As filed with the Securities and Exchange Commission on April 12, 2002
Registration No. 333-73832
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
Amendment No. 4 To
FORM S-2
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
LIGHTPATH TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 86-0708398
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) (Identification No.)
3819 Osuna, N.E., Albuquerque, New Mexico 87109
(505) 342-1100
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
Donna Bogue Copy to: Joseph M. Crabb, Esq.
Chief Financial Officer and Treasurer Squire, Sanders & Dempsey L.L.P
LightPath Technologies, Inc. 40 North Central Avenue
3819 Osuna, NE Suite 2700
Albuquerque, New Mexico 87109 Phoenix, Arizona 85004
(505) 342-1100 Telephone: (602) 528-4000
(Name, address, including zip code, and telephone Facsimile: (602) 253-8129
number, including area code, of agent for service)
APPROXIMATE DATE OF PROPOSED SALE TO PUBLIC: As soon as practicable after the
effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If the registrant elects to deliver its latest annual report to security
holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1)
of this Form, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462 (b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462 (c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
===================================================================================================================
Proposed maximum Proposed maximum
Title of each class of Amount to be offering price aggregate offering Amount of
securities to be registered registered per unit* price* registration fee
-------------------------------------------------------------------------------------------------------------------
Options to purchase five
(5) shares of Class A
common stock, $0.01 par value 40,250 Options $19.325 $777,831.25 $194.46
===================================================================================================================
* Estimated solely for the purpose of calculating the registration fee
pursuant to Rules 457(c) and 457(g) under the Securities Act of 1933, as
amended, based on the average of the high and low prices of a share of
Class A Common Stock as reported on the Nasdaq National Market on November
16, 2001. This average price per share of $3.865 multiplied by five (5)
shares per Option comprises the proposed maximum offering price per unit.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
================================================================================
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THE
SELLING SHAREHOLDERS MAY NOT SELL THESE SECURITIES PURSUANT TO THIS REGISTRATION
STATEMENT UNTIL THIS REGISTRATION STATEMENT FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION IS DECLARED EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO
SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES
IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION
PROSPECTUS
40,250 OPTIONS TO PURCHASE SHARES OF CLASS A COMMON STOCK
LIGHTPATH TECHNOLOGIES, INC.
3819 Osuna, N.E.
Albuquerque, New Mexico 87109
Telephone: (505) 342-1100
LightPath Technologies, Inc., a Delaware corporation ("we", "us" or the
"Company"), is issuing up to 40,250 options (the "Options") to acquire shares of
the Company's Class A common stock, $0.01 par value per share (the "Common
Stock") in connection with the settlement (the "Settlement" or "Settlement
Agreement") of a class action lawsuit involving the Company and the former
holders of shares of our Class E-1, Class E-2 and Class E-3 common shares
(collectively, the "Class E" stock). As part of the Settlement Agreement, the
former holders of our Class E shares who did not elect to be excluded from the
Settlement Agreement have been offered, in exchange for their settlement of the
class action lawsuit, the choice of either: (i) $0.40 per Class E share, or (ii)
an Option, for every one hundred (100) Class E shares held, to purchase five (5)
shares of our Class A Common Stock (the "Option Shares"), at an exercise price
of $3.73 per share of our Class A Common Stock, subject to adjustment. The
Options are being distributed to those former Class E holders who elect to
receive the Options among these settlement alternatives. See "Description of the
Options." Under either settlement alternative, former Class E shareholders
participating in the Settlement Agreement will also receive the redemption price
of $0.0001 per Class E share held. The offering period terminates 15 days
following the delivery of the prospectus to the non-excluded class members.
Class members must respond by letter to the Company indicating their election
within the 15-day period. If a non-excluded class member fails to make a timely
election, the Company will deem such non-excluded class member to have elected
to receive the cash alternative. The Options may be exercised at any time prior
to 5:00 p.m., central time, on December 10, 2003, and shall be void thereafter.
Any proceeds that we receive from the exercise of the Options will be used for
general corporate purposes. All of the Options being distributed are being
offered directly by us, and because certain Class E holders have indicated an
intention to opt out of the Settlement Agreement, there is no assurance that all
of the Options will be issued. We have agreed to bear all the expenses of
registration of the Options in this Prospectus. No underwriting discounts or
commissions will be paid in connection with this offering.
The Settlement Agreement requires that we offer the Options to former Class E
holders who did not elect to be excluded from the settlement. The market price
of our Class A Common Stock has declined significantly since the time the
Settlement Agreement was negotiated, and the exercise price of the Options now
exceeds the market price of the underlying Class A Common Stock. Based on the
current market price of the Class A Common Stock, it is economically more
favorable for former Class E holders to receive $0.40 per Class E share formerly
held rather than to receive the Options. Accordingly, even though the Settlement
Agreement requires that we offer the Options to former Class E holders, we
recommend that former Class E holders elect to receive the cash alternative
(i.e., $0.40 per Class E share formerly held) rather than the Options. We do not
intend to list the Options on any securities exchange and do not anticipate that
a trading market for the Options will develop or be maintained. Our Class A
Common Stock is traded in the over-the-counter market through the Nasdaq
National Market system under the symbol LPTH. On November 16, 2001, and March
13, 2002, the closing prices of the Class A Common Stock on the Nasdaq National
Market system were $4.40 and $1.86 per share, respectively. See "Price Range of
the Company's Class A Common Stock."
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE MATTERS SET FORTH UNDER
"RISK FACTORS," AT PAGE 9.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is _______ __, 2002.
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AVAILABLE INFORMATION
We file annual, quarterly and current reports and other information with
the U.S. Securities and Exchange Commission. You may read and copy any document
that we have filed at the SEC's Public Reference Room at 450 Fifth Street, N.W.,
Washington, DC, 20549. Please call the SEC at 1-800-SEC-0330 for further
information about the operation of its public reference facilities. Our SEC
filings are also available to you free of charge at the SEC's web site at
http://www.sec.gov.
Copies of publicly available documents that we have filed with the SEC can
also be inspected and copied at the offices of the National Association of
Securities Dealers, Inc., 1735K Street, N.W., Washington, D.C. 20006.
We have filed a registration statement on Form S-2 with the SEC that covers
the issuance of the Options offered by this prospectus. This prospectus is a
part of that registration statement, but the prospectus does not include all of
the information included in the registration statement. We have also filed a
registration statement on Form S-3 with the SEC that covers the resale of the
common stock underlying the Options offered by this prospectus. You should refer
to these registration statements for additional information about us and the
Options being offered in this prospectus. Statements that we make in this
prospectus relating to any documents filed as an exhibit to the registration
statement or any document incorporated by reference into the registration
statement may not be complete and you should review the referenced document
itself for a complete understanding of its terms.
The SEC allows us to "incorporate by reference" to the information we file
with them, which means that we can disclose important information to you in this
prospectus by referring you to those documents. The documents that have been
incorporated by reference are an important part of the prospectus, and you
should be sure to review that information in order to understand the nature of
any investment by you in the common stock. We incorporate by reference the
documents listed below:
+ our annual report on Form 10-KSB for the fiscal year ended June 30,
2001;
+ our proxy statement relating to the 2001 Annual Meeting of
Shareholders;
+ our quarterly reports on Form 10-Q for the fiscal quarters ended
September 30, 2001, and December 31, 2001;
+ our current report on Form 8-K/A filed on October 11, 2000;
+ our current reports on Form 8-K filed on January 4, 2002, February
4, 2002 and April 3, 2002; and
+ the description of our Class A Common Stock included in our
registration statement on Form 8-A filed on January 13, 1996.
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We will provide you with copies of any of the documents incorporated by
reference, at no charge to you, however, we will not deliver copies of any
exhibits to those documents unless the exhibit itself is specifically
incorporated by reference. If you would like a copy of any document, please
write or call us at:
LightPath Technologies, Inc.
3819 Osuna, N.E.
Albuquerque, New Mexico 87109
Attn: Investor Relations
Telephone: (505) 342-1100
You should only rely upon the information included in or incorporated by
reference into this prospectus or in any prospectus supplement that is delivered
to you. We have not authorized anyone to provide you with additional or
different information. You should not assume that the information included in or
incorporated by reference into this prospectus or any prospectus supplement is
accurate as of any date later than the date on the front of the prospectus or
prospectus supplement.
This prospectus does not constitute an offer of these securities in any
state where the offer is not permitted. The information contained in this
prospectus is accurate only as of the date of this prospectus, regardless of the
time of delivery of this prospectus or any sale of Class A Common Stock.
FORWARD-LOOKING STATEMENTS
Throughout this prospectus and the other documents incorporated by
reference into this prospectus we make certain "forward-looking" statements.
These are statements about future events, results of operations, business plans
and other matters. We use words such as "expect", "anticipate", "intend" or
other similar words to identify forward-looking statements. These statements are
made based on our current knowledge and understanding. However, there can be no
assurances as to whether or not actual results will be consistent with these
statements. In fact, actual events or results could vary dramatically from these
statements as a result of among other factors:
+ Economic conditions, domestically and internationally
+ Technological developments
+ Industry trends
+ Risk factors described in this prospectus.
We have no obligation to update the forward-looking statements made in this
prospectus or incorporated by reference herein.
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PROSPECTUS SUMMARY
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THE
COMPANY MAY NOT SELL THESE SECURITIES PURSUANT TO THIS REGISTRATION STATEMENT
UNTIL THIS REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION IS DECLARED EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE
SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY
STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
THE FOLLOWING SUMMARY SHOULD BE READ TOGETHER WITH, AND IS QUALIFIED IN ITS
ENTIRETY BY, THE MORE DETAILED INFORMATION IN OTHER SECTIONS OF THIS PROSPECTUS.
YOU SHOULD CAREFULLY CONSIDER THE FACTORS DESCRIBED UNDER THE HEADING "RISK
FACTORS."
THE COMPANY
LightPath is a manufacturer of families of high-performance fiber-optic
collimator and isolator products, GRADIUM(R) glass lenses and other optical
materials to produce products that manipulate light. We operate through two
operating segments; optoelectronics and fiber telecommunications ("telecom"),
and traditional optics (e.g. lenses used in lasers, data storage, bar coding,
medical equipment, consumer optics, etc.). We manufacture and sell the following
types of telecom products: (i) collimators, (ii) isolators and (iii) molded
aspheric lenses. 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
back reflection of optical signals that can degrade transmitter and amplifier
performance. Molded aspheres are used in telecom applications to collimate or
couple light as it emerges from a fiber. Collimators, isolators, molded aspheres
and other optical components are used throughout fiber optic systems. Such
systems are used by the telecommunications industry with a goal of increased
bandwidth, through the development of all optical networks, 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.
We also perform research and development for optical solutions in the fiber
telecommunications and traditional optics markets. On April 14, 2000, we
acquired Horizon Photonics, Inc. ("Horizon"), a California corporation
originally founded in July 1997. Horizon is engaged in the automated production
of passive optical components for the telecommunications and data communications
markets. Horizon manufactures isolator products at their Walnut, California
facility. On September 20, 2000, the Company acquired Geltech, Inc., a Delaware
corporation, ("Geltech"), a manufacturer of precision molded aspherical optics
used in the active telecom components market to provide a highly efficient means
to couple laser diodes to fibers or waveguides.
We also manufacture traditional optics products including: (i) GRADIUM
glass products, lenses, prisms and (ii) molded aspheric lenses. GRADIUM glass is
an optical quality glass material with varying refractive indices used for
optics such as lenses for YAG lasers. Molded aspheres are used in non-telecom
applications such as optical data storage, high precision printing, bar coding
and by manufacturers of medical equipment. In addition, we manufacture a family
of traditional optics including laser flow tubes, polished cylinders and flats,
and prisms.
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
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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, 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
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 ours or the ability to produce such material
on a prescribable basis.
Our management and marketing focus is organized to serve two markets: (1)
optoelectronics and fiber telecommunications ("telecom"), and (2) traditional
optics. 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. We believe
that GRADIUM glass and other optical materials can potentially be marketed for
use in many optics and optoelectronics 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 isolators, next generation optical
subassemblies, diffractive gratings, waveguides, switches, micro-collimators and
lens arrays for use in the telecommunications field as well as new GRADIUM glass
materials to be used in various telecom applications.
THE OFFERING
The Options are to be issued pursuant to the "Order and Final Judgment,"
entered on November 9, 2001, in "LIGHTPATH TECHNOLOGIES, INC., V. LEEBURG, ET
AL.," C.A. No. 18021, commenced on May 2, 2000, in the Delaware Court of
Chancery, New Castle County, modifying and approving the "Stipulation of
Settlement," filed on November 17, 2000. The Delaware Action involved certain
rights associated with the Company's Class E Stock. In particular, the terms of
the Class E Stock provided that if the Company failed to meet certain
performance benchmarks by June 30, 2000, all rights associated with the Class E
Stock would expire as of that date, and all such shares would be redeemed by the
Company no later than September 30, 2000. Prior to June 30, 2000, uncertainty
arose with respect to the rights that the holders of the Class E Stock would
have to vote their shares of the expired but unredeemed Class E Stock at the
Company's 2000 annual meeting of shareholders. Accordingly, the Company
commenced the Delaware action, in which it sought declaratory judgment relating
to the rights of the approximately 250 former Class E shareholders to vote at
the 2000 annual meeting of shareholders, the Company's right to redeem the Class
E shares, and for certification of the former holders of the Class E Stock as a
class and the named defendants as its representatives. The named defendants were
Donald E. Lawson, the Company's then President and Chief Executive Officer, a
Director of the Company, and holder of an aggregate of 25,000 shares of Class E
Stock, Louis G. Leeburg, a Director of the Company who owns or advises owners of
502,877 shares of Class E Stock, and William Leeburg, who owns or controls an
aggregate of 21,816 shares of Class E Stock. The former holders of the Class E
Stock were certified as a class and the named defendants were certified as the
class representatives.
5
The original settlement offer was negotiated by Robert Ripp, Chairman of
the Board, on behalf of the Company, and Louis G. Leeburg, on behalf of the
defendant class. Under the terms of the original settlement offer, the former
Class E shareholders who did not elect to be excluded from the settlement
agreement were entitled to receive either $0.40 per share for each Class E share
held, or an option, for every one hundred (100) Class E shares held, to purchase
one (1) share of the Company's Class A common stock. A settlement hearing was
held on January 8, 2001, at which class certification issues, including the
necessity of an opt out provision, were addressed. Because of the passage of
time since the settlement hearing and the determination to include an opt out
provision, and the change in market conditions during the interim, counsel for
the Company proposed, and counsel for the former Class E shareholders accepted,
an increase in the option alternative. Accordingly, under the terms of the
Settlement Agreement, the Class E shareholders who did not elect to be excluded
are entitled to receive either $0.40 per share for each Class E share held, or
an option, for every one hundred (100) Class E shares formerly held, to purchase
five (5) shares of the Company's Class A Common Stock at an exercise price of
$3.73 per share.
Due primarily to a decline in the market value of the Company's common
stock, the option alternative is no longer approximately equal in value to the
cash alternative. The option alternative was based on the trading price of the
Company's Class A common stock at that time. At the time of the original
settlement negotiations, the Company's Class A Common Stock (par value $0.01)
was trading at approximately $40 per share.
With the passage of time, the market price of the Company's Class A common
stock declined to approximately $4 per share, or about 10% of the market price
at the time of the original settlement offer, thereby prompting a renegotiation
of the terms of the settlement offer. The revised settlement offer was
negotiated by Robert Ripp, Chairman of the Board, on behalf of the Company, and
Louis G. Leeburg and Robert D. Goldberg, class counsel, on behalf of the
defendant class. In exchange for a disproportionately small increase, from one
(1) to five (5), in the number of Class A shares under the option alternative,
the Company agreed to leave the cash alternative at $0.40 per share of Class E
Stock. Under either settlement alternative, former Class E shareholders
participating in the Settlement Agreement will also receive the redemption price
of $0.0001 per Class E share held. Accordingly, as a result of the renegotiation
of the terms of the Settlement Agreement and of the significant decline in the
price of the underlying Class A Common Stock, the option alternative is now
worth less than the cash alternative. This disparity in value represents the key
advantage of the cash alternative over the option alternative. With the
exception of possible favorable tax treatment (See "CERTAIN FEDERAL INCOME TAX
CONSEQUENCES"), the option alternative is economically less favorable to the
former Class E holders than the cash alternative.
The date by which the former holders of the Class E Stock were required to
make their decision about whether to opt out of the proposed settlement of the
Delaware action was December 24, 2001. The information provided to class members
to assist them in making this decision included:
a. the Stipulation of Settlement, attached to the Form S-2 as
Exhibit 99.1, which includes a detailed discussion of the history
of and allegations underlying the litigation; and
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b. the Notice of Pendency of Class Action, Class Determination,
Proposed Settlement, Settlement Hearing and Right to Appear,
attached to the Form S-2 as Exhibit B to Exhibit 99.1, which
includes the history of the litigation, and summarizes the
evidence adduced at trial.
The foregoing documents were provided to class members in accordance with
procedural requirements of the Delaware Chancery Court, and were on file with
the Court and publicly available prior to distribution to class members. Upon
receipt of these documents, approximately 63 of the 250 class members, former
holders of approximately 12.5% of the Class E Stock, attempted to opt out of the
Settlement Agreement. However, the opt out forms for the plaintiffs in the Texas
action, which comprise approximately 60 of these 63 purportedly excluded class
members, are executed by their attorney. The execution of the opt out forms by
counsel for the Texas plaintiffs appears to be inconsistent with the authority
granted to such attorney under the engagement letter between the Texas
plaintiffs and their counsel. Further, federal caselaw raises the issue of
whether due process concerns regarding adequate notice prohibit an attorney from
executing an opt-out form on behalf of class members. Accordingly, the question
has arisen regarding whether this noncompliance with proper opt out procedures
invalidates the effectiveness of the Texas plaintiffs' attempts to opt out of
the Settlement Agreement. This question is currently unresolved but has been
submitted to the Delaware court for resolution.
The Company is also involved in litigation relating to the Class E shares
in Harris County, Texas. In the Texas action, the plaintiffs, certain former
Class E shareholders, allege that the actions of the Company, and certain named
individuals, leading up to and surrounding the Company's 1995 proxy statement
constitute fraud, negligent misrepresentation, fraudulent inducement, breach of
fiduciary duty and civil conspiracy. In general, the Texas plaintiffs allege
misrepresentations and omissions in connection with a request from the Company
that its shareholders consent to a recapitalization, resulting in a 5.5 to 1
reverse stock split and the issuance of certain Class E Stock. The Texas
plaintiffs further allege that, as a result of the defendants' actions, they
were induced to consent to the Company's recapitalization. Management believes
that the allegations underlying the Texas action are without merit. On October
23, 2001, the Company participated in a mediation proceeding related to the
Texas action. Nonetheless, the Texas plaintiffs, who are comprised of former
holders of approximately 12.2% of the Class E Stock, have purportedly elected to
opt out of the Settlement Agreement, and will proceed with the Texas action
pending resolution in the Delaware court of the opt out matter.
The Company will send copies of the prospectus to all former Class E
shareholders who did not elect to be excluded from the Settlement Agreement. The
non-excluded former Class E shareholders will have fifteen (15) days to make
their election between the cash and the Options. Apart from the various required
notices related to the Settlement Agreement, no other communications have been
or will be made to the Class E Shareholders. Copies of: (1) the Stipulation of
Settlement; (2) the Supplemental Notice of Class Action, Class Action
Determination and Approval of Class Action Settlement; and (3) Order and Final
Judgment have been filed as exhibits to the registration statement of which this
prospectus is a part.
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SUMMARY OF THE OFFERING
Securities Offered....................... A maximum of 40,250 options to acquire
five (5) shares of Class A common
stock, $0.01 par value, of the
Company.
Determination of Offering Price.......... The exercise price of the Options will
be $3.73 per share of the Company's
Class A Common Stock.
Class A Common Stock Outstanding
as of December 31, 2001.................. 19,478,667 shares(1)(2).
Use of Proceeds ......................... The Options are being issued as part
of a settlement of class action
litigation and will not result in
any cash proceeds to the Company.
Proceeds from exercises of the Options
will be used for general corporate
purposes.
Risk Factors ............................ Prospective investors should carefully
consider the matters set forth under
"Risk Factors."
Nasdaq National Market Symbol............ "LPTH"
Settlement Agreement..................... The Options are being offered pursuant
to the Settlement Agreement. Due to a
decline in the market price of the
Class A Common Stock since the time
the Settlement Agreement was
negotiated, the Options have decreased
in value and are now (excluding the
impact of tax treatment) economically
less favorable than the cash
alternative (i.e., $0.40 per Class E
share formerly held). Accordingly, the
Company recommends that former Class E
holders elect to receive the cash
settlement rather than the Options.
(1) Does not include shares underlying options outstanding to purchase 4,182,241
shares of Class A Common Stock which are exercisable at option exercise prices
ranging from $.63 to $51.56 per share and approximately 540,000 shares of Class
A Common Stock reserved for issuance upon future grants of options under
LightPath's stock option plans at December 31, 2001.
(2) Does not include an aggregate of 840,392 shares of Class A Common Stock
consisting of (i) 299,300 shares of Class A Common Stock issuable upon exercise
of private placement and other warrants; and (ii) 541,092 shares of Class A
Common Stock issuable upon conversion of the 127 remaining shares of Series F
Preferred Stock (minimum of 292,483 shares based on the fixed conversion price
at closing) as of December 31, 2001.
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RISK FACTORS
THE FOLLOWING RISK FACTORS SHOULD BE READ BY YOU TOGETHER WITH THE MORE DETAILED
INFORMATION INCLUDED AT OTHER SECTIONS OF THIS PROSPECTUS AND INCORPORATED BY
REFERENCE IN THIS PROSPECTUS BEFORE PURCHASING THE SECURITIES OFFERED HEREBY.
OUR FISCAL YEAR ENDS ON JUNE 30 AND REFERENCES TO YEARS IN THIS PROSPECTUS REFER
TO OUR FISCAL YEAR ENDED AS OF JUNE 30 OF THE REFERENCED CALENDAR YEAR.
RISKS RELATED TO THE OFFERING
THE OPTION ALTERNATIVE IS ECONOMICALLY UNFAVORABLE.
The Settlement Agreement requires that we offer the Options to former Class
E holders who did not elect to be excluded from the settlement. The market price
of the Company's Class A Common Stock has declined significantly since the time
the Settlement Agreement was negotiated, and the exercise price of the Options
now exceeds the market price of the underlying Class A Common Stock. Based on
the current market price of the Class A Common Stock, it is economically more
favorable for former Class E holders to receive $0.40 per Class E share formerly
held rather than to receive the Options. Accordingly, even though the Settlement
Agreement requires that we offer the Options to former Class E holders, we
recommend that former Class E holders elect to receive the cash alternative
(i.e., $0.40 per Class E share formerly held) rather than the Options.
OUR STOCK PRICE IS VOLATILE.
Broad market fluctuations or fluctuations in our operations may adversely affect
the market price of our Common Stock. The market for our Common Stock is
volatile. The trading price of our Common Stock has been and will continue to be
subject to:
- volatility in the trading markets generally and in our particular
market segment;
- significant fluctuations in response to quarterly variations in
operating results;
- announcements regarding our business or the business of our customers
or competitors;
- changes in prices of our or our competitors' products and services;
- changes in product mix;
- changes in revenue and revenue growth rates; and - other events or
factors.
Statements or changes in opinions, ratings or earnings estimates made by
brokerage firms or industry analysts relating to the markets in which we operate
or expect to operate could have an adverse effect on the market price of our
Common Stock. In addition, the stock market as a whole, as well as our
particular market segment, have from time to time experienced extreme price and
volume fluctuations which have particularly affected the market price for the
securities of many companies and which often have been unrelated to the
operating performance of these companies.
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HOLDERS MAY NOT REALIZE PROCEEDS FROM THE SALE OF OPTION SHARES.
Holders of Options may not be able to realize any proceeds from the Options.
Holders will only be able to realize proceeds if they exercise their Options and
then subsequently sell the underlying Option Shares for a price greater than the
Exercise Price of the Option. As such, the potential proceeds that could be
realized from the exercise of the Options and the subsequent resale of the
underlying Option Shares will depend upon the trading price of the Common Stock,
which is subject to substantial risk and volatility. There can be no assurance
that the trading price of the Common Stock will ever exceed the Option Exercise
Price. If a holder exercises Options but does not immediately sell the
underlying Option Shares, the trading price of the Common Stock could remain at
or decline to a level below the Option Exercise Price. Accordingly, holders who
exercise Options but are unable to sell the underlying Option Shares at a price
greater than the Exercise Price could lose money.
DECLARATION OF DIVIDENDS TO SHAREHOLDERS IN THE FORESEEABLE FUTURE IS
UNLIKELY.
Our Board has never declared a dividend on our Common Stock. We do not
anticipate paying dividends on the Common Stock in the foreseeable future. It is
anticipated that earnings, if any, will be reinvested in the expansion of our
business.
A PUBLIC MARKET FOR THE OPTIONS IS UNLIKELY TO DEVELOP.
The Options have no established trading market and it is unlikely that any such
market will develop or, if one develops, that it will be sustained. The Company
does not intend to apply to list the Options on any stock exchange. Holders of
the Options may be unable to sell or otherwise realize any proceeds from the
Options for an extended period of time, if at all.
THE SETTLEMENT AGREEMENT WAS NEGOTIATED BY DIRECTORS OF THE COMPANY.
The named defendants in the Delaware action include Donald E. Lawson, the
Company's then President and Chief Executive Officer and a Director of the
Company, and Louis G. Leeburg, a Director of the Company. The Settlement
Agreement was negotiated by Robert Ripp, Chairman of the Board, on behalf of the
Company, and Mr. Leeburg, on behalf of the defendant class. Although Mr. Leeburg
owns or advises owners of 502,877 shares of Class E Stock and was certified as
one of the class representatives along with the other named defendants, Mr.
Leeburg was a director of the Company at the time of the negotiation of the
Settlement Agreement. Although the Company believes the terms of the Settlement
Agreement are fair, former Class E holders should be aware of the relationship
between the Company and the named class representatives, including Mr. Leeburg
who negotiated the Settlement Agreement on behalf of the class.
10
RISKS RELATED TO OUR FINANCIAL RESULTS
WE HAVE A HISTORY OF LOSSES AND MAY CONTINUE TO INCUR LOSSES.
We incurred net losses of $60.8 million and $15.6 million for the fiscal years
ended June 30, 2001 and 2000, respectively. We had accumulated deficits of $105
million and $133 million as of June 30, 2001 and December 31, 2001,
respectively. In June 2001, we announced lower net revenue guidance for our
fiscal year ending June 30, 2002 from $85 million to $35-55 million due to the
unanticipated widespread softening of the U.S. economy and the
telecommunications industry in particular. We have experienced order
cancellations and extensions of product shipment dates by our customers who are
adjusting their inventory levels in response to slower industry growth. These
cancellations and extensions adversely impact our revenues and could result in
higher inventory levels than required to support our sales levels. These
conditions may significantly delay, and could prevent, our ability to achieve
profitability. We expect to continue to incur significant product development,
sales and marketing and administrative expenses, and, as a result, we will need
to generate increased revenues to achieve profitability. Even if we achieve
profitability, given the competition in, and the evolving nature of, the optical
networking market, we may not be able to sustain or increase profitability on a
quarterly or annual basis. As a result, we will need to generate significantly
higher revenues while containing costs and operating expenses if we are to
achieve profitability.
WE FACE ORDER CANCELLATIONS AND EXTENSIONS OF PRODUCT SHIPMENT DATES BY
SOME OF OUR CUSTOMERS.
Our sales are generally made pursuant to purchase orders that are subject to
cancellation, modification or rescheduling without significant penalties to our
customers. We have recently experienced order cancellations and extensions of
product shipment dates by some of our customers. If these or other current
customers stop placing orders, or further reduce orders, we may not be able to
replace these orders with orders from new customers. The majority of our current
customers do not have any minimum purchase obligations, and they may stop
placing orders with us at any time, regardless of any forecast they may have
previously provided. The loss of any of our key customers or further reductions
in sales to these customers would reduce our net revenues from the levels
currently expected.
11
WE HAVE ONLY RECENTLY BEGUN SELLING PRODUCTS TO THE TELECOMMUNICATIONS
INDUSTRY.
We have only generated revenues from the sale of products to the
telecommunications industry since fiscal 1999. Through June 1996, our primary
activities were basic research and development of glass material properties.
Moreover, our ability to accurately forecast revenues is impacted by weaknesses
and uncertainties regarding overall demand within the telecommunications
industry, inventory levels within the industry, sudden order reductions and
cancellations by customers, lower backlog of customer orders, and potential
pricing pressures that may arise from supply/demand conditions within the
industry. Because we have only recently begun to sell these products, we have in
the past and may in the future be unable to accurately forecast our revenues
from sales of these products, and we have limited meaningful historical
financial data upon which to plan future operating expenses. Many of our
expenses are fixed in the short term, and we may not be able to quickly reduce
spending if our revenue is lower than we project. Major new product
introductions will also result in increased operating expenses in advance of
generating revenues, if any. Therefore, net losses in a given quarter could be
greater than expected. We may not be able to address the risks associated with
our limited operating history in an emerging market and our business strategy
may not be sustainable. Failure to accurately forecast our revenues and future
operating expenses could cause quarterly fluctuations in our net revenues and
may result in volatility or a decline in our stock price.
OUR PRODUCTS ARE AT AN EARLY STAGE OF DEVELOPMENT AND MAY NOT ACHIEVE
MARKET ACCEPTANCE.
Many of our telecommunications products are still in the introductory phase, and
our current line of GRADIUM products and other traditional optics, have not
generated sufficient revenues to sustain operations. While we believe our
existing products are commercially viable, we anticipate the need to educate the
optical components market in order to generate market demand and market feedback
may require us to further refine these products. Development of additional
product lines will require significant further research, development, testing
and marketing prior to commercialization. There can be no assurance that any
proposed products will be successfully developed, demonstrate desirable optical
performance, be capable of being produced in commercial quantities at reasonable
costs or be successfully marketed.
OUR PRODUCTS HAVE NOT BEEN DEMONSTRATED TO BE COMMERCIALLY SUCCESSFUL.
Our collimator products have not yet achieved broad commercial acceptance, our
isolator sales first entered the commercial production phase in April 2000 with
one significant customer and our molded aspheres telecom applications are new.
Although we are engaged in negotiations and discussions with potential
customers, there can be no assurance that any such discussions will lead to
development of commercially viable products or significant revenues, if any, or
that any products currently existing or to be developed in the future will
attain sufficient market acceptance to generate significant revenues. We must
also satisfy industry-standard Telcordia testing on telecommunication products
to meet customer requirements, as well as satisfy prospective customers that we
will be able to meet their demand for quantities of products, since we may be
the sole supplier and licensor. We do not have demonstrated experience as a
12
manufacturer for all our product lines and have limited financial resources. We
may be unable to accomplish any one or more of the foregoing to the extent
necessary to develop market acceptance of our products.
Although our traditional optics products have been accepted commercially, the
benefits of the GRADIUM glass line are not widely known. In order to persuade
potential customers to purchase GRADIUM products, we will need to overcome
industry resistance to, and suspicion of, gradient lens technology that has
resulted from previous failed attempts by various researchers and manufacturers
unrelated to us to develop a repeatable, consistent process for producing lenses
with variable refractive indices. Prospective customers will need to make
substantial expenditures in order to redesign products to incorporate GRADIUM
lenses. There can be no assurances that potential customers will view the
benefits of our products as sufficient to warrant such design expenditures.
WE DEPEND ON A FEW KEY CUSTOMERS.
In the fiscal year ended June 30, 2001, Agere Systems, Inc., Corning
Incorporated and JDS Uniphase accounted for 44%, 7.4%, and 5.2% of our net
revenues, respectively. We anticipate that our operating results will continue
to depend on sales to a relatively small number of significant customers. The
loss of any of these customers, or a significant reduction in sales to any such
customers, could adversely affect our revenues.
RISKS RELATED TO THE OPTICAL NETWORKING INDUSTRY
SALES OF OUR PRODUCTS DEPENDS UPON DEPLOYMENT OF OPTICAL NETWORKS TO
SATISFY INCREASED BANDWIDTH REQUIREMENTS.
Our future success depends on the continuing increase in the amount of data
transmitted over communications networks, or bandwidth, and the growth of
optical networks to meet the increased demand for bandwidth. If the Internet
does not continue to expand as a widespread communications medium and commercial
marketplace, the need for significantly increased bandwidth across networks and
the market for optical networking products may not continue to develop. Future
demand for our products is uncertain and will depend to a great degree on the
continued growth and upgrading of optical networks. If the growth and upgrading
of optical networks does not continue, sales of our products may decline, which
would adversely affect our revenues.
THE OPTICAL NETWORKING MARKET IS NEW AND UNPREDICTABLE AND CHARACTERIZED BY
RAPID TECHNOLOGICAL CHANGES AND EVOLVING STANDARDS.
The optical networking market is relatively new and is characterized by rapid
technological change, frequent new product introductions, changes in customer
requirements and evolving industry standards. Because this market is relatively
new, it is difficult to predict its potential size or future growth rate.
Widespread adoption of optical networks is critical to our future success.
Potential end-user customers who have invested substantial resources in their
existing copper lines or other systems may be reluctant or slow to adopt a new
13
approach, like optical networks. Our success in generating revenues in this
emerging market will depend on, among other things:
- maintaining and enhancing our relationships with our customers;
- the education of potential end-user customers and network service
providers about the benefits of optical networks; and
- our ability to accurately predict and develop our products to meet
industry standards.
If we fail to address changing market conditions, the sales of our products may
decline, which would adversely impact our revenues.
WE MUST INCREASE OUR SALES VOLUMES, REDUCE OUR COSTS OR INTRODUCE HIGHER
MARGIN PRODUCTS TO OFFSET ANTICIPATED REDUCTIONS IN THE AVERAGE SELLING PRICES
OF OUR PRODUCTS.
We have experienced decreases in the average selling prices of some of our
products, including most of our passive component products. We anticipate that
as products in the optical component and module market become more commoditized,
the average selling prices of our products may decrease in response to
competitive pricing pressures, new product introductions by us, our competitors
or other factors. The optical component and module market is experiencing
extreme volatility as a result of lower product demand, which will make it
difficult for us to increase our sales volume. If we are unable to offset the
anticipated decrease in our average selling prices by increasing our sales
volumes or product mix, our net revenues and gross margins will decline. In
addition, to maintain or improve our gross margins, we must continue to reduce
the manufacturing cost of our products, and we must develop and introduce new
products and product enhancements with higher margins. If we cannot maintain or
improve our gross margins, our financial position may be harmed and our stock
price may decline.
RISKS RELATED TO OUR BUSINESS
OUR FUTURE SUCCESS DEPENDS ON OUR ABILITY TO DEVELOP AND SUCCESSFULLY
INTRODUCE NEW AND ENHANCED PRODUCTS THAT MEET THE NEEDS OF OUR CUSTOMERS.
Our future success depends on our ability to anticipate our customers' needs and
develop products that address those needs. Introduction of new products and
product enhancements will require that we effectively transfer production
processes from research and development to manufacturing and coordinate our
efforts with the efforts of our suppliers to rapidly achieve efficient volume
production. If we fail to effectively transfer production processes, develop
product enhancements or introduce new products that meet the needs of our
customers as scheduled, our net revenues may decline.
IF WE ARE UNABLE TO SUCCESSFULLY INTEGRATE ACQUIRED COMPANIES, OUR BUSINESS
MAY BE ADVERSELY AFFECTED.
During the calendar year ended December 31, 2000, we acquired both Horizon and
Geltech in separate transactions. The efficient integration of these businesses
into our organization will be important to our success. If our integration
14
efforts prove to be unsuccessful, our business will suffer. We have spent, and
expect to continue to spend, significant financial, management and other
resources to integrate these businesses into our organization. Our headcount
increased substantially as a result of the acquisitions, and these new employees
must be integrated with our existing employees. Both Horizon and Geltech were
privately held and may require substantial investments in operational and
financial infrastructure to ensure that their systems and processes adequately
support operating as a publicly held organization. Each of these organizations
will also need additional investments in manufacturing infrastructure in order
to develop new products and ramp up production volumes. There can be no
assurances that we will be able to retain the key employees of Horizon and
Geltech. We have limited experience with integrating acquired businesses into
our organization. Our integration efforts may not be successful and may result
in unanticipated operations problems, expenses and liabilities and the diversion
of management attention. If we are unable to integrate these companies into our
organization in a timely and effective manner, our business and our operating
results will be adversely affected.
We anticipate that in the future, as part of our business strategy, we may
continue to make strategic acquisitions of complementary companies, products or
technologies. In the event of any further future acquisitions, we could:
- issue stock that would dilute our current stockholders' percentage
ownership;
- incur debt;
- assume liabilities; or
- incur expenses related to in-process research and development,
amortization of intangible assets.
Any future acquisitions also could involve numerous risks, including:
- problems associated with combining the acquired operations,
technologies or products;
- unanticipated costs or liabilities;
- diversion of management's attention from our core business;
- adverse effects on existing business relationships with suppliers and
customers;
- risks associated with entering markets in which we have no or limited
prior experience; and
- potential loss of key employees, particularly those of the acquired
businesses.
We cannot assure that we will be able to successfully integrate any businesses,
products, technologies or personnel that we might acquire in the future, which
may harm our business.
COMPETITION MAY INCREASE, WHICH COULD REDUCE OUR SALES AND GROSS MARGINS,
OR CAUSE US TO LOSE MARKET SHARE.
Competition in the optical component and module market in which we compete is
intense. Many of our competitors are large public companies that have longer
operating histories and significantly greater financial, technical, marketing
and other resources than we have. As a result, these competitors are able to
devote greater resources than we can to the development, promotion, sale and
support of their products. In addition, the market capitalization and cash
reserves of several of our competitors are much larger than ours, and, as a
result, these competitors are much better positioned than we are to acquire
15
other companies in order to gain new technologies or products that may displace
our product lines. Such acquisitions could give our competitors a strategic
advantage. For example, if our competitors acquire any of our significant
customers, these customers may reduce the amount of products they purchase from
us. Alternatively, some of our competitors may spin-out new companies in the
optical component and module market. These companies may compete more
aggressively than their former parent companies due to their greater dependence
on our markets. In addition, many of our potential competitors have
significantly more established sales and customer support organizations, much
greater name recognition, more extensive customer bases, more developed
distribution channels and broader product offerings than we have. These
companies can leverage their customer bases and broader product offerings and
adopt aggressive pricing policies to gain market share. Additional competitors
may enter the market, and we are likely to compete with new companies in the
future. We expect to encounter potential customers that, due to existing
relationships with our competitors, are committed to the products offered by
these competitors. As a result of the foregoing factors, we expect that
competitive pressures may result in price reductions, reduced margins and loss
of market share.
We compete with manufacturers of conventional spherical lens products and
aspherical lens products, producers of optical quality glass and other
developers of gradient lens technology as well as telecom product manufacturers.
In both the optical lens and telecommunications components markets, we are
competing against, among others, established international industry giants. Many
of these companies also are primary customers for optical and telecommunication
components, and therefore have significant control over certain markets for our
products. We are also aware of other companies that are attempting to develop
radial gradient lens technology. There may also be others of which we are not
aware that are attempting to develop axial gradient lens technology similar to
our technology. There can be no assurance that existing or new competitors will
not develop technologies that are superior to or more commercially acceptable
than our existing and planned technologies and products.
OUR PRODUCTS MAY CONTAIN UNKNOWN DEFECTS.
Some of our products are designed to be deployed in large and complex optical
networks. Because of the nature of these products, they can only be fully tested
for reliability when deployed in networks for long periods of time. Our fiber
optic products may contain undetected defects when first introduced or as new
versions are released, and our customers may discover defects in our products
only after they have been fully deployed and operated under peak stress
conditions. In addition, our products often are combined with products from
other vendors. As a result, should problems occur, it may be difficult to
identify the source of the problem. If we are unable to fix defects or other
problems, we could experience, among other things:
- loss of customers;
- damage to our brand reputation;
- failure to attract new customers or achieve market acceptance;
- diversion of development and engineering resources; and
- legal actions by our customers or third parties.
16
The occurrence of any one or more of the foregoing factors could cause our net
revenues to decline or otherwise have an adverse effect on our business.
WE FACE PRODUCT LIABILITY RISKS.
The sale of our optical products will involve the inherent risk of product
liability claims by others. We do not currently maintain product liability
insurance coverage, although we do intend to procure such insurance in the
future. Product liability insurance is expensive, subject to various coverage
exclusions and may not be obtainable on terms acceptable to us. Moreover, the
amount and scope of any coverage may be inadequate to protect us in the event
that a product liability claim is successfully asserted.
OUR PRODUCTS HAVE LONG AND VARIABLE SALES CYCLES.
The timing of our revenue is difficult to predict because of the length and
variability of the sales and implementation cycles for our products. We do not
recognize revenue until a product has been shipped to a customer, all
significant vendor obligations have been performed and collection is considered
probable. Customers often view the purchase of our products as a significant and
strategic decision. As a result, customers typically expend significant effort
in evaluating, testing and qualifying our products and our manufacturing
process. This customer evaluation and qualification process frequently results
in a lengthy initial sales cycle (often one year or longer). While our customers
are evaluating our products and before they place an order with us, we may incur
substantial sales and marketing and research and development expenses to
customize our products to the customer's needs. We may also expend significant
management efforts, increase manufacturing capacity and order long lead-time
components or materials prior to receiving an order. Even after this evaluation
process, a potential customer may not purchase our products. Because of the
evolving nature of the optical component and module market, we cannot predict
the length of these sales and development cycles. The recent slowdown in the
U.S. economy has resulted in order cancellations and extensions of product
shipment dates by our customers. These long sales cycles, coupled with the
uncertain affects of the slowdown in the U.S. economy, may cause our revenues
and operating results to vary significantly and unexpectedly from quarter to
quarter, which could continue to cause volatility in our stock price.
WE DEPEND ON KEY PERSONNEL TO MANAGE OUR BUSINESS EFFECTIVELY.
Our future success depends upon the continued services of our executive officers
and other key engineering, sales, marketing, manufacturing and support
personnel. Our inability to retain or attract key employees could have a
material adverse effect on our business and results of operations. Our
operations depend, to a great extent, upon the efforts of our senior officers.
We also depend upon our ability to attract additional members to our management
and operations teams to support our expansion strategy. The loss of any of these
key employees would adversely affect our business. We had approximately 200
full-time employees on September 30, 2001. Although we have reduced our
workforce by approximately 190 people during the last three quarters, we expect
to continue to hire selectively in the manufacturing, engineering, sales and
marketing and administrative functions to the extent consistent with our
business levels. Our ability to continue to attract and retain highly skilled
17
personnel will be a critical factor in determining whether we will be
successful. Competition for highly skilled personnel is intense. We may not be
successful in attracting, assimilating or retaining qualified personnel to
fulfill our current or future needs, which could adversely impact our ability to
develop and sell our products.
WE HAVE LIMITED PRODUCT OFFERINGS, SOME OF WHICH ARE CURRENTLY EXPERIENCING
A DECLINE IN DEMAND.
We derive a substantial portion of our net revenues from a limited number of
products. Specifically, in the fiscal year ended June 30, 2001, we derived
approximately 50%, 16%, 14.5% and 19.5% of our net revenues from our isolators,
collimators, molded aspheric lenses and traditional optics, respectively. We
expect that net revenues from a limited number of products will continue to
account for a substantial portion of our total net revenues. Demand for these
and other optical component and module products has declined as a result of the
recent slowdown in the economy and we have recently experienced order
cancellations and delays in product shipment dates by our customers. Aside from
the current slowdown in the telecommunications industry, continued and
widespread market acceptance of our products is critical to our future success.
We cannot assure you that, once the telecommunication industry conditions
improve, our current products will achieve market acceptance at the rate at
which we expect, or at all, which could adversely affect our results of
operations.
WE MUST ACCURATELY TIME OUR MANUFACTURING CAPACITY WITH THE DEMAND FOR OUR
PRODUCTS.
We face a challenge in accurately timing the installation of our manufacturing
capacity with the demand for our products. Throughout fiscal 2001 we expanded
our manufacturing capacity through the expansion of facilities and the hiring of
employees and through the acquisition of Geltech. At September 30, 2001, we had
a total of 200 full-time employees, up from 125 employees at June 30, 2000 but
down from 300 at June 30, 2001. As a result of the recent, and sudden, order
cancellations and extensions of product shipment dates by our customers, we are
slowing the rate of production of some of our products. We also may curtail
efforts to install new equipment in our facilities until market conditions
improve. We believe this approach will allow us to quickly ramp production if
unit demand for our products merits. However, if demand for our products
continues to decline, we may have more employees and facility space than
necessary to deliver our products, which would adversely impact our ability to
achieve profitability, and could require us to further reduce the size of our
operations.
Despite our recent announcement to slow down expansion of our business, we still
face challenges as a result of our rapid expansion over the past few fiscal
years. The increase in employees as a result of the acquisitions and the growth
in our operations, combined with the challenges of managing
geographically-dispersed operations, have placed, and will continue to place, a
significant strain on our management systems and resources. We expect that we
will need to continue to improve our financial and managerial controls,
reporting systems and procedures and continue to expand, train and manage our
work force. The failure to effectively manage our recent growth and to
accurately time any future growth with market demand for our products could
adversely impact our ability to manufacture and sell our products, which could
reduce our revenues.
18
WE MUST EXPAND OUR SALES ORGANIZATION.
The sale of our products requires long and involved efforts targeted at several
key departments within our prospective customers' organizations. Sales of our
products require the prolonged efforts of executive personnel and specialized
systems and applications engineers working together with a small number of
dedicated salespersons. Currently, our sales organization is limited. We will
need to grow our sales force in order to increase market awareness and sales of
our products. Competition for these individuals is intense, and we might not be
able to hire the kind and number of sales personnel and applications engineers
we need. If we are unable to expand our sales operations, we may not be able to
increase market awareness or sales of our products, which would prevent us from
increasing our revenues.
WE MUST MAKE SALES IN A FRAGMENTED MARKET.
The markets for optical lenses and telecommunication components are highly
fragmented. Consequently, we will need to identify and successfully target
particular market segments in which we believe we will have the most success.
These efforts will require a substantial, but unknown, amount of effort and
resources. The fragmented nature of the optical products market may impede our
ability to achieve commercial acceptance for our products. In addition, our
success will depend in great part on our ability to develop and implement a
successful marketing and sales program. There can be no assurance that any
marketing and sales efforts undertaken by us will be successful or will result
in any significant product sales.
CURRENT AND PENDING LITIGATION MAY ADVERSELY IMPACT OPERATING RESULTS.
On May 2, 2000, the Company commenced a class action lawsuit in the Chancery
Court of Delaware, New Castle County (the "Court"). In this action, the Company
sought a declaratory judgment with respect to the Company's right to redeem the
Class E Common Stock on March 31, 2001 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 Options offered
hereby are being distributed as part of the Settlement Agreement that was
approved by the Court on November 9, 2001, in settlement of this lawsuit. The
Settlement Agreement permits the Class E shareholders to elect not to
participate in the settlement and thus will not be binding on any Class E
shareholders who so elect.
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"). Plaintiffs
in the Texas Action have made various allegations regarding the circumstances
surrounding the issuance of the Class E Common Stock and seek damages based upon
those allegations. Although management believes the allegations underlying the
Texas litigation are without merit, we are unable to predict the outcome of this
litigation.
The Company may from time to time become involved in other lawsuits and legal
proceedings. Litigation is subject to inherent uncertainties, and an adverse
result in any such matters that may arise from time to time may adversely impact
19
our operating results or financial condition. Additionally, any litigation to
which we are subject could require significant involvement of our senior
management and may divert management's attention from our business and
operations.
WE FACE RISKS ASSOCIATED WITH INTERNATIONAL SALES.
For the fiscal year ended June 30, 2001, 14.9% of our net revenues were from
sales to international customers. Our international sales will be limited if we
cannot establish and/or maintain relationships with international distributors,
establish foreign operations, expand international sales, and develop
relationships with international service providers. Additionally, our
international sales may be adversely affected if international economies weaken.
We are subject to risks including the following:
- greater difficulty in accounts receivable collection and longer
collection periods;
- the impact of recessions in economies outside the United States;
- unexpected changes in regulatory requirements;
- sudden and unexpected reductions in demand in particular countries in
response to exchange rate fluctuations;
- certification requirements;
- reduced protection for intellectual property rights in some countries;
- potentially adverse tax consequences; and
- political and economic instability.
While we expect our international revenues to be denominated predominantly in
U.S. dollars, in the future a portion of our international revenues and expenses
may be denominated in foreign currencies. Accordingly, we could experience the
risks of fluctuating currencies and the corresponding exchange rates.
POTENTIAL INFLUENCE OF EXISTING MANAGEMENT AND PRINCIPAL SHAREHOLDERS.
If our management and shareholders act in concert, disposition of matters
submitted to shareholders or the election of the entire Board of Directors may
be hindered. We estimate that management and our principal shareholders
beneficially owned approximately 26.2% of the aggregate Common Stock outstanding
as of August 1, 2001.
SOME PROVISIONS IN OUR CHARTER DOCUMENTS AND BYLAWS MAY HAVE ANTI-TAKEOVER
EFFECTS.
Our Certificate of Incorporation and Bylaws contain some provisions that could
have the effect of discouraging a prospective acquirer from making a tender
offer, or which may otherwise delay, defer or prevent a change in control.
20
OUR CONVERTIBLE PREFERRED STOCK, WARRANTS AND OPTIONS MAY AFFECT OUR FUTURE
FINANCING.
The existence of our outstanding Convertible Preferred Stock, options or
warrants may adversely affect the terms on which we can obtain additional
financing. As of December 31, 2001, there were outstanding:
- warrants issued in private placement and other transactions pursuant
to which 299,300 shares of Common Stock are issuable;
- 127 shares of Series F Convertible Preferred Stock, $.01 par value per
share, pursuant to which 541,092 shares of Common Stock are reserved
for issuance to the holders of the shares of Series F Convertible
Preferred Stock upon conversion of such shares (minimum of 292,483
shares based on the fixed conversion price at closing); and
- outstanding options to purchase an aggregate of 4,182,241 shares of
Common Stock.
In addition, approximately 540,000 shares of Common Stock were reserved as of
December 31, 2001 for issuance pursuant to future grants to be made under the
Omnibus Incentive Plan and Directors Stock Incentive Plan.
For the life of such options, warrants and Convertible Preferred Stock, the
holders will have the opportunity to profit from a rise in the price of the
underlying common stock, with a resulting dilution in the interest of other
holders of common stock upon exercise or conversion. Further, the option and
warrant holders can be expected to exercise their options and warrants at a time
when we would, in all likelihood, be able to obtain additional capital by an
offering of our unissued common stock on terms more favorable to us than those
provided by such options or warrants.
The eligibility of the foregoing shares to be sold to the public, whether
pursuant to an effective registration statement, Rule 144 or an exemption from
the registration requirements may have a material adverse effect on the market
value and trading price of the Common Stock.
WE HAVE AGREED TO CERTAIN LIMITATIONS UPON POTENTIAL LIABILITY OF OUR
DIRECTORS.
Our Certificate of Incorporation provides that directors will not be personally
liable for monetary damages to LightPath or its shareholders for a breach of
fiduciary duty as a director, subject to limited exceptions. Although such
limitation of liability does not affect the availability of equitable remedies
such as injunctive relief or rescission, the presence of these provisions in the
Certificate of Incorporation could prevent the recovery of monetary damages by
LightPath or its shareholders.
21
WE MUST MAINTAIN COMPLIANCE WITH CERTAIN CRITERIA IN ORDER TO MAINTAIN
LISTING OF OUR SHARES ON THE NASDAQ MARKET.
The Company's Common Stock is currently traded on the Nasdaq National Market.
Failure to meet the applicable quantitative and/or qualitative maintenance
requirements of Nasdaq could result in our securities being delisted from the
Nasdaq National Market. If delisted from the Nasdaq National Market, our
securities may be eligible for trading on the Nasdaq SmallCap Market, the OTC
Bulletin Board or on other over-the-counter markets, although there can be no
assurance that our securities will be eligible for trading on any alternative
exchanges or markets. As a consequence of such delisting, an investor could find
it more difficult to dispose of or to obtain accurate quotations as to the
market value of our securities. Among other consequences, delisting from Nasdaq
may cause a decline in the stock price and difficulty in obtaining future
financing.
WE MAY NOT HAVE ENOUGH FUNDS AVAILABLE TO REDEEM OUTSTANDING SHARES OF
PREFERRED STOCK.
In the event of automatic conversion of the Series F Preferred Stock (three
years after issuance or November 2002) LightPath has the right to redeem such
preferred stock for cash or convert such preferred stock into Class A Common
Stock. The redemption value of the outstanding Series F Preferred Stock at
September 30, 2001 was $1,440,000, or 5.8% of the Company's cash. In addition,
in the event of any liquidation, dissolution or winding up of the Company
("Liquidation Event"), either voluntary or involuntary, the then Holders of
shares of Series F Preferred Stock shall be entitled to receive an amount per
share equal to the sum of (i) the Original Series F Issue Price for each
outstanding share of Series F Preferred Stock and (ii) an amount equal to seven
percent (7%) of the Original Series F Issue Price, per annum. At each Holder's
option, a sale, conveyance or disposition of all or substantially all of the
assets of the Company or the effectuation by the Company of a transaction or
series of related transactions in which more than fifty percent (50%) of the
voting power of the Company is disposed of shall be deemed to be a Liquidation
Event as defined above; provided further that a consolidation, merger,
acquisition, or other business combination of the Company with or into any other
publicly traded company or companies shall not be treated as a Liquidation
Event. However, a consolidation, merger, acquisition, or other business
combination of the Company with or into any other non-publicly traded company or
companies in which the surviving entity is not a publicly traded company shall
be treated as a Liquidation Event. There can be no assurance that we will have
adequate cash to effect such cash redemptions in the future.
WE WILL RECOGNIZE A SUBSTANTIAL CHARGE TO INCOME UPON CONVERSION OF OUR
CLASS E COMMON STOCK.
In the event any shares of the Class E Common Stock held by shareholders who are
officers, directors, employees or consultants of the Company converted into
shares of Common Stock, we will record compensation expense for financial
reporting purposes during the period conversion appears probable. These
conversion rights expired on September 30, 2000 based on the operating results
of the Company for the year ended June 30, 2000. Our management believes the
conversion rights have not been met and that, as a result, the Class E Common
Stock will be subject to redemption for a nominal amount. However, we continue
to be involved in litigation regarding the Class E Common Stock, the outcome of
22
which cannot be determined at this time. Any adverse determination in such
litigation, including any determination resulting in a conversion of the Class E
Common Stock, could have a material adverse effect on the market price of the
Common Stock.
RISK THAT FORWARD-LOOKING STATEMENTS MAY NOT COME TRUE.
This report contains forward-looking statements that involve risks and
uncertainties. We use words such as "believe", "expect," "anticipate," "plan" or
similar words to identify forward-looking statements. Forward-looking statements
are made based upon our belief as of the date that such statements are made.
These forward-looking statements are based largely on our current expectations
and are subject to a number of risks and uncertainties, many of which are beyond
our control. You should not place undue reliance on these forward-looking
statements, which speak as of the date of this report. Our actual results could
differ materially from those anticipated in these forward-looking statements for
many reasons, including the risks faced by us described above and elsewhere in
this report.
BUSINESS INTERRUPTIONS COULD ADVERSELY AFFECT OUR BUSINESS.
Our operations are vulnerable to interruption by fire, earthquake, power loss,
telecommunications failure and other events beyond our control. We do not have a
detailed disaster recovery plan. We carry only a limited amount of business
interruption insurance, which may not sufficiently compensate us for losses that
may occur. Our facilities in the State of California may be subject to
electrical blackouts as a consequence of a shortage of available electrical
power in the state. We currently do not have backup generators or alternate
sources of power in the event of a blackout. If blackouts interrupt our power
supply, we would be temporarily unable to continue operations at our affected
facilities. Any losses or damages incurred by us as a result of blackouts or
other business interruptions could impair our reputation, harm our ability to
retain existing customers and to obtain new customers, and could result in lost
revenue, any of which could substantially harm our business and results of
operations.
WE MAY NEED ADDITIONAL FUTURE FINANCING IN ORDER TO FUND OUR OPERATIONS AND
PLANS FOR GROWTH.
There can be no assurance that the Company will generate sufficient revenues to
fund its future operations and growth strategies. We may need to obtain
additional financing in the future. We do not have any commitments from others
to provide additional financing in the future and there can be no assurance that
any such additional financing will be available if needed or, if available, will
be on terms favorable to us. In the event such needed financing is not obtained,
our operations will be materially adversely affected and we could be forced to
cease or substantially reduce operations. Any additional equity financing may be
dilutive to shareholders, and debt financings, if available, may involve
restrictive covenants.
OUR BUSINESS DEPENDS UPON THE EFFORTS OF THIRD PARTIES.
Our strategy for the research, development and commercialization of certain
products entails entering into various arrangements with corporate partners,
OEMs, licensees and others in order to generate product sales, license fees,
23
royalties and other funds adequate for product development. We may also rely on
our collaborative partners to conduct research efforts, product testing and to
manufacture and market certain of our products. Although we believe that parties
to any such arrangements would have an economic motivation to succeed in
performing their contractual responsibilities, the amount and timing of
resources to be devoted to these activities may not be within our control. There
can also be no assurance that we will be successful in establishing any such
collaborative arrangements or that, if established, the parties to such
arrangements will assist us in commercializing products. We have a non-exclusive
agreement with a catalog company to distribute certain of our products. We have
formalized relationships with eight foreign distributors to create markets for
GRADIUM in their respective countries. There can be no assurance that these
parties, or any future partners, will perform their obligations as expected or
that any revenue will be derived from such arrangements.
RISKS RELATED TO MANUFACTURING OUR PRODUCTS
IF WE DO NOT ACCURATELY PROJECT DEMAND FOR OUR PRODUCTS, WE WILL HAVE
EXCESS MANUFACTURING CAPACITY OR INSUFFICIENT MANUFACTURING CAPACITY.
We currently manufacture substantially all of our products in our facilities
located in Albuquerque, New Mexico, Walnut, California and Orlando, Florida.
Based on the recent and sudden change in U.S. economic conditions, we now expect
lower demand for our products in fiscal 2002. We intend to lower production
output during the first part of fiscal 2002 while retaining flexibility to meet
demand if it should increase in the near future. As occurred in the first
quarter of fiscal 2002, we expect that the production slowdown will negatively
impact our gross margins during the first half of fiscal 2002. If we fail to
accurately coordinate our production capacity and output with demand for our
products in the future, we may have excess capacity or insufficient capacity,
either of which may seriously harm our results of operations.
Furthermore, we may experience delays, disruptions or quality control problems
in our manufacturing operations, and, as a result, product shipments to our
customers could be delayed beyond the revised shipment schedules requested by
our customers, which would negatively impact our revenues, competitive position
and reputation. For example, we have, in the past, experienced a disruption in
the manufacture of some of our products due to changes in our manufacturing
processes, which resulted in reduced manufacturing yields and delays in the
shipment of our products. If we experience similar disruptions in the future, it
may result in lower yields or delays of our product shipments, which could
adversely affect our revenues, gross margins and results of operations.
24
OUR FAILURE TO ACCURATELY FORECAST MATERIAL REQUIREMENTS COULD CAUSE US TO
INCUR ADDITIONAL COSTS, HAVE EXCESS INVENTORIES OR HAVE INSUFFICIENT MATERIALS
TO BUILD OUR PRODUCTS.
We use rolling forecasts based on anticipated product orders to determine our
materials requirements. It is very important that we accurately predict both the
demand for our products and the lead times required to obtain the necessary
materials. Lead times for materials that we order vary significantly and depend
on factors such as specific supplier requirements, the size of the order,
contract terms and current market demand for the materials at a given time. If
we overestimate our material requirements, we may have excess inventory, which
would increase our costs. If we underestimate our material requirements, we may
have inadequate inventory, which could interrupt our manufacturing and delay
delivery of our products to our customers. Any of these occurrences would
negatively impact our results of operations. Recent order cancellations and
extension of product delivery dates by our customers have created a risk of
material obsolescence. Additionally, in order to avoid excess material
inventories we may incur cancellation charges associated with modifying existing
purchase orders with our vendors.
IF WE DO NOT ACHIEVE ACCEPTABLE MANUFACTURING YIELDS OR SUFFICIENT PRODUCT
RELIABILITY, OUR ABILITY TO SHIP PRODUCTS TO OUR CUSTOMERS COULD BE DELAYED.
The manufacture of our products involves complex and precise processes. Our
manufacturing costs for several products are relatively fixed, and, thus,
manufacturing yields are critical to our results of operations. Changes in our
manufacturing processes or those of our suppliers, or the use of defective
materials, could significantly reduce our manufacturing yields and product
reliability. In addition, we may experience manufacturing delays and reduced
manufacturing yields upon introducing new products to our manufacturing lines.
We may experience lower than targeted product yields in the future which could
adversely affect our operating results.
IF OUR CUSTOMERS DO NOT QUALIFY OUR MANUFACTURING LINES FOR VOLUME
SHIPMENTS, OUR OPERATING RESULTS COULD SUFFER.
Generally, customers do not purchase our products, other than limited numbers of
evaluation units, prior to qualification of the manufacturing line for volume
production. Our existing manufacturing lines, as well as each new manufacturing
line, must pass through varying levels of qualification with our customers.
Customers may require that we be registered under international quality
standards, such as ISO 9001. This customer qualification process determines
whether our manufacturing lines meet the customers' quality, performance and
reliability standards. If there are delays in qualification of our products, our
customers may drop the product from a long-term supply program, which would
result in significant lost revenue opportunity over the term of that program.
WE DEPEND ON SINGLE OR LIMITED SOURCE SUPPLIERS FOR SOME OF THE KEY
MATERIALS IN OUR PRODUCTS, WHICH MAKES US SUSCEPTIBLE TO SUPPLY SHORTAGES OR
PRICE FLUCTUATIONS.
25
We currently purchase several key materials used in the manufacture of our
products from single or limited source suppliers. We may fail to obtain required
materials in a timely manner in the future, or could experience further delays
from evaluating and testing the products of these potential alternative
suppliers. The recent softening of demand in the telecommunications industry
could adversely impact the financial condition of our suppliers, many of whom
have limited financial resources. We have in the past, and may in the future, be
required to provide advance payments in order to secure key materials from
financially limited suppliers. Financial or other difficulties faced by these
suppliers could limit the availability of key components or materials.
Additionally, financial difficulties could impair our ability to recover
advances made to these suppliers. Any interruption or delay in the supply of any
of these materials, or the inability to obtain these materials from alternate
sources at acceptable prices and within a reasonable amount of time, would
impair our ability to meet scheduled product deliveries to our customers and
could cause customers to cancel orders.
RISKS RELATED TO OUR INTELLECTUAL PROPERTY
WE MAY NOT BE ABLE TO PROTECT OUR PROPRIETARY TECHNOLOGY.
We rely on a combination of patent, copyright, trademark and trade secret laws
and restrictions on disclosure to protect our intellectual property rights. We
cannot assure that our patent applications will be approved, that any patents
that may issue will protect our intellectual property or that third parties will
not challenge any issued patents. Other parties may independently develop
similar or competing technology or design around any patents that may be issued
to us.
WE MAY BECOME INVOLVED IN INTELLECTUAL PROPERTY DISPUTES AND LITIGATION.
We anticipate, based on the size and sophistication of our competitors and the
history of rapid technological advances in our industry, that several
competitors may have patent applications in progress in the United States or in
foreign countries that, if issued, could relate to products similar to ours. If
such patents were to be issued, the patent holders or licensees may assert
infringement claims against us or claim that we have violated other intellectual
property rights. These claims and any resulting lawsuits, if successful, could
subject us to significant liability for damages and invalidate our proprietary
rights. The lawsuits, regardless of their merits, could be time-consuming and
expensive to resolve and would divert management time and attention. Any
potential intellectual property litigation could also force us to do one or more
of the following, any of which could harm our business:
- stop selling, incorporating or using our products that use the
disputed intellectual property;
- obtain from third parties a license to sell or use the disputed
technology, which license may not be available on reasonable terms, or
at all; or
- redesign our products that use the disputed intellectual property.
26
IF WE ARE UNABLE TO PROTECT AND ENFORCE OUR INTELLECTUAL PROPERTY RIGHTS,
WE MAY BE UNABLE TO COMPETE EFFECTIVELY.
We regard substantial elements of our technology as proprietary and attempt to
protect them by relying on patent, trademark, service mark, copyright and trade
secret laws. We also rely on confidentiality procedures and contractual
provisions with our employees, consultants and corporate partners. The steps we
take to protect our intellectual property may be inadequate, time consuming and
expensive. Furthermore, despite our efforts, we may be unable to prevent third
parties from infringing upon or misappropriating our intellectual property,
which could harm our business.
It may be necessary to litigate to enforce our patents, copyrights, and other
intellectual property rights, to protect our trade secrets, to determine the
validity of and scope of the proprietary rights of others or to defend against
claims of infringement or invalidity. Such litigation can be time consuming,
distracting to management, expensive and difficult to predict. Our failure to
protect or enforce our intellectual property could have an adverse effect on our
business, financial condition, prospects and results of operation.
NECESSARY LICENSES OF THIRD-PARTY TECHNOLOGY MAY NOT BE AVAILABLE TO US OR
MAY BE VERY EXPENSIVE.
From time to time we may be required to license technology from third parties to
develop new products or product enhancements. We cannot assure you that
third-party licenses will be available to us on commercially reasonable terms,
or at all. The inability to obtain any third-party license required to develop
new products and product enhancements could require us to obtain substitute
technology of lower quality or performance standards or at greater cost, either
of which could seriously harm our ability to manufacture and sell our products.
USE OF PROCEEDS
The Options are being issued as part of the Settlement Agreement, and the
Company will not receive any proceeds from such issuance. The net proceeds to be
received by the Company from the sale of the approximately 201,250 shares of
Class A Common Stock upon the exercise of the Options will be used for general
corporate purposes.
DETERMINATION OF OFFERING PRICE
Because the Options are being issued as part of a settlement of class
action litigation and will not result in any cash proceeds to the Company, there
is no offering price of the Options. The Exercise Price of the Options is $3.73,
which represents the average closing price of the Company's Class A Common Stock
for the ten (10) trading days immediately prior to December 10, 2001, the
effective date of the Settlement Agreement pursuant to which the Options are
issued.
27
PLAN OF DISTRIBUTION
The Options offered hereby are being distributed as part of the Settlement
Agreement that was approved by the Delaware Court of Chancery for New Castle
County (the "Court") on November 9, 2001. See "RISK FACTORS - Current and
Pending Litigation." The Options offered hereby are being distributed to those
non-excluded former Class E shareholders who have chosen to receive the Option
in settlement of their claim (the "Optionholders"). The Company will furnish
each non-excluded former Class E shareholder with a prospectus describing the
Company's business and finances as of the dates set forth. Non-excluded former
Class E shareholders will have fifteen (15) days from the date on which the
prospectus was mailed to them within which to elect to receive either the cash
or the Option as set forth herein, by letter addressed to Ms. Donna Bogue, Chief
Financial Officer, LightPath Technologies, Inc., 3819 Osuna, N.E., Albuquerque,
NW 87109. Any such letter shall be deemed received two (2) days following the
postmark date on the letter. In the event a non-excluded Class E shareholder
fails to make a timely election, LightPath will deem such shareholder to have
elected to receive a cash payment of $0.40 per Class E share formerly held.
Under either settlement alternative, former Class E shareholders participating
in the Settlement Agreement will also receive the redemption price of $0.0001
per Class E share held. Because the Options are being issued as part of a
settlement of class action litigation, the issuance of the Options will not
result in any cash proceeds to the Company. The Company has agreed to bear all
the expenses of registering the issuance of the Options in this Prospectus.
DESCRIPTION OF OPTIONS
As part of the Settlement Agreement and pursuant to that certain
Stipulation of Settlement, filed on November 17, 2000, as approved by the Court
by the entry of its Order and Final Judgment on November 9, 2001, the Company
has agreed to issue the Options to the Optionholders. Upon issuance of the
Options pursuant to the Settlement Agreement, Continental Stock Transfer and
Trust Company, the Company's Transfer Agent, will serve as Option Agent.
The following is a summary of the material features of the Options. A copy
of the form of Option has been filed as an exhibit to the registration statement
of which this Prospectus is a part.
Each Option entitles the Optionholder, at any time prior to 5:00 p.m.,
central time, on December 10, 2003, to purchase five (5) shares of the Company's
Class A Common Stock, at the Exercise Price of $3.73 per share. Both the number
of shares underlying the Options and the Exercise Price are subject to
adjustment under certain circumstances, as set forth below.
The Settlement Agreement requires that we offer the Options to former Class
E holders who did not elect to be excluded from the settlement. The market price
of the Company's Class A Common Stock has declined significantly since the time
the Settlement Agreement was negotiated, and the exercise price of the Options
now exceeds the market price of the underlying Class A Common Stock. Based on
the current market price of the Class A Common Stock, it is economically more
favorable for former Class E holders to receive $0.40 per Class E share formerly
held rather than to receive the Options. Accordingly, even though the Settlement
Agreement requires that we offer the Options to former Class E holders, we
recommend that former Class E holders elect to receive the cash alternative
(i.e., $0.40 per Class E share formerly held) rather than the Options.
28
Optionholders will not be entitled (i) to vote, consent, or receive notice
with respect to meetings of shareholders or the election of directors; or (ii)
to receive dividends or subscription rights as shareholders, until the Option
has been exercised.
The Company does not intend to list the Options on any securities exchange
and does not anticipate that a trading market for the Options will develop or be
maintained. See "RISK FACTORS -- A Public Market for the Options is Unlikely to
Develop."
The Options are exercisable by the Optionholder, for the entire number of
Option Shares, at any time during the term of the Option, by the surrender of
the Option and the executed Notice of Exercise, attached to the Form of Option,
at the offices of both the Option Agent and the Company, and upon payment in
full of the Exercise Price.
The number of Option Shares issuable upon exercise of the Options and the
Exercise Price are subject to adjustment in the event of certain transactions
involving the Company, including: (i) a reorganization, merger, consolidation or
sale of all or substantially all of the Company's assets (an "Extraordinary
Transaction"); (ii) a reclassification; (iii) a split, subdivision or
combination of shares; and (iv) payment of stock or other non-cash dividends.
Upon the effective date of an Extraordinary Transaction, unless such transaction
otherwise provides, the Options will terminate after notice and an opportunity
to exercise the Options. Upon a reclassification, split, subdivision or
combination of shares, the number of Option Shares for which the Options are
exercisable and the Exercise Price shall each be increased or decreased
commensurate with the reclassification, split, subdivision or combination of
shares. Upon the Company's payment of a stock or other non-cash dividend to the
holders of its Class A Common Stock, the Options shall represent the right to
receive, upon exercise, in addition to the Option Shares, and for no additional
consideration, such stock or non-cash dividend, adjusted as necessary from the
date of the payment of the stock or non-cash dividend to the date of exercise.
The Options may not be offered for sale, sold, hypothecated, assigned or
otherwise transferred, except (i) by will or the laws of descent and
distribution, (ii) under a domestic relations order in settlement of marital
property rights, or (iii) to a custodian, trustee (including a trustee of a
voting trust), executor, or other fiduciary in a custodial account, trust or
other arrangement by which the Optionholder retains the entire beneficial
interest in the Option.
29
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Based on the foregoing and the advice of its tax counsel, Squire, Sanders &
Dempsey L.L.P., and subject to the limitations stated herein, the Company
believes that the material U.S. federal income tax consequences of the
Settlement Agreement to Class E Shareholders will be as described in this
Section, Federal Income Tax Consequences.
This discussion is based on present federal income tax law. The discussion
is not intended to be, nor should it be relied on as, a comprehensive analysis
of the tax issues arising from or relating to the Proposed Settlement. Income
tax consequences to the stockholders may vary from the federal tax consequences
described generally below.
1. REDEMPTION OF SHARES PURSUANT TO THE OFFER
As part of this Proposed Settlement, the Class E Shareholders will receive
the redemption price of $0.0001 per Class E share, and each Class E Shareholder,
at its option pursuant to the Proposed Settlement, may receive additional
consideration $0.40 per Class E Share.
While the factual issues are not entirely free from doubt, for federal tax
purposes it is reasonable to conclude and it has been assumed that: (i) the
Delaware Action is a contingency that prevents the redemption of the Class E
Shares until such time that the transactions contemplated by the Proposed
Settlement are consummated; and (ii) the consideration paid is for the Class E
Shares redeemed. Based on the facts and the assumptions contained in this
federal income tax consequences section, the sale of Class E Shares pursuant to
the Offer will be a taxable transaction for federal income tax purposes, either
as a "sale or exchange," or under certain circumstances, as a "dividend."
Under Section 302(b) of the Internal Revenue Code of 1986, as amended (the
"Code"), a sale of Class E Shares pursuant to the Offer generally will be
treated as a "sale or exchange" if the receipt of cash: (a) results in a
"complete termination" of the shareholder's interest in the Company, (b) is
"substantially disproportionate" with respect to the shareholder, or (c) is "not
essentially equivalent to a dividend" with respect to the shareholder. If any of
these three tests for "sale or exchange" treatment is met, a shareholder will
recognize gain or loss equal to the difference between the amount of cash
received pursuant to the Offer and the tax basis of the Class E Shares sold. If
such Class E Shares are held as a capital asset, the gain or loss will be a
capital gain or loss.
A. COMPLETE TERMINATION
A "complete termination" of a shareholder's interest occurs when the
shareholder disposes of all of its proprietary interest in a company. Class E
Shareholders who redeem all of their Class E Shares but continue to own shares
of other Company stock, including but not limited to Class A Common Stock, have
not completely terminated their interest. In addition, the Internal Revenue
Service applies the attribution rules under Code ss.318 when determining whether
a shareholder has completely terminated its proprietary interest. Thus, for
example, Company stock owned by a family member or any entity referenced in Code
ss.318 may be attributed to a related Class E Shareholder and treated as a
proprietary interest that prevents such shareholder from having completely
terminated its interest in the Company. Finally, if constructive ownership under
the family attributions rule of Code ss.318 is all that prevents complete
termination of a shareholder's proprietary interest, the shareholder may seek
relief by waiving family attribution under Code ss.302(c)(2) in certain
instances prescribed in that Code provision.
30
B. SUBSTANTIALLY DISPROPORTIONATE SALE
A "substantially disproportionate" sale or exchange results when the
following three requirements are satisfied:
1. Immediately after redemption, the shareholder must own less than
50% of the total combined voting power of all classes of Company
stock entitled to vote;
2. The shareholder's percentage of the total outstanding voting
stock immediately after the redemption must be less than 80% of
its percentage of ownership of such stock immediately before the
redemption; and
3. The shareholder's percentage of outstanding common stock (voting
or non-voting) after the redemption must be less than 80% of the
shareholder's percentage of ownership before the redemption.
Again, the attribution rules of Code ss.318 apply when determining a
shareholder's percentage ownership.
C. NOT ESSENTIALLY EQUIVALENT TO A DIVIDEND
According to the Supreme Court in UNITED STATES V. DAVIS, 397 U.S. 301
(1970), the determination of whether a sale or exchange is "not essentially
equivalent to a dividend" is a fact-specific determination that looks to whether
the redemption has resulted in a "meaningful reduction in the shareholder's
proportionate interest in the corporation." In making this determination, the
attribution rules of Code ss.318, discussed above, apply. For this purpose, a
meaningful reduction of a shareholder's proportionate interest in the
corporation has been held to refer to a significant reduction in 1) the
shareholder's voting interest, 2) the shareholder's dividend rights, 3) the
shareholder's rights to receive the proceeds of a complete liquidation of the
corporation, or 4) some combination of the foregoing shareholder rights.
However, a precise dividing line between those reductions that are meaningful
and those that are not meaningful has not been established in the cases or
administrative authorities. Rather, the authorities make that determination
based on the facts and circumstances relating to the particular shareholder and
corporation.
If a Class E Shareholder cannot meet one of the three tests under Code
ss.302(b), the redemption of that shareholder's stock will be treated as a
distribution under ss.301. Under ss.301, the amount of the distribution is
treated as ordinary income to the extent of the Company's earnings and profits,
then as recovery of basis of the shareholder's Class E Shares, and finally as
gain from the sale or exchange of property. Generally, if the Company has
distributed other dividends in the year of redemption, earnings and profits will
first be attributed to the earlier dividends. If a Class E shareholder retains
shares, the basis of the retained shares will be increased by the basis of the
redeemed shares. If a Class E Shareholder retains no shares, it may transfer the
basis of its redeemed shares to shares held by a related shareholder.
31
2. EXCHANGE OF CLASS E SHARES FOR OPTION TO PURCHASE CLASS A COMMON SHARES
Also, as part of the Proposed Settlement, the Class E Shareholders have the
option to exchange their Class E Shares for $0.0001 per Class E Share and an
Option or Options to purchase Class A Common Shares.
While the factual issues are not entirely free from doubt, for federal tax
purposes it is reasonable to conclude and it has been assumed that: (i) the
Delaware Action is a contingency that prevents the exchange of the Class E
Shares until such time that the transactions contemplated by Proposed Settlement
are consummated; and (ii) the consideration paid is for the Class E Shares
exchanged. Based on the facts and the assumptions in this federal income tax
consequences section, the Company believes that the exchange of Class E Shares
for options to purchase Class A Common Stock will constitute a
"recapitalization" under Section 368(a)(1)(E) of the Code.
(1) The issuance of the Options and cash pursuant to the Option Alternative
in exchange for the Class E Shares should constitute a reorganization within the
meaning of Section 368(a)(1)(E); (2) the Company should be a party to a
reorganization within the meaning of Section 368(b) of the Code; (3) no gain or
loss should be recognized by the Class E Shareholders of the Company upon their
receipt of an Option, except that a Class E Shareholder shall recognize gain to
the extent the cash received by a shareholder pursuant to the Option
Alternative, but no greater than the amount by which the value of the Options
plus the cash received pursuant to the Option Alternative exceeds the Class E
Shareholder's aggregate tax basis in the Class E Shares surrendered pursuant to
the Option Alternative; (4) the aggregate tax basis of the Options received by a
Class E Shareholder of the Company should be the same as the aggregate tax basis
of the Class E Shares exchanged pursuant to the Option Alternative, reduced by
the amount of cash received pursuant to the Option Alternative and increased by
the amount of gain recognized by the Class E Shareholder in connection with the
Option Alternative; and (5) the holding period of the Options received in the
exchange should include the holding period of the Class E Shares surrendered in
the exchange, provided that such shareholder held the Class E Shares as a
capital asset on the date of the exchange.
Further, assuming that an Option is held as a capital asset, it is also our
opinion that (1) the taxation of the disposition of an Option received in
exchange for Class E shares should be governed by Section 1234 of the Code; (2)
under Section 1234, a Class E Shareholder that sells an Option should realize a
capital gain or loss that should be short-term or long-term, depending upon the
holding period of the Option; (3) a Class E Shareholder that allows its Option
to expire should realize a capital loss that should be short-term or long-term,
depending upon the holding period of the Option; (4) if a Class E Shareholder
exercises its Option to purchase Class A Shares, the tax basis of the Option
should be added to the aggregate tax basis of the purchased Class A Shares, and
(5) the holding period of Class A Shares acquired through exercise of an Option
received in exchange for Class E Shares should not include the holding period of
the Option.
The Company generally will be required to withhold tax equal to the rate of
30.5% (backup withholding) from any payment to a tendering Class E Shareholder
that is an individual (or certain other non-corporate persons) if the
shareholder fails to provide the Company with its correct taxpayer
identification number and certify that it is not subject to backup withholding
on dividends (by completing and returning the Form W-9 included in theNotice of
Election) or if the Internal Revenue Service advises the Company that the
shareholder is subject to backup withholding for prior underreporting of
reportable interest or dividend payments. A foreign shareholder generally will
be able to avoid backup withholding with respect to payments by the Company
W-8BEN, certifying under penalties of perjury, that it (1) is neither a citizen
nor a resident of the United States, (2) has not been, and reasonably does not
expect to be, present in the United States for a period aggregating 183 days or
32
more during the calendar year, and (3) reasonably expects not to be engaged in a
trade or business within the U.S. to which the gain on sale of the Class E
Shares would be effectively connected, or a duly completed Form W-8ECI,
certifying under penalties of perjury, that (1) it is neither a citizen nor
resident of the U.S., and (2) this income is effectively connected with a U.S.
trade or business. Backup withholding is not an additional tax, and any amounts
withheld may be credited against a shareholder's U.S. federal income tax
liability or refunded by the Internal Revenue Service.
The foregoing discussion is intended only as a summary of the material
federal income tax consequences of the Proposed Settlement. The foregoing
discussion does not address the tax consequences that may be relevant to
particular Class E Shareholders in light of their personal circumstances or to
taxpayers subject to special treatment under the Code (for example, tax exempt
entities, life insurance companies, regulated investment companies and foreign
taxpayers, corporations, or related parties). The foregoing discussion is not
intended as tax advice to any person or entity.
No information is provided herein with respect to the tax consequences, if
any, of the Proposed Settlement under applicable state, local, foreign or other
tax laws. No ruling from the Internal Revenue Service or opinion of counsel will
be obtained regarding the federal income tax consequences to the stockholders as
a result of the Proposed Settlement.
The foregoing discussion is based upon the provisions of the Internal
Revenue Code, applicable Treasury regulations thereunder, Internal Revenue
Service rulings, and judicial decisions as in effect as of the date of this
proxy statement. There can be no assurance that future legislative,
administrative, or judicial changes or interpretations will not affect the
accuracy of the statements or conclusions set forth herein. Any such change
could apply retroactively and could affect the accuracy of this discussion.
BECAUSE OF THE INTENSELY FACTUAL NATURE OF THE ABOVE ANALYSIS, YOU STRONGLY ARE
URGED TO CONSULT YOUR OWN TAX ADVISOR AND SEEK YOUR TAX ADVISOR'S OPINION AS TO
THE SPECIFIC TAX CONSEQUENCES TO YOU OF THE SETTLEMENT AGREEMENT, INCLUDING THE
APPLICATION OF FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX LAWS.
INTERESTS OF NAMED EXPERTS AND COUNSEL
On October 6, 2000, James L. Adler, Jr. was elected to serve as a director
of LightPath until the 2003 annual meeting of shareholders. Mr. Adler is a
partner of the law firm of Squire, Sanders & Dempsey L.L.P., which has issued an
opinion as to the validity of the Options offered by this prospectus and also
provides legal services to us on a regular basis. Mr. Adler holds options under
the Directors Stock Option Plan to purchase 59,176 shares of Class A Common
Stock at exercise prices ranging from $3.25 to $28.03. As of October 31, 2001,
these shares represented less than 1% of the total outstanding shares of Class A
Common Stock.
33
INFORMATION WITH RESPECT TO THE REGISTRANT
DESCRIPTION OF THE BUSINESS
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 metro WDM market. Since 1998,
LightChip has received approximately $84 million from the issuance of common
stock and three series of convertible preferred stock. The initial investors
included AT&T Ventures and LightPath. Subsequent investors also include
Morgenthaler Ventures, J.P. Morgan Capital and Berkeley International. Our
current percentage ownership of LightChip is approximately 16.4% of total
preferred and common shares (13.2% if fully diluted by the exercise of
outstanding stock options).
LightChip successfully demonstrated a WDM model and had prototypes of
several products available in fiscal 2000. They began product sales in calendar
2001 in Salem, New Hampshire. We licensed the use of GRADIUM glass to LightChip
for specific applications. 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.
In fiscal year 1998, we 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.
34
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 optical components market. This strategy is built around automated
production of the telecom components using laser fusion and fiber attachment
techniques we have developed. We have also maintained our emphasis on optical
materials where we gained expertise during the development of GRADIUM glass.
During fiscal 1998, sales of lenses to the traditional optics market continued
with increases in sales of lenses used in the YAG laser market, catalog and
distributor sales and lenses used in the wafer inspection markets. During this
time, we reorganized 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".
In designing our optoelectronic devices, we focused on automation of the
manufacturing process. Although many other manufacturers in this industry rely
on offshore production to control costs, we believe that automation of the
manufacturing process can yield significant costs savings over the long term.
Our patented laser fusion and fiber attachment techniques are highly automated,
and we believe these techniques provide improve quality and a better flexibility
to increase manufacturing capacity in response to growth in demand. Our
automation concept was expanded upon with our fiscal 2000 acquisition of Horizon
Photonics, Inc. ("Horizon") where we employ the use of robotic welders in
manufacturing of isolators.
On April 14, 2000, we acquired Horizon, a California corporation originally
founded in July 1997. Horizon is engaged 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 $40.2 million, based on the trading price of our
common stock). Horizon manufactures isolator products at their Walnut,
California facility.
On September 20, 2000, we acquired Geltech, Inc. ("Geltech"), a Delaware
corporation, originally founded in May 1985. Geltech is a manufacturer of
precision molded aspheric optics used in the active telecom components market to
provide a highly efficient means to couple laser diodes to fibers or waveguides.
Additionally, Geltech has a unique and proprietary line of all-glass diffraction
gratings (StableSil(R)) for telecom applications such as optical switching,
mux/demux and laser tuning. Geltech also produces lens arrays for optical
switches and other applications and is currently developing a product family of
Sol-Gel based waveguides. We acquired all of the outstanding shares of Geltech
for an aggregate purchase price of approximately $28.5 million, comprised of
822,737 shares of Class A common stock (valued at $27.5 million based on the
trading price of our common stock) and approximately $1 million in acquisition
costs. Geltech manufactures products at its facility in Orlando, FL. During
fiscal 2001 and continuing into fiscal 2002, Geltech has been expanding its
manufacturing facility, which will include integrating some of the automation
techniques utilized at our other facilities.
35
OPERATING SEGMENTS AND PRODUCTS
We operate through two operating segments; optoelectronics and fiber
telecommunications ("telecom"), and traditional optics (e.g. lasers, data
storage, bar coding, medical equipment, consumer optics, etc.). We manufacture
and sell the following types of telecom products at LightPath, Horizon and
Geltech: (i) collimators, (ii) isolators and (iii) molded aspheric lenses.
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 back
reflection of optical signals that can degrade transmitter and amplifier
performance. Molded aspheres are used in telecom applications to collimate or
couple light as it emerges from a fiber. Collimators, isolators, molded aspheres
and other optical components are used throughout fiber optic systems. Such
systems are used by the telecommunications industry with a goal of increased
bandwidth, through the development of all optical networks, 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.
LightPath and Geltech manufacture traditional optics products including:
(i) GRADIUM glass products, lenses, prisms and (ii) molded aspheric lenses.
GRADIUM glass is an optical quality glass material with varying refractive
indices used for optics such as lenses for YAG lasers. Molded aspheres are used
in non-telecom applications such as optical data storage, high precision
printing, bar coding and by manufacturers of medical equipment. In addition, we
manufacture a family of traditional optics including laser flow tubes, polished
cylinders and flats, and prisms.
COLLIMATORS
We offer three product levels of collimators:
* collimating lenses;
* single mode fiber Gen3 collimator assemblies; 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 than
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, in most cases, immediate improvements in performance, repeatability and
cost.
36
GEN3 COLLIMATOR AND LARGE BEAM 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. We demonstrated our first
passive optoelectronic product, a single mode fiber collimator assembly ("SMF
Assembly") in February 1998. Our SMF Assembly and subsequent Gen3 offer 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 collimator is a key element in all fiber optic systems, including WDM
equipment. Collimators straighten and make parallel, diverging light as it exits
a fiber. Our Gen3 collimator 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.
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 for the WDM market. To date, Horizon is
manufacturing a qualified family of free-space, laminate and contract-specific
isolators. In 2001, Horizon released a new line of isolator assemblies for
application in the metro and access telecom markets. This line is based on a
flexible manufacturing platform which can address a wide range of customer
specifications while attracting lower cost applications.
Horizon's core competency is the optical isolator. An isolator is used to
prevent the back reflection 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.
MOLDED ASPHERES, MOLDED LENS ARRAYS AND DIFFRACTION GRATINGS
The telecom industry has a need for molded aspheres for laser-to-fiber
coupling, tunable lasers, DFB lasers and device coupling. Corning Inc. developed
the original process of molding a proprietary low melting temperature glass into
an asphere lens. In 1994, Geltech acquired the laboratory scale process, key
personnel and equipment, and also secured a perpetual license to all Corning's
intellectual property associated with the development of precision molded
optics. Since acquiring the technology from Corning, Geltech has refined the
process and developed the markets for these exceptional lenses. As high
37
performance laser diode applications have proliferated, Geltech's business and
reputation have grown significantly.
Geltech's focus is on providing custom optical solutions to meet unique
customer needs in the rapidly changing telecommunications market. Geltech
provides optics of size up to 15mm, and is a developer of sub-millimeter optics.
Geltech has also developed a line of molded lens arrays. Geltech has
developed a process to mold lens arrays capable of producing optical components
with very small lens diameters and very high lens density (for example 40,000
optical elements in a two-inch diameter array).
Geltech also has a unique and proprietary line of all-glass diffraction
gratings (StableSil(R)) for telecom applications and is developing a product
family of Sol-Gel based waveguides. Gratings operate by separating light into
various wavelengths, utilized in DWDM, tunable lasers and optical test equipment
applications. Geltech gratings are replicated providing a low-cost, high-volume
approach when compared with conventional methods currently employed by some of
Geltech's competitors.
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.
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
isolators, next generation optical subassemblies, diffractive gratings,
waveguides, switches, micro-collimators and lens arrays for use in the
telecommunications field as well as new GRADIUM glass materials to be used in
various telecom applications.
We were issued a patent in fiscal year 2000 for development of a process
utilizing high-powered lasers for fusion, splicing and polishing of optical
material to include optical fiber. 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 to the lens axis 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
38
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.
We were issued a patent in fiscal year 2001 relating to our robotic
assembly platform used for the manufacturing of isolators and have several other
patents in process. We have approximately 50 US and foreign patents in the areas
of precision molded optics and Sol-Gel technologies. We also hold the exclusive
right to certain materials we believe are key to the development of high
precision molded optics.
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.
MODULES
During fiscal 2001, we introduced a number of modules which will combine
two or more of our current components, such as the isolator and molded aspheres,
into a subassembly. During fiscal 2002 we plan on expanding these modules
offering and to automate the manufacturing of these modules to take advantage of
low cost assembly. Demand for modules is driven by specific customer needs.
Utilizing automation techniques, we are able to provide active alignment of
multiple components and deliver a subsystem optimized for the customers unique
needs with very low insertion loss.
SWITCHES AND COLLIMATOR ARRAYS
During fiscal 2002, we had planned on shipment of the 1XN opto-mechanical
switch based upon a patent licensed from Herzel Laor. Due to the current
economic environment we have elected to delay expenditures required to launch
this product in fiscal 2002. We will concentrate instead on development of
further enhancements to existing product lines. We introduced the prototype of
this product in August 2000. The prototype is much smaller than current
competitor's switches while demonstrating impressive switching speeds. We are
also working on technologies that can be applied to NxN switches. Using the
automated alignment techniques learned in production of the 1XN opto-mechanical
switch, we plan on developing collimator arrays.
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 remain in
development.
39
SOL-GEL TECHNOLOGY
Late in 1994, after the acquisition of the complementary Precision Molded
Optics process from Corning, Geltech redirected the Sol-Gel technology's focus
towards development and manufacture of advanced optical components. Examples of
these components include the high volume manufacture (more than 17 million units
to date) of silica substrates for optically active windows used in toxic gas
detection and the development and production of unique solid-state calibration
filters. Geltech has practiced Sol-Gel technology since its inception and has
successfully addressed many different markets over the years. Today, Geltech has
significant knowledge in this field with protection through extensive know-how,
trade secrets, and 7 issued patents.
During the past few years, Geltech also developed a replication process to
manufacture glass diffractive optical components using Sol-Gel technology. This
process allows the fabrication by replication of these complex optics at a
fraction of the cost of conventional technologies such as photolithography and
reactive-ion etching.
Early in 2000, Geltech introduced a line of all-glass gratings in response
to the anticipated demand from the telecommunications industry for the
fabrication of DWDM and other devices requiring high performance and sturdy
gratings. These all-glass gratings present significant advantages over available
gratings due to outstanding environmental resistance, high performance and low
cost.
Geltech continues to pursue the development of additional products based on
Sol-Gel technology. Included in our new product plan are inorganic waveguides,
active waveguides and arrayed waveguide gratings to be used in
telecommunications applications.
BUSINESS STRATEGY
Our management and marketing focus is organized with the intended purpose
of serving two separate markets: (1) optoelectronics and fiber
telecommunications ("telecom"), and (2) traditional optics (e.g. lasers, data
storage, bar coding, medical equipment, consumer optics, etc.). 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 (TELECOM PRODUCTS)
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
dramatic rise of the Internet, office automation, videoconferencing, local and
wide area networking, and remote access telecommunications has fueled the demand
for increased 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
40
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.
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 developed which utilizes laser fusion and fiber attachment. During
1999 and 2000, we expanded this product line, demonstrating to the
telecommunication optical components industry that we can provide low cost
products and 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 our investment in LightChip, we have positioned
ourselves with products that are used within WDM systems.
With our acquisition of Horizon, we acquired a manufacturer engaged 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
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. We believe Horizon has
a competitive advantage for a certain segment of OEM business, especially as it
41
relates to isolator products, since its proprietary platform allows Horizon to
produce unique designs at competitive prices in a flexible, automated process.
In fiscal 2001, Horizon released a new line of isolator assemblies for
application in the metro and access telecom markets. This new line is based on a
flexible manufacturing platform which can address a wide range of customer
specifications while attracting lower cost applications.
ASPHERIC LENSES
Lenses in telecommunications applications perform two major tasks. One is
for the collimation of light as it emerges from the fiber. This collimated light
then passes through multiple components including isolators, filters, and a
second collimator, before returning back into a fiber. The second major task is
coupling light at the output of a laser diode to a fiber or waveguide. Aspheric
lenses and lens arrays are used in both of these configurations.
Telecom products manufactured using this technology include aspheric
lenses, sub-millimeter lenses and lens arrays. Several new products targeting
telecommunications applications, and using this technology are under development
at Geltech. These new products include low-cost aspheric lenses, anamorphic
lenses, cross cylinder lenses, multifunctional optical components and new
components for low cost WDM products. All of these products have key relevancy
for many different applications in the telecommunications market.
SWITCHES
In 1999, we entered into an exclusive licensing agreement with Herzel Laor
for the commercialization of two fiberoptic opto-mechanical switch technologies.
In August 2000 we introduced the LP1600 opto-mechanical switch at the National
Fiber Optics Engineers Conference in Denver, Colorado. The LP1600 is a 1xN
optical switch, which is designed to route one incoming fiber into one-of-many
output fibers. The current design allows customers to select custom
configurations of 4 to 24 output channels, with future designs allowing up to
100 output channels. The Company planned to manufacture the switch at its
Albuquerque location using its patented automated fiber fusion and active
alignment processes. Due to delays which developed after Kaifa Technology went
through two acquisitions to ultimately become part of JDS Uniphase Corporation,
we decided not to continue our efforts under a 1999 joint assembly and
distribution agreement for the fiberoptic mechanical switches with Kaifa
Technology. In fiscal 2001, due to the current economic environment we have
elected to delay expenditures required to launch this product in fiscal 2002. We
intend to concentrate instead on development of further enhancements to existing
product lines.
WAVEGUIDES
Waveguides and Waveguide Array Gratings are important technologies for
coupling and splitting wavelengths of light in DWDM applications. Typical
configurations are made of silica on silicon and new developments are being made
using Sol-Gel. The largest market segment for waveguide usage is currently in
the area of multiplexing/demultiplexing.
42
OTHER PRODUCTS
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 in sales of
our 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 distributor, Permanova Lasersystems
AB of Sweden, funded and 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.
MOLDED ASPHERES
In 1994, Geltech acquired the Precision Molded Optics process from Corning,
Inc. Geltech's traditional optics product applications are molded aspheres used
in optical data storage, high precision printing, bar coding and by
manufacturers of medical equipment. In addition to the molded aspheres, Geltech
also manufactures a family of traditional optics including laser flow tubes,
polished cylinders and flats, and prisms. These devices are primarily sold to
manufacturers of medical devices, laser eye surgery, and other traditional optic
applications.
43
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
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 may 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 designed in 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
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, data storage), 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.
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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. 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. With our
acquisition of Geltech, we have added a product line sold into the active
optical component markets as well as products to be sold into DWDM systems.
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
* Florida
* 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.lightpath.com) as vehicles for broader promotion of our
telecom 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 Agere Systems, Inc., Lucent Technologies, Inc.,
Corning, Inc., JDS Uniphase Corporation and Alcatel Optronics. The lens and Gen3
collimator 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 Gen3 collimator as we believe that the Gen3 collimator will
replace the collimating lens in many applications. Since many of our targeted
customers currently assemble their own collimators, our sales approach will be
to highlight the Gen3 collimator price/performance ratio (value) and compare
that to the customer's internal costs plus their lost opportunity cost. During
fiscal 2001, our large beam collimator was selected as the primary customized
collimator built specifically for Corning's PurePath(TM) Wavelength Selective
Switch. This product utilizes both a GRADIUM lens and a Gen3 collimator which
takes advantage of the unique properties of both components.
Telecom product sales for fiscal years 2001, 2000 and 1999 were
approximately $21.1 million, $1.5 million and $57,000 respectively, primarily
generated by targeting our sales efforts on collimators and isolators, entry
level products currently used by the telecommunications industry. Our major
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telecom customers in fiscal 2001 and 2000 included Agere Systems, Inc., Lucent,
Inc., Corning, Inc. and JDS Uniphase Corporation.
Horizon's current marketing plan for isolators targets niche players in the
telecom/datacom markets with high 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 largest customer, with
sales of approximately $11.4 million and $900,000 in fiscal 2001 and 2000,
respectively, was Agere Systems, Inc. ("Agere") (formerly the Microelectronics
division of Lucent Technologies Inc.) Early in fiscal 2001, this platform was
qualified to support Agere's premium isolator package for high volume
production, although there can be no assurance that Agere will purchase Horizon
products in these quantities. Horizon has also qualified a low-cost isolator
platform to be used in the metro access markets.
Geltech's current marketing plan for molded aspheres targets the asphere
lenses used with the 980/1480 pump lasers, DFB lasers and tunable lasers with
their major customers being JDSU, Alcatel and New Focus. Geltech is also focused
on niche players in the DWDM who utilize all glass diffraction gratings and
Sol-Gel waveguides. Geltech's micro lens array has application in optical
switching, waveguide coupling and fiber array coupling. In addition, Geltech is
focusing on several high volume opportunities in optical data storage working
closely with the key players developing the next generation of audio/video
devices.
In addition to our telecom products business, we are planning on providing
modules where several of our components are integrated with automation to
provide a subassembly to the customer. We believe these modules have the
potential to provide higher gross profit margins than the individual components.
We are also addressing our customers DWDM needs by focusing our development team
efforts on a "micro-collimator" assembly to target 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.
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 16.4% of the preferred and common shares
outstanding of LightChip (13.2% if fully diluted by exercise of outstanding
stock options). LightChip successfully demonstrated a WDM model and DWDM
prototypes and product sales began 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
46
In 1999, we entered into an exclusive licensing agreement with Herzel Laor
for the commercialization of two fiberoptic opto-mechanical switch technologies.
In August 2000 we introduced the LP1600 opto-mechanical switch at the National
Fiber Optics Engineers Conference in Denver, Colorado. The LP1600 is a 1xN
optical switch, which is designed to route one incoming fiber into one-of-many
output fibers. The current design allows customers to select custom
configurations of 4 to 24 output channels, with future designs allowing up to
100 output channels. The Company planned to manufacture the switch at its
Albuquerque location using its patented automated fiber fusion and active
alignment processes. Due to delays which developed after Kaifa Technology went
through two acquisitions to ultimately become part of JDS Uniphase Corporation,
we decided not to continue our efforts under a 1999 joint assembly and
distribution agreement for the fiberoptic mechanical switches with Kaifa
Technology. In fiscal 2001, due to the current economic environment we have
elected to delay expenditures required to launch this product in fiscal 2002. We
will concentrate instead on development of further enhancements to existing
product lines. 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.
* 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 Phase 2 total funds of $750,000 were awarded to
Radiant Research Inc. for continuation of the WDM project, of which we received
approximately $300,000. The project ended in fiscal 2000.
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. During fiscal 2001, we have displayed our additional product lines of
isolators, molded aspheres, diffraction gratings and micro lens arrays. These
shows provide an opportunity for us to meet with potential customers, distribute
information and samples of our products or to discuss test results from samples
previously sent.
TRADITIONAL OPTICS
Prior to our 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 2001 and 2000 were approximately $5.1 million and $768,000,
respectively. The growth in 2001 was primarily due to the addition of Geltech's
47
traditional optics business in September 2000, which accounted for $4 million of
traditional optics sales in fiscal 2001. Geltech's products are used in data
storage and by manufacturers of medical equipment. 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 2001 included Coherent, Alpine
Research, Sunrise Technologies and Gerhard Franck Optronik GmBH. Our major
customers in fiscal 2000 included Gerhard Franck Optronik GmBH and Permanova
Laser Systems AB.
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.lightpath.com) 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 selected
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, who
converted to a non-exclusive arrangement.
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
48
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 Gen3 collimator. 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 Gen3 collimator
will compete against existing collimator assemblies, which are produced by
Casix, DiCon Fiberoptics, Samsung Electronics, Wave Optics and Oz Optics. There
are also a number of companies that assemble their own collimators, such as
Lucent, and JDS Uniphase. 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 in the immediate future.
ISOLATORS
Horizon competes with a few specific players in the isolator segment of the
WDM components market. These include Namiki, TDK, Tokin, Kyocera, Sumitomo and
Kaifa Technology (acquired by E-TEK/JDS Uniphase). Horizon's strategy does not
involve direct competition with the "catalog" offerings of these companies;
rather, Horizon focuses its efforts on designing and manufacturing specialty and
hybrid components according to particular OEM specifications by delivering
flexible and novel packaging solutions achieved by its automated platform.
MOLDED ASPHERES
Geltech competes with Hoya Corporation and Asahi Corporation in the molded
asphere lenses. Diffraction gratings or a competitive solution are sold by
American Holigraphics, Jobin Yvan and Pirelli; arrayed waveguide gratings are
produced by Lucent and PIRI; and reflective gratings are produced by Instruments
49
SA. In addition, for less performance driven applications, Geltech competes with
manufacturers of plastic aspheres.
SWITCHES AND OPTICAL CROSS-CONNECTS ("OXC")
Mechanical switches comprise the majority of switches used today in the
telecommunications industry. Current competitors in this area include JDS
Uniphase and 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 continue with the development of OXC. 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 generally performed electronically, however, several non-optical
switches have recently been announced. To our knowledge, all of these devices
remain in 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 aspheric 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
substantial technological expertise 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 aspheric lenses and optical components provide significant
competition for our traditional optics in providing products that improve the
shortcomings of conventional lenses. Aspheric lens system manufacturers include
Eastman Kodak Corporation, Hoya Corporation, Schott Glass, Hikari Glass Co.,
Ltd. and U.S. Precision Lens. The use of aspheric 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 nonspheric 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, aspheric lenses
presently have significant commercial acceptance.
50
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, and Gradient Lens
Corporation. 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.
MANUFACTURING
LIGHTPATH
LightPath has full scale commercial manufacturing operations in its
Albuquerque, New Mexico facilities, totaling 30,300 square feet. In June 2000,
we completed the initial construction of a 5,000 square foot clean room that
houses seventeen operational manufacturing stations. Each station includes laser
fusion and housing equipment and an automated testing process. We currently have
two laser polishing stations in operation. With this equipment, we believe our
facilities can meet the capacity requirements of our planned telecom products
for several years. Our present telecom manufacturing facility can also be
expanded by approximately 25% if needed.
Due to manufacturing techniques we have developed, we believe our costs to
produce the Gen3 collimator will be less than the traditional industry
manufacturing costs. In April 1996, we built out our 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
51
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 our ability 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 while the assembly and alignment of collimators will be done with
automation at our manufacturing facilities.
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 2002.
We have taken steps to protect our proprietary methods of repeatable high
quality manufacturing by patent disclosures and internal trade secret controls.
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, including EDM
capability, 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
52
throughput, and (ii) product consistency as a result of eliminating manual
labor. We believe Horizon is the only manufacturer of free-space isolators
currently 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 Polarcora. To date, Horizon has been
able to acquire an ample supply of polarizing glass. The latching garnet used in
some isolators is supplied exclusively by Agere. Allocations of supply for this
raw material can be very competitive but have not been an issue to date.
Non-latching garnet and other crystals used in Horizon's other isolator products
are provided by a number of vendors, including Casix, Sumitomo and TDK.
Available quantities and adequate pricing of this garnet has not proven
problematic. 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.
GELTECH
Geltech's manufacturing lines are housed in approximately 23,000 sq./ft at
its headquarters in Orlando, Florida. This facility includes extensive research
and development labs featuring state-of-the-art equipment and metrology. The
manufacturing plants include lens pressing equipment, high precision mold
production equipment, advanced metrology and inspection equipment and coating
facilities. The Orlando plant features an extensive tooling and machine shop,
developed for the fabrication of proprietary press workstations, and advanced
mold development.
In November 2001, Geltech moved into a new 41,000 sq/ft., production
facility to accommodate current and future growth needs in Orlando. At this time
we consolidated our traditional optics work within the new facility and closed a
second site. The new facility will feature extensive clean room operations,
expanded tooling and coating work areas, and expanded areas for the production
of diffraction gratings and micro-lens arrays. The new production facility will
also emphasize automation in all phases of manufacturing. The new facility is
expected to provide Geltech with the platform to significantly reduce costs
through process improvements and automation, and provide the capacity needed for
the fulfillment of high volume opportunities.
SUPPLIERS
Geltech utilizes a number of glass compositions for the manufacture of its
molded glass aspheres and lens array products. One such glass is a proprietary
glass composition licensed from and manufactured by Corning Incorporated.
53
Corning Incorporated is currently the sole source for this glass composition. 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. Suppliers and second sources of other glass compositions are readily
available.
Geltech also relies on local and regional vendors for component materials
and services such as chemicals and inert gases, specialty ceramics, UV coatings
and other specialty coatings. To date, Geltech has found a suitable number of
qualified vendors for these materials and services.
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 2001,
LightPath and its subsidiaries had forty-nine issued U.S. patents, twenty-nine
foreign patents and had filed numerous applications for additional U.S. patents
and foreign patents. Patents have been issued and/or patent applications have
been filed in the areas of glass composition, glass molding, gradient
geometries, production processes, sol-gel processing, product design, fiber
attachment, robotic assembly and micro-fabrication. The first of our issued
patents expires in 2006; the remainder expire at various times through 2018.
Patent applications corresponding to our 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". Geltech's StableSil (R) is a
registered trademark.
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
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 an insurance policy for patent
infringement liability coverage for costs or damages relating to claims of
54
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 ourself 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 processes 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. Geltech
utilizes certain chemicals and solvents in its manufacturing process. Geltech
maintains all necessary permits and believes it is in full compliance with all
applicable regulations
55
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
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.
The majority of present development efforts are focused on the Gen3
collimator assembly and expanding the Company's products to the areas of
switches, interconnects and cross-connects for the telecommunications industry.
Our acquired businesses continue their efforts in the area of isolators and next
generation optical subassemblies, diffractive gratings, waveguides, lens arrays
and sub-assembly technologies. We incurred expenditures for research and
development for the years ended June 30, 2001, 2000 and 1999 of $7,089,931,
$1,449,347 and $615,371, respectively. In addition, during fiscal 2001, $9.1
million and during fiscal 2000 $4.2 million of in-process research and
developments costs were expensed related to the acquisition of Geltech and
Horizon, respectively. We currently plan to expend approximately $6.5 million
for research and development during fiscal 2002, which could vary depending upon
progress of projects in the proof of concept stage.
56
EMPLOYEES
We currently have approximately 200 full-time employees in California, New
Mexico, Texas, Florida and New Jersey. Although we have reduced our workforce by
approximately 190 people during the last three quarters, we expect to continue
to hire selectively in the manufacturing, engineering, sales and marketing and
administrative functions to the extent consistent with our business levels. 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.
PRICE RANGE OF THE COMPANY'S CLASS A COMMON STOCK.
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
Common Stock
Fiscal Year Ended Quarter ended High Low
----------------- ------------- ---- ---
June 30, 2000: September 30, 1999 $ 7.19 $ 1.78
December 31, 1999 $ 18.69 $ 3.13
March 31, 2000 $ 65.31 $ 15.88
June 30, 2000 $ 41.38 $ 15.63
June 30, 2001: September 30, 2000 $ 57.94 $ 26.50
December 31, 2000 $ 48.00 $ 10.56
March 31, 2001 $ 27.44 $ 10.25
June 30, 2001 $ 19.00 $ 6.65
June 30, 2002: September 30, 2001 $ 8.39 $ 1.78
December 31, 2001 $ 5.00 $ 1.81
We estimate that there were approximately 300 holders of record and
approximately 19,000 beneficial holders of the Company's Class A Common Stock on
August 15, 2001. We have not paid cash 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.
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
LightPath is providing the following information to assist you in your
financial analysis of the Company. The table below represents selected
historical consolidated statement of operations and balance sheet data of
LightPath Technologies, Inc. and subsidiaries. The consolidated statement of
operations data set forth below for the years ended June 30, 2001, 2000 and 1999
and the consolidated balance sheet data as of June 30, 2001 and 2000 are derived
from, and are qualified by reference to, the audited consolidated financial
statements of LightPath Technologies, Inc. and subsidiaries included elsewhere
in this prospectus. The consolidated statement of operations data set forth
57
below for the years ended June 30, 1998 and 1997 and the consolidated balance
sheet data as of June 30, 1999, 1998 and 1997 are derived from audited
consolidated financial statements of LightPath Technologies, Inc. and
subsidiaries not included in this prospectus. The consolidated statement of
operations data set forth below for the six months ended December 31, 2001 and
2000 and the consolidated balance sheet data as of December 31, 2001 are derived
from, and are qualified by reference to, the unaudited condensed consolidated
financial statements included elsewhere in this prospectus.
In LightPath's opinion, the unaudited consolidated information for the six
months ended December 31, 2001 and 2000 reflects all adjustments, consisting
only of normal recurring adjustments, necessary to fairly present the results of
operations and financial condition. Results from interim periods should not be
considered indicative of results for any other periods or for the year. This
information is only a summary. You should read it in conjunction with
LightPath's historical financial statements and related notes and the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," which are included elsewhere in this prospectus.
In 000's except per Six months ended
share data December 31 Fiscal Year end June 30
----------------------- -------------------------------------------------------------
2001 2000 2001 2000 1999 1998 1997
--------- --------- --------- --------- --------- --------- ---------
Total Revenues $ 5,855 $ 10,826 $ 26,143 $ 2,266 $ 1,086 $ 758 $ 674
Cost of Sales 6,918 6,436 15,284 1,310 409 290 152
Operating Loss (28,773) (27,223) (63,126) (16,198 (2,857) (3,553) (3,104)
Net loss applicable
to common shareholders $ (28,022) $ (25,784) $ (60,853) $ (17,842) $ (3,359) $ (6,030) $ (2,998)
========= ========= ========= ========= ========= ========= =========
Basic & Diluted Net
Loss per share $ (1.45) $ (1.38) $ (3.19) $ (1.86) $ (0.79) $ (2.00) $ (1.09)
========= ========= ========= ========= ========= ========= =========
Number of shares
used in per share
calculations 19,382 18,785 19,064 9,587 4,271 3,011 2,755
Total Assets $ 58,406 $ 84,290 $ 100,713 $ 2,767 $ 6,308 $ 2,709
Working Capital 24,000 35,375 59,129 1,001 4,561 873
Stockholders' Equity $ 53,406 $ 78,024 $ 98,298 $ 1,828 $ 4,895 $ 2,059
58
SUPPLEMENTARY QUARTERLY CONSOLIDATED FINANCIAL DATA (UNAUDITED)
Net Loss Basic and Number of
Applicable to Diluted Net Shares used
Three Months Common Loss per in per share
Ended Revenues Gross Profit Operating Loss Shareholders Share Calculation
----- -------- ------------ -------------- ------------ ----- -----------
Fiscal 2000:
------------
09/30/99 $ 269,105 $ 184,284 $ (589,411) $ (1,024,536) $(0.20) 5,222,931
12/31/99 277,795 172,786 (1,001,630) (2,139,621) (0.32) 6,786,966
03/31/00 333,175 191,197 (2,419,398) (3,134,329) (0.29) 10,674,337
06/30/00 $ 1,386,189 $ 408,286 $(12,187,483)(1) $(11,543,524)(1) $(0.73) 15,741,760
Fiscal 2001:
------------
09/30/00 $ 3,064,939 $ 1,340,165 $(17,768,798)(2) $(16,965,646)(2) $(0.93) 18,327,625
12/31/00 7,760,606 3,049,119 (9,454,104) (8,863,512) (0.46) 19,242,857
03/31/01 10,269,074 4,656,152 (9,680,718) (9,175,835) (0.48) 19,332,856
06/30/01 $ 5,048,537 $ 1,814,026 $(26,222,658)(3) $(25,847,917)(3) $(1.33) 19,362,307
Fiscal 2002:
------------
09/30/01 $ 3,458,046 $ 344,279 $(11,065,974) $(10,381,860) $(0.54) 19,371,167
12/31/01 $ 2,396,871 (1,407,783) (17,707,142) (17,639,833)(4) (0.91) 19,392,308
(1) Includes $4.2 million charge for acquired in-process research and
development from the April 2000 acquisition of Horizon Photonics, Inc.
(2) Includes $9.1 million charge for acquired in-process research and
development from the September 2000 acquisition of Geltech Inc.
(3) Includes $13.8 million charge for asset impairment, $13.4 million from the
June 2001 adjustment to the carrying value of the intangible assets,
goodwill and customer supply agreement, related to the Horizon Photonics
Inc. acquisition and $0.4 million for equipment held for disposal due to a
site closure.
(4) Includes $7.0 million charge for asset impairment, $1.5 million from the
December 2001 adjustment to the carrying value of the customer supply
agreement, related to the Horizon Photonics Inc. acquisition, $4.9 million
adjustment to the carrying value of the intangible assets, related to the
Geltech Inc. acquisition and $0.6 million for excess manufacturing
equipment used in the production on collimators.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 PROVIDES A SAFE HARBOR FOR
FORWARD LOOKING STATEMENTS MADE BY OR ON BEHALF OF THE COMPANY. ALL STATEMENTS
IN THIS "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS" AND ELSEWHERE IN THIS PROSPECTUS, OTHER THAN STATEMENTS OF
HISTORICAL FACTS, WHICH ADDRESS ACTIVITIES, EVENTS OR DEVELOPMENTS THAT THE
COMPANY EXPECTS OR ANTICIPATES WILL OR MAY OCCUR IN THE FUTURE, INCLUDING SUCH
THINGS AS FUTURE CAPITAL EXPENDITURES, GROWTH, PRODUCT DEVELOPMENT, SALES,
BUSINESS STRATEGY AND OTHER SIMILAR MATTERS ARE FORWARD-LOOKING STATEMENTS.
THESE FORWARD-LOOKING STATEMENTS ARE BASED LARGELY ON THE COMPANY'S CURRENT
EXPECTATIONS AND ASSUMPTIONS AND ARE SUBJECT TO A NUMBER OF RISKS AND
UNCERTAINTIES, MANY OF WHICH ARE BEYOND THE COMPANY'S CONTROL. ACTUAL RESULTS
COULD DIFFER MATERIALLY FROM THE FORWARD-LOOKING STATEMENTS SET FORTH HEREIN AS
A RESULT OF A NUMBER OF FACTORS, INCLUDING, BUT NOT LIMITED TO, THE COMPANY'S
EARLY STAGE OF DEVELOPMENT, THE NEED FOR ADDITIONAL FINANCING, INTENSE
COMPETITION IN VARIOUS ASPECTS OF ITS BUSINESS AND OTHER RISKS DESCRIBED IN THE
COMPANY'S REPORTS ON FILE WITH THE SECURITIES AND EXCHANGE COMMISSION. IN LIGHT
OF THESE RISKS AND UNCERTAINTIES, ALL OF THE FORWARD-LOOKING STATEMENTS MADE
HEREIN ARE QUALIFIED BY THESE CAUTIONARY STATEMENTS AND THERE CAN BE NO
ASSURANCE THAT THE ACTUAL RESULTS OR DEVELOPMENTS ANTICIPATED BY THE COMPANY
WILL BE REALIZED. THE COMPANY UNDERTAKES NO OBLIGATION TO UPDATE OR REVISE ANY
OF THE FORWARD LOOKING STATEMENTS CONTAINED HEREIN.
59
ACQUISITIONS
GELTECH, INC.
On September 20, 2000, LightPath acquired all of the outstanding shares of
Geltech, Inc. (Geltech), a manufacturer of precision molded aspheric optics used
in the active telecommunication components markets, for an aggregate purchase
price of approximately $28.5 million. In the first quarter of fiscal 2001, the
Company recorded an immediate non-recurring charge of $9.1 million related to
the acquired in-process research and development of Geltech. The value assigned
to in-process research and development was determined by the Company based on
estimates of the projected discounted cash flows from certain development
projects including diffraction gratings, waveguides, lens arrays and
sub-assembly technologies. These programs were in various stages of completion
ranging from 30% to 50% of completion, with estimated completion dates through
December 2001 and projected costs to complete of approximately $2.25 million. As
of June 30, 2001, these programs were not complete and a new completion date of
June 2002 was established. Geltech had no sales in fiscal 2001 from these
programs, which is consistent with the revenue projections.
Geltech had no sales during the six months ended December 31, 2001 from these
programs, which is consistent with the revenue projections. During the second
quarter of fiscal 2002, the Company decided to defer the development of the
diffraction gratings and waveguides, projects that were in process at the time
of the acquisition of Geltech, due primarily to the continued decline in the
market for telecommunications components. However, the development of the lens
arrays and sub-assembly technologies, projects also in process at the
acquisition date, continue as planned.
For fiscal 2002, the consolidated research and development expenditures budget
for LightPath was approximately $7.7 million, which includes approximately $1.7
million related to the ongoing development efforts which were in process at the
time of the acquisition of Geltech. For the six months ended December 31, 2001,
we estimate approximately $630,000 of research and development expenditures were
incurred in connection with these efforts.
HORIZON PHOTONICS, INC.
On April 14, 2000, LightPath acquired Horizon Photonics, Inc. (Horizon), a
company engaged in the automated production of passive optical components for
the telecommunications and data communications markets, for a total purchase
price of approximately $40.2 million. In the fourth quarter of fiscal 2000, the
Company recorded an immediate non-recurring charge of $4.2 million, related to
the acquired in-process research and development of Horizon. The in-process
research and development related to 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%, with estimated completion dates through June
2001 and estimated costs to complete the projects of $1 million. As of June 30,
2001, these programs were not completed and a revised completion date of June
2002 was established. Horizon had no sales in fiscal 2001 from these programs,
which is consistent with the revenue projections.
Horizon had no sales from these programs during the six months ended December
31, 2001, which is consistent with the revenue projections.
For fiscal 2002, the consolidated research and development expenditures budget
for LightPath was approximately $7.7 million, which includes approximately $1.6
million related to the ongoing development efforts which were in process at the
time of the acquisition of Horizon. For the six months ended December 31, 2001,
we estimate approximately $1 million of research and development expenditures
were incurred, which included these efforts as well as other isolator
development efforts.
60
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 2001 COMPARED TO THE THREE MONTHS ENDED DECEMBER
31, 2000
CONSOLIDATED OPERATIONS
Our consolidated revenues totaled $2.4 million for the second quarter of
fiscal 2002, a decrease of approximately $5.4 million or 69% compared to
revenues for the second quarter of fiscal 2001. The decrease was primarily
attributable to a decrease in telecom product sales of $4.4 million or 56% and a
decrease in traditional optics sales of $1 million or 13%.
In the second quarter of fiscal 2002, consolidated cost of sales was
approximately 159% of product sales, an increase from the comparable period of
fiscal 2001, in which cost of sales was approximately 61% of product sales.
During the quarter, the Company recorded a write down of inventory of
approximately $1.2 million. Excluding the inventory write down, cost of sales
during the quarter would have been approximately 109%, an increase of 48% from
the comparable period of fiscal 2001, due primarily to the underutilization of
manufacturing facilities and staff because of reduced sales of telecom and
traditional optics products during the quarter.
During the second quarter of fiscal 2002, sales declined approximately 30
percent from levels noted during the first quarter. The Company also noted
several factors in its evaluation of the value of inventory during the quarter
which resulted in a charge of approximately $1.2 million to write down inventory
to net realizable value. The Company received a determination that certain
lenses and raw materials did not pass qualification requirements for their
particular applications during the quarter. In addition, the value of certain
finished lens had diminished due to a change in market conditions because a
competitor began reducing prices for similar products to a level below our cost.
Finally, the Company noted uncertainty regarding the realization of value for
certain finished products on hand for a recently cancelled purchase order.
Specifically, charges to write-down inventory of approximately $517,000,
$171,000 and $247,000 were recorded for finished goods, work in process and raw
materials, respectively. In addition, inventory write-off's of $220,000 were
recorded ($100,000 of finished goods and $120,000 of raw materials) and the
related inventory was disposed of in January 2002 as no alternative use was
identified.
During the second quarter of fiscal 2002, selling, general and
administrative costs decreased by $1.4 million from the second quarter of fiscal
2001 to $2.9 million, due primarily to a decrease of $1.3 million in
administration and manufacturing support personnel costs. We incurred several
non-cash charges during the second quarter of fiscal 2002, including an
impairment charge of approximately $7 million related to intangible assets and
manufacturing equipment, $2.4 million in amortization of goodwill and
intangibles from acquisitions, and $1.8 million in stock-based compensation
charges. The impairment consists of approximately $6.5 million related to the
values assigned to certain intangibles at acquisition during April and September
2000, which may not be recoverable due to reduced revenue forecasts from those
expected at acquisition as a result of the downturn in the telecom industry, and
approximately $0.5 million due to the removal of excess manufacturing lines used
for collimator production. In addition, the Company reversed the net deferred
tax liability of approximately $3.3 million established in connection with the
non-taxable purchase of Geltech against the related intangible assets prior to
the impairment charge as the carrying value of the remaining Geltech intangible
assets was reduced in connection with the impairment.
Research and development costs increased by approximately $0.4 million to
$2.2 million in the second quarter of fiscal 2002 versus 2001. The majority of
development work consisted of expenses associated with automation development
and products in the areas of telecommunication switches, isolators and next
generation optical subassemblies, waveguides, lens arrays and sub-assembly
technologies.
61
Investment and other income decreased approximately $474,000 as interest
earned on investments in the second quarter of fiscal 2002 declined due to lower
interest rates and a decrease in cash balances. Interest and other expense in
the second quarter of fiscal 2002 and the comparable period of fiscal 2001 was
not significant.
Net loss of $17.6 million in the second quarter of fiscal 2002 includes
$11.2 million from the non-cash charges described above and $1.2 million related
to inventory write-offs, which if excluded, would have resulted in a net loss of
$5.2 million. These net loss figures represent an increase from the comparable
period of fiscal 2001, which reported a net loss of $8.9 million including $6.5
million in non-cash charges, which if excluded, would have resulted in a net
loss of $2.4 million. The $2.8 million increase in net loss excluding the
non-cash charges was due primarily to the $5.4 million decrease in total
revenues offset by the decreased cost of sales of $2.1 million, and decreases in
operating costs primarily in selling, general and administrative expense which
were offset by increased research and development costs. Net loss applicable to
common shareholders of $17.6 million for the second quarter of fiscal 2002
included an additional charge of $22,407 attributable to the premium on our
outstanding preferred stock. Net loss per share of $0.91 in the second quarter
of fiscal 2002 was an increase of $0.45 compared to the second quarter of fiscal
2001 net loss per share of $0.46. Net loss applicable to common shareholders for
the second quarter of fiscal 2001 of $8.9 million included $18,551 attributable
to the premium on the Company's outstanding preferred stock.
Sales backlog does not represent sales, rather it is an indicator of
customer orders received by the Company. Sales revenues from orders will be
recognized in future quarters as the products are shipped, generally nine to
twelve months after orders are received. At December 31, 2001, our consolidated
backlog was $4.4 million, consisting of $3.2 million in orders for telecom
components and $1.2 million in orders for lenses. During the second quarter of
fiscal 2002, the Company revised its policy for disclosing sales backlog such
that unscheduled orders or orders with a delivery past 12 months would be
excluded from the backlog, which caused the Company to decrease reported backlog
to $6.4 million from the previously disclosed sales backlog of $16.5 million at
September 30, 2001, which was comprised of $14.6 million in orders for telecom
components and $1.9 million in orders for lenses.
TELECOM SEGMENT
For the second quarter of fiscal 2002, telecom product sales decreased 75%
to approximately $1.5 million from $5.8 million for the comparable period last
year. Telecom segment sales for fiscal 2002 include isolator sales of $0.6
million, $0.3 million of collimator product sales and $0.6 million of active
telecom components sales.
The telecom segment incurred an operating loss of $3.7 million for the
second quarter of fiscal 2002 as compared to a loss of $1.6 million for the
comparable period last year due primarily to decreased sales, lower margins and
inventory write-offs.
TRADITIONAL OPTICS SEGMENT
During the second quarter of fiscal 2002, our approximately $0.9 million of
segment sales were comprised of $0.7 million in finished lens product sales and
$0.2 million from laser optic lens sales, compared with $1.9 million for the
comparable period last year. The decrease of $1 million from the comparable
period of the prior year was due primarily to the reduced sales of optics
products used in data storage which accounted for approximately $1.7 million of
traditional optics sales for the second quarter of fiscal 2001.
The traditional optics segment incurred an operating loss of approximately
$1.1 million for the second quarter of fiscal 2002 as compared to operating
income of approximately $275,000 for the comparable period last year. The
increased loss during the quarter was primarily due to reduced sales,
unfavorable margins and inventory write-offs.
62
SIX MONTHS ENDED DECEMBER 31, 2001, COMPARED TO THE SIX MONTHS ENDED DECEMBER
31, 2000
CONSOLIDATED OPERATIONS
Our consolidated revenues totaled $5.8 million for the first six months of
fiscal 2002, a decrease of approximately $5 million or 46% compared to revenues
for the first six months of fiscal 2001. The decrease was primarily attributable
to a decrease in telecom product sales of $5.1 million or 47%, offset by 1% or
$0.1 million increase in traditional optics sales. Sales generated from the
acquired Geltech business (September 2000) accounted for $2.9 million or 49% of
the total revenue in fiscal 2002 as compared to $3.4 million or 32% of total
revenue for the comparable period of fiscal 2001.
In the first six months of fiscal 2002, consolidated cost of sales was 118%
of product sales, an increase from the comparable period of fiscal 2001, in
which cost of sales was 59% of product sales. During the second quarter of
fiscal 2002, the Company recorded a write down of inventory of approximately
$1.2 million. Excluding the inventory write down, cost of sales during the
quarter would have been approximately 98%, an increase of 39% from the
comparable period of fiscal 2001. Approximately 36% of the increase was due to
the reduction in sales for telecom products, and the underutilization of
manufacturing facilities and staff. In addition, in the first quarter of fiscal
2002, we determined that we were selling some traditional optic products at a
negative gross margin, which impacted consolidated gross margins by
approximately 3%. To counter these cost overages we reduced the manufacturing
staff, eliminated unprofitable traditional optic products, and closed our
Auburn, California facility resulting in a total decrease in manufacturing
personnel of 37% since June 30, 2001. It is anticipated that these measures will
improve our cost of sales in future quarters as we work to balance our
manufacturing capabilities and product lines; however, economic conditions may
result in pricing pressure in future quarters of fiscal 2002 which could reduce
margins.
During the six months ended December 31, 2001, total inventory declined 4%
from prior levels before consideration of the inventory write down recorded
during the second quarter of fiscal 2002. Raw materials continue to make up the
majority of our inventory at $2.5 million or 63% of total inventory. We have
approximately $2 million of raw materials on hand specifically used in the
production of isolators that have long lead times and the Company has elected to
maintain a sufficient quantity of these materials. Our inventory turn ratio was
2.9 times and 4.0 times for the six months ended December 31, 2001, and 2000,
respectively, which is indicative of the reduction in sales experienced in
fiscal 2002.
During the second quarter of fiscal 2002, sales declined approximately 30
percent from levels noted during the first quarter. The company also noted
several factors in its evaluation of the value of inventory during the quarter
which resulted in a charge of approximately $1.2 million to write down inventory
to net realizable value. The Company received a determination that certain
lenses and raw materials did not pass certain qualification requirements for
their particular applications during the quarter. In addition, the value of
certain finished lens had diminished due to a change in market conditions
because a competitor began reducing prices for similar products to a level below
our cost. Finally, the Company noted uncertainty regarding the realization of
value for certain finished products on hand for a recently cancelled purchase
order. Specifically, charges to write-down inventory of approximately $517,000,
$171,000 and $247,000 were recorded related to finished goods, work in process
and raw materials, respectively. In addition, inventory write-off's of $220,000
were recorded ($100,000 of finished goods and $120,000 of raw materials) and the
related inventory was disposed of in January 2002 as no alternative use was
identified.
During the first six months of fiscal 2002, selling, general and
administrative costs decreased by $1 million from first the six months of fiscal
2001, to $6.7 million, even after including $1.4 million accrued for legal fees
and the proposed litigation settlement, and $0.5 million of administrative costs
incurred by Geltech. These increases were offset by a decrease of $2.7 million
in administration and manufacturing support personnel costs. We incurred several
non-cash charges during the first six months of fiscal 2002, including an
impairment charge of $7 million related to intangible assets and manufacturing
equipment, $5.1 million in amortization of goodwill and intangibles from
acquisitions, and $4.7 million in stock-based compensation charges. In addition,
63
the Company reversed the net deferred tax liability of approximately $3.3
million established in connection with the non-taxable purchase of Geltech
against the related intangible assets prior to the impairment charge as the
carrying value of the remaining Geltech intangible assets was reduced in
connection with the impairment.
Research and development costs increased by approximately $1.1 million to
$4.2 million in the first six months of fiscal 2002 versus fiscal 2001, of which
$0.3 million was due to Geltech. The majority of development work consisted of
expenses associated with automation development and products in the areas of
telecommunication switches, isolators and next generation optical subassemblies,
waveguides, lens arrays and sub-assembly technologies. In an effort to control
research and development costs, the Company has reduced development staff
levels, deferred any additional effort on the switch project and is in the
process of subleasing the New Jersey development facility.
Investment and other income included a non-recurring gain of approximately
$390,000 related to the first quarter sale of certain assets located in Auburn,
CA, while interest earned on investments decreased approximately $971,000 during
the first six months of fiscal 2002 as a result of lower interest rates and a
decrease in cash balances. Interest expense in during the first six months of
fiscal 2002 and the comparable period of fiscal 2001 was not significant.
Net loss of $28 million in the first six months of fiscal 2002 includes
$16.8 million from the non-cash charges described above, $1.4 million related to
litigation settlement costs and $1.2 million for inventory write-offs, which if
excluded, would have resulted in a net loss of $8.6 million. As compared to the
first six months of fiscal 2001 which reported a net loss of $25.8 million
including $20.8 million in non-cash charges, which if excluded, would have
resulted in a net loss of $5 million. The $3.6 million increase in net loss
excluding the non-cash charges was due primarily to the $5 million decrease in
total revenues, offset by decreased cost of sales of $0.7 million while
decreases in operating costs primarily in selling, general and administrative
expense were offset by increased research and development costs. Net loss
applicable to common shareholders of $28 million for the first six months of
fiscal 2002 included an additional charge of $48,016 attributable to the premium
on our outstanding preferred stock. Net loss per share of $1.45 in the first six
months of fiscal 2002 was an increase of $0.07 compared to the first six months
of fiscal 2001 net loss per share of $1.38. Net loss applicable to common
shareholders for the first six months of fiscal 2001 of $25.8 million included
$45,464 attributable to the premium on the Company's outstanding preferred
stock.
TELECOM SEGMENT
For the first six months of fiscal 2002, telecom product sales decreased
59% to approximately $3.5 million from $8.6 million for the comparable period
last year. Telecom segment sales in the first six months of fiscal 2002 include
isolator sales of $1.8 million, $0.7 million of collimator product sales and $1
million of active telecom components sales.
The telecom segment incurred an operating loss of $6.2 million for the
first six months of fiscal 2002 as compared to a loss of $3.4 million for the
comparable period last year due primarily to decreased sales, reduced margins
due to underutilization of capacity, inventory write-offs and increased research
and development costs associated with the switch project.
The decrease in telecom sales for the first six months together with the
decreased sales backlog reflect the general market condition for optical
components and the broader telecommunications sector. We continue to work
closely with our customers to manage excess inventory levels as well as focus on
next generation products. During the first six months of fiscal 2002, our work
on next generation systems led to design wins and corresponding orders but
overall spending levels are currently restrained. We have implemented processes
built around automated platforms that are resulting in significant yield
improvements that we believe are unmatched in the photonics industry. We have
also been able to maintain robust design activity throughout most of this
downturn which we attribute to the reliability of our products demonstrated by
the completion of full Telcordia qualifications during the first quarter of
fiscal 2002. It is our belief that the photonics industry will begin to mature
64
as the industry moves out of this downturn and that there will be less focus on
rapid capacity expansion and more focus on manufacturing and process issues.
Specifically, we believe attention will shift to the implementation of highly
automated manufacturing processes and yield improvements where we believe we
have a significant advantage over some of our competitors.
TRADITIONAL OPTICS SEGMENT
During the first six months of fiscal 2002, our approximately $2.3 million
of traditional optics segment sales were comprised of $1.8 million in finished
lens products and $0.5 million from laser optic lens sales, compared with $2.2
million for the comparable period last year. During the first quarter of fiscal
2002, we have stopped manufacturing several product lines, including data
storage lenses, due to unfavorable margins. In addition, due to the closure of
the Auburn, CA, facility we consolidated the manufacturing of all finished lens
products into the Orlando, FL, facility.
The traditional optics segment incurred an operating loss of approximately
$1.8 million for the first six months of fiscal 2002 as compared to an operating
loss of approximately $42,000 for the comparable period last year. The increased
loss was primarily due to reduced sales, unfavorable margins and inventory
write-offs we incurred during the first six months of fiscal 2002.
FISCAL YEAR ENDED JUNE 30, 2001 COMPARED TO FISCAL YEAR ENDED JUNE 30, 2000
TELECOM SEGMENT - (optoelectronics and fiber telecommunications)
During fiscal 2001, telecom product sales increased to approximately $21 million
from $1.5 million for fiscal 2000. The telecom segment results include isolator
sales of $13 million, $4.2 million of collimator product sales and $3.8 million
of aspheric optics for active telecom product sales. Sales generated from
acquired businesses accounted for $15.8 million or 81% of the increase in
telecom revenue.
Sales to the Agere Systems, Inc. ("Agere") (formerly the Microelectronics
division of Lucent Technologies Inc.) represent 50% of the current open sales
orders and 55% of the telecom sales for fiscal 2001.
In August 2000, we introduced the LP1600 opto-mechanical switch which employs a
patented retro-reflecting mirror design in conjunction with our Gen3 collimator.
Due to the current economic environment we have elected to delay expenses
related to the launch of this product; however, we will concentrate on the
development of further enhancements to existing product lines. The telecom
segment incurred an operating loss of $7.2 million for fiscal 2001 as compared
to an operating loss of $7.5 million for the comparable period of fiscal 2000.
Significant events which impacted our telecom segment during fiscal 2001
include:
* Continued record telecom sales of $21 million. The completion of the
expansion of the Horizon automated manufacturing facility which is
dedicated to large volume isolator production and the development of
next-generation optical subassemblies contributed to the overall sales
growth as well as the inclusion of sales from Geltech's telecom products.
Horizon released a new line of isolator assemblies for application in the
metro and access telecom markets. This line is based on a flexible
manufacturing platform which can address a wide range of customer
specifications while attracting lower cost applications;
* The September 20, 2000, expansion of our telecom products to include active
components through the acquisition of privately held Geltech. We began
acquisition talks with Geltech, due to our interest in their precision
molded aspheric optics used in the active telecommunication components
markets. The acquisition purchase price was $27.5 million which was paid
through the issuance of 822,737 shares of Class A common stock plus
65
approximately $1 million in acquisition costs for an aggregate purchase
price of approximately $28.5 million;
* Changes to LightPath's management team included the addition of Dennis Yost
as LightPath's Chief Operating Officer and promotion of Bob Cullen to
Executive Vice President in charge of Technology Integration. Mr. Yost will
focus on the advancement of our telecom lines, specifically collimators and
arrays. Mr. Cullen, the current President of Horizon, expanded his role to
assist in the further automation of the Company including manufacturing,
packaging, assembly and test methods; and o The Company's additional
investment in LightChip, Inc. of $7.2 million (significant investors in the
August 2000 private placement included Berkeley International, Morgenthaler
Ventures, J.P. Morgan Capital, AT&T Ventures and LightPath).
Geltech acquisition
On August 9, 2000, the Company entered into a definitive agreement to acquire
Geltech Inc., a Delaware corporation, for an aggregate purchase price of
approximately $28.5 million. Geltech is a manufacturer of precision molded
aspheric optics used in the active telecommunication components markets. On the
closing date, September 20, 2000, LightPath acquired all of the outstanding
shares of Geltech in exchange for 822,737 shares of Class A common stock. The
acquisition has been accounted for using the purchase method of accounting and,
accordingly, the results of operations of Geltech have been included in the
Company's consolidated financial statements from September 20, 2000. In the
first quarter of fiscal 2001, the Company recorded an immediate non-recurring
charge of $9.1 million, due to acquired in-process research and development. The
value assigned to in-process R&D was determined based on estimates of the
resulting net cash flows from diffraction gratings, waveguides, lens arrays and
sub-assembly technologies and the discounting of such cash flows to present
value. These programs were in various stages of completion ranging from 30% to
50% of completion, with estimated completion dates through December 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
fiscal 2002, with projected research and development costs-to-complete of
approximately $2.25 million. Geltech had no revenues from these programs in
fiscal 2001 which is consistent with the projected revenues. In projecting net
cash flows resulting from diffraction gratings, waveguides, lens arrays and
sub-assembly 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 nine
years of approximately 132%. Projections of revenue growth for the
various products in development 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. Pro forma growth rate in fiscal 2001 was 27%.
* The estimated cost of sales as a percentage of revenue, initially at
51% increasing to 60%, was consistent with the historical rates for
Geltech's business as well as its business plan analysis. Actual cost
of sales percentage in fiscal 2001 was 60%.
* Estimated SG&A costs were expected to decrease as a percentage of
sales, from 21% initially to approximately 13% in later years. Actual
SG&A costs as a percentage of sales in fiscal 2001 was 26%.
* The estimated R&D costs were expected to remain approximately 10% of
sales as most R&D efforts are in a development or maintenance phase.
Actual R&D costs as a percentage of sales in fiscal 2001 was 12%.
* A 38% effective tax rate was estimated.
The projected net cash flows for the in-process projects were discounted using a
range of 30% to 65% weighted-average cost of capital (WACC) based on
consideration of the perceived risk of each project considering estimated
completion percentage, technology advances, market acceptance and future
projected financial expectations. The calculation produces the average required
rate of return of an investment in an operating enterprise. The WACC selected
66
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 range of
25% to 30% 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 Geltech.
Geltech revenues for fiscal 2001 used in the projected net cash flows for the
purchase price were greater than those achieved during fiscal 2001 due to the
economic downturn within the telecom industry in the third and fourth quarter of
our fiscal year. Expenses have approximated the projections resulting in actual
net cash flows for the ten months below the original projections. Management
believes that the original projections of net cash flows from Geltech continue
to be reasonable assuming current sales deferrals reverse in future years,
although there can be no assurance this will occur.
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. As of June 30, 2001 these programs were not completed,
with a revised completion date of June 2002. Horizon had no sales in fiscal 2001
from these programs which is consistent with the revenue projections. 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. Actual sales growth
rate in fiscal 2001 was 484%.
* 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. Actual
cost of sales percentage in fiscal 2001 was 59%.
* Estimated SG&A costs were expected to decrease slightly as a
percentage of sales, with a 20% average. Actual SG&A costs as a
percentage of sales in fiscal 2001 was 26%.
* The estimated R&D costs were expected to remain at 2% of sales as most
R&D efforts are in a maintenance phase. Actual R&D costs as a
percentage of sales in fiscal 2001 was 11%.
* 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
67
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.
TRADITIONAL OPTICS SEGMENT
During fiscal 2001, the majority of our traditional optics product sales of
approximately $5.1 million were from Geltech's lens sales and existing customers
for laser optic lenses. Traditional optics sales in fiscal 2000 were
approximately $768,000. The growth was primarily due to the acquisition of
Geltech's traditional optics business in September 2000, which accounted for $4
million of traditional optics product sales in fiscal 2001. Geltech's products
are used in data storage and by manufacturers of medical equipment. The majority
of their sales are due to custom quotations as they have no direct distribution
channels. Revenues for fiscal 2000 included approximately $167,000 in license
fees and government funded subcontracts. The traditional optics segment reported
operating income of approximately $73,000 for fiscal 2001 as compared to an
operating loss of approximately $365,000 for fiscal 2000.
Joining with the German optical products manufacturer Linos AG, a pioneer
in the field of photonics (which acquired Rodenstock Prazisionsoptik GmbH
("Rodenstock"), precision optics division in June 2000), we are proceeding with
the marketing program for the development, production and joint-distribution of
GRADIUM based optical products in Europe. We believe our agreement and
relationships will continue to grow under the Linos AG/Rodenstock alliance. We
believe the relationship with Linos AG/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.
CONSOLIDATED OPERATIONS
Our consolidated revenues totaled $26.1 million for fiscal 2001, an
increase of approximately $23.9 million or 1054% over fiscal 2000. The growth
was primarily attributable to increases of $12.1 million (51%) in isolator and
other sales, $7.8 million (33%) in active telecom components and finished lenses
and $4 million (16%) primarily in collimator products. Sales generated from
acquired businesses accounted for $19.9 million or 83% of the increase in total
revenue.
During fiscal 2001, consolidated cost of sales was 58% of total revenues, a
decrease from fiscal 2000, when cost of sales was 62% of product sales (excludes
product development fees). The decrease was primarily due to increased margins
on isolator products. It is anticipated that we will maintain approximately 60%
cost of sales for fiscal 2002 as we work to expand our manufacturing
capabilities and product lines; however, economic conditions may result in
pricing pressure in fiscal 2002 which could cause a further decrease in margins.
During fiscal 2001, selling, general and administrative costs increased by
$13.3 million from fiscal 2000 to $19.3 million, due to $1.6 million incurred
for litigation settlement, $0.7 million for legal costs incurred in Class E
shareholder litigation, $5.3 million of administrative costs incurred by
acquired companies, Horizon and Geltech, and $5.7 million from increases in
LightPath personnel in administration, manufacturing overhead and support.
We incurred non-cash charges totaling $47.6 million during fiscal 2001,
including $13.7 million for impairment of goodwill and intangible asset related
to the deferral of sales by a significant customer and consolidation of
traditional optics facilities, $11.2 million in non-cash stock-based
compensation charges, $13.6 million in amortization of goodwill and intangibles
from acquisitions, and a non-recurring charge of $9.1 million for in-process
research and development from the acquisition of Geltech.
Research and development costs increased by approximately $5.6 million from
fiscal 2000 to $7.1 million in fiscal 2001, of which $2.1 million was due to
acquisitions. The majority of development work consisted of expenses associated
68
with the Gen3 collimator assembly, LP1600 opto-mechanical switch, lens arrays
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. Our acquired businesses continue their
efforts in the area of isolators and next generation optical subassemblies,
diffraction gratings, waveguides, lens arrays and sub-assembly technologies.
Investment income increased approximately $1.4 million in fiscal 2001 due
to the increase in interest earned on temporary investments as a result of an
increase in cash balances. Interest expense was not significant in 2001. 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 resulting in the issuance of approximately one million shares of Class
A Common Stock.
Net loss of $60.8 million in fiscal 2001 represented an increase of
approximately $45.2 million from fiscal 2000. Of this amount, $47.6 million
related to non-cash charges described above and $2.3 million related to one-time
charges for a litigation settlement and the legal costs associated with Class E
shareholder litigation. Non-cash charges in fiscal 2000 were approximately $9.8
million. Excluding the non-cash and one time charges from both years, the
remaining $5.1 million increase in net loss was due primarily to increased cost
of sales and operating costs, primarily in selling, general and administrative
expense and a $5.6 million increase in research and development costs. These
increased costs were partially offset by the $23.9 million increase in total
revenues, $1.4 million increase in interest income and the $402,000 reduction of
interest expense during fiscal 2001. Net loss applicable to common shareholders
of $60.9 million for fiscal 2001 included an additional charge of $89,549
attributable to the premium on our outstanding preferred stock. Net loss per
share of $(3.19) in fiscal 2001 represented an increase of $1.33 compared to the
fiscal 2000 net loss per share of $(1.86). Net loss applicable to common
shareholders of $17.8 million in fiscal 2000 included an additional charge of
$2.1 million for the imputed dividend and $137,281 attributable to the premium
on the Company's outstanding preferred stock.
At June 30, 2001, our consolidated backlog, which represents an indicator
of customer orders received by the Company, was $17 million. The backlog, which
consists of orders for $11.8 million in isolators, $1.8 million for collimators,
$1.4 million in active components and $2 million for lenses, compares to March
31, 2001 sales backlog of $19.1 million, December 31, 2000 sales backlog of $23
million and September 30, 2000 sales backlog of $10.2 million. Within our
current backlog are purchase orders where shipments have been pushed-out past
their original delivery dates and the customers have not yet provided us with
revised shipment dates. Accordingly, we are unable to determine the quarters in
which we anticipate shipment will occur. Sales revenues from orders will be
recognized in future quarters as the products are shipped.
FISCAL YEAR ENDED JUNE 30, 2000 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1999
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 proceeds 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,
69
due to our interest in their automated production of passive optical
components and complimentary product lines of isolators. The April
2000 acquisition involved 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 from customers such as Avanex Corp. which
reflect 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
(investors in the December 1999 private placement 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's 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.
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 vicinity of 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. Due to the acquisition of E-TEK by
JPS-Uniphase and the current economic environment, we have elected to delay
expenses related to the launch of this product; however, we will concentrate on
the development of further enhancements to existing product lines. 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.
The internal focus in fiscal 2000 was for 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
70
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.
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
71
markets for GRADIUM in their respective countries, primarily in the area of the
YAG laser market.
CONSOLIDATED OPERATIONS
Our consolidated revenues totaled $2.3 million for fiscal 2000, an increase
of approximately $1.2 million or 109% over fiscal 1999. The increase was
primarily attributable to an increase of $943,000 (87%) in Horizon isolator
sales, and an increase of $442,000 (41%), in additional product sales, primarily
telecom products. These increases were offset by a $206,000 decrease (19%) in
product development/license fees as the government subcontract has concluded.
In fiscal 2000, consolidated cost of sales was 62% of product sales, which
represents an increase from fiscal 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 were attributable to a materials issue that has since been
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
fiscal 1999 to $6 million. Of this increase, $450,000 is attributable to
Horizon, and $2.5 million is attributable to increases in personnel in
administration and manufacturing support. We incurred several non-cash charges
during the fourth quarter of fiscal 2000, including 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 fiscal 2000 versus fiscal 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 fiscal 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
fiscal 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 fiscal 1999.
Net loss of $15.6 million in fiscal 2000, which represented an increase of
approximately $12.5 million from fiscal 1999, included $3.2 million related to
non-cash stock-based compensation charges, a $4.2 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 fiscal 1999 net loss per share of $.79.
72
Net loss per share increased due to the preferred stock dividend, however, the
increase was offset by an increase in the number of weighted shares outstanding
for fiscal 2000 versus fiscal 1999. The fiscal 1999 net loss per share contains
$224,651 attributable to the premium on the preferred stock.
At June 30, 2000, our consolidated backlog, which represents an indicator
of customer orders received by the Company, was $4.3 million. The backlog, which
consists of orders for $2.7 million in isolators, $1.3 for collimators and
$305,000 for lenses, compares to June 30, 1999 backlog of $35,000 for lenses,
$10,000 for collimators and $100,000 for government project funding. Sales
revenues from orders will be recognized in future quarters as the products are
shipped.
LIQUIDITY AND CAPITAL RESOURCES
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 November 1999, we completed four preferred stock
and one convertible debt private placements, which generated total net proceeds
of approximately $12 million. During fiscal 2000 and 2001, we received net
proceeds of approximately $67.6 million from the exercise of stock options and
warrants issued at the initial public offering or in connection with previous
private placements. While the Company has no firm commitments for any future
financing at this time, management believes that its financial resources will be
sufficient to finance LightPath's operations and capital expenditures, excluding
acquisitions, for the next twelve months.
Cash used in operations for the six months ended December 31, 2001, was
approximately $6.7 million, a decrease of approximately $2.9 million from the
same period of fiscal 2001. Working capital needs declined due to the
maintenance of accounts receivable and inventory balances and the accrual of
certain settlement costs which were not paid as of December 31, 2001. We expect
to continue to incur net losses until such time, if ever, as we obtain market
acceptance of our products at sale prices and volumes which provide adequate
gross revenues to offset our operating costs. During six months ended December
31, 2001, we expended approximately $2.4 million for capital equipment and
patent protection, offset by proceeds from the sale of assets of approximately
$0.4 million. The majority of the capital expenditures during the year were
related to the equipment used to enhance or expand our manufacturing facilities.
An additional $0.8 million has been budgeted in fiscal 2002 for various
manufacturing and development projects. Additionally, approximately $1.6 million
of cash would be expended if all of the former holders of Class E Common Stock
selected the cash alternative under the settlement offer in the Delaware action.
Cash used in operations for fiscal 2001 was approximately $15 million, an
increase of approximately $11.7 million from fiscal 2000. Working capital needs
increased approximately $6 million as a result of growth in accounts receivable
due to increased sales and increased raw materials maintained in inventory. The
remaining $5.7 million increase is due to increased administrative costs due to
our acquisitions and increases in personnel. During fiscal 2001, we expended
approximately $7.3 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. We have budget commitments for fiscal 2002 to expend an additional
$6.8 million for capital equipment, manufacturing facilities and patent
protection. Of this amount, $3.6 million has been budgeted to be used to fund
expansion of Geltech's manufacturing facilities while the remaining fiscal 2002
budgeted capital expenditures are for research and development equipment and
construction of additional collimator and isolator manufacturing and testing
stations.
In August 2000, we purchased $7.2 million of LightChip, Inc. preferred
stock as part of a private placement in which LightChip, Inc. issued $65 million
of convertible preferred stock to outside investors including LightPath.
73
In September 2000, we acquired Geltech, a Delaware corporation, for an
aggregate purchase price (including expenses) of approximately $28.5 million. We
acquired all of the outstanding shares of Geltech for 822,737 shares of Class A
common stock. Acquisition costs of approximately $1 million were provided from
working capital. Since the acquisition, approximately $1.5 million of acquired
debt has been repaid from working capital.
INFLATION; SEASONALITY
The Company has not been significantly impacted by inflation in 2001, due
to the nature of its product components. The Company does not believe that
seasonal factors will have a significant impact on its business. However, the
Company is impacted by changes in the general business condition of the
telecommunications industry and, as a result, has experienced a downturn in
sales in fiscal 2001, which could continue in the future.
RECENT ACCOUNTING PRONOUNCEMENTS
On October 3, 2001 the FASB issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
SFAS 144 supersedes SFAS 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of," but retains many of the
fundamental provisions of SFAS 121. SFAS 144 also supersedes APB Opinion No. 30,
"Reporting the Results of Operations, Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions." SFAS 144 retains the requirement in Opinion 30 to
report separately discontinued operations and extends this reporting requirement
to a component of an entity that either has been disposed of or is classified as
held for sale. SFAS 144 is effective for fiscal years beginning after December
15, 2001, and interim periods within those fiscal years. Early application is
permitted. LightPath does not expect the adoption of SFAS 144 to have a material
impact on its financial statements or results of operations.
In June 2001, the FASB issued Statement No. 143, ACCOUNTING FOR ASSET
RETIREMENT OBLIGATIONS, which addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. The standard applies to legal obligations
associated with the retirement of long-lived assets that result from the
acquisition, construction, development and (or) normal use of the asset.
Statement No. 143 requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is incurred if a
reasonable estimate of fair value can be made. The fair value of the liability
is added to the carrying amount of the associated asset and this additional
carrying amount is depreciated over the life of the asset. The liability is
accreted at the end of each period through charges to operating expense. If the
obligation is settled for other than the carrying amount of the liability, the
Company will recognize a gain or loss on settlement. The Company is required and
plans to adopt the provisions of Statement No. 143 for the quarter ending
September 30, 2002. To accomplish this, the Company must identify all legal
obligations for asset retirement obligations, if any, and determine the fair
value of these obligations on the date of adoption. The determination of fair
value is complex and will require the Company to gather market information and
develop cash flow models. Additionally, the Company will be required to develop
processes to track and monitor these obligations. Because of the effort
necessary to comply with the adoption of Statement No. 143, it is not
practicable for management to estimate the impact of adopting this Statement at
the date of this report.
In June 2001, the FASB issued Statement No. 141, BUSINESS COMBINATIONS, and
Statement No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS. Statement 141 requires
that the purchase method of accounting be used for all business combinations
initiated after June 30, 2001, as well as all purchase method business
combinations completed after June 30, 2001. Statement 141 also specifies
criteria that intangible assets acquired in a purchase method business
combination must meet in order to be recognized and reported apart from
goodwill. Statement 142 will require that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead be tested for
impairment at least annually in accordance with the provisions of Statement 142.
Statement 142 will also require that intangible assets with estimable useful
74
lives be amortized over their respective estimated useful lives to their
estimated residual values, if any, and reviewed for impairment in accordance
with FAS Statement No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF.
The Company is required to adopt the provisions of Statement 141 on July 1,
2002. The Company had no business combinations initiated prior to July 1, 2001.
Goodwill and intangible assets acquired in business combinations completed
before July 1, 2001, will continue to be amortized and tested for impairment in
accordance with the appropriate pre-Statement 142 accounting requirements prior
to the adoption of Statement 142.
Statement 141 will require, upon adoption of Statement 142, that the
Company evaluate those of its existing intangible assets and goodwill that were
acquired in prior business combinations, and to make any reclassifications
necessary to conform with the new criteria in Statement 141 for recognition
apart from goodwill. Upon adoption of Statement 142, the Company will be
required to reassess the useful lives and residual values of all intangible
assets acquired, and make any necessary amortization period adjustments by the
end of the first interim period after adoption. In addition, to the extent an
intangible asset is identified as having an indefinite useful life, the Company
will be required to test the intangible asset for impairment in accordance with
the provisions of Statement 142 within the first interim period. Any impairment
loss will be measured as of the date of adoption and recognized as the
cumulative effect of a change in accounting principle in the first interim
period.
In connection with Statement 142's transitional goodwill impairment
evaluation, the Statement will require the Company to perform an assessment of
whether there is an indication that goodwill is impaired as of the date of
adoption. To accomplish this, the Company must identify its reporting units and
determine the carrying value of each reporting unit by assigning the assets and
liabilities, including the existing goodwill and intangible assets, to those
reporting units as of the date of adoption. The Company will then have up to six
months from the date of adoption to determine the fair value of each reporting
unit and compare it to the reporting unit's carrying amount. To the extent a
reporting unit's carrying amount exceeds its fair value, an indication exists
that the reporting unit's goodwill may be impaired and the Company must perform
the second step of the transitional impairment test. In the second step, the
Company must compare the implied fair value of the reporting unit's goodwill,
determined by allocating the reporting unit's fair value to all of it assets
(recognized and unrecognized) and liabilities in a manner similar to a purchase
price allocation in accordance with Statement 141, to its carrying amount, both
of which would be measured as of the date of adoption. This second step is
required to be completed as soon as possible, but no later than the end of the
year of adoption. Any transitional impairment loss will be recognized as the
cumulative effect of a change in accounting principle in the Company's statement
of earnings.
The Company expects to have unamortized goodwill in the amount of $2.3
million remaining at July 1, 2002, which will be subject to the transition
provisions of Statements 141 and 142. Amortization expense related to goodwill
was $2.95 million for the year ended June 30, 2001. Because of the extensive
effort needed to comply with adopting Statements 141 and 142, it is not
practicable to reasonably estimate the impact of adopting these Statements on
the Company's financial statements at the date of this report, including whether
it will be required to recognize any transitional impairment losses as the
cumulative effect of a change in accounting principle.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company invests liquid cash primarily in money market accounts,
certificate of deposits or in overnight repurchase agreements. Due to the
short-term nature of these investments, we believe that the market risk related
to these investments is minimal.
75
LEGAL MATTERS
Certain legal matters have been passed upon for us by Squire, Sanders &
Dempsey L.L.P., Phoenix, Arizona.
EXPERTS
The consolidated financial statements of LightPath Technologies, Inc. as of
June 30, 2001 and 2000, and for each of the years in the three year period ended
June 30, 2001, have been included herein and in the registration statement in
reliance upon the report of KPMG LLP, independent accountants, appearing
elsewhere herein, and upon the authority of said firm as experts in accounting
and auditing.
76
INDEX TO FINANCIAL STATEMENTS AND MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
Unaudited Condensed Balance Sheets as of December 31, 2001 and
June 30, 2000 .......................................................... F-2
Unaudited Condensed Statements of Operations for the three and six months
ended December 31, 2001 and 2000........................................ F-3
Unaudited Condensed Statements of Cash Flows for the three and six months
ended December 31, 2001 and 2000........................................ F-4
Notes to Condensed Financial Statements (unaudited)....................... F-5
Report of KPMG LLP, Independent Auditors.................................. F-12
Consolidated Balance Sheets as of June 30, 2001, and 2000 ................ F-13
Consolidated Statements of Operations for fiscal years ended
June 30, 2001, 2000 and 1999............................................ F-14
Consolidated Statements of Stockholders' Equity for fiscal years ended
June 30, 2001, 2000 and 1999............................................ F-15
Consolidated Statements of Cash Flows for fiscal years ended
June 30, 2001, 2000 and 1999............................................ F-16
Notes to Consolidated Financial Statements................................ F-17
F-1
LIGHTPATH TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
DECEMBER 31, JUNE 30,
2001 2001
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 20,777,024 $ 29,273,034
Trade accounts receivable - less allowance of $183,413 and $120,947 1,937,183 2,579,483
Inventories 3,984,708 5,414,587
Prepaid expenses and other receivables 659,174 1,058,187
------------- -------------
Total current assets 27,358,089 38,325,291
Property and equipment - net 11,699,853 12,046,891
Intangible assets - net 10,908,448 25,683,341
Investment in LightChip, Inc. and other assets 8,440,065 8,234,885
------------- -------------
Total assets $ 58,406,455 $ 84,290,408
============= =============
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 789,855 $ 1,276,204
Accrued liabilities 1,504,972 300,263
Accrued payroll and benefits 946,666 1,131,252
Current portion of capital lease obligations 116,654 242,475
------------- -------------
Total current liabilities 3,358,147 2,950,194
Deferred income taxes -- 3,316,304
Redeemable convertible preferred stock - see note 6 1,465,086 1,417,070
Commitments and contingencies
Stockholders' equity
Common stock: Class A, $.01 par value, voting;
34,500,000 shares authorized; 19,478,667 and 19,371,167 shares
issued and outstanding 194,787 193,712
Additional paid-in capital 186,705,752 181,708,752
Accumulated deficit (133,317,317) (105,295,624)
------------- -------------
Total stockholders' equity 53,583,222 76,606,840
------------- -------------
Total liabilities, redeemable convertible preferred stock
and stockholders' equity $ 58,406,455 $ 84,290,408
============= =============
SEE ACCOMPANYING NOTES.
F-2
LIGHTPATH TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
2001 2000 2001 2000
------------ ------------ ------------ ------------
REVENUES
Telecom product and lens sales $ 2,325,704 $ 7,757,106 $ 5,675,758 $ 10,654,675
Product development fees and other sales 71,167 3,500 179,159 170,870
------------ ------------ ------------ ------------
Total revenues 2,396,871 7,760,606 5,854,917 10,825,545
COSTS AND EXPENSES
Cost of sales (exclusive of stock-based compensation
of $6,956, none, $13,912 and none, for the three
months ended December 31, 2001 and 2000, and the
six months ended December 31, 2001 and 2000,
respectively) 3,804,654 4,711,487 6,918,421 6,436,261
Selling, general and administrative (exclusive of
stock-based compensation of $1,869,294, $2,782,773,
$4,678,346 and $5,482,773 for the three months
ended December 31, 2001 and 2000, and the six
months ended December 31, 2001 and 2000,
respectively) 2,888,398 4,275,338 6,725,666 7,683,828
Research and development (exclusive of stock-based
compensation of none, none, $13,767 and none for
the three months ended December 31, 2001 and 2000,
and the six months ended December 31, 2001 and
2000, respectively) 2,169,419 1,768,900 4,221,873 3,131,243
Impairment of long-lived and intangible assets 6,955,229 -- 6,955,229 --
Stock-based compensation 1,876,250 2,782,773 4,706,025 5,482,773
Amortization of goodwill and intangibles 2,410,063 3,676,212 5,100,819 6,214,342
Acquired in process research and development -- -- -- 9,100,000
------------ ------------ ------------ ------------
Total costs and expenses 20,104,013 17,214,710 34,628,033 38,048,447
------------ ------------ ------------ ------------
Operating loss (17,707,142) (9,454,104) (28,773,116) (27,222,902)
OTHER INCOME (EXPENSE)
Investment and other income, net 89,716 609,143 799,439 1,439,208
------------ ------------ ------------ ------------
Net loss $(17,617,426) $ (8,844,961) $(27,973,677) $(25,783,694)
Imputed dividend on preferred stock (22,407) (18,551) (48,016) (45,464)
------------ ------------ ------------ ------------
Net loss applicable to common shareholders $(17,639,833) $ (8,863,512) $(28,021,693) $(25,829,158)
============ ============ ============ ============
Basic and diluted net loss per share $ (0.91) $ (0.46) $ (1.45) $ (1.38)
============ ============ ============ ============
Number of shares used in per share calculation 19,392,308 19,242,857 19,381,738 18,785,241
============ ============ ============ ============
SEE ACCOMPANYING NOTES.
F-3
LIGHTPATH TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
DECEMBER 31,
2001 2000
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(27,973,677) $(25,783,694)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 6,579,098 7,343,661
Impairment of long-lived and intangible assets 6,955,229 --
Stock-based compensation 4,706,025 5,482,773
Acquired in process research and development -- 9,100,000
Changes in operating assets and liabilities
(net of the effect of the acquisition of Geltech,
Inc.):
Trade receivables 642,300 (3,192,176)
Inventories 1,429,879 (1,721,669)
Prepaid expenses and other 453,013 (153,655)
Accounts payable and accrued expenses 533,774 (647,184)
------------ ------------
Net cash used in operating activities (6,674,359) (9,571,944)
CASH FLOWS FROM INVESTING ACTIVITIES
Property and equipment additions, net (2,315,255) (3,968,052)
Proceeds from sale of assets 372,480 --
Patent and license agreement costs (45,105) (33,550)
Acquisition of Geltech, Inc., net of cash acquired -- (18,411)
Investment in LightChip -- (7,234,885)
------------ ------------
Net cash used in investing activities (1,987,880) (11,254,898)
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on capital leases (125,821) (797,561)
Proceeds from exercise of stock options and warrants 292,050 1,143,351
------------ ------------
Net cash provided by financing activities 166,229 345,790
------------ ------------
Net decrease in cash and cash equivalents (8,496,010) (20,481,052)
Cash and cash equivalents at beginning of period 29,273,034 58,728,130
------------ ------------
Cash and cash equivalents at end of period $ 20,777,024 $ 38,247,078
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Class A common stock, warrant and stock options
issued to acquire Geltech, Inc. $ -- $ 27,723,054
Note receivable in exchange for equipment $ 270,000 $ --
Class E common stock issued $ -- $ 556
Class E common stock redemption $ -- $ 40,221
============ ============
SEE ACCOMPANYING NOTES.
F-4
LIGHTPATH TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
DECEMBER 31, 2001
ORGANIZATION
LightPath Technologies, Inc. ("LightPath" or the "Company") was incorporated in
Delaware on June 15, 1992. On April 14, 2000, the Company acquired Horizon
Photonics, Inc. ("Horizon"). On September 20, 2000, the Company acquired
Geltech, Inc. ("Geltech"). The Company is engaged in the production of
collimator, isolator, and precision molded aspherical optics used in the telecom
components market, GRADIUM(R) glass lenses and other optical materials.
Additionally, Geltech has a unique and proprietary line of all-glass diffraction
gratings (StableSil(R)) for telecom applications as well as a product family of
Sol-Gel based waveguides. The Company also performs research and development for
optical solutions for the fiber telecommunications and traditional optics
markets. As used herein, the terms ("LightPath" or the "Company"), refer to
LightPath individually or, as the context requires, collectively with its
subsidiaries on a consolidated basis.
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the requirements of Article 10 of Regulation S-X
and, therefore, do not include all information and footnotes necessary for a
fair presentation of financial position, results of operations, and cash flows
in conformity with generally accepted accounting principles. These consolidated
financial statements should be read in conjunction with the Company's
consolidated financial statements and related notes included in its Form 10-KSB
for the fiscal year ended June 30, 2001, as filed with the Securities and
Exchange Commission on August 29, 2001.
These statements are unaudited but include all adjustments, which include normal
recurring adjustments, that the Company considers necessary to present fairly
the financial position, results of operations and cash flows of the Company for
the interim periods presented. Results of operations for interim periods are not
necessarily indicative of results which may be expected for the year as a whole.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATED FINANCIAL STATEMENTS include the accounts of the Company and its
wholly-owned subsidiaries. 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 materials, 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 and supply contracts,
licenses, patents, trademarks and others 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 supply
contracts and other intangibles are being amortized on straight-line basis over
the estimated period of benefit ranging from two to eight
F-5
LIGHTPATH TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
DECEMBER 31, 2001
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.
INCOME TAXES are accounted for under the asset and liability method. 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 is generally recognized from product sales when products are shipped to
the customer provided that LightPath has received a valid purchase order, the
price is fixed, title has transferred, collection of the associated receivable
is reasonably assured, and there are no remaining significant obligations.
Revenues from product development agreements are recognized as milestones are
completed in accordance with the terms of the agreements. Provisions for
estimated losses are made in the period in which such losses are determined.
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. For stock options
granted to non-employees, stock-based compensation is determined using the fair
value method as prescribed by SFAS 123, "Accounting for Stock-Based
Compensation."
MANAGEMENT MAKES ESTIMATES and assumptions during the preparation of the
Company's consolidated financial statements that affect amounts reported in the
financial statements and accompanying notes. Such estimates and assumptions
could change in the future as more information becomes known, which in turn
could impact the amounts reported and disclosed herein.
FAIR VALUES OF FINANCIAL INSTRUMENTS of the Company are disclosed as required by
Statement of Financial Accounting Standards No. 107, DISCLOSURES ABOUT FAIR
VALUES OF FINANCIAL INSTRUMENTS. The carrying amounts of cash and cash
equivalents, trade accounts receivable, accounts payable and accrued liabilities
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. When an evaluation is required, the estimated future undiscounted
cash flows associated with the asset are compared to the asset's carrying amount
to determine if a write-down to fair value is required. See Notes 3 and 4.
2. INVENTORIES
The components of inventories include the following at:
December 31 June 30
2001 2001
---------- ----------
Raw materials $2,525,626 $3,208,838
Work in process 460,473 971,916
Finished goods 998,609 1,233,833
---------- ----------
Total inventories $3,984,708 $5,414,587
========== ==========
F-6
LIGHTPATH TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
DECEMBER 31, 2001
3. PROPERTY AND EQUIPMENT
During the second quarter of fiscal 2002, the Company recorded an impairment
charge to write off certain excess manufacturing equipment with a carrying value
of approximately $553,000 which was used in the production of collimators and
was removed from service by the Company due to changes in the manufacturing
process.
4. INTANGIBLE ASSETS
Intangible assets consist of the following:
Life December 31 June 30
In years 2001 2001
-------- ---- ----
Goodwill 4 $ 5,203,365 $ 5,203,365
Customer list and supply contract 4 1,041,750 4,800,000
Developed technology 2 - 4 6,064,981 18,000,000
Covenant not-to-compete 3 3,100,000 3,100,000
Other intangibles 2 - 5 2,860,000 2,860,000
Patents and trademarks granted 10 - 17 602,673 582,787
License agreements 17 46,560 46,560
Patent applications in process 146,539 127,800
----------- -----------
19,065,868 34,720,512
Less accumulated amortization 8,157,420 9,037,171
----------- -----------
Total intangible assets $10,908,448 $25,683,341
=========== ===========
Pursuant to SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of," the Company evaluated the
recoverability of its the long-lived assets as of December 31, 2001, including
the intangible assets acquired in April 2000 and September 2000, when the
Company purchased Horizon Photonics, Inc. ("Horizon") and Geltech Inc.
("Geltech"), respectively. While revenues from the sale of Horizon's products
was substantial during fiscal 2001, Horizon has had to defer sales under a
supply contract to a significant customer since May 2001. At June 30, 2001, the
Company determined that the estimated future undiscounted cash flows related to
the customer supply contract and associated goodwill recorded in connection with
the acquisition of Horizon were below the carrying value of the related
intangible assets and the intangibles were written down to their estimated fair
value at June 30, 2001. In November 2001, the customer indicated they will not
take delivery of any remaining orders which resulted in the impairment of the
remaining carrying value of the customer supply contract of approximately $1.5
million as of December 31, 2001. In addition, Geltech continued to experience
sales growth during the first quarter of fiscal 2002, however, design changes by
a major customer in October 2001 as well as the continued decline in the
telecommications industry has lead to a significant decline in future sales
projections and growth potential at Geltech. At December 31, 2001, the Company
determined that the estimated future undiscounted cash flows remaining from the
developed technology and customer list recorded in connection with the purchase
of Geltech were below the carrying value of the related intangible assets.
Accordingly, the Company recorded an impairment charge of approximately $4.9
million to write down the carrying value of these intangibles to their estimated
fair value of approximately $4.7 million at December 31, 2001. The estimated
fair values of the intangible assets were based on the anticipated discounted
future cash flows from revised sales forecasts. In addition, the Company
reversed the net deferred tax liability of approximately $3.3 million
established in connection with the non-taxable purchase of Geltech against the
related intangible assets prior to the impairment charge as the carrying value
of the remaining Geltech intangible assets was reduced in connection with the
impairment.
F-7
LIGHTPATH TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
DECEMBER 31, 2001
5. ACQUISITIONS
On September 20, 2000, the Company acquired all of the outstanding shares of
Geltech, a leading manufacturer of precision molded aspherical optics used in
the active telecom components market to provide a highly efficient means to
couple laser diodes to fibers or waveguides. Additionally, Geltech has a unique
and proprietary line of all-glass diffraction gratings (StableSil(R)) for
telecom applications such as optical switching, mux/demux and laser tuning as
well as a product family of Sol-Gel based waveguides. LightPath acquired all of
the outstanding shares of Geltech for 822,737 shares of Class A common stock
(valued at $27.5 million) which resulted an aggregate purchase price of $28.5
million including acquisition costs. The acquisition has been accounted for
using the purchase method of accounting and, accordingly, the results of
operations of Geltech have been included in the Company's consolidated financial
statements from September 20, 2000. In the first quarter of fiscal 2001, the
Company recorded an immediate non-recurring charge of $9.1 million, due to
acquired in-process research and development based on an assessment of purchased
technology of Geltech.
6. REDEEMABLE CONVERTIBLE PREFERRED STOCK
The Series F Convertible Preferred Stock has a stated value and liquidation
preference of $10,000 per share, plus a 7% per annum premium. There are 127
shares of Series F Convertible Preferred Stock outstanding at December 31, 2001
and June 30, 2001, respectively. The holders of the Series F Convertible
Preferred Stock are not entitled to vote or to receive dividends. Each share of
Series F Convertible Preferred Stock is convertible at the option of the holder,
into Class A common stock based on its stated value at the conversion date
divided by a conversion price. The conversion price is defined as the lesser of
$5.00 or 80% of the average closing bid price of the Company's Class A common
stock for the five days preceding the conversion date. The Company accounted for
the beneficial conversion feature associated with the Series F Convertible
Preferred Stock at issuance.
The certificate of designation of the Series F Convertible Preferred Stock
provides the Company the right to convert any outstanding shares to Class A
common stock or redeem them for cash three years from the date of issuance
(effective November 2002). In addition, the certificate of designation provides
that In the event of any liquidation, dissolution or winding up of the Company
("Liquidation Event"), either voluntary or involuntary, the then Holders of
shares of Series F Preferred Stock shall be entitled to receive an amount per
share equal to the sum of (i) the Original Series F Issue Price for each
outstanding share of Series F Preferred Stock and (ii) an amount equal to seven
percent (7%) of the Original Series F Issue Price, per annum. At each Holder's
option, a sale, conveyance or disposition of all or substantially all of the
assets of the Company or the effectuation by the Company of a transaction or
series of related transactions in which more than fifty percent (50%) of the
voting power of the Company is disposed of shall be deemed to be a Liquidation
Event as defined above. A consolidation, merger, acquisition, or other business
combination of the Company with or into any other publicly traded company or
companies shall not be treated as a Liquidation Event as defined above, however,
a consolidation, merger, acquisition, or other business combination of the
Company with or into any other non-publicly traded company or companies in which
the surviving entity is not a publicly traded company shall be treated as a
Liquidation Event as defined above.
Based on the SEC staff guidance addressed in EITF Topic D-98, which indicates
that the possibility that any triggering event that is not solely within the
control of the issuer could occur - without regard to probability - requires the
security to be classified outside of permanent equity, the Company has
classified the Series F preferred stock outside of stockholders' equity, for all
periods presented.
7. STOCKHOLDERS' EQUITY
The Company's authorized common stock includes, 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 (collectively the "E Shares") with $.01 par value. The E
Shares were automatically convertible into Class A common stock upon the
attainment of certain conversion provisions through June 30, 2000. Since the
conversion provisions expired without being met, the E Shares were redeemed by
the Company, effective as of December 30, 2000. The holders of E Shares will
receive their redemption value of $.0001 per share upon resolution of certain
stockholder litigation relating to E Shares. See Note 10.
F-8
LIGHTPATH TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
DECEMBER 31, 2001
Class A Warrants
Common Class C, E, L, Common Stock
Stock and other Options
----- --------- -------
Shares outstanding at June 30, 2001 19,371,167 299,300 4,249,454
Options granted -- -- 358,745
Options exercised 107,500 -- (107,500)
Option forfeitures -- -- (318,458)
---------- ------- ---------
Shares outstanding at December 31, 2001 19,478,667 299,300 4,182,241
========== ======= =========
8. NET LOSS PER SHARE
Basic net loss per common share is computed based upon the weighted average
number of shares of Class A common stock 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 December 31, 2001: 4,182,241 shares
of Class A common stock issuable upon exercise of outstanding stock options,
299,300 shares of Class A common stock issuable upon exercise of private
placement and other warrants, and 541,092 shares of Class A common stock
issuable upon the conversion of convertible preferred stock (292,483 shares
based on the fixed conversion price at closing). A seven percent premium earned
by the preferred shareholders increased the net loss applicable to common
shareholders by $22,407 and $18,551 for the three months ended December 31, 2001
and 2000, respectively, and by $48,016 and $45,464 for the six months ended
December 31, 2001 and 2000, respectively.
9. SEGMENT INFORMATION
Optoelectronics and Fiber Telecommunications ("Telecom") and Traditional Optics
are the Company's reportable segments under SFAS No. 131, "Disclosure about
Segments of an Enterprise and Related Information". For the six months ended
December 31, 2001, Telecom product sales represent approximately 60% of total
revenues and Traditional Optics sales represent approximately 40% of total
revenues of the Company. The telecom segment is based primarily on the
development and sale of fiber collimators and fiber-optic switches, free space
isolators, precision molded aspheric optics and other related passive component
products for the optoelectronics segment of the telecommunications industry. The
traditional optics segment is based primarily upon the sale of lenses to the
data storage and medical equipment market and the development and sale of
GRADIUM glass in the form of lenses and blanks for the general optics markets.
Summarized financial information concerning the Company's reportable segments
for the six and three months ended December 31, is shown in the following table.
Traditional Corporate and
Telecom Optics Other (1) Total
------- ------ --------- -----
SIX MONTHS ENDED
DECEMBER 31
Revenues (2)
2001 $ 3,544,155 2,310,762 -- $ 5,854,917
2000 $ 8,643,480 2,182,065 -- $ 10,825,545
Segment operating loss (3)
2001 $ (6,220,057) (1,793,727) (20,759,332) $(28,773,116)
2000 $ (3,429,433) (41,966) (23,751,503) $(27,222,902)
F-9
LIGHTPATH TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
DECEMBER 31, 2001
Traditional Corporate and
Telecom Optics Other (1) Total
------- ------ --------- -----
continued
THREE MONTHS ENDED
DECEMBER 31
Revenues (2)
2001 $ 1,474,768 922,103 -- $ 2,396,871
2000 $ 5,828,224 1,932,382 -- $ 7,760,606
Segment operating loss (3)
2001 $(3,727,435) (1,066,997) (12,912,710) $(17,707,142)
2000 $(1,604,472) 275,081 (8,124,713) $ (9,454,104)
----------
(1) Corporate functions include certain members of executive management, the
corporate accounting and finance function, non-cash charges and other
typical administrative functions which are not allocated to segments.
(2) There were no material inter-segment sales during all periods presented.
(3) In addition to unallocated corporate functions, management does not
allocate interest expense, interest income, and other non-operating income
and expense amounts in the determination of the operating performance of
the reportable segments.
10. CONTINGENCIES
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
December 30, 2000 for $.0001 per share, the right of the holders of Class E
Common Stock to vote at the Annual Meeting 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,
former President, Chief Executive Officer and 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. The Company proposed a settlement of this lawsuit which
the Delaware Chancery Court heard on January 8, 2001. The settlement proposal
was made to include all holders of Class E Common Stock. On February 2, 2001,
the Delaware Chancery Court issued a letter in which it indicated that holders
of Class E Common Stock must be provided an opportunity to request exclusion
from the settlement class. The Company has re-evaluated the proposed settlement
offer and in December 2001 determined it will proceed with the settlement to
include a provision that each E shareholder has the right to request exclusion
from the settlement class. The final settlement terms allow the holders of Class
E Common Stock to elect to receive either $0.40 for each share of Class E Common
Stock or receive an option to purchase five shares of Class A Common Stock for
each 100 shares of Class E Common Stock they hold for a period of two years with
an exercise price of $3.73 per share. The Company estimates that if all of the
Class E Common Stock were exchanged for options, approximately 40,220 options to
acquire 201,102 shares of Class A Common Stock would be issued resulting in a
settlement charge equal to the estimated fair value of the options issued of
approximately $458,000. If all of the Class E Common Stock were exchanged for
cash, a settlement charge of approximately $1.6 million would be recorded. The
Company has determined that it is probable that the settlement offer will occur
and an estimated settlement charge of $1.1 million has been accrued as of
December 31, 2001.
F-10
LIGHTPATH TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
DECEMBER 31, 2001
On or about June 9, 2000, a small group of holders of Class E Common Stock (the
"Texas Plaintiffs") commenced an action in a state court in Texas (the "Texas
Action"). The Texas Plaintiffs allege that the actions of the Company, and
certain named individuals, leading up to and surrounding the Company's 1995
proxy statement constitute fraud, negligent misrepresentation, fraudulent
inducement, breach of fiduciary duty and civil conspiracy. In general, the Texas
Plaintiffs allege misrepresentations and omissions in connection with a request
from the Company that its shareholders consent to a recapitalization, resulting
in a 5.5 to 1 reverse stock split and the issuance of certain Class E Common
Stock. The Texas Plaintiffs further allege that, as a result of the defendants'
actions, they were induced to consent to the Company's recapitalization. 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 is vigorously defending against these claims. The participants in the Texas
Action will be provided the opportunity to accept the settlement discussed
above. In addition, the Company participated in a mediation proceeding relating
to the Texas Action on October 23, 2001. During the six months ended December
31, 2001, the Company incurred and expensed legal fees associated with these
claims of approximately $525,000, however, an insurance claim for the aggregate
amount incurred in connection with the Texas Action in excess of applicable
deductibles has been filed by the Company. During the first quarter of fiscal
2002, one of the insurance companies responsible for the claim, which had
previously filed for reorganization, was declared insolvent. The Company is
working with regulatory agencies to resolve and collect the monies due under
this policy, although the Company currently considers any potential recovery
under this policy as speculative. Accordingly, no claim for recovery is recorded
as of December 31, 2001.
LightPath is subject to various other claims and lawsuits in the ordinary course
of its business, none of which are currently considered material to the
Company's financial condition and results of operations. Except as set forth
above, there have been no material developments in any legal actions reported in
the Company's Form 10-KSB for the year ended June 30, 2001.
F-11
FINANCIAL STATEMENTS FOR FISCAL YEAR 2001
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, 2001 and 2000, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the three
years ended June 30, 2001. 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 financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of LightPath
Technologies, Inc., as of June 30, 2001 and 2000, and the results of their
operations and their cash flows for the three years ended June 30, 2001 in
conformity with accounting principles generally accepted in the United States of
America.
KPMG LLP
Albuquerque, New Mexico
August 1, 2001
F-12
LIGHTPATH TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, JUNE 30,
2001 2000
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 29,273,034 $ 58,728,130
Trade accounts receivable - less allowance of $120,947 and $15,000 2,579,483 841,533
Inventories (NOTE 2) 5,414,587 1,690,058
Other receivables and advances to employees 442,116 17,733
Prepaid expenses and other 616,071 225,451
------------- -------------
Total current assets 38,325,291 61,502,905
Property and equipment - net (NOTE 3) 12,046,891 6,482,039
Goodwill and intangible assets - net (NOTE 4) 25,683,341 31,727,811
Investment in LightChip, Inc. (NOTE 6) 8,234,885 1,000,000
------------- -------------
Total assets $ 84,290,408 $ 100,712,755
============= =============
LIABILITIES, REDEEMABLE COMMON AND CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,276,204 $ 1,573,531
Accrued liabilities 300,263 469,771
Accrued payroll and benefits 1,131,252 330,734
Capital lease obligations and note payable (NOTE 7) 242,475 --
------------- -------------
Total current liabilities 2,950,194 2,374,036
Deferred income taxes (NOTE 11) 3,316,304 --
Commitments and contingencies (NOTE 15)
Redeemable convertible preferred stock (NOTE 9)
$.01 par value; stated value of $10,000 per share; 5,000,000 shares
authorized; 127 and 153 Series F shares issued and outstanding 1,417,070 1,601,698
Redeemable common stock (NOTE 10)
Class E-1, E-2 and E-3 - performance based and redeemable common stock 0
and 4,022,037 shares issued and outstanding -- 40,221
Stockholders' equity: (NOTES 10 AND 12)
Common stock: Class A, $.01 par value, voting; 34,500,000 shares
authorized; 19,371,167 and 18,136,254 shares issued and outstanding 193,712 181,363
Additional paid-in capital 181,708,752 140,958,151
Accumulated deficit (105,295,624) (44,442,714)
------------- -------------
Total stockholders' equity 76,606,840 96,696,800
------------- -------------
Total liabilities, redeemable common and convertible preferred stock
and stockholders' equity $ 84,290,408 $ 100,712,755
============= =============
SEE ACCOMPANYING NOTES.
F-13
LIGHTPATH TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED JUNE 30
2001 2000 1999
------------ ------------ ------------
REVENUES
Telecom product and lens sales $ 25,257,391 $ 2,098,841 $ 712,317
Product development fees and other sales 885,765 167,423 373,809
------------ ------------ ------------
Total revenues 26,143,156 2,266,264 1,086,126
COSTS AND EXPENSES
Cost of sales (exclusive of stock-based compensation
of $11,875 and none, for the year ended June 30,
2001 and 2000, respectively) 15,283,694 1,309,711 409,417
Selling, general and administrative (exclusive of stock-based
compensation of $11,127,536 and $3,144,490, for the year
ended June 30, 2001 and 2000, respectively) 19,291,630 5,942,029 2,918,184
Research and development (exclusive of stock-based
compensation of $25,094 and none, for the year
ended June 30, 2001 and 2000, respectively) 7,089,931 1,449,347 615,371
Asset impairment (NOTES 3 AND 4) 13,772,867 -- --
Stock-based compensation 11,164,505 3,144,980 --
Amortization of goodwill and intangibles 13,566,807 2,418,119 --
Acquired in process research and development 9,100,000 4,200,000 --
------------ ------------ ------------
Total costs and expenses 89,269,434 18,464,186 3,942,972
------------ ------------ ------------
Operating loss (63,126,278) (16,197,922) (2,856,846)
OTHER INCOME (EXPENSE)
Investment income 2,436,438 1,062,952 95,362
Interest and other expense (73,521) (475,097) (10,863)
Equity in Loss of LightChip, Inc. (NOTE 6) -- -- (361,671)
------------ ------------ ------------
Net loss $(60,763,361) $(15,610,067) $ (3,134,018)
Imputed dividend and premium on preferred stock (89,549) (2,231,943) (224,651)
------------ ------------ ------------
Net loss applicable to common shareholders
(NOTE 12) $(60,852,910) $(17,842,010) $ (3,358,669)
============ ============ ============
Basic and diluted net loss per share (NOTE 12) $ (3.19) $ (1.86) $ (0.79)
============ ============ ============
Number of shares used in per share calculation 19,064,141 9,586,817 4,271,313
============ ============ ============
SEE ACCOMPANYING NOTES.
F-14
LIGHTPATH TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
CLASS A
COMMON STOCK
------------------------ ADDITIONAL
NUMBER OF PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
---------- --------- ------------- ------------- -------------
Balances at June 30, 1998 3,330,607 $ 33,306 $ 22,651,915 $ (23,242,035) $ (556,814)
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
Series A shares, 103 Series B shares and
277 Series C shares of convertible
preferred stock 1,614,488 16,145 4,141,441 -- 4,157,586
Premium on Series A, Series B and Series C
convertible preferred stock -- -- -- (224,651) (224,651)
Net loss -- -- -- (3,134,018) (3,134,018)
---------- --------- ------------- ------------- -------------
Balances at June 30, 1999 4,960,703 $ 49,607 $ 26,860,418 $ (26,600,704) $ 309,321
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 1,066,970 10,670 3,923,831 -- 3,934,501
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 18,136,254 $ 181,363 $ 140,958,151 $ (44,442,714) $ 96,696,800
Exercise of stock options 306,255 3,063 1,501,562 -- 1,504,625
Exercise of warrants and unit purchase
options 50,217 502 65,487 -- 65,989
Issuance of common stock upon conversion of
26 shares Series F convertible preferred
stock 55,704 557 273,620 -- 274,177
Issuance of common stock and stock options
to acquire Geltech, Inc. 822,737 8,227 27,705,609 -- 27,713,836
Redemption E1, E2, E3 common stock -- -- 39,818 -- 39,818
Stock-based compensation -- -- 11,164,505 -- 11,164,505
Premium on Series F convertible preferred stock -- -- -- (89,549) (89,549)
Net loss -- -- -- (60,763,361) (60,763,361)
---------- --------- ------------- ------------- -------------
Balances at June 30, 2001 19,371,167 $ 193,712 $ 181,708,752 $(105,295,624) $ 76,606,840
========== ========= ============= ============= =============
SEE ACCOMPANYING NOTES.
F-15
LIGHTPATH TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED JUNE 30
------------------------------------------------
2001 2000 1999
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(60,763,361) $(15,610,067) $ (3,134,018)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 16,261,789 3,090,322 375,358
Equity in loss of LightChip -- -- 361,671
Debt discount -- 425,795 --
Write off abandoned patent applications -- 132,011 --
Asset impairment 13,772,867 -- --
Stock-based compensation 11,164,505 3,144,980 --
Acquired in-process research and development 9,100,000 4,200,000 --
Changes in operating assets and liabilities
(net of the effect of acquisitions):
Receivables, net and advances to employees (945,878) 639,450 (57,984)
Inventories (2,656,444) (531,698) (107,608)
Prepaid expenses and other (317,053) (197,858) 24,505
Accounts payable and accrued liabilities,
including payroll (588,408) 1,451,545 (123,666)
------------ ------------ ------------
Net cash used in operating activities (14,971,983) (3,255,520) (2,661,742)
CASH FLOWS FROM INVESTING ACTIVITIES
Property and equipment additions, net (7,230,694) (5,148,438) (437,223)
Costs incurred in acquiring patents and license agreements (84,630) (58,324) (79,223)
Acquisitions, net of cash acquired (18,411) (2,164,662) --
Investment in LightChip (7,234,885) (1,570,000) (713,333)
------------ ------------ ------------
Net cash used in investing activities (14,568,620) (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 notes payable and capital leases (1,484,704) (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 1,570,211 65,509,236 39,950
Proceeds from issuance of common stock -- 258,800 27,559
------------ ------------ ------------
Net cash provided by financing activities 85,507 70,511,686 67,509
------------ ------------ ------------
Net (decrease) increase in cash and cash (29,455,096) 58,314,742 (3,824,012)
equivalents
Cash and cash equivalents at beginning of period 58,728,130 413,388 4,237,400
------------ ------------ ------------
Cash and cash equivalents at end of period $ 29,273,034 $ 58,728,130 $ 413,388
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 72,811 $ 1,180 $ 2,930
============ ============ ============
Non cash investing and financing activities:
Class A common stock, warrant and stock options
issued for acquisitions $ 27,713,836 $ 37,968,613 $ --
============ ============ ============
Class A common stock issued upon conversion of
preferred stock $ 274,177 $ 3,934,501 $ 4,157,586
============ ============ ============
Preferred stock premium $ (89,549) $ (137,281) $ (224,651)
============ ============ ============
Class E common stock - redeemed in 2001 and
issued in 2000 and 1999 $ 40,221 $ 421 $ 291
============ ============ ============
SEE ACCOMPANYING NOTES.
F-16
LIGHTPATH TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001 AND 2000
ORGANIZATION
LightPath Technologies, Inc. ("LightPath" or 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 in 1985. On April 14, 2000, the Company acquired Horizon
Photonics, Inc. ("Horizon"). On September 20, 2000, the Company acquired
Geltech, Inc. ("Geltech"). The Company is engaged in the production of
collimator, isolator, and precision molded aspheric optics used in the telecom
components market, GRADIUM(R) glass lenses and other optical materials.
Additionally, Geltech has a unique and proprietary line of all-glass diffraction
gratings (StableSil(R)) for telecom applications as well as a product family of
Sol-Gel based waveguides. The Company also performs research and development for
optical solutions for the fiber telecommunications and traditional optics
markets. As used herein, the terms ("LightPath" or the "Company"), refer to
LightPath individually or, as the context requires, collectively with its
subsidiaries on a consolidated basis.
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 subsidiaries. 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 materials, 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 and supply contracts,
licenses, patents, trademarks and others 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 supply
contracts and other intangibles are being amortized on straight-line basis over
the estimated period of benefit ranging from two to eight 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-17
LIGHTPATH TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
INCOME TAXES are accounted for under the asset and liability method. 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 is generally recognized from product sales when products are shipped to
the customer provided that LightPath has received a valid purchase order, the
price is fixed, title has transferred, collection of the associated receivable
is reasonably assured, and there are no remaining significant obligations.
Revenues from product development agreements are recognized as milestones are
completed in accordance with the terms of the agreements. Provisions for
estimated losses are made in the period in which such losses are determined.
Sales to the Agere Systems, Inc (formerly Microelectronics division of Lucent
Technologies Inc.) were approximately $11.5 million which represents 44% of all
revenues for the year ended June 30, 2001. Sales to Lucent Technologies, Inc.,
for the year ended June 30, 2000 were approximately $930,000 or 41% of total
revenues.
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. For options issued to
non-employees, stock-based compensation is accounted for using the fair value
method as prescribed by Statement of Financial Accounting Standards No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION (SFAS 123).
Pro forma information required by SFAS 123 has been presented as if the fair
value method using a Black-Scholes option pricing model had been applied.
MANAGEMENT MAKES ESTIMATES and assumptions during the preparation of the
Company's consolidated financial statements that affect amounts reported in the
financial statements and accompanying notes. Such estimates and assumptions
could change in the future as more information becomes known, which in turn
could impact the amounts reported and disclosed herein.
FAIR VALUES OF FINANCIAL INSTRUMENTS of the Company are disclosed as required by
Statement of Financial Accounting Standards No. 107, DISCLOSURES ABOUT FAIR
VALUES OF FINANCIAL INSTRUMENTS. The carrying amounts of cash and cash
equivalents, trade accounts receivable, accounts payable and accrued liabilities
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. When an evaluation is required, the estimated future undiscounted
cash flows associated with the asset are compared to the asset's carrying amount
to determine if a write-down to fair value is required. See Notes 3 and 4.
F-18
LIGHTPATH TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
2. INVENTORIES
The components of inventories include the following at June 30:
2001 2000
---------- ----------
Raw materials $3,208,838 $ 733,050
Work in process 971,916 459,789
Finished goods 1,233,832 497,219
---------- ----------
Total inventories $5,414,587 $1,690,058
========== ==========
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at June 30:
2001 2000
----------- -----------
Manufacturing equipment $13,755,183 $ 5,339,963
Computer equipment and software 1,182,772 757,595
Furniture and fixtures 604,567 296,318
Platinum molds 656,073 931,815
Leasehold improvements 1,667,582 1,022,857
----------- -----------
17,866,177 8,348,548
Less accumulated depreciation 5,819,286 1,866,509
----------- -----------
Total property and equipment $12,046,891 $ 6,482,039
=========== ===========
During the fourth quarter of fiscal 2001, the Company recorded an impairment
charge of approximately $408,000 related to equipment held for disposal,
expected to be completed during the first quarter of fiscal 2002. The net
carrying value of the equipment held for disposal was approximately $90,000 at
June 30, 2001. The equipment was used for the production of traditional optics
in California, which the Company is consolidating into its Florida facilities.
4. INTANGIBLE ASSETS
Intangible assets consist of the following at June 30:
Life
In years 2001 2000
-------- ---- ----
Goodwill 4 $ 5,203,365 $11,797,725
Customer list and supply contract 4 - 8 4,800,000 15,900,000
Developed technology 2 - 4 18,000,000 2,400,000
Covenant not-to-compete 3 3,100,000 2,000,000
Other intangibles 2 - 5 2,860,000 1,520,000
Patents and trademarks granted 10 - 17 582,787 509,095
License agreements 17 46,560 40,000
Patent applications in process 127,800 60,845
----------- -----------
34,720,512 34,227,665
Less accumulated amortization 9,037,171 2,499,854
----------- -----------
Total intangible assets $25,683,341 $31,727,811
=========== ===========
Pursuant to SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of," the Company evaluated the
recoverability of the long-lived assets including the intangible assets acquired
F-19
LIGHTPATH TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
in April 2000, when the Company purchased Horizon Photonics Inc. ("Horizon")
(see Note 5). While revenue was substantial for fiscal 2001, Horizon has had to
defer sales to a significant customer since May 2001. At June 30, 2001, the
Company determined that the estimated future undiscounted cash flows remaining
from this customer supply agreement and associated goodwill were below the
carrying value of the related intangible assets. Accordingly, the Company
adjusted the carrying value of the goodwill and customer supply agreement to
their estimated fair value of approximately $2.1 million resulting in a noncash
impairment loss of approximately $13.4 million. The estimated fair value was
based on anticipated discounted future cash flows.
5. ACQUISITIONS
On April 14, 2000, the Company acquired 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. The Company assumed approximately
$250,000 of indebtedness of Horizon, which was repaid upon closing of the
transaction and incurred approximately $1 million in acquisition 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 liabilities assumed approximated their
historical book value at April 14, 2000. The estimated fair value of the
tangible net assets, identifiable intangible assets and goodwill, based on
management's assessment, 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 a non-recurring
charge of $4.2 million, due to acquired in-process research and development
based on an assessment of the 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 and development will have no
alternative future use 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.
F-20
LIGHTPATH TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
On September 20, 2000, the Company acquired all of the outstanding shares of
Geltech, for an aggregate purchase price of approximately $28.5 million,
comprised of 822,737 shares of Class A common stock (valued at $27.5 million)
and approximately $1 million in acquisition costs. The number of shares of Class
A common stock issued to the former shareholders of Geltech was based on the
average closing price of the Class A common stock for five days prior to the
date of the purchase agreement, August 9, 2000. Geltech, a Delaware corporation,
is a leading manufacturer of precision molded aspheric optics used in the active
telecom components market to provide a highly efficient means to couple laser
diodes to fibers or waveguides. Additionally, Geltech has a unique and
proprietary line of all-glass diffraction gratings (StableSil(R)) for telecom
applications such as optical switching, mux/demux and laser tuning as well as a
product family of Sol-Gel based diffraction gratings. The acquisition has been
accounted for using the purchase method of accounting and, accordingly, the
results of operations of Geltech have been included in the Company's
consolidated financial statements from September 20, 2000.
The purchase price was allocated to the tangible net assets and identifiable
intangible assets. The value of the tangible net assets acquired approximated
their historical book value at the date of the acquisition excluding previously
acquired goodwill and certain licensed technology at the acquisition date. In
addition, a net deferred tax liability of approximately $3.3 million was
recorded following a reduction in the Company's deferred tax valuation allowance
of approximately $5 million at the acquisition date. The estimated fair value of
the tangible net assets and identifiable intangible assets, based on
management's assessment, are as follows:
Fair Value
At Acquisition
--------------
Current assets $ 3,127,107
Equipment 1,437,137
Patents 62,577
In-process research and development 9,100,000
Customer list 2,700,000
Developed technology 15,600,000
Covenants not-to-compete 1,100,000
Patents, trademark & tradename 600,000
Acquired work force 740,000
Current liabilities (922,091)
Long-term debt and capital leases (1,727,179)
Deferred income taxes (3,316,304)
------------
Total $ 28,501,247
============
In the first quarter of fiscal 2001, the Company recorded a non-recurring charge
of $9.1 million, due to acquired in-process research and development based on an
assessment of the purchased technology of Geltech. This charge represents
technology that did not meet the accounting definitions of "completed
technology," and thus should be charged to earnings under generally accepted
accounting principles. This assessment analyzed certain diffraction gratings,
waveguides, lens arrays and sub-assembly technologies that were under
development at the time of acquisition. These programs were in various stages of
completion ranging from 30% to 50% of completion, with estimated completion
dates through December 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 fiscal 2002, with projected research and
development costs-to-complete of approximately $2.25 million. The estimated 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 acquisitions of Horizon and Geltech had taken place at
the beginning of fiscal 2000 and excludes the write-off of the acquired
in-process research and development of $4.2 million and $9.1 million,
respectively.
F-21
LIGHTPATH TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Pro forma June 30, June 30,
(in 000's except per share data) 2001 2000
-------- --------
Revenues $ 28,628 $ 11,622
Net loss applicable to common shareholders $(54,189) $(27,084)
Net loss per basic and diluted share $ (2.82) $ (2.33)
The unaudited pro forma information is presented for informational purposes only
and is not necessarily indicative of the results of operations that actually
would have been achieved had the acquisitions been consummated as of that date,
nor is it intended to be a projection of future results.
6. INVESTMENT IN LIGHTCHIP, INC.
On August 21, 2000, LightChip issued additional shares of voting convertible
preferred stock for $60 million, of which the Company funded $7.2 million, its
pro-rata interest. The Company's combined common stock and preferred stock
voting interest in LightChip decreased to approximately 16.4% after the August
2000 issuance of voting convertible preferred stock.
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 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 and the
Company's combined common stock and preferred stock voting interest in LightChip
decreased to approximately 18% following the investment. Accordingly, the
Company began accounting for its investment in LightChip under the cost method
in December 1999. 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.
7. CAPITAL LEASES AND NOTE PAYABLE
The Company has capital lease obligations with various institutions, payable in
monthly installments which expire throughout June 30, 2002, at 11.1% to 13.4%.
These obligations are generally secured by the equipment purchased under the
agreement. Geltech is currently in negotiations with Corning Incorporated
related to their licensing agreement and has not repaid the $77,613 balance on
the note payable to Corning Incorporated that was originally due in July 1999.
The Company continues to accrue interest on the note (prime rate plus .5%) and
any unpaid amounts are included in the capital lease obligations and note
payable at June 30, 2001. The Company incurred interest expense of $77,904,
$1,180 and $2,930 in years ended June 30, 2001, 2000 and 1999, respectively.
Geltech has a line of credit with a bank for $500,000 which expires in June 2002
and $500,000 was available at June 30, 2001. Borrowings are limited to 75% of
certain accounts receivable and 50% of certain inventory balances. Interest is
payable monthly at the prime rate plus 1.5% (6.75% at June 30, 2001). The line
of credit is collateralized by accounts receivable, intangible assets, and
inventory. Geltech is required to maintain various financial covenants.
8. 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
F-22
LIGHTPATH TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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.
9. REDEEMABLE CONVERTIBLE PREFERRED STOCK
Authorized 5,000,000 shares of preferred stock. From June 1997 to January 1998,
the Board of Directors designated 950 shares as Series A, Series B and Series C
Convertible Preferred Stock; $.01 par value. The Company entered into private
placement transactions which provided proceeds on the sale of 785 shares of
Series A, Series B and Series C Preferred Stock totaling $7,850,000, less
issuance costs of approximately $660,000, resulting in net proceeds of
approximately $7,190,000 by their respective final closing dates. As of June 30,
2001, all Series A, Series B and Series C shares were converted to common stock.
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.
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.
The Series A, Series B, Series C and Series F Convertible Preferred Stock
(collectively "Convertible Preferred Stock") has a stated value and liquidation
preference of $10,000 per share, plus an 8% per annum premium (7% Series F). The
holders of the Convertible Preferred Stock are not entitled to vote or to
receive dividends. Each share of 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. 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 beneficial
conversion feature 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
beneficial conversion feature 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.
The certificate of designation of the Series F Convertible Preferred Stock
provides the Company the right to convert any outstanding shares to Class A
common stock or redeem them for cash three years from the date of issuance
(effective November 2002). In addition, the certificate of designation provides
that In the event of any liquidation, dissolution or winding up of the Company
("Liquidation Event"), either voluntary or involuntary, the then Holders of
shares of Series F Preferred Stock shall be entitled to receive an amount per
share equal to the sum of (i) the Original Series F Issue Price for each
outstanding share of Series F Preferred Stock and (ii) an amount equal to seven
percent (7%) of the Original Series F Issue Price, per annum. At each Holder's
option, a sale, conveyance or disposition of all or substantially all of the
F-23
LIGHTPATH TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
assets of the Company or the effectuation by the Company of a transaction or
series of related transactions in which more than fifty percent (50%) of the
voting power of the Company is disposed of shall be deemed to be a Liquidation
Event as defined above. A consolidation, merger, acquisition, or other business
combination of the Company with or into any other publicly traded company or
companies shall not be treated as a Liquidation Event as defined above, however,
a consolidation, merger, acquisition, or other business combination of the
Company with or into any other non-publicly traded company or companies in which
the surviving entity is not a publicly traded company shall be treated as a
Liquidation Event as defined above.
Based on the SEC staff guidance addressed in EITF Topic D-98, which indicates
that the possibility that any triggering event that is not solely within the
control of the issuer could occur - without regard to probability - requires the
security to be classified outside of permanent equity, the Company has
classified the Series F preferred stock outside of stockholders' equity, for all
periods presented.
Preferred stock activity during the fiscal periods ended June 30, 2001, 2000 and
1999 were as follows:
CONVERTIBLE PREFERRED STOCK
-----------------------------------------------------
SHARES OUTSTANDING AT: SERIES A SERIES B SERIES C SERIES F TOTAL
-------- -------- -------- -------- -----
June 30, 1998 49 104 361 -- 514
Conversions to common stock (12) (103) (277) -- (392)
June 30, 1999 37 1 84 -- 122
Issuance of Series F preferred stock -- -- -- 408 408
Conversions to common stock (37) (1) (84) (255) (377)
June 30, 2000 -- -- -- 153 153
Conversions to common stock -- -- -- (26) (26)
June 30, 2001 -- -- -- 127 127
10. STOCKHOLDERS' EQUITY
The Company completed an IPO on February 22, 1996 for the sale of 1,840,000
units at an initial public offering price of $5.00. Each unit consisted of one
share of Class A common stock, one Class A warrant and one Class B warrant.
Common Stock - The Company's common stock consists of the following:
Authorized 34,500,000 shares of Class A common stock, $.01 par value. The
stockholders of Class A common stock are entitled to one vote for each share
held.
The Company's authorized common stock includes, 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 (collectively the "E Shares" ) with $.01 par value. The
stockholders of E Shares are entitled to one vote for each share held. Each E
Share was automatically convertible 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 E
Shares was equal to or in excess of 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 were redeemed by the Company, effective as
of September 30, 2000. The holders of E Shares will receive their redemption
value of $.0001 per share upon resolution of certain stockholder litigation
relating to E Shares. See Note 15.
F-24
LIGHTPATH TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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. As of June 30,
2001, 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. Each Class A warrant entitled 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 entitled the
holder to purchase one share of Class A common stock at an exercise price of
$8.75 until February 2001. The warrants were 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.
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, in
November 1999 the Company reduced the applicable exercise prices by twenty
percent and extended 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 2001, 47,000 private placement warrants
were exercised resulting in the issuance of approximately 41,633 shares of Class
A common stock. 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. The underlying shares
were registered on a Form S-3 that became effective on January 18, 2000. In
connection with the Geltech acquisition, the Company assumed a warrant to
purchase up to 6,753 shares of Class A Common Stock at $25.27 per share at any
time through June 2004. 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. All of the remaining Unit Purchase Options were exercised
during fiscal 2001 for 8,584 shares of Class A common stock.
The following table provides information on warrants during fiscal 2001, 2000
and 1999.
F-25
LIGHTPATH TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Warrants
----------------------------------------------------------
Class Class
C, E, G, D, F, H
Outstanding Class A & B I & K J & L Other
----------- ----------- ----- ----- -----
June 30, 1998 4,519,000 914,068 123,345 --
---------- ---------- ---------- ----------
June 30, 1999 4,519,000 914,068 123,345 --
---------- ---------- ---------- ----------
Issuance of securities 2,950,469 916,950 275,000 281,250
Conversions and exercises - equity (7,469,469) (1,392,371) (201,345) --
Conversions - debt -- (427,350) (150,000) --
---------- ---------- ---------- ----------
June 30, 2000 -- 11,297 47,000 281,250
---------- ---------- ---------- ----------
Issuance of securities 6,753
Conversions and exercises - equity -- -- (47,000) --
---------- ---------- ---------- ----------
June 30, 2001 -- 11,297 -- 288,003
========== ========== ========== ==========
INCOME TAXES
There was no provision for income taxes during the years ended June 30, 2001,
2000 and 1999.
Significant components of the Company's deferred tax assets and liabilities are
as follows at June 30:
Deferred tax assets: 2001 2000
------------ ------------
Start-up expenses, net $ -- $ 601,000
Research and development expenses 895,000 815,000
Net operating loss and credit carryforwards 20,648,000 9,999,000
Stock based compensation 5,038,000 240,000
Inventory 654,000 --
Other 661,000 --
------------ ------------
Gross deferred tax assets 27,896,000 11,655,000
Valuation allowance for deferred tax assets (20,968,000) (3,337,000)
------------ ------------
Total deferred tax assets 6,928,000 8,318,000
Deferred tax liabilities-
intangible assets and other (10,244,000) (8,318,000)
------------ ------------
Net deferred tax liability $ (3,316,000) $ --
============ ============
The valuation allowance has increased by approximately $17.6 million and
decreased by approximately $4.6 million during the years ended June 30, 2001 and
2000, respectively. The change is primarily due to the interaction of the
combining companies tax positions related to the non-taxable acquisitions of
Geltech in 2001 and Horizon in 2000 which created a deferred tax liability. To
the extent that approximately $4.6 million of the valuation allowance related to
acquired tax attributes is reduced in future periods, the benefit will be
recognized as a reduction to goodwill and intangible assets prior to recording
any future benefits.
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
primarily from the change in the valuation allowance.
F-26
LIGHTPATH TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
At June 30, 2001, the Company has consolidated net operating loss carryforwards
for federal income tax purposes of approximately $52 million (including $8.5
million of acquired net operating losses) which will expire from 2009 through
2021, if not previously utilized. The Company also has research and development
credit carryforwards of approximately $660,000 which will expire from 2009
through 2021, if not previously utilized. A portion of the net operating loss
carryforwards 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.
12. EMPLOYEE AND DIRECTOR STOCK OPTION PLANS
At June 30, 2001, the Company has three stock based compensation plans which are
described below. The Company applies APB Opinion No. 25 and related
Interpretations and SFAS 123 (non-employee grants only) in accounting for its
plans. No compensation costs have been recognized for its fixed stock options
grants to employees 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 3,275,000 shares of common stock for awards under the Incentive
Plan. The number of shares reserved for award by the Directors Plan at June 30,
2001 is 450,000 shares of common stock.
The Incentive Plan authorizes the Company to grant various awards using common
stock, and cash to officers and key employees of the Company. Prior to fiscal
2001, only incentive stock options had been issued under the plan with an
exercise price equal to the fair market value of the underlying stock on the
date the options are granted and an average vesting period of four years. During
fiscal 2001, following the Geltech acquisition, the Company issued 130,000 stock
options with exercise prices below fair market value on the date of grant. In
addition, the Company issued 67,912 shares of common stock for time accelerated
restricted stock awards to management which vest upon continued employment for
five years, or three years if certain performance criteria are met. The
intrinsic value of the restricted stock awards is being recognized over the
vesting period. The Company recognized a stock-based compensation charge of
approximately $330,000 in fiscal 2001, related to the restricted stock awards
and the in-the-money options. 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 approximately 440,000 options under the Incentive Plan available for
grant at June 30, 2001.
The Directors Plan authorizes the Company to grant awards to certain eligible
non-employee directors of the Company using common stock. Under the plan each
non-employee director receives options to purchase shares of the Company common
stock. Prior to fiscal 2001, the director's option vested ratably over their
three year term. In fiscal 2001, the plan adopted an annual grant which vest
monthly over the year. 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 approximately
128,000 options under the Director Plan available for grant at June 30, 2001.
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
option grants 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
F-27
LIGHTPATH TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
granted (1 million granted with an exercise prices less than market), non-cash
charges of approximately $18 million will be amortized over the vesting period
of the options. In addition, 219,000 and 150,000 options were granted in fiscal
2001 and 2000, respectively, 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 board of directors accelerated the vesting of certain options issued which
resulted in recording of stock-based compensation charges of approximately
$35,000 and $400,000 during the year ended June 30, 2001 and 2000, respectively.
In the aggregate, approximately $11.2 and $3.1 million of non-cash charges were
recorded for the years ended June 30, 2001 and 2002, respectively.
A summary of the status of the stock option plans as of June 30, 2001, 2000 and
1999 and changes during the years then ended is presented below:
Weighted
Average
Shares under option: Incentive Plan Directors Plan Nonqualified Exercise Price
-------------------- -------------- -------------- ------------ --------------
Outstanding at June 30, 1998 864,974 71,500 47,401 $ 7.61
Granted at market value 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
Granted at market value 1,032,781 80,000 219,000 $ 17.00
Granted below market value 130,000 -- -- $ 33.43
Exercised (254,656) (46,510) (7,645) $ 4.96
Lapsed or canceled (68,400) (24,642) (10,000) $ 14.99
---------- ---------- ---------- ----------
Outstanding at June 30, 2001 2,119,482 239,124 1,890,848 $ 13.86
========== ========== ========== ==========
Options exercisable:
June 30, 2001 565,270 215,188 66,848 $ 11.31
========== ========== ========== ==========
June 30, 2000 487,591 180,728 39,493 $ 6.67
========== ========== ========== ==========
June 30, 1999 502,891 115,464 39,328 $ 7.16
========== ========== ========== ==========
The following table summarizes information about fixed stock options outstanding
at June 30, 2001:
Options Outstanding Options Exercisable
------------------------------------------------- ------------------------------
Number Weighted-Avg. Number
Range of outstanding at Remaining Weighted-Avg. Exercisable at Weighted-Avg.
Exercise Prices June 30, 2001 Contractual Life Exercise Price June 30, 2001 Exercise Price
--------------- ------------- ---------------- -------------- ------------- --------------
$ 1 to 6 415,998 7.4 Years $ 3.91 225,198 $ 4.14
$ 6 to 12 2,049,307 8.1 $ 7.92 366,671 $ 7.60
$13 to 19 574,500 9.2 $17.18 128,500 $17.53
$19 to 29 1,040,681 9.0 $24.22 92,219 $25.62
$30 to 52 168,968 8.6 $35.15 34,718 $35.83
---------- ----------
$ 1 to 52 4,249,454 8.4 $13.86 847,306 $11.31
========== ==========
Had compensation costs for the Company's stock based compensation plans been
determined using the fair value method of FASB Statement No. 123, the Company's
net loss would have been increased to the pro forma amounts indicated below:
F-28
LIGHTPATH TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
2001 2000 1999
------------- ------------- -------------
Net loss applicable to common shareholders, as reported $ (60,852,910) $ (17,842,010) $ (3,358,669)
============= ============= =============
Net loss applicable to common shareholders, pro forma $ (62,327,788) $ (18,719,290) $ (4,375,669)
============= ============= =============
Basic and diluted net loss per share, as reported $ (3.19) $ (1.86) $ (0.79)
============= ============= =============
Basic and diluted net loss per share, pro forma $ (3.27) $ (1.95) $ (1.02)
============= ============= =============
The weighted-average fair value of options granted during the years ended June
30, 2001, 2000 and 1999 was $13.63, $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 2001, 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.
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, 2001: 4,249,454 Class A common stock options,
private placement and other warrants to acquire 299,300 shares of Class A common
stock and 307,340 Class A shares issuable upon the conversion of convertible
preferred stock (minimum of 283,520 shares based on the fixed conversion price
at closing).
A premium ranging from 7 to 8 percent earned by the preferred shareholders of
$89,549, $137,281, and $224,651 increased the net loss applicable to common
shareholders for the years ended June 30, 2001, 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.
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.
Company matching contributions during the fiscal year ended June 30, 2001 were
approximately $65,000. There were no company matching contributions made 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, 2001, the Company has entered into lease agreements for manufacturing and
office facilities in Albuquerque, New Mexico, Walnut and Auburn, California,
Warren, New Jersey and Orlando, Florida. These leases, which are generally for
five year terms with renewal options, expire beginning in March 2002 through May
2005. Equipment rental agreements are generally for three year terms. Equipment
and office rent expense recognized for the years ended June 30, 2001, 2000 and
1999 was approximately $950,000, $285,000, and $143,000, respectively.
Commitments under noncancelable operating leases are approximately $1.5 million
for 2002; $1.3 million for 2003; $1 million for 2004; $0.8 million for 2005 and
$0.6 million for 2006.
The Company has employment agreements, which expire in March 2002 through
September 2003, with officers and key employees which provide for an aggregate
payment of salaries of approximately $1.2 million annually. The Company has
outstanding purchase commitments for approximately $1.3 million at June 30,
F-29
LIGHTPATH TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
2001, the majority of these commitments are for raw materials, lens finishing
and advertising while the balance is for manufacturing, research and development
equipment.
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 March
31, 2001 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. The Company entered into a proposed settlement of this lawsuit
whereby the holders of Class E Common Stock could elect to receive either $.40
for each share of Class E Common Stock or a two year option to purchase one
Class A Common Stock for each 100 shares of Class E Common Stock they hold. The
option would be priced at the fair market value of the Class A Common Stock on
the settlement date. The Company estimates that if all of the Class E Common
Stock were exchanged for options to purchase Class A Common Stock, approximately
40,221 shares of Class A Common Stock would be issued. If all of the Class E
Common Stock were exchanged for cash, approximately $1.6 million would be
expended. On January 8, 2001, the Delaware Chancery Court held a hearing on the
proposed settlement. The settlement proposal was made to include all holders of
Class E Common Stock holders. On February 2, 2001, the Delaware Chancery Court
issued a letter in which it indicated that holders of Class E Common Stock must
be provided an opportunity to request exclusion from the settlement class. In
July 2001, the Chancery Court agreed to postpone further action regarding the
proposed settlement pending the currently scheduled mediation of the Texas
action. Due to the uncertainty regarding the proposed settlement offer, the
different exchange methods and the coverage of insurance for such claims, the
Company has not been able to determine that it is probable that the proposed
settlement will occur nor the likely amounts to be accrued for any possible
settlement costs.
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. As of
June 30, 2001, the Company has expensed legal fees associated with this claim of
approximately $650,000 and has filed an insurance claim for the amount related
to the lawsuit, in excess of deductible amounts. One of the insurance companies
responsible for the claim has filed for reorganization. The company is working
with regulatory agencies to resolve and collect the monies due under this
policy.
On November 15, 2000, the Company filed a complaint against Carmichael & Company
LLC, in the State of New Mexico, for violation of its agreement with the Company
as financial advisors and seeking to terminate the agreement. On or about
November 15, 2000, Carmichael & Company LLC filed a complaint against the
Company in the State of New York, for breach of contract and claiming
approximately $5 million in damages. On April 5, 2001, the parties met in New
Mexico for mediation and was settled by payment of $1.3 million to Carmichael.
The Company incurred approximately $300,000 in legal fees in connection with
this matter during fiscal 2001. The financial advisor contract with Carmichael &
Company LLC was terminated and both parties released the other from any further
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.
F-30
LIGHTPATH TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
16. RELATED PARTY TRANSACTIONS
During the fiscal years ended June 30, 2001, 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 an aggregate of approximately
$405,000, $425,000, and $127,000, respectively.
Sales to Lucent Technologies, Inc., which owned approximately 3% of the
outstanding Class A common stock of the Company, for the year ended June 30,
2000 were approximately $930,000.
17. SEGMENT INFORMATION
Optoelectronics and Fiber Telecommunications ("Telecom"), represents 81% of
total revenues of the Company, and Traditional Optics, represents 19% 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 telecom
segment is based primarily on the development and sale of fiber collimators and
fiber-optic switches, free space isolators, precision molded aspheric optics and
other related passive component products for the optoelectronics segment of the
telecommunications industry. The traditional optics segment is based primarily
upon the sale of lenses to the data storage and medical equipment market and the
development and sale of GRADIUM glass in the form of lenses and blanks for the
general optics markets. During fiscal 2001 approximately $13.4 million in
telecom sales were derived from one isolator and one collimator customer and
approximately $.6 million of traditional lens sales were derived from one
medical equipment customer. During fiscal 2000 approximately $1.3 million 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.
F-31
LIGHTPATH TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Summarized financial information concerning the Company's reportable segments
for the respective years ended June 30, is shown in the following table.
Traditional Corporate
Segment Information Telecom Optics And other(1) Total
------------------- ----------- ---------- ---------- ------------
Revenues(2)
2001 $21,076,466 5,066,690 -- $ 26,143,156
2000 $ 1,497,911 768,353 -- $ 2,266,264
1999 $ 57,029 1,029,097 -- $ 1,086,126
Segment operating loss(3)
2001 $(7,201,837) 73,162 (55,997,603) $(63,126,278)
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
2001 $13,450,705 2,617,060 194,024 $ 16,261,789
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
2001 $ 5,500,656 1,146,402 583,636 $ 7,230,694
2000 $ 2,768,108 2,255,552 124,778 $ 5,148,438
1999 $ 389,709 47,514 -- $ 437,223
Total assets
2001 $40,307,590 12,899,691 31,083,127 $ 84,290,408
2000 $38,225,268 3,325,638 59,161,849 $100,712,755
Other Foreign
United Countries
Geographic Information States Canada (over 15) Total
---------------------- ----------- ---------- ---------- ------------
Revenues(4) 2001 $22,236,329 1,678,633 2,228,194 $ 26,143,156
2000 $ 1,749,974 -- 516,290 $ 2,266,264
1999 $ 678,746 -- 407,380 $ 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, other receivables, advances, prepaid expenses
and unallocated property and equipment. The Company's investment in
LightChip is included in the assets of the Telecom segment.
(2) There were no material inter-segment sales during the years ended June 30,
2001, 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-32
No dealer, sales person or other person has been authorized to give any
information or to make any representation other than those contained in this
prospectus and, if given or made, such information or representation must not be
relied upon as having been authorized by the company or any underwriter. This
prospectus does not constitute an offer to sell or a solicitation of an offer to
buy any of the securities offered hereby by anyone in any jurisdiction in which
such offer or solicitation is not authorized or in which the person making such
offer or solicitation is not qualified to do so or to any person to whom it is
unlawful to make such offer or solicitation in such jurisdiction. Neither the
delivery of this prospectus nor any sale made hereunder shall, under any
circumstances, create any implication that the information herein is correct as
of any time subsequent to the date hereof or that there has been no change in
the affairs of the company since such date.
TABLE OF CONTENTS
Page
----
Available Information....................................................... 2
Prospectus Summary.......................................................... 4
The Company................................................................. 4
The Offering................................................................ 5
Risk Factors................................................................ 9
Use of Proceeds............................................................. 26
Determination of Offering Price............................................. 26
Plan of Distribution........................................................ 27
Description of Options...................................................... 27
Interest of Named Experts and Counsel....................................... 33
Information with respect to the Registrant:
- Description of the Business............................................... 34
- Price Range of Common Stock............................................... 57
- Selected Historical Consolidated Financial Data........................... 57
- Supplementary Quarterly Consolidated Financial Data (Unaudited)........... 59
- Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................. 59
Legal Matters............................................................... 76
Experts..................................................................... 76
Index to Financial Statements............................................... F-1
40,250 OPTIONS
TO PURCHASE SHARES OF CLASS A COMMON STOCK
LIGHTPATH TECHNOLOGIES, INC.
-------------------------
PROSPECTUS
APRIL __, 2002
-------------------------
PART II TO FORM S-2
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
It is estimated that the following expenses will be incurred in connection
with the proposed offering hereunder. All of such expenses will be borne by
LightPath:
Amount
------
SEC Registration Fee............................................... $ 128.80
Legal fees and expenses............................................ $ 40,000.00
Accounting fees and expenses....................................... $ 25,000.00
Printing expenses (1).............................................. $ 2,000.00
-----------
Total.............................................................. $ 67,128.80
===========
(1) Estimated
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article TENTH of LightPath's Certificate of Incorporation, as amended,
provides that, with certain exceptions, no director of the Company will face
personal liability to the corporation or its shareholders for breach of
fiduciary duty. Exceptions to this indemnification provision include breaches of
a director's duty of loyalty, acts or omissions involving bad faith, intentional
misconduct or knowing violations of the law, transactions yielding improper
personal benefits to any director, and Section 174 of the Delaware General
Corporation Law.
Article VII of the Company's Bylaws provides, in summary, that the Company
is required to indemnify to the fullest extent permitted by applicable law, any
person made or threatened to be made a party or involved in a lawsuit, action or
proceeding by reason that such person is or was an officer, director, employee
or agent of the Company. Indemnification is against all liability and loss
suffered and expenses reasonably incurred. Unless required by law, no such
indemnification is required by the Company of any person initiating such suit,
action or proceeding without board authorization. Expenses are payable in
advance if the indemnified party agrees to repay the amount if he is ultimately
found to not be entitled to indemnification.
II-1
ITEM 16. EXHIBITS.
Exhibit
Number Description
------ -----------
4.1 Form of Option *
4.2 Certificate of Designations of Series F Preferred Stock 1
5 Opinion of Squire, Sanders & Dempsey L.L.P. re legality
of securities to be offered 2
8 Opinion of Squire, Sanders & Dempsey L.L.P. re tax matters *
10.4 Directors Compensation Agreement with Amendment for
Robert Ripp 3
10.6 Omnibus Incentive Plan 4
10.7 Directors Stock Option Plan 5
10.8 Amended Omnibus Incentive Plan 3
10.9 Merger Agreement dated April 14, 2000 between Registrant
and Horizon Photonics, Inc. 6
10.10 Merger Agreement dated August, 2000 between Registrant
and Geltech, Inc. 7
23.1 Consent of KPMG LLP *
23.2 Consent of Ernst & Young LLP *
23.3 Consent of Squire, Sanders & Dempsey L.L.P. (included in
its opinion filed as exhibit 5) See Exh. 5
23.4 Consent of Squire, Sanders & Dempsey L.L.P. re tax matters
(included in its opinion filed as exhibit 8) See Exh. 8
24 Powers of Attorney (included on the signature page See
on page II-4) Page II-4
99.1 Stipulation of Settlement 8
99.2 Supplemental Notice of Class Action, Class Action
Determination and Approval of Class Action Settlement 8
99.3 Order and Final Judgment 8
99.4 Notice of Election 8
----------
1. 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.
2. This exhibit was filed as an exhibit to Amendment No. 2 to our Registration
Statement on Form S-2 (File No: 333-73832) dated February 28, 2002 and is
incorporated herein by reference thereto.
3. This exhibit was filed as an exhibit to our Registration Statement on Form
S-8 (File No: 333-50976) dated November 30, 2000 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 Registration Statement on Form
S-8 (File No: 333-50974) dated November 30, 2000 and is incorporated herein
by reference thereto.
6. 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.
7. This exhibit was filed as an exhibit to our Registration Statement on Form
S-3 (File No: 333-47992) dated October 20, 2000 and is incorporated herein
by reference thereto.
8. This exhibit was filed as an exhibit to Amendment No. 3 to our Registration
Statement on Form S-2 (File No: 333-73832) dated March 25, 2002 and is
incorporated herein by reference thereto.
* Filed herewith.
II-2
ITEM 17. UNDERTAKINGS
A. Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of LightPath pursuant to the foregoing provisions, or otherwise, we have been
informed that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
B. The undersigned Registrant hereby undertakes to:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) include any prospectus required by section 10(a)(3) of the
Securities Act;
(ii) reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the information in
the registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any deviation
from the low or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in the volume and price represent no
more than a 20% change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration statement;
(iii) include any additional or changed material information on
the plan of distribution.
(2) For determining liability under the Securities Act, treat each
such post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-2 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, there unto duly
authorized, in the City of Albuquerque, State of New Mexico, on April 12, 2002.
LIGHTPATH TECHNOLOGIES, INC.,
a Delaware corporation
/s/ Donna Bogue
----------------------------------------
By: Donna Bogue, Chief Financial Officer
and Treasurer
SPECIAL POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned, constitutes and
appoints each of Robert Ripp and Donna R. Bogue, his true and lawful
attorney-in-fact and agent with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign any
and all pre and post-effective amendments (including all subsequent registration
statements and amendments thereto filed pursuant to Rule 462(b)) to this Form
S-2 Registration Statement, and to file the same with all exhibits thereto, and
all documents in connection therewith, with the Securities and Exchange
Commission, granting such attorney-in-fact and agents, full power and authority
to do and perform each and every act and thing requisite and necessary to be
done in person, hereby ratifying and confirming all that such attorney-in-fact
and agents may lawfully do or cause to be done by virtue hereof. Pursuant to the
requirements of the Securities Act of 1933, this Registration Statement has been
signed by the following persons in the capacities and on the dates stated.
Signature Title Date
--------- ----- ----
/s/ Robert Ripp Chairman of the Board and Interim April 12, 2002
----------------------------- CEO (Interim Principal Executive Officer)
Robert Ripp
/s/ Donna R. Bogue CFO and Treasurer (Principal Financial and April 12, 2002
----------------------------- Accounting Officer)
Donna R. Bogue
*
-----------------------------
James L. Adler, Jr. Director April 12, 2002
*
-----------------------------
Louis Leeburg Director April 12, 2002
*
-----------------------------
Robert Bruggeworth Director April 12, 2002
*
-----------------------------
Dr. Steve Brueck Director April 12, 2002
*
-----------------------------
Gary Silverman Director April 12, 2002
*By /s/ Robert Ripp
-----------------------------
Robert Ripp, attorney-in-fact April 12, 2002
II-4