shall be paid
disability pay at the rate of fifty percent (50%) of the Employee's then
compensation per annum or, if the Employee has group long term disability
insurance, that amount to bring the Employee's long term disability payments up
to one hundred percent (l00%) of the Employee's then compensation per annum for
the remainder of the employment term (unless the Employee dies before the end of
the employment term, at which time the disability payments shall stop and the
provisions of paragraph 5.1 shall supersede).
7
<PAGE>
ARTICLE 7
RESTRICTIVE COVENANTS
7.1 Competition.
(a) The Executive agrees that during his employment with the
Company and for a period of two (2) years following the date of termination of
his employment hereunder (the "Non-Competition Period"), for any reason (whether
such termination shall be voluntary or involuntary), the Executive shall not:
(i) except as a passive investor in publicly-held companies,
and except for investments held as of the date hereof directly or indirectly
own, operate, manage, consult with, control, participate in the management or
control of, be employed by, maintain or continue any interest whatsoever in any
optical materials company that directly competes with the Company; or
(ii) directly or indirectly solicit any business of a nature
that is directly competitive with the business of the Company from any
individual or entity that obtained such products or services from the Company or
its affiliates at any time during his employment with the Company; or
(iii) directly or indirectly solicit any business of a
nature that is directly competitive with the business of the Company from any
individual or entity solicited by him on behalf of the Company or its
affiliates, or
(iv) employ, or directly or indirectly solicit, or cause the
solicitation of, any employees of the Company who are in the employ of the
Company on the termination date of his employment hereunder for employment by
others.
(b) The Executive expressly agrees and acknowledges that:
(i) this covenant not to compete is reasonably necessary for
the protection of the interests of the Company and is reasonable as to time and
geographical area and does not place any unreasonable burden upon him;
(ii) the general public will not be harmed as a result of
enforcement of this covenant not to compete;
(iii) his personal legal counsel has reviewed this covenant
not to compete, and
(iv) he understands and hereby agrees to each and every term
and condition of this covenant not to compete.
7.2 Patent Rights. Any new patents, or proprietary fights to any new
products or processes not patented, developed by the Executive during the term
of the Executive's employment hereunder shall be the property of the Company in
accordance with the Employment, Confidential Information and Invention
Assignment Agreement entered into on May 22, 1995 by the Executive and the
Company.
7.3 Remedies. The Executive expressly agrees and acknowledges that the
covenant not to compete set forth in Section 6.1 is necessary for the Company's
and its affiliates' protection because of the nature and scope of their business
and his position with the Company. Further, the Executive acknowledges that, in
the event of his breach of his covenant not to compete, money damages will not
sufficiently compensate the Company for its injury caused thereby, and he
accordingly agrees that in addition to such money damages he may be restrained
and enjoined from any continuing breach of the covenant not to compete without
any bond or other security being required. The Executive acknowledges that any
breach of the covenant not to compete would result in irreparable damage to the
Company. The Executive further acknowledges and agrees that if the Executive
fails to comply with this Article VI, the Company has no obligation to provide
any compensation or other benefits described in Article V hereof The Executive
acknowledges that the remedy at law for any breach or threatened breach of
Sections 6.1 and
8
<PAGE>
6.2 will be inadequate and, accordingly, that the Company shall, in addition to
all other available remedies (including without limitation, seeking such damages
as it can show it has sustained by reason of such breach), be entitled to
injunctive relief or specific performance.
ARTICLE 8
MISCELLANEOUS
8.1 No Assignments. This Agreement is personal to each of the parties
hereto. No party may assign or delegate any rights or obligations hereunder
without first obtaining the written consent of the other parry hereto, except
that this Agreement shall be binding upon and inure to the benefit of any
successor corporation to the Company.
(a) The Company shall use reasonable efforts to require any
successor (whether direct or indirect, by purchase, merger, consolidation or
otherwise) to all or substantially all of the business and/or assets of the
Company to expressly assume and agree to perform this Agreement in the same
manner and to the same extent that the Company would be required to perform it
if no such succession had taken place. As used in this Agreement, "Company"
shall mean the Company as defined herein and any successor to its business
and/or assets which assumes this Agreement by operation of law or otherwise.
(b) This Agreement shall inure to the benefit of and be
enforceable by the Executive and his personal or legal representatives,
executors, administrators, successors, heirs, distributees, devises and
legatees. If the Executive should die while any amount would still be payable to
him hereunder had he continued to live, all such amounts, unless otherwise
provided herein, shall be paid in accordance with the terms of this Agreement to
his devisee, legates or other designee, or if there is no such designee, to his
estate.
8.2 Notice. For the purpose of this Agreement, notices and a other
communications provided for in this Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
certified or registered mail, return receipt requested, postage prepaid,
addressed to the respective addresses set forth below, or to such other
addresses as either party may have furnished to the other in writing in
accordance herewith, except that notice of a change of address shall be
effective only upon actual receipt:
To the Company: LightPath Technologies, Inc.
6820 Academy Parkway East, NE
Albuquerque, NM 87109
To the Executive: Donald E. Lawson
4216 Glen Arbor Ct. N.W.
Albuquerque, NM 87107
Notices pursuant to Article VII of this Agreement shall specify the specific
termination provision relied upon by the party giving notice and shall state the
effective date of the termination.
8.3 Amendments or Additions. No amendments or additions to this
Agreement shall be binding unless in writing and signed by each of the parties
hereto.
8.4 Section Headings. The section headings used in this Agreement are
included solely for convenience and shall not affect, or be used in connection
with, the interpretation of this Agreement.
8.5 Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof. If, in any
judicial proceedings, a court shall refuse to enforce one or more of the
covenants or agreements contained herein because the duration thereof is too
long, or the scope thereof is too broad, it is expressly agreed between the
parties hereto that such scope or duration shall be deemed reduced to the extent
necessary to permit the enforcement of such covenants or agreements.
9
<PAGE>
8.6 Counterparts. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original but all of which
together shall constitute one and the same instrument.
8.7 Arbitration. Any dispute or controversy arising under or in
connection with this Agreement shall be settled exclusively by arbitration,
conducted before a panel of three (3) arbitrators in Albuquerque, New Mexico in
accordance with the rules of the American Arbitration Association then in
effect. The decision of the arbitrators shall be final and binding on the
parties, and judgment may be entered on the arbitrators' award in any court
having jurisdiction. The costs and expenses of such arbitration shall be borne
in accordance with the determination of the arbitrators. Notwithstanding any
other provision of this Agreement, if any termination of this Agreement becomes
subject to arbitration, the Company shall not be required to pay any amounts to
the Executive (except those amounts required by law) until the completion of the
arbitration and the rendering of the arbitrators' decision. The amounts, if any,
determined by the arbitrators to be owed by the Company to the Executive shall
be paid within five (5) days after the decision by the arbitrators is rendered.
8.8 No Mitigation or Offset. The Executive shall not be required to
mitigate the amount of any payment provided for in this Agreement by seeking
other employment or otherwise, nor shall the amount of any payment or benefit
provided for in this Agreement be reduced by any compensation earned by the
Executive as the result of employment by another employer or by pension benefits
paid by the Company or another employer after the date of termination or
otherwise except that on the date that the Executive and his dependents are
eligible and elect coverage under the plans of a subsequent employer which
provide substantially equivalent or greater benefits to the Executive and his
dependents.
8.9 Modifications and Waiver. No provision of this Agreement may be
modified, waived or discharged unless such waiver, modification or discharge is
agreed to in writing and signed by the Executive and such officer of the Company
as may be specifically designated by the Board. No waiver by either party hereto
at any time of any breach by the other party hereto of, or compliance with, any
condition or provision of this Agreement to be performed by such other party
shall be deemed a waiver of similar or dissimilar provisions or conditions at
the same or at any prior or subsequent time.
8.10 Governing Law. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the State of New
Mexico without regard to its conflicts of law principles.
8.11 Taxes. Any payments provided for hereunder shall be paid net of
any applicable withholding or other employment taxes required under federal,
state or local law.
8.12 Survival. The obligations of the Company under Article V hereof
and the obligations of the Executive under Article VI hereof shall survive the
expiration of this Agreement.
IN WITNESS WHEREOF, each of the parties hereto has executed this
Agreement as of the date first indicated above.
LIGHTPATH TECHNOLOGIES, INC.
a Delaware corporation
/s/Haydock H. Miller, Jr., /s/ Donald E. Lawson
By_____________________________ __________________________
Chairman of the Compensation Committee
Its of the Board of Directors DONALD E. LAWSON
"COMPANY" "EXECUTIVE"
10
Exhibit 11
LightPath Technologies, Inc.
Computation of Net Loss Per Share
For the Year Ended June 30
--------------------------
1998 1997
---- ----
Net loss $(4,331,290) $(2,998,290)
Preferred stock 8% premium (311,529) --
Imputed dividend on Series A, Series B and Series C
Preferred Stock (1,386,700) --
--------------------------
Net loss applicable to common shareholders $(6,029,519) $(2,998,290)
--------------------------
Weighted average common shares outstanding 3,010,861 2,755,001
==========================
Basic and Diluted net loss per common share $ (2.00) $ (1.09)
==========================
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 11, 1998, except for Note 15 which is as of September 9,
1998, relating to the balance sheets of LightPath Technologies, Inc. as of June
30, 1998 and 1997, and the related statements of operations, stockholders'
equity, and cash flows for the years then ended, which report appears in the
June 30, 1998, annual report on Form 10-KSB of LightPath Technologies, Inc..
Our report dated August 11, 1998, except for Note 15 which is as of September 9,
1998, contains an explanatory paragraph that states that the Company has
suffered recurring losses from operations and is dependent on external 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 9, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the Form
10-KSB for the year ended June 30, 1998 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-30-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<CASH> 4,237,400
<SECURITIES> 0
<RECEIVABLES> 256,491
<ALLOWANCES> 0
<INVENTORY> 488,710
<CURRENT-ASSETS> 5,064,790
<PP&E> 1,585,282
<DEPRECIATION> 861,444
<TOTAL-ASSETS> 6,308,467
<CURRENT-LIABILITIES> 422,581
<BONDS> 0
0
5
<COMMON> 33,306
<OTHER-SE> 26,405,210
<TOTAL-LIABILITY-AND-EQUITY> 6,308,467
<SALES> 529,318
<TOTAL-REVENUES> 758,232
<CGS> 289,918
<TOTAL-COSTS> 289,918
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,217
<INCOME-PRETAX> (4,331,290)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,331,290)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,331,290)
<EPS-PRIMARY> (2.00)
<EPS-DILUTED> (2.00)
</TABLE>
