10-Q 1 e-9595.txt QUARTERLY REPORT FOR THE QTR ENDED 12/31/2002 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 2002 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.) 2603 CHALLENGER TECH CT. SUITE 100 ORLANDO, FLORIDA 32826 (Address of principal executive offices) (ZIP Code) (407) 382-4003 (Registrant's telephone number, including area code) N/A (Former name, former address, and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES [ ] NO [X] APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date: 20,677,071 shares of common stock, Class A, $.01 par value, outstanding as of January 31, 2003 ================================================================================ LIGHTPATH TECHNOLOGIES, INC. FORM 10-Q INDEX ITEM PAGE ---- ---- PART I FINANCIAL INFORMATION Item 1. Condensed Unaudited Consolidated Balance Sheets 2 Condensed Unaudited Consolidated Statements of Operations 3 Condensed Unaudited Consolidated Statements of Cash Flows 4 Notes to Condensed Unaudited Consolidated Financial Statements 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 14 Item 3. Quantitative and Qualitative Disclosures About Market Risk 22 Item 4. Controls and Procedures 22 PART II OTHER INFORMATION Item 1. Legal Proceedings 23 Item 4. Submission of Matters to a Vote of Security Holders 23 Item 5. Other Information 24 Item 6. Exhibits and Reports on Form 8-K 25 SIGNATURES 27 CERTIFICATIONS PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 28 1 ITEM 1. FINANCIAL STATEMENTS LIGHTPATH TECHNOLOGIES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
DECEMBER 31, JUNE 30, 2002 2002 ------------- ------------- ASSETS Current assets: Cash and cash equivalents $ 6,466,618 $ 13,177,624 Trade accounts receivable, net of allowance of $309,052 and $278,255, respectively 952,284 1,560,198 Inventories 2,032,994 2,403,644 Prepaid expenses and other receivables 649,226 1,531,367 ------------- ------------- Total current assets 10,101,122 18,672,833 Property and equipment, net 3,806,660 6,664,374 Goodwill, net -- 2,276,472 Intangible assets, net 4,085,513 5,777,707 Investment in LightChip, Inc. (included in June 30, 2002 balance only) and other assets 159,391 3,585,842 ------------- ------------- Total assets $ 18,152,686 $ 36,977,228 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 479,050 $ 1,002,374 Accrued liabilities 848,173 1,835,040 Accrued payroll and benefits 396,459 549,241 Accrued severance and exit costs 114,112 1,059,680 Other current liabilities 77,613 88,550 ------------- ------------- Total current liabilities 1,915,407 4,534,885 Commitments and contingencies - (Note 10) Stockholders' equity: Common stock: Class A, $.01 par value, voting; 34,500,000 shares authorized; 20,677,071 shares issued and outstanding 206,771 206,771 Additional paid-in capital 188,255,978 188,276,439 Accumulated deficit (172,225,470) (156,040,867) ------------- ------------- Total stockholders' equity 16,237,279 32,442,343 ------------- ------------- Total liabilities and stockholders' equity $ 18,152,686 $ 36,977,228 ============= =============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED UNAUDITED CONSOLIDATED STATEMENTS. 2 LIGHTPATH TECHNOLOGIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS SIX MONTHS ENDED ENDED DECEMBER 31, DECEMBER 31, ---------------------------- ---------------------------- 2002 2001 2002 2001 ------------ ------------ ------------ ------------ REVENUES Sales, net $ 1,663,573 $ 2,325,704 $ 3,308,556 $ 5,675,758 Product development fees and other sales -- 71,167 -- 179,159 ------------ ------------ ------------ ------------ Total revenues 1,663,573 2,396,871 3,308,556 5,854,917 COSTS AND EXPENSES Cost of sales (exclusive of stock-based compensation of $9,966 and $6,956, $(20,585) and $13,912 for the three months and the six months ended December 31, 2002 and 2001, respectively) 2,441,164 3,804,654 4,684,416 6,918,421 Selling, general and administrative (exclusive of stock-based compensation of $(37,835) and $1,869,294, $17,523 and $4,678,346 for the three months and the six months ended December 31, 2002 and 2001, respectively) 1,647,382 2,888,398 3,670,116 6,725,666 Research and development (exclusive of stock-based compensation of $(30,285) and none, $(17,398) and $13,767 for the three months and the six months ended December 31, 2002 and 2001, respectively) 599,409 2,169,419 1,533,197 4,221,873 Asset impairment 1,966,666 6,955,229 5,504,457 6,955,229 Stock-based compensation (58,154) 1,876,250 (20,460) 4,706,025 Amortization of goodwill and intangibles 730,644 2,410,063 1,543,509 5,100,819 Reorganization and relocation expense 232,175 -- 431,287 -- ------------ ------------ ------------ ------------ Total costs and expenses 7,559,286 20,104,013 17,346,522 34,628,033 ------------ ------------ ------------ ------------ Operating loss (5,895,713) (17,707,142) (14,037,966) (28,773,116) OTHER INCOME (EXPENSE) Investment and other income, net 45,093 89,716 129,834 799,439 ------------ ------------ ------------ ------------ Loss before cumulative effect of accounting change (5,850,620) (17,617,426) (13,908,132) (27,973,677) Cumulative effect of accounting change (2,276,472) -- (2,276,472) -- ------------ ------------ ------------ ------------ Net loss $ (8,127,092) $(17,617,426) $(16,184,604) $(27,973,677) ------------ ------------ ------------ ------------ Imputed dividend on preferred stock -- (22,407) -- (48,016) ------------ ------------ ------------ ------------ Net loss applicable to common shareholders $ (8,127,092) $(17,639,833) $(16,184,604) $(28,021,693) ============ ============ ============ ============ Loss per share of common stock (basic and diluted) Before cumulative effect of accounting change $ (0.28) $ (0.91) $ (0.67) $ (1.45) Cumulative effect of accounting change (0.11) -- (0.11) -- ------------ ------------ ------------ ------------ Net loss $ (0.39) $ (0.91) $ (0.78) $ (1.45) ============ ============ ============ ============ Number of shares used in per share calculation 20,677,071 19,392,308 20,677,071 19,381,738 ============ ============ ============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED UNAUDITED CONSOLIDATED STATEMENTS. 3 LIGHTPATH TECHNOLOGIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED DECEMBER 31, ---------------------------- 2002 2001 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES Net loss $(16,184,604) $(27,973,677) Adjustments to reconcile net loss to net cash used in operating activities: Cumulative effect of accounting change 2,276,472 -- Depreciation and amortization 2,475,706 6,579,098 Asset impairment 5,504,457 6,955,229 Stock-based compensation (20,460) 4,706,025 Provision for uncollectible accounts receivable 30,797 -- Changes in operating assets and liabilities: Trade receivables 577,117 642,300 Inventories 370,650 1,429,879 Prepaid expenses and other 905,549 453,013 Accounts payable and accrued expenses (2,608,540) 533,774 ------------ ------------ Net cash used in operating activities (6,672,856) (6,674,359) CASH FLOWS FROM INVESTING ACTIVITIES Property and equipment additions, net (125,242) (2,315,255) Proceeds from sale of assets 116,008 372,480 Patent and license agreement costs, net (17,979) (45,105) ------------ ------------ Net cash used in investing activities (27,213) (1,987,880) CASH FLOWS FROM FINANCING ACTIVITIES Payments on capital leases (10,937) (125,821) Proceeds from exercise of stock options and warrants -- 292,050 ------------ ------------ Net cash provided by financing activities (10,937) 166,229 ------------ ------------ Net decrease in cash and cash equivalents (6,711,006) (8,496,010) Cash and cash equivalents at beginning of period 13,177,624 29,273,034 ------------ ------------ Cash and cash equivalents at end of period $ 6,466,618 $ 20,777,024 ============ ============ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Note receivable in exchange for equipment $ -- $ 270,000 Preferred stock premium $ -- $ (48,016)
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED UNAUDITED CONSOLIDATED STATEMENTS. 4 LIGHTPATH TECHNOLOGIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED DECEMBER 31, 2002 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 precision molded aspherical lenses, GRADIUM(R) glass lenses, collimator and isolator optics used in various markets, including industrial, telecommunications medical, defense, test and measurement. The Company also performs research and development for emerging optical products and market segments in both the traditional optics markets and telecommunications. 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 of convertible debentures to raise additional capital. These funds were used for further research, development and commercialization of optoelectronic products and GRADIUM(R) glass lenses. During fiscal year 2000, warrants issued at the IPO and private placement warrants were exercised for approximately $65.5 million. The optical components markets, particularly the telecommunications market, have experienced a severe downturn since mid-2001, resulting in a significant decline in the demand for the Company's telecom related products as well as competitors' products. During the first six months of fiscal 2003, the Company completed the consolidation of the collimator and GRADIUM(R) product lines in Orando, Florida, relocated the administrative headquarters from Albuquerque, New Mexico to Orlando, Florida, and is currently evaluating strategic alternatives for the isolator business including either the consolidation of the Walnut, California plant into the Orlando, Florida plant, or sale of the unit. 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-K for the fiscal year ended June 30, 2002, filed with the Securities and Exchange Commission. These statements are unaudited but include all adjustments, which include normal recurring adjustments, which, in the opinion of management, are 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. Certain items in the prior year's financial statements have been reclassified to conform with the 2003 presentation. These reclassifications had no effect on stockholders' equity or the results of operations. 1. SIGNIFICANT ACCOUNTING POLICIES CONSOLIDATED FINANCIAL STATEMENTS include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. CASH AND CASH EQUIVALENTS consist of cash in the bank and temporary investments with maturities of 90 days or less when purchased. INVENTORIES which consist 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. 5 LIGHTPATH TECHNOLOGIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED PROPERTY AND EQUIPMENT are stated at cost and depreciated using both straight-line 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 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 life of the related assets ranging from ten to seventeen years. Customer list and supply contracts and other intangibles are being amortized on a straight-line basis over the estimated period of benefit ranging from two to five years. The recoverability of the carrying values of these intangible assets are evaluated on a recurring basis. 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. The Company adopted Statement of Financial Accounting Standards No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS (SFAS 142) on July 1, 2002. SFAS 142 eliminates the amortization of goodwill and other intangible assets that have indefinite useful lives. Amortization will continue to be recorded for intangible assets with definite useful lives. SFAS 142 also requires at least an annual impairment review of goodwill and other intangible assets. Any asset deemed to be impaired is to be written down to its fair value. The Company has completed its review of goodwill and other intangible assets for impairment in accordance with SFAS 142 as of December 31, 2002. INVESTMENTS AND OTHER ASSETS consists of the Company's ownership interest in LightChip Inc. ("LightChip") which is accounted for under the cost method. Investment in LightChip was disposed of during the first fiscal quarter of 2003. Also included is a long-term note receivable related to the sale of certain fixed assets with a maturity in 2006. INCOME TAXES are accounted for under the asset and liability method. Deferred income tax assets and liabilities are computed on the basis of differences between the financial statement and tax basis 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." 6 LIGHTPATH TECHNOLOGIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED 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 available, 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. 2. INVENTORIES The components of inventories include the following at: December 31 June 30 2002 2002 ---------- ---------- Raw materials $1,322,957 $1,670,488 Work in process 630,472 380,987 Finished goods 79,565 352,169 ---------- ---------- Total inventories $2,032,994 $2,403,644 ========== ========== 3. PROPERTY AND EQUIPMENT During the first six months of fiscal 2003, the Company recorded asset impairment charges on property and equipment of $1.9 million, of which $134,748 was recorded as a result of the relocation and disposal of equipment in connection with the reorganization of operations from Albuquerque, New Mexico to Orlando, Florida in the first fiscal quarter, and $1.8 million impairment of equipment at the Walnut, California facility in the second fiscal quarter. The net carrying value of the equipment remaining in Orlando, Florida, which was held for disposal at December 31, 2002, is approximately $88,000. 4. GOODWILL AND INTANGIBLE ASSETS Effective July 1, 2002, the Company no longer amortizes goodwill in accordance with SFAS 142. Accordingly, amortization expense decreased by approximately $.9 million for the six-month period ended December 31, 2002. The following table presents the impact of the adoption of SFAS 142 on the Company's reported net loss and net loss per applicable common share had SFAS 142 been in effect in fiscal 2001: 7 LIGHTPATH TECHNOLOGIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
DECEMBER 31, DECEMBER 31, THREE MONTH PERIODS ENDED: 2002 2001 ------------ ------------ Reported loss before cumulative effect of accounting change applicable to common shareholders $ (5,850,620) $(17,639,833) Add back: amortization of goodwill -- 445,210 ------------ ------------ Adjusted loss before cumulative effect of accounting change applicable to common shareholders $ (5,850,620) $(17,194,623) ============ ============ Reported net loss applicable to common shareholders $ (8,127,092) $(17,639,833) Add back: amortization of goodwill -- 445,210 ------------ ------------ Adjusted net loss applicable to common shareholders $ (8,127,092) $(17,194,623) ============ ============ Reported loss before cumulative effect of accounting change per applicable common share $ (0.28) $ (0.91) ------------ ------------ Adjusted loss before cumulative effect of accounting change per applicable common share $ (0.28) $ (0.89) ============ ============ Reported net loss per applicable common share $ (0.39) $ (0.91) ------------ ------------ Adjusted net loss per applicable common share $ (0.39) $ (0.89) ============ ============ DECEMBER 31, DECEMBER 31, SIX MONTH PERIODS ENDED: 2002 2001 ------------ ------------ Reported loss before cumulative effect of accounting change applicable to common shareholders $(13,908,132) $(28,021,693) Add back: amortization of goodwill -- 890,420 ------------ ------------ Adjusted loss before cumulative effect of accounting change applicable to common shareholders $(13,908,132) $(27,131,273) ============ ============ Reported net loss applicable to common shareholders $(16,184,604) $(28,021,693) Add back: amortization of goodwill -- 890,420 ------------ ------------ Adjusted net loss applicable to common shareholders $(16,184,604) $(27,131,273) ============ ============ Reported loss before cumulative effect of accounting change per applicable common share $ (0.67) $ (1.45) ------------ ------------ Adjusted loss before cumulative effect of accounting change per applicable common share $ (0.67) $ (1.40) ============ ============ Reported net loss per applicable common share $ (0.78) $ (1.45) ------------ ------------ Adjusted net loss per applicable common share $ (0.78) $ (1.40) ============ ============
8 LIGHTPATH TECHNOLOGIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED The following table discloses information regarding the carrying amounts and associated accumulated amortization for intangible assets subject to amortization after the adoption of SFAS 142. DECEMBER 31, 2002 ------------------------------------------ Gross carrying Accumulated Net carrying Amortized intangible assets: amount amortization amount ----------- ------------ ----------- $ 1,041,750 $ 378,825 $ 662,925 Customer list and supply contract Developed technology 6,064,981 3,732,721 2,332,260 Covenant not-to-compete 1,100,000 835,186 264,814 Other intangibles 2,860,000 2,533,333 326,667 Patents and trademarks granted 643,388 237,278 406,110 Patent applications in process 92,737 -- 92,737 ----------- ----------- ----------- Total $11,802,856 $ 7,717,343 $ 4,085,513 =========== =========== =========== JUNE 30, 2002 ------------------------------------------ Gross carrying Accumulated Net carrying Amortized intangible assets: amount amortization amount ----------- ------------ ----------- Customer list and supply contract $ 1,041,750 $ 189,409 $ 852,341 Developed technology 6,064,981 3,066,360 2,998,621 Covenant not-to-compete 3,100,000 2,151,852 948,148 Other intangibles 2,860,000 2,391,111 468,889 Patents and trademarks granted 643,388 208,437 434,951 Patent applications in process 74,757 -- 74,757 ----------- ----------- ----------- Total $13,784,876 $ 8,007,169 $ 5,777,707 =========== =========== =========== The following table summarizes the amortization expense attributable to intangible assets for the three month and six month periods ended December 31, 2002 and 2001, as well as estimated amortization expense for the fiscal years ending in June 2003 through 2007. Aggregate amortization expense: Three Months Ended Six Months Ended ------------------ ---------------- December 31, 2002 $ 730,644 $1,543,509 December 31, 2001 $2,410,063(a) $5,100,819(b) Estimated amortization expense: For the fiscal years ending: June 30, 2003 $2,614,000 June 30, 2004 $1,973,000 June 30, 2005 $ 578,000 June 30, 2006 $ 90,000 June 30, 2007 $ 60,000 (a) Totals for the three months ended December 31, 2001 includes $445,210 of goodwill amortization. (b) Totals for the six months ended December 31, 2001 includes $890,420 of goodwill amortization. During the second fiscal quarter of 2003, the Company further evaluated its goodwill and intangibles. As a result, approximately $2.3 million of goodwill impairment associated with the acquisition of Horizon Photonics, Inc. ("Horizon") was recorded in the second fiscal quarter. 9 LIGHTPATH TECHNOLOGIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED 5. INVESTMENT IN LIGHTCHIP, INC. During the first quarter ended September 30, 2002, LightChip ceased operations. Subsequently, the Board of Directors of LightChip approved the sale of its assets to two corporations who also agreed to hire LightChip's remaining employees. As a result, the Company recorded an impairment charge of $3.4 million to write down the remaining carrying value of its investment in LightChip to zero during the quarter ended September 30, 2002. 6. RESTRUCTURING On June 27, 2002, the Company announced a restructuring plan to consolidate its corporate headquarters and manufacturing facilities from Albuquerque, New Mexico to Orlando, Florida by September 30, 2002. A restructuring accrual for employee severance and other exit costs was recorded at June 30, 2002 for approximately $1.1 million, which includes employee severance for 67 employees and other lease costs. As of December 31, 2002, $.9 million of the accrued restructuring costs were paid. The severance benefits were paid by December 31, 2002 and the lease payments will be substantially complete by June 30, 2003. The Company also recorded reorganization and relocation expenses totaling approximately $.4 million during the six months ended December 31, 2002. The restructuring accrual and its activity during the period are summarized as follows: Balance at June 30, Amounts Balance at December 31, 2002 paid 2002 ----------- ----------- ----------- Severance $ 631,181 $ (631,181) $ -- Lease and other 428,499 (314,387) 114,112 ----------- ----------- ----------- $ 1,059,680 $ (945,568) $ 114,112 =========== =========== =========== 7. STOCKHOLDERS' EQUITY On September 30, 2000, the Company redeemed 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 since the conversion provisions expired without being met. The former holders of E Shares received their redemption value of $.0001 per share upon resolution of certain stockholder litigation relating to E Shares by September 30, 2002. See Note 10. 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, 2002: 3,812,214 shares of Class A common stock issuable upon exercise of outstanding restricted stock options, and 299,300 shares of Class A common stock issuable upon exercise of private placement and other warrants. A seven percent premium earned by the preferred shareholders increased the net loss applicable to common shareholders by $22,407 and $48,016 for the three months and the six months ended December 31, 2001, respectively. 9. SEGMENT INFORMATION Beginning in fiscal 2003, the Company reorganized into the Optical Lens Group ("Optical Lens") and Laser Component Group ("Laser Component") as the Company's reportable segments under SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information". For the three months ended December 31, 2002, Optical Lens product sales represented approximately 69% of total revenues and Laser Component product sales represented approximately 31% of total revenues of the Company. The Optical Lens segment includes the core lens business of the Company, precision molded aspheric optics, GRADIUM lenses and collimators. Applicable markets for the Optical Lens products include defense, medical devices, barcode 10 LIGHTPATH TECHNOLOGIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED scanners, optical data storage, machine vision, sensors, and environmental monitoring. The Optical Lens Group also performs research and development in the aforementioned markets. The Laser Component Group includes the integrated platform segment with a focus on optical packaging solutions. The Laser Component Group also manufactures isolator components, and performs research and development in support of optical generation and detection applications, such as transmitters, transceivers and pumps. In addition, current passive optical packages such as OASIS(TM) and Vectra(TM) collimator arrays are included within this segment. Summarized financial information concerning the Company's reportable segments for the three months ended December 31, is shown in the following table. Prior year information has been restated to conform to the new reportable segments of the Company. 11 LIGHTPATH TECHNOLOGIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
Optical Laser Corporate and Lens Component Other (1) Total ----------- ---------- ----------- ------------ THREE MONTHS ENDED DECEMBER 31 Revenues (2) 2002 $ 1,154,734 508,839 -- $ 1,663,573 2001 $ 1,819,434 577,437 -- $ 2,396,871 Operating loss 2002 $ (660,302) (3,231,071) (2,004,340) $ (5,895,713) 2001 $(3,451,667) (1,342,765) (12,912,710) $(17,707,142) Loss before cumulative effect of accounting change (3) 2002 $ (660,302) (3,231,071) (1,959,247) $ (5,850,620) 2001 $(3,451,667) (1,342,765) (12,822,994) $(17,617,426) Net loss (3) 2002 $ (660,302) (5,340,877) (2,125,913) $ (8,127,092) 2001 $(3,451,667) (1,342,765) (12,822,994) $(17,617,426) Total Assets at December 31 2002 $ 4,890,669 2,888,082 10,373,935 $ 18,152,686 2001 $ 4,731,809 6,589,277 47,085,369 $ 58,406,455 SIX MONTHS ENDED DECEMBER 31 Revenues (2) 2002 $ 2,543,192 765,364 -- $ 3,308,556 2001 $ 4,057,075 1,797,842 -- $ 5,854,917 Segment operating loss (3) 2002 $(1,703,956) (3,343,851) (8,990,159) $(14,037,966) 2001 $(5,844,319) (2,169,465) (20,759,332) $(28,773,116) Loss before cumulative effect of accounting change (3) 2002 $(1,703,956) (3,343,851) (8,860,325) $(13,908,132) 2001 $(5,844,319) (2,169,465) (19,959,893) $(27,973,677) Net loss (3) 2002 $(1,703,956) (5,453,657) (9,026,991) $(16,184,604) 2001 $(5,844,319) (2,169,465) (19,959,893) $(27,973,677)
(1) Corporate functions include certain members of executive management, the corporate accounting and finance function, non-cash charges and other typical administrative functions as well as the restructuring expenses, 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. 12 LIGHTPATH TECHNOLOGIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED 10. CONTINGENCIES In December 2001, the Company agreed to proceed with the settlement of a May 2, 2000 class action lawsuit, which the Company had commenced in the Chancery Court of Delaware. The settlement included a provision that each former Class E shareholder had the right to request exclusion from the settlement class. By June 30, 2002, the final settlement arrangements had been mailed to former holders of Class E Common Stock pursuant to which they would receive a settlement payment of $0.40 for each share. Approximately 3.6 million shares or 88% of Class E Common Stock participated in the settlement whereas holders of approximately 0.5 million shares or 12% opted out of the settlement. At June 30, 2002, the Company accrued an estimated settlement charge of $1.5 million of which approximately $1.3 million was distributed as of December 31, 2002. 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 alleged 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 alleged 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 alleged 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. During the first quarter of fiscal 2003, the Texas court granted a motion for Summary Judgment filed by the Company. The plaintiffs sought reconsideration of the ruling, however, on October 24, 2002, the Texas court denied their motion. The Company is in the process of seeking to have the two remaining named individuals dismissed from the action. During the six months ended December 31, 2002, the Company incurred and expensed legal fees associated with the Texas Action of approximately $.4 million, 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, 2002. On March 6, 2002, the Company commenced an action in a state court in New Mexico for various claims surrounding the now insolvent insurance carrier and the Company's former insurance broker. 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-K for the year ended June 30, 2002. 13 LIGHTPATH TECHNOLOGIES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ITEM 2. 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. RESULTS OF OPERATIONS THREE MONTHS ENDED DECEMBER 31, 2002 COMPARED TO THE THREE MONTHS ENDED DECEMBER 31, 2001 CONSOLIDATED OPERATIONS Our consolidated revenues totaled $1.7 million for the second quarter of fiscal 2003, a decrease of approximately $0.7 million or 31% compared to revenues for the second quarter of fiscal 2002. The decrease was primarily attributable to a decrease in laser components sales of $69,000 and optical lens sales of $.7 million. In the second quarter of fiscal 2003, consolidated cost of sales was approximately 147% of product sales, versus the comparable period of fiscal 2002 in which we reported cost of sales of 159%. Both periods included inventory write downs of $.3 million and $1.2 million, respectively. Excluding the write downs, the fiscal 2003 consolidated cost of sales was approximately 126% of product sales, versus the comparable period of fiscal 2002 of 108%. The elevated cost of sales is attributable principally to the underutilization of manufacturing facilities and staff because of reduced sales during the quarter. During the second quarter of fiscal 2003, selling, general and administrative costs decreased by $1.2 million from the second quarter of fiscal 2002 to $1.6 million, due, primarily, to the decrease in administrative and personnel costs as we consolidated facilities. We incurred several non-cash charges during the second quarter of fiscal 2003, including $2.4 million related to the write down of the Company's goodwill and remaining intangible assets from the Horizon acquisition, $1.8 million impairment of manufacturing equipment related to the isolator business, and $.7 million in amortization of intangibles from acquisitions. This was offset by the forfeiture of restricted stock awards resulting in $(58,000) in stock-based compensation charges. Research and development costs decreased by approximately $1.6 million to approximately $.6 million in the second quarter of fiscal 2003 versus the second quarter of fiscal 2002, due to reduced personnel and discontinuation of the research and development efforts directed at developing a optical cross connect switch. Other development work consisted of expenses associated with automation development and products in the areas of isolators and next generation optical subassemblies and sub-assembly technologies. During the second fiscal quarter of 2003, the Company also recorded approximately $.2 million of reorganization and relocation expenses incurred in connection with its previously announced plans to consolidate its corporate headquarters and manufacturing facilities from Albuquerque, New Mexico to Orlando, Florida. These expenses consist primarily of employment expenses, costs to dispose equipment, and travel expenses. In addition, during the second quarter of fiscal 2003, we paid approximately $.5 million of the employee severance and lease termination fees accrued at June 30, 2002. 14 LIGHTPATH TECHNOLOGIES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Investment and other income decreased approximately $45,000 as interest earned on investments in the second quarter of fiscal 2003 declined due to lower interest rates and a decrease in cash balances. Interest and other expense in the second quarter of fiscal 2003 and fiscal 2002 were not significant. Net loss was $8.1 million during the second quarter of fiscal 2003. Included in the net loss was approximately $4.9 million from the non-cash charges described above, $.3 million inventory write down and $.2 million in reorganization and relocation expenses, which, if excluded would have resulted in a net loss of $2.6 million. This compares with the second quarter of fiscal 2002 in which we reported a net loss of $17.6 million, including $11.2 million in non-cash charges and a $1.2 million inventory write down, which, if excluded would have resulted in a net loss of $5.2 million. The $2.6 million decrease in net loss excluding the non-cash and other charges was due primarily to the reductions in operating costs, primarily in selling, general and administrative expense and research and development. Effective July 1, 2002, the Company no longer amortizes goodwill in accordance with SFAS 142. Accordingly, amortization expense decreased by approximately $.4 million for the three-month period ended December 31, 2002. Net loss of $8.1 million for the second quarter of fiscal 2003 resulted in a net loss per share of $0.39, a decrease of $0.52 compared to the second quarter of fiscal 2002 net loss per applicable common share of $0.91. Net loss applicable to common shareholders for the second quarter of fiscal 2002 of $17.6 million included $22,407 attributable to a premium on the Company's preferred stock previously outstanding.) SEGMENTS In June 2002 we announced plans for fiscal 2003 to consolidate lens product lines in Florida and reorganize internally into two segments; the Optical Lens Group and the Laser Component Group. OPTICAL LENS GROUP The Optical Lens Group manages the aspheric, GRADIUM(R), and collimator lens products. We believe the aspheric lens product line, in particular, has broad applicability to market segments beyond communications. We are aggressively pursuing new opportunities in the application areas of medical devices, barcode scanners, optical data storage, machine vision, sensors, and environmental monitoring. For the second quarter of fiscal 2003, lens product sales decreased $.7 million to approximately $1.1 million from $1.8 million for the comparable period last year. This decrease is due largely to declining demand for collimators, primarily in the telecommunications market. The Optical Lens Group incurred a segment operating loss of $.7 million for the second quarter of fiscal 2003 as compared to $3.4 million for the comparable period last year, due primarily to overhead reductions. The company was able to significantly reduce operating overhead through the shut-down and transfer of its New Jersey research and development office, and the relocation and reorganization of the New Mexico production facility into the Orlando, Florida facility. Additional savings came from targeted headcount and expense reductions. LASER COMPONENT GROUP The Laser Component Group includes integrated platforms with a focus on optical packaging solutions. As our customers ask for more demanding optical performance, we see a great opportunity to provide the entire solution from laser to fiber. The Laser Component Group will be investing a modest amount in research and development in support of optical generation and detection applications, such as transmitters, transceivers and pumps. This group allows LightPath to augment current passive optical packages such as OASIS(TM) and Vectra(TM) collimator arrays with new innovative passive optical modules, such as multiport and hybrid devices, to provide effective optical management solutions for our customers. During the second quarter of fiscal 2003, the Company reported approximately $.5 million of laser component sales, which is comparable to the same period last year. A decrease of approximately $68,000 from the comparable period of the prior year was due primarily to reduced sales of isolator products in the telecommunications market. 15 LIGHTPATH TECHNOLOGIES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Laser Component Group incurred a segment operating loss of approximately $3.2 million for the second quarter of fiscal 2003, which is $1.9 million higher compared to the same period of fiscal 2002. This segment net loss includes $2.3 million for the write down of Goodwill and Intangibles consistent with the transitional analysis performed in accordance with SFAS 142 and an additional $1.9 million for the impairment of long-lived assets in accordance with SFAS 144 "Accounting for the Impairment or Disposal of Long-Lived Assets". In January 2003, the Company announced plans to either sell the Walnut, California operating unit or consolidate the operations into its Orlando, Florida facility. SIX MONTHS ENDED DECEMBER 31, 2002 COMPARED TO THE SIX MONTHS ENDED DECEMBER 31, 2001 CONSOLIDATED OPERATIONS Our consolidated revenues totaled $3.3 million for the first six months of fiscal 2003, a decrease of approximately $2.5 million or 43% compared to revenues for the first six months of fiscal 2002. The decrease was primarily attributable to a decrease in laser component product sales of $1.0 million or 57% and a decrease in optical lens sales of $1.5 million or 37%. In the first six months of fiscal 2003, consolidated cost of sales was approximately 142% of product sales, an increase from the comparable period of fiscal 2002 in which we reported cost of sales of 118%. Both years included inventory write downs of $.5 million and $1.2 million, respectively. Excluding the write down, the fiscal 2003 consolidated cost of sales was approximately 127% of product sales, versus the comparable period of fiscal 2002 of 98%. The increase of 29% from the comparable period of fiscal 2002 is attributable principally to the underutilization of manufacturing facilities and staff because of reduced sales during the period. During the first six months of fiscal 2003, selling, general and administrative costs decreased by $3.1 million from the first six months of fiscal 2002 to $3.7 million. The decrease is due primarily to a $1.2 million legal settlement accrual included in fiscal 2002 and a $2.5 million decrease in administrative and personnel costs due to reorganization of facilities. We incurred several non-cash charges during the first six months of fiscal 2003, including $3.4 million related to the write down of the Company's investment in LightChip, $2.4 million related to the write down of the Company's goodwill and remaining intangible assets from the Horizon acquisition, $1.9 million of asset impairment charges primarily from manufacturing equipment related to the isolator business, $1.5 million in amortization of intangibles from acquisitions, and the forfeit of restricted stock awards resulting in ($20,460) in stock-based compensation charges. Research and development costs decreased by approximately $2.7 million to $1.5 million in the first six months of fiscal 2003 versus the first six months of fiscal 2002, due, primarily, to reduced personnel and discontinuation of the research and development efforts directed at developing a optical cross connect switch. Other development work consisted of expenses associated with automation development and products in the areas of isolators and next generation optical subassemblies and sub-assembly technologies. During the first six months of fiscal 2003, the Company also recorded approximately $.4 million of reorganization and relocation expenses incurred in connection with its previously announced plans to consolidate its corporate headquarters and manufacturing facilities from Albuquerque, New Mexico to Orlando, Florida. These expenses consist primarily of costs to dispose and move equipment to Florida, employment, and travel expenses. In addition, during the first six months of fiscal 2003, we paid approximately $.9 million of the employee severance and lease termination fees accrued at June 30, 2002. Investment and other income decreased approximately $.3 million as interest earned on investments in the first six months of fiscal 2003 declined due to lower interest rates and a decrease in cash balances. In addition, the first six 16 LIGHTPATH TECHNOLOGIES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS months of fiscal 2002 included a gain on the sale of assets of approximately $.4 million not present in fiscal 2003. Interest and other expense in the first six months of fiscal 2003 and fiscal 2002 were not significant. Net loss was $16.2 million during the first six months of fiscal 2003. Included in the net loss was approximately $9.3 million from the non-cash charges described above, $.5 million in inventory write downs and $.6 million in reorganization and relocation expenses including $.1 million for asset impairment, which, if excluded would have resulted in a net loss of $5.3 million. This compares with the first six months of fiscal 2002 in which we reported a net loss of $28 million including $16.8 million in non-cash charges, a $1.2 million inventory write down and a $1.4 million charge related to litigation settlement costs, which, if excluded would have resulted in a net loss of $8.7 million. The $3.7 million decrease in net loss excluding the non-cash and other charges was due primarily to the reductions in operating costs, primarily in selling, general and administrative expense and research and development. Effective July 1, 2002, the Company no longer amortizes goodwill in accordance with SFAS 142. Accordingly, amortization expense decreased by approximately $.9 million for the six-month period ended December 31, 2002. Net loss of $16.2 million for the first six months of fiscal 2003 resulted in a net loss per share of $0.78, a decrease of $0.67 compared to the first six months of fiscal 2002 net loss per applicable common share of $1.45. Net loss applicable to common shareholders for the first six months of fiscal 2002 of $28 million included $48,016 attributable to a premium on the Company's preferred stock previously outstanding. SEGMENTS In June 2002 we announced plans for fiscal 2003 to consolidate lens product lines in Florida and reorganize internally into two segments; the Optical Lens Group and the Laser Component Group. OPTICAL LENS GROUP The Optical Lens Group manages the aspheric lens products, collimator, and GRADIUM(R) glass lenses. We believe the aspheric lens product line, in particular, has broad applicability to market segments beyond communications. We are aggressively pursuing new opportunities in the application areas of medical devices, barcode scanners, optical data storage, machine vision, sensors, and environmental monitoring. For the first six months of fiscal 2003, lens product sales decreased $1.5 million to approximately $2.5 million from $4.0 million for the comparable period last year. This decrease is due largely to declining demand for collimators, primarily in the telecommunications market. The Optical Lens Group incurred a segment operating loss of $1.7 million for the first six months of fiscal 2003 as compared to $5.8 million for the comparable period last year due primarily to overhead reductions offset by reduced margins. LASER COMPONENT GROUP The Laser Component Group includes integrated platforms with a focus on optical packaging solutions. As our customers ask for more demanding optical performance, we see a great opportunity to provide the entire solution from laser to fiber. The Laser Component Group will be investing a modest amount in research and development in support of optical generation and detection applications, such as transmitters, transceivers and pumps. This Group allows LightPath to augment current passive optical packages such as OASIS(TM) and Vectra(TM) collimator arrays with new innovative passive optical modules, such as multiport and hybrid devices, to provide effective optical management solutions for our customers. During the first six months of fiscal 2003, the Company reported approximately $.8 million of laser component sales, compared with $1.8 million for the comparable period last year. The decrease of approximately $1.0 million from the comparable period of the prior year was due primarily to reduced sales of isolator products in the telecommunications market segment. The Laser Component Group incurred a segment operating loss of approximately $3.3 million for the first six months of fiscal 2003, a decrease of approximately $1.2 million from the comparable period last year. This segment loss includes $2.3 million for the write down of Goodwill and Intangibles 17 LIGHTPATH TECHNOLOGIES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS consistent with the transitional analysis performed in accordance with SFAS 142 and an additional $1.9 million for the impairment of long-lived assets in accordance with SFAS 144 "Accounting for the Impairment or Disposal of Long-Lived Assets". In January 2003, the Company announced plans to either sell the Walnut, California operating unit or consolidate the operations into its Orlando, Florida facility. CRITICAL ACCOUNTING POLICIES The preparation of Consolidated Financial Statements in conformity with generally accepted accounting principles requires the Company to select appropriate accounting policies, and to make judgments and estimates affecting the application of those accounting policies. In applying the Company's accounting policies, different business conditions or the use of different assumptions may result in materially different amounts reported in our Consolidated Financial Statements. In response to the Securities and Exchange Commission's ("SEC") Release No. 33-8040, "Cautionary Advice Regarding Disclosure About Critical Accounting Policies," the Company has identified the most critical accounting principles upon which the Company's financial status depends. The critical principles were determined by considering accounting policies that involve the most complex or subjective decisions or assessments. The most critical accounting principles identified relate to: (i) revenue recognition; (ii) inventory valuation; (iii) long-lived assets; (iv) investment in LightChip and (v) intangible assets. These critical accounting policies and the Company's other significant accounting policies are disclosed in Note 1 to the Company's Condensed Consolidated Financial Statements. REVENUE RECOGNITION. The Company recognizes revenue upon shipment of the product provided that persuasive evidence of a final agreement exists, title has transferred, the selling price is fixed and determinable and that collectibility is reasonably assured. INVENTORY VALUATION. The Company regularly assesses the valuation of inventories and writes down those inventories that are obsolete or in excess of forecasted usage to estimated net realizable value. Estimates of realizable value are based upon the Company's analyses and assumptions including, but not limited to, forecasted sales levels by product, expected product lifecycle, product development plans and future demand requirements. If market conditions are less favorable than the Company's forecast or actual demand from customers is lower than the Company's estimates, the Company may be required to record additional inventory write-downs. If demand is higher than expected, the Company may sell inventories that have previously been written down. LONG-LIVED ASSETS. The Company evaluates the carrying value of long-lived assets, including property and equipment, whenever certain events or changes in circumstances indicate that the carrying amount may not be recoverable. Such events or circumstances include, but are not limited to, a prolonged industry downturn, a significant decline in the Company's market value, or significant reductions in projected future cash flows. If facts and circumstances warrant such a review, under the current standard, a long-lived asset would be impaired if future undiscounted cash flows, without consideration of interest, are insufficient to recover the carrying amount of the long-lived asset. Once deemed impaired, the long-lived asset is written down to its fair value which could be considerably less than the carrying amount or future undiscounted cash flows. The determination of future cash flows and, if required, fair value of a long-lived asset is by its nature, a highly subjective judgment. Fair value is generally determined by calculating the discounted future cash flows using a discount rate based upon the Company's weighted average cost of capital. Significant judgments and assumptions are required in the forecast of future operating results used in the preparation of the estimated future cash flows, including long-term forecasts of the amounts and timing of overall market growth and the Company's percentage of that market, groupings of assets, discount rate and terminal growth rates. Changes in these estimates could have a material adverse effect on the assessment of property and equipment, thereby requiring the Company to write down the assets. INVESTMENT IN LIGHTCHIP. The Company accounts for its investment in LightChip under the cost method of accounting as prescribed by APB 18 given its ownership percentage of voting shares is approximately 13% at June 30, 2002. In addition, the Company regularly assesses the carrying value of its investment in LightChip 18 LIGHTPATH TECHNOLOGIES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS to determine if a write down is necessary. The fair value of privately held securities is highly subjective and involves inherent risk. While there are several valuation techniques that could provide objective evidence of the value of equity securities, the Company considers cash transactions with independent third parties involving similar equity securities to be the strongest objective evidence of fair value. The carrying value of our investment at December 31, 2002 is based on the most recent price per share of a cash transaction involving third parties. As of December 31, 2002, the Company has disposed of the whole investment in LightChip, based on the fact that a future round of financing be completed at a per share price would be less than the current carrying value. INTANGIBLE ASSETS. The Company generally obtains intangible assets in connection with a business unit purchase (for example, in a business combination). The assignment of value to individual intangible assets generally requires the use of a specialist, such as an appraiser. The assumptions used in the appraisal process are forward-looking, and thus subject to significant judgment. Because individual intangible assets may be: (i) expensed immediately upon acquisition (for example, purchased in-process research and development assets); or (ii) amortized over their estimated useful life (for example, acquired technology), their assigned values could have a material affect on current and future period results of operations. Further, intangible assets are subject to the same judgments when evaluating for impairment as other long-lived assets. 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. The optical components markets have experienced a severe downturn for the last eighteen months, resulting in a significant decline in the demand for our products as well as those of our competitors'. We believe the Company has adequate financial resources, and will take the necessary actions, to manage through this downturn. However, a further prolonged downturn in the optical components markets or the unsuccessful move to sell our optical components into non-telecom markets, failure by the Company to anticipate or respond to product technological changes, changes by our customers or suppliers, or any significant delays in the introduction of new products, could have a material adverse effect on the Company's financial condition, operating results or cash flows. 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. Cash used in operations for the quarter ended December 31, 2002 was approximately $2.6 million, a decrease of approximately $1.5 million from the quarter ended September 30, 2002. This improvement was due to the cash payout of a $1.2 million Delaware litigation settlement in the first quarter, and savings realized from the consolidation of the Albuquerque, New Mexico facility into Orlando, Florida. We will continue to reduce our cash expenditures through improved manufacturing efficiencies, suspension of selected development projects and consolidation of equipment and facilities. During the first six months of fiscal 2003, we completed the consolidation of our lens product lines in Florida, ceased manufacturing operations in our New Mexico facilities and reorganized internally, all of which we believe will further decrease our cash requirements for the remainder of fiscal 2003. While the Company has no firm commitments for any future financing at this time, with a cash balance of approximately $6.5 million at December 31, 2002, we will take the necessary actions to manage through this downturn. We believe that our financial resources will be sufficient to finance the Company's operations and capital expenditures, excluding acquisitions, for the next twelve months. While significant progress has been made to reduce operating cash outflow in recent quarters, significant risk and uncertainty remains. At December 31, 2002, the company had a cash balance of approximately $6.5 million. If the company 19 LIGHTPATH TECHNOLOGIES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS were unable to achieve additional reductions in cash outflow in future quarters, from the actual total cash outflow of $2.6 million in the second quarter, the company would have less than three quarters cash on hand. Factors which could increase cash used in future quarters include, but are not limited to, a decline in revenue, additional losses for bad debt, increased material costs, increased labor costs, lump sum payments for annual Directors and Officers insurance premiums, costs associated with the anticipated sale or relocation of the Walnut, California facility, employee separation costs, increased health insurance and benefits costs, and increases in discretionary spending. Excluding the payment of $.2 million related to the settlement of certain litigation and $.8 million of cash used in connection with the reorganization and relocation efforts during the quarter the Company would have had cash used from operations of approximately $1.6 million in the second quarter. If the Company were unable to achieve additional reductions in cash flow in future quarters, from this adjusted cash flow of $1.6 million in the second quarter, the Company would have approximately four quarters of cash remaining. The Company continues to take actions and seek additional savings in cash flow through sales increases and cost reduction. Actions that are planned for the remainder of 2003 include additional headcount reductions, sale or relocation of our Walnut, California facility, reduced discretionary spending on research and development, advertising and trade shows and tight restrictions on capital spending. The Company has also taken actions in the first two quarters of 2003 to increase sales activities through the hiring of additional sales personnel, and the signing of new distributor and manufacturer's representative agreements. Actual cash flow benefit from such actions remains uncertain. The timing of such actions and severity of cuts will impact the realization of such benefits and magnitude of ongoing benefit. For the six months ended December 31, 2002, cash used in operations, excluding cash requirements related to changes in working capital, was approximately $5.9 million, a decrease of approximately $3.8 million from the same period of fiscal 2002. During the first six months of fiscal 2003, working capital needs used approximately $.8 million in cash, primarily due to the payment of the cash settlement in the Delaware litigation action and the reorganization and relocation efforts. During the first six months of fiscal 2002, changes in working capital resulted in an increase of approximately $3.1 million in cash due primarily to growth in accounts payable, accrued expenses, and inventories. During the six months ended December 31, 2002, there were no significant expenditures for capital equipment and patent protection, and proceeds from the sale of assets totaled approximately $.4 million. The table below presents the Company's contractual obligations and commercial commitments as of December 31, 2002: CONTRACTUAL OBLIGATIONS
Stated (Dollars in 000's) Total Maturity Comments ------------------ ----- -------- -------- Note payable $ 78 Jul. 1999 Negotiating settlement with third party Operating leases $ 3,813 2003-2008 Real estate leases with monthly payments Employee severance and other exit costs $ 115 Apr. 2005 Lease costs will be substantially paid by 6/30/03 Legal settlement payments on Delaware action $ 300 Not applicable Settlement costs to be paid by June 30, 2003
The Company does not engage in any activities involving special purpose entities or off-balance sheet financing. 20 LIGHTPATH TECHNOLOGIES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RECENT ACCOUNTING PRONOUNCEMENTS In June 2002, the FASB issued SFAS No. 146, "ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES" which the Company will be required to adopt for any future costs associated with an exit or disposal activity. The Company does not believe the adoption of SFAS 146 will have a material effect on our results of operations or financial position. In November 2002, the FASB issued Interpretation No. 45, "GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT GUARANTEES OF INDEBTEDNESS OF OTHERS." Interpretation No. 45 supersedes Interpretation No. 34, "DISCLOSURE OF INDIRECT GUARANTEES OF INDEBTEDNESS OF OTHERS," and provides guidance on the recognition and disclosure to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees. The initial recognition and measurement provisions of Interpretation No. 45 are effective for guarantees issued or modified after December 31, 2002, and are to be applied prospectively. The disclosure requirements are effective for financial statements for interim or annual periods ending after December 15, 2002. Adoption of Interpretation No. 45 is not expected to materially impact our results of operations or financial position. In November 2002, the FASB's Emerging Issues Task Force ("EITF") discussed Issue No. 02-16, "ACCOUNTING BY A RESELLER FOR CASH CONSIDERATION RECEIVED FROM A VENDOR." Issue No. 02-16 provides guidance on the recognition of cash consideration received by a customer from a vendor. The consensus reached by the EITF in November 2002 is effective for fiscal periods beginning after December 15, 2002. Income statements for prior periods are required to be reclassified to comply with the consensus. Adoption of the consensus reached in November 2002 related to Issue No. 02-16 is not expected to materially impact our results of operations or financial position. In December 2002, the FASB issued SFAS No. 148, "ACCOUNTING FOR STOCK-BASED COMPENSATION TRANSITION AND DISCLOSURE." SFAS No.148 amends SFAS No. 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION," and provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. SFAS No. 148 also amends the disclosure requirements of SFAS No. 123 to require more prominent and frequent disclosures in financial statements about the effects of stock-based compensation. The transition guidance and annual disclosure provisions of SFAS No. 148 are effective for financial statements issued for fiscal years ending after December 15, 2002. The interim disclosure provisions are effective for financial reports containing financial statements for interim periods beginning after December 15, 2002. Adoption of SFAS No. 148 is not expected to materially impact our results of operations or financial position. 21 LIGHTPATH TECHNOLOGIES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ITEM 3. 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. ITEM 4. CONTROLS AND PROCEDURES Within the 90-day period prior to the filing of this report, an evaluation was carried out under the supervision and with the participation of the Company's management, including the Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-14(c) and 15-d-14(c)). Based on that evaluation, the CEO and CFO have concluded that the Company's disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. Subsequent to the date of their evaluation, there were no significant changes in the Company's internal controls or in other factors that could significantly affect the disclosure controls, including any corrective actions with regard to significant deficiencies and material weaknesses. 22 LIGHTPATH TECHNOLOGIES, INC. PART II ITEM 1. LEGAL PROCEEDINGS Reference is made to Item 1, Legal Proceedings, in Form 10-Q for the quarter ended September 30, 2002 for descriptions of the following and other legal proceedings. In December 2001, the Company agreed to proceed with the settlement of a May 2, 2000 class action lawsuit, which the Company had commenced in the Chancery Court of Delaware. The settlement included a provision that each former Class E shareholder had the right to request exclusion from the settlement class. By June 30, 2002, the final settlement arrangements had been mailed to former holders of Class E Common Stock pursuant to which they would receive a settlement payment of $0.40 for each share. Approximately 3.6 million shares or 88% of Class E Common Stock participated in the settlement whereas holders of approximately 0.5 million shares or 12% opted out of the settlement. At June 30, 2002, the Company accrued an estimated settlement charge of $1.5 million of which approximately $1.3 million was distributed as of December 31, 2002. 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 alleged 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 alleged 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 alleged 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. During the first quarter of fiscal 2003, the Texas court granted a motion for Summary Judgment filed by the Company. The plaintiffs sought reconsideration of the ruling; however, on October 24, 2002, the Texas court denied their motion. The Company is in the process of seeking to have the two remaining named individuals dismissed from the action. During the six months ended December 31, 2002, the Company incurred and expensed legal fees associated with the Texas Action of approximately $.4 million; 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, 2002. On March 6, 2002, the Company commenced an action in a state court in New Mexico for various claims surrounding the now insolvent insurance carrier and the Company's former insurance broker. 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-K for the year ended June 30, 2002. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS LightPath Technologies, Inc. conducted its 2002 Annual Meeting of Stockholders on October 15, 2002. 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 III Directors to hold office until the Annual Meeting of Stockholders in 2005 and a Class II Director to hold office until the Annual Meeting of Stockholders in 2003. The election of Class III Directors, Louis Leeburg and Gary Silverman, of the Company 23 LIGHTPATH TECHNOLOGIES, INC. was approved by a vote of Class A shareholders of 18,170,257 FOR and 1,088,403 WITHHOLD AUTHORITY, 18,014,268 FOR and 1,244,392 WITHHOLD AUTHORITY, respectively. The election of Class II Director, Kenneth Brizel, of the Company was approved by a vote of Class A shareholders of 17,947,862 FOR and 1,310,798 WITHHOLD AUTHORITY. The terms of the Company's Class I Directors, Robert Ripp and Robert Bruggeworth and of its Class II Directors, James Adler Jr. and Steve Brueck continued after the date of the Annual Meeting. 2. Approval of the Amended and Restated Omnibus Incentive Plan was approved by a vote of Class A shareholders 15,772,086 FOR; 3,394,627 AGAINST and 91,947 ABSTENTIONS. 3. Ratification of the selection of KPMG LLP as independent accountants for the Company for the fiscal year ending June 30, 2003 was approved by a vote of Class A shareholders 18,002,281 FOR; 1,239,748 AGAINST and 16,631 ABSTENTIONS. ITEM 5. OTHER INFORMATION On January 24, 2003, the Company filed a definitive Proxy Statement and Notice of Special Shareholders Meeting to be held on February 28, 2003 whereby shareholder approval will be sought in order to affect a reverse stock split of up to 8-to-1 as a means to conform to the minimum bid price requirement to remain listed on the Nasdaq National Market. The Company believes that a reverse stock split may be desirable for a number of reasons. First, the Company believes that a reverse stock split may avoid the delisting of LightPath common stock from the Nasdaq National Market. Second, the Company believes that a reverse stock split could improve the marketability and liquidity of its common stock. LightPath common stock is quoted on the Nasdaq National Market. In order for it to continue to be quoted on the Nasdaq National Market, certain listing maintenance standards, established by Nasdaq, must be satisfied. Among other things, if the closing bid price of the common stock is under $1.00 per share for 30 consecutive trading days and does not thereafter reach $1.00 per share or higher for a minimum of ten consecutive trading days during the 90 calendar days following notification by Nasdaq, Nasdaq may delist the common stock from trading on the Nasdaq National Market. If the Company's common stock were to be delisted, and did not qualify for trading on the Nasdaq SmallCap Market, the common stock would trade on the OTC Bulletin Board or in the "pink sheets" maintained by the National Quotation Bureau, Inc. Such alternative markets are generally considered to be less efficient than, and not as broad as, the Nasdaq National Market. On July 24, 2002, the Company received a letter from Nasdaq advising that its common stock had not met Nasdaq's minimum bid price requirement for 30 consecutive trading days and that, if the Company were unable to demonstrate compliance with this requirement during the 90 calendar days ending October 22, 2002, its common stock would be delisted from the Nasdaq National Market. On October 23, 2002, a letter was received from Nasdaq advising that the Company had not regained compliance with the minimum bid price requirement and as a result, its common stock would be delisted from the Nasdaq National Market on October 31, 2002. In accordance with Nasdaq's rules, the Company requested a hearing before Nasdaq's Listing Qualifications Panel to review the staff's determination and remain listed on the Nasdaq National Market. This request stayed the delisting of LightPath common stock, pending the outcome of the panel hearing which was set for December 5, 2002. On December 5, 2002, the Company presented its case to the Listing Qualifications Panel which determined that the Company's common stock must meet the $1.00 per share minimum bid price requirement as soon as possible. The Company submitted a proposal whereby a reverse stock split could be accomplished in approximately 90 days. On January 7, 2003, the Listing Qualifications Panel approved such a plan and permitted the Company's common stock to remain listed on the Nasdaq National Market pending such reverse stock split and compliance with the minimum bid price requirement (in addition to all other maintenance listing requirements) by or before March 7, 2003. A further condition of continued listing on the Nasdaq National Market is that the Company's common stock maintains a closing bid price of at least $1.00 per share for a minimum of ten consecutive trading days (in addition to all other maintenance listing requirements). 24 LIGHTPATH TECHNOLOGIES, INC. The Company expects that a reverse stock split of its common stock will increase the market price so that it will be able to maintain compliance with the Nasdaq minimum bid price listing standard. However, the effect of a reverse split upon the market price of the Company's common stock cannot be predicted with any certainty, and the history of similar stock split combinations for companies in like circumstances is varied. It is possible that the per share price of the Company's common stock after the reverse split will not rise in proportion to the reduction in the number of shares of its common stock outstanding resulting from the reverse stock split, and there can be no assurance that the market price per post-reverse split share will either exceed or remain in excess of the $1.00 minimum bid price for a sustained period of time. The market price of the Company's common stock may be based also on other factors which may be unrelated to the number of shares outstanding, including the Company's future performance. In addition, there can be no assurance that the Company will not be delisted due to a failure to meet other continued listing requirements even if the market price per post-reverse split share of its common stock remains in excess of $1.00. Notwithstanding the foregoing, the Company believes that the proposed reverse stock split, when implemented within the proposed exchange ratio range, will result in the market price of our common stock rising to the level necessary to satisfy the $1.00 minimum bid price requirement. The Company also believes that the increased market price of its common stock expected as a result of implementing a reverse stock split may improve the marketability and liquidity of its common stock and may encourage interest and trading in its common stock. Because of the trading volatility often associated with low-priced stocks, many brokerage houses and institutional investors have internal policies and practices that either prohibit them from investing in low-priced stocks or tend to discourage individual brokers from recommending low-priced stocks to their customers. Some of those policies and practices may function to make the processing of trades in low-priced stocks economically unattractive to brokers. Additionally, because brokers' commissions on low-priced stocks generally represent a higher percentage of the stock price than commissions on higher-priced stocks, the current average price per share of the Company's common stock can result in individual stockholders paying transaction costs representing a higher percentage of their total share value than would be the case if the share price were substantially higher. It should be noted that the liquidity of the Company's common stock may be adversely affected by the proposed reverse split given the reduced number of shares that would be outstanding after the reverse stock split. The Company is hopeful, however, that the anticipated higher market price will reduce, to some extent, the negative effects on the liquidity and marketability of the common stock inherent in some of the policies and practices of institutional investors and brokerage houses described above. LightPath also announced in January 2003 that it plans to continue the realignment of its outstanding stock option incentives, initiated in July 2002, with the cancellation of additional selected stock options and the issuance of restricted stock awards. LightPath will cancel approximately 1.6 million options and issue restricted stock awards covering a total of .8 million shares, providing a reduction of approximately .8 million shares. The Company will also issue approximately 150,000 new incentive options to employees bringing the net reduction in underlying shares from 3.8 million to 3.1 million or approximately 15% of outstanding shares. This realignment is expected to be completed within the next 120 days. The issuance of the restricted stock awards will result in the recording of non-cash stock-based compensation charges of approximately $.3 million which will be recorded ratably over the vesting period. In January 2003, Todd Childress, formerly Vice President, Finance, assumed the role of CFO and Secretary for the Company. 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, 2002: 25 LIGHTPATH TECHNOLOGIES, INC. 1. Current report on Form 8-K dated October 17 2002, included the press release announcing the results of the Annual Shareholders meeting held October 15, 2002 and that the first quarter fiscal 2003 conference call would be held on October 31, 2002. 2. Current report on Form 8-K dated October 31, 2002 included the press release of the first quarter fiscal 2003 financial results made on October 31, 2002. 26 LIGHTPATH TECHNOLOGIES, INC. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized. LIGHTPATH TECHNOLOGIES, INC. Date: February 10, 2003 By: /s/ Ken Brizel ----------------- ------------------------------------ CHIEF EXECUTIVE OFFICER 27 LIGHTPATH TECHNOLOGIES, INC. Certification of the Principal Executive Officer Pursuant to 15 U.S.C. 78m(a) or 78o(d) (Section 302 of the Sarbanes-Oxley Act of 2002) I, Ken Brizel, the President and Chief Executive Officer of LightPath Technologies, Inc. (the "Company"), certify that: (1) I have reviewed this quarterly report on Form 10-Q of the Company; (2) Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; (3) Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this quarterly report; (4) The Company's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Company and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the Company's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; (5) The Company's other certifying officers and I have disclosed, based on our most recent evaluation, to the Company's auditors and the audit committee of Company's board of directors (or persons performing the equivalent function): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Company's ability to record, process, summarize and report financial data and have identified for the Company's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal controls; and (6) The Company's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: February 10, 2003 ----------------- /s/ Ken Brizel ------------------------------------- Ken Brizel LightPath Technologies, Inc. President and Chief Executive Officer 28 LIGHTPATH TECHNOLOGIES, INC. Certification of the Principal Financial Officer Pursuant to 15 U.S.C. 78m(a) or 78o(d) (Section 302 of the Sarbanes-Oxley Act of 2002) I, Todd Childress, the Chief Financial Officer of LightPath Technologies, Inc. (the "Company"), certify that: (1) I have reviewed this quarterly report on Form 10-Q of the Company; (2) Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; (3) Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this quarterly report; (4) The Company's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Company and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the Company's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; (5) The Company's other certifying officers and I have disclosed, based on our most recent evaluation, to the Company's auditors and the audit committee of Company's board of directors (or persons performing the equivalent function): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Company's ability to record, process, summarize and report financial data and have identified for the Company's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal controls; and (6) The Company's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: February 10, 2003 ----------------- /s/ Todd Childress ------------------------------------- Todd Childress LightPath Technologies, Inc. Chief Financial Officer 29 LIGHTPATH TECHNOLOGIES, INC. Certification of the Principal Executive Officer Pursuant to 18 U.S.C. 1350 (Section 906 of the Sarbanes-Oxley Act of 2002) I, Ken Brizel, the President and Chief Executive Officer of LightPath Technologies, Inc. (the "Company") certify that to the best of my knowledge, based upon a review of the Quarterly Report on Form 10-Q for the period ended December 31, 2002 of the Company (the "Report"): (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: February 10, 2003 ----------------- /s/ Ken Brizel --------------------------- Ken Brizel LightPath Technologies, Inc. President and Chief Executive Officer I, Todd Childress, the Chief Financial Officer of LightPath Technologies, Inc. (the "Company") certify that to the best of my knowledge, based upon a review of the Quarterly Report on Form 10-Q for the period ended December 31, 2002 of the Company (the "Report"): (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: February 10, 2003 ----------------- /s/ Todd Childress --------------------------- Todd Childress LightPath Technologies, Inc. Chief Financial Officer 30