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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, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE REPORT OF 1934
For the transition period from ___________ to ____________
Commission file number 000-27548
LIGHTPATH TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 86-0708398
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No)
6820 ACADEMY PARKWAY EAST, NE 87109
ALBUQUERQUE, NEW MEXICO (ZIP CODE)
(Address of principal executive offices)
http://www.light.net
(505) 342-1100
(Registrant's telephone number, including area code)
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
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.
$2,266,264
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 National 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 $670,278,050 on August 7, 2000.
The number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practical date:
CLASS OUTSTANDING AT AUGUST 7, 2000
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Common Stock, Class A, $.01 par value 18,219,442 shares
Common Stock, Class E-1, $.01 par value 1,508,267 shares
Common Stock, Class E-2, $.01 par value 1,508,267 shares
Common Stock, Class E-3, $.01 par value 1,005,503 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the 2000 Annual Meeting of
Stockholders are incorporated by reference into Part III of this report.
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LIGHTPATH TECHNOLOGIES, INC.
FORM 10-KSB
INDEX
Item Page
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PART I
Description of Business 2
Description of Property 15
Legal Proceedings 16
Submission of Matters to a Vote of Security Holders 16
PART II
Market for Common Equity and Related Stockholder Matters 17
Management's Discussion and Analysis of Financial Condition
and Results of Operations 19
Financial Statements 23
Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 23
PART III
Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act 24
Executive Compensation 26
Security Ownership of Certain Beneficial Owners and Management 26
Certain Relationships and Related Transactions 26
Exhibits and Reports on Form 8-K 27
INDEX TO FINANCIAL STATEMENTS F-1
SIGNATURES 28
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
GENERAL
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.
From our inception in 1985 until June 1996, we were classified as a
development stage enterprise that engaged in basic research and development. Our
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. During this stage, we believe that
most of our product sales were to persons evaluating the commercial application
of GRADIUM glass (SEE - PRODUCTS: GRADIUM) or using the products for research
and development. In 1987, we realized that our early discoveries had much
broader application, and we expanded our focus to imaging optics applications.
During fiscal year 1997, our operational focus began to shift to product
development and sales. We completed numerous prototypes for production orders
and received catalog sales of standard lens profiles. We also began to offer
standard, computer-based profiles of GRADIUM glass that engineers use for
product design.
In June 1997, we announced we had joined with Invention Machine Corporation
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 and wide area
networks system integrators. WDM systems are needed by the telecommunications
industry to increase bandwidth by serving as data "traffic cops" by combining
multiple light streams from individual transmissions onto a single optical
fiber. We 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. Since 1998, LightChip has received $890,000 in seed
funding, issued $6.5 million of convertible preferred stock to AT&T Ventures and
LightPath and issued $16 million in another private placement completed in
December 1999 which included Morgenthaler, J.P. Morgan Capital, AT&T Ventures
and LightPath as investors. Our current ownership of LightChip is approximately
12.4% based on our investment in LightChip voting preferred stock (18% of
preferred and common stock).
During the first year of the joint venture, Invention Machine Corporation
provided their proprietary invention and engineering methodology software while
we provided GRADIUM glass technology and research and development capabilities
to LightChip. LightChip has successfully demonstrated a WDM model and currently
has prototypes available. They anticipate product sales will begin in calendar
2001. We licensed the use of GRADIUM glass to LightChip. We anticipate minimal,
if any, short-term revenue from LightChip. The value of our investment in
LightChip could 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, 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, we also began to explore the development of
products for emerging markets such as optoelectronics, photonics and solar due
to the number of potential customer 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 us to develop a
strategy to enter the telecom components market. This strategy is built around
automated production of the telcom components using laser fusion and fiber
attachment techniques we have developed. During 1998, we organized internally
and realigned our marketing efforts with the purpose of expanding our focus to
include the optoelectronics and fiber telecommunications markets in addition to
the traditional optics market. See "Sales and Marketing - Optoelectronics and
Fiber Telecommunications".
On April 14, 2000, we acquired Horizon Photonics, Inc. ("Horizon"), a
California corporation originally founded in July 1997. Horizon is an emerging
leader in the automated production of passive optical components for the
telecommunications and data communications markets. We acquired all of the
outstanding shares of Horizon for approximately 1.4 million shares of Class A
Common Stock and $1 million in cash (an aggregate purchase price of
approximately $36.2 million). Horizon manufactures isolator products at their
Walnut, California facility.
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PRODUCTS
We manufacture and sell three types of products: (i) GRADIUM glass
products, (ii) collimators, and (iii) isolators. GRADIUM glass is an optical
quality glass material with varying refractive indices. Collimators are
assemblies that are used to straighten and make parallel diverging light as it
exits a fiber. An isolator is used to prevent the backward propagation of
optical signals that can degrade transmitter and amplifier performance.
Collimators and isolators and other optical components are used throughout fiber
optic systems including wavelength division multiplexing ("WDM") equipment. WDM
systems are used by the telecommunications industry to increase bandwidth by
combining multiple light streams from individual transmissions onto a single
optical fiber. We are also planning to develop other products related to the
optoelectronics and telecommunications industry through licenses and
relationships with other manufacturers. SEE "CURRENT FOCUS ON PRODUCTS" BELOW.
GRADIUM
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. We believe that GRADIUM glass lenses provide
advantages over conventional lenses for certain applications. By reducing
optical aberrations and the number of lenses in an optical system, we believe
that GRADIUM glass can provide more efficient light transmission and greater
brightness, lower production costs, and a simpler, smaller product. While we
believe that other researchers have sought to automate production of passive
optical components and to produce optical quality lens material with the
properties of GRADIUM glass, we are not aware of any other person or firm that
has developed a repeatable manufacturing process comparable to our abilities or
with the ability to produce such material on a prescribable basis.
COLLIMATORS
We offer three product levels of collimators:
* collimating lenses;
* single mode fiber collimator assemblies ("SMF Assembly"); and
* large-beam collimator assemblies.
COLLIMATING LENSES
We offer two types of lenses for use in telecommunication applications: TL
and GPX-series. Our TL-series lenses are 1.8 mm diameter collimating, rod lenses
and are available in 0.18, 0.23 and 0.25 pitch-equivalent lenses. These lenses
have an optional angles facet to control back reflection and for ease of
assembly. Our TL-series lenses provide a high degree of collimation, design
customization, have tight piece to piece control and are more compact then
competing radial-gradient lenses. Customized TL-series lenses with larger
diameters can provide beam diameters greater than 2 mm. Our GPX series lenses
are available in a wide variety of sizes and focal lengths. These lenses provide
superior aberration control and are easily customized. They are sold separately
for assembly into customers components and are also incorporated into our large
beam collimator. These GRADIUM collimating lenses can replace homogeneous lenses
with immediate improvements in performance, repeatability and cost.
SMF ASSEMBLY
We demonstrated our first passive optoelectronic product, a single mode
fiber collimator assembly ("SMF Assembly") in February 1998. Our SMF Assembly
offers high quality performance in the areas of back reflection and insertion
loss. It is also more compact and we believe it can be manufactured at a
significantly lower cost than the competitive products currently available in
commercial quantities. The SMF Assembly is a key element in all fiber optic
systems, including WDM equipment. The SMF Assembly straightens and makes
parallel, diverging light as it exits a fiber. Our newly designed SMF Assembly
is approximately 50-60% smaller than the existing industry collimator, provides
superior performance in back reflection and insertion loss and can withstand 10
watts of optical power. 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.
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GEN3 COLLIMATOR
In fiscal 2000 we released our advanced collimator assembly called the
Gen3. Our tests on the Gen3 collimator indicate it has the lowest documented
insertion loss reported to date in these devices.
ISOLATORS
Horizon has developed a family of products that utilize a proprietary
micro-fixture design and robotic platform process. This automated process allows
for micro-optics to be mounted in small transferable fixtures that are processed
in arrays and converted into a variety of optical components and component
subsystems. Horizon's platform is capable of producing products such as
isolators, gain flatteners, attenuators, filter assemblies, and other
volume-oriented optic assemblies to the WDM market. Horizon is currently
manufacturing a qualified family of free-space, laminate and contract-specific
isolators, and is developing a series of products based on its micro-collimator
technology.
Horizon's core competency is the optical isolator. An isolator is used to
prevent the backward propagation of optical signals that can degrade transmitter
and amplifier performance. Horizon has developed and qualified an automated
platform process that avoids the traditional pitfalls of producing optical
isolators. Applicable to a variety of passive optical components, Horizon's
automated platform process has proven to be an efficient and low cost method for
manufacturing isolators without machining tiny metal fixtures and without
utilizing a significant level of manual labor. Horizon believes it has a
competitive advantage for a certain segment of OEM business, especially as it
relates to isolator products, since its proprietary platform allows Horizon to
produce unique designs at competitive prices in a flexible, automated process.
Horizon has filed two patent applications and a foreign application is pending
related to its production techniques. To date, Horizon's family of isolator
products includes free-space, laminate, and OEM-specific versions.
CURRENT FOCUS ON PRODUCTS
The current focus of our development efforts has been to develop new
products based on our optical and automation platforms in the areas of
fiberoptic opto-mechanical switches, isolators, multiplexers, interconnects and
cross-connects for use in the telecommunications field as well as new GRADIUM
glass materials to be used in various telecom applications.
We have most recently developed a process utilizing high powered lasers for
fusion, splicing and polishing of optical material to include optical fiber. We
were issued a patent for this process in fiscal year 2000. Our 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. We have developed a set of proprietary software design tools
so that the light upon leaving the glass can be precisely modeled. GRADIUM glass
lenses can be produced across a large diameter range (currently 1mm-100mm).
Growth in our manufacturing capabilities has led to improved yield and
automation, advancing our goal of producing competitively priced optoelectronic
and GRADIUM glass products.
In addition, we utilize other optical materials and specialized optical
packaging concepts to manipulate light and perform research and development for
optical solutions in the fiber telecommunications and traditional optics
markets.
SWITCHES
In the Spring of 2000, we introduced the 1XN opto-mechanical switch based
upon a patent licensed from Herzel Laor. As the product design is finalized and
production begins, more information will be made available. We are is also
working on technologies that can be applied to NxN switches.
Optical cross-connects, which perform high speed wavelength routing,
switching and conversion functions in an optical network, are products that we
intend to focus on in the future. We believe our material processing expertise
will be key to the development of optical cross-connect products that overcome
the cost and performance challenges of current technology. Today, switching is
primarily performed electronically; however, several non-optical switches have
recently been announced. To our knowledge, all of these devices are still under
development.
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BUSINESS STRATEGY
During 1998, we organized our 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.). We continue to focus on these two markets. We
believe that GRADIUM glass and other optical materials can potentially be
marketed for use in many optics and optoelectronics products.
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. The
telecom/datacom networks are facing explosive growth. The dramatic rise of the
Internet, office automation, videoconferencing, local and wide area networking,
and remote access telecommunications has fueled the demand for more and more
network capacity in both long-haul telecommunications and cable television
networks.
Given the inherently faster speed of light signals in fiber-optic networks
and their immunity from electromagnetic interference, fiber-optic systems are
replacing existing copper wire networks for long-haul (more than 600 kilometers)
telecommunications networks. Cable television networks are also shifting to
fiber-optic solutions for the distribution of signals from the broadcast station
to the local cable distribution hubs. Today, fiber-optic cable is the primary
medium for long-haul telecommunications and cable television networks and is
making inroads to replace copper in the shorter distance "metro loops" that
serve larger metropolitan and other public networks with transmission distances
of less than 100 kilometers. By the beginning of 1999, over 44 million
kilometers of fiber was installed throughout the world, and analysts estimate
that this figure will grow to 67 million kilometers by the year 2001. (Kessler
Marketing Intelligence). Ryan Hankin & Kent forecasts that the optical
components segment will grow at an annual rate of more than 50% from $1.4
billion in 1999 to nearly $ 7 billion in 2003.
COLLIMATORS
Prior to 1998, we targeted various optoelectronic industry market niches as
potential purchasers of our GRADIUM glass products. During 1998, we began the
development of products for the emerging optoelectronics markets, specifically
in the areas of fiber telecommunications. With our resolution of packaging and
alignment issues we demonstrated our first passive optoelectronic product, the
SMF Assembly, in 1998. This product is manufactured with automated production
techniques we have developed which utilize laser fusion and fiber attachment.
During 1999 and 2000, we have expanded this product line, demonstrating to the
telecommunication optical components industry that we can provide low cost
products and provide solutions to meet their telecom-related collimator needs.
ISOLATORS AND WDM SYSTEMS
The demand for increased bandwidth in fiber-optic networks has led to the
widespread use of a once-theoretical method for transmitting multiple signals at
slightly different wavelengths through a single fiber to achieve efficient use
of fiber capacity. This technique, known as wavelength division multiplexing, or
WDM, requires separate source lasers transmitting slightly different wavelengths
for each signal or "channel" and more complex modulators and optical amplifiers
to control and amplify the signal in the network. WDM systems, originally
developed for eight separate channels in 1996, are currently being designed to
carry as many as 128 separate channels with 0.4 of a nanometer in
differentiation between wavelengths. In theory, a single pair of optical fibers
can carry more than 10 terabits of information per second, which is roughly
equivalent to 156 million voice channels or 500,000 simultaneous two-way HDTV
channels. Through Horizon and LightChip, we have positioned ourselves with
products that are used within WDM systems
With our April 14, 2000 acquisition of Horizon, we acquired an emerging
leader in the automated production of passive optical components for the
telecommunications and data communications markets. Horizon believes its primary
strength is the design of optical subassemblies for automation. Horizon's team
has a comprehensive background in the field of fiber optics, taking research
efforts "off the bench" and into manufacturing. Drawing upon years of experience
in automation, optoelectronic package design and testing, and a multitude of
technical disciplines, Horizon has demonstrated novel solutions for today's WDM
design and processing challenges. By targeting product families and creating
common platforms for each, Horizon can rapidly tailor variations within a
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family, as the customer demands, and without major process or tooling changes.
This philosophy is evident in their proprietary micro-fixture design and
automated platform manufacturing process. This platform allows robots to mount
micro-optics in small transferable fixtures that can be processed at various
levels and converted into a variety of finished products. Horizon believes it
has a competitive advantage for a certain segment of OEM business, especially as
it relates to isolator products, since its proprietary platform allows Horizon
to produce unique designs at competitive prices in a flexible, automated
process.
SWITCHES
In 1999, we entered into an exclusive licensing agreement with Herzel Laor
for the commercialization of two fiberoptic opto-mechanical switch technologies.
On April 27, 1999, we signed a joint assembly and distribution agreement for the
2X2 and 1XN fiberoptic mechanical switches with Kaifa Technology located in San
Jose, California. In fiscal 2000, we continued the fiberoptic, mechanical switch
development process with a separate business unit of E-TEK, Kaifa Technology,
which E-TEK acquired in July 1999. Although we are uncertain how the recent
acquisition of E-TEK by JDS Uniphase Corporation will impact this relationship,
we anticipate that the mechanical switch project will remain on schedule. We
believe these agreements will accelerate our planned introduction of fiberoptic
mechanical switching products for the telecommunications market. The new
products, for which patent applications have been filed, were displayed at a
March 2000 trade show and we expect to enter into field trials by the end of
calendar 2000. Industry sources have estimated that the current annual market
for sales of mechanical switches is approximately $100 million.
OTHER PRODUCTS
We have worked under a joint development agreement with an OEM 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 local area networks and
wide area networks and satellite-to-satellite communications. We have received
orders from several customers for these unique optics and will continue to
explore opportunities within this photonics market. We are currently developing
additional optoelectronics products based on our proprietary technologies. Key
strategic alliances with technology and marketing partners to design, build and
sell next generation integrated components and devices may be considered in the
future. However, we do not currently have any agreements, other than those
discussed above, to enter into any strategic alliances for this purpose.
TRADITIONAL OPTICS
LASER MARKETS FOR GRADIUM LENSES
We initially emphasized laser products because we believed GRADIUM lenses
could have a substantial immediate commercial impact in laser products with a
relatively small initial investment. The majority of the increase from sales of
lenses is due to optics used by YAG lasers. Generally, optical designers can
substitute our standard GRADIUM glass components 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, we believe, and customers test
results confirm, that GRADIUM glass has the ability to improve the current
standard of laser performance. In 1998, our 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.
Our growth strategy is to increase our 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. Rodenstock sold their precision optics division to Linos AG, a pioneer
in the field of photonics, in June 2000. We believe our agreement and
relationships will continue to grow under the Linos AG/Rodenstock alliance. We
also have established relationships with eight additional foreign distributors.
ORIGINAL EQUIPMENT MANUFACTURERS ("OEMS")
In addition to laser applications, through our printed and Internet on-line
catalog, we offer a standard line of GRADIUM glass lenses for broad-based sales
to optical designers developing particular systems for 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
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systems, we believe 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, we intend
to focus our 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 that are
seeking to optimize performance of existing optical products.
We believe OEM relationships may improve our ability to develop more
sophisticated technology development methods and products, although there can be
no assurances in this regard. Such OEM relationships have been utilized in the
development of prototype lenses for manufacturers of endoscopes and wafer chip
inspection equipment. We will evaluate future OEM projects based on a number of
factors, including our assessment of the OEM's ability to fund the design effort
for the project and expected impact upon future sales.
SALES AND MARKETING
ACCORDING TO THE MITRE ECONOMIC ANALYSIS REPORT, THE ANNUAL MARKET FOR ALL
TELECOM COMPONENTS, EXCLUDING OPTICAL FIBER, IS CURRENTLY OVER $12 BILLION
AND WILL GROW TO $22 BILLION BY 2005. RYAN HANKIN & KENT FORECASTS THAT THE
OPTICAL COMPONENTS SEGMENT ALONE WILL GROW AT AN ANNUAL RATE OF MORE THAN
50% FROM $1.4 BILLION IN 1999 TO NEARLY $ 7 BILLION IN 2003.
Extensive product diversity and varying levels of product maturity
characterize the optics industry. 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 our products is highly segmented and no single
marketing approach will allow us to access all available market segments.
Since fiscal 1998, our primary marketing objective has been 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 our product focus was in response to the
opportunities in the emerging optoelectronics market where we believe we have
key advantages and our success in sales of laser based products. We believe our
key advantages are:
* we have developed packaging solutions for optoelectronic products;
* we have been able to develop patentable processes with optical materials
that provide product solutions; and
* through automation, we have developed low cost production techniques.
Combining these elements, we believe we have the opportunity to enter into key
optical telecommunications markets with products that are enabling and cost
effective. Although the same design constraints and technological shortcomings
of conventional optical technology and materials restrict all optical products,
we believe that our 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 our targeted markets. In addition,
with our acquisition of Horizon, we have added to our line of passive optical
components while maintaining our emphasis on low cost production from
automation.
OPTOELECTRONICS AND FIBER TELECOMMUNICATIONS
In order to be more accessible to potential customers we have divided our
sales staff into the following territorial areas because of their high
concentrations of telecom users:
* California
* New Mexico
* Texas
* New Jersey
In addition, we have formalized relationships with eight industrial,
optoelectronics and medical component distributors located in foreign countries
to assist in distribution of telecom products outside the United States. Because
the optics industry is highly fragmented, we utilize distributors and our
Internet site (www.light.net) as vehicles for broader promotion of our telecom
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products. We have placed, and will continue to place, print media advertisements
in various trade magazines and will participate in appropriate domestic and
foreign trade shows.
The target market for our current products is concentrated within several
industry experts such as Lucent Technologies, Inc., Corning, Inc., JDS Uniphase
Corporation and ALCOA Fujikura. The lens and SMF Assembly are used in free space
applications where coupling to an optical fiber is required. We are developing
these initial products into families of products as variations are made to meet
specific customer requirements. Our focus will be on the SMF Assembly as we
believe that the SMF Assembly will replace collimating lens sales. Since many of
our targeted customers currently assemble their own collimators, our 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.
Telecom product sales for fiscal years 2000 and 1999 were $1,497,911 and
$57,029 respectively, primarily generated by targeting our sales efforts on
collimators and isolators, entry level products currently used by the
telecommunications industry. Our major telecom customers in fiscal 2000 included
Lucent Technologies, Inc., Corning, Inc. and Avanex Corp.
Horizon's current marketing plan for isolators targets niche players in the
telecom/datacom markets with huge volume potential for the next decade.
Specifically, Horizon is focusing on the following market segments: (i) WDM
long-haul system manufacturers, (ii) cable television carrier system
manufacturers, (iii) "metro loop" system manufacturers, and (iv) Fiber
Channel/Gigabit Ethernet system manufacturers. Horizon's current core competency
is the optical isolator. Horizon's largest customer, with sales of approximately
$900,000 in fiscal 2000, was Lucent Technologies, Inc. In addition, Horizon has
developed a platform for polarization independent isolators. Currently, this
platform is being qualified to support an OEM isolator package for high volume
production.
In addition to its core isolator business, Horizon is fielding numerous
requests for manufacturing services related to collimating packages. Generally,
these inquiries are coming from producers of next generation switches, MEMS and
other optical devices that need assistance with packaging and volume production.
Horizon's development team is focusing efforts on a "micro-collimator" assembly
to target this potential business. Analysts expect global sales of WDM optical
components to continue at a 27% annual growth rate to reach $10 billion in 2002
(ElectroniCast; Cruttenden Roth).
STRATEGIC ALLIANCES
* WDM MODEL AND DWDM PROTOTYPES
Since fiscal 1997, we have entered into strategic alliances with other
companies in an effort to quickly enter into the optoelectronics markets. For
example, we currently own approximately 12.4% of the voting preferred stock of
LightChip. LightChip has successfully demonstrated a WDM model and DWDM
prototypes. LightChip anticipates that product sales will begin in calendar
2001. We 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. We have retained the rights to the specific
areas of fiber collimators, isolators, amplifiers, circulators, couplers,
splitters and fiber-optic switches.
* SWITCHES
In 1999, we entered into an exclusive licensing agreement with Herzel Laor
for the commercialization of two fiberoptic opto-mechanical switch technologies.
On April 27, 1999, we 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. Although we
are uncertain how the recent acquisition of E-TEK by JDS Uniphase Corporation
will impact this relationship, we anticipate that the mechanical switch project
will remain on schedule. We believe these agreements will accelerate our 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 2000.
Since the license agreement was signed, we have been working to develop the
first products for testing and establish a partnering relationship for assembly
and distribution. We anticipate sales of LightPath switches will begin in
calendar 2001. However, the telecommunications industry is subject to, among
other risks, intense competition and rapidly changing technology, and there can
be no assurances as to our ability to anticipate and respond to the demands and
competitive aspects of this industry.
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* FEDERALLY FUNDED RESEARCH ON WDM PROTOTYPES AND CONCEPTS
We began our sales of WDM prototypes and concepts in 1997. With funding
from a federal government contract, we worked in partnership with Radiant
Research Inc. and the Microelectronics Research Center, University of Texas to
address WDM problems encountered in network applications. By employing GRADIUM
microlenses for a tunable WDM, we were able to develop possible solutions for
these issues. In fiscal 2000 and 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 we received approximately $300,000. The project ended in
fiscal 2000. We have also worked with an OEM on a prototype that incorporates
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 local area networks and wide are
networks and satellite-to-satellite communications. Prototype tests demonstrated
the ability of GRADIUM lenses to provide high quality data transmission over
long distances. We have received orders from several customers for these unique
optics and hope to continue to work in these fields based upon customer
interest.
TRADE SHOWS
We displayed our collimating lens, the SMF assembly and large-beam
collimator assembly products at industry trade shows in early calendar 1999. We
displayed the enhanced Gen3 collimator at the January 2000 Photonics West trade
show. These shows allow us to deliver additional samples and to meet with
potential customers to distribute information on our products or to discuss test
results from samples previously sent.
TRADITIONAL OPTICS
Prior to the Company's IPO in 1996, our resources had been applied
primarily to research and development; consequently, LightPath and GRADIUM glass
were not introduced to the commercial market. Promotion of our products through
the Internet, trade advertising in industrial magazines and participation in
numerous domestic and foreign trade shows increased interest and awareness of
our products, resulting in additional lens sales. Traditional optics lens sales
for fiscal years 2000, 1999, 1998, 1997 and 1996 were $598,376, $655,288,
$529,318, $199,524, and $33,444, respectively, primarily generated by a variety
of industrial and government accounts. Lens sales are primarily due to sales of
lenses for laser and wafer chip inspection markets. Our sales efforts in
targeting laser applications, an area where GRADIUM lenses increase the quality
of YAG laser beams and reduce the focal spot size, has received market
acceptance. Our major customers in fiscal 2000 included Gerhard Franck Optronik
GmBH and Permanova Laser Systems AB. Our major customers in fiscal 1999 included
Nu-Tek Precision Optical Corporation and OptoPower Corporation, who supply
products for wafer chip inspection and YAG lasers, respectively.
INDUSTRIAL AND OPTOELECTRONIC DISTRIBUTORS IN FOREIGN COUNTRIES
We have formalized relationships with eight industrial and optoelectronic
distributors located in foreign countries. Because the optics industry is highly
fragmented, we utilize distributors and the Internet as vehicles for broader
promotion of GRADIUM glass. Our Internet web site (www.light.net) is one source
of information on GRADIUM glass, and potential customers can view products from
our catalog. We have placed, and will continue to place, print media
advertisements in various trade magazines and will participate in appropriate
domestic and foreign trade shows. We have 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.
OEMS
We intend 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 our assessment of its ability to achieve certain economic
criteria. In fiscal 2000 we recognized $125,000 in licensing fees from a 1994
agreement with Karl Storz GMBH & Co., a major endoscope manufacturer. Under the
agreement, we have received in excess of $1 million, representing minimum
royalty payments during the prototype development stage through the second
production year, in exchange for an exclusive license from us to the GRADIUM
design developed for Karl Storz. Karl Storz is not obligated to order commercial
quantities of GRADIUM glass products, and may terminate the agreement without
entering into production orders. In June 1999, Karl Storz indicated to us that
they are likely to convert the exclusive license to a non-exclusive license in
future years, and as a result, we expect to have no additional license revenue
from this arrangement.
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DEVELOPMENT OF LENS PROTOTYPES WITH OEM FUNDING; STRATEGIC ALLIANCES
We have 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. We believe 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, we no longer intend to develop these prototypes without funding of
their development effort by the OEM.
We entered into a strategic alliance with DR Technologies, Inc. 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
our October 1996 subcontract with DR Technologies to create a graded index solar
concentrator packaged into a compact panel that can provide electrical power for
orbiting space satellites. We have not received any development fees for
projects under these agreements for the past two years. We will require a
commercial partner or further research funding for further work to continue. As
of June 30, 2000, the companies had not received any further joint funding.
PROMOTIONAL AND EDUCATION ACTIVITIES FOR OPTICAL DESIGNERS
As part of our marketing strategy, we have provided promotional and
educational activities concerning GRADIUM glass and its properties, intended to
familiarize and educate optical engineers from numerous, high performance optics
markets. We presently have six standard profiles of GRADIUM glass that engineers
can use for product design, and will continue to develop more profiles as
required. Our 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, we 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, we have the capability to create a
custom GRADIUM glass profile for the customer. Our 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.
COMPETITION
OPTOELECTRONICS AND FIBER TELECOMMUNICATIONS
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. We 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 we must be open to continuous improvement
of our products and processes. If we can pass these tests we believe we 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 our ability to
anticipate and respond to the demands and competitive aspects of this industry
COLLIMATORS
There are currently only a handful of direct competitors for our
collimating lenses and SMF Assembly. Nippon Sheet Glass currently supplies the
majority of collimator lenses. The collimator lens is a separate business from
Nippon Sheet Glass's primary product, automotive glass. The SMF Assembly 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, JDS
Uniphase and E-TEK Dynamics. These competitors have greater financial,
manufacturing, marketing and other resources than LightPath. We are aware of
current research projects that integrate optical technologies, such as existing
planar waveguide structures, which have the potential to replace some of the
current collimator applications. We believe that many of these products
currently have limitations which have made their wide spread usage unfeasible,
thereby reducing the likelihood that they will replace current collimator
applications.
HORIZON: ISOLATORS
Horizon competes with a few specific players in the isolator segment of the
WDM components market. These include Namiki, Kyocera and Kaifa Technology
(acquired by E-TEK Dynamics in 1999). Horizon also competes with a few large
components manufacturers, including JDS Uniphase and E-TEK Dynamics, which
announced a merger in January 2000 (formalization pending). Horizon has never
looked to directly compete with the "catalog" offerings of these companies;
rather, Horizon focuses its efforts on designing and manufacturing specialty and
hybrid components according to particular OEM specification by delivering
flexible and novel packaging solutions achieved by its automated platform.
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DWDM SYSTEMS
Dense wavelength division multiplexing ("DWDM") systems that LightChip
intends to produce and that Horizon is developing products for, 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:
* fiber bragg grating produced by Ciena and Pirelli;
* arrayed waveguide grating produced by Lucent and PIRI; and
* reflective grating produced by Instruments SA.
We believe 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.
SWITCHES AND OPTICAL CROSS-CONNECTS ("OXC")
Mechanical switches comprise the majority of switches used today in the
telecommunications industry. The industry leader in this area is JDS Uniphase,
followed by Dicon Fiberoptics. These competitors have greater financial,
manufacturing, marketing and other resources than LightPath. OXC perform high
speed wavelength routing, switching and conversion functions in an optical
network. We intend to focus on development of OXC at our Warren, New Jersey
facility. We believe our material processing expertise will be key to the
development of OXC products which overcome the cost and performance challenges
of current technology. Today switching is performed electronically, however,
several non-optical switches have recently been announced. To our knowledge, all
of these devices are still under development.
TRADITIONAL OPTICS
The market for optical components is highly competitive and highly
fragmented. We compete 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, we
compete with developers of radial gradient lenses and optical components. Many
of these competitors have greater financial, manufacturing, marketing and other
resources than we do.
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 our products. In addition, although these companies do not
manufacture axial gradient lenses, and although we believe that we have 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, our products compete with other products currently
produced by these manufacturers.
Manufacturers of aspherical lenses and optical components provide
significant competition for LightPath 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, we compete with manufacturers of other gradient index
lens materials. Currently, processes to produce gradient index materials include
ion-exchange, chemical vapor deposition 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. We believe that these processes are limited by
the small refractive index change achievable (typically, < 0.05), the small skin
depth of the gradient region (typically < 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
LightPath has full scale commercial manufacturing operations in its 30,300
square feet of facilities in Albuquerque, New Mexico. In June 2000, we completed
the initial construction of a 5,000 square foot clean room that houses ten
operational manufacturing stations. Seven additional manufacturing stations were
placed in service in July 2000 and three more stations will be operational by
August 31, 2000. Each station includes laser fusion and housing equipment and an
automated testing process. We currently have a laser polishing station in
operation with a second station under construction. With this equipment, we
believe our facilities can meet the capacity requirements of our recently
introduced and planned optoelectronics products for several years. Our present
telecom manufacturing facility can also be expanded by approximately 50% if
needed.
Due to manufacturing techniques we have developed, we believe the costs to
produce the SMF Assembly will be considerably less than the traditional industry
manufacturing costs. In April 1996, we built out the lens manufacturing plant
for traditional optics. We believe 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, we have not manufactured products in such quantities,
as our sales have not supported this scale of production.
Our purchase of five larger, more sophisticated furnaces, milling machines
and metrology equipment in fiscal 1998 generated further production efficiencies
in the form of yield efficiencies and reduced unit production costs. The
furnaces, which are equipped with monitoring and feedback systems, allow
production of multiple boules that are up to four times as large as our 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 our manufacturing efficiencies and use of off-the-shelf base
glass, GRADIUM lenses are generally price competitive with conventional
homogenous lenses.
Much of product qualification is performed in-house. Our test and
evaluation capabilities include Damp Heat, High/Low Temp Storage, and a Thermal
Shock Oven, which are representative of the equipment required to meet BellCore
Testing requirements. Our engineering departments have full design and CAD/CAM
technical support. The implementation of Statistical Process Controls has
allowed us to eliminate costly manual testing operations. We believe the ability
to maintain consistently high quality at the manufacturing stage represents a
significant asset and distinctive characteristic of our production capabilities.
Quality control will be critical to bring telecommunication products to market
as the customers demand rigorous testing prior to purchasing a product.
* SUBCONTRACTORS; STRATEGIC ALLIANCES
We believe that low manufacturing costs will be crucial to our long-term
success. We presently use subcontractors for finishing lenses, including the
collimator lens, and intend to continue to do so. We have the internal
capability to finish prototype lenses and small volume orders. We have qualified
and licensed numerous finishers to fabricate lenses, several of which are
located in Asia. Qualification of additional offshore finishers to augment our
strategy of maximizing cost efficiencies will continue to be a top manufacturing
priority.
We 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. In February 2000,
Hikari announced that they intended to spend $5 million to purchase equipment
necessary to build out a second facility for GRADIUM glass materials and other
products. The companies have plans to implement some of our goals during fiscal
year 2001. We 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/JDS Uniphase.
We have taken steps to protect our proprietary methods of repeatable high
quality manufacturing by patent disclosures and internal trade secret controls.
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* SUPPLIERS
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. We believe that a satisfactory supply of production materials will
continue to be available at reasonable prices, although there can be no
assurances in this regard.
HORIZON
Horizon's manufacturing lines are housed in approximately 5,000 square-feet
of clean room space (certified Class 10,000) within their Walnut, California
facility. The manufacturing lab contains dual beam laser welding stations,
sub-micron alignment engines, robotic assembly stations, automated dispensing
systems and precision dicing equipment. A tool and die operation is located in a
separate shop and assembly area. The shop supports Horizon's product design and
automation efforts including metrology and inspection, part prototype
fabrication for proof of concept, and machine building from prototype to
production line. The primary benefits of Horizon's approach to manufacturing are
(i) reduced costs as a result of higher yields and throughput, and (ii) product
consistency as a result of eliminating manual labor. Horizon believes that it is
the only manufacturer of free-space isolators using automated manufacturing.
Horizon has similar product qualification processes and equipment as LightPath.
* SUPPLIERS
Horizon currently purchases a few key materials from single or limited
sources. The polarizing glass used in its isolator products is supplied
exclusively by Corning and is marketed as Polarcor(TM). To date, Horizon has
been able to acquire an ample supply of polarizing glass. The latching garnet
used in the isolator is supplied exclusively by Lucent Technologies Inc.
Allocations of supply for this raw material can be very competitive.
Non-latching garnet and other crystals used in Horizon's other isolator products
are provided by a number of vendors, including Casis, Sumitomo and Mitsubishi.
Available quantities and adequate pricing of this garnet has not proven
problematic, but Horizon has yet to ramp-up high volume production of products
utilizing this raw material. We believe that a satisfactory supply of production
materials will continue to be available at reasonable prices, although there can
be no assurances in this regard.
Horizon also relies on local and regional vendors for component materials
such as housings, fixtures and magnets. In addition, certain Horizon products
require external processing such as brazing and metalization. To date, Horizon
has found a suitable number of qualified vendors in the Southern California
market.
PATENTS AND OTHER PROPRIETARY INTELLECTUAL PROPERTY
Our policy is to protect our technology by, among other things, patents,
trade secret protection, trademarks and copyrights. As of June 2000, LightPath
had twenty-two issued U.S. patents, nine foreign patents and had filed numerous
applications for additional U.S. patents and foreign patents. Horizon has filed
two U.S. patent applications. Patents have been issued and/or patent
applications have been filed in the areas of glass composition, gradient
geometries, production processes, product design, fiber attachment and
micro-fabrication. The first of our issued patents expires in 2006; the
remainder expire at various times through 2017. Patent applications
corresponding to our and Horizon's U.S. applications have been filed in the
patent offices in Europe and Japan pursuant to the Patent Cooperation Treaty.
Under the Patent Cooperation Treaty, a patent applicant may file one patent
application and have it acknowledged as an accepted filing in as many member
nations to the Patent Cooperation Treaty 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 our formula upon inspection and, to
our 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. Horizon has filed a federal trademark
application for the mark "Horizon Photonics".
There can be no assurance that any issued patents owned by us will afford
adequate protection to us or not be challenged, invalidated, infringed or
circumvented, or that patent applications relating to our products will result
in patents being issued. There can be no assurance that any rights granted to us
for technologies that we may license in the future will provide competitive
advantages to us. There can be no assurance that patents owned or licensed by us
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that are 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 our
activities would not infringe upon patents owned by others.
Further, there can be no assurance that others have not independently
developed or will not independently develop and patent similar or superior
products and technologies, duplicate any of our products or technologies or
design around our patents. There can be no assurance that patents issued to
others will not adversely affect the development or commercialization of our
products or technologies. We do not have a policy of patent infringement
liability coverage for costs or damages relating to claims of infringement. We
could incur substantial costs in defending suits brought against us or any of
our licensees, or in suits in which we may assert that our patent or patents
provide us with rights against others or in suits contesting the validity of a
patent. Any such proceedings could be protracted. In addition, there can be no
assurance that we would be successful in defending our patent rights in any
future infringement action. If the outcome of any such litigation is adverse to
our interests, our business may be materially adversely affected.
We do not believe that any of our products or processes infringes any U.S.
or foreign patent rights of any other party. There can be no assurance, however,
that our products or processes do not infringe on a United States or foreign
patent, or patent application. Patent applications in the United States are
maintained in secrecy until the patent is issued. We could incur substantial
costs in defending our self 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 for us to make, use, distribute and sell products.
We also rely on trade secrets and proprietary know-how. We seek to protect
our trade secrets and proprietary know-how in part, by confidentiality
agreements with our employees, consultants and customers. However, there can be
no assurance that our confidentiality agreements will not be breached or that we
would have adequate remedies for any breach. Some of the confidentiality
agreements that we rely 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 our technology or processes, or that
our trade secrets will not otherwise become disclosed to or independently
discovered by our competitors.
ENVIRONMENTAL AND GOVERNMENT REGULATION
Currently, emissions and waste from our present manufacturing process are
at such low levels that no special environmental permits or licenses are
required. In the future, we may need to obtain special permits for disposal of
increased waste by-products. The glass materials we utilize contain lead and
other toxic elements in a stabilized molecular form. However, the high
temperature diffusion process results in low-level emissions of such elements in
gaseous form. If production reaches a certain level, we believe that we will be
able to efficiently recycle certain of our raw material waste, thereby reducing
disposal levels. We believe that we are presently in compliance with all
material federal, state and local laws and regulations governing our operations
and have obtained all material licenses and permits necessary for the operation
of our business.
Horizon uses a low-emission spray booth for the application of certain
solvents and adhesives in its manufacturing process. Horizon maintains a permit
for its spray booth through its local air quality management district and
believes it is in full compliance with all applicable regulations.
There are currently no federal, state or local regulations that restrict
the manufacturing and distribution of our telecom products or 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, we will generally be involved on
a secondary level and the OEM customer will be the responsible for the license
and approval process.
RESEARCH AND DEVELOPMENT
From August 1985 through June 1996, we were 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. We shipped our first GRADIUM glass products in May 1994. Our initial
flint product line is lead-based. The flint GRADIUM glass family has been
expanded over the years, to include crown glasses, titania silicate glasses and
polymer materials. We intend 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
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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). We will
continue to upgrade the material design modeling software and optical design
tools to facilitate product design. Working with DR Technologies, we
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.
We are currently working to expand our product line further into
optoelectronics, the areas of multiplexers and interconnects for the
telecommunications field. We expended or incurred expenditures for research and
development for the two years ended June 30, 2000 and 1999 of $1,449,347 and
$615,371, respectively. In addition, $4.2 million of in-process research and
developments costs were expensed during fiscal 2000 related to the acquisition
of Horizon. We currently plan to expend approximately $4 million for research
and development during fiscal 2001, which could vary depending upon progress of
projects in the proof of concept stage and the receipt of Government contracts
or awards.
Horizon is currently utilizing a qualified platform process to manufacture
a family of free-space and OEM-specific isolators. Horizon is developing similar
platforms for its micro-collimator and laminate isolator products
EMPLOYEES
We currently have 125 full-time employees in California, New Mexico, Texas
and New Jersey. We expect to add approximately 60 additional employees in the
next twelve months, primarily consisting of manufacturing personnel. Twenty of
our present employees are engaged in management, administrative and clerical
functions, 13 in research and development, 11 in product development, 10 in
sales and marketing and 71 are in production and metrology. We intend to
continue our current practice of utilizing outside consultants, where
appropriate, in addition to hiring full-time personnel. None of our employees
are represented by labor unions.
ITEM 2. DESCRIPTION OF PROPERTY
We lease our headquarters, a manufacturing facility and an engineering
office, in Albuquerque, New Mexico. The leases are generally five year leases
with renewal options which currently are scheduled to expire from April 2001
through March 2005. The leased space houses all of our operations, including
research, product design and development, production and all administrative
operations. The 13,300, 17,000 and 3,500 square foot facilities are located in a
business and research park. We are obligated to make monthly rental payments of
approximately $18,000. Currently we believe our present facilities will be
sufficient for our current and planned business needs during at least the next
two years.
We lease an 11,500 square foot facility for office and research and
development in Warren, New Jersey. The leased space houses sales staff and
research, product design and development relating to the development of the
optical switch engine to be sold as an enabling component for an optical cross
connect system. We are obligated to make monthly rental payments of
approximately $17,000 until May 2005.
Horizon leases a 10,200 square foot facility in Walnut, California. The
leased space houses all of their operations, including office, manufacturing and
development space. Horizon is obligated to make monthly rental payments of
approximately $6,000 until October 2003.
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ITEM 3. LEGAL PROCEEDINGS
On May 2, 2000, our Board of Directors authorized its Litigation Committee
to commence a class action lawsuit in the Chancery Court of Delaware, New Castle
County (LightPath Technologies, Inc., Plaintiff, vs. Louis G. Leeburg, et al.,
Defendants, C.A. No. 1802/NC). The action, filed on May 2, 2000, seeks a
declaratory judgment with respect to our right to redeem our Classes E-1, E-2
and E-3 Common Stock on September 30, 2000 for $.0001 per share, the right of
the holders of Class E Common Stock to vote at the our Annual Meeting to be held
on October 6, 2000, and for certification of the holders of Class E Common Stock
as a class and the named defendants as its representatives. The named defendants
are Donald E. Lawson, President, Chief Executive Officer and a Director of the
Company, who owns an aggregate of 25,000 shares of Class E Common Stock, Louis
G. Leeburg, a Director of the Company, who owns an aggregate of 7,272 shares of
Class E Common Stock, and William Leeburg, who owns or controls an aggregate of
21,816 shares of Class E Common Stock.
On or about June 9, 2000, a small group of holders of Class E Common Stock
commenced an action in a state court in Texas (the "Texas Action"). In essence,
the Texas Action makes various allegations regarding the circumstances
surrounding the issuance of the Class E Common Stock and seeks damages based
upon those allegations. We believe the allegations underlying the Texas Action
have no basis in fact and that this lawsuit is without merit. We have retained
counsel and intend to conduct a vigorous defense against these claims.
In Delaware, LightPath has moved for class action determination and intends
to litigate all claims in that forum as promptly as possible. LightPath has been
advised that a final disposition of the claims in Delaware may preclude
re-litigation of the same claims in the Texas Action.
We are involved in various legal actions arising in the normal course of
our 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 position, results of operations or
liquidity.
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.
Our Class A Common Stock was quoted on the Nasdaq SmallCap Market system
under the symbol "LPTHA" and has been continuously since February 22, 1996. On
July 12, 2000, our Class A Common Stock moved to the Nasdaq National Market
System under the symbol "LPTH". We estimate there were approximately 300 holders
of record and approximately 20,100 beneficial holders of the Class A Common
Stock on August 7, 2000. We have not paid dividends in the past and we do 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, 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
June 30, 2000
-------------
Quarter ended September 30, 1999 $ 7.19 $ 1.78
Quarter ended December 31, 1999 $18.69 $ 3.13
Quarter ended March 31, 2000 $65.31 $15.88
Quarter ended June 30, 2000 $41.38 $15.63
On February 9, 1998, we 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 our
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 us of approximately
$3,530,000. In addition, the placement agent was granted 58,427 Class H warrants
to purchase shares of our Class A common stock at a price of $6.68 per share at
any time through February 2003.
On July 28, 1999, we issued $1,000,000 aggregate principal amount of 6%
Convertible Debentures (the "Debentures") due July 2002 and 427,350 attached
Class I warrants. The Debentures are immediately convertible at any time prior
to maturity into 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. Each Class I warrant entitles the holder to purchase one share
of Class A common stock at $2.20 per share at any time through July 2004. In
addition, the placement agent received 150,000 Class J warrants to purchases
shares of the Company's Class A common stock at $2.20 per share at any time
through July 2004. In addition, the investors of the Debentures are entitled to
receive additional shares of Class A Common Stock in the event the Company
issues additional shares of its Class A Common Stock or securities convertible
into such class of securities at any time prior to July 28, 2001 under certain
circumstances. The Debentures and attached Class I Warrants were sold for
aggregate consideration of $1 million and resulted in net proceeds to the
Company of approximately $893,000 after deducting the cash fee paid to the
placement agent as well as the Company's legal and other associated costs.
On November 2, 1999, we completed a private placement of 408 shares of its
Series F Preferred Stock (the "Series F Stock"). The Series F Stock is
convertible into shares of Class A common stock, at a conversion price which is
equal to the lower of $5.00 or 80% of the five day average closing bid price of
the Company's Class A common stock at the conversion date. Each share of
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Preferred Stock is convertible into Class A Common Stock at the option of
holder, subject to certain volume limitations during the first 9 months. Holders
of Series F Stock also received Class K warrants to acquire a total of 489,600
shares of Class A common stock in addition to the modification of terms on
warrants outstanding from prior private placements. The Class K Warrants may be
exercised at any time prior to expiration on November 2, 2002 at a price of
$5.00 per share. Each of the investors in the Series F Stock has previously
invested in our Series A, B and/or C Preferred Stock. In order to induce them to
invest in the Series F Stock, we agreed to reduce the applicable exercise prices
and extend the applicable expiration dates of all outstanding warrants issued in
connection with the sale of such Series A, B and C Preferred Stock. The gross
proceeds received for the private placement of Series F Stock was $4,080,000,
less placement fees and related expenses resulting in net proceeds to us was
approximately $3,900,000. We also issued 125,000 Class L warrants to the
placement agent, with terms identical to Class K Warrants.
On November 5, 1999 Robert Ripp entered into an agreement to purchase
62,500 shares of LightPath Class A Common Stock for $4.00 per share in
connection with his election to serve as Chairman of the Board of Directors. Mr.
Ripp also received warrants to purchase up to 281,250 shares of Class A Common
Stock at $6.00 per share at any time through November 10, 2009. These shares
were registered on a Form S-3 that became effective on January 18, 2000.
All of the Preferred Stock, Class C, Class D, Class E, Class F, Class G,
Class H, Class I, Class J, Class K and Class L Warrants, and the Class A Common
Stock and warrants issued to Robert Ripp, 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 January 11, 2000, we called all of our outstanding Class A Warrants for
redemption on February 10, 2000 at the redemption price of $.05 per Class A
Warrant. Each Class A Warrant was exercisable at a price of $6.50 for one share
of Class A Common Stock and one Class B Warrant. As of March 31, 2000
substantially all of the outstanding 2.7 million Class A Warrants and
approximately 2 million Class B Warrants were exercised for net proceeds of
approximately $33 million. On May 15, 2000 we called all of our outstanding
Class B warrants for redemption on June 13, 2000 at the redemption price of $.05
per Class B Warrant. Each Class B Warrant was exercisable at a price of $8.75
for one share of Class A Common Stock. As of June 30, substantially all of the
outstanding Class B Warrants were exercised for 2.8 million shares of Class A
Common Stock and we received net proceeds of approximately $23.5 million.
On February 25, 1998, our Board of Directors 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 LightPath. 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 us one
one-hundredth of a share of Series D Participating Preferred Stock, $.01 par
value, of LightPath, 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
LightPath 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 LightPath, was attached as Exhibit 1 to our
Registration Statement filed on Form 8-A, dated April 28, 1998.
During 1997, we adopted a policy whereby employees may purchase Class A
common stock of LightPath at fair market value as payroll deduction. During
fiscal 2000 one employee elected to make stock purchases of 3,929 shares at an
average price of $2.24 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, we limited our offering of the
shares solely to the employees. No other public offering or advertisement was
conducted. In addition, we relied upon certain representations made by the
employees with respect to their understanding of our 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 US. 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 WE EXPECT 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 OUR EXPECTATIONS AND ASSUMPTIONS AND ARE SUBJECT
TO A NUMBER OF RISKS AND UNCERTAINTIES, MANY OF WHICH ARE BEYOND OUR 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,
OUR EARLY STAGE OF PRODUCT DEVELOPMENT, THE NEED FOR ADDITIONAL FINANCING,
INTENSE COMPETITION IN VARIOUS ASPECTS OF ITS BUSINESS AND OTHER RISKS DESCRIBED
IN OUR 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 US WILL BE REALIZED. WE
UNDERTAKE NO OBLIGATION TO UPDATE OR REVISE ANY OF THE FORWARD LOOKING
STATEMENTS CONTAINED HEREIN.
TELECOM SEGMENT
During fiscal 2000, our optoelectronics and fiber telecommunications
segment was impacted by:
* receipt of approximately $65.5 million in proceeds from the
exercise of outstanding warrants and stock options and the net
financial investment of $4.7 million in July and November private
placements which are available to grow this segment;
* the April 2000 expansion of our telecom products to include
isolators through the acquisition of privately held Horizon
Photonics, Inc. ("Horizon"). We began acquisition talks with
Horizon in February 2000, due to our interest in their automated
production of passive optical components and complimentary
product lines of isolators. The April 2000 acquisition represents
a purchase price of $36.2 million of which $1 million was paid in
cash and the balance was exchanged for 1.4 million shares of
Class A common stock;
* the enhancement of our management team with the November addition
of Robert Ripp, former Chairman and CEO of AMP, Inc., with
substantial business experience and knowledge of the
telecommunications industry, as Chairman of the Board, and the
hiring of Stephen Barna, formerly of Lucent and AT&T, as VP
Marketing & Sales;
* continued record sales bookings from customers such as Avanex
Corp. which reflects qualification of our collimator lens,
Corning Inc.'s purchases of our large beam collimator, and
continued product enhancements such as the Gen3 collimator which
has the lowest documented insertion loss reported to date in
these devices; and
* the increase in the Company's investment in LightChip by $1.6
million (December 1999 private placement investors included
Morgenthaler, J.P. Morgan Capital, AT&T Ventures and LightPath).
Telecom product sales increased to approximately $1,498,000, which includes
LightPath's $554,000 of collimator product sales and, during the fourth quarter,
Horizon had isolator sales of approximately $944,000. LightPath's product sales
alone are approximately ten times greater than our entire telecom revenues of
$57,029 in fiscal 1999. The backlog for collimator products increased to $1.3
million at June 30, 2000, primarily from Corning, versus $10,000 at June 30,
1999. Horizon has a $2.7 million sales backlog for its isolator products,
primarily from Lucent, which will be supplied during the next eight months.
Lucent continues to increase their forecast requirements for isolators.
In fiscal 2000, our optoelectronics and fiber telecommunications segment
continued its efforts to:
* increase the sale of collimator assemblies and lenses and the
distribution of collimator samples to potential customers for
testing;
* develop fiberoptic switches; and
* obtain patent protection for its proprietary telecommunications
products and processes.
In the fall of 1999, we completed the installation of a clean room in our
original manufacturing area to meet anticipated future customer demands. Shortly
thereafter, in response to the acceptance of our collimator product line by
various customers, we began an expansion of our manufacturing production
capability. We leased 3,600 square feet adjacent to our original Albuquerque
facility to house the engineering staff and glass research and development
projects. During January 2000, we completed negotiations on an additional lease
for more than 17,000 square feet of manufacturing space in the same vicinity of
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our existing facility. In this space we built a 5,000 square foot clean room and
ten collimator manufacturing stations. In addition, we leased approximately
11,500 square feet at a facility in New Jersey for development of the optical
switch engine to be sold as an enabling component for an optical cross connect
system.
We have continued the fiberoptic, mechanical switch development process
with a separate business unit of E-TEK. We are uncertain how the recent
acquisition of E-TEK by JPS-Uniphase will impact this relationship. In addition,
we have expanded our strategic alliance with Hikari Glass Co., Ltd. to include
products based on our automated laser polishing and laser fusion processes. We
believe this agreement will increase our presence throughout Asia where Hikari
has a strong marketing and sales presence.
In fiscal year 2000, we were awarded five additional US patents and one
foreign patent. Three of these patents relate to telecom products or processes,
with the most significant being the proprietary process to fuse fibers directly
to a larger optical component such as the collimator lens. We terminated three
in process patents related to GRADIUM technology.
Or internal focus continues to be on the sale and shipment of products and
samples of our SMF Assembly. Based on the results of customers' testing and
qualification of our collimating lens by Avanex Corp., we believe higher-volume
production orders will develop in the future. We anticipate such orders to be
received in response to customer use that confirms that the SMF Assembly offers
superior performance in the areas of back reflection and insertion loss at a
very competitive price. We believe that our increased sales orders for the year
reflect this positive feedback and customer qualification.
HORIZON ACQUISITION
On April 14, 2000, we acquired Horizon for a total purchase price of $40.2
million, including approximately $2.0 million of acquisition costs and $2.8
million related to the fair value of LightPath stock options exchanged for the
outstanding vested stock options of Horizon. In connection with the allocation
of the purchase price to identifiable intangible assets, $4.2 million was
allocated to in-process research and development ("R&D") which was expensed upon
acquisition as required under generally accepted accounting principles. The
in-process R&D related to the micro-collimator products as well as active
alignment and isolator injection molding technologies that were under
development at the time of acquisition. These programs were in various stages of
completion ranging from 50% to 60% of completion, with estimated completion
dates through June 2001. The value assigned to in-process R&D was determined
based on estimates of the resulting net cash flows from micro-collimator
products as well as active alignment and isolator injection molding technologies
and the discounting of such cash flows to present value. In projecting net cash
flows resulting from micro-collimator products as well as active alignment and
isolator injection molding technologies, management estimated revenues, cost of
sales, R&D expenses, selling, general and administrative (SG&A) expenses and
income taxes for those projects. These estimates were based on the following
assumptions:
* Estimated revenues projected a compound annual growth rate over five
years of approximately 117%. The majority of projected revenues were
ascribed to micro-collimators. Projections of revenue growth were
based on management's estimates of market size and growth supported by
market data and by the nature and expected timing of the development
of the products by LightPath and its competitors.
* The estimated cost of sales as a percentage of revenue, initially at
50% declining to 47%, was consistent with the historical rates for
Horizon's business as well as their business plan analysis.
* Estimated SG&A costs were expected to decrease slightly as a
percentage of sales, with a 20% average.
* The estimated R&D costs were expected to remain at 2% of sales as most
R&D efforts are in a maintenance phase.
* A 40% effective tax rate was estimated.
The projected net cash flows for the in-process projects were discounted using a
30% weighted-average cost of capital (WACC). The calculation produces the
average required rate of return of an investment in an operating enterprise. The
WACC selected was based upon venture capital rates of return as required for
investment in companies during their early stages of development and reflective
of the risk associated with corresponding development/operating challenges. A
WACC of 25% was used to determine the value of the return of the developed
technology, the customer list and other intangibles acquired as part of the
purchase of Horizon.
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TRADITIONAL OPTICS SEGMENT
During fiscal 2000, the majority of our sales to the traditional optics
segment were comprised of laser optic lenses. Annual revenues of approximately
$768,000, included $125,000 in license fees and $42,400 in revenues for
government funded subcontracts utilizing GRADIUM glass in optoelectronics
applications. Joining with the German optical products manufacturer Rodenstock
Prazisionsoptik GmbH ("Rodenstock") we are proceeding with the marketing program
for the development, production and joint-distribution of GRADIUM based optical
products in Europe. We believe the relationship with Rodenstock may create new
and sustain existing markets for GRADIUM in Europe primarily in the area of
imaging systems. Our remaining distributors continue to work with existing
markets for GRADIUM in their respective countries primarily in the area of the
YAG laser market. At June 30, 2000, we had a backlog of $305,000 as compared to
$35,000 in lens products at June 30, 1999.
CONSOLIDATED OPERATIONS
Our consolidated revenues totaled $2.3 million for 2000, an increase of
approximately $1.2 million or 109% over 1999. The increase was primarily
attributable an increase of $943,000 (87%) from Horizon isolator sales, and an
increase of $442,000 (41%), in additional product sales, primarily for telecom
products. These increases were offset by a $206,000 decrease (19%) in product
development/license fees as the government subcontract has concluded. At June
30, 2000, our consolidated backlog was $4.3 million consisting of $2.7 million
in isolator sales, $1.3 for collimator sales and $305,000 for lens sales, as
compared to June 30, 1999 backlog of $35,000 for lens sales, $10,000 for
collimator sales and $100,000 for government project funding. Sales revenues
from orders will be recognized in future quarters as the products are shipped.
In 2000, consolidated cost of sales was 62% of product sales, an increase
from 1999, when cost of sales was 57% of product sales. The increase was
primarily due to lower margins in the fourth quarter at Horizon which they
attributed to a materials issue which they have since resolved. Our margins were
48% on telecom products and sales to traditional optics distributors during the
year. It is anticipated that our telecom products will continue to maintain a
lower cost of sales than our traditional optics products. Additionally, with
increased volume and the increased utilization of off-shore lens finishers, the
cost of traditional optics production could be decreased. Selling, general and
administrative costs increased by $3 million from 1999 to $6 million due to
$450,000 from Horizon and the $2.5 million balance due from increases in
personnel in administration and manufacturing support. We incurred several
non-cash charges during the fourth quarter of fiscal 2000; Horizon's $4.2
million non-recurring in-process research and development charge, $2.4 million
in amortization of Horizon's goodwill and intangibles, and $2.7 in non-cash
stock-based compensation charges primarily due to Mr. Ripp's stock options.
Research and development costs increased by approximately $834,000 to $1.4
million in 2000 versus 1999 of which $196,000 was due to Horizon. The majority
of development work consisted of expenses associated with the collimator
assembly design and the New Jersey facility where development work is on-going
to expand the Company's products to the areas of switches, interconnects and
cross-connects for the telecommunications industry. Horizon continues its
efforts in the area of isolators and micro-collimators.
Investment income increased approximately $1 million in 2000 due to the
increase in interest earned on temporary investments as a result of an increase
in cash balances. In July 1999, we issued $1 million aggregate principal amount
of 6% convertible debentures and paid approximately $10,000 of interest expense.
We recognized an interest charge of $381,869 in the first quarter of fiscal year
2000 for the "beneficial conversion feature" associated with the Debentures and
$43,926 of the remaining debt discount was amortized from the issuance date
through September 24, 1999 when all of the Debentures were converted and related
warrants were exercised into approximately one million shares of Class A Common
Stock. Interest expense was not significant in 1999. We account for our
investment in LightChip under the cost method as of December 1999. We
discontinued application of the equity method of accounting when our pro-rata
share of LightChip's losses (approximately 12.4% based on its pro-rata
investment in LightChip preferred stock) had reduced the investment to zero. As
a result, we recognized LightChip total losses of $0 in 2000 versus $361,671 in
1999.
Net loss of $15.6 million in 2000 was an increase of approximately $12.5
million from 1999 of which $3.2 million relates to non-cash stock-based
compensation charges, $4.2 is non-recurring write off of Horizon's in-process
research and development, $2.4 million in amortization of Horizon's goodwill and
intangibles and $425,000 from the recognition of charges associated with the
debenture issuance and interest expense. The remaining increase was due
primarily to increased cost of sales and operating costs primarily in selling,
general and administrative expense and an $834,000 increase in research and
development costs. These increased costs were partially offset by the $1.2
million increase in total revenues, $1 million increase in interest income and
the $362,000 reduction of our share of LightChip's loss. Net loss applicable to
common shareholders of $17.8 million included an additional charge of $2.1
million for the imputed dividend and $137,281 attributable to the premium on our
outstanding preferred stock. Net loss per share of $1.86 in fiscal year 2000 was
$1.07 more than the 1999 net loss per share of $.79. Net loss per share was
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increased due to the preferred stock dividend, however, the increase was offset
by an increase in the number of weighted shares outstanding for 2000 versus
1999. The 1999 net loss per share contains $224,651 attributable to the premium
on the preferred stock.
FINANCIAL RESOURCES AND LIQUIDITY
We financed our initial operations through private placements of equity and
debt until February 1996 when our initial public offering of units of common
stock and Class A and B Warrants generated net proceeds of approximately $7.2
million. From June 1997 through February 1998, we completed three preferred
stock private placements which generated total net proceeds of approximately
$7.2 million. In July 1999, we issued convertible debentures with warrants
resulting in net proceeds of approximately $893,000. In September 1999 all of
the debentures were converted to shares of common stock and all of the
associated warrants were exercised resulting in additional net proceeds of
$940,000. In November 1999, we issued 408 shares of Series F Convertible
Preferred Stock and warrants in a private placement. Net proceeds from the
private placement were approximately $3.9 million. Since June 30, 1999, we have
also received net proceeds of approximately $65.5 million from the exercise of
stock options and warrants issued at the initial public offering or in
connection with previous private placements.
Cash used in operations for fiscal 2000 totaled approximately $3.3 million,
an increase of approximately $594,000 from fiscal 1999, due primarily to
increased administrative costs. We expect to continue to incur net losses until
such time, if ever, as we obtain market acceptance for our products at sale
prices and volumes which provide adequate gross revenues to offset our operating
costs. During fiscal 2000, we expended approximately $5.2 million for capital
equipment and patent protection. The majority of the capital expenditures during
the year were related to the development of our clean rooms and equipment used
to expand our manufacturing facilities for collimator production. We have
outstanding budget commitments for fiscal 2001, to expend an additional $5
million of which approximately $3 million will be used to fund expansion of
Horizon's manufacturing facilities. The remaining fiscal 2001 projected capital
expenditures are for research and development equipment and construction of
additional collimator manufacturing stations.
In October 1999, we funded the remaining $570,000 of our commitment to
LightChip upon completion of the product development requirements in the
September 1998 agreement. In addition, we funded $1 million for LightChip
preferred stock in December 1999 at which time LightChip issued $16 million of
convertible preferred stock in a private placement. Subsequent to June 30, 2000,
we funded $7 million for LightChip preferred stock in August 2000 at which time
LightChip issued $60 million of convertible preferred stock in a private
placement.
In April 2000, we acquired Horizon Photonics, Inc. "Horizon" a California
corporation for an aggregate purchase price of approximately $36.2 million. We
acquired all of the outstanding shares of Horizon for approximately 1.4 million
shares of Class A common stock and $1 million cash. We also assumed
approximately $250,000 of indebtedness of Horizon, which was repaid upon closing
of the transaction. The cash portion of the purchase price, along with expenses
incurred for the acquisition, were provided from our working capital.
As the second quarter came to a close, we achieved a significant milestone
by meeting the criteria to call the Class A and Class B Warrants that were
issued as part of the February 1996 IPO. Substantially all of the Class A
Warrants and Class B Warrants and various private placement warrants were
exercised for net proceeds of approximately $62 million during fiscal 2000. We
intend to use a portion of this capital to:
* expand the collimator and isolator production facilities and
staff;
* to operate our facility in New Jersey for development of the
optical switch engine to be sold as an enabling component for an
optical cross connect system;
* to increase the size of our current product and technology
development team which continues to improve upon and expand our
current telecom products built around the single mode fiber
collimator, and;
* broaden our telecom component offerings and automation base
through additional strategic acquisitions and strategic
alliances.
INFLATION; SEASONALITY
We have not been significantly impacted by inflation in 2000 due to the
nature of our product components. We do not believe that seasonal factors will
have a significant impact on our business.
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RECENT ACCOUNTING PRONOUNCEMENTS
In June 1999, Statement of Financial Accounting Standards ("SFAS") No. 137,
Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Dare of FASB Statement No. 133, was issued. SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities, establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. The
provisions of this statement are now effective for financial statements for
fiscal years beginning after June 15, 2000, although early adoption is allowed.
We plan to adopt the provisions of this SFAS on July 1, 2000. We do not expect
the adoption of this standard to have a material effect on our results of
operations or financial position.
In March 2000, the FASB issued FASB Interpretation No. 44, Accounting for
Certain Transactions Involving Stock Compensation: an Interpretation of APB
Opinion No. 25. This interpretation clarifies the application of APB Opinion No.
25, Accounting for Stock Issued to Employees, and is effective July 1, 2000. We
do not expect our adoption of this interpretation to have a material effect on
our results of operations or financial position.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements.
This bulletin summarizes certain of the staff's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
In June 2000, the SEC issued SAB No. 101B that delayed the implementation date
of SAB No. 101 until the fourth fiscal quarter of fiscal years beginning after
December 15, 1999, although early adoption is allowed. We do not expect our
adoption of the provisions of this statement effective April 1, 2001, to have a
material effect on our results of operations or financial position.
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.
23
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT.
DIRECTORS AND EXECUTIVE OFFICERS
The Directors and Executive Officers of LightPath, and their respective
ages and positions with us, are as follows:
Name Age Position
---- --- --------
Robert Ripp (1)(3) 59 Chairman
Donald E. Lawson (3) 49 President, Chief Executive Officer,
Treasurer and Director
James L. Adler, Jr. (1)(3) 72 Director
Leslie A. Danziger (2) 47 Director
Katherine E. Dietze (2) 42 Director
Louis Leeburg (2)(3) 46 Director
Haydock H. Miller, Jr. 75 Director - retired November 1999
James A. Wimbush 64 Director - resigned April 2000
Mark Fitch 37 Senior Vice President
Robert Cullen 49 President, Horizon
----------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
(3) Member of the Finance Committee.
DIRECTORS
ROBERT RIPP has served as Chairman of LightPath since November 11, 1999.
Mr. Ripp was Chairman and CEO of AMP Inc. from August 1998 until April 1999 when
AMP was sold to TYCO, International Ltd. Mr. Ripp held various executive
positions at AMP from 1994 to August 1999. Mr. Ripp spent 29 years with IBM of
Armonk, NY. He held positions in all aspects of operations within IBM
culminating in the last four years as Vice President and Treasurer and he
retired from IBM in 1993. Mr. Ripp represents LightPath as a member of the
LightChip, Inc. (an affiliate) board of directors. Mr. Ripp graduated from Iona
College in 1963 and in 1967 received his M.B.A. from New York University. Mr.
Ripp is currently on the board of directors of Ace, Ltd. and A.J. Gallagher both
of which are listed on the new York Stock Exchange.
DONALD E. LAWSON has served as a Director of LightPath 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 our Chief Operating Officer
since June 1995. From 1991 to 1995, Mr. Lawson served as Vice President,
Operations for Lukens Medical Corporation, a medical device manufacturer. From
1980 to 1990, Mr. Lawson served in various capacities, including Production
Superintendent, for Ethicon, Inc., a division of Johnson & Johnson and a
manufacturer of medical products. Mr. Lawson received a B.B.A. degree in Finance
from Texas A & M University.
JAMES L. ADLER, JR. has served as a Director of LightPath since October
1997. Since 1989 he has been a partner in the law firm of Squire, Sanders &
Dempsey L.L.P., which has acted as general counsel to LightPath 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,
energy, and international lawyer. From 1998-1999, Mr. Adler served as President
of the Arizona Business Leadership Association. He 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 Consul General of Japan at Phoenix. He has
previously served as Chairman of the International Law Section of the Arizona
24
<PAGE>
State Bar Association and, by gubernatorial appointments, as a Member of the
Investment Committee of the Arizona State Retirement System and a Member and
Chairman of the Investment Committee of the State Compensation Fund. Mr. Adler
graduated from Carleton College, magna cum laude, and from Yale Law School in
1952. He is a member of the Arizona State Bar.
LESLIE A. DANZIGER has been Director, and former Chairwoman, of LightPath
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 to perform consulting services to LightPath
until October 1999. Ms. Danziger was a partner or executive officer of our
predecessors from 1985 until incorporation of LightPath. Ms. Danziger is a
founder of LightPath and a co-inventor of the first two LightPath patents. She
has developed and guided the execution of our long-term business strategies and
the development and commercialization of our technologies. From 1974 to 1979 she
served as an Executive Vice President of COS, Inc., and from 1979 to 1982 she
served as Executive Vice President of Arctic Communications Corporation. Both of
these communication consulting firms developed tools designed to assist clients
in resolving conflicts relating to economic development, land use and natural
resource issues. Ms. Danziger attended the University of Texas
KATHERINE E. DIETZE has served as a Director of LightPath 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 LightPath 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, these funds are affiliated
with a significant stockholder of LightPath.
HAYDOCK H. MILLER, JR. served as a Director of LightPath from January 1993
until November 1999. 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 served as a Director of LightPath from May 1998 until
April 2000. 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.
EXECUTIVE OFFICERS
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
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.
DONNA R. BOGUE has been Senior Vice President, Chief Financial Officer,
Secretary/Treasurer since July 2000. She previously held the position of Vice
President - Finance from November 1996 until June 2000, she joined LightPath in
April 1996. Ms. Bogue was previously Chief Financial Officer for Hebenstreit
Communications and Vice President and Controller for Diagnostek, Inc. During her
career, she served as controller for a variety of companies and was an auditor
with Ernst & Young for five years. Ms. Bogue is an honors graduate of Northern
Arizona University with a B.S. in Accountancy. She obtained her CPA license in
1981 and is a member of the AICPA.
25
<PAGE>
STEPHEN J. BARNA joined LightPath Technologies in December of 1999 as Vice
President- Sales & Marketing. Prior to joining LightPath, Mr. Barna spent 19
years at AT&T / Lucent Technologies where he held several technical positions
within AT&T's Bell Laboratories and Network Systems primarily in the area of
physical design of Advanced Lithographic, Cellular, Transmission and Data
Systems and for the past five years served as Market Manager and then Sales
Manager within Lucent Technologies. Mr. Barna received his B.S. at The College
of New Jersey and his M.S. in Management from Brooklyn's Polytechnic University.
ROBERT CULLEN has been Chief Executive Officer, President and was a
director of Horizon since its inception in July 1997 until LightPath acquired
Horizon in April 2000. Prior to co-founding Horizon, Mr. Cullen was a laser
packaging engineer with Ortel Corporation between 1993 and 1997, where he was
responsible for the design and manufacturing of several laser transmitter
models. Prior to Ortel, Mr. Cullen served as an Engineering Technologist with
the prestigious DuPont Engineering Development Laboratory (EDL) between 1982 and
1993, where he received numerous awards for various projects. In 1989, Mr.
Cullen served on a field assignment to a British Telecom-DuPont joint venture
(BT&D Technologies) in Ipswich, England, where he acted as project manager for
products such as semiconductor optical amplifiers, tunable semiconductor lasers
and 1480 pump lasers. In 1990, Mr. Cullen earned a patent for a miniature
optical isolator and co-authored a paper on high gain optical amplifiers. Mr.
Cullen pursued a Bachelors Degree in Electrical Engineering at Drexel
University, Philadelphia, Pennsylvania.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires our officers
and directors, and persons who own more than 10% of a registered class of our
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 us with copies
of all Section 16(a) forms they file. Based solely upon a review of the copies
of such forms furnished to us, or written representations that no Forms 5 were
required, we believe that during the year ended June 30, 2000, 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 our proxy
statement to be filed with the Securities and Exchange Commission on or before
September 11, 2000 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 our proxy
statement to be filed with the Securities and Exchange Commission on or before
September 11, 2000 and is incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required under this item will be set forth in our proxy
statement to be filed with the Securities and Exchange Commission on or before
September 11, 2000 and is incorporated herein by reference.
26
<PAGE>
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 November 2, 1999 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
10.3 Employment Agreement between Registrant and Donald E. Lawson 5
10.4 Directors Compensation Agreement with Amendment for
Robert Ripp *
10.6 Omnibus Incentive Plan 4
10.7 Directors Stock Option Plan 6
10.8 Amended Omnibus Incentive Plan 6
10.9 Merger Agreement dated April 14, 2000 between Registrant
and Horizon Photonics, Inc. 7
23.1 Consent of KPMG LLP *
27 Financial Data Schedule *
----------
1. This exhibit was filed as an exhibit to Our 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 Our Registration Statement on Form
S-3 (File No: 333-94303) dated January 10, 2000 and is incorporated herein
by reference thereto.
3. This exhibit was filed as an exhibit to Our 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 Our 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 Our Form 10-KSB for the fiscal year
ended June 30, 1998 dated September 17, 1998 and is incorporated herein by
reference thereto.
6. This exhibit was filed as an exhibit to Our Form 10-KSB for the fiscal year
ended June 30, 1999 dated August 20, 1999 and is incorporated herein by
reference thereto.
7. This exhibit was filed as an exhibit to Our Registration Statement on Form
S-3 (File No: 333-37622) dated June 12, 2000 and is incorporated herein by
reference thereto.
* Filed herewith.
b) The following reports on Form 8-K were filed under the Securities Exchange
Act of 1934 during the quarter ended June 30, 2000:
1. Current report on Form 8-K dated April 14, 2000, announced the
acquisition of Horizon Photonics Inc.
2. Current report on Form 8-K dated May 16, 2000 included a copy of the
press release noting the redemption of the Class B Warrants along with
a copy of the redemption notice sent to registered holders of the
Class B Warrants.
3. Current report on Form 8-K/A-1 dated May 19, 2000, included the
audited financial statements of Horizon Photonics, Inc. and pro forma
financial statements for the acquisition of Horizon Photonics Inc.
4. Current report on Form 8-K dated June 19, 2000, announced that the
final number of shares issued, after post closing adjustments, for the
acquisition of Horizon Photonics Inc. were 1,447,815 shares of Class A
common stock.
27
<PAGE>
LIGHTPATH TECHNOLOGIES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of KPMG LLP, Independent Auditors ....................................F-2
Consolidated Financial Statements
Consolidated Balance Sheets..................................................F-3
Consolidated Statements of Operations........................................F-4
Consolidated Statements of Stockholders' Equity..............................F-5
Consolidated Statements of Cash Flows........................................F-6
Notes to Consolidated 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 consolidated balance sheets of LightPath
Technologies, Inc., as of June 30, 2000 and 1999, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the years
then ended. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of LightPath
Technologies, Inc., as of June 30, 2000 and 1999, and the results of their
operations and their cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of America.
/s/ KPMG LLP
Albuquerque, New Mexico
August 4, 2000, except as to the third paragraph of note 6
which is as of August 21, 2000
F-2
<PAGE>
LIGHTPATH TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
2000 1999
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 58,728,130 $ 413,388
Trade accounts receivable - less allowance of $15,000 841,533 335,706
Inventories (NOTE 2) 1,690,058 514,669
Advances to employees and related parties 17,733 17,329
Prepaid expenses and other 225,451 19,124
------------- -------------
Total current assets 61,502,905 1,300,216
Property and equipment - net (NOTE 3) 6,482,039 893,537
Goodwill and intangible assets - net (NOTES 4 AND 5) 31,727,811 572,877
Investment in LightChip, Inc. (NOTE 6) 1,000,000
------------- -------------
Total assets $ 100,712,755 $ 2,766,630
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,573,531 $ 110,875
Accrued liabilities 469,771 56,285
Accrued payroll and benefits (NOTE 8) 330,734 131,755
------------- -------------
Total current liabilities 2,374,036 298,915
Accrued loss of LightChip, Inc. (NOTE 6) -- 570,000
Note payable to stockholder (NOTE 7) -- 30,000
Commitments and contingencies (NOTE 15)
Redeemable common stock (NOTE 12)
Class E-1, E-2 and E-3 - performance based and redeemable
common stock 4,022,037 and 3,979,939 shares issued and
outstanding 40,221 39,800
Stockholders' equity (NOTES 11 AND 12)
Preferred stock, $.01 par value; 5,000,000 shares authorized;
Series A convertible shares, 0 and 37 issued and outstanding,
Series B convertible shares, 0 and 1 issued and outstanding,
Series C convertible shares, 0 and 84 issued and outstanding,
Series F convertible shares 153 and 0 issued and outstanding,
$1,530,000 liquidation preference at June 30, 2000 1 1
Common stock:
Class A, $.01 par value, voting; 34,500,000 shares authorized;
18,136,254 and 4,960,703 shares issued and outstanding 181,363 49,607
Additional paid-in capital 142,559,848 28,379,011
Accumulated deficit (44,442,714) (26,600,704)
------------- -------------
Total stockholders' equity 98,298,498 1,827,915
------------- -------------
Total liabilities and stockholders' equity $ 100,712,755 $ 2,766,630
============= =============
</TABLE>
See accompanying notes.
F-3
<PAGE>
LIGHTPATH TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
-----------------------------
2000 1999
------------ ------------
<S> <C> <C>
REVENUES
Telecom product and lens sales $ 2,098,841 $ 712,317
Product development fees 167,423 373,809
------------ ------------
Total revenues 2,266,264 1,086,126
COSTS AND EXPENSES
Cost of goods sold 1,309,711 409,417
Selling, general and administrative 5,942,029 2,918,184
Stock based compensation 3,144,980 --
Research and development 1,449,347 615,371
Amortization of goodwill and intangibles 2,418,119 --
Acquired in process research and development 4,200,000 --
------------ ------------
Total costs and expenses 18,464,186 3,942,972
------------ ------------
Operating loss (16,197,922) (2,856,846)
OTHER INCOME(EXPENSE)
Investment income 1,062,952 95,362
Interest and other expense (475,097) (10,863)
Equity in loss of LightChip, Inc. (NOTE 6) -- (361,671)
------------ ------------
Net loss $(15,610,067) $ (3,134,018)
Imputed dividend and premium on Preferred Stock (2,231,943) (224,651)
------------ ------------
Net loss applicable to common shareholders (NOTE 13) $(17,842,010) $ (3,358,669)
============ ============
Basic and diluted net loss per share (NOTE 13) $ (1.86) $ (.79)
============ ============
Number of shares used in per share calculation 9,586,817 4,271,313
============ ============
</TABLE>
See accompanying notes.
F-4
<PAGE>
LIGHTPATH TECHNOLOGIES, INC.
CONSOLIDATED 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, 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 (4) 1,614,488 16,145 (16,141) -- --
Premium on Series A, B and C
convertible preferred stock -- -- -- 224,651 (224,651) --
Net loss -- -- -- -- (3,134,018) (3,134,018)
----------- ----------- ----------- ------------ ------------ ------------
Balances at June 30, 1999 $ 1 4,960,703 $ 49,607 $ 28,379,011 $(26,600,704) $ 1,827,915
Issuance of 408 shares of Series F
convertible preferred stock, net 4 -- -- 3,880,320 -- 3,880,324
Issuance of common stock -- 66,429 664 258,136 -- 258,800
Exercise of stock options and unit
purchase options -- 682,521 6,825 3,214,108 -- 3,220,933
Exercise of warrants
Debt 577,350 5,774 1,264,396 -- 1,270,170
Equity -- 8,764,665 87,647 60,930,062 -- 61,017,709
Issuance of common stock upon
conversion of 37 shares Series A,
1 share Series B, 84 shares Series C
and 255 shares Series F convertible
preferred stock (4) 1,066,970 10,670 (10,666) -- --
Issuance of common stock upon
conversion of 6% convertible
debentures -- 569,801 5,698 1,313,423 -- 1,319,121
Issuance of common stock and stock
options to acquire
Horizon Photonics, Inc. -- 1,447,815 14,478 37,954,135 -- 37,968,613
Stock based compensation -- -- -- 3,144,980 -- 3,144,980
Imputed dividend on Series F
convertible preferred stock -- -- -- 2,094,662 (2,094,662) --
Premium on Series A, Series B,
Series C and Series F convertible
preferred stock -- -- -- 137,281 (137,281) --
Net loss -- -- -- -- (15,610,067) (15,610,067)
----------- ----------- ----------- ------------ ------------ ------------
Balances at June 30, 2000 $ 1 18,136,254 $ 181,363 $142,559,848 $(44,442,714) $ 98,298,498
=========== =========== =========== ============ ============ ============
</TABLE>
See accompanying notes.
F-5
<PAGE>
LIGHTPATH TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
JUNE 30
----------------------------
2000 1999
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(15,610,067) $ (3,134,018)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 3,090,322 375,358
Provision for uncollectible receivables -- 15,000
Debt discount 425,795 --
Write off abandoned patent applications 132,011 --
Equity in loss of LightChip -- 361,671
Stock based compensation 3,144,980 --
Acquired in-process research and development 4,200,000 --
Changes in operating assets and liabilities (net of the
effect of the acquisition of Horizon Photonics, Inc.):
Receivables and advances to employees 639,450 (72,984)
Inventories (531,698) (107,608)
Prepaid expenses and other (197,858) 24,505
Accounts payable and accrued expenses 1,451,545 (123,666)
------------ ------------
Net cash used in operating activities (3,255,520) (2,661,742)
CASH FLOWS FROM INVESTING ACTIVITIES
Property and equipment additions, net (5,148,438) (437,223)
Costs incurred in acquiring patents and license agreements (58,324) (79,223)
Acquisition of Horizon Photonics, Inc., net of cash acquired (2,164,662) --
Investment in LightChip (1,570,000) (713,333)
------------ ------------
Net cash used in investing activities (8,941,424) (1,229,779)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of 6% convertible debentures, net of
discount and offering costs 893,326 --
Payment on note payable (30,000) --
Proceeds from sales of Convertible Series F preferred stock, net 3,880,324 --
Proceeds from exercise of common stock options and warrants, net 65,509,236 39,950
Proceeds from issuance of common stock 258,800 27,559
------------ ------------
Net cash provided by financing activities 70,511,686 67,509
------------ ------------
Net increase(decrease) in cash and cash equivalents 58,314,742 (3,824,012)
Cash and cash equivalents at beginning of period 413,388 4,237,400
------------ ------------
Cash and cash equivalents at end of period $ 58,728,130 $ 413,388
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Class A common stock and stock options issued to acquire
Horizon Photonics, Inc. $ 37,968,613 $ --
Class E common stock issued $ 421 $ 291
Class A common stock issued upon conversion of preferred stock $ 10,670 $ 16,145
</TABLE>
See accompanying notes.
F-6
<PAGE>
LIGHTPATH TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 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. On April 14, 2000, the Company acquired Horizon
Photonics, Inc. ("Horizon"). The Company is engaged in the production of
collimator and isolator products, GRADIUM(R) glass lenses and other optical
materials. The Company also performs research and development for optical
solutions for the fiber telecommunications and traditional optics markets.
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
years 1997, 1998 and 2000 the Company completed four private placements of
convertible preferred stock and one private placement for convertible debentures
to raise additional capital. These funds were used to further research,
development and commercialization of optoelectronic products and GRADIUM glass
lenses. During fiscal year 2000, warrants issued at the IPO and private
placement warrants were exercised for approximately $65.5 million.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATED FINANCIAL STATEMENTS include the accounts of the Company and its
wholly-owned subsidiary. All significant intercompany transactions have been
eliminated in consolidation.
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, isolators,
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 both
straight-line and accelerated methods over the estimated useful lives of the
related assets ranging from three to seven years. Platinum molds less estimated
salvage value are depreciated on a straight-line basis over the estimated useful
lives ranging from one to two years.
INTANGIBLE ASSETS consisting of goodwill, customer list, licenses, patents,
trademarks and other intangibles 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. Goodwill, customer list and other
intangibles are being amortized on straight-line basis over the estimated period
of benefit ranging from two to four years. The recoverability of the carrying
values of these intangible 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 cost method.
F-7
<PAGE>
LIGHTPATH TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED 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 and other requirements are met.
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, EARNINGS PER SHARE. See Note 13.
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.
LONG-LIVED ASSETS are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets may not be
recoverable. 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 1999 financial statements has been
made to conform to the 2000 financial statement presentation.
F-8
<PAGE>
LIGHTPATH TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
2. INVENTORIES
The components of inventories include the following at June 30:
2000 1999
----------- -----------
Raw materials $ 733,050 $ 50,736
Work in process 459,789 97,321
Finished goods 497,219 366,612
----------- -----------
Total inventories $ 1,690,058 $ 514,669
=========== ===========
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at June 30:
2000 1999
----------- -----------
Manufacturing equipment $ 5,339,963 $ 1,439,237
Computer equipment and software 757,595 299,085
Furniture and fixtures 296,318 117,885
Platinum molds 931,815 97,288
Leasehold improvements 1,022,857 99,134
----------- -----------
8,348,548 2,052,629
Less accumulated depreciation 1,866,509 1,159,092
----------- -----------
Total property and equipment $ 6,482,039 $ 893,537
=========== ===========
4. INTANGIBLE ASSETS
Intangible assets consist of the following at June 30:
2000 1999
----------- -----------
Goodwill $11,797,725 $ --
Customer list 15,900,000 --
Developed technology 2,400,000 --
Covenant not-to-compete 2,000,000 --
Other intangibles 1,520,000 --
Patents and trademarks granted 509,095 397,652
License agreements 40,000 40,000
Patent applications in process 60,845 216,959
----------- -----------
34,227,665 654,611
Less accumulated amortization 2,499,854 81,734
----------- -----------
Total intangible assets $31,727,811 $ 572,877
=========== ===========
5. ACQUISITION OF HORIZON PHOTONICS, INC.
On April 14, 2000, the Company acquired Horizon Photonics, Inc. ("Horizon") a
California corporation which is an emerging leader in the automated production
of passive optical components for the telecommunications and data communications
markets. LightPath acquired all of the outstanding shares of Horizon for
approximately 1.4 million shares of Class A common stock and $1 million cash for
a purchase price of approximately $36.2 million. The Company assumed
approximately $250,000 of indebtedness of Horizon, which was repaid upon closing
F-9
<PAGE>
LIGHTPATH TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
of the transaction and incurred approximately $1 million in acquistion costs.
Additionally, LightPath issued replacement stock options for all of Horizon's
outstanding employee stock options (approximately 193,000 shares). The fair
value of the options issued of approximately $2.8 million is included in the
final determination of the purchase price. The acquisition has been accounted
for using the purchase method of accounting and, accordingly, the results of
operations of Horizon have been included in the Company's consolidated financial
statements from April 14, 2000.
The purchase price was allocated to tangible net assets and identifiable
intangible assets with the unallocated purchase price attributed to goodwill.
The value of tangible assets acquired and liabilites assumed approximated their
historical book value at April 14, 2000. The estimated fair value of
identifiable intangible assets and goodwill, was determined based on a
discounted cash flows assessment of management together with an independent
valuation firm are as follows:
Fair Value
at Acquisition
------------
Current assets $ 1,908,395
Equipment 1,112,267
Patents 29,016
In-process research and development 4,200,000
Customer list 15,900,000
Developed technology 2,400,000
Covenants not-to-compete 2,000,000
Patents, trademark & tradename 1,300,000
Acquired work force 220,000
Goodwill 11,797,725
Other liabilities (623,576)
------------
Total $ 40,243,827
============
In the fourth quarter of fiscal 2000, the Company recorded an immediate
non-recurring charge of $4.2 million, due to acquired in-process research and
development based on an independent assessment of purchased technology of
Horizon. This charge represents technology that did not meet the accounting
definitions of "completed technology," and will have no alternative future uses
if the products are not feasible. This assessment analyzed certain
Micro-Collimator products as well as active alignment and isolator injection
molding technologies that were under development at the time of acquisition.
These programs were in various stages of completion ranging from 50% to 60% of
completion, with estimated completion dates through June 2001. This in-process
research will have no alternative future uses if the products are not feasible.
Revenues from in-process products are estimated primarily beginning in the
second quarter of fiscal 2001, with projected research and development
costs-to-complete of approximately $1.1 million. The fair value of these
development programs was determined in accordance with views expressed by the
staff of the Securities and Exchange Commission.
The following unaudited pro forma information presents the results of operations
of the Company as if the acquisition of Horizon had taken place at the beginning
of each year presented and excludes the write-off of the acquired in-process
research and development of $4.2 million.
June 30, June 30,
(in 000's except per share data) 2000 1999
-------- --------
Revenues $ 3,557 $ 1,675
Net loss $(21,740) $(13,109)
Net loss per basic and diluted share $ (1.97) $ (2.29)
F-10
<PAGE>
LIGHTPATH TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The pro forma information is presented for informational purposes only and is
not necessarily indicative of the reults of operations that actually would have
been achieved had the acquisition been consummated as of that date, nor is it
intended to be a projection of future results.
6. INVESTMENT IN LIGHTCHIP, INC.
During fiscal 1999, the Company discontinued application of the equity method of
accounting to its investment in LightChip, a development stage company, since
its pro-rata share of LightChip's losses (approximately 12.4% based on its
pro-rata investment in LightChip voting preferred stock) had reduced the
investment to its remaining contractually committed obligation for future
funding of $570,000. In October 1999, LightChip issued additional shares of
voting convertible preferred stock for $3 million, of which the Company funded
its $570,000 contractual obligation. On December 8, 1999 LightChip issued
additional shares of voting convertible preferred stock for $16 million, of
which the Company funded $1 million. In accordance with the SEC staff position
stated in EITF Topic D-84, the Company's pro-rata share of LightChip losses
through December 8, 1999 totaling $514,288 were not recognized as a result of
the Company's additional investment.
The Company's combined common stock and preferred stock voting interest in
LightChip decreased to approximately 18% after the December 8, 1999 investment.
Accordingly, as of December 8, 1999 the Company accounts for its investment in
LightChip, Inc. under the cost method.
Subsequent to June 30, 2000, LightChip issued additional shares of voting
convertible preferred stock for $60 million, of which the Company funded $7
million, its prorata interest, on August 21, 2000.
7. NOTE PAYABLE TO STOCKHOLDER
At June 30, 1999, the Company had a note payable to a stockholder of $30,000,
which bears interest at 10.28%, payable monthly. The note was repaid by the
Company in November 1999, and interest of $1,180 and $2,930 were paid in 2000
and 1999, respectively.
8. 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, 2000 and 1999, the total deferred
amounts were $8,100 and $72,524, respectively. The remaining officer and the
Company have agreed to make repayment of such remaining deferred amounts
contingent upon the resolution of the conditions for conversion of the Class E
common stock into Class A common stock.
9. CONVERTIBLE DEBENTURES
On July 28, 1999, the Company completed a private placement for $1,000,000 of 6%
Convertible Debentures (the "Debentures"). The Debentures were immediately
convertible into shares of Class A common stock at a conversion price of $1.76
per share. Debenture holders also received Class I warrants to acquire 427,350
shares of Class A common stock (fair value estimated by management to be
$618,131). The warrant agreement provided for an exercise price of $2.20 per
share. The warrants were immediately exercisable and had a five year life. On
September 24, 1999 all of the Debentures and the related warrants were converted
into 997,151 shares of Class A common stock. Interest of $9,370 was paid to the
debenture holders. The Company recognized an interest charge of $381,869 in the
first quarter of fiscal year 2000 for the "beneficial conversion feature"
associated with the Debentures and $43,926 of the remaining discount was
amortized from the issuance date through the conversion date.
In connection with the private placement of the Debentures, the Company issued
150,000 Class J warrants to the placement agent, with terms identical to those
issued to the Debenture holders. During the six months ended December 31, 1999,
150,000 shares of Class A common stock were issued upon exercise of all of the
outstanding Class J warrants.
F-11
<PAGE>
LIGHTPATH TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
10. 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 in prior years. 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 and liabilities are
as follows at June 30:
2000 1999
Deferred tax assets: ------------ ------------
Start-up expenses, net $ 601,000 $ 1,197,000
Research and development expenses 815,000 719,000
Net operating loss carryforwards 9,743,000 6,001,000
Stock based compensation 240,000
Research and development
credit carryforwards 256,000 8,000
------------ ------------
Gross deferred tax assets 11,655,000 7,925,000
Valuation allowance for deferred tax assets (3,337,000) (7,925,000)
------------ ------------
Total deferred tax assets 8,318,000 --
Deferred tax liabilities-
intangible assets and other (8,318,000) --
------------ ------------
Net deferred tax assets $ -- $ --
============ ============
The valuation allowance has decreased by $4,588,000 and increased by $1,594,000
during the years ended June 30, 2000 and 1999, respectively. The fiscal 2000
decrease is primarily due to the interaction of the combining companies tax
positions related to the non-taxable acquisition of Horizon which created a
deferred tax liability. To the extent that $0.4 million of this valuation
allowance related to Horizon's tax attributes is reduced in future periods, the
benefit will be recognized as a reduction to goodwill. In 1999, the increase was
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 change in the valuation allowance. At June 30, 2000, the Company has net
operating loss carryforwards for federal income tax purposes of approximately
$25 million which will begin to expire in 2009 if not previously utilized. The
Company also has research and development credit carryforwards of approximately
$256,000 which will begin to expire in 2009, if not previously utilized. A
portion 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 in future periods.
11. EMPLOYEE AND DIRECTOR STOCK OPTION PLANS
At June 30, 2000, 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 grants where the fair market value of the
underlying stock equaled the option price at the date of grant.
In June 1992, the Company implemented the Omnibus Incentive Plan (the "Incentive
Plan"), and the Directors Stock Option Plan (the "Directors Plan"). The Company
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 at June 30,
2000 is 350,000 shares of common stock.
F-12
<PAGE>
LIGHTPATH TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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 the Company years. The term of the options granted
under the Incentive Plan cannot exceed ten years and grants to stockholders who
hold 10% or more of the Company stock cannot exceed five years from the date of
grant. There are 84,285 options under the Incentive Plan available for grant at
June 30, 2000.
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
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. There are 82,997 options under the Director
Plan available for grant at June 30, 2000.
In addition, the Company has issued nonqualified options to certain directors,
officers and consultants to the Company not covered by the Incentive or
Directors Plans. In November 1999, the Company entered into a Directors
Compensation Agreement, pursuant to which the Company's Chairman could elect to
receive a restricted stock grant if the closing price of the Company's Class A
common stock exceeded certain targets during the term of the agreement. During
the quarter ended March 31, 2000, the target prices defined in the agreement
were reached resulting in the recording of a non-cash stock-based compensation
charge which was subject to adjustment for changes in the market value of the
Class A common stock. Accordingly through March 31, 2000, the Company recognized
a non-cash stock-based compensation charge of approximately $710,000, under the
terms of the original agreement. Subsequent to March 31, 2000, the Company
modified the terms of the Directors Compensation Agreement whereby the share
substitution clause was deleted. The Chairman received two nonqualified stock
options to acquire 1 million and 500,000 shares each of Class A Common Stock
with a ten-year term which vest on December 1, 2001. The exercise prices are $6
and $24 per share, respectively. Based on the terms of the options granted, a
non-cash charge of approximately $18 million will be amortized over the vesting
period of the options. This resulted in $2.7 million non-cash charge being
recorded for the year ended June 30, 2000. Accordingly, future non-cash charges
will be recorded of approximately $2.7 million per quarter through December
2001. In addition, 150,000 options were granted to officers at a price equal to
the fair market value of the underlying stock on the date of grant, with a term
of ten years. The Company did not issue any nonqualified options in 1999.
Finally, the board of directors accelerated the vesting of certain options
issued to outside directors which resulted in recording a stock-based
compensation charge of approximately $400,000 during the year ended June 30,
2000.
A summary of the status of the stock option plans as of June 30, 2000 and 1999
and changes during the years ended is presented below:
<TABLE>
<CAPTION>
Weighted-Avg.
Incentive Directors Exercise
Plan Plan Nonqualified Price
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Shares under option:
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
Granted at market value 718,321 60,227 650,000 $ 16.47
Granted below market value -- -- 1,000,000 $ 6.00
Exercised (419,257) (36,000) -- $ 4.77
Lapsed or canceled (18,181) -- (435) $ 5.18
---------- ---------- ---------- ----------
Outstanding at June 30, 2000 1,279,757 230,276 1,689,493 $ 10.82
========== ========== ========== ==========
Options exercisable:
June 30, 2000 487,591 180,728 39,493 $ 6.67
========== ========== ========== ==========
June 30, 1999 502,891 115,464 39,928 $ 7.16
========== ========== ========== ==========
</TABLE>
F-13
<PAGE>
LIGHTPATH TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The following table summarizes information about fixed stock options outstanding
at June 30, 2000:
<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, 2000 Contractual Life Exercise Price June 30, 2000 Exercise Price
--------------- ------------- ---------------- -------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
$ 1 to 6 640,951 8.5 Years $ 3.93 311,975 $ 4.16
$ 6 to 11 1,549,607 8.3 $ 6.62 380,869 $ 7.51
$15 to 24 29,968 9.8 $32.98 -- --
$25 to 52 979,000 6.6 $21.30 14,968 $37.69
---------- --------
$ 1 to 52 3,199,526 8.6 $10.82 707,812 $ 6.67
========== ========
</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:
<TABLE>
<CAPTION>
2000 1999
------------ -----------
<S> <C> <C>
Net loss applicable to common shareholders, as reported $(17,842,011) $(3,816,880)
============ ===========
Net loss applicable to common shareholders, pro forma $(18,719,290) $(4,833,880)
============ ===========
Basic and diluted net loss per share, as reported $ (1.86) $ (.89)
------------ -----------
Basic and diluted net loss per share, pro forma $ (1.95) $ (1.13)
------------ -----------
</TABLE>
The weighted-average fair value of options granted during the years ended June
30, 2000 and 1999 was $9.33 and $2.27, 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 2000 and 1999: dividend yield of 0%; expected volatility of
125% (100% for fiscal 1999); risk free interest rate of 7%; and expected lives
of 3 years.
12. 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, 2,000,000 shares of
Class E-2 common stock and 1,500,000 shares of Class E-3 common stock (the
"E Shares" ) with $.01 par value. The stockholders of E shares are entitled
to one vote for each share held. Each E 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 a minimum value of approximately $13.5 million in
fiscal 2000. Since the conversion provisions expired without being met as
of June 30, 2000, the E shares will be redeemed on September 30, 2000 by
the Company for $.0001 per share and will be canceled. (See Note 15)
F-14
<PAGE>
LIGHTPATH TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Preferred Stock - The Company's preferred stock consists of the following:
Authorized 5,000,000 shares of preferred stock. In June 1997, the Board of
Directors designated 250 shares as Series A Convertible Preferred Stock; $.01
par value. The Company entered into a private placement transaction which
provided proceeds on the sale of 180 shares of Series A Preferred Stock totaling
$1,800,000, less issuance costs of approximately $204,000, resulting in net
proceeds of approximately $1,596,000 by the final closing date, July 25, 1997.
In September 1997, the Board of Directors designated 300 shares as Series B
Convertible Preferred Stock; $.01 par value. The Company entered into a private
placement transaction which provided proceeds on the sale of 230 shares of
Series B Preferred Stock totaling $2,300,000, less issuance costs of
approximately $236,000 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 $220,000 resulting in net proceeds of
approximately $3,530,000 by the final closing date, February 9, 1998. In October
1999, the Board of Directors designated 500 shares as Series F Convertible
Preferred Stock; $.01 par value. The Company entered into a private placement
transaction which provided proceeds on the sale of 408 shares of Series F
Preferred Stock totaling $4,080,000, less issuance costs of approximately
$180,000 resulting in net proceeds of approximately $3,900,000 by the final
closing date, November 2, 1999.
The Series A, Series B, Series C and the Series F Convertible Preferred Stock
has a stated value and liquidation preference of $10,000 per share, plus an
7%-8% per annum premium. The holders of the Series A, Series B, Series C and
Series F Convertible Preferred Stock are not entitled to vote or to receive
dividends. Each share of Series A, Series B, Series C and Series F Convertible
Preferred 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. During fiscal 2000, the Company issued 1,066,970 shares of Class A common
stock upon the conversion of the remaining 122 shares of Series A, Series B and
Series C and 255 shares of Series F Preferred Stock. 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, $6.675 and $5.00 for the Series A, Series B,
Series C and Series F Convertible Preferred Stock, respectively, or 85% (80%
Series F) 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 prior to June 30, 1998. The discount provision in the Series F
Preferred Stock was recognized as an imputed dividend for the year ending June
30, 2000, in the amount of $2,094,662, increasing net loss applicable to common
shareholders from the date of issuance to the first date that conversion can
occur.
Designations, rights, and preferences related to the remaining preferred shares
may be determined by the Board of Directors. The terms of any series of
preferred stock may include priority claims to assets and dividends and voting
or other rights.
Warrants
Each Class A warrant entitles the holder to purchase one share of Class A common
stock and one Class B warrant at an exercise price of $6.50 until February 2001.
Each Class B warrant entitles the holder to purchase one share of Class A common
stock at an exercise price of $8.75 until February 2001. 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. On January 11, 2000, the Company called all of its outstanding Class A
warrants for redemption on February 10, 2000. On May 15, 2000, the Company
called all of its outstanding Class B warrants for redemption on June 13, 2000.
F-15
<PAGE>
LIGHTPATH TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
As of June 30, 2000, substantially all of the outstanding Class A warrants and
Class B warrants were exercised for net proceeds of approximately $56 million
and resulted in the issuance of approximately 7.5 million shares of Class A
common stock. Unexercised Class A and Class B warrants were redeemed at price of
$.05 per warrant on the redemption date.
Class C, Class E, Class G and Class K warrants were issued in connection with
the private placements of Series A, Series B, Series C and Series F Convertible
Preferred Stock. A total of 320,000 Class C, 317,788 Class E, 365,169 Class G
and 489,600 Class K 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, $6.68 and $5.00, respectively, expiring from July 2000 to
November 2002. Each of the investors in the Series F Convertible Preferred Stock
previously invested in the Company's Series A, B and C Preferred Stock. In order
to induce them to invest in the Series F Convertible Preferred Stock, the
Company agreed to reduce the applicable exercise prices by twenty percent and
extend the expiration dates by three years for all outstanding Class C, E and G
warrants issued in connection with the sale of such Series A, B and C Preferred
Stock. A total of 64,000 Class D, 47,668 Class F, 58,427 Class H and 125,000
Class L 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, $6.68 and $5.00 respectively, expiring from July
2002 until November 2004. The Company registered the resale of the Class A
common stock underlying the Series A, Series B, Series C and Series F Preferred
Stock and the associated warrants on individual Form S-3's which are all
effective. During fiscal 2000, approximately 1.6 million private placement
warrants were exercised resulting in the issuance of approximately 1.3 million
shares of Class A common stock.
On November 5, 1999 Robert Ripp entered into an agreement to purchase 62,500
shares of LightPath Class A Common Stock for $4.00 per share in connection with
his election to serve as Chairman of the Board of Directors. Mr. Ripp also
received warrants to purchase up to 281,250 shares of Class A Common Stock at
$6.00 per share at any time through November 10, 2009. These shares were
registered on a Form S-3 that became effective on January 18, 2000. In
connection with the IPO, the underwriter received a Unit Purchase Option to
acquire up to 160,000 IPO Units at an exercise price of $6.75 per unit. Each IPO
unit consists of one Class A common share, one Class A warrant to acquire a
share of Class A common stock and a Class B warrant, and one Class B warrant.
The Unit Purchase Options are exercisable until February 2001, and as of June
30, 2000 only 2,145 Units, which can be exercised for 8,580 shares of Class A
common stock remain outstanding.
The following table provides information on preferred stock and warrants during
fiscal 1999 and 1998.
<TABLE>
<CAPTION>
Warrants
Preferred -------------------------------------------------
Stock - Series Class Class
A, B, C Class C, E, G, D, F, H
Shares Outstanding & F A & B I & K J & L Other
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
June 30, 1998 536 4,519,000 914,068 123,345
Conversions (414) -- -- --
---------- ---------- ---------- ---------- ----------
June 30, 1999 122 4,519,000 914,068 123,345 --
Issuance of securities 408 2,950,469 916,950 275,000 281,250
Conversions and
exercises - equity (377) (7,469,469) (1,392,371) (201,345) --
Conversions - debt -- (427,350) (150,000) --
---------- ---------- ---------- ---------- ----------
June 30, 2000 153 -- 11,297 47,000 281,250
========== ========== ========== ========== ==========
</TABLE>
F-16
<PAGE>
LIGHTPATH TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
13. 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, 2000: Class A common stock options 3,199,526,
private placement and other warrants to acquire 348,127 shares of Class A common
stock and 370,260 Class A shares issuable upon the conversion of convertible
preferred stock (minimum of 320,143 shares based on the fixed conversion price
at closing). A premium ranging from 7 to 8 percent earned by the preferred
shareholders of $137,281 and $224,651 increased the net loss applicable to
common shareholders for the years ended June 30, 2000 and 1999, respectively. In
addition, net loss applicable to common shareholders was increased by an imputed
dividend in the amount of $2,094,662 during the year ended June 30, 2000. The
imputed dividend resulted from a beneficial conversion feature associated with
the Series F Preferred Stock issued on November 2, 1999.
<TABLE>
<CAPTION>
Loss Shares Per Share
Year Ended June 30, (Numerator) (Denominator) Amount
------------ ------------ ------------
<S> <C> <C> <C>
2000
Net loss $(15,610,067)
Less: Preferred Stock Premium (137,281)
Imputed dividend on Series F
Preferred Stock (2,094,662)
------------
BASIC AND DILUTED EPS
Net loss applicable to common shareholders $(17,842,010) 9,586,817 $ (1.86)
============ ============ ============
1999
Net loss $ (3,134,018)
Less: Preferred Stock Premium (224,651)
------------
BASIC AND DILUTED EPS
Net loss applicable to common shareholders $ (3,358,669) 4,271,313 $ (.79)
============ ============ ============
</TABLE>
14. 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, 2000 and 1999.
15. COMMITMENTS AND CONTINGENCIES
The Company has operating leases for office equipment and office space. At June
30, 2000, the Company has entered into five lease agreements for manufacturing
and office facilities in Albuquerque, New Mexico, Walnut, California and Warren,
New Jersey. These leases, which are generally for five year terms with renewal
options, expire beginning in April 2001 through May 2005. Equipment rental
agreements are generally for three year terms. Equipment and office rent expense
recognized for the years ended June 30, 2000 and 1999 was approximately $285,000
and $143,000, respectively. Commitments under noncancelable operating leases are
approximately $582,000 for 2001; $491,000 for 2002; $501,000 for 2003; $341,000
for 2004 and $323,000 for 2005.
F-17
<PAGE>
LIGHTPATH TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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
$390,000 annually. The Company has outstanding purchase commitments for
approximately $1 million at June 30, 2000, for manufacturing collimators, lens
finishing and advertising. In addition, the Company has outstanding commitments
to purchase approximately $1.7 million for manufacturing, research and
development and computer equipment at June 30, 2000. The total capital budget
for fiscal 2001 is approximately $5 million.
On May 2, 2000, the Company commenced a class action lawsuit in the Chancery
Court of Delaware, New Castle County. The action seeks a declaratory judgment
with respect to the Company's right to redeem the Class E Common Stock on
September 30, 2000 for $.0001 per share, the right of the holders of Class E
Common Stock to vote at the Annual Meeting to be held on October 6, 2000, and
for certification of the holders of Class E Common Stock as a class and the
named defendants as its representatives. The named defendants are Donald E.
Lawson, President, Chief Executive Officer and a Director of the Company, who
owns an aggregate of 25,000 shares of Class E Common Stock, Louis G. Leeburg, a
Director of the Company, who owns an aggregate of 7,272 shares of Class E Common
Stock, and William Leeburg, who owns or controls an aggregate of 21,816 shares
of Class E Common Stock.
On or about June 9, 2000, a small group of holders of Class E Common Stock
commenced an action in a state court in Texas (the "Texas Action"). In essence,
the Texas Action makes various allegations regarding the circumstances
surrounding the issuance of the Class E Common Stock and seeks damages based
upon those allegations. The Company believes the allegations underlying the
Texas Action have no basis in fact and that this lawsuit is without merit. The
Company has retained counsel and intends to vigorously defend against these
claims.
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 position or results of operations.
16. RELATED PARTY TRANSACTIONS
Sales to Lucent Technologies, Inc., which owns approximately 3% of the
outstanding Class A common stock of the Company, for the year ended June 30,
2000 were approximately $930,000. During the fiscal years ended June 30, 2000
and 1999, current directors (or their firms) of the Company, provided legal and
consulting services to the Company for which they billed the Company
approximately $425,000 and $127,000, respectively.
17. SEGMENT INFORMATION
Optoelectronics and Fiber Telecommunications (optoelectronics), which represents
66% of total revenues of the Company, and Traditional Optics, which represents
34% 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, isolators, 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 2000 approximately $1,300,000 in sales
were derived from one isolator and one collimator customer and approximately
$227,000 of lens sales were derived from two YAG laser customers. 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.
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
F-18
<PAGE>
LIGHTPATH TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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.
Opto- Traditional Corporate
Segment Information Electronics Optics and other (1) Total
------------------- ----------- ------ ------------- -----
Revenues (2)
2000 $ 1,497,911 768,353 -- $ 2,266,264
1999 $ 57,029 1,029,097 -- $ 1,086,126
Segment operating
loss (3)
2000 $ (7,540,317) (365,316) (8,292,289) $(16,197,922)
1999 $ (1,172,653) (211,218) (1,472,975) $ (2,856,846)
Depreciation and
amortization
2000 $ 2,468,543 558,205 63,574 $ 3,090,322
1999 $ 72,337 224,445 78,576 $ 375,358
Capital Expenditures
for segment assets
2000 $ 2,768,108 2,255,552 124,778 $ 5,148,438
1999 $ 389,709 47,514 -- $ 437,223
Total Assets
2000 $ 38,225,268 3,325,638 59,161,849 $100,712,755
1999 $ 410,473 1,755,326 600,831 $ 2,766,630
============ ========= ======= ============
Other
United Foreign
Geographic Information States Germany Countries Total
---------------------- ------ ------- --------- -----
Revenues (4) 2000 1,749,974 247,604 268,686 $ 2,266,264
1999 678,746 168,205 239,175 $ 1,086,126
----------
(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 and unallocated
property and equipment.
(2) There were no inter-segment sales during the years ended June 30, 2000 or
1999.
(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-19
<PAGE>
LIGHTPATH TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
18. SUBSEQUENT EVENT (UNAUDITED)
On August 9, 2000, the Company entered into a definitive agreement to acquire
Geltech Inc. ("Geltech"), a Delaware corporation, for an aggregate purchase
price of approximately $27.5 million. Geltech is a manufacturer of precision
molded aspherical optics used in the active telecommunication components
markets. On the closing date, LightPath will acquire all of the outstanding
shares of Geltech in exchange for approximately 823,000 shares of Class A common
stock, subject to closing adjustments. The transaction will be accounted for
using the purchase method of accounting and may result in a significant amount
of goodwill which will be amortized over the expected period of benefit. In
addition, any in-process research and development acquired will be expensed at
the time of the acquisition as required by generally accepted accounting
principles.
On June 30, 2000, Geltech had approximately $5 million of total assets and $1.5
million in long-term debt (unaudited). For the six months ended June 30, 2000,
Geltech had total revenue of approximately $5 million and net income of
approximately $230,000 (unaudited).
F-20
<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 28, 2000
---------------------- ---------------
Donald E. Lawson Date
Chief Executive Officer, President
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
<TABLE>
<S> <C>
/s/ Donald E. Lawson August 28, 2000 /s/ Donna R. Bogue August 28, 2000
------------------------ --------------- ------------------------ ---------------
Donald E. Lawson Donna R. Bogue
Chief Executive Officer, Senior Vice President, Chief
President and Director Financial Officer and Treasurer
(Principal Executive Officer) (Principal Financial Officer)
/s/ Robert Ripp August 28, 2000 /s/ James L. Adler Jr. August 28, 2000
------------------------ --------------- ------------------------ ---------------
Robert Ripp James L. Adler Jr.
Chairman of the Board Director
/s/Katherine Dietze August 28, 2000 /s/ Louis Leeburg August 28, 2000
------------------------ --------------- ------------------------ ---------------
Katherine Dietze Louis Leeburg
Director Director
/s/ Leslie Danziger August 28, 2000
------------------------ ---------------
Leslie Danziger
Director
</TABLE>
28
