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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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE REPORT OF 1934
For the transition period from ___________ to ____________
COMMISSION FILE NUMBER 000-27548
LIGHTPATH TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 86-0708398
(State or other jurisdiction of I.R.S. Employer
incorporation or organization) (Identification No)
6820 ACADEMY PARKWAY EAST, NE 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, CLASS A WARRANTS AND CLASS B WARRANTS
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.
$1,086,126
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 $8,395,994 on August 13, 1999.
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 5,088,431 shares
Common Stock, Class E-1, $.01 par value 1,492,480 shares
Common Stock, Class E-2, $.01 par value 1,492,480 shares
Common Stock, Class E-3, $.01 par value 994,979 shares
- --------------------------------------- ------------------------------
CLASS OUTSTANDING AT AUGUST 13, 1999
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the 1999 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
PART I
Description of Business 2
Description of Property 15
Legal Proceedings 15
Submission of Matters to a Vote of Security Holders 15
PART II
Market for Common Equity and Related Stockholder Matters 16
Management's Discussion and Analysis of Financial Condition
and Results of Operations 18
Financial Statements 22
Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 22
PART III
Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act 23
Executive Compensation 25
Security Ownership of Certain Beneficial Owners and Management 25
Certain Relationships and Related Transactions 25
Exhibits and Reports on Form 8-K 26
INDEX TO FINANCIAL STATEMENTS F-1
SIGNATURES 27
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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 and specialized optical
packaging concepts 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
seventeen US 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 or are in process for laser fusion techniques and
fiberoptic opto-mechanical switch technology. The Company continues to develop
new GRADIUM glass materials with various refractive index and dispersion
profiles as well as fiberoptic opto-mechanical switches, 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 to the Company, which were
primarily used for working capital, manufacturing equipment and repayment of
bridge loans. During fiscal year 1998, the Company completed three private
placements of its Series A, B and C Preferred Stock generating approximately
$7.2 million net proceeds to the Company ($7.85 million gross). The Series A, B
and C 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 stock have been reserved and 2,071,341 shares have been issued as of June
30, 1999. The Company used 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 and Invention Machine Corp. created LightChip, Inc. ("LightChip") of
which the Company acquired 51% of the outstanding voting stock. During 1998,
LightChip began operations as a development stage company with $936,000 in funds
from founding shareholders and convertible bridge loans. LightChip's business
plan is to develop and manufacture wavelength division multiplexing (WDM)
systems for use by telecommunication carriers and network system integrators. In
September 1998, LightChip issued phase one or $3.5 million of the total $6.5
million of convertible preferred stock to AT&T Ventures and LightPath, converted
$890,000 of its 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 to 26%.
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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 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. In 1998, the resolution of packaging and alignment issues
along with advances made by LightChip with WDM equipment, led the Company to
develop a strategy to enter the optoelectronics market. See "Sales and Marketing
- - Optoelectronics and Fiber Telecommunications". The Company's first passive
optoelectronic product, a single mode fiber collimator assembly ("SMF
assembly"), was demonstrated in February 1998. The SMF assembly is a key element
in all fiber optic systems, including WDM equipment. The SMF assembly straighten
and make parallel, diverging light as it exits a fiber. The Company is now
offering, and has delivered for testing to potential customers, three product
levels: the collimating lens, the SMF assembly and the large beam collimating
assembly. The telecommunications collimator market place, is currently estimated
by industry experts to generate annual gross revenues of $125 million with
projected growth to $256 million in five years.
The current focus of the Company's development efforts has been to expand
application of GRADIUM products to the areas of fiberoptic opto-mechanical
switches, 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 advancing our goal of producing
competitively priced GRADIUM glass and optoelectronic products.
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 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.).
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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, 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. With the Company's
resolution of packaging and alignment issues, along with advances made by
LightChip for WDM equipment, the Company demonstrated a passive optoelectronic
product, the single mode fiber collimator assembly. During 1999 the Company
expanded this product line with the goal of demonstrating to the
telecommunication optical components industry that it could provide low cost
products and provide solutions to meet their telecom needs.
The Company's newly designed single-mode fiber collimator assembly (SMF
assembly) is approximately 50-60% smaller than the existing collimator. This
entry level product currently used by the telecommunications industry prevents
light from diverging and shepherds it into the next piece of equipment or fiber.
The Company offers three product levels: the collimating lens, a SMF assembly
and a large-beam collimator assembly. The collimating lens can replace existing
lenses with immediate improvements in performance, repeatability and cost. The
SMF assembly offers high quality 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. In addition, LightPath is seeking
to attract customers interested in obtaining a second source supplier since the
majority of existing collimator sales are through one manufacturer. In 1999,
production line SMF assembly and collimating lenses were delivered for testing
to approximately 50 potential customers in the U.S. and Asia. The first scale-up
production orders are expected by the end of calendar 1999 due to the amount of
testing time required by telecommunication customers. The Company has received
mostly favorable comments from potential customers on the collimating lenses due
to improved insertion loss and competitive pricing. The Company displayed all
three products at trade shows during January and February 1999 resulting in the
shipment of test products to potential customers. Based on the cost of the
Company's prototypes and GRADIUM lenses, the Company believes the profit margin
in these optoelectronics products will equal or exceed the margins historically
experienced in the traditional optics markets. The development of these products
is anticipated to increase the Company's presence in this telecommunications
collimator market place.
In 1999, LightPath and Herzel Laor entered into an exclusive licensing
agreement for the commercialization of two fiberoptic opto-mechanical switch
technologies. On April 27, 1999, The Company signed a joint assembly and
distribution agreement for the 2X2 and 1XN fiberoptic mechanical switches with
Kaifa Technology located in San Jose, California. The Company believes these
agreements will accelerate its planned introduction of fiberoptic mechanical
switching products for the telecommunications market. The new products, for
which patent applications have been filed, are expected to enter into field
trials by the end of calendar 1999. Since the license agreement was signed, the
Company has been working to develop the first products for testing and establish
a partnering relationship for assembly and distribution. Under the terms of the
1999 agreement with Kaifa, the two companies will jointly complete the
development of the two mechanical switches. The manufacturing and assembly will
occur in China. Both parties can market the switch products and a royalty will
be paid to LightPath for all product sold under the Kaifa name. Industry
estimates of the current market sales for the mechanical switch are
approximately $100 million. The Company anticipates that sales of LightPath
switches will begin in calendar 2000. In July 1999, Kaifa was purchased by E-TEK
Dynamics, a leader in optoelectronic components for the telecommunications
industry. Kaifa will remain as a separate business unit of E-TEK and LightPath
anticipates that the mechanical switch project will remain on schedule.
In June 1997, the Company announced it had joined with Invention Machine
Corporation (IMC) to form a joint venture company, 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
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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 $936,000 in 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 calendar 1999. In September 1998,
LightChip issued phase one ($3.5 million) 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 $510,000 in warrants
were exercised. Following the sale of convertible preferred stock and exercise
of warrants, LightPath's voting interest fell to 26%. LightPath has licensed the
use of GRADIUM glass to LightChip. LightPath anticipates minimal, if any,
short-term revenue from LightChip. 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. Eagle Optoelectronics is now doing
business under the name of LightPointe Communications, Inc.
The Company is currently developing additional optoelectronics products
based on its proprietary technologies. 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, other than those discussed
above, to enter into any strategic alliances for this purpose.
TRADITIONAL OPTICS
The Company initially emphasized laser products because it believed GRADIUM
lenses could have a substantial immediate commercial impact in laser products
with a relatively small initial investment. In fiscal 1999, the Company's lens
sales increased 35% over fiscal 1998, 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 OEM manufacturer of high-powered CO2 and YAG lasers,
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 1999, LightPath and Rodenstock Prazisionsoptik GmbH (Rodenstock)
executed an agreement to transfer to Rodenstock the exclusive,
application-related utilization and distribution of GRADIUM lenses throughout
Europe. The agreement was for an initial five-year period. The Company believes
Rodenstock's one hundred years of experience in the field of advanced optical
systems will be a strong asset to the expansion of LightPath's presence in
Europe. The Rodenstock Group, which is located in Munich, Germany, employees
over 6,000 people worldwide and participates in sixty specific markets. The
Company also has established relationships with eight foreign distributors and
with a Silicon Valley manufacturer representative.
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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 the Company has been engaged in the development of prototype
lenses for manufacturers of endoscopes and wafer chip inspection equipment. The
Company will evaluate future OEM projects based on a number of factors,
including its assessment of the OEM's ability to fund the design effort for the
project and expected impact upon the Company's sales.
As part of its marketing strategy, the Company has provided promotional and
educational activities concerning GRADIUM glass and its properties, intended to
familiarize and educate optical engineers from numerous, high performance optics
markets. 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 be
more likely to incorporate GRADIUM glass in their original designs. If a
standard GRADIUM glass profile is not suited for a specific design, LightPath
has the capability to create a custom GRADIUM glass profile for the customer.
The Company's objective is to educate optical designers, through the
distribution of materials, about the potential of GRADIUM glass to provide them
with additional flexibility and design freedom to create optical products more
efficiently and with enhanced performance.
SALES AND MARKETING
During fiscal 1998, the Company changed its primary marketing objectives 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 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. Third the
Company has developed low cost production techniques. 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.
According to the Mitre Economic Analysis Report, the annual market for optical
components, excluding optical fiber, is currently over $12 billion and will grow
to $22 billion by 2005.
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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 bandwidth expansion
and data transfer improvement in the drive 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 the Company believes 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 primary 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
June 1997, the Company announced it had joined with Invention Machine
Corporation (IMC) to form a joint venture company LightChip, to develop,
manufacture and market the next generation of dense WDM (DWDM) systems for use
by telecommunication carriers, CATV companies, local area networks (LAN) and
wide area networks (WAN) system integrators. LightChip will serve the growing
DWDM market, which some industry analysts predicted that North American sales
will grow at the rate of 70% annually until it reaches $3.2 billion in 2002. 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 ($3.5
million) 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 $510,000 from the exercise of warrants. LightChip has
successfully demonstrated a WDM model and currently expects it will have DWDM
prototypes available in fall 1999. Following the sale of convertible preferred
stock and exercise of warrants, LightPath's share of voting stock became 26%.
LightPath has licensed the use of GRADIUM glass, as well as any newly developed
intellectual property, in the field of fiber-optic communication systems,
components and devices to LightChip. LightPath has retained the rights to the
specific areas of fiber collimators, isolators, amplifiers, circulators,
couplers, splitters and fiber-optic switches.
In 1997, with funding from a federal government contract, the Company
addressed 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 edge-coupling schemes. By employing GRADIUM microlenses for a
tunable WDM, the Company was able to develop solutions for both problems. In
fiscal 1999, Phase 2 total funds of $750,000 were awarded to Radiant Research
Inc. for continuation of the WDM project into the year 2000, of which, the
Company was awarded $350,000. These funds will be used in partnership with
Radiant Research Inc. and the Microelectronics Research Center, University of
Texas
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 assembly. The Company's
newly designed single-mode fiber collimator assembly (SMF assembly) is
approximately 50-60% smaller than existing collimators. This entry level product
currently used by the telecommunications industry prevents light from diverging
as it exits a fiber and shepherds it into the next piece of equipment or fiber.
The Company offers three product levels: the collimating lens, a SMF assembly
and a large-beam collimator assembly. The collimating lens can replace existing
lenses with immediate improvements in performance, repeatability and cost. The
SMF assembly offers superior performance in the areas of size, back reflection
and insertion loss. The Company believes it can be manufactured at a
significantly lower cost than the competitive products currently available. The
target market for the Company's current products is concentrated within several
industry experts such as Lucent Technologies, Corning OCA, JDS Uniphase, E-TEK
Dynamics and ALCOA Fujikura. The lens and SMF assembly are used in free space
applications where coupling to an optical fiber is required. The Company will
develop these initial products into families of products as variations are made
to meet specific customer requirements. It is intended that the SMF assembly
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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
assembly price/performance ratio (value) and compare that to the customer's
internal costs plus their lost opportunity cost. ElectroniCast Corporation
estimates the collimator assembly and lens market at $125 million in 1999 and
estimates it will grow to $210 million in 2002.
In 1999, LightPath and Herzel Laor entered into an exclusive licensing
agreement for the commercialization of two fiberoptic opto-mechanical switch
technologies. On April 27, 1999, the Company signed a joint assembly and
distribution agreement for the 2X2 and 1XN fiberoptic mechanical switches with
Kaifa Technology, located in San Jose, California. In July 1999, Kaifa was
acquired by E-TEK Dynamics, a leader in optoelectronic components for the
telecommunications industry. Kaifa will remain as a separate business unit of
E-TEK and LightPath anticipates that the mechanical switch project will remain
on schedule. The Company believes these agreements will accelerate its planned
introduction of fiberoptic mechanical switching products for the
telecommunications market. The new products, for which patent applications have
been filed, are expected to enter into field trials by the end of calendar 1999.
Since the license agreement was signed, the Company has been working to develop
the first products for testing and establish a partnering relationship for
assembly and distribution. Under the terms of the agreement with Kaifa, the two
companies will jointly complete the development of the switches. The
manufacturing and assembly will occur in China. Both parties can market the
switch products and a royalty will be paid to LightPath for all product sold
under the Kaifa name. The Company anticipates sales of LightPath switches will
begin in calendar 2000. However, the telecommunications 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.
In 1997, the Company entered into a joint development agreement with Eagle
Optoelectronics, now doing business as LightPointe Communications, Inc., to
build a prototype of a DWDM (dense wavelength division multiplexer) by early
1998. During the development LightPointe 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. LightPointe'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. 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. Product sales for fiscal years
1999, 1998, 1997 and 1996 were $712,317, $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 customers in fiscal 1999 included Nu-Tek
Precision Optical Corporaton and OptoPower Corporation who supply products for
wafer chip inspection and YAG lasers, respectively. In fiscal 1998, Lumonics
Corporation, one of the largest YAG laser suppliers in the world, was the
Company's major customer. During fiscal 1999, Lumonics and many other YAG laser
suppliers were negatively impacted by the Asian economic downturn. Analysts of
the laser industry predict an upturn in laser product sales to this region by
the end of calendar 1999. 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 were qualified into systems produced by Rofin-Sinar GmbH, a
major OEM manufacturer of high-powered CO2 and YAG lasers, headquartered in
Germany.
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The Company has formalized relationships with eight industrial,
optoelectronics and medical component distributors located in foreign countries.
Because the optics industry is highly fragmented, the Company utilizes
distributors and the Internet as vehicles for broader promotion of GRADIUM
glass. The Company's Internet web site (www.light.net) is one source of
information on the Company and GRADIUM glass, and potential customers can view
products from the Company's catalog. The Company has placed, and will continue
to place, print media advertisements in various trade magazines and will
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.
The Company intends to 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 $800,000 representing minimum
royalty payments during the prototype development stage through the second
production year, in exchange for an exclusive license from the Company to the
GRADIUM design developed for Storz. Storz is not obligated to order commercial
quantities of GRADIUM glass products, and may terminate the agreement without
entering into production orders. The Company's relationship with Storz will
yield significant revenues in the future only if Storz sells commercial
quantities of the GRADIUM glass endoscopes. In June 1999, Storz indicated to the
Company that they are likely to convert the exclusive license to a non-exclusive
license in future years.
The Company has 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 no longer intends to develop these prototypes
without funding of their development effort by the OEM. In February 1997, 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 requested additional time for their technical testing of the
lenses. The joint technical review was completed in November 1998, at which time
the parties did not proceed to further 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., 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.
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 $0
and $68,000 in fiscal years 1999 and 1998, 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. As of
June 30, 1999, the companies had not received any further funding from these
programs.
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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 are also a
number of companies that assemble their own collimators, such as Lucent
Technologies and E-TEK Dynamics. These competitors all have greater financial,
manufacturing, marketing and other resources than the Company. The Company is
aware of current research projects which integrate optical technologies, such as
existing planar waveguide structures, which have the potential to replace some
of the current collimator applications. The Company believes that many of these
products currently have limitations which has made their wide spread usage
unfeasible thereby reducing the likelihood that they will replace current
collimator applications.
Mechanical switches comprise the majority of switches used today in the
telecommunications industry. The industry leader in this area is JDS Fitel,
which recently merged with Uniphase, followed by Dicon Fiberoptics. These
competitors all have greater financial, manufacturing, marketing and other
resources than the Company.
Optical cross-connects ("OXC"), which perform high speed wavelength
routing, switching and conversion functions in an optical network, are products
that the Company intends to focus on in the future. 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,
however, the Company is aware of current research projects to develop other
switching technologies. To the Company's knowledge, all of these projects are in
the early stages of development.
Dense wavelength division multiplexing (DWDM) systems that LightChip
intends to produce will compete against a number of companies attempting to
capture this vast market. Currently three main technologies are utilized in the
long haul DWDM 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. The Company believes that 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 can 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.
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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 companies do not
manufacture axial gradient lenses, and although the Company believes that it has
a substantial technological lead in this field, these companies could rapidly
pursue development of axial gradient products, in light of their substantial
resources. 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, Gradient Lens Corporation and Gel-Tech, Inc. 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.
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MANUFACTURING
LightPath has a full scale commercial manufacturing operation in its 13,300
square foot facility in Albuquerque. In April 1996, the Company built out its
existing lens manufacturing plant for traditional optics. 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, which are
equipped with monitoring and feedback systems, allow production of multiple
boules that are up to four times as large as the Company's initial boules.
Automation of certain assembly processes, including core drilling and metrology,
are resulting in further cost savings and quality improvements. GRADIUM glass
lenses have spherical surfaces, and as a result 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. During fiscal 1998, the Company purchased some of the
equipment necessary for the production of the SMF collimator. In fiscal 1999,
the equipment required to manufacture the full line of collimating products
became operational at a cost of approximately $350,000. With this equipment, the
Company believes its facility can meet the capacity requirements of its recently
introduced and planned optoelectronics products for the next fiscal year. Once
the Company has secured sufficient production orders, it intends to order a
second set of production equipment at an estimated cost of $200,000. Due to
manufacturing techniques developed by the Company, it believes the costs to
produce the SMF assembly will be considerably less than the traditional industry
manufacturing costs.
The Company knows that low manufacturing costs will be crucial to its
long-term success. The Company presently uses subcontractors for finishing
lenses, including the collimator lens, and intends to continue to do so. The
Company has the internal capability to finish prototype lenses and small volume
orders. The Company has qualified and licensed numerous finishers to fabricate
lenses, several 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. The Company
entered into a 1997 strategic alliance with Hikari Glass Co., Ltd. of Japan (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, 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 1999 and have plans to implement some of the
goals during fiscal year 2000. LightPath also entered into a 1999 agreement with
Kaifa Technology, Inc. to jointly manufacture and distribute mechanical fiber
optic switch products. Kaifa Technology was purchased in July 1999 by E-TEK
Dynamics of San Jose, California. LightPath has taken steps to protect its
proprietary methods of repeatable high quality manufacturing by patent
disclosures and internal trade secret controls.
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.
Base optical materials, used in both optoelectronic and traditional optic
products, are manufactured and supplied by a number of major manufacturers, such
as Hikari, Schott Glaswerke and Hoya Corporation. Optical fiber and collimator
housings are manufactured and supplied by a number of major manufacturers, such
as Corning. The Company believes that a satisfactory supply of production
materials will continue to be available at reasonable prices, although there can
be no assurances in this regard.
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PATENTS AND OTHER PROPRIETARY INTELLECTUAL PROPERTY
The Company's policy is to protect its technology by, among other things,
patents, trade secret protection, trademarks and copyrights. As of June 1999,
the Company had seventeen issued U.S. patents, seven 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 2016. 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 to the
Company's knowledge, cannot be reverse-engineered. LightPath(R) is now
registered as a service mark in the United States and GRADIUM (R) is a
registered trademark.
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 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.
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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 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.
Working with DR Technologies, LightPath successfully completed the
development of GRADIUM polymer and acrylic materials in fiscal 1998. 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, 1999 and 1998 of $615,371 and $564,779,
respectively. The Company currently plans to expend approximately $350,000 for
research and development during fiscal 2000 which could vary depending upon
receipt of Government contracts or awards for which the Company has applied.
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EMPLOYEES
The Company currently has twenty-five full-time employees. The Company
expects to hire four to eight additional employees in the next twelve months,
primarily consisting of manufacturing and sales personnel. Four of the Company's
present employees are engaged in management, administrative and clerical
functions, two in research and development, fourteen in production, metrology
and product development and five 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, under
a five year lease which expires April 2001. The leased space houses 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 $6,900. Currently the Company believes its present facilities, with
the installation of a prefabricated clean room expected to be complete by
December 1999, will be 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 significant effect on the Company.
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 is quoted on the Nasdaq SmallCap Market
system under the symbol "LPTHA" and has been continuously since February 22,
1996.
The Company estimates there were approximately 300 holders of record and
approximately 2500 beneficial holders of the Class A Common Stock on August 16,
1999. 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 reflects inter-dealer prices, without retail mark-up, mark-down or
commission, and may not represent actual transactions.
Class A
Fiscal Year Ended Common Stock
High Low
------ ------
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
JUNE 30, 1999
Quarter ended September 30, 1998 $ 5.94 $ 3.38
Quarter ended December 31, 1998 $ 5.75 $ 2.50
Quarter ended March 31, 1999 $ 5.63 $ 2.56
Quarter ended June 30, 1999 $ 3.56 $ 1.06
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 the
holder 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 to the Company 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 the holder 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 to the Company of approximately $2,064,000. In
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addition, the placement agent was granted 47,668 Class F warrants to purchase
shares of the Company's Class A common stock at a price of $7.24 per share at
any time through September 2002.
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 365,169 attached Class G warrants. Each share of Series C Stock is
convertible into Class A Common Stock at the option of the holder 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 to the Company 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, of the Company. The dividend became payable on the
record date May 1, 1998, 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, at a price of $35.00 per share, subject to
adjustment following the occurrence of certain events. The description and terms
of the Rights are set forth in a Rights Agreement, dated as of May 1, 1998
between the Company and Continental Stock Transfer & Trust Company, as 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.
During 1997 the Company adopted a policy whereby employees may purchase
Class A common stock of the company at fair market value as payroll deduction.
During fiscal 1999 two employees have elected to make stock purchases of 8,344
shares at an average price of $3.30 per share. All of these shares were issued
in a private offering pursuant to Section 4(2) of the Securities Act of 1933, as
amended (the "Act"). In relying upon Section 4(2) of the Act, the Company
limited its offering of the shares solely to the employees. No other public
offering or advertisement was conducted. In addition, the Company relied upon
certain representations made by the employees with respect to their
understanding of the Company's business and financial condition, and future
business prospects, and their intent to acquire the shares for their own
investment purposes and not with a view to resale. The resale of these shares
has been restricted and appropriate legends have been placed on the certificates
representing such restrictions.
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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 SET FORTH HEREIN 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.
During the year ended June 30, 1999, the Company's management focused its
efforts on the following key areas: 1) the completion of the AT&T Ventures'
financing for the Company's affiliate LightChip, 2) the sale and distribution of
collimator lens and assembly samples to potential customers for testing, 3) the
licensing agreement for fiberoptic switches between LightPath and Herzel Laor 4)
the implementation of the strategic plan to focus the Company as a provider of
cost effective product solutions for the telecommunication optical components
industry and 5) obtaining financing to implement the growth plan outlined in the
strategic plan. On September 9, 1998, LightChip received approximately $3.5
million from AT&T Ventures and LightPath as consideration for the issuance of
its Series A convertible preferred stock. The balance of the $6.5 million
commitment ($3 million) is due upon completion of certain product design
requirements by LightChip. In addition, $890,000 of LightChip's bridge loans
converted to equity and LightChip received $508,333 from the exercise of
warrants. LightChip has relocated to the Boston metropolitan area to begin
scale-up of their research and development efforts to meet product design
milestones. The Company believes LightChip is making significant progress in the
development of its products for next-generation wavelength division multiplexing
(WDM) products for metro and local area network applications. The Company will
experience further dilution of its ownership in LightChip when the balance of
the private placement is funded, currently anticipated to occur in calendar
1999.
LightPath has granted to LightChip a worldwide, royalty free license for
the use of GRADIUM glass, as well as any newly developed intellectual property,
in the field of fiber-optic communication systems, components and devices.
LightPath has retained the rights to the specific areas of fiber collimators,
isolators, amplifiers, circulators, couplers, splitters and fiber-optic
switches.
The Company's internal focus, during the fiscal year 1999, has been on the
development and shipment of product samples of LightPath's newly designed
single-mode fiber collimator assembly (SMF assembly) which is approximately
50-60% smaller than the existing collimators. This entry level product currently
used by the telecommunications industry prevents light from diverging and
shepherds it into the next piece of equipment or fiber. The Company introduced
three product levels in fiscal 1999: the collimating lens, a SMF assembly and a
large-beam collimator assembly. The collimating lens can replace existing lenses
with immediate improvements in performance, repeatability and cost. The SMF
assembly 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. In addition, LightPath is seeking
to attract customers interested in obtaining a second source supplier since the
majority of existing collimator sales are through one manufacturer. In 1999,
production line SMF assembly and collimating lenses were delivered for testing
to approximately 50 potential customers in the U.S. and Asia. The first scale-up
production orders are expected in late calendar 1999 due to the amount of
testing time required by telecommunication customers. The Company has received
mostly favorable comments from potential customers on the collimating lenses due
to improved insertion loss. The Company displayed all three products at trade
shows during January and February 1999 resulting in the shipment of testing
products to other potential customers. The Company has received follow-on
production orders from two key customers in July 1999, which the Company
believes are representative of market acceptance for the products. Based on the
cost of the Company's prototypes and GRADIUM lenses, the Company believes the
profit margin in these optoelectronics products will equal or exceed the margins
historically experienced in the traditional optics markets.
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In December 1998, LightPath and Herzel Laor entered into an exclusive
licensing agreement for the commercialization of two fiberoptic opto-mechanical
switch technologies. On April 27, 1999, The Company signed a joint assembly and
distribution agreement for the 2X2 and 1XN fiberoptic mechanical switches with
Kaifa Technology which in July 1999 was acquired by E-TEK Dynamics also of San
Jose, California. Kaifa will remain as a separate business unit of E-TEK and
LightPath anticipates that the mechanical switch project will remain on
schedule. The Company believes these agreements will accelerate its planned
introduction of fiberoptic mechanical switching products for the
telecommunications market. Mr. Laor and his businesses have been active in the
development of fiberoptic switches for 20 years. The new products, for which
patent applications have been filed, are expected to enter into field trials by
the end of calendar 1999. Since the license agreement was signed, the Company
has been working to develop the first products for testing and establish a
partnering relationship for assembly and distribution. The Company believes its
agreement with Kaifa Technology will help accomplish this goal. Under the terms
of the agreement with Kaifa, the two companies will jointly complete the
development of the switches. The manufacturing and assembly will occur in China.
Both parties can market the switch products and a royalty will be paid to
LightPath for all product sold under the Kaifa name. Industry estimates of the
current market sales for the mechanical switch are approximately $100 million
annually, and the Company anticipates sales of LightPath switches will begin in
calendar 2000. However, the telecommunications 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.
Subsequent to 1999 fiscal year end, the Company completed a private
placement for $1 million in 6% Convertible Debentures. Additionally, the
Debenture holders and the placement agent each received warrants to acquire
Class A common stock totaling 427,350 and 150,000 shares, respectively. In
connection therewith, the Company will recognize in addition to the coupon rate
of 6%, approximately $835,000 of interest expense over the three-year life of
the debentures. Additionally, the Company will recognize an additional interest
charge of approximately $382,000 in the first quarter of fiscal year 2000 for
the "beneficial conversion feature" associated with the debentures. In addition,
the Company continues to work with a financial advisor to assist the Company in
evaluation of various options including capital fund raising, mergers,
acquisitions, dispositions and consolidations.
Consistent with the Company's strategy to focus its efforts in the
optoelectronics and telecommunications market, it has continued to work towards
further agreements with strategic companies to distribute GRADIUM into
traditional optic products. During 1999, the Company announced a five year
Strategic Agreement with the German optical products manufacturer Rodenstock
Prazisionsoptik GmbH for the development, production and joint-distribution of
GRADIUM based optical products in Europe. Rodenstock products include high-end
camera lenses, precision optical components, medical instruments and laser and
imaging systems. The Agreement calls for joint marketing and coordinated efforts
to sell into these markets. The Company anticipates that this Agreement will
provide a vehicle to expand the presence of its products in Europe to a higher
level, although there can be no assurances in this regard. In 1999 lens sales to
large YAG laser manufacturers continued. The Company currently has relationships
with eight industrial, optoelectronic and medical component distributors based
around the globe. The Company believes these distributors may create new and
sustain existing markets for GRADIUM in their respective countries primarily in
the area of the YAG laser market.
Revenues totaled $1,086,000 for 1999, an increase of approximately $328,000
or 43% over 1998. The increase was attributable to growth in product sales of
$183,000, primarily for lenses used in lasers and wafer chip inspection, and
telecom products as well as the increase of $145,000 in product
development/license fees. Sales of lenses during this period increased 35% which
was below the rate of growth the Company had projected due to reduced laser
equipment sales into Asia. The Company expects the rate of growth for laser and
wafer chip inspection lenses to continue into fiscal 2000. Revenues for
government funded subcontracts in the area of optoelectronics totaled $231,000
for 1999 versus $68,000 for solar energy work during 1998. The Company received
$143,000 in license and development fees for 1999 versus $161,000 for such fees
during 1998. The license fee agreement with Karl Storz was increased to $20,833
per month effective January 1999 for the calendar year versus $16,667 per month
in fiscal 1998. At June 30, 1999, a backlog of $45,000 existed for lens and
collimator sales and $150,000 in government project funding.
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In 1999, cost of goods sold was 57% of product sales which approximates the
55% rate from 1998. It is anticipated that with increased volume and the
increased utilization of off-shore lens finishers, the cost of traditional
optics production could be decreased. The Company believes the profit margin
from expected sales of optoelectronics products in fiscal 2000 will equal or
exceed the margins historically experienced in the traditional optics markets.
Selling, general and administrative costs in 1999 decreased $538,000 or 16% from
1998, primarily due to the reduction of personnel in administration and the
reduction in overhead and personnel costs associated with LightChip. Research
and development costs increased $51,000 or 9% in 1999 versus 1998. The majority
of development work in 1999 consisted of expenses associated with the design and
manufacturing process for telecommunications industry products.
Investment income decreased approximately $77,000 in 1999 due to the
decrease in interest earned on temporary investments primarily as a result of
the decreased cash position of the Company. Interest expense was not significant
in 1999 or 1998. The Company accounts for the investment in LightChip under the
equity method. In June 1998, the Company committed to purchase $1.25 million of
LightChip preferred stock thereby requiring the Company to recognize
substantially all of LightChip's loss until the private placement occurred in
September 1998. With the completion of the September 1998 private placement, the
Company's share of LightChip losses was reduced to its ownership percentage of
approximately 26%. The Company has recognized $819,882 in LightChip losses in
1999 versus $945,382 in 1998.
Net loss of $3,592,229 in 1999 was a decrease of $739,061 from 1998 of
which $125,500 relates to reduced equity method losses of LightChip offset in
part by the decrease in other income (expense) of $82,625. The remaining
decrease of $696,186 was due to a $144,895 increase in product development fees,
the increase in gross margin on product sales of $63,500 and a decrease in
selling, general and administrative costs of $538,383 offset in part by an
increase in research and development costs of $50,592. Net loss applicable to
common shareholders of $3,816,880 included additional charges of $224,651 for
the 8% premium on the preferred stock. Net loss per share of $.89 was a decrease
of $1.11 from the 1998 net loss per share of $2.00, of which $.38 was due to the
increase in weighted shares outstanding due to the conversion of preferred stock
in 1999. The 1998 net loss applicable to common shareholders of $6,029,519
contains an imputed dividend of $1,386,700 arising from the issuance of
preferred stock and $311,529 due to 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 to
the Company of approximately $7.2 million. From June 1997 through February 1998,
the Company completed three preferred stock private placements which generated
total net proceeds of approximately $7.2 million. Subsequent to June 30, 1999,
the Company completed a private placement for $1 million in 6% Convertible
Debentures and related warrants. The Company intends to continue to explore
additional funding opportunities in fiscal year 2000, although it currently has
no commitments for such funding. Cash used in operations for fiscal 1999 totaled
approximately $2,662,000, a decrease of $930,000 from fiscal 1998, due primarily
to administrative cost reductions. 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 1999, the Company expended
approximately $516,000, net, for capital equipment and patent protection. The
majority of the capital expenditures during the year were for equipment used to
expand the Company's manufacturing facilities for collimator production.
The Company purchased 51% of the voting stock of LightChip for $23,720 in
1998. In September 1998, LightChip obtained a significant equity commitment of
$6.5 million for the sale of convertible preferred stock to LightPath ($1.25
million) and AT&T Ventures ($5.25 million). In September 1998, phase one or
approximately $3.5 million, of which the Company's portion was $713,333, was
completed and the balance is due at the next stage of product development,
currently anticipated to occur in the fall of 1999. In addition, debt holders of
LightChip converted all of their outstanding balances to preferred stock and
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exercised substantially all of the outstanding warrants as part of the equity
investment. As a result of these transactions, the Company currently holds
approximately 26% of LightChip's voting stock.
Projected product sales as well as the proceeds from the July 1999 sale of
6% Convertible Debentures and related warrants will be used for working capital
for fiscal 2000. Such sales will depend on the extent that the SMF assembly,
collimating lenses and GRADIUM glass become commercially accepted and at levels
sufficient to sustain its operations. There can be no assurance that the Company
will generate sufficient revenues to fund its future operations and growth
strategies. At this time the Company does not believe product sales will reach
the level required to sustain its operations and growth plans beyond the near
term; therefore, the Company is actively pursuing additional financing. If
financing is not available, the Company may not be able to fund its $570,000
remaining commitment to LightChip, which would further dilute the ownership
interest in LightChip. The Company may also be required to 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
Company's existing investors.
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. This problem is commonly referred to as the "Year 2000 Issue". The
Company has determined that its internal computer systems, manufacturing
equipment and software products were produced to be Year 2000 compliant and no
material remediation costs have been incurred or are expected to be incurred by
the Company. During the third quarter of fiscal 1999, the Company confirmed 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 of third parties is complete and based on their responses,
the Company believes its material third party relationships will not be
adversely impacted by the Year 2000 Issue barring any unforeseen circumstances.
Under a worst case scenario the Company may experience delays in receiving
products and services thereby impacting product shipments. The Company plans on
having adequate inventory levels to minimize such impact, if any. The Company
will continue to monitor third parties throughout the remainder of calendar 1999
and develop contingency plans if a third party is subsequently found to be
non-compliant.
The Company has not been significantly impacted by inflation in 1999 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.
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Recent Accounting Pronouncements
Statement of Financial Accounting Standards ("SFAS") No. 133, ACCOUNTING
FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, was issued in June 1998. This
statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. The provisions of SFAS No. 133, as
amended, are effective for financial statements for fiscal years beginning after
June 15, 2000, although early adoption is permitted. We have not determined the
potential financial impact of adopting SFAS 133.
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.
Not applicable.
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PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT.
DIRECTORS AND EXECUTIVE OFFICERS
The Directors and Executive Officers of the Company, and their respective
ages and positions with the Company, are as follows:
Name Age Position
---- --- --------
Leslie A. Danziger 46 Chairwoman
Donald E. Lawson 48 President, Chief Executive Officer,
Treasurer and Director
Mark Fitch 35 Senior Vice President
James L. Adler, Jr. 71 Director
Katherine E. Dietze 41 Director
Louis Leeburg (2) 45 Director
Haydock H. Miller, Jr. (1, 2) 74 Director
James A. Wimbush (1) 63 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. Effective January 1,
1999, Ms. Danziger, with approval of the Board, modified the terms and
responsibilities of her position. With a change from full to part time status,
Ms. Danziger became a consultant to the Company. 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. She represents the Company as a
member of the LightChip, Inc. Board of Directors. 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, who until September 1998 was a Vice President of
the Company, and is the sister-in-law of Milton Klein, M.D., a Director of the
Company until October 1998.
DONALD E. LAWSON has served as a Director of the Company and has been CEO
since April 1998, President since October 1997 and Treasurer since September
1995. He previously held the position of Executive Vice President from May 1995
until April 1998. 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.
MARK A. FITCH has been the Senior Vice President of Sales since March 1999.
He joined LightPath in October 1997 as Vice President - Marketing & Sales and
has also had increasing responsibilities in the telecommunication product
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development area. From 1994 to 1997, Mr. Fitch was Vice President - Operations
for Geltech Inc., a specialty optics manufacturer. From 1985 to 1994, Mr. Fitch
held various technical and commercial positions with Corning Incorporated,
ending with Chief Engineer in the optics division. Mr. Fitch graduated Summa Cum
Laude from the State University of New York with a B.S. in Physics.
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. In 1998-1999, Mr. Adler served as President of the
Arizona Business Leadership Association (of which he remains a director), and is
a member of the Arizona District Export Council, and a Trustee of the Phoenix
Committee on Foreign Relations. In March 1999, Mr. Adler was appointed by the
government of Japan to a five year term as Honorary Counsel General of Japan at
Phoenix for Arizona. 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.
KATHERINE E. DIETZE has served as a Director of the Company since October
1998. She currently is a managing director in the Global Telecommunications and
Media Group in the Investment Banking Department of Credit Suisse First Boston,
a leading global investment bank which she joined in September 1996. For the
prior eleven years she was with the investment banking firm of Salomon Brothers.
Ms. Dietze received her B.A. from Brown University and her M.B.A. from Columbia
University Graduate School of Business.
LOUIS LEEBURG has served as a Director of the Company since May 1996. Mr.
Leeburg is a self-employed business consultant. 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 thereto 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.
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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, 1999, all Section 16(a) filing requirements
applicable to its officers, directors and greater than 10% beneficial owners
were complied with.
ITEM 10. EXECUTIVE COMPENSATION.
The information required under this item will be set forth in the Company's
proxy statement to be filed with the Securities and Exchange Commission on or
before September 15, 1999 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 15, 1999 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 15, 1999 and is incorporated herein by reference.
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ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits
Exhibit
Number Description
------ -----------
3.1 Certificate of Incorporation of Registrant, as amended 1
3.2 Certificate of Designations filed November 10, 1995 with
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 5
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 *
10.8 Amended Omnibus Incentive Plan *
11 Computation of Net Loss Per Share *
23.1 Consent of KPMG LLP *
27 Financial Data Schedule *
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 thereto.
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 thereto.
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 thereto.
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 thereto.
5. This exhibit was filed as an exhibit to the Company's Form 10-KSB for the
fiscal year ended June 30, 1998 dated September 17, 1998 and is
incorporated herein by reference thereto.
* Filed herewith.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarterly period ended June
30, 1999.
26
<PAGE>
LIGHTPATH TECHNOLOGIES, INC.
INDEX TO FINANCIAL STATEMENTS
Report of KPMG LLP, Independent Auditors.....................................F-2
Audited Financial Statements
Balance Sheets...............................................................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 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, 1999 and 1998, 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, 1999 and 1998, 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 LLP
Albuquerque, New Mexico
August 10, 1999
F-2
<PAGE>
LIGHTPATH TECHNOLOGIES, INC.
BALANCE SHEETS
JUNE 30, JUNE 30,
1999 1998
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 413,388 $ 4,237,400
Trade accounts receivable - less allowance
of $15,000 and $0 335,706 256,491
Inventories (NOTE 2) 514,669 407,061
Advances to employees and related parties 17,329 38,560
Prepaid expenses and other 19,124 43,629
------------ ------------
Total current assets 1,300,216 4,983,141
Property and equipment - net (NOTE 3) 893,537 805,487
Intangible assets - net (NOTE 4) 572,877 519,839
Investment in LightChip, Inc. (NOTE 5) 369,696 --
============ ============
Total assets $ 3,136,326 $ 6,308,467
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 167,160 $ 190,530
Accrued payroll and benefits (NOTE 7) 131,755 232,051
------------ ------------
Total current liabilities 298,915 422,581
Accrued loss of LightChip, Inc. -- 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 1,492,480 and 1,481,584 shares
issued and outstanding 14,925 14,816
Class E-2 - performance based and redeemable
common stock 1,492,480 and 1,481,584 shares
issued and outstanding 14,925 14,816
Class E-3 - performance based and redeemable
common stock 994,979 and 987,715 issued
and outstanding 9,950 9,877
Stockholders' equity (NOTES 9 AND 10)
Preferred stock, $.01 par value; 5,000,000 shares
authorized; Series A convertible shares, 37 and
49 issued and outstanding, Series B convertible
shares, 1 and 126 issued and outstanding, Series
C convertible shares, 84 and 361 issued and
outstanding, $1,220,000 liquidation preference
at June 30, 1999 1 5
Common stock:
Class A, $.01 par value, voting; 34,500,000
shares authorized; 4,960,703 and 3,330,607
shares issued and outstanding 49,607 33,306
Additional paid-in capital 29,776,918 28,103,439
Accumulated deficit (27,058,915) (23,242,035)
------------ ------------
Total stockholders' equity 2,767,611 4,894,715
------------ ------------
Total liabilities and stockholders' equity $ 3,136,326 $ 6,308,467
============ ============
See accompanying notes.
F-3
<PAGE>
LIGHTPATH TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
YEAR ENDED JUNE 30
-------------------------
1999 1998
----------- -----------
REVENUES
Lenses and other $ 712,317 $ 529,318
Product development fees 373,809 228,914
----------- -----------
Total revenues 1,086,126 758,232
COSTS AND EXPENSES
Cost of goods sold 409,417 289,918
Selling, general and administrative 2,918,184 3,456,567
Research and development 615,371 564,779
----------- -----------
Total costs and expenses 3,942,972 4,311,264
----------- -----------
Operating loss (2,856,846) (3,553,032)
OTHER INCOME(EXPENSE)
Investment income 95,362 172,341
Interest and other expense (10,863) (5,217)
Equity in loss of LightChip, Inc. (NOTE 5) (819,882) (945,382)
----------- -----------
Net loss $(3,592,229) $(4,331,290)
=========== ===========
Net loss applicable to common shareholders (NOTE 11) $(3,816,880) $(6,029,519)
=========== ===========
Basic and diluted net loss per share (NOTE 11) $ (.89) $ (2.00)
=========== ===========
Number of shares used in per share calculation 4,271,313 3,010,861
=========== ===========
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, 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
Issuance of common stock -- 8,344 83 27,476 -- 27,559
Exercise of stock options -- 7,264 73 39,586 -- 39,659
Issuance of common stock upon
conversion of 12 shares Series
A, 103 shares Series B and 277
shares Series C convertible
preferred stock to common stock (4) 1,614,488 16,145 (16,141) -- --
8% premium on Series A, Series B
and Series C convertible
preferred stock -- -- -- 224,651 (224,651) --
Sale of securities by LightChip, Inc. -- -- -- 1,397,907 -- 1,397,907
Net loss -- -- -- -- (3,592,229) (3,592,229)
============ ============ ============ ============ ============ ============
Balances at June 30, 1999 $ 1 4,960,703 $ 49,607 $ 29,776,918 $(27,058,915) $ 2,767,611
============ ============ ============ ============ ============ ============
</TABLE>
See accompanying notes.
F-5
<PAGE>
LIGHTPATH TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
YEAR ENDED JUNE 30
-------------------------
1999 1998
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(3,592,229) $(4,331,290)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 375,358 302,507
Provision for uncollectible receivables 15,000 --
Services provided for common stock -- 11,250
Equity in loss of LightChip 819,882 945,382
Changes in operating assets and liabilities:
Receivables, advances to employees,
related parties (72,984) (124,928)
Inventories (107,608) (231,302)
Prepaid expenses and other 24,505 (5,025)
Accounts payable and accrued expenses (123,666) (158,868)
----------- -----------
Net cash used in operating activities (2,661,742) (3,592,274)
CASH FLOWS FROM INVESTING ACTIVITIES
Property and equipment additions, net (437,223) (250,857)
Costs incurred in acquiring patents
and license agreements (79,223) (45,652)
Investment in LightChip (713,333) (23,720)
----------- -----------
Net cash used in investing activities (1,229,779) (320,229)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sales of Convertible Series
A, Series B and Series C preferred stock, net -- 6,798,605
Proceeds from exercise of common stock
options and warrants 39,950 331,468
Proceeds from issuance of common stock 27,559 26,325
----------- -----------
Net cash provided by financing activities 67,509 7,156,398
----------- -----------
Net (decrease) increase in cash
and cash equivalents (3,824,012) 3,243,895
Cash and cash equivalents at beginning of period 4,237,400 993,505
=========== ===========
Cash and cash equivalents at end of period $ 413,388 $ 4,237,400
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Class A common stock issued for services $ -- $ 11,250
Class E common stock issued $ 291 $ 845
Class A common stock issued upon conversion
of preferred stock $ 16,145 $ 4,568
Sale of securities by LightChip, Inc. $ 1,397,907 $ --
See accompanying notes.
F-6
<PAGE>
LIGHTPATH TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30,1999
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, collimator products and other optical materials. The Company also
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 completed 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 of convertible debentures
completed in July 1999 (see Note 16) and cash flows from projected product sales
to finance the Company's working capital and other requirements for fiscal year
2000. However, without additional sources of capital or increased sales of
GRADIUM glass and optoelectronic products, there is substantial doubt about the
Company's ability to continue as a going concern. These 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, collimators 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
ranging from three to seven years.
INTANGIBLE ASSETS consisting of licenses, patents and trademarks, are recorded
at cost. Upon issuance of the license, patent or trademark, these assets are
being amortized on the straight-line basis over the estimated useful lives of
the related assets ranging from ten to seventeen years. The recoverability of
the carrying values of these assets are evaluated on a recurring basis.
INVESTMENTS consists of the Company's ownership interest in LightChip Inc.
(LightChip) which is accounted for under the equity method. The Company's voting
interest decreased to 26% in September 1998 due to the sale of voting
convertible preferred stock by LightChip as well as the conversion and exercise
of outstanding debentures and warrants.
F-7
<PAGE>
LIGHTPATH TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
INCOME TAXES are accounted for under the provisions of Statement of Financial
Accounting Standards No. 109, ACCOUNTING FOR INCOME TAXES, which requires an
asset and liability approach to financial accounting and reporting for income
taxes.
Deferred income tax assets and liabilities are computed for differences between
the financial statement and tax bases of assets and liabilities that will result
in taxable or deductible amounts in the future based upon enacted tax laws and
rates applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized.
REVENUE RECOGNITION occurs from sales of products upon shipment or as earned
under product development agreements.
RESEARCH AND DEVELOPMENT costs are expensed as incurred.
STOCK BASED COMPENSATION is accounted for using the intrinsic value method as
prescribed by APB Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES,
under which no compensation expense is recognized when the exercise price of the
employees stock option equals or exceeds the market price of the underlying
stock on the date of grant.
Pro forma information required by Statement of Financial Accounting Standards
No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, has been presented under the
fair value method using a Black-Scholes option pricing model.
PER SHARE DATA is accounted for under the provisions of the Statement of
Financial Accounting Standards No. 128 (FAS 128), EARNINGS PER SHARE. See Note
11.
MANAGEMENT MAKES ESTIMATES and 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 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.
RECLASSIFICATION of certain amounts in the 1998 financial statements has been
made to conform to the 1999 financial statement presentation.
F-8
<PAGE>
LIGHTPATH TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
2. INVENTORIES
The components of inventories include the following at June 30:
1999 1998
---------- ----------
Raw materials $ 50,736 $ 44,885
Boules and blanks in process 97,321 83,530
Finished goods 366,612 278,646
---------- ----------
Total inventories $ 514,669 $ 407,061
========== ==========
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at June 30:
1999 1998
---------- ----------
Manufacturing equipment $1,536,525 $1,132,167
Computer equipment and software 299,085 294,361
Furniture and fixtures 117,885 123,176
Leasehold improvements 99,134 117,227
---------- ----------
2,052,629 1,666,931
Less accumulated depreciation 1,159,092 861,444
---------- ----------
$ 893,537 $ 805,487
========== ==========
4. INTANGIBLE ASSETS
Intangible assets consist of the following at June 30:
1999 1998
---------- ----------
Patents and trademarks granted $ 397,652 $ 309,385
License agreements 40,000 --
Patent applications in process 216,959 266,003
---------- ----------
654,611 575,388
Less accumulated amortization 81,734 55,549
---------- ----------
$ 572,877 $ 519,839
========== ==========
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 an additional loss of $921,662 for
substantially all of LightChip's losses during fiscal 1998.
On September 9, 1998, LightPath purchased 2,266,667 shares of voting Series A
convertible preferred stock of LightChip in a private placement participating
with AT&T Ventures who acquired 9,400,000 shares of voting Series A convertible
preferred stock (Preferred Stock) for an aggregate purchase price of
approximately $3.5 million. LightPath and AT&T Ventures have committed to
purchase an additional $570,000 and $2.5 million, respectively, of voting Series
A1 convertible preferred stock upon completion of certain product design
requirements. Each share of Preferred Stock was issued at $.30 per share, 8% per
F-9
<PAGE>
LIGHTPATH TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
annum dividend if declared, noncumulative and a liquidation preference equal to
the purchase price plus any declared but unpaid dividends. In conjunction with
the private placement all the convertible bridge loans outstanding at LightChip,
totaling $890,000, converted to Preferred Stock at $.30 per share as permitted
in the debt agreement. In addition, substantially all of the warrant holders of
LightChip exercised their warrants, including 111,111 shares of Preferred Stock
received upon the exercise of warrants by LightPath. In total, LightChip issued
approximately 16,460,000 shares of Preferred Stock. Each share of Preferred
Stock is convertible into one share of Common Stock at (i) the option of the
holder, (ii) the consent of the majority of the holders of the outstanding
Preferred Stock or (iii) an initial public offering if gross proceeds from the
offering exceed 5 times that paid by holders of the Preferred Stock.
Accordingly, the Company recognized all of LightChip's losses from July 1, 1998
through the closing of the private placement on September 9, 1998, which upon
completion, reduced the Company's voting interest to approximately 26%. From the
closing date through June 30, 1999, the Company recognized its pro-rata share of
LightChip's losses (approximately 26%). Upon completion of the sale of the
Preferred Stock by LightChip, the Company recorded an increase to additional
paid-in capital of $1,397,907 which represents an amount necessary to increase
LightPath's Investment in LightChip to its pro rata share of total LightChip
equity at this date. Due to the Company's tax position, no deferred tax effects
were recognized related to this increase to stockholders' equity.
Summarized financial information of LightChip as of and for the periods ended
June 30, 1999 and 1998 follows:
LightChip Inc.
Summarized financial information June 30, June 30,
1999 1998
---------- ----------
Assets
Current assets $ 1,604,994 $ 18,011
Property and equipment - net 512,110 134,144
----------- -----------
Total assets $ 2,117,104 $ 152,155
=========== ===========
Liabilities and Equity
Current liabilities $ 304,936 $ 183,817
Debt 429,659 890,000
----------- -----------
Total liabilities 734,595 1,073,817
Shareholders' Capital 4,910,502 46,045
Accumulated deficit (3,527,993) (967,707)
----------- -----------
Total shareholders' equity 1,382,509 (921,662)
----------- -----------
Total liabilities and shareholders' equity $ 2,117,104 $ 152,155
=========== ===========
For fiscal years ended June 30, 1999 and 1998
Net loss during development stage $(2,560,286) $ (967,707)
=========== ===========
6. NOTE PAYABLE TO STOCKHOLDER
At June 30, 1999 and 1998, 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 $2,930 and $5,217 was paid in 1999 and 1998,
respectively.
F-10
<PAGE>
LIGHTPATH TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
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, 1999 and 1998, the total deferred
amounts were $72,524 and $153,435, respectively. Certain key officers of the
Company have agreed to make repayment of such deferred amounts 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 are being 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: 1999 1998
----------- -----------
Start-up expenses, net $ 1,197,000 $ 1,792,000
Research and development expenses 719,000 685,000
Net operating loss carryforwards 6,001,000 3,894,000
Research and development
credit carryforwards 224,000 193,000
Other (35,000) (233,000)
----------- -----------
Total deferred tax assets 8,106,000 6,331,000
Valuation allowance for deferred tax assets (8,106,000) (6,331,000)
----------- -----------
$ -- $ --
=========== ===========
The valuation allowance has increased by $1,775,000 and $1,350,000 during the
years ended June 30, 1999 and 1998, respectively, as a result of increased
deferred tax assets created principally by the operating losses and the deferral
of research and development 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, 1999, the Company has net
operating loss carryforwards for federal income tax purposes of approximately
$15 million which will begin to expire in 2009 if not previously utilized. The
Company also has research and development credit carryforwards of approximately
$224,000 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 credit carryforwards are subject to certain
limitations of the Internal Revenue Code which restrict their annual
utilization.
9. EMPLOYEE AND DIRECTOR STOCK OPTION PLANS
At June 30, 1999 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. 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.
F-11
<PAGE>
LIGHTPATH TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
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 has reserved 1,825,000 shares of common stock for awards under the
Incentive Plan. The number of shares reserved for award by the Directors Plan
was increased from 125,000 to 350,000 shares of common stock in 1999.
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 and grants to stockholders with 10% or
more of the Company's stock cannot exceed five years from 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, 1999 were 826,126 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
each nonemployee director receives options to purchase shares of the Company's
common stock. The director's option vest ratably over their three year term.
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, 1999 were
143,951 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 1999 or 1998. Options
issued prior to the IPO are bundled into an option for the purchase of one share
of Class A common stock, 1.5 shares each of Class E-1 and E-2 common stock and
one share of Class E-3 common stock.
A summary of the status of the stock option plans as of June 30, 1999 and 1998
and changes during the years ended is presented below:
Weighted-Avg.
Shares under option: Incentive Directors Exercise
Plan Plan Nonqualified Price
-------- -------- -------- --------
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
Granted 266,600 167,880 -- $ 3.52
Exercised -- -- (7,264) $ 5.50
Lapsed or canceled (132,700) (33,331) (209) $ 6.49
-------- -------- -------- --------
Outstanding at June 30, 1999 998,874 206,049 39,928 $ 6.29
======== ======== ======== ========
Options exercisable:
June 30, 1999 502,891 115,464 39,928 $ 7.16
======== ======== ======== ========
F-12
<PAGE>
LIGHTPATH TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
The following table summarizes information about fixed stock options outstanding
at June 30, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------ ------------------------------
Number Weighted-Avg. Number
Range of outstanding at Remaining Weighted-Avg. Exercisable at Weighted-Avg.
Exercise Prices June 30,1999 Contractual Life Exercise Price June 30, 1999 Exercise Price
- --------------- ------------ ---------------- -------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
$ 3 to 6 572,414 8.7 Years $ 4.05 218,829 $ 4.42
$ 6 to 11 657,034 6.9 $ 7.51 424,051 $ 7.47
$27 to 52 15,403 4.2 $ 37.60 15,403 $ 37.60
--------- ---------
$ 3 to 52 1,244,851 7.7 $ 6.29 658,283 $ 7.16
========= =========
</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:
1999 1998
------------- -------------
Net loss applicable to common shareholders,
as reported $ (3,816,880) $ (6,029,519)
============= =============
Net loss applicable to common shareholders,
pro forma $ (4,833,880) $ (6,707,519)
============= =============
Basic and diluted net loss per share,
as reported $ (.89) $ (2.00)
------------- -------------
Basic and diluted net loss per share,
pro forma $ (1.13) $ (2.23)
------------- -------------
The weighted-average fair value of options granted during the years ended June
30, 1999 and 1998 was $2.27 and $4.05, 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 1999: dividend yield of 0%; expected volatility of 100% (75%
for fiscal 1998); risk free interest rate of 7%; and expected lives of 3 years.
F-13
<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:
* 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.
* 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 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 $13.5 million in fiscal 2000. Conversion provisions
related to the Company's bid price per share and acquisition or merger
expired on February 22, 1999 without being met.
* 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 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 at least $18
million in fiscal 2000. Conversion provision related to the Company's
acquisition or merger expired on February 22, 1999 without being met.
* 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 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 $37 million in fiscal 2000. Conversion provision related to the
Company's acquisition or merger expired February 22, 1999 without being
met.
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 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, 1999.
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
remaining earnings thresholds 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
F-14
<PAGE>
LIGHTPATH TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
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
1,614,000 shares of Class A common stock were issued upon the conversion of 12
shares of Series A Preferred Stock, 125 shares of Series B Preferred Stock and
277 shares of Series C Preferred Stock during fiscal 1999. 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 was 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. All of these imputed
dividends were recognized prior to June 30, 1998.
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. 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, Class E and Class G warrants were issued in connection with the private
placements of Series A, Series B and Series C Convertible Preferred Stock which
were completed during fiscal 1998. A total of 320,000 Class C, 317,788 Class E
and 365,169 Class G warrants were granted to the preferred stockholders which
entitle the holder to purchase one share of Class A common stock at an exercise
price of $5.63, $7.24 and $6.68, respectively, expiring from July 2000 to
February 2001. A total of 64,000 Class D, 47,668 Class F and 58,427 Class H
warrants were granted to the placement agent for each private placement which
entitles the holder to purchase one share of Class A common stock at an exercise
price of $5.63, $7.24 and $6.68 respectively, expiring from July 2002 until
February 2003. 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.
F-15
<PAGE>
LIGHTPATH TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
The following table provides information on preferred stock and warrants
activity during fiscal 1999 and 1998.
Warrants
Preferred -------------------------------------
Stock - Series Class Class Class
Shares Outstanding A, B & C A & B C, E & G D, F & H
---------- ---------- ---------- ----------
June 30, 1997 45 4,519,000 -- --
Issuance of securities 740 11,251 1,002,957 170,095
Conversions and exercises (249) (11,251) (88,889) (46,750)
---------- ---------- ---------- ----------
June 30, 1998 536 4,519,000 914,068 123,345
Conversions (414) -- -- --
---------- ---------- ---------- ----------
June 30, 1999 122 4,519,000 914,068 123,345
========== ========== ========== ==========
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, 1999: Class A common stock options 1,244,851,
private placement warrants 1,037,413, IPO warrants 4,519,000, approximately
220,000 Class A shares reserved for the convertible preferred stock and the
Class E redeemable common stock that is automatically converted into Class A
common stock upon attainment of certain performance criteria (see Note 10). An
eight percent premium earned by the preferred shareholders of $224,651 and
$311,529 increased the net loss applicable to common shareholders for the years
ended June 30, 1999 and 1998, respectively. In addition, net loss applicable to
common shareholders was increased by an imputed dividend in the amount of
$1,386,700 during the year ended June 30, 1998. The imputed dividend resulted
from a discount provision included in the Series A, Series B and Series C
Preferred Stock issued in fiscal 1998.
Loss Shares Per Share
Year Ended June 30, (Numerator) (Denominator) Amount
----------- ------------- -----------
1999
Net loss $(3,592,229)
Less: Preferred Stock Premium (224,651)
-----------
BASIC AND DILUTED EPS
Net loss applicable to common
shareholders $(3,816,880) 4,271,313 $ (.89)
=========== =========== ===========
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)
=========== =========== ===========
F-16
<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, if any, are
made by the Company to match a portion of the funds employees contribute,
however, there were no Company contributions during the fiscal years ended June
30, 1999 and 1998.
13. COMMITMENTS AND CONTINGENCIES
The Company has operating leases for office equipment and office space.
Effective April 1, 1996, the Company 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, 1999 and 1998 was $108,317 and $113,407, respectively. Commitments
under noncancelable operating leases are $98,500 for 2000; and $76,500 for 2001.
The Company has employment agreements, which expire in April 2001 and March
2002, with two officers which provide for a combined payment of salaries of
$275,000 annually. The Company has outstanding purchase commitments for
approximately $100,000 at June 30, 1999 for manufacturing collimators, 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, 1999 and 1998, current directors (or
their firms) of the Company, provided legal and consulting services to the
Company for which they billed the Company approximately $127,000 and $145,000,
respectively. In addition, the Company retained the legal services of a
stockholder for licensing work performed during fiscal 1998 valued at $11,250,
which was paid for in Class A common stock.
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 utilized office equipment, office space and some
personnel at no charge from LightPath in fiscal year 1998, estimated value of
these contributed services was approximately $137,000. In addition, LightChip
reimbursed LightPath for personnel, services and working capital provided during
fiscal year 1998 totaling approximately $161,000, the balance $10,446 was paid
during the year ended June 30, 1999.
15. SEGMENT INFORMATION
Optoelectronics and Fiber Telecommunications (optoelectronics), which represents
5% of total revenues of the Company, and Traditional Optics, which represents
95% of total revenues, are the Company's reportable segments under SFAS No. 131,
Disclosure about Segments of an Enterprise and Related Information (SFAS 131).
The optoelectronics segment is based primarily on the development and sale of
fiber collimators, fiber-optic switches and other related passive component
products for the optoelectronics segment of the telecommunications industry
while the traditional optics segment provides for the development and sale of
GRADIUM glass in the form of lenses, blanks and development fees for the general
optics markets. During fiscal 1999 approximately $78,000 in sales were derived
from one wafer chip inspection customer and approximately $72,000 of lens sales
were derived from one YAG laser customer. During fiscal 1998, approximately
$135,000 of lens sales were derived from one YAG laser customer.
F-17
<PAGE>
LIGHTPATH TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Summarized financial information concerning the Company's reportable segments
for the respective years ended June 30, is shown in the following table. During
fiscal 1999, the Company changed its primary marketing objectives from primarily
traditional optics products 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. Prior period
information has been conformed to the segments described above, where
applicable, which are based on the structure and internal organization of the
Company at June 30, 1999.
<TABLE>
<CAPTION>
Opto- Traditional Corporate
Segment Information Electronics Optics And other (1) Total
- ------------------- ----------- ----------- ------------- -----
<S> <C> <C> <C> <C> <C>
Revenues (2)
1999 $ 57,029 1,029,097 -- $ 1,086,126
1998 4,500 753,732 -- 758,232
Segment operating
loss (3)
1999 $ (1,172,653) (211,218) (1,472,975) $ (2,856,846)
1998 (498,755) (1,216,687) (1,837,590) (3,553,032)
Depreciation and
amortization
1999 $ 72,337 224,445 78,576 $ 375,358
1998 -- 217,363 85,144 302,507
Capital Expenditures
for segment assets
1999 $ 389,709 47,514 -- $ 437,223
1998 -- 250,857 -- 250,857
Total Assets
1999 $ 410,473 1,755,326 970,527 $ 3,136,326
1998 4,500 1,762,464 4,541,503 6,308,467
<CAPTION>
United Other foreign
Geographic Information States Germany Countries Total
- ---------------------- ------ --------- ------------- -----
<S> <C> <C> <C> <C> <C>
Revenues(4)
1999 $ 678,746 168,205 239,175 $ 1,086,126
1998 438,258 139,636 180,338 758,232
</TABLE>
(1) Corporate functions include certain members of executive management, the
corporate accounting and finance function and other typical administrative
functions which are not allocated to segments. Corporate assets include
cash and cash equivalents, advances, prepaid expenses, unallocated property
and equipment and the Company's Investment in LightChip.
(2) There were no inter-segment sales during the years ended June 30, 1999 or
1998.
(3) In addition to unallocated corporate functions, management does not
allocate interest expense, interest income, other non-operating income and
expense amounts in the determination of the operating performance of the
reportable segments.
(4) Revenues attributed to foreign countries are export sales, and are based on
the destination of the shipment. The Company has no long lived assets in a
foreign country.
F-18
<PAGE>
LIGHTPATH TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
16. SUBSEQUENT EVENT
On July 28, 1999, LightPath completed a private placement for $1,000,000 of 6%
Convertible Debentures (the "Debentures"). The Debentures are immediately
convertible into approximately 570,000 shares of Class A common stock, at a
conversion price which is equal to the lower of 80% of the five day average
closing bid price of the Company's Class A common stock at (i) the date of
closing ($1.76) or (ii) the conversion date, until maturity July 2002. The
Debentures may be redeemed by the Company at 115% of the balance of the
outstanding principal plus accrued interest with 10 days notice to the holders.
Debenture holders also received warrants to acquire 427,350 shares of Class A
common stock. The warrant agreement provides for a conversion price of $2.20 per
share. The warrants are immediately exercisable and have a five year life.
Additionally, LightPath issued 150,000 warrants to the placement agent, with
terms identical to those issued to the Debenture holders. The value of the
warrants, aggregating approximately $835,000, will be recognized as an increase
to additional paid-in capital and as interest expense over the life of the
Debentures. Finally, LightPath will recognize an additional interest charge of
approximately $382,000 in the first quarter of fiscal year 2000 for the
"beneficial conversion feature" associated with the Debentures.
F-19
<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 August 24, 1999
-------------------------------------
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.
/s/ Donald E. Lawson August 24, 1999
- --------------------------------------
Donald E. Lawson
Chief Executive Officer, President and Treasurer, Director
(Principal Executive Officer and Principal Financial Officer)
/s/ Leslie A. Danziger August 24, 1999 /s/ James L. Adler Jr. August 24, 1999
- -------------------------------------- --------------------------------------
Leslie A. Danziger James L. Adler Jr.
Chairwoman of the Board Director
/s/ Katherine Dietze August 24, 1999 /s/ Louis Leeburg August 24, 1999
- -------------------------------------- --------------------------------------
Katherine Dietze Louis Leeburg
Director Director
/s/ Haydock H. Miller Jr. August 24, 1999 /s/ James A. Wimbush August 24, 1999
- -------------------------------------- --------------------------------------
Haydock H. Miller Jr. James A. Wimbush
Director Director
27
Exhibit 10.7
LIGHTPATH TECHNOLOGIES, INC.
AMENDED AND RESTATED
DIRECTORS STOCK OPTION PLAN
1. PURPOSE.
This Amended and Restated LightPath Technologies, Inc. Directors Stock
Option Plan (the Plan") is intended as an amendment and restatement of the
LightPath Technologies, Inc. Directors Stock Option Plan. The options granted
under this Plan are intended as an incentive to retain as independent directors
on the Board of Directors of LightPath Technologies, Inc. persons of training,
experience and ability, to encourage the sense of proprietorship of such persons
and to stimulate the active interests of such persons in the development and
financial success of LightPath Technologies, Inc. The options issued pursuant to
this Plan shall constitute non-qualified stock options, taxable in accordance
with Section 83 of the Internal Revenue Code of 1986, as amended.
2. EFFECTIVE DATE AND TERM OF PLAN.
The effective date of this Plan, as amended and restated, is May 11, 1999.
The Plan shall terminate on the earlier of: (i) the effective date of
termination of the Plan by the Board in accordance with Section 9; or (ii) the
date on which all shares of Common Stock reserved under the Plan are subject to
Options granted under the Plan.
3. DEFINITIONS.
For purposes of this Plan, the following terms shall have the meanings set
forth below:
(a) "Board" means the Board of Directors of the Company.
(b) "Code" means the Internal Revenue Code of 1986, as amended, together
with the regulations promulgated thereunder.
(c) "Common Stock" means the Class A Common Stock of the Company or any
security of Company issued in substitution, exchange or lieu thereof.
(d) "Company" means LightPath Technologies, Inc. or any successor
corporation.
(e) "Director" means an individual who: (i) is a member of the Board as a
director; (ii) is not an employee of the Company or any Subsidiary;
and (iii) in the event the Company becomes subject to the provisions
of the Exchange Act, is not eligible, and has not been eligible for at
least one year prior to becoming a nonemployee director of the
Company, to receive a grant or award of equity securities pursuant to
a plan of the Company or any affiliate of the Company that is
administered by any person having discretion with respect to the
selection of participants and/or the amount of awards, as determined
under Rule 16b-3 promulgated under the Exchange Act.
(f) "Disability" means permanent and total disability. An individual is
permanently and totally disabled if he or she is unable to engage in
any substantial gainful activity by reason of any medically
determinable physical or mental impairment which can be expected to
result in death or which has lasted or can be expected to last for a
continuous period of not less than 12 months.
(g) "Eligibility Date" means the date as of which an individual first
becomes a Director.
(h) "Exchange Act" means the Securities Exchange Act of 1934, as amended
and in effect from time to time, or any successor statute.
(i) "Fair Market Value" means on any given date (i) the highest closing
price of a share of the Common Stock on any established national
exchange or exchanges or, if no sale of Common Stock is made on such
day, the next preceding day on which there was a sale of such stock,
or (ii) if the Common Stock is quoted in the over-the-counter market
reported by the National Association of Securities Dealers, Inc. the
mean between the closing paid and low asked quotations of the Common
Stock for such date, or (iii) if the Common Stock is neither quoted on
an exchange nor in the over-the-counter market, then the fair market
value as determined by the Board, taking into account various factors
consistent with the provisions of applicable law pertaining to the
valuation of stock for federal income tax purposes.
(j) "Plan" means this Directors Stock Option Plan, as set forth herein and
as it may be hereafter amended.
1
<PAGE>
(k) "Option" means an option to purchase shares of Common Stock granted
pursuant to the provisions of Section 5 of the Plan.
(l) "Option Agreement" means the written document that sets forth the
terms and conditions of an Option, as described in Section 10(e).
(m) "Subsidiary" means any corporation or entity in which the Company
directly or indirectly controls 50% or more of the total voting power
of all classes of its stock having voting power, whether existing at
the date of institution of this Plan or subsequently.
4. COMMON STOCK SUBJECT TO PLAN.
Shares of Common Stock Subject to Plan. The maximum number of shares of Common
Stock in respect of which Options shall be granted under the Plan (the "Plan
Maximum") shall be 350,000, subject to adjustment as provided in Section 6
below. Common Stock issued under the Plan may be either authorized and un-issued
shares or issued shares which have been reacquired by the Company. The following
terms and conditions shall apply to Common Stock subject to the Plan:
(i) In no event shall more than the Plan Maximum be cumulatively
available for Options under the Plan;
(ii) For the purpose of computing the total number of shares of Common
Stock available for Options under the Plan, there shall be counted
against the foregoing limitations, the number of shares of Common
Stock subject to issuance upon exercise or settlement of Options
(regardless of exercisability);
(iii) If any Options are forfeited, terminated or expire un-exercised, the
shares of Common Stock which were previously subject to the Options
shall again be available for Options under the Plan to the extent of
such forfeiture or expiration of the Options;
(iv) Any shares of Common Stock which are used as full or partial payment
to the Company by a Director of the purchase price of shares of
Common Stock upon exercise of an Option shall again be available for
Options under the Plan; and
(v) Any shares of Common Stock that may remain unsold and that are not
subject to outstanding Options at the termination of the Plan shall
cease to be reserved for the purpose of the Plan, but until
termination of the Plan the Company shall at all times reserve a
sufficient number of shares to meet the requirements of the Plan.
5. FORMULA FOR GRANT OF OPTIONS.
(a) General. An Option shall be granted pursuant to Subsection (b) below,
to each person who is a Director. Each Option shall be evidenced by an Option
Agreement in a form specified by the Board containing such terms and conditions
that are consistent with the terms of this Plan or applicable law. An Option
granted to a Director under this Plan shall be in addition to regular directors'
fees or other benefits with respect to the Director's position with the Company
or any of its Subsidiaries. Neither the Plan nor any Option granted under the
Plan shall confer upon any person any right to continue to serve as a director
of the Company.
(b) Grant. A Director shall be granted, effective as of the Director's
Eligibility Date, an option to purchase Common Stock with a value equal to
$88,320. In the event the Director is re-elected to the Board for a subsequent
term, he or she shall be granted an additional option relating to the same value
of Common Stock as of the date each subsequent term commences. A Director who
receives an Option grant under this Subsection (b) may exercise the Option in
accordance with the following schedule:
(i) with respect to one third (1/3) of the shares subject to the Option
commencing as of the effective date of the grant;
(ii) with respect to two thirds (2/3) of the shares subject to the Option
commencing as of the first anniversary of the effective date of the
grant;
(iii) with respect to all shares subject to the Option commencing as of the
second anniversary of the effective date of the grant.
2
<PAGE>
An Option shall be exercisable pursuant to clause (i), (ii), or (iii), above,
only if the Director has continued to perform services as a director of the
Company during the period beginning on the date the Option is first granted and
ending on the date the relevant portion of the Option is first exercisable
pursuant to clause (i), (ii) or (iii), as the case may be. The exercisability of
an Option upon cessation of such services is set forth in Subsection (f), below.
The term of an Option grant pursuant to this Subsection (b) shall be ten (10)
years commencing as of the effective date of the grant, regardless of whether
the relationship between the individual and the Company terminates or changes.
The exercise price for a share of Common Stock under an Option grant pursuant to
this Subsection (b) shall be the Fair Market Value of a share of Common Stock as
of the effective date of the grant.
(c) Method of Exercise. Subject to applicable exercise restrictions set
forth herein, an Option may be exercised, in whole or in part, by
giving written notice of exercise to the Company specifying the number
of shares to be purchased. The notice shall be accompanied by payment
in full of the purchase price. The purchase price may be paid by any
of the following methods, subject to the restrictions set forth in
Subsection (d), below:
(1) in cash, by certified or cashier's check, by money order or by
personal check (if approved by the Board) of an amount equal to
the aggregate purchase price of the shares of Common Stock to
which such exercise relates;
(2) if acceptable to the Board, by delivery of shares of Common Stock
already owned by the Director, which shares, including any cash
tendered therewith, have an aggregate Fair Market Value
(determined as of the date preceding the Company's receipt of
exercise notice) equal to the aggregate purchase price of the
shares of Common Stock to which such exercise relates; or
(3) if acceptable to the Board, by delivery to the Company of an
exercise notice that (i) requests the Company, subsequent to the
exercise of the Option and prior to the actual delivery of any
shares of Common Stock to the Director, to arrange for the sale
of that number of shares of Common Stock that have a value equal
to the exercise price of the Option and (ii) agrees that the
Company may use the proceeds of such sale to discharge the
Director's liability to pay to the Company the exercise price of
such Option.
(d) Restrictions on Method of Exercise. Notwithstanding the foregoing
payment provisions, the Board may refuse to recognize the method of
exercise selected by the Director (other than the method of exercise
set forth in Subsection (c)(1)), above, if, in the opinion of counsel
to the Company, (i) the Director is, or within the six months
preceding such exercise was, subject to reporting under Section 16(a)
of the Exchange Act, and (ii) there is a substantial likelihood that
the method of exercise selected by the Director would subject the
Director to substantial risk of liability under Section 16 of the
Exchange Act.
(e) Grant of Reload Options. Whenever a Director holding any Option (the
"Original Option") outstanding under this Plan (including any "Reload
Options" granted under the provisions of this Subsection (e))
exercises the Original Option and makes payment of the option price by
tendering shares of Common Stock previously held by him or her, then
the Board will grant a new option (the "Reload Option") for additional
shares of Common Stock equal to the number of shares tendered by the
Director in payment of the option price for the Original Option being
exercised. All such Reload Options granted hereunder shall be on the
following terms and conditions:
(1) The Reload Option exercise price per share shall be an amount
equal to the then current Fair Market Value of a share of Common
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Stock, determined as of the date of the Company's receipt of the
exercise notice for the Original Option;
(2) The option exercise period shall expire, and the Reload Option
shall no longer be exercisable, on the expiration of the option
period of the Original Option or two (2) years from the date of
the grant of the Reload Option, whichever is later,
(3) Any Reload Option granted under this Subsection (e) shall become
exercisable one (1) year following the date of exercise of the
Original Option; and
(4) All other terms of Reload Options granted hereunder shall be
identical to the terms and conditions of the Original Option, the
exercise of which gives rise to the grant of the Reload Option.
(f) Exercisability of Options Upon Termination of Relationship with the
Company. Notwithstanding anything in the Plan to the contrary, a
Director who ceases to perform services as a director of the Company
for any reason (including death and Disability) shall be entitled to
exercise any outstanding Options for the remainder of each Option's
term, but only to the extent the Option was exercisable as of the date
of such cessation of services. In the event of the death of the
Director, the Director's beneficiary shall be entitled to exercise any
outstanding Options to the extent permitted in accordance with the
preceding sentence.
(g) Non-transferability of Options. No Option and no rights or interest therein
shall be assignable or transferable by a Director except by will or the
laws of descent and distribution. During the lifetime of the Director or
the Director's beneficiary, as the case may be, Options are exercisable
only by the Director, or the Director's beneficiary, as the case may be, or
the legal representative of the Director or the Director's beneficiary.
6. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION, ETC.
(a) General. The existence of the Plan and the Options granted hereunder
shall not affect or restrict in any way the right or power of the
Board or the stockholders of the Company to make or authorize any
adjustment, re-capitalization, reorganization or other change in the
Company's capital structure or its business, any merger or
consolidation of the Company, any issue of bonds, debentures,
preferred or prior preference stocks ahead of or affecting the
Company's Common Stock or the rights thereof, the dissolution or
liquidation of the Company, or any sale or transfer of all or any part
of its assets or business, or any other corporate act or proceeding.
(b) Change in Capitalization. In the event of any change in capitalization
affecting the Common Stock of the Company, such as a stock dividend,
stock split, re-capitalization, merger, consolidation, split up,
combination, exchange of shares, other form of reorganization, or any
other change affecting the Common Stock, the Board, in its discretion,
may make proportionate adjustments it deems appropriate to reflect
such change with respect to (i) the maximum number of shares of Common
Stock which may be sold or awarded to any Director, (ii) the number of
shares of Common Stock covered by each outstanding Option, and (iii)
the price per share in respect of the outstanding Options.
Notwithstanding the foregoing, the Board may only increase the
aggregate number of shares of Common Stock for which Options may be
granted under the Plan solely to reflect the change, if any, of the
capitalization of the Company or a Subsidiary.
(c) Sale of Assets. The Board may also make such adjustments in the number
of shares covered by, and the price or other value of any outstanding
Options in the event of a spin off or other distribution (other than
normal cash dividends) of Company assets to stockholders.
7. CHANGE OF CONTROL.
(a) General. In the event of Change of Control (as defined in Subsection
(b) below) of the Company, Options then outstanding with respect to an
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affected Director shall become fully exercisable as of the applicable
date. For purposes of this Subsection (a), "applicable date" shall
mean the earlier of the two dates on which occur the events described
in subsections (b)(1) and (b)(2) below.
(b) Definition. A "Change of Control" shall be deemed to have occurred
with respect to a Director upon the occurrence of any one of the
following events, other than a transaction with another person
controlled by the Company or its officers or directors, or a benefit
plan or trust established by the Company for its employees:
(1) Any person, including a group as defined in Section 13(d)(3) of
the Exchange Act, becomes owner of shares of Common Stock of the
Company with respect to which fifty-one (51%) or more of the
total number of votes for the election of the Board may be cast;
or
(2) The stockholders of the Company approve an agreement providing
for the sale or other disposition of all or substantially all of
the assets of the Company.
8. SECURITIES LAWS RESTRICTIONS.
Each person exercising an Option may be required by the Company to give a
representation in writing that he or she is acquiring shares of Common Stock for
his or her own account for investment and not with a view to, or for sale in
connection with, the distribution of any part thereof (regardless of whether the
Option and shares of Common Stock covered by the Plan are registered under the
Securities Act of 1933, as amended). As a condition of transfer of the
certificate evidencing shares of Common Stock, the Board may obtain such other
agreements or undertakings, if any, that it may deem necessary or appropriate to
assume compliance with any provisions of the Plan or any law or regulation.
Certificates for shares of Common Stock delivered under the Plan may be subject
to such stock transfer orders and other restrictions as the Board may deem
advisable under the rules, regulations, and other requirements of the Securities
and Exchange Commission, any stock exchange upon which the shares of Common
Stock are then listed, and any applicable Federal or state securities laws. The
Board may cause a legend or legends to be put on any such certificate to refer
to those restrictions.
9. AMENDMENT AND TERMINATION.
(a) Amendments Without Stockholder Approval. Except as set forth in
Subsections (b) and (c) below, the Board may, without further approval
of the stockholders, amend or terminate this Plan for purposes of
meeting or addressing any changes in legal requirements applicable to
the Plan or for any other reason permitted by law.
(b) Amendments Requiring Stockholder Approval. The Board must obtain
approval of the stockholders to make any amendment to the Plan for
which stockholder approval is required to comply with the restrictions
set forth in Rule 16b-3 promulgated under the Exchange Act, as amended
and in effect from time to time (or any successor rule) and to comply
with the Code and accompanying regulations, but subject to changes in
law or other legal requirements (including any change in the
provisions of Rule 16b-3 and the Code and accompanying regulations
that would permit otherwise).
(c) Prohibited Amendments. Notwithstanding Subsections (a) and (b), the
provisions of Section 5 regarding eligibility and automatic grants of
Options under the Plan shall not be amended more than once every six
(6) months, except for such amendments as may be necessary to comply
with the applicable provisions of the Code or the rules and
regulations promulgated thereunder.
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10. MISCELLANEOUS MATTERS.
(a) Government Regulations. The Plan and the granting and exercise of
Options hereunder, and the obligations of the Company to sell and
deliver shares of Common Stock under such Options, shall be subject to
all applicable laws, rules and regulations, and to such approvals by
any governmental agencies or national securities exchanges as may be
required.
(b) Costs of Plan. The costs and expenses of administering the Plan shall
be borne by the Company.
(c) Interpretation. If any provision of the Plan is held invalid for any
reason, such holding shall not affect the remaining provisions of the
Plan, but instead the Plan shall be construed and enforced as if such
provisions had never been included in the Plan. Headings contained in
the Plan are for convenience only and shall in no manner be construed
as part of this Plan. Any reference to the masculine, feminine or
neuter gender shall be a reference to such other gender as is
appropriate.
(d) Section 83(b) Election. If as a result of exercising an Option, a
Director receives shares of Common Stock that are subject to a
"substantial risk of forfeiture" and are not "transferable" as those
terms are defined for purposes of Section 83(b) of the Code, then such
Director may elect under Section 83(b) to include in his gross income,
for the taxable year in which the shares of Common Stock are
transferred to him, the excess of the fair market value of such shares
at the time of transfer (determined without regard to any restriction
other than one which by its terms will never lapse), over the amount
paid for such shares. If the Director makes the Section 83(b) election
described above, the Director shall (i) make the election in a manner
that is satisfactory to the Board; (ii) provide the Company with a
copy of such election; and (iii) agree to promptly notify the Company
if any Internal Revenue Service or state tax agent, on audit or
otherwise, questions the validity or correctness of such election or
of the amount of income reportable on account of such election.
(e) Option Agreement and Beneficiary Designation. Each Director receiving
an Option grant under the Plan shall enter into an Option Agreement
with the Company in a form specified by the Board agreeing to the
terms and conditions of the Option. Each Director receiving an Option
grant under the Plan shall designate one or more beneficiaries who may
elect to exercise any Options exercisable upon or after the death of
the Director.
(f) Governing Law. The Plan and all actions taken thereunder shall be
governed by and construed in accordance with the laws of the State of
Delaware.
June 1999
6
Exhibit 10.8
OMNIBUS INCENTIVE PLAN
AMENDED LIGHTPATH TECHNOLOGIES, INC.
OMNIBUS INCENTIVE PLAN
NOVEMBER 12, 1997
1. PURPOSE.
This Amended Omnibus Incentive Plan (the "Plan") is intended as an amendment and
restatement of the previous LightPath Technologies, Inc. Omnibus Incentive Plan.
This Plan is intended to provide incentive compensation to certain employees and
officers of LIGHTPATH TECHNOLOGIES, INC. (the "Company") or of its subsidiary
corporations (the "Subsidiaries", as that term is defined in Section 424 of the
Internal Revenue Code of 1986, as amended from time to time) in the form of cash
or Company stock, to permit Plan participants to acquire or increase their
proprietary interest in the success of the Company, and to encourage them to
continue to perform services on behalf of the Company. The Plan is designed to
meet this intent by offering performance-based stock and cash incentives and
other equity based incentive awards, thereby providing a proprietary interest in
pursuing the long-term growth, profitability and financial success of the
Company.
2. EFFECTIVE DATE.
The effective date of this Plan is August 19, 1997, the date on which the Board
adopted this amendment and restatement.
3. DEFINITIONS.
For purposes of this Plan, the following terms shall have the meanings set forth
below:
(a) "Award" or "Awards" means an award or grant made to a Participant under
Sections 7 through 10, inclusive, of the Plan.
(b) "Award Agreement" means the written document that sets forth the terms
and conditions of an Award, as described in Section 16(e).
(c) "Board" means the Board of Directors of the Company.
(d) "Code" means the Internal Revenue Code of 1986, as amended, together
with the regulations promulgated thereunder.
(e) "Committee" means the Compensation Committee of the Board, or any
committee of the Board performing similar functions, constituted as provided in
Section 4 of the Plan.
(f) "Common Stock" means the Class A Common Stock of the Company or any
security of the Company issued in substitution, exchange or lieu thereof.
(g) "Company" means LightPath Technologies, Inc. or any successor
corporation.
(h) "Consultants" means any person who performs services on behalf of the
Company from time to time on an independent contractor basis; provided, however,
that such services shall not be in connection with the offer and sale of
securities in a capital-raising transaction.
(i) "Disability" means permanent and total disability. An individual is
permanently and totally disabled if he or she is unable to engage in any
substantial gainful activity by reason of any medically determinable physical or
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mental impairment which can be expected to result in death or which has lasted
or can be expected to last for a continuous period of not less than 12 months.
(j) "Exchange Act" means the Securities Exchange Act of 1934, as amended
and in effect from time to time, or any successor statute.
(k) "Fair Market Value" means on any given date (i) the highest closing
price of the Common Stock on any established national exchange or exchanges or,
if no sale of Common Stock is made on such day, the next preceding day on which
there was a sale of such stock, or (ii) if the Common Stock is quoted in the
over-the-counter market reported by the National Association of Securities
Dealers, Inc., the mean between the closing bid and low asked quotations of the
Common Stock for such date, or (iii) if the Common Stock is neither quoted on an
exchange nor in the over-the-counter market, then the fair market value as
determined by the Committee, taking into account various factors consistent with
the provisions of applicable law pertaining to the valuation of stock for
federal income tax purposes.
(l) "Incentive Stock Option" means any Stock Option (as defined below) that
is intended to be and is specifically designated as an "incentive stock option"
within the meaning of Section 422 of the Code.
(m) "Nonqualified Stock Option" means any Stock Option granted pursuant to
the provisions of Section 7 of the Plan that is not an Incentive Stock Option.
(n "Participant" means an employee or officer of the Company or any
Subsidiary, who is granted an Award under the Plan.
(o) "Performance Bonus Award" means an Award of cash and/or shares of
Common Stock granted pursuant to the provisions of Section 10 of the Plan.
(p) "Plan" means this Omnibus Incentive Plan, as set forth herein and as it
may be hereafter amended.
(q) "Restricted Award" means an Award granted pursuant to the provisions of
Section 9 of the Plan.
(r) "Restricted Stock Grant" means an Award of shares of Common Stock
granted pursuant to the provisions of Section 9 of the Plan.
(s) "Restricted Unit Grant" means an Award of units representing shares of
Common Stock granted pursuant to the provisions of Section 9 of the Plan.
(t) "Stock Appreciation Right" means an Award to benefit from the
appreciation of Common Stock granted pursuant to the provisions of Section 8 of
the Plan.
(u) "Stock Option" means an Award to purchase shares of Common Stock
granted pursuant to the provisions of Section 7 of the Plan.
(v) "Subsidiary" means any corporation or entity in which the company
directly or indirectly controls 50% or more of the total voting power of all
classes of its stock having voting power, whether existing at the date of
institution of this Plan or subsequently.
(w) "Ten Percent Shareholder" means a person who owns (or is considered to
own after taking into account the attribution of ownership rules of Section
424(d) of the code) more than ten percent (10%) of the total combined voting
power of all classes of stock of the Company or any Subsidiary.
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4. ADMINISTRATION.
(a) The Plan shall be administered by the Committee, as appointed from time
to time by the Board. The Board may from time to time remove members from, or
add members to, the Committee. In the event the Company becomes subject to the
provisions of the Exchange Act, the Committee shall be constituted so as to
permit the Plan to comply with Rule 16b-3 promulgated by the Securities and
Exchange Commission ("SEC") under the Exchange Act or any successor rule ("Rule
16b-3") and shall be comprised of those members of the Board who are not, during
the one year period prior to service as members of the Committee or any
committee of any similar plan of the Company or any affiliate of the Company, or
during the period in which they serve as members of the Committee, granted or
awarded an equity securities (as determined under Rule 16b-3) pursuant to this
Plan or any similar plan of the Company or any affiliate of the Company.
(b) A majority of the members of the Committee shall constitute a quorum
for the transaction of business. Action approved in writing by a majority of the
members of the Committee then serving shall be as effective as if the action had
been taken by unanimous vote at a meeting duly called and held.
(c) The Committee is authorized to construe and interpret the Plan, to
promulgate, amend, and rescind rules and procedures relating to the
implementation of the Plan, and to make all other determinations necessary or
advisable for the administration of the Plan. Any determination, decision, or
action of the Committee in connection with the construction, interpretation,
administration, or application of the Plan shall be binding upon all
Participants and any person validly claiming under or through any Participant.
(d) The Committee may designate persons other than members of the Committee
to carry out its responsibilities under such conditions and limitations as it
may prescribe, except that in the event the Company becomes subject to the
provisions of the Exchange Act, the Committee may not delegate its authority
with regard to selection for participation of, and the granting of Awards to,
persons subject to Sections 16(a) and 16(b) of the Exchange Act or who are
eligible to receive Awards under the Plan.
(e) The Committee is expressly authorized to make modifications to the Plan
as necessary to effectuate the intent of the Plan as a result of any changes in
the tax, accounting, or securities laws treatment of Participants and the Plan,
subject to those restrictions that are set forth in Section 15 below.
(f) The Company shall effect the granting of Awards under the Plan, in
accordance with the determinations made by the Committee, by execution of
instruments in writing in such form as approved by the Committee.
5. ELIGIBILITY.
Persons eligible for Awards under the Plan shall consist of employees, officers
and Consultants of the Company or its Subsidiaries who from time to time shall
be designated by the Committee.
6. COMMON STOCK SUBJECT TO PLAN.
Shares of Common Stock Subject to Plan. The maximum number of shares of
Class A Common Stock in respect of which Awards may be granted under the Plan
(the "Plan Maximum") shall be 1,825,000, subject to adjustment as provided in
Section 13 below. Common Stock issued under the Plan may be either authorized
and unissued shares or issued shares which have been reacquired by the Company.
The following terms and conditions shall apply to Common Stock subject to the
Plan:
(i) In no event shall more than the Plan Maximum be cumulatively available
for Awards under the Plan;
(ii) For the purpose of computing the total number of shares of Common
Stock available for Awards under the Plan, there shall be counted against the
foregoing limitations, (A) the number of shares of Common Stock subject to
issuance upon exercise or settlement of Awards (regardless of vesting), and (B)
the number of shares of Common Stock which equal the value of Restricted Unit
Grants or Stock Appreciation Rights determined at the dates on which such Awards
are granted;
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(iii) If any Awards are forfeited, terminated, expire unexercised, settled
in cash in lieu of stock or exchanged for other Awards, the shares of Common
Stock which were previously subject to the Awards shall again be available for
Awards under the Plan to the extent of such forfeiture or expiration of the
Awards;
(iv) Any shares of Common Stock which are used as full or partial payment
to the Company by a Participant of the purchase price of shares of Common Stock
upon exercise of a Stock Option shall again be available for Awards under the
Plan; and
(v) Any shares of Common Stock that may remain unsold and that are not
subject to outstanding Options at the termination of the Plan shall cease to be
reserved for the purpose of the Plan, but until termination of the Plan the
Company shall at all times reserve a sufficient number of shares to meet the
requirements of the Plan.
7. STOCK OPTIONS.
Stock Options granted under the Plan may be in the form of Incentive Stock
Options, Deferred Compensation Stock Options, or Non-Qualified Stock Options
(collectively, the "Stock Options").
Subject to the provisions of the Code, any Stock Option granted in the form
of an Incentive Stock Option shall continue to be treated as an outstanding
Stock Option hereunder, even if it ceases to be treated as an Incentive Stock
Option under the Code. Such Stock Option shall be treated as a Nonqualified
Stock Option, subsequent to the time it ceases to qualify as an Incentive Stock
Option under the Code.
Stock Options shall be subject to the following terms and conditions, and
each Stock Option shall contain such additional terms and conditions, not
inconsistent with the express provisions of the Plan, as the Committee shall
deem desirable:
(a) Grant. Stock Options shall be granted separately. In no event will
Stock Options or Awards be issued in tandem whereby the exercise of one affects
the right to exercise the other.
(b) Stock Option Price. The exercise price per share of Common Stock
purchasable under a Stock Option shall be determined by the Committee at the
time of grant and set forth in the Award Agreement. The Committee may specify an
exercise price for a Nonqualified Stock Option which is less than, equal to, or
greater than the Fair Market Value of the Common Stock on the date of the grant
of the Nonqualified Stock Option. The Committee may also issue Nonqualified
Stock Options with an exercise price less than the Fair Market Value of the
Common Stock on the date of the grant, in satisfaction of the Company's
obligations to pay deferred compensation. Such Stock Options shall be referred
to hereunder as "Deferred Compensation Stock Options. However, in no event shall
the exercise price of an Incentive Stock Option be less than one hundred percent
(100%) of the Fair Market Value of the Common Stock on the date of the grant of
the Incentive Stock Option. In the case of a Ten Percent Shareholder, the
exercise price of an Incentive Stock Option shall be not less than one hundred
ten percent (110%) of the Fair Market Value of the Common Stock on the date of
the grant.
(c) Option Term. The term of each Nonqualified Stock Option and Deferred
Compensation Stock Options, shall be determined by the Committee and set forth
in the Award Agreement. The term of Incentive Stock Options shall not exceed ten
(10) years after the date the Incentive Stock Option is granted, and the term of
any Incentive Stock Options granted to Ten Percent Shareholders shall not exceed
five (5) years after the date of the grant.
(d) Exercisability.
(i) Incentive Stock Options and Nonqualified Stock Options shall be
exercisable at the time or times determined by the Committee and set forth in
the Award Agreement, provided, however, that except as provided in sections
11(a), 11(b), 11(c), and 14, no Incentive Stock Option shall be exercisable
prior to the first anniversary of the date of grant. Notwithstanding the
previous sentence, Stock Options may be exercised at an earlier date, pursuant
to the provisions of Section 14 hereof.
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(ii) Reload Options shall become exercisable in accordance with Section
7(h)(iii) hereof. Deferred Compensation Stock Options shall become exercisable
in accordance with the terms of the grant thereof as established by the
Committee and set forth in the Award Agreement.
(e) Method of Exercise. Subject to applicable exercise restrictions set
forth in Section 7(d) above, a Stock Option may be exercised, in whole or in
part, by giving written notice of exercise to the Company specifying the number
of shares to be purchased. The notice shall be accompanied by payment in full of
the purchase price. The purchase price may be paid by any of the following
methods, subject to the restrictions set forth in Section 7(f) hereof:
(i) in cash, by certified or cashier's check, by money order or by personal
check (if approved by the Committee) of an amount equal to the aggregate
purchase price of the shares of Common Stock to which such exercise
relates;
(ii) if acceptable to the Committee, by delivery of shares of Common Stock
already owned by the Participant, which shares, including any cash tendered
therewith, have an aggregate Fair Market Value (determined as of the date
preceding the Company's receipt of exercise notice) equal to the aggregate
purchase price of the shares of Common Stock to which such exercise
relates; or
(iii) if acceptable to the Committee, by delivery to the Company of an
exercise notice that (i) requests the Company, subsequent to the exercise
of the Option and prior to the actual delivery of any shares of Common
Stock to the Participant, to arrange for the sale of that number of shares
of Common Stock that have a value equal to the exercise price of the Option
and (ii) agrees that the Company may use the proceeds of such sale to
discharge the Participant's liability to pay to the Company the exercise
price of such Option.
(f) Restrictions on Method of Exercise. Notwithstanding the foregoing
payment provisions, the Committee, in granting Stock Options pursuant to the
Plan, may limit the methods by which a Stock Option may be exercised by any
person and in processing any purported exercise of a Stock Option granted
pursuant to the Plan, may refuse to recognize the method of exercise selected by
the Participant (other than the method of exercise set forth in Section
7(e)(i)), if, in the opinion of counsel to the Company, (i) the Participant is,
or within the six months preceding such exercise was, subject to reporting under
Section 16(a) of the Exchange Act, and (ii) there is a substantial likelihood
that the method of exercise selected by the Participant would subject the
Participant to substantial risk of liability under Section 16 of the Exchange
Act. Furthermore, no Incentive Stock Option may be exercised in accordance with
the methods of exercise set forth in subsections 7(e)(ii) and 7(e)(iii) above
unless, in the opinion of counsel to the Company, such exercise would not have a
material adverse effect upon the incentive stock option tax treatment of any
outstanding Incentive Stock Options or Incentive Stock Options that thereafter
may be granted pursuant to the Plan.
(g) Tax Withholding. In addition to the alternative methods of exercise set
forth in Section 7(e), holders of Nonqualified Stock Options, subject to the
discretion of the Committee, may be entitled to elect at or prior to the time
the exercise notice is delivered to the Company, to have the Company withhold
from the shares of Common Stock to be delivered upon exercise of the
Nonqualified Stock Option the number of shares of Common Stock (determined based
on the Fair Market Value as of the date preceding the Company's receipt of the
exercise notice) that is necessary to satisfy any withholding taxes attributable
to the exercise of the Nonqualified Stock Option; provided, however, that the
amount of the Fair Market Value of the shares so withheld does not exceed the
tax on such exercise at the maximum marginal tax rate. If withholding is made in
shares of the Common Stock pursuant to the method set forth above, the
Committee, in its sole discretion, may grant " Reload Option(s)" (as defined in
Section 7(h) below) on the terms specified in Section 7(h) below for the shares
so withheld. Notwithstanding the foregoing provisions, a holder of a
Nonqualified Stock Option may not elect to satisfy his or her withholding tax
obligation in respect of any exercise as contemplated above if, in the opinion
of counsel to the Company, (i) the holder of the Nonqualified Stock Option is,
or within the six months preceding such exercise was, subject to reporting under
Section 16(a) of the Exchange Act, (ii) there is a substantial likelihood that
the election or timing of the election would subject the holder to a substantial
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risk of liability under Section 16 of the Exchange Act, or (iii) such
withholding would have an adverse tax or accounting effect to the Company.
(h) Grant of Reload Options. Whenever the Participant holding any Incentive
Stock Option or Nonqualified Stock Option (the "Original Option") outstanding
under this Plan (including any "Reload Options" granted under the provisions of
this Section 7(h)) exercises the Original Option, then the Committee may, in its
sole discretion, grant a new option (the "Reload Option") for additional shares
of Common Stock in an amount to be determined in its sole discretion. All such
Reload Options granted hereunder shall be on the following terms and conditions:
(i) The Reload Option price per share shall be determined by the Committee
and set forth in the Award Agreement;
(ii) The option exercise period shall expire, and the Reload Option shall
no longer be exercisable, on terms specified in the Reload Option, as
determined by the Committee; and
(iii) Any Reload Option granted under this Section 7(h) shall become
exercisable on terms specified in the Reload Option, as determined by the
Committee.
In the event the Committee determines that the price per share of Common
Stock under a Reload Option is one hundred percent (100%) of the Fair Market
Value of such a share on the date of grant of such option (or one hundred ten
percent (110%) of such Fair Market Value of a share under a grant to a Ten
Percent Shareholder), the Committee in its sole discretion may designate such
Reload Option as an Incentive Stock Option.
Even if the shares of Common Stock which are issued upon exercise of the
Original Option are sold within one (1) year following the exercise of the
Original Option such that the sale constitutes a disqualifying disposition for
purposes of Incentive Stock Option treatment under the Code, no provision of
this Plan shall be construed as prohibiting such a sale.
(i) Special Rule for Incentive Stock Options. With respect to Incentive
Stock Options granted under the Plan, the aggregate Fair Market Value
(determined as of the date Incentive Stock Options are granted) of the number of
shares with respect to which Incentive Stock Options are exercisable for the
first time by a Participant during any calendar year shall not exceed one
hundred thousand dollars ($100,000) or such other limits as may be required by
the Code.
(j) Incentive Stock Options. Notwithstanding anything in the Plan to the
contrary, no term of this Plan relating to Incentive Stock Options shall be
interpreted, amended, or altered, nor shall any discretion or authority granted
under the Plan be so exercised, so as to disqualify the Plan under Section 422
of the Code or, without the consent of the Participant(s) affected, to
disqualify any Incentive Stock Option under such Section 422 of the Code. To the
extent permitted under Section 422 of the Code or applicable regulations
thereunder or any applicable Internal Revenue Service pronouncements:
(i) if a Participant's employment is terminated by reason of death or
Disability and the Incentive Stock Option by action of the Committee
becomes exercisable in whole or in part after the post-termination period
specified in Section 11(a) or 11(b), such Stock Option or portion thereof
shall be treated as a Nonqualified Stock Option;
(ii) if the exercise of an Incentive Stock Option is accelerated by reason
of a Change in Control (as defined in Section 14 below), such that the
holding period or term of exercise rules applicable to Incentive Stock
Options are not met, then such Incentive Stock Option shall be treated as a
Nonqualified Stock Option;
6
<PAGE>
(iii) if the Committee so approves, an Incentive Stock Option exercise may
be made which exceeds the $100,000 limitation set forth in Section 7(i)
above, with such excess to be treated as a Nonqualified Stock Option; and
(iv) if the Committee so approves, the option term and the terms of
exercise of the Incentive Stock Option can be changed, with the consent of
the Participant, such that the Incentive Stock Option loses its status as
such under the Code, and the entire Stock Option is treated as a
Nonqualified Stock Option.
8. STOCK APPRECIATION RIGHTS
The grant of Stock Appreciation Rights under the Plan shall be subject to
the following terms and conditions, and shall contain such additional terms and
conditions, not inconsistent with the express terms of the Plan, as the
Committee shall deem desirable:
(a) Stock Appreciation Rights. A Stock Appreciation Right is an Award
entitling a Participant to receive an amount equal to the excess of the Fair
Market Value of a share of Common Stock on the date of exercise over the Fair
Market Value of a share of Common Stock on the date of grant of the Stock
Appreciation Right, (or such other lesser or greater price as may be set by the
Committee), multiplied by the number of shares of Common Stock with respect to
which the Stock Appreciation Right shall have been exercised.
(b) Grant. A Stock Appreciation Right shall be granted separately. In no
event will Stock Appreciation Rights and other Awards be issued in tandem
whereby the exercise of one such Award affects the right to exercise the other.
(c) Exercise. A Stock Appreciation Right may be exercised by a Participant
in accordance with procedures established by the Committee. The Committee shall
establish procedures to provide that, with respect to any Participant subject to
Section 16(b) of the Exchange Act who would receive cash in whole or in part
upon exercise of the Stock Appreciation Right, such exercise may only occur
during an exercise period described in Rule 16b-3(e)(3)(iii) (as such provision
exists from time to time) which, as of the date of adoption of this Plan, is a
period beginning on the third (3rd) business day following the Company's public
release of quarterly or annual summary statements of sales and earnings and
ending on the twelfth (12th) business day following such public release ("Window
period"). To the extent it is not inconsistent with the preceding sentence, the
Committee, in its discretion, may provide that a Stock Appreciation Right shall
be automatically exercised on one or more specified dates, or that a Stock
Appreciation Right may be exercised during only limited time periods.
(d) Form of Payment. Payment to the Participant upon exercise of a Stock
Appreciation Right may be made (i) in cash, by certified or cashier's check or
by money order, (ii) in shares of Common Stock, or (iii) any combination of the
above, as the Committee shall determine. The Committee may elect to make this
determination either at the time the Stock Appreciation Right is granted, or
with respect to payments contemplated in clauses (i) and (ii) above, at the time
of the exercise.
9. RESTRICTED AWARDS.
Restricted Awards granted under the Plan may be in the form of either
Restricted Stock Grants or Restricted Unit Grants. Restricted Awards shall be
subject to the following terms and conditions, and may contain such additional
terms and conditions, not inconsistent with the express provisions of the Plan,
as the Committee shall deem desirable:
(a) Restricted Stock Grants. A Restricted Stock Grant is an Award of shares
of Common Stock transferred to a Participant subject to such terms and
conditions as the Committee deems appropriate, as set forth in Section 9(d)
below; provided, however, that the Committee shall require a Participant who has
not been employed by or performed services for the Company as of the date of
grant, to pay an amount at least equal to the par value of the shares of Common
7
<PAGE>
Stock subject to the Restricted Stock Grant within thirty (30) days of the
grant. Failure to pay such amount shall result in the automatic termination of
the Restricted Stock Grant.
(b) Restricted Unit Grants. A Restricted Unit Grant is an Award of units
granted to a Participant subject to such terms and conditions as the Committee
deems appropriate, including, without limitation, the requirement that the
Participant forfeit such units upon termination of employment for specified
reasons within a specified period of time, and restrictions on the sale,
assignment, transfer or other disposition of the units. Based on the discretion
of the Committee at the time a Restricted Unit Grant is awarded to a
Participant, a unit will have a value (i) equivalent to one share of Common
Stock, or (ii) equivalent to the excess of the Fair Market Value of a share of
Common Stock on the date the restriction lapses over the Fair Market Value of a
share of Common Stock on the date of the grant of the Restricted Unit Grant (or
over such other value as the Committee determines at the time of the grant).
(c) Grant of Awards. Restricted Awards shall be granted separately under
the Plan in such form and on such terms and conditions as the Committee may from
time to time approve. Restricted Awards, however, may not be granted in tandem
with other Awards whereby the exercise of one such Award affects the right to
exercise the other. Subject to the terms of the Plan, the Committee shall
determine the number of Restricted Awards to be granted to a Participant and the
Committee may impose different terms and conditions on any particular Restricted
Award made to any Participant. Each Participant receiving a Restricted Stock
Grant shall be issued a stock certificate in respect of the shares of Common
Stock. The certificate shall be registered in the name of the Participant, shall
be accompanied by a stock power duly executed by the Participant, and shall bear
an appropriate legend referring to the terms, conditions and restrictions
applicable to the Award. The certificates evidencing the shares shall be held in
custody by the Company until the restrictions imposed thereon shall have lapsed
or been removed.
(d) Restriction Period. Restricted Awards shall provide that in order for a
Participant to vest in the Awards, the Participant must continuously provide
services for the Company or its Subsidiaries, subject to relief for specified
reasons, for a period specified by the Committee commencing on the date of the
Award and ending on such later date or dates as the Committee may designate at
the time of the Award ("Restriction period") During the Restriction Period, a
Participant may not sell, assign, transfer, pledge, encumber, or otherwise
dispose of shares of Common Stock received under a Restricted Stock Grant. The
Committee, in its sole discretion, may provide for the lapse of restrictions in
installments during the Restriction Period. Upon expiration of the applicable
Restriction Period (or lapse of restrictions during the Restriction Period where
the restrictions lapse in installments), the Participant shall be entitled to
receive his or her Restricted Award or the applicable portion thereof, as the
case may be. Upon termination of a Participant's employment with the Company or
any Subsidiary for any reason during the Restriction Period, all or a portion of
the shares or units, as applicable, that are still subject to a restriction may
vest or be forfeited, in accordance with the terms and conditions established by
the Committee at or after grant.
(e) Payment of Awards. A Participant shall be entitled to receive payment
for a Restricted Unit Grant (or portion thereof) in an amount equal to the
aggregate Fair Market Value of the units covered by the Award upon the
expiration of the applicable Restriction Period. Payment in settlement of a
Restricted Unit Grant shall be made as soon as practicable following the
conclusion of the respective Restriction Period (i) in cash, by certified or
cashier's check or by money order, (ii) in shares of Common Stock equal to the
number of units granted under the Restricted Unit Grant with respect to which
such payment is made, or (iii) in any combination of the above, as the Committee
shall determine, subject, however, to any applicable Window Period requirement
imposed by the Committee with respect to Restricted Unit Grants settled in whole
or in part in cash. The Committee may elect to make this determination either at
the time the Award is granted, or with respect to payments contemplated in
clause (i) and (ii) above, at the time the Award is settled.
(f) Rights as a Shareholder. A Participant shall have, with respect to the
shares of Common Stock received under a Restricted Stock Grant, all of the
rights of a shareholder of the Company, including the right to vote the shares,
and the right to receive any cash dividends. Stock dividends issued with respect
to the shares covered by a Restricted Stock Grant shall be treated as additional
shares under the Restricted Stock Grant and shall be subject to the same
8
<PAGE>
restrictions and other terms and conditions that apply to shares under the
Restricted Stock Grant with respect to which the dividends are issued
10. PERFORMANCE BONUS AWARDS.
Performance Bonus Awards granted under the Plan may be in the form of cash
or shares of Common Stock, or a combination thereof. Performance Bonus Awards
may be granted under the Plan in such form as the Committee may from time to
time approve. Subject to the terms of the Plan, the Committee shall determine
the Performance Bonus Awards to be granted to a Participant for any given
calendar year, and the Committee may impose different terms and conditions on
any particular Performance Bonus Award made to any Participant including, but
not limited to, restrictions on the sale, assignment and transfer of Common
Stock covered by a Performance Bonus Award.
11. TERMINATION OF EMPLOYMENT.
The terms and conditions under which an Award (other than an Award of
Incentive Stock Options) may be exercised after a Participant's termination of
employment shall be determined by the Committee and set forth in the Award
Agreement. The conditions under which such post-termination exercises shall be
permitted with respect to Incentive Stock Options shall be determined as
provided below:
(a) Termination by Death. Subject to Section 7(j), if a Participant's
employment by the Company or any Subsidiary terminates by reason of the
Participant's death or if the Participant's death occurs within three months
after the termination of his or her employment, any Award held by such
Participant may thereafter be exercised, to the extent such Award otherwise was
then exercisable by the Participant, by the legal representative of the
Participant's estate or by any person who acquired the Award by will or the laws
of descent and distribution, for a period of one year from the Participant's
termination of employment (as contemplated in this Section 11(a)) or until the
expiration of the stated term of the Award, whichever period is the shorter. Any
right of exercise under a nonvested Award held by a Participant at the time of
his or her death is extinguished and terminated.
(b) Termination by Reason of Disability. Subject to Section 7(j), if a
Participant's employment by the Company or Subsidiary terminates by reason of
Disability, any Award held by such Participant may thereafter be exercised by
the Participant, to the extent such Award otherwise was then exercisable by the
Participant, for a period of one year from the date of such termination of
employment or until the expiration of the stated term of such Award, whichever
period is the shorter; provided, however, that if the Participant dies within
such one-year period, any unexercised Award held by such Participant shall
thereafter be exercisable to the extent to which it was exercisable at the time
such death or until the expiration of the stated term of such Award, whichever
period is shorter. Any right of exercise under a nonvested Award held by the
Participant at the time of his or her termination by reason of Disability is
terminated and extinguished.
(c) Other Termination. Subject to Section 7(j), if a Participant's
employment by the Company or any Subsidiary is terminated for any reason, any
Award held by the Participant at the time of his or her termination shall be
exercisable, to the extent otherwise then exercisable, for the lesser of three
(3) months from the date of such termination or the balance of the term of the
Award, and any right of exercise under any nonvested Award held by a Participant
at the time of his or her termination is terminated and extinguished. Pursuant
to Section 7(j)(iv), the Committee with the Participant's consent may change the
option term and the terms of exercise of an Incentive Stock Option subject to
this Section 11(c), such that the Incentive Stock Option loses its status as
such under the Code, and the entire Stock Option is treated as a Nonqualified
Stock Option.
12. NON-TRANSFERABILITY OF AWARDS.
No Award under the Plan, and no rights or interest therein, shall be
assignable or transferable by a Participant except by will or the laws of
descent and distribution, after which assignment Section 11(a) hereof shall
apply to exercise of the Award by the assignee. During the lifetime of a
9
<PAGE>
Participant, Awards are exercisable only by, and payments in settlement of
Awards will be payable only to, the Participant or his or her legal
representative.
13. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION, ETC.
(a) The existence of the Plan and the Awards granted hereunder shall not
affect or restrict in any way the right or power of the Board or the
shareholders of the Company to make or authorize any adjustment,
recapitalization, reorganization or other change in the Company's capital
structure or its business, any merger or consolidation of the Company, any issue
of bonds, debentures, preferred or prior preference stocks ahead of or affecting
the Company's Common Stock or the rights thereof, the dissolution or liquidation
of the Company, or any sale or transfer of all or any part of its assets or
business, or any other corporate act or proceeding.
(b) In the event of any change in capitalization affecting the Common Stock
of the Company, such as a stock dividend, stock split, recapitalization, merger,
consolidation, split-up, combination, exchange of shares, other form of
reorganization, or any other change affecting the Common Stock, the Board, in
its discretion, may make proportionate adjustments it deems appropriate to
reflect such change with respect to (i) the maximum number of shares of Common
Stock which may be sold or awarded to any Participant, (ii) the number of shares
of Common Stock covered by each outstanding Award, and (iii) the price per share
in respect of the outstanding Awards. Notwithstanding the foregoing, the Board
may only increase the aggregate number of shares of Common Stock for which
Awards may be granted under the Plan solely to reflect the change, if any, of
the capitalization of the Company or a Subsidiary.
(c) The Committee may also make such adjustments in the number of shares
covered by, and the price or other value of any outstanding Awards in the event
of a spin-off or other distribution (other than normal cash dividends) of
Company assets to shareholders.
14. CHANGE OF CONTROL.
(a) In the event of Change of Control (as defined in Paragraph (b) below)
of the Company, and except as the Board may expressly provide otherwise in
resolutions adopted prior to the date of the Change of Control:
(i) All Stock Options or Stock Appreciation Rights then outstanding with
respect to an affected Participant shall become fully exercisable as of the
applicable date; and
(ii) All restrictions and conditions of all Restricted Stock Grants,
Restricted Unit Grants and Performance Bonus Awards then outstanding with
respect to an affected Participant shall be deemed satisfied as of the
applicable date.
For purposes of this subsection (a), "applicable date" shall mean the
earlier of the three dates on which occur the events described in subsections
(b)(i) through (b)(ii) below:
(b) A "Change of Control" shall be deemed to have occurred with respect to
a Participant upon the occurrence of any one of the following events, other than
a transaction with another person controlled by the Company or its officers or
directors, or a benefit plan or trust established by the Company for its
employees:
(i) Any person, including a group as defined in Section 13(d)(3) of the
Exchange Act, becomes owner of shares of Common Stock of the Company with
respect to which fifty-one (51 %) or more of the total number of votes for
the election of the Board may be cast;
(ii) The stockholders of the Company approve an agreement providing for the
sale or other disposition of all or substantially all of the assets of the
Company; or
10
<PAGE>
15. AMENDMENT AND TERMINATION.
(a) Amendments Without Shareholder Approval. Except as set forth in
Sections 15(b) and 15(c) below, the Board may, without further approval of the
shareholders, at any time amend, alter, discontinue or terminate this Plan, in
such respects as the Board may deem advisable.
(b) Amendments Requiring Shareholder Approval. Except as set forth in
Section 15(c) below, to comply with the restrictions set forth in Rule 16b-3
promulgated under the Exchange Act, as amended and in effect from time to time
(or any successor rule) and to comply with the Code and accompanying
regulations, but subject to changes in law or other legal requirements
(including any change in the provisions of Rule 16b-3 and the Code and
accompanying Regulations that would permit otherwise), the Board must obtain
approval of the shareholders to make any amendment that would (a) increase the
aggregate number of shares of Common Stock that may be issued under the Plan
(except for adjustments pursuant to Section 13 of the plan), (b) materially
modify the requirements as to eligibility for participation in the Plan, or (c)
materially increase the benefits accruing to Participants under the Plan. (c)
Prohibited Amendments. Notwithstanding Sections 15(a) and 15(b), under no
circumstances may the Board or Committee (i) amend, alter, discontinue or
terminate the requirements set forth in Sections 7(b), 7(c), 7(i) and 7(j) with
respect to Incentive Stock Options (except as otherwise permitted in Section 7),
unless (a) such modifications are made to comply with changes in the tax laws,
or (b) the Plan is completely terminated, or (ii) make any amendment, alteration
or modification to the Plan that would impair the vested rights of a Participant
under any Award theretofore granted under this Plan, except as provided in
Section 16(c).
16. MISCELLANEOUS MATTERS.
(a) Tax Withholding. In addition to the authority set forth in Section 7(g)
above, the Company shall have the right to deduct from a Participant's wages or
from any settlement, including the delivery of shares, made under the Plan any
federal, state, or local taxes of any kind required by law to be withheld with
respect to such payments, or to take such other action as may be necessary in
the opinion of the Company to satisfy all obligations for the payment of such
taxes.
(b) No Right to Employment. Neither the adoption of the Plan nor the
granting of any Award shall confer upon any Participant any right to continue
employment with the Company or any Subsidiary, as the case may be, nor shall it
interfere in any way with the right of the Company or a Subsidiary to terminate
the employment of any Participant at any time, with or without cause.
(c) Annulment of Awards. The grant of any Award under the Plan payable in
cash is provisional until cash is paid in settlement thereof. The grant of any
Award payable in Common Stock is provisional until the Participant becomes
entitled to the certificates in settlement thereof. In the event the employment
of a Participant is terminated for cause (as defined below), any Award which is
provisional shall be annulled as of the date of such termination for cause. For
the purpose of this Section 16(c), the term "terminated for cause" means any
discharge for violation of the policies and procedures of the Company or a
Subsidiary or for other job performance or conduct which is detrimental to the
best interests of the Company or a Subsidiary.
(d) Securities Law Restrictions. No shares of Common Stock shall be issued
under the Plan unless counsel for the Company shall be satisfied that such
issuance will be in compliance with applicable Federal and state securities
laws. Certificates for shares of Common Stock delivered under the Plan may be
subject to such stock-transfer orders and other restrictions as the Committee
may deem advisable under the rules, regulations, and other requirements of the
Securities and Exchange Commission, any stock exchange upon which the Common
Stock is then listed, and any applicable Federal or state securities law. The
Committee may cause a legend or legends to be put on any such certificates to
refer to those restrictions.
(e) Award Agreement. Each Participant receiving an Award under the Plan
shall enter into an, Award Agreement with the Company in a form specified by the
Committee agreeing to the terms and conditions of the Award and such related
matters as the Committee, in its sole discretion, shall determine.
(f) Costs of Plan. The costs and expenses of administering the Plan shall
be borne by the Company.
11
<PAGE>
(g) Governing Law. The Plan and all actions taken thereunder shall be
governed by and construed in accordance with the laws of the State of Delaware
May 11, 1999
12
EXHIBIT 11
LIGHTPATH TECHNOLOGIES, INC.
COMPUTATION OF NET LOSS PER SHARE
FOR THE YEAR ENDED JUNE 30
--------------------------
1999 1998
----------- -----------
Net loss $(3,592,229) $(4,331,290)
Preferred stock 8% premium (224,651) (311,529)
Imputed dividend on Series A, Series B and
Series C Preferred Stock -- (1,386,700)
----------- -----------
Net loss applicable to common shareholders $(3,816,880) $(6,029,519)
----------- -----------
Weighted average common shares outstanding 4,271,313 3,010,861
=========== ===========
Basic and Diluted net loss per common share $ (.89) $ (2.00)
=========== ===========
EXHIBIT 23.1
CONSENT OF KPMG 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 and (No.'s 333-80119, 333-39641 and
333-47905) on Form S-3 of LightPath Technologies, Inc. of our report dated
August 10, 1999, relating to the balance sheets of LightPath Technologies, Inc.
as of June 30, 1999 and 1998, and the related statements of operations,
stockholders' equity and cash flows for the years then ended, which report
appears in the June 30, 1999, annual report on Form 10-KSB of LightPath
Technologies, Inc..
Our report dated August 10, 1999 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 LLP
Albuquerque, New Mexico
August 27, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM
10-KSB FOR THE YEAR ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> JUN-30-1999
<CASH> 413,388
<SECURITIES> 0
<RECEIVABLES> 350,706
<ALLOWANCES> 15,000
<INVENTORY> 514,669
<CURRENT-ASSETS> 1,300,216
<PP&E> 2,052,629
<DEPRECIATION> 1,159,092
<TOTAL-ASSETS> 3,136,326
<CURRENT-LIABILITIES> 298,915
<BONDS> 0
0
1
<COMMON> 49,607
<OTHER-SE> 29,776,918
<TOTAL-LIABILITY-AND-EQUITY> 3,136,326
<SALES> 712,317
<TOTAL-REVENUES> 1,086,126
<CGS> 409,417
<TOTAL-COSTS> 409,417
<OTHER-EXPENSES> 3,533,555
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,930
<INCOME-PRETAX> (3,592,229)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,592,229)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,592,229)
<EPS-BASIC> (.89)
<EPS-DILUTED> (.89)
</TABLE>
