================================================================================ U. S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________ to ____________ COMMISSION FILE NUMBER 000-27548 LIGHTPATH TECHNOLOGIES, INC. (Exact name of registrant as specified in its charter) DELAWARE 86-0708398 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3819 OSUNA, N.E. HTTP://WWW.LIGHTPATH.COM 87109 ALBUQUERQUE, NEW MEXICO (ZIP Code) (Address of principal executive offices) Registrant's telephone number, including area code: (505) 342-1100 Check whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date: Common Stock, Class A, $.01 par value 19,478,667 shares CLASS OUTSTANDING AT JANUARY 30, 2002 ================================================================================
LIGHTPATH TECHNOLOGIES, INC. FORM 10-Q INDEX ITEM PAGE - ---- ---- PART I FINANCIAL INFORMATION Item 1 Condensed Consolidated Balance Sheets 2 Condensed Consolidated Statements of Operations 3 Condensed Consolidated Statements of Cash Flows 4 Notes to Condensed Consolidated Financial Statements 5 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Item 3 Quantitative and Qualitative Disclosures About Market Risk 19 PART II OTHER INFORMATION Legal Proceedings 20 Changes in Securities and Use of Proceeds 21 Defaults Upon Senior Securities 21 Submission of Matters to a Vote of Security Holders 21 Other Information 21 Exhibits and Reports on Form 8-K 21 SIGNATURES 22 1
LIGHTPATH TECHNOLOGIES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) <TABLE> <CAPTION> DECEMBER 31, JUNE 30, 2001 2001 ------------- ------------- <S> <C> <C> 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 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 and stockholders' equity $ 58,406,455 $ 84,290,408 ============= ============= </TABLE> SEE ACCOMPANYING NOTES. 2
LIGHTPATH TECHNOLOGIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) <TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED DECEMBER 31, DECEMBER 31, 2001 2000 2001 2000 ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> 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 ============ ============ ============ ============ </TABLE> SEE ACCOMPANYING NOTES. 3
LIGHTPATH TECHNOLOGIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) <TABLE> <CAPTION> SIX MONTHS ENDED DECEMBER 31, 2001 2000 ------------ ------------ <S> <C> <C> 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 ============ ============ </TABLE> SEE ACCOMPANYING NOTES. 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 years. The recoverability of the carrying values of these intangible assets are evaluated on a recurring basis. 5
LIGHTPATH TECHNOLOGIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED 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 =========== =========== 6
LIGHTPATH TECHNOLOGIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED 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. 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 7
LIGHTPATH TECHNOLOGIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED 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. 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. <TABLE> <CAPTION> Class A Warrants Common Class C, E, L, Common Stock Stock and other Options ----------- -------------- ------------ <S> <C> <C> <C> 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 =========== ======== ========== </TABLE> 8
LIGHTPATH TECHNOLOGIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED 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. <TABLE> <CAPTION> Traditional Corporate Telecom Optics and Other (1) Total ------- ------ ------------- ----- <S> <C> <C> <C> <C> 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) </TABLE> (continued) 9
LIGHTPATH TECHNOLOGIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED <TABLE> <CAPTION> Traditional Corporate continued Telecom Optics and Other (1) Total ------- ------ ------------- ----- <S> <C> <C> <C> <C> 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) </TABLE> (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. 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' 10
LIGHTPATH TECHNOLOGIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED 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. 11
LIGHTPATH TECHNOLOGIES, INC. 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 REPORT, OTHER THAN STATEMENTS OF HISTORICAL FACTS, WHICH ADDRESS ACTIVITIES, EVENTS OR DEVELOPMENTS THAT THE COMPANY EXPECTS OR ANTICIPATES WILL OR MAY OCCUR IN THE FUTURE, INCLUDING SUCH THINGS AS FUTURE CAPITAL EXPENDITURES, GROWTH, PRODUCT DEVELOPMENT, SALES, BUSINESS STRATEGY AND OTHER 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. 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 which were in process at 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 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 during the six months ended December 31, 2001 from these programs which is consistent with the revenue projections. 12
LIGHTPATH TECHNOLOGIES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 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 developments efforts. 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 which reported cost of sales of 61%. 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. 13
LIGHTPATH TECHNOLOGIES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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. As compared to the second quarter 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, generally nine to twelve months, as the products are shipped. 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 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. The 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 over 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. 14
LIGHTPATH TECHNOLOGIES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 from 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 last year which reported cost of sales of 59%. During the second 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 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 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 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, 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 15
LIGHTPATH TECHNOLOGIES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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. The 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 flat to down 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 with them on next generation products. During the first six months, 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 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. TRADITIONAL OPTICS SEGMENT During the first six months of fiscal 2002, our approximately $2.3 million of 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 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. 16
LIGHTPATH TECHNOLOGIES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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. 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 the Company'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 for 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 to for various manufacturing and development projects. An additional approximately $1.6 million of cash would be expended if all of the holders of Class E Common Stock selected cash for the settlement offer in the Delaware action. 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 supercedes 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 supercedes 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 that reporting 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 December 31, 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 17
LIGHTPATH TECHNOLOGIES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 intangible assets acquired in a purchase method business combination must meet 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 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 its existing intangible assets and goodwill that were acquired in a prior purchase business combinations, and to make any necessary reclassifications in order 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 of approximately $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. 18
LIGHTPATH TECHNOLOGIES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company invests liquid cash primarily in money market accounts, certificates of deposit 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. 19
LIGHTPATH TECHNOLOGIES, INC. PART II ITEM 1. LEGAL PROCEEDINGS 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, 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 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 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. 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. 20
LIGHTPATH TECHNOLOGIES, INC. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS LightPath Technologies, Inc. conducted its 2001 Annual Meeting of Stockholders on October 17, 2001. Actions concluded at the meeting through submission of matters to a vote by stockholders was conducted by proxy and included the following: 1. Election of Class I Directors to hold office until the Annual Meeting of Stockholders in 2004 a Class II Director to hold office until the Annual Meeting of Stockholders in 2003. The election of Class I Directors, Robert Ripp and Robert Bruggeworth, of the Company was approved by a vote of Class A shareholders of 17,605,832 FOR and 79,631 WITHHOLD AUTHORITY. The election of Class II Director Steve Brueck, of the Company was approved by a vote of Class A shareholders of 17,617,932 FOR and 67,531 WITHHOLD AUTHORITY. The terms of the Company's Class III Directors, Donald Lawson and Louis Leeburg and of its Class II Directors, James Adler Jr. continued after the date of the Annual Meeting. 2. Ratification of the selection of KPMG LLP as independent accountants for the Company for the fiscal year ending June 30, 2002 was approved by a vote of Class A shareholders 17,640,658 FOR; 19,147 AGAINST and 24,658 ABSTENTIONS. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION Donald Lawson, President and CEO resigned from the Company in October 2002 to pursue other interests. He will receive severance compensation per the terms of his employment contract of approximately $500,000. Robert Ripp, Chairman of the Board of Directors, was elected to serve as interim President and CEO and a search committee was formed by the Board of Directors to fill this position. Mr. Ripp receives a monthly consulting fee of approximately $21,000 while acting as the interim President and CEO. Mr. Ripp also received an incentive stock option on October 31, 2001, for 100,000 shares of common stock which was fully vested at issuance, has a term of ten years, and was priced at $2.78 per share which was the fair market value of the underlying stock on the grant date. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a) Exhibits None b) The following reports on Form 8-K were filed under the Securities Exchange Act of 1934 during the quarter ended December 31, 2001: 1. Current report on Form 8-K dated October 1, 2001, announced the first quarter of fiscal 2001 conference call would be held on October 25, 2001. 2. Current report on Form 8-K dated October 25, 2001, included the press release of the first quarter of fiscal 2002 financial results. 21
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed in its behalf by the undersigned, thereunto duly authorized. LIGHTPATH TECHNOLOGIES, INC. By: /s/ Donna Bogue February 14, 2002 ------------------------------------------- DONNA BOGUE DATE CHIEF FINANCIAL OFFICER 22