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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-19882
KOPIN CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 04-2833935
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
695 Myles Standish Blvd., Taunton, MA 02780-1042
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (508) 824-6696
Securities registered pursuant to Section 12(b) of the Act: None
Name on each exchange on which registered: NASDAQ
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
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 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 filing requirements
for the past 90 days. Yes [X] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
As of March 23, 2000, the aggregate market value of outstanding shares of voting
stock held by non-affiliates of the registrant was $2,227,219,803.
As of March 23, 2000, 31,369,293 shares of the registrant's Common Stock, par
value $.01 per share, were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement relating to the Annual Meeting of Shareholders
to be held on May 25, 2000 are incorporated by reference into Part III of this
Report. Other documents incorporated by reference are listed in the Exhibit
Index.
Part I
Item 1. Business
Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. These statements relate to future events or our future financial
performance and include statements about our manufacturing capabilities and cash
flows. In some cases, you can identify forward-looking statements by terminology
such as "may, " "will," "should," "expects," "plans," "anticipates," "believes,"
"estimates," "predicts," "potential" or "continue" or the negative of such terms
or other comparable terminology. These statements are only predictions and
involve known and unknown risks, uncertainties and other factors, including the
risks outlined under "Risk Factors," that may cause our or our industry's actual
results, levels of activity, performance or achievements to be materially
different from any future results, levels or activity, performance or
achievements expressed or implied by such forward- looking statements. Although
we believe that the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of activity, performance
or achievements. We are under no duty to update any of the forward-looking
statements or to conform such statements to actual results.
Introduction
Kopin Corporation ("Company") is a leading developer and manufacturer of
advanced semiconductor materials and miniature flat panel displays. We use our
proprietary technology to design, manufacture and market products used in highly
demanding wireless communications and high resolution portable consumer
electronics applications. Our products enable our customers to develop and
market an improved generation of products for these target applications.
We produce two types of high performance components-our heterojunction
bipolar transistor wafers, or HBT transistor wafers, and our CyberDisplay
products. Our HBT transistor wafer product is a customer specific array of
vertically oriented transistors that our customers use primarily to produce high
performance integrated circuits for wireless communications products. Our
CyberDisplay products are miniature, high performance, high resolution, low cost
displays well suited for high resolution, high information content applications.
These applications include viewing images in camcorders and digital cameras, and
reading e-mail and browsing the Internet using digital wireless handsets, pagers
and other consumer electronics devices.
We are currently experiencing rapidly increasing demand for both of our
principal products and we are significantly increasing our production capacity.
The principal customer for our HBT transistor wafers is Conexant Systems. In
addition to Conexant, original equipment manufacturers including Nortel Networks
and Hewlett-Packard purchase our HBT transistor wafers. We currently sell our
CyberDisplay product to JVC and Matsushita for use in digital camcorders and to
Mustek, a leading Taiwanese manufacturer of digital still cameras, scanners and
other consumer electronics products, for use in digital cameras.
On December 29, 1999, we effected a 2 for 1 stock split in the form of a
100% stock dividend to all holders of our common stock. All share numbers and
prices in this Form 10-K have been adjusted to reflect the stock dividend.
Industry Overview
Gallium Arsenide Products
Advanced semiconductor materials are used in the manufacture of integrated
circuits for high frequency, low power applications. The rapid growth in the
wireless communications industry, as well as the increasingly shorter product
cycles of wireless products, has fueled demand for these integrated circuits,
which are predominantly used in wireless handsets. Dataquest, in a report dated
September 1999, expects that by 2003 the worldwide digital wireless subscriber
base will exceed 868 million users, and annual worldwide shipments of digital
wireless handsets will reach nearly 415 million units.
In first generation wireless handsets, integrated circuits used in high
frequency, low power applications were generally constructed with silicon-based
semiconductors. These integrated circuits, while relatively inexpensive to
manufacture, were unable to deliver the performance demanded by wireless handset
manufacturers and their customers. This
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inability led to the development of gallium arsenide products for use in
wireless communications. Gallium arsenide is generally regarded as having better
performance characteristics than silicon due, in part, to its inherent physical
properties that permit gallium arsenide integrated circuits to operate at much
higher frequencies than silicon integrated circuits, or operate at the same
frequency with lower power consumption. The reduction in system power
requirements is particularly important in portable applications, such as
wireless handsets, because it extends battery life. The high performance
characteristics of gallium arsenide have led to the increased use of gallium
arsenide field effect transistors, commonly known as MESFETs, in a wide range of
commercial systems.
Even as device manufacturers are increasingly adopting gallium arsenide
field effect transistor technology in the manufacture of high frequency
integrated circuits, the industry is calling for even greater performance.
Second generation wireless communications products use digital signal processing
and generally operate at higher cellular frequencies. Air interface standards in
these frequency bands have increased in recent years. These standards, which
include Global System Mobile, or GSM, Time Division Multiple Access, or TDMA,
and Code Division Multiple Access, or CDMA, provide improved capacity, sound
quality and capabilities at cellular and wireless frequency bands, but are
incompatible with each other and have fragmented the market for equipment.
Suppliers of wireless handsets have begun to offer multi-mode and multi-band
wireless handsets that allow users to switch from one high frequency band to
another to enable consumers to use wireless handsets across various territories
and different interface standards. This new generation of products is
significantly more complex than the prior generation and requires certain key
features, including:
o Simpler system design;
o Support for higher frequencies;
o Lower power consumption;
o Improved signal quality; and
o Wider range of operating temperatures.
Display Products
Small form factor displays are used in the consumer electronics industry in
products such as camcorders and digital cameras. These industry segments are
expected to grow significantly over the next five years:
o According to a Dataquest report dated June 1999, the annual worldwide
factory revenues for camcorders will exceed $7.2 billion by 2003; and
o International Data Corporation projects that annual worldwide
shipments of digital cameras will exceed 22 million units in 2003.
We also expect that a large market for new wireless communications devices,
including third generation wireless handsets and enhanced pagers will develop.
In order for this market to develop, advances in wireless communications systems
such as greater bandwidth and increased functionality, including real- time
wireless data and broadband Internet access, will be necessary. Small form
factor displays will be a critical component in the development of advanced
wireless communications systems, as these systems must provide high resolution
images without compromising the portability of the product. International Data
Corporation estimates that annual worldwide production of "smart hand-held
devices" which are comprised of hand-held computers/organizers, smart phones and
other devices, will exceed 35 million units by 2003, representing almost $17
billion in revenues.
There are several display technologies currently available. The most
commonly used technology in portable applications is based on the traditional
liquid crystal display, or LCD, which is now in widespread use in products
requiring a solid state monochrome or color display. These displays form an
image by either transmitting or blocking light emitted from a source located
behind the LCD. The principal LCD technologies are passive and active matrix.
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o Passive Matrix LCD. These displays are primarily used in calculators,
watches, pagers and wireless handsets because of their relatively low
cost and low power consumption. Their relatively low image quality,
slow response time and limited viewing angle, however, make them
inadequate for many demanding applications.
o Active Matrix LCD. These displays are used primarily in laptop
computers, instrumentation and projection systems. In contrast to
passive matrix LCDs, monochrome active matrix LCDs incorporate a
transistor at every pixel location and color active matrix LCDs
incorporate three transistors at every pixel location. This
arrangement allows each pixel to be turned on and off independently
which improves image quality and response time and also provides an
improved side-to-side viewing angle of the display. The increased
number of transistors required to produce those benefits, however,
creates significant drawbacks, particularly in color applications. The
high number of transistors used in conventional active matrix LCDs
limits achievable pixel density and their relatively high power
consumption makes them difficult to use in high information content
ultra-portable electronics products.
The high growth potential for portable communications products can be
realized effectively only if these products are able to clearly present to end
users the information they wish to access without compromising the size of the
product. These products, as well as future models of digital cameras and other
consumer electronics, require a miniature, low cost display with low power
consumption and sharp monochrome or rich, full color high resolution images. To
date, display technologies have not fully addressed these needs due to
constraints with respect to size, power consumption, resolution, cost or full
color capability.
The Kopin Solution
HBT Transistor Wafers
We manufacture our HBT transistor wafers using our proprietary metal
organic chemical vapor deposition semiconductor growth techniques. By depositing
films of atomic-level thickness on gallium arsenide wafers, we are able to
create HBT transistor wafers that consist of a series of material layers which
form a vertical transistor. This transistor structure enables the design of
integrated circuits in which individual transistors are vertically arranged.
The vertical structure of an HBT transistor wafer, as opposed to the
horizontal structure of a competing gallium arsenide field effect transistor,
offers advantages to an integrated circuit manufacturer:
o Smaller Size. We believe that integrated circuits fabricated from our
HBT transistor wafers can be made smaller than integrated circuits
fabricated from gallium arsenide field effect transistors. Smaller
size enables more die per wafer, which can increase manufacturing
yields and lead to reduced costs.
o Faster Circuits. We believe that our HBT transistor wafers enable the
design of faster integrated circuits than may be designed with gallium
arsenide field effect transistors because the effective transistor
gate length, or the distance an electron must travel within a
transistor, is shorter. The transistor gate length of gallium arsenide
field effect transistors is constrained by current optical lithography
techniques to approximately 0.2 microns for commercial volumes. We
currently manufacture our HBT transistor wafers in commercial volumes
with an effective transistor gate length ranging from approximately
0.05 microns to 0.1 microns. We are able to achieve this result
because the thickness of the vertical base layer of our HBT transistor
wafers determines transistor gate length rather than the limitations
of current optical lithography techniques.
We believe that our HBT transistor wafers also offer the following
additional advantages over gallium arsenide field effect transistors:
o Greater Power Efficiency. Efficiency is a measure of power output as a
percentage of battery power consumed by the device. We believe that
our HBT transistor wafers are more efficient and use less power to
transmit the same output power than comparable gallium arsenide field
effect transistors. Increased efficiency can translate into improved
battery life and increased talk time.
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o Improved Signal Quality. Power amplifiers within wireless handsets are
a key determinant of signal quality. We believe that power amplifiers
based on our HBT transistor wafers can amplify signals with reduced
distortion, providing increased signal quality. Improved signal
quality is important for wireless networks that use digital air
interface standards such as Time Division Multiple Access, or TDMA,
and Code Division Multiple Access, or CDMA.
o Less Complexity. Power amplifiers and other integrated circuits based
on our HBT transistor wafers run on a single power supply voltage. In
contrast, gallium arsenide field effect transistors generally require
both a positive and negative power supply, which results in the need
to include a negative voltage generator and other additional
components or circuitry. As a result, we believe that integrated
circuits using our HBT transistor wafers are easier to design, which
can translate into reduced component costs and smaller equipment.
CyberDisplay Products
Our principal CyberDisplay product is a miniature, 0.24 inch diagonal, high
density 320 x 240 resolution color or monochrome active matrix LCD. In contrast
to current passive matrix and active matrix LCD approaches, our CyberDisplay
products utilize high quality, single crystal silicon - the same high quality
silicon used in conventional integrated circuits. This single crystal silicon is
not grown on glass; rather, it is first formed on a silicon wafer and then
lifted off as a thin film using our proprietary technology. The thin film is
patterned into an integrated circuit (including the active matrix, driver
circuitry and other logic circuits) in an integrated circuit foundry and
transferred to glass, so that the transferred layer is a fully-functional active
matrix integrated circuit.
Our proprietary technology enables the production of transparent circuits,
in contrast to conventional silicon circuits, which are opaque. Our CyberDisplay
products' imaging properties are a result of the formation of a liquid crystal
layer over the transparent active matrix integrated circuit. We believe that our
manufacturing process offers several advantages over conventional active matrix
LCD manufacturing approaches with regard to small form factor displays,
including:
o Greater miniaturization;
o Reduced cost;
o Higher pixel density;
o Full color capability; and
o Lower power consumption.
Our use of high quality single crystal silicon in the manufacture of our
CyberDisplay products offers several performance advantages. High quality
silicon enables high speed displays which operate at 180 frames per second,
compared to 60 frames per second for most active matrix LCDs. At this higher
cycle speed, we are able to produce full color displays without using color
filters. Our color CyberDisplay products generate colors by using a backlight
composed of three light emitting diodes, commonly known as LEDs, that emit a
sequence of red, green and blue light. Each pixel either blocks or transmits the
colored light 180 times per second, which allows the generation of color images
without using three separate pixels, decreasing the size, weight, and power
requirements of the color display. Furthermore, the color pixels are not
spatially separated as in conventional active matrix LCDs, resulting in sharper
color images.
Our CyberDisplay products have the additional advantage of being fabricated
using conventional silicon integrated circuit lithography processes. These
processes enable the manufacture of miniature active matrix circuits, resulting
in comparable or higher resolution displays relative to passive and other active
matrix displays that are fabricated on glass. Our production partner, United
Microelectronics Corporation, or UMC, fabricates integrated circuits for our
CyberDisplay products in its foundry in Taiwan. The fabricated wafers are then
returned to our facilities, where we lift the integrated circuits off the
silicon wafers and transfer them to glass using our proprietary technology. The
transferred integrated circuits are then processed and packaged with liquid
crystal and assembled into display panels for shipment to customers. This
arrangement allows us to benefit from UMC's economies of scale and advanced
fabrication processes. We expect that our
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CyberDisplay products will benefit from further general technological advances
in the design and production of integrated circuits and active matrix LCDs,
resulting in further improvements in resolution and miniaturization.
Our CyberDisplay products, when illuminated by a backlight and viewed
through a lens, display high resolution video and data images equivalent to
viewing a 20 inch diagonal screen from a distance of five feet.
Strategy
Our objective is to be the leading supplier of advanced semiconductor
materials and miniature displays that enable our customers to develop and
manufacture differentiated communications and consumer electronic devices in
high volumes. The critical elements of our strategy include:
o Increase Our Production Capacity in Response to Increased Demand. We
have recently experienced increased demand in both our product lines
and anticipate that demand will continue to increase in the future. We
will position ourselves to add new customers through substantial
increases in production capacity. Sufficient capacity is a key
criteria for prospective customers in their vendor selection process.
In July 1999, we began the expansion of our HBT production capacity
with the installation of several additional production lines at our
HBT transistor wafer facility, and we anticipate adding more
production lines that should become fully operational in 2000. We also
plan to purchase new equipment and to establish an additional facility
to enable us to increase our HBT transistor wafer production capacity.
We also plan to establish additional manufacturing capability for our
CyberDisplay products to meet the demands of our customers.
o Increase the Number of Product Designs That Use Our Components. Our
goal is to grow sales of our components by increasing the number and
type of products into which they are incorporated. Both of our product
lines are subject to long design lead-times, and we work closely with
our customers to help them design and develop cost-effective products
based on our HBT transistor wafer and CyberDisplay products. We use an
aggressive pricing strategy as an inducement for manufacturers of
consumer electronics and wireless communications products to integrate
our CyberDisplay products into their products.
o Reduce CyberDisplay Production Costs. We intend to reduce our per unit
production costs for our CyberDisplay product line. We plan to achieve
this primarily through automation and also by investing in additional
equipment and utilizing third party vendors in order to increase the
volume and speed with which we manufacture our products.
o Maintain Our Technological Leadership. We believe that our ability to
develop innovative products based on our extensive materials science
expertise enhances our opportunity to grow within our targeted
markets. By continuing to invest in research and development, we are
able to add to our expertise in the design of HBT transistor wafers
and innovative, high-resolution, miniature flat panel displays. We
intend to continue to focus our development efforts on our proprietary
HBT transistor wafers and miniature displays.
o Leverage Integrated Circuit and Display Technologies and
Infrastructure. We will continue to leverage our use of standard
integrated circuit fabrication and LCD packaging technologies to
achieve greater production capacity and to reduce capital investment
and process development costs. Our use of these technologies allows us
to engage third party manufacturers for certain fabrication and
packaging of our CyberDisplay products and to rapidly take advantage
of new technologies, cost- efficiencies and increased production
capabilities of these third party manufacturers. We believe that
general technological advances in the design and fabrication of
integrated circuits, LCD technology and LCD manufacturing processes
will allow us to continue to enhance our CyberDisplay product
manufacturing process.
Markets and Customers
HBT Transistor Wafers
We develop and manufacture customer and application specific HBT transistor
wafers for advanced integrated circuit applications. We believe that we are one
of the world's leading suppliers of HBT transistor wafers and currently
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support volume production of three-inch and four-inch HBT transistor wafers. In
addition, we have begun to provide initial quantities of six-inch HBT transistor
wafers to several of our customers. Our primary HBT transistor wafer product is
based on an aluminum gallium arsenide vertical layer structure. We also supply
customers with HBT transistor wafers based on an indium gallium phosphide
vertical layer structure. We vary our manufacturing process to create customized
HBT transistor wafer products for customers. For the years ended December 31,
1997, 1998, 1999, sales of gallium arsenide products constituted 92%, 87% and
87% of our product revenues, respectively.
Using our HBT transistor wafers, our customers have developed gallium
arsenide power amplifiers for wireless handsets. At present, our HBT transistor
wafers have been used predominantly in Code Division Multiple Access power
amplifiers, but we believe that our HBT transistor wafers can be used in, and
provide the same benefits to, the Global System Mobile, Time Division Multiple
Access and third generation wireless handset standards. In those countries where
one uniform standard has not yet been adopted, the diversity of standards
requires equipment capable of operating in dual modes and bands. This equipment
is likely to require higher performance semiconductor technology such as our HBT
transistor wafers.
In addition to wireless handset power amplifiers, our HBT transistor wafers
are also being used in the fabrication of integrated circuits for other
applications. In particular, our HBT transistor wafers are also used in high
speed fiber optic switching equipment used in broadband Internet data
transmission and high speed instrumentation.
We design our HBT transistor wafers in collaboration with our customers'
engineering teams in order to create customized products that meet their
specific application needs. Once our HBT transistor wafers have been "designed
in" a customer's product, we believe that it would be costly and difficult for
that customer to switch to an alternate supplier. Our largest customer for our
HBT transistor wafers is Conexant, with which we have collaborated on the
manufacturing and development of our HBT transistor wafers and related
integrated circuits for several years. Other customers of our gallium arsenide
products include Hewlett-Packard, Mitsubishi Electric, Nortel Networks, Northrop
Grumman, Raytheon, and Siemens. For the years ended December 31, 1997, 1998 and
1999, sales of gallium arsenide products to Conexant constituted 63%, 59% and
49% of our total revenues, respectively.
CyberDisplay Products
We currently sell our CyberDisplay products to customers either as a single
component or together with a lens and backlight as a unit. We provide our
CyberDisplay products to JVC and Matsushita for use in digital camcorders and to
Mustek for use in digital cameras. In addition, we are actively working with
numerous other customers to develop additional and new applications for our
CyberDisplay products.
In order for our CyberDisplay products to function properly in their
intended applications, integrated circuit chip sets generally are required.
Several companies have designed integrated circuit chip sets to work with our
CyberDisplay products. Motorola has designed the integrated circuit chip set
currently used with our CyberDisplay product in camcorders. Motorola and other
companies are designing other integrated circuit chip sets based on our
CyberDisplay products for use in camcorders and other consumer electronics
products.
Sales and Marketing
We principally sell our HBT transistor wafer products directly to
integrated circuit manufacturers in the United States, Europe and Asia. We sell
our CyberDisplay products directly to original equipment manufacturers and co-
market our CyberDisplay products with Motorola on a worldwide basis under the
terms of an agreement with Motorola. Sales of our HBT transistor wafers and our
CyberDisplay products to customers in Japan are made primarily through a foreign
distributor.
We believe that the technical nature of our products and markets demands a
commitment to close relationships with our customers. Our sales and marketing
staff, assisted by the technical staff and senior management, visits prospective
and existing customers worldwide on a regular basis. We believe that these
contacts are vital to the development of a close, long-term working relationship
with our customers, and in obtaining regular forecasts, market updates and
information regarding technical and market trends. We also participate in
industry specific trade shows and conferences.
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Our design and engineering staff is actively involved with a customer
during all phases of prototype design and production by providing engineering
data, up-to-date product application notes, regular follow-up and technical
assistance. In most cases, our technical staff works with each customer in the
development stage to identify potential improvements to the design of the
customer's product in parallel with the customer's effort. We have established a
prototype product design group in Los Gatos, California to assist our
CyberDisplay customers to incorporate our products into their own and to reduce
the time required to bring end products to the marketplace. This group helps
customers accelerate their design process, achieve cost-effective and
manufacturable designs, and ensure a smooth transition into high volume
production.
Product Development
We believe that continued introduction of new products in our target
markets is essential to our growth. We have assembled a group of highly skilled
engineers that work internally as well as with our customers to continue our
product development efforts. For the years ended December 31, 1997, 1998 and
1999, we incurred total research and development expenses of $10.4 million, $9.6
million and $7.1 million, respectively. Research and development expenses
related to our internal development programs for our HBT transistor wafers and
CyberDisplay products were $7.6 million, $5.7 million and $4.3 million,
respectively, for the years ended December 31, 1997, 1998 and 1999. Although
research and development expenses have declined as we have shifted from initial
product development to application specific engineering, we expect that these
expenses will increase in the future.
Gallium Arsenide Products
We intend to continue developing HBT transistor wafers and other gallium
arsenide products for advanced integrated circuit applications from other
compound materials. We are working closely with several of our major customers
in the development of the next generation of HBT transistor wafers, primarily by
modifying the composition and nature of the vertical transistor structure. In
particular, we have developed extensive technology and expertise in the use of
indium gallium phosphide as a vertical transistor structure. We believe that
indium gallium phosphide HBT transistor wafers are simpler to process than our
gallium arsenide HBT transistor wafers and result in greater yields for certain
products made by our customers. In 1998, we began commercial shipments of HBT
transistor wafers using indium gallium phosphide.
We are currently manufacturing HBT transistor wafers with a base layer
thickness ranging from approximately 0.05 microns to 0.1 microns, and we are
developing manufacturing processes to further reduce this thickness. In
addition, we are developing manufacturing processes for production of six-inch
HBT transistor wafers and are currently providing initial quantities of these
wafers to several of our customers.
CyberDisplay Products
Our product development efforts are focused towards continually enhancing
the features, functions and manufacturability of our CyberDisplay products. A
principal focus of this effort is the improvement of manufacturing processes for
very small active matrix pixels, which we will use in succeeding generations of
our CyberDisplay products. The pixel size of our current CyberDisplay products
is 15 microns and we believe that we can achieve a pixel size of less than 10
microns in commercial production. This pixel size is in contrast to a pixel size
of approximately 100 microns in a typical laptop computer display. The
resolution of the current commercially available CyberDisplay product is 320 x
240. We have already demonstrated and are providing our customers with samples
of 640 x 480 resolution CyberDisplay products in a 0.38 inch diagonal display.
In addition, we have demonstrated 1,280 x 1,024 resolution CyberDisplay products
in a 0.96 inch diagonal display, as well as 2,560 x 2,048 resolution
CyberDisplay products in a 1.5 inch diagonal display and we are working on the
commercialization of these products. We are also working on further decreasing
the already low power consumption of our CyberDisplay products. Additional
display development efforts include further automating our final display
assembly processes and increasing the quantity of CyberDisplay active matrix
pixel arrays processed on each transistor by further reducing the display size
and using increasingly precise manufacturing techniques.
Funded Research and Development
We have entered into various development contracts with agencies of the
U.S. government. These contracts help support the continued development of our
core technologies. We intend to continue to pursue other U.S. government
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development contracts for applications that relate to our commercial product
applications. Our contracts with U.S. government agencies contain certain
milestones relating to technology development and may be terminated by the
government agencies prior to completion of funding. Our policy is to retain our
proprietary rights with respect to the principal commercial applications of our
technology. To the extent technology development has been funded by a U.S.
federal agency, under applicable U.S. federal laws, the federal agency has the
right to obtain a non- exclusive, non-transferable, irrevocable, fully-paid
license to practice or have practiced this technology for governmental use.
Revenues attributable to research and development contracts for the years ended
December 31, 1997, 1998 and 1999 totaled $3.3 million, $3.7 million, and $2.5
million, respectively.
Competition
Gallium Arsenide Products
With respect to our HBT transistor wafers, we presently compete with
several companies, including Epitronics, Emcore and Hitachi Cable, as well as
integrated circuit manufacturers with in-house transistor growth capabilities,
such as TRW, RF Micro Devices, and Fujitsu. We believe that TRW and RF Micro
Devices are the only other companies currently producing HBT transistor wafers
in commercial quantities, however, we believe they currently produce these
transistor wafers solely for use by RF Micro Devices. In the gallium arsenide
HBT transistor wafer market, competition could become increasingly intense as
new entrants emerge. The production of gallium arsenide integrated circuits has
been and continues to be more costly than the production of silicon integrated
circuits. Although we have reduced production costs of our HBT transistor wafers
by achieving higher volumes, we cannot assure you that we will be able to
continue to decrease production costs. In addition, we believe the costs of
producing gallium arsenide integrated circuits by our customers will continue to
exceed the costs associated with the production of competing silicon integrated
circuits. As a result, we must target markets where these higher costs are
justified by their superior performance. Competition in the display field is
based on price and performance characteristics, product quality and the ability
to deliver products in a timely fashion.
CyberDisplay Products
The display market is highly competitive and is currently dominated by
large Asian electronics companies including Sharp, Hitachi, Seiko, Toshiba,
Sony, NEC, Sanyo and Display Technologies, a joint venture of IBM and Toshiba.
The display market consists of multiple segments, each focusing on different
end- user applications applying different technologies. Competition in the
display field is based on price and performance characteristics, product quality
and the ability to deliver products in a timely fashion. The success of our
display product offerings will also depend upon the adoption of our CyberDisplay
products in the industry as an alternative to traditional active matrix LCDs and
upon our ability to compete against other types of well-established display
products. We cannot assure you that we will be able to compete against these
companies and technologies.
There are also a number of active matrix LCD and alternative display
technologies in development and production. These technologies include LED,
reflective, field emission display, plasma, organic light emitting diode and
virtual retinal displays, some of which target the high performance small form
factor display markets in which our display products are sold. There are many
large and small companies that manufacture or have in development products based
on these technologies. Our CyberDisplay products will compete with other
displays utilizing these and other competing display technologies.
Patents, Proprietary Rights and Licenses
An important part of our product development strategy is to seek, when
appropriate, protection for our products and proprietary technology through the
use of various United States and foreign patents and contractual arrangements.
We intend to prosecute and defend our proprietary technology aggressively. We
own more than 60 issued United States patents and more than 40 pending United
States patent applications. Many of these United States patents and applications
have counterpart foreign patents, foreign applications or international
applications through the Patent Cooperation Treaty. In addition, we are licensed
by MIT under more than 20 issued United States patents, more than 4 pending
United States patent applications, and some foreign counterparts to these United
States patents and applications. Our United States patents expire
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at various dates through July 2016. The United States patents licensed to us by
MIT expire during the period running at various dates through March 2016.
In 1985, we obtained a license from MIT to certain patents and patent
applications directed to device wafers and related technology. The license
grants to Kopin a worldwide license to make, have made, use, and sell products
covered by the licensed patents for the life of these patents. The license was
exclusive with respect to commercial applications until April 22, 1999, and
became non-exclusive at that time. In 1995, we obtained an additional license
from MIT to certain optical technology. The license grants to Kopin a worldwide
license to make, have made, use, lease and sell products covered by the licensed
patents until 2007.
The process of seeking patent protection can be time consuming and
expensive and we cannot assure you that patents will issue from currently
pending or future applications or that our existing patents or any new patents
that may be issued will be sufficient in scope or strength to provide meaningful
protection or any commercial advantage to us. We may be subject to or may
initiate interference proceedings in the United States Patent and Trademark
Office, which can demand significant financial and management resources. Patent
applications in the United States are maintained in secrecy until patents issue
and since publication of discoveries in the scientific and patent literature
lags behind actual discoveries, we cannot be certain that we were the first to
conceive of inventions covered by pending patent applications or the first to
file patent applications on such inventions. We cannot assure you that our
pending patent applications or those of our licensors will result in issued
patents or that any issued patents will afford protection against a competitor.
In addition, we can not assure you that others will not obtain patents that we
would need to license, circumvent or cease manufacturing and sales of products
covered by these patents, nor can we be sure that licenses, if needed, would be
available to the us on favorable terms, if at all.
We cannot assure you that foreign intellectual property laws will protect
our intellectual property rights or that others will not independently develop
similar products, duplicate our products or design around any patents issued to
Kopin. Our products might infringe the patent rights of others, whether existing
now or in the future. For the same reasons, the products of others could
infringe our patent rights. Although we are not aware of any pending or
threatened patent litigation against us, we may be notified, from time to time,
that we could be or we are infringing certain patents and other intellectual
property rights of others. Litigation, which could be very costly or lead to
substantial diversion of our resources even if the outcome is favorable, may be
necessary to enforce our patents or other intellectual property rights or to
defend us against claimed infringement of the rights of others. These problems
can be particularly severe in foreign countries. In the event of an adverse
ruling in litigation against Kopin for patent infringement, we might be required
to discontinue the use of certain processes, cease the manufacture, use and sale
of infringing products, expend significant resources to develop non-infringing
technology or obtain licenses to patents of third parties covering the
infringing technology. We cannot assure you that licenses will be obtainable on
acceptable terms, or at all, or that damages for infringement will not be
assessed or that litigation will not occur. The failure to obtain necessary
licenses or other rights or litigation arising out of any such claims could
adversely affect our ability to conduct our business as we propose to conduct
it.
We also attempt to protect our proprietary information with contractual
arrangements and under trade secret laws. We believe that our future success
will depend primarily upon the technical expertise, creative skills and
management abilities of our officers and key employees rather than on patent
ownership. Kopin employees and consultants generally enter into agreements
containing provisions with respect to confidentiality and the assignment of
rights to inventions made by them while in our employ. Agreements with
consultants generally provide that rights to inventions made by them while
consulting for Kopin will be assigned to us unless the assignment of rights is
prohibited by the terms of any agreements with their regular employers.
Agreements with employees, consultants and collaborators contain provisions
intended to further protect the confidentiality of our proprietary information.
To date, we have had no experience in enforcing these agreements. We cannot
assure you that these agreements will not be breached or that we would have
adequate remedies for any breaches. Our trade secrets may not be secure from
discovery or independent development by competitors.
Government Regulations
We are subject to a variety of federal, state and local governmental
regulations related to the use, storage, discharge and disposal of toxic,
volatile or otherwise hazardous chemicals used in our manufacturing process.
Although we believe that our activities conform to presently applicable
environmental regulations, the failure to comply with present or future
regulations could result in fines being imposed on us, suspension of production
or a cessation of operations. Any failure on
9
our part to control the use of, or adequately restrict the discharge of,
hazardous substances, or otherwise comply with environmental regulations, could
subject us to significant future liabilities. In addition, although we believe
that our past operations conformed with then applicable environmental laws and
regulations, we cannot assure you that we have not in the past violated
applicable laws or regulations, which violations could result in remediation or
other liabilities. We also cannot assure you that past use or disposal of
environmentally sensitive materials in conformity with then existing
environmental laws and regulations will protect us from required remediation or
other liabilities under current or future environmental laws or regulations.
Investments in Related Businesses
We have made equity investments in other companies including Kowon
Technology, a manufacturer of optoelectronic products located in South Korea and
Kendin Communications, a developer and manufacturer of silicon integrated
circuits for high speed data and network communications.
In 1998 we made a $2.0 million investment in Kowon for which we received a
65% equity interest. We consolidated the financial statements of Kowon with our
financial statements beginning in the second quarter of 1998. Kowon's results of
operations are principally denominated in the South Korean won and are subject
to exchange rate fluctuations. On December 31, 1999, our investment in Kendin
totaled approximately $2,580,000, representing approximately 17% of the
outstanding equity of the company. Kendin is a privately held company. Our
investment in Kendin is carried on our balance sheet at cost. We may from time
to time make further equity investments in Kendin and other companies engaged in
certain aspects of the display and electronics industries as part of our
business strategy. These investments may not provide us with any financial
return or other benefit and any losses by these companies or associated losses
in our investments may negatively impact our operating results.
Employees
As of December 31, 1999, we and our subsidiaries employed 262 full-time and
9 part-time individuals. Of these, 15 hold Ph.D. degrees in Material Science,
Electrical Engineering or Physics. Our management and professional employees
have significant prior experience in semiconductor materials, device transistor
and display processing, manufacturing and other related technologies. None of
our employees is covered by a collective bargaining agreement. We consider
relations with our employees to be good.
Item 2. Properties
We lease separate HBT transistor wafer manufacturing and CyberDisplay
product fabrication facilities. Our HBT transistor wafer manufacturing facility
is located at our corporate headquarters in Taunton, Massachusetts. The Taunton
facility occupies 25,100 square feet, including 6,000 square feet of contiguous
environmentally controlled production clean rooms. The Taunton facility is
occupied under a lease that expires in October 2002.
Our CyberDisplay production facility occupies 74,000 square feet in
Westborough, Massachusetts, of which 10,000 square feet consist of contiguous
environmentally controlled production clean rooms, of which 7,000 square feet
are Class 10. We occupy our Westborough facility under a lease that expires in
October 2001, with renewable options for up to three additional years at our
election.
In addition to our Massachusetts facilities, we lease a 5,280 square foot
design facility in Los Gatos, California for developing prototypes of products
incorporating our CyberDisplay product. This facility is occupied under a lease
that expires in November 2002.
Our subsidiary, Kowon Technology, owns two facilities in Kyungii-Do, South
Korea, in which it manufactures its optoelectronic products and in which its
corporate headquarters is located. These facilities occupy an aggregate of
28,000 square feet.
10
Item 3. Legal Proceedings
We may become engaged in legal proceedings arising in the ordinary course
of business from time to time. We currently are not a party to any material
legal proceedings.
On December 15, 1999, the Company held a Special Meeting of Stockholders to
consider and vote upon the following proposals: A proposal to amend the
Company's Certificate of Incorporation to increase the number of authorized
shares of Common Stock from 20,000,000 to 60,000,000 shares.
Results with respect to the voting on such proposal were as follows:
10,123,235 votes for; 2,491,353 votes against; and 19,675 abstentions.
Item 4. Submission of Matter to a Vote of Security Holders
Not applicable.
11
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company, who are elected on an annual basis to
serve at the discretion of the Board of Directors, are as follows:
Name Age Position with the Company
- ---- --- -------------------------
John C. C. Fan 56 President and Chief Executive Officer; Chairman of the Board of Directors
Richard A. Sneider 39 Treasurer and Chief Financial Officer
Bor-Yeu Tsaur 44 Executive Vice President-Display Operations
Ronald P. Gale 49 Chief Technology Officer
Daily S. Hill 43 Vice President-Gallium Arsenide Operations
Matthew J. Micci 43 Vice President-Sales, Gallium Arsenide Products
Matthew M. Zavracky 44 Vice President-Engineering
John C.C. Fan, President, Chief Executive Officer, Chairman of the Board of
Directors. Dr. Fan, one of our founders, has served as our Chief Executive
Officer and Chairman of the Board of Directors since April 1984. He has also
served as President of the Company since July 1990. Prior to July 1985, Dr. Fan
was Associate Leader of the Electronic Materials Group at MIT Lincoln
Laboratory. Dr. Fan is the author of numerous patents and scientific
publications. Dr. Fan received a Ph.D. in Applied Physics from Harvard
University.
Richard A. Sneider, Treasurer and Chief Financial Officer. Mr. Sneider has
served as our Treasurer and Chief Financial Officer since September 1998. Mr.
Sneider is a Certified Public Accountant and was formerly a partner of the
international public accounting firm, Deloitte & Touche LLP, where he worked for
sixteen years.
Bor-Yeu Tsaur, Executive Vice President--Display Operations. Dr. Tsaur
joined us as Executive Vice President--Display Operations in July 1997. From
1993 to 1997, Dr. Tsaur served as Group Leader, Electronic Material Group, at
MIT Lincoln Laboratory. Dr. Tsaur received a Ph.D. in Electrical Engineering
from the California Institute of Technology.
Ronald P. Gale, Chief Technology Officer and Vice President. Dr. Gale
became Chief Technology Officer in 1997. Previously, Dr. Gale served as our Vice
President in several capacities since July 1985. Dr. Gale received a Ph.D. in
Materials Science and Engineering from the Massachusetts Institute of Technology
in 1978.
Daily S. Hill, Vice President--Gallium Arsenide Operations. Mr. Hill has
served as Vice President--Gallium Arsenide Operations since July 1997. From
December 1995 to June 1997, Mr. Hill served as our Director of Gallium Arsenide
Operations. From November 1987 to January 1995, Mr. Hill served as a manager of
our HBT transistor wafer product group.
Matthew J. Micci, Vice President--Sales, Gallium Arsenide Products. Mr.
Micci joined us in January 1988 as Regional Director of Sales and became Vice
President, Sales in July 1990. Prior to joining us, Mr. Micci worked for ten
years for Texas Instruments Semiconductor Group.
Matthew M. Zavracky, Vice President--Engineering. Mr. Zavracky has served
as Vice President--Engineering since July 1997. From 1985 to 1997, Mr. Zavracky
served as Director of Engineering.
12
Part II
Item 5. Market for Company's Common Stock and Related Stockholder Matters.
Our common stock is traded on the Nasdaq National Market under the symbol
"KOPN." The following table sets forth, for the quarters indicated, the range of
high and low sale prices for the common stock as reported on the Nasdaq National
Market for the periods indicated. The prices indicated reflect a 2 for 1 stock
split in the form of a 100% stock dividend effected on December 29, 1999.
High Low
---- ---
Fiscal Year Ended December 31, 1998
First Quarter $11.187 $ 7.000
Second Quarter 11.187 8.000
Third Quarter 10.500 5.719
Fourth Quarter 10.625 5.687
Fiscal Year Ending December 31, 1999
First Quarter $12.437 $ 6.000
Second Quarter 12.437 6.500
Third Quarter 20.375 10.625
Fourth Quarter 43.594 13.766
As of December 31, 1999, there were approximately 225 stockholders of
record of our common stock, which does not reflect those shares held
beneficially or those shares held in "street" name.
We have not paid dividends in the past, nor do we expect to pay dividends
for the foreseeable future. We anticipate that earnings, if any, will be
retained for the development of our businesses.
13
Item 6. Selected Financial Data
Year Ended December 31,
-----------------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
(in thousands, except per share data)
Statement of Operations Data:
Revenues:
Product revenues $ 36,126 $ 23,225 $ 13,110 $ 11,727 $ 7,161
Research and development revenues 2,536 3,680 3,283 6,291 8,628
--------- --------- --------- --------- ---------
Total revenues 38,662 26,905 16,393 18,018 15,789
Expenses:
Cost of product revenues 26,280 15,509 8,636 9,489 6,059
Research and development-funded programs 2,858 3,954 2,802 6,591 8,757
Research and development-internal 4,262 5,659 7,623 9,876 6,856
Selling, general and administrative 5,757 4,015 4,292 7,070 4,013
Other 366 385 327 598 403
Write-down of subsidiary assets -- -- -- 3,900 --
Impairment charge -- 1,800 -- 4,990 --
--------- --------- --------- --------- ---------
39,524 31,322 23,680 42,514 26,088
--------- --------- --------- --------- ---------
Loss from operations (862) (4,417) (7,287) (24,496) (10,299)
Other income, net 1,728 1,508 1,029 1,676 1,308
--------- --------- --------- --------- ---------
Income (loss) before minority interest 865 (2,909) (6,258) (22,820) (8,991)
Minority interest in (income) loss of subsidiary (90) (59) -- 1,224 --
--------- --------- --------- --------- ---------
Net income (loss) $ 775 $ (2,968) $ (6,258) $ (21,596) $ (8,991)
========= ========= ========= ========= =========
Net income (loss) per share:
Basic $ 0.03 $ (0.12) $ (0.28) $ (0.99) $ (0.48)
Diluted $ 0.03 $ (0.12) $ (0.28) $ (0.99) $ (0.48)
Weighted average number of common shares outstanding:
Basic 25,882 24,137 22,020 21,842 18,924
Diluted 28,146 24,137 22,020 21,842 18,924
December 31,
-----------------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
(in thousands)
Balance Sheet Data:
Cash and equivalents and marketable securities $ 99,099 $ 36,808 $ 19,046 $ 27,072 $ 41,997
Working capital 106,481 39,359 21,466 27,687 44,727
Total assets 145,074 61,906 43,394 53,746 76,160
Long-term obligations, less current portion 2,567 4,209 1,959 2,793 1,605
Stockholders' equity 130,067 51,846 35,869 40,271 61,842
14
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Kopin is a leading developer and manufacturer of advanced semiconductor
materials and miniature displays. We use our proprietary technology to design,
manufacture and market products used in highly demanding commercial wireless
communications and high resolution portable applications. Our products enable
our customers to develop and market an improved generation of products for these
target applications.
We have two principal components of revenues: product revenues and research
and development revenues. Historically, product revenues have consisted of sales
of our HBT transistor wafers. For the year ended December 31, 1997, we had
product revenues of $13.1 million, or 80.0% of total revenues. For the year
ended December 31, 1998, product revenues were $23.2 million, or 86.3% of total
revenues. Product revenues were $36.1 million, or 93.4% of total revenues for
the year ended December 31, 1999. We began shipping our CyberDisplay product in
1998. This product line represented 13% of our product revenues for the year
ended December 31, 1999.
Research and development revenues consist primarily of development
contracts with agencies of the U.S. government. For the year ended December 31,
1997, as management intensified its efforts on the marketing and sales of its
commercial products, research and development revenues declined to $3.3 million,
or 20.0% of total revenues. For the year ended December 31, 1998, research and
development revenues were $3.7 million, or 13.7% of total revenues. Research and
development revenues were $2.5 million, or 6.6% of total revenues for the year
ended December 31, 1999. We believe that research and development revenues will
continue to decline on an annual basis as a percentage of total revenues for the
near future.
We recognize revenues when a product is shipped or when a service is
performed. We typically provide customers with a twelve month warranty from the
date of sale for some of our products. Based upon historical and anticipated
warranty costs, we account for estimated sales return and warranty reserves in
the period the sale is made. We recognize revenues from long-term contracts on
the percentage-of-completion method of accounting as work is performed, based
upon the ratio of costs or hours already incurred to the estimated total cost of
completion or hours of work to be performed. We account for product development
and research contracts that have established prices for distinct phases as if
each phase were a separate contract. We classify amounts earned on contracts in
progress that are in excess of amounts billed as unbilled receivables and we
classify amounts received in excess of amounts earned as unearned revenues. We
bill unbilled receivables based on dates specified in the related agreement or
in periodic installments based upon our invoicing cycle. We recognize the entire
amount of an estimated ultimate loss in our financial statements at the time the
loss on a contract becomes known.
Results of Operations
Year Ended December 31, 1999 ("1999") Compared to Year Ended December 31, 1998
("1998")
Revenues. Our total revenues for the year ended December 31, 1999 were
$38.7 million compared to $26.9 million in 1998, an increase of approximately
$11.8 million or 43.7%. Our product revenues for the year ended December 31,
1999 were $36.1 million compared to $23.2 million for the year ended December
31, 1998, an increase of approximately $12.9 million or 55.5%. This increase in
product revenues was primarily due to an increase in sales of our
gallium arsenide products as well as our CyberDisplay products in the
year ended December 31, 1999 compared to year ended December 31, 1998. For the
year ended gallium arsenide product sales and CyberDisplay product sales were
$31.5 million and $4.6 million, respectively, versus $20.3 million and $2.9
million, respectively, for 1998. Research and development revenues for the year
ended December 31, 1999 were $2.5 million, compared to $3.7 million in 1998, a
decrease of $1.1 million, or 31.1%. Research and development revenues declined
primarily due to the expirations of multi-year contracts with the U.S.
government.
Cost of Product Revenues. Cost of product revenues, which is comprised of
materials, labor and manufacturing overhead related to our products, was $26.3
million for the year ended December 31, 1999 compared to $15.5 million in 1998,
an increase of approximately $10.8 million or 69.4%. The increase in cost of
product revenues as a percentage of product revenues in 1999 primarily is
attributable to increased production staffing as we increased production
capacity, re-deployed certain assets and personnel previously involved in
development activities to manufacturing activities and increased sales of our
CyberDisplay products as a percentage of total sales.
15
Research and Development. Research and development expenses are incurred
under development programs for gallium arsenide and display products either in
support of internal development programs or programs funded by agencies of the
U.S. government. Research and development costs include staffing, purchases of
materials and laboratory supplies, circuit design costs, fabrication and
packaging of display products, and overhead. Funded research and development
expenses were $2.9 million for the year ended December 31, 1999 compared to $4.0
million in 1998, a decrease of $1.1 million, or 27.5% due to reduced
subcontractor expenses caused by the expiration of multi-year contracts with
agencies of the U.S. government. Internal research and development expenses were
$3.9 million for the year ended December 31, 1999 compared to $5.7 million in
1998, a decrease $1.8 million, or 31.6%. The decrease in internal research and
development was primarily a result of the re-deployment of certain assets and
personnel from development activities into manufacturing activities.
Selling, General and Administrative. Selling, general and administrative
expenses consist of the expenses incurred by our sales and marketing personnel
and related expenses, and administrative and general corporate expenses.
Selling, general and administrative expenses were $5.8 million for the year
ended December 31, 1999 compared to $4.0 million in 1998, an increase of $1.7
million, or 43.4%. The increase in selling, general and administrative expense
is primarily due to increases in headcount in the sales and marketing staff and
significant travel associated with new customer support. In addition, selling,
general and administrative expenses include non-cash charges for compensation
expense of $55,020 for the year ended December 31, 1999 compared to $66,900 in
1998, relating to the issuance of certain stock options.
Other. Other expenses, primarily amortization of patents and licenses, were
$366,079 for the year ended December 31, 1999 compared to $384,349 in 1998.
Other Income, Net. Other income, net was $1.7 million for the year ended
December 31, 1999 compared to $1.5 million in 1998. This increase was primarily
due to a decrease in interest expense as a result of reduced debt.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Revenues. Our total revenues were $26.9 million for 1998 compared to $16.4
million in 1997, an increase of $10.5 million, or 64.1%. Our product revenues
were $23.2 million for 1998 compared to $13.1 million in 1997, an increase of
$10.1 million, or 77.2%. The increase in product revenues was primarily due to
an increase in sales of our gallium arsenide products as well as our
CyberDisplay product sales for the year ended December 31, 1998 versus December
31, 1997. Gallium arsenide product sales and CyberDisplay product sales were
$20.3 million and $2.9 million for the year ended 1998, respectively, versus
$12.0 million and $1.2 million in 1997. The increase in sales of our gallium
arsenide products HBT wafers was primarily due to the increased use of our
advanced semiconductor transistors in various wireless telecommunications
products, particularly by our major customer, Conexant. Research and development
revenues were $3.7 million for 1998 compared to $3.3 million in 1997, an
increase of $396,608. The increase in research and development revenues was
primarily attributable to an increase in contract revenues from agencies of the
U.S. government.
Cost of Product Revenues. Cost of product revenues was $15.5 million for
1998 compared to $8.6 million in 1997. Included in 1998 cost of product revenues
is a charge totaling approximately $1.7 million associated with the write-down
of inventory resulting from modification of certain processes in the production
of our CyberDisplay products to improve manufacturing flexibility and to meet
customer requirements. Excluding this inventory write- down, cost of product
revenues decreased as a percentage of product revenues because of manufacturing
efficiencies derived from the increase in unit volume production. The benefit
from manufacturing efficiencies was offset in part from an increase in display
products as a percentage of total product revenues.
Research and Development. Funded research and development expenses were
$4.0 million for 1998 compared to $2.8 million in 1997, an increase of $1.2
million. The increase in funded research and development expenses in 1998 was
primarily due to an increase in programs funded by agencies of the U.S.
government. Internal research and development expenses were $5.7 million in 1998
compared to $7.6 million in 1997, a decrease of $2.0 million. The decrease in
internal research and development expenses was primarily a result of reduced
research costs incurred for developing our display products.
Selling, General and Administrative. Selling, general and administrative
expenses were $4.0 million for 1998 compared to $4.3 million in 1997, a decrease
of $277,521. In addition, selling, general and administrative expenses include
16
non-cash charges for compensation expense of $66,900 for 1998 compared to
$75,857 in 1997 relating to the issuance of certain stock options.
Impairment Charge. In 1998, we recorded a non-cash impairment charge
totaling approximately $1.8 million associated with the write-down of equipment
and intangible assets resulting from modification of certain processes in the
production of our CyberDisplay products to improve manufacturing flexibility.
Other. Other expenses were $384,349 for 1998 compared to $327,102 in 1997,
an increase of $57,247.
Other Income, Net. Other income, net was $1.5 million in 1998 compared to
$1.0 million in 1997, an increase of $478,921. The increase was primarily due to
an increase in interest income of $779,834 to $2.0 million in 1998 from $1.3
million in 1997, resulting from higher cash balances in 1998. This increase was
partially offset by an increase in interest expense of $300,913 due to
additional debt funding.
Liquidity and Capital Resources
We have financed our operations primarily through public offerings and
private placements of our equity securities, research and development contract
revenues, and sales of our gallium arsenide and display products. We believe our
available cash resources will support our operations and capital needs for at
least the next twelve months.
As of December 31, 1999, we had cash and equivalents and marketable
securities of $99.1 million and working capital of $106.5 million compared to
$36.8 million and $39.4 million, respectively, as of December 31, 1998. The
increase in cash and equivalents and marketable securities was primarily due to
proceeds from an October 1999 public common stock offering that resulted in net
proceeds to the Company of $73.2 million and proceeds from the exercise of stock
options of $4.6 million, partially offset by cash used in operations of
$366,000, capital expenditures of $15.0 million, and principal payments on
long-term obligations of $1.5 million. The increase in capital expenditures is
primarily for our expansion programs to increase manufacturing capacity for our
gallium arsenide and display products.
We periodically enter into long-term debt arrangements to finance equipment
purchases and other activities. As of December 31, 1999, long-term debt
obligations totaled $4.7 million, of which $2.1 million is payable in the next
twelve months.
Our CyberDisplay products are targeted at large sales volume consumer
electronic and wireless communication applications. We believe that in order to
obtain customers in these markets, it has been necessary to make significant
investments in equipment and infrastructure. We believe that it will be
necessary to continue to make significant investments in equipment and
development in order to produce current and future CyberDisplay products. As a
result of the current cost structure of our CyberDisplay product line, our
ability to achieve profitability in that product line depends upon achieving
significant sales volumes and higher gross profit margins. We have not yet
produced our CyberDisplay products at volumes necessary to achieve
profitability. Accordingly, we may not be able to obtain sufficient sales
volumes, or if sufficient sales volumes are achieved, we may not be able to
produce our CyberDisplay products at a gross margin which will allow the product
line to generate a profit.
We lease equipment and our facilities located in Taunton and Westborough,
Massachusetts, and Los Gatos, California, under non-cancelable operating leases.
The Taunton lease expires in October 2002. The Westborough lease expires in
October 2001, with renewable options for up to three additional years at our
election. The Los Gatos lease covers a five year period terminating in 2002. We
record costs incurred under operating leases as rent expense and this expense
aggregated approximately $1.3 million for 1999.
We expect to expend approximately $30.0 million on capital expenditures
over the next twelve months, primarily for the acquisition of equipment relating
to the production of our HBT transistor wafers and the manufacturing, packaging
and testing of CyberDisplay products, including the establishment of a second
manufacturing product facility for our HBT transistor wafers.
As of December 31, 1999, we had tax loss carryforwards of approximately
$44.7 million, which may be used to offset future taxable income.
17
Recent Accounting Pronouncements
The Financial Accounting Standards Board ("FASB") has issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which is effective for fiscal years
commencing after June 15, 2000. SFAS No. 133 requires fair value accounting for
all stand-alone derivatives and many derivatives embedded in other financial
instruments and contracts. The impact of SFAS No. 133 on us has not yet been
determined.
Seasonality
The Company's business is not seasonal in nature.
Inflation
The Company does not believe that its operations have been materially
affected by inflationary forces.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
We invest our excess cash in high quality government and corporate
financial instruments which generally bear minimal risk. We believe that the
effect, if any, of reasonably possible near-term changes in interest rates on
our financial position, results of operations, and cash flows should not be
material. We sell our products to customers worldwide. We maintain a reserve for
potential credit losses and such losses have been minimal. We are exposed to
changes in foreign currency exchange primarily through our translation of our
foreign subsidiary's financial position, results of operations, and cash flows
and the sale of our CyberDisplay products to customers in Asia.
18
RISK FACTORS
This Form 10-K report contains forward-looking statements within the
meaning of the securities laws that are based on current expectations,
estimates, forecasts and projections about the industries in which Kopin
operates, management's beliefs and assumptions made by management. In addition,
other written or oral statements which constitute forward-looking statements may
be made by or on behalf of the Company. Words such as "expects", "anticipates",
"intends", "plans", "believes", "seeks", "estimates", variations of such words
and similar expressions are intended to identify such forward-looking
statements. These statements are not guarantees of future performance and
involve certain risks, uncertainties and assumptions which are difficult to
predict. Therefore, actual outcomes and results may differ materially from what
is expressed or forecasted in such forward-looking statements, whether as a
result of new information, future events or otherwise. Factors that could cause
or contribute to such differences in outcomes and results, include, but are not
limited to, those discussed below.
We have experienced a history of losses and have a significant accumulated
deficit. We did not achieve profitability on an annual basis until 1999. Since
inception, we have incurred significant net operating losses. For the years
ended December 31, 1998 and 1997, we incurred net losses of $3.0 million and
$6.3 million, respectively, and as of December 31,1999 we had an accumulated
deficit of $56.7 million. We cannot assure you that we will maintain
profitability in the future.
Our revenue and cash flow could be negatively affected by the loss of any of the
few customers who account for a substantial portion of our revenues. A few
customers account for a substantial portion of our revenues. Sales of our HBT
transistor wafers to Conexant Systems accounted for approximately 49%, 59%, and
63% of our total revenues for the years ended December 31, 1999,1998 and 1997,
respectively. For the years ended December 31, 1999, 1998 and 1997, revenues
from multiple contracts with various U.S. governmental agencies accounted for
approximately 7%, 14% and 20%, respectively, of our total revenues. We
anticipate that sales of our HBT transistor wafers to Conexant will continue to
represent a significant portion of our revenues for the near future. A reduction
in research and development contracts from the U.S. government or a reduction or
delay in orders from Conexant or any of our other significant customers would
materially reduce our revenue and cash flow and adversely affect our ability to
achieve and maintain profitability.
If we are unable to significantly increase our CyberDisplay production capacity
and reduce our CyberDisplay production costs, our business will suffer. We have
limited experience manufacturing display products. We expect to significantly
increase our CyberDisplay production capacity in 2000 in an attempt to meet
anticipated increased demand. We are also embarking on an initiative to automate
portions of our display manufacturing process to increase throughput and lower
unit production costs. If we are unable to successfully increase our
CyberDisplay production capacity and reduce manufacturing costs, we may lose
customer orders and our display business will remain unprofitable.
Our CyberDisplay products may not be accepted by the market. We have had limited
sales of our CyberDisplay products to date. Our success will in large part
depend on the widespread adoption of the viewing format of our CyberDisplay. Our
success also depends upon the widespread consumer acceptance of our customers'
products. Potential customers may be reluctant to adopt our CyberDisplay
products because of concerns surrounding perceived risks relating to:
o The introduction of our display technology generally;
o Consumer acceptance of our CyberDisplay products; and
o The relative complexity, reliability, usefulness and
cost-effectiveness of our display products compared to other display
products available in the market or that may be developed by our
competitors.
In addition, our customers may be reluctant to rely upon a relatively small
company such as Kopin for a critical component. We cannot assure you that
prospective customers will adopt our CyberDisplay products or that consumers
will accept our CyberDisplay products. If we fail to achieve market acceptance
of our CyberDisplay products, our business may not be successful and the value
of your investment in Kopin may decline.
Our success depends on the continued growth and evolution of the wireless
communications market. Sales of products for wireless communications
applications constitute substantially all of our current, and a significant
portion of our projected, product revenues and cash flows. The implementation of
higher bandwidth infrastructure will be needed to drive the
19
development of the next generation of wireless communications services. These
developments include data oriented services, such as Internet browsing
capabilities and the ability to view e-mail and other information that should
increase the demand for our products. Our success will depend in large part on
the widespread adoption of this infrastructure and the cost-effectiveness of
these services to the consumer. We may be unable to grow or sustain our business
if there is a slowdown in the wireless communications market.
We generally do not have long-term contracts with our customers, which makes
forecasting our revenues and operating results difficult. We generally do not
enter into agreements with our customers obligating them to purchase our
products. Our business is characterized by short-term purchase orders and
shipment schedules and we generally permit orders to be canceled or rescheduled
without significant penalty. As a result, forecasting our revenues is difficult.
In addition, due to the absence of substantial noncancellable backlog, we
typically plan our production and inventory levels based on internal forecasts
of customer demand, which are highly unpredictable and can fluctuate
substantially. Our operating results are difficult to forecast because we are
continuing to invest in capital equipment and increasing our operating expenses
for personnel and new product development. If we fail to accurately forecast our
revenues and operating results, our business may not be successful and the value
of your investment in Kopin may decline.
Potential fluctuations in operating results make financial forecasting difficult
and could affect the price of our common stock. Our quarterly and annual
revenues and operating results are difficult to predict and may fluctuate
significantly from quarter to quarter. You should not rely on our revenues and
our operating results for any one quarter or year as an indication of our future
revenues or operating results. Our revenues and our results of operations may
fluctuate for several reasons including:
o The timing and successful introduction of additional manufacturing
capacity;
o The timing of the initial selection of our HBT transistor wafers and
CyberDisplay products as a component in our customers' new products;
o Market acceptance of our and our customers' products;
o Competitive pressures on selling prices of our CyberDisplay products;
o The timing and cancellation of customer orders;
o Our ability to introduce new products and technologies on a timely
basis;
o Our ability to successfully reduce costs; and
o The cancellation of U.S. government contracts.
If our quarterly revenues or results of operations fall below expectations of
investors or public market analysts, the price of our common stock could fall
substantially.
Disruptions of our HBT transistor wafer production would adversely affect our
operating results. If we were to experience any significant disruption in the
operation of our facilities, we would be unable to supply HBT transistor wafers
to our customers. Our manufacturing processes are highly complex and customer
specifications are extremely precise. We periodically modify our processes in an
effort to improve yields and product performance and to meet particular customer
requirements. We intend to broaden our volume production capabilities to produce
HBT transistor wafers up to six inches in diameter, but we have limited
experience in producing finished six-inch HBT transistor wafers in commercial
quantities. Process changes or other problems that occur in the complex
manufacturing process can result in interruptions in production or significantly
reduced yields. Additionally, as we introduce new equipment into our
manufacturing processes, our HBT transistor wafer products could be subject to
especially wide variations in manufacturing yields and efficiency. We may
20
experience manufacturing problems that would result in delays in product
introduction and delivery or yield fluctuations. We are also subject to the
risks associated with the shortage of raw materials used in the manufacture of
our products.
We would be unable to manufacture and distribute our CyberDisplay products if
the third parties we rely on for manufacturing and packaging fail to provide
those services. We depend on United Microelectronics Corporation, or UMC, and
its affiliate, Unipac Optoelectronics, for the fabrication of integrated
circuits and a portion of the packaging of our CyberDisplay products. We have no
long-term contracts with these companies, both of which are located in Taiwan.
If these companies were to terminate their arrangements with us or become unable
to provide the required capacity and quality on a timely basis, we would be
unable to manufacture and ship our CyberDisplay products until replacement
foundry or packaging services could be obtained. Furthermore, we cannot assure
you that we would be able to establish alternative manufacturing and packaging
relationships on acceptable terms.
Our reliance on UMC and Unipac involves certain risks, including:
o The lack of control over production capacity and delivery schedules;
o Limited control over quality assurance, manufacturing yields and
production costs; and
o The risks associated with international commerce, including unexpected
changes in legal and regulatory requirements, changes in tariffs and
trade policies and political and economic instability.
UMC and Unipac, as well as several other third parties with which we do
business, are located in Taiwan. Due to the earthquake that occurred in Taiwan
in 1999, many Taiwanese companies including UMC and Unipac experienced related
business interruptions. Both UMC and Unipac have resumed normal operations . Our
business could suffer significantly if UMC or Unipac's operations were disrupted
again for an extended period of time.
We also depend on third parties to provide integrated circuit chip sets for use
with our CyberDisplay products. Motorola currently produces integrated circuit
chip sets for use with our CyberDisplay products in camcorders. If Motorola or
any other third party were unable to supply these integrated circuit chip sets,
we would be unable to sell our CyberDisplay products until a replacement
supplier could be found. Any interruption in our ability to manufacture and
distribute our CyberDisplay products could cause our display business to be
unsuccessful and the value of your investment in Kopin may decline.
We may not be able to operate multiple manufacturing facilities successfully. A
critical part of our business strategy is the expansion of our production
capacity. We plan to establish a second facility to manufacture our HBT
transistor wafers and we are also considering the establishment of additional
internal or third party manufacturing capability to produce our CyberDisplay
products. To date, we have operated only one facility for each of our product
lines, and we have no experience operating multiple facilities to manufacture a
single product line.
Our ability to successfully operate additional manufacturing sites will depend
on a number of factors including:
o The identification and availability of appropriate and affordable
sites;
o The management of facility construction and development timing and
costs;
o The establishment of adequate management and information systems and
financial controls; and
o The adaptation of our complex manufacturing process in our additional
sites.
21
Additionally, we cannot be sure that any new manufacturing facilities will have
operating results similar to those of our current facilities. Any failure to
effectively implement our expansion strategy would adversely impact our ability
to grow our business.
Increased competition may result in decreased demand or prices for our products.
Competition in the markets for our products is intense. We compete with several
companies primarily engaged in the business of designing, manufacturing and
selling integrated circuits or alternative display technologies, as well as the
supply of other discrete products. Our competitors could develop new process
technologies that may be superior to ours, including technologies that target
markets in which our products are sold. Many of our existing and potential
competitors have strong market positions, considerable internal manufacturing
capacity, established intellectual property rights and substantial technological
capabilities. Furthermore, they also have greater financial, technical,
manufacturing, marketing and personnel resources than we do, and we may not be
able to compete successfully with them.
In addition, many of our existing and potential customers manufacture or
assemble wireless communications devices and have substantial in-house
technological capabilities. If one of our large customers establishes internal
design and manufacturing capabilities, it could have an adverse effect on our
operating results.
We expect competition to increase. This could mean lower prices or reduced
demand for our products. Any of these developments would have an adverse effect
on our operating results.
If we fail to keep pace with changing technologies, we may lose customers. The
advanced semiconductor materials and display industries are characterized by
rapidly changing customer requirements and evolving technologies and industry
standards. To achieve our goals, we need to enhance our existing products and
develop and market new products that keep pace with continuing changes in
industry standards and requirements and customer preferences. If we cannot keep
pace with these changes, our business could suffer.
We may not be successful in protecting our intellectual property and proprietary
rights. Our success depends in part on our ability to obtain patents and
licenses and to preserve other intellectual property rights covering our
products and manufacturing processes. To that end, we have obtained certain
domestic and foreign patents and we intend to continue to seek patents on our
inventions when appropriate. We also attempt to protect our proprietary
information with contractual arrangements and under trade secret laws. Our
employees and consultants generally enter into agreements containing provisions
with respect to confidentiality and the assignment of rights to inventions made
by them while in our employ. If these measures fail to adequately protect our
intellectual and proprietary rights, our business will not be successful and the
value of your investment in Kopin may decline.
Our business could suffer if we lose the services of, or fail to attract, key
personnel.In order to continue to provide quality products in our rapidly
changing business, we believe it is important to retain personnel with
experience and expertise relevant to our business. Our success depends in large
part upon a number of key management and technical employees. The loss of the
services of one or more key employees, including John C.C. Fan, our President
and Chief Executive Officer, could seriously impede our success. We do not
maintain any "key-man" insurance policies on Dr. Fan or any other employees. In
addition, due to the level of technical and marketing expertise necessary to
support our existing and new customers, our success will depend upon our ability
to attract and retain highly-skilled management, technical, and sales and
marketing personnel. Competition for highly-skilled personnel is intense and
there may be only a limited number of persons with the requisite skills to serve
in these positions. We may be unsuccessful in attracting and retaining these
personnel.
We may be unable to continue to grow at our historical growth rates or to manage
our growth effectively. In 1998 and 1999, we have experienced significant growth
in our HBT transistor wafer business and we anticipate growth in our
CyberDisplay business. This growth has placed, and our anticipated growth is
expected to place, significant strain on our limited administrative, operational
and financial resources. We cannot assure you that our systems, procedures,
controls and existing and planned space will be adequate to support our future
operations. As a result of these concerns, we cannot be sure that we will
continue to grow, or, if we do grow, that we will be able to maintain our
historical growth rate.
We may pursue acquisitions and investments that could adversely affect our
business. In the past we have made, and in the future we may make, acquisitions
of and investments in businesses, products and technologies that could
complement or expand our business. If we identify an acquisition candidate, we
may not be able to successfully negotiate or finance the
22
acquisition or integrate the acquired businesses, products or technologies into
our existing business and products. Future acquisitions could result in
potentially dilutive issuances of equity securities, the incurrence of debt and
contingent liabilities, amortization expenses and write-downs of acquired
assets.
We may incur significant liabilities if we fail to comply with stringent
environmental regulations or if we did not comply with these regulations in the
past. We are subject to a variety of federal, state and local governmental
regulations related to the use, storage, discharge and disposal of toxic or
otherwise hazardous chemicals used in our manufacturing process. Although we
believe that our activities conform to environmental regulations, the failure to
comply with present or future regulations could result in fines being imposed on
us, suspension of production or a cessation of operations. We cannot assure you
that we have not in the past violated applicable laws or regulations, which
could result in required remediation or other liabilities.
You should not expect to receive dividends from us. We have not paid dividends
in the past, nor do we expect to pay dividends for the foreseeable future. We
anticipate that earnings, if any, will be retained for the development of our
businesses.
Our stock price may be volatile in the future. The trading price of the
Company's common stock could be subject to wide fluctuations in response to
quarter-to-quarter variations in results of operations, announcements of
technological innovations or new products by the Company or its competitors,
general conditions in the wireless communications, semiconductor and display
markets, changes in earnings estimates by analysts or other events or factors.
In addition, the public stock markets have experienced extreme price and trading
volatility in recent months. This volatility has significantly affected the
market prices of securities of many technology companies for reasons frequently
unrelated to the operating performance of the specific companies. These broad
market fluctuations may adversely affect the market price of the Company's
common stock.
Item 8. Financial Statements and Supplementary Data
The financial statements of the Company required by this item are
incorporated in this report on pages F-1 through F-14. For other financial
statements and schedules along with independent auditors' reports thereon
required under this item, reference is made to Item 14 of this Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not Applicable.
Item 10. Directors and Executive Officers of the Registrant
(a) Directors. The information with respect to directors required by this
item is incorporated herein by reference from the Company's Proxy
Statement relating to the Company's Annual Meeting of Shareholders to
be held on May 25, 2000 (the "Proxy Statement").
(b) Executive Officers. The information with respect to executive officers
required by this item is set forth in Part I of this Report.
(c) Reports of Beneficial Ownership. The information with respect to
reports of beneficial ownership required by this item is incorporated
herein by reference from the Company's Proxy Statement.
Item 11. Executive Compensation
The information required under this item is incorporated herein by
reference from the Company's Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
23
The information required under this item is incorporated herein by
reference from the Company's Proxy Statement.
Item. 13. Certain Relationships and Related Transactions
The information required under this item is incorporated herein by
reference from the Company's Proxy Statement.
24
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Documents filed as part of the Report: Page
----
(1) Consolidated Financial Statements:
Index to Consolidated Financial Statements F-1
Independent Auditors' Report F-2
Consolidated Balance Sheets at December 31, 1999 and 1998 F-3
Consolidated Statements of Income and Comprehensive Income (Loss)
for the years ended December 31, 1999, 1998 and 1997 F-4
Consolidated Statements of Stockholders' Equity for the years ended December 31, F-5
1999, 1998 and 1997
Consolidated Statements of Cash Flows for the years ended December 31, 1999, F-6
1998 and 1997
Notes to Consolidated Financial Statements. F-7 to F-14
(2) Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts
Schedules other than the one listed above have been omitted because of the
absence of conditions under which they are required or because the required
information is included in the financial statements or the notes thereto.
(3) Exhibits
3.1 Amended and Restated Certificate of Incorporation (2)
3.2 Amendment to Certificate of Incorporation (13)
3.3 Amended and Restated By-laws (2)
4 Specimen Certificate of Common Stock (1)
10.1 Form of Employee Agreement with Respect to Inventions
and Proprietary Information (1)
10.2 1985 Incentive Stock Option Plan, as amended (1)
10.3 1992 Stock Option Plan Amendment (14)
10.4 Form of Key Employee Stock Purchase Agreement (1)
10.5 License Agreement by and between the Company and
Massachusetts Institute of Technology
dated April 22, 1985, as amended (1)
10.6 Technology and Business Development Agreement,
dated as of November 6, 1992 by and between the Company and
Rockwell International Corporation (confidential
portions on file with the Commission) (2)
10.7 Facility Lease, by and between the Company and
Massachusetts Technology Park Corporation dated October 15, 1993 (3)
10.8 Master Sublease - Purchase Agreement, by and between the Company and
Massachusetts Industrial Finance Agency dated June 23, 1994 (4)
25
10.9 Contract by and between the Company and the Advanced Research Projects
Agency dated May 25, 1994(confidential portions
on file with the Commission) (4)
10.10 Joint Agreement by and between the Company and
Philips Consumer Electronics Company, Division of
Philips Electronics North America Corporation dated
July 25, 1994 (confidential portions on file with the Commission) (5)
10.11 Cross License and Supply Agreement, by and between the Company and
Philips Electronics North America Corporation dated June 18, 1994
(confidential portions on file with the Commission) (5)
10.12 Securities Purchase Agreement, by and between the Company
and GMT Microelectronics Corporation, dated January 6, 1995
(confidential portions on file with the Commission) (7)
10.13 Contract by and between the Company and the United States Department of
Commerce dated April 25,1995 (9)
10.14 Cooperative Research and Development Agreement, by and between
the Company and Massachusetts Institute of Technology Lincoln Laboratory
dated June 21, 1995 (confidential portions on file with the Commission) (9)
10.15 Stock Purchase Agreement, by and between the Company and
Telecom Holding dated November 24, 1995 (10)
10.16 Letter Agreement, by and between the Company and
Telecom Holding Co., Ltd. Co., Ltd. dated November 24, 1995 (10)
10.17 Stock Purchase Agreement, by and between the Company and
United Microelectronics Corporation dated November 29, 1995 (9)
10.18 Stock Purchase Agreement, by and between the Company and
Unipac Optoelectronics Corporation dated November 29, 1995 (9)
10.19 Letter Agreement, by and between the Company and United Microelectronics
Corporation dated November 29, 1995
(confidential portions on file with the Commission) (9)
10.20 Amendment Agreement, by and between the Company and
Rockwell International Corporation dated September 29, 1995 (9)
10.21 Securities Purchase Agreement, by and between the Company and
Unitek Semiconductor, Inc. dated January 26, 1996 (11)
10.22 Chattel Leasing Promissory Note, by and between the Company
and BancBoston Leasing dated January 29, 1996 (11)
10.23 Master lease agreement, by and between Company and BancBoston
Leasing dated December 23, 1996 (11)
10.24 Joint Venture Agreement, by and among the Company,
Kowon Technology Co., Ltd., and Korean Investors,
dated as of March 3, 1998 (14)
10.25 Amended and Restated Employment Agreement between the Company and
Dr. John C.C. Fan, dated as of February 20, 1998 (14)
21.1 Subsidiaries of Kopin Corporation
23.1 Consent of Deloitte & Touche LLP, Independent Auditors of the Company
27 Financial Data Schedule
(1) Filed as an exhibit to Registration Statement on Form S-1, File No.
33-45853, and incorporated herein by reference.
(2) Filed as an exhibit to Registration Statement on Form S-1, File No.
33-57450, and incorporated herein by reference.
(3) Filed as an exhibit to Annual Report on Form 10-K for the fiscal year ended
December 31, 1993 and incorporated herein by reference.
26
(4) Filed as an exhibit to Quarterly Report on Form 10-Q for the quarterly
period ended July 2, 1994 and incorporated herein by reference.
(5) Filed as an exhibit to Quarterly Report on Form 10-Q for the quarterly
period ended October 1, 1994 and incorporated herein by reference.
(6) Filed as an exhibit to Annual Report on Form 10-K for the fiscal year ended
December 31, 1994 and incorporated herein by reference
(7) Filed as an exhibit to Quarterly Report on Form 10-Q for the quarterly
period ended April 1, 1995 and incorporated herein by reference.
(8) Filed as an exhibit to Quarterly Report on Form 10-Q for the quarterly
period ended July 1, 1995 and incorporated herein by reference.
(9) Filed as an exhibit to Annual Report on Form 10-K for the fiscal year ended
December 31, 1995 and incorporated herein by reference.
(10) Filed as an exhibit to Schedule 13D for Telecom Holding, Co., Ltd. filed on
October 10, 1995 and incorporated herein by reference.
(11) Filed as an exhibit to Quarterly Report on Form 10-Q for the quarterly
period ended March 30, 1996 and incorporated herein by reference.
(12) Filed as an exhibit to Quarterly Report on Form 10-Q for the quarterly
period ended June 29, 1996 and incorporated herein by reference.
(13) Filed as an exhibit to Annual Report on Form 10-K for the fiscal year ended
December 31, 1996 and incorporated herein by reference.
(14) Filed as an exhibit to Annual Report on Form 10-Q for the quarterly period
ended June 27, 1998 and incorporated herein by reference.
(b) Reports on Form 8-K:
None
27
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
March 27, 2000 KOPIN CORPORATION
By: /s/ John C. C. Fan
-------------------------------------
John C. C. Fan
Chairman of the Board, Chief Executive
Officer, President and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant in
the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ John C. C. Fan Chairman of the Board, March 27, 2000
- ------------------------------- Chief Executive Officer,
John C. C. Fan President and Director
(principal executive officer)
/s/ David E. Brook Director March 27, 2000
- -------------------------------
David E. Brook
/s/ Morton Collins Director March 27, 2000
- -------------------------------
Morton Collins
/s/ Andrew H. Chapman Director March 27, 2000
- -------------------------------
Andrew H. Chapman
/s/ Chi Chia Hsieh Director March 27, 2000
- -------------------------------
Chi Chia Hsieh
/s/ Michael A. Wall Director March 27, 2000
- -------------------------------
Michael A. Wall
/s/ Richard A. Sneider Treasurer and Chief March 27, 2000
- ------------------------------- Financial Officer
Richard A. Sneider (principal financial and
accounting office
KOPIN CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 1999, 1998, 1997
Balance at Additions Deductions Balance at
Beginning Charged to from End
Description of Year Income Reserve of Year
------------------------------------------------------------------------
Reserve deducted from assets--
allowance for doubtful accounts:
1997 $137,400 72,000 (56,700) 152,700
1998 152,700 -- (1,900) 150,800
1999 150,800 300,000 -- 450,800
Index to Exhibits
Sequential
page
Exhibits number
- -------- ------
3.1 Amended and Restated Certificate of Incorporation (2)
3.2 Amendment to Certificate of Incorporation (13)
3.3 Amended and Restated By-laws (2)
4 Specimen Certificate of Common Stock (1)
10.1 Form of Employee Agreement with Respect to Inventions and Proprietary Information (1)
10.2 1985 Incentive Stock Option Plan, as amended (1)
10.3 1992 Stock Option Plan Amendment (14)
10.4 Form of Key Employee Stock Purchase Agreement (1)
10.5 License Agreement by and between the Company and Massachusetts Institute of
Technology dated April 22, 1985, as amended (1)
10.6 Technology and Business Development Agreement, dated as of November 6, 1992
by and between the Company and Rockwell International Corporation (confidential
portions on file with the Commission) (2)
10.7 Facility Lease, by and between the Company and Massachusetts Technology Park
Corporation dated October 15, 1993 (3)
10.8 Master Sublease - Purchase Agreement, by and between the Company and
Massachusetts Industrial Finance Agency dated June 23, 1994 (4)
10.9 Contract by and between the Company and the Advanced Research Projects
Agency dated May 25, 1994(confidential portions on file with the Commission) (4)
10.10 Joint Agreement by and between the Company and Philips Consumer Electronics
Company, Division of Philips Electronics North America Corporation dated
July 25, 1994 (confidential portions on file with the Commission) (5)
10.11 Cross License and Supply Agreement, by and between the Company and
Philips Electronics North America Corporation dated June 18, 1994(confidential
portions on file with the Commission) (5)
10.12 Securities Purchase Agreement, by and between the Company
and GMT Microelectronics Corporation, dated January 6, 1995
(confidential portions on file with the Commission) (7)
10.13 Contract by and between the Company and the United States Department of
Commerce dated April 25,1995 (9)
10.14 Cooperative Research and Development Agreement, by and between the Company
and Massachusetts Institute of Technology Lincoln Laboratory dated
June 21, 1995 (confidential portions on file with the Commission) (9)
10.15 Stock Purchase Agreement, by and between the Company and Telecom Holding
dated November 24, 1995 (10)
10.16 Letter Agreement, by and between the Company and Telecom Holding Co., Ltd.
Co., Ltd. dated November 24, 1995 (10)
10.17 Stock Purchase Agreement, by and between the Company and United Microelectronics
Corporation dated November 29, 1995 (9)
10.18 Stock Purchase Agreement, by and between the Company and Unipac Optoelectronics
Corporation dated November 29, 1995 (9)
10.19 Letter Agreement, by and between the Company and United Microelectronics
Corporation dated November 29, 1995(confidential portions on file with the Commission) (9)
10.20 Amendment Agreement, by and between the Company and Rockwell International
Corporation dated September 29, 1995 (9)
10.21 Securities Purchase Agreement, by and between the Company and
Unitek Semiconductor, Inc. dated January 26, 1996 (11)
10.22 Chattel Leasing Promissory Note, by and between the Company
and BancBoston Leasing dated January 29, 1996 (11)
10.23 Master lease agreement, by and between the Company and BancBoston Leasing
dated December 23, 1996 (11)
10.24 Joint Venture Agreement, by and among the Company, Kowon Technology Co., Ltd.,
and Korean Investors, dated as of March 3, 1998 (14)
10.25 Amended and Restated Employment Agreement between the Company and Dr. John C.C.
Fan, dated as of February 20, 1998 (14)
21.1 Subsidiaries of Kopin Corporation
23.1 Consent of Deloitte & Touche LLP, Independent Auditors of the Company
27 Financial Data Schedule
(1) Filed as an exhibit to Registration Statement on Form S-1, File No.
33-45853, and incorporated herein by reference.
(2) Filed as an exhibit to Registration Statement on Form S-1, File No.
33-57450, and incorporated herein by reference.
(3) Filed as an exhibit to Annual Report on Form 10-K for the fiscal year ended
December 31, 1993 and incorporated herein by reference.
(4) Filed as an exhibit to Quarterly Report on Form 10-Q for the quarterly
period ended July 2, 1994 and incorporated herein by reference.
(5) Filed as an exhibit to Quarterly Report on Form 10-Q for the quarterly
period ended October 1, 1994 and incorporated herein by reference.
(6) Filed as an exhibit to Annual Report on Form 10-K for the fiscal year ended
December 31, 1994 and incorporated herein by reference
(7) Filed as an exhibit to Quarterly Report on Form 10-Q for the quarterly
period ended April 1, 1995 and incorporated herein by reference.
(8) Filed as an exhibit to Quarterly Report on Form 10-Q for the quarterly
period ended July 1, 1995 and incorporated herein by reference.
(9) Filed as an exhibit to Annual Report on Form 10-K for the fiscal year ended
December 31, 1995 and incorporated herein by reference.
(10) Filed as an exhibit to Schedule 13D for Telecom Holding, Co., Ltd. filed on
October 10, 1995 and incorporated herein by reference.
(11) Filed as an exhibit to Quarterly Report on Form 10-Q for the quarterly
period ended March 30, 1996 and incorporated herein by reference.
(13) Filed as an exhibit to Quarterly Report on Form 10-Q for the quarterly
period ended June 29,
1996 and incorporated herein by reference.
(13) Filed as an exhibit to Annual Report on Form 10-K for the fiscal year ended
December 31, 1996 and incorporated herein by reference.
(14) Filed as an exhibit to Annual Report on Form 10-Q for the quarterly period
ended June 27, 1998 and incorporated herein by reference
KOPIN CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report............................................. F-2
Consolidated Balance Sheets at December 31, 1999 and 1998................ F-3
Consolidated Statements of Operations and Comprehensive Income (Loss) for
the years ended
December 31, 1999, 1998 and 1997........................................ F-4
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1999, 1998 and 1997........................................ F-5
Consolidated Statements of Cash Flows for the years ended December 31,
1999, 1998 and 1997..................................................... F-6
Notes to Consolidated Financial Statements............................... F-7
F-1
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Kopin Corporation
Taunton, Massachusetts
We have audited the accompanying consolidated balance sheets of Kopin
Corporation and subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of operations, comprehensive income (loss),
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Kopin Corporation and
subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999 in conformity with accounting principles generally accepted
in the United States of America.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Boston, Massachusetts
March 17, 2000
F-2
KOPIN CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31,
--------------------------
1999 1998
------------ ------------
ASSETS
Current assets:
Cash and equivalents............................. $ 65,981,848 $ 30,807,335
Marketable securities............................ 33,117,555 6,000,883
Accounts receivable, net of allowance of $450,800
and $150,800
Billed......................................... 10,547,762 2,743,211
Unbilled....................................... 655,220 910,787
Inventory........................................ 6,157,195 3,337,178
Prepaid expenses and other current assets........ 1,651,905 743,069
------------ ------------
Total current assets......................... 118,111,485 44,542,463
Equipment and improvements:
Equipment........................................ 32,849,431 24,953,456
Leasehold improvements........................... 808,884 808,884
Furniture and fixtures........................... 459,097 426,084
Equipment under construction..................... 7,207,812 25,131
------------ ------------
41,325,224 26,213,555
Accumulated depreciation and amortization........ 20,653,963 16,867,698
------------ ------------
20,671,261 9,345,857
------------ ------------
Other assets....................................... 4,352,793 6,173,153
Intangible assets.................................. 1,938,190 1,844,148
------------ ------------
TOTAL ASSETS....................................... $145,073,729 $ 61,905,621
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................. $ 7,564,070 $ 1,728,596
Accrued payroll and expenses..................... 1,923,656 1,455,640
Current portion of long-term obligations......... 2,142,373 1,999,494
------------ ------------
Total current liabilities.................... 11,630,099 5,183,730
------------ ------------
Long-term obligations, less current portion........ 2,567,100 4,209,474
Minority interest.................................. 809,238 665,994
Commitments
Stockholders' equity:
Preferred stock, par value $.01 per share;
authorized, 3,000 shares; none issued and
outstanding..................................... -- --
Common stock, par value $.01 per share;
authorized, 60,000,000 shares; issued,
30,149,362 shares in 1999 and 24,537,122 shares
in 1998......................................... 301,494 245,372
Additional paid-in capital....................... 186,077,638 108,832,093
Deferred compensation............................ (110,035) (165,055)
Accumulated other comprehensive income .......... 509,725 420,812
Deficit.......................................... (56,711,530) (57,486,799)
------------ ------------
Total stockholders' equity................... 130,067,292 51,846,423
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY......... $145,073,729 $ 61,905,621
============ ============
See notes to consolidated financial statements.
F-3
KOPIN CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31,
-------------------------------------
1999 1998 1997
----------- ----------- -----------
Revenues:
Product revenues..................... $36,125,822 $23,225,415 $13,110,044
Research and development revenues.... 2,536,188 3,679,582 3,282,974
----------- ----------- -----------
38,662,010 26,904,997 16,393,018
----------- ----------- -----------
Costs and expenses:
Cost of product revenues............. 26,280,390 15,509,316 8,636,199
Research and development-funded
programs............................ 2,858,233 3,953,875 2,801,671
Research and development-internal.... 4,262,235 5,659,362 7,622,614
Selling, general and administrative.. 5,757,288 4,014,862 4,292,383
Other................................ 366,079 384,349 327,102
Impairment charge.................... -- 1,800,000 --
----------- ----------- -----------
39,524,225 31,321,764 23,679,969
----------- ----------- -----------
Loss from operations................... (862,215) (4,416,767) (7,286,951)
Other income and expense:
Interest and other income............ 2,133,613 2,043,886 1,264,052
Interest expense..................... (405,972) (535,783) (234,870)
----------- ----------- -----------
Income (loss) before minority
interest.............................. 865,426 (2,908,664) (6,257,769)
Minority interest in (income) loss of
subsidiary............................ (90,157) (59,223) --
----------- ----------- -----------
Net income (loss)...................... $ 775,269 $(2,967,887) $(6,257,769)
=========== =========== ===========
Net income (loss) per share:
Basic................................. $ 0.03 $ (0.12) $ (0.28)
=========== =========== ===========
Diluted............................... $ 0.03 $ (0.12) $ (0.28)
=========== =========== ===========
Weighted average number of common
shares outstanding:
Basic................................ 25,881,517 24,136,956 22,020,320
Diluted.............................. 28,160,957 24,136,956 22,020,320
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Years Ended December 31,
-------------------------------------
1999 1998 1997
----------- ----------- -----------
Net income (loss)...................... $ 775,269 $(2,967,887) $(6,257,769)
Foreign currency translation
adjustments........................... 98,592 414,492 --
Unrealized gain (loss) on marketable
securities, net....................... (9,679) 12,321 (50,934)
----------- ----------- -----------
Comprehensive income (loss)............ $ 864,182 $(2,541,074) $(6,308,703)
=========== =========== ===========
See notes to consolidated financial statements.
F-4
KOPIN CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Accumulated
Common Stock Additional Other
-------------------- Paid-in Deferred Comprehensive
Shares Amount Capital Compensation Income (Loss) Deficit Total
---------- -------- ------------ ------------ ------------- ------------ ------------
Balance, January 1,
1997................... 21,862,816 $218,628 $ 88,496,137 $(227,706) $ 44,933 $(48,261,143) $ 40,270,849
Exercise of stock
options............... 381,470 3,814 1,826,769 -- -- -- 1,830,583
Compensation relating
to grant of stock
options............... -- -- 80,106 (80,106) -- -- --
Amortization of
compensation relating
to grant of stock
options............... -- -- -- 75,857 -- -- 75,857
Net unrealized loss on
marketable
securities............ -- -- -- -- (50,934) -- (50,934)
Net loss............... -- -- -- -- -- (6,257,769) (6,257,769)
---------- -------- ------------ --------- -------- ------------ ------------
Balance, December 31,
1997................... 22,244,286 222,442 90,403,012 (231,955) (6,001) (54,518,912) 35,868,586
Issuance of common
stock, net of issuance
costs of $1,829,000... 2,000,000 20,000 17,151,418 -- -- -- 17,171,418
Exercise of stock
options............... 292,836 2,930 1,277,663 -- -- -- 1,280,593
Amortization of
compensation relating
to grant of stock
options............... -- -- -- 66,900 -- -- 66,900
Net unrealized gain on
marketable
securities............ -- -- -- -- 12,321 -- 12,321
Foreign currency
translation
adjustments........... -- -- -- -- 414,492 -- 414,492
Net loss............... -- -- -- -- -- (2,967,887) (2,967,887)
---------- -------- ------------ --------- -------- ------------ ------------
Balance, December 31,
1998................... 24,537,122 245,372 108,832,093 (165,055) 420,812 (57,486,799) 51,846,423
Issuance of common
stock, net of issuance
costs of $4,902,000... 4,600,000 46,000 73,107,802 -- -- -- 73,153,802
Repurchase of common
stock................. (65,360) (654) (499,346) -- -- -- (500,000)
Exercise of stock
options............... 1,077,600 10,776 4,637,089 -- -- -- 4,647,865
Amortization of
compensation relating
to grant of stock
options............... -- -- -- 55,020 -- -- 55,020
Net unrealized loss on
marketable
securities............ -- -- -- -- (9,679) -- (9,679)
Foreign currency
translation
adjustments........... -- -- -- -- 98,592 -- 98,592
Net income............. -- -- -- -- -- 775,269 775,269
---------- -------- ------------ --------- -------- ------------ ------------
Balance, December 31,
1999.................. 30,149,362 $301,494 $186,077,638 $(110,035) $509,725 $(56,711,530) $130,067,292
========== ======== ============ ========= ======== ============ ============
See notes to consolidated financial statements.
F-5
KOPIN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
-------------------------------------
1999 1998 1997
----------- ----------- -----------
Cash flows from operating activities:
Net income (loss)...................... $ 775,269 $(2,967,887) $(6,257,769)
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities:
Depreciation and amortization......... 4,093,176 4,275,202 3,512,272
Amortization of compensation relating
to grant of stock options............ 55,020 66,900 75,857
Impairment charge..................... -- 1,800,000 --
Decrease in unearned revenue.......... -- -- (80,484)
Decrease in deferred rent............. -- (165,166) (216,000)
Minority interest in income of
subsidiary........................... 90,157 59,223 --
Changes in assets and liabilities:
Accounts receivable.................... (7,526,441) 682,103 1,754,988
Inventory.............................. (2,795,274) (594,151) (7,875)
Prepaid expenses and other current
assets................................ (903,245) 63,114 458,914
Intangible assets...................... (445,642) (509,175) (501,677)
Accounts payable and accrued expenses.. 6,291,289 (372,105) (4,233,891)
----------- ----------- -----------
Net cash provided by (used in)
operating activities............... (365,691) 2,338,058 (5,495,665)
----------- ----------- -----------
Cash flows from investing activities:
Marketable securities.................. (27,126,351) (1,367,678) 5,888,997
Other assets........................... 1,820,540 (2,799,751) (410,543)
Capital expenditures................... (15,003,438) (2,945,784) (3,555,266)
----------- ----------- -----------
Net cash provided by (used in)
investing activities............... (40,309,249) (7,113,213) 1,923,188
----------- ----------- -----------
Cash flows from financing activities:
Net proceeds from issuance of common
stock................................. 73,153,802 17,171,418 --
Net proceeds from issuance of
subsidiary stock...................... -- 383,583 --
Repurchase of common stock............. (500,000) -- --
Principal payments on long-term
obligations........................... (1,499,495) (2,292,818) (1,553,829)
Proceeds from long-term obligations.... -- 5,000,000 1,259,832
Proceeds from note payable............. -- -- 450,000
Principal payment on note payable...... -- (450,000) (500,000)
Proceeds from exercise of stock
options............................... 4,647,865 1,280,593 1,830,583
----------- ----------- -----------
Net cash provided by financing
activities......................... 75,802,172 21,092,776 1,486,586
----------- ----------- -----------
Effect of exchange rate changes on
cash................................... 47,281 64,314 --
----------- ----------- -----------
Net increase (decrease) in cash and
equivalents............................ 35,174,513 16,381,935 (2,085,891)
Cash and equivalents:
Beginning of period.................... 30,807,335 14,425,400 16,511,291
----------- ----------- -----------
End of period.......................... $65,981,848 $30,807,335 $14,425,400
=========== =========== ===========
Supplementary cash flow information--
Interest paid in cash.................. $ 426,471 $ 501,691 $ 229,328
See notes to consolidated financial statements.
F-6
KOPIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Significant
estimates included within the financial statements include net realizable value
of subsidiary assets, sales return reserves, warranty reserves, inventory
reserves, allowances for doubtful accounts and the economic life of intangible
assets.
References herein to "1999", "1998" and "1997" are for and as of the fiscal
years ended December 31, 1999, 1998 and 1997.
Industry Segment
Kopin Corporation and its subsidiaries (the "Company") operate in one
industry segment which includes the development, manufacture and sale of flat
panel display devices and products and gallium arsenide transistor wafers and
products for commercial and consumer markets, and the performance of related
research and development under contracts.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company,
its wholly owned subsidiary and Kowon Technology Co., Ltd., a majority owned
(65%) subsidiary located in Korea. All intercompany transactions and balances
have been eliminated.
Stock Split
All shares, income (loss) per share, and related information give
retroactive effect to the 2 for 1 stock split effected in the form of a stock
dividend for shareholders of record as of December 20, 1999, and effected on
December 29, 1999.
Revenue Recognition
Product revenue is recognized when a product is shipped or when a service is
performed. For certain of its products, the Company provides customers with a
twelve-month warranty from the date of sale. Estimated sales return and
warranty reserves are provided at the time of sale based upon historical and
anticipated warranty costs.
Revenue from long-term research and development contracts is recognized on
the percentage-of-completion method of accounting as work is performed, based
upon the ratio that incurred costs or hours bear to estimated total completion
cost or hours. At the time a loss on a contract becomes known, the entire
amount of the estimated ultimate loss is recognized in the financial
statements. Amounts earned on contracts in progress in excess of the billings
of such contracts are classified as unbilled receivables and amounts received
in excess of amounts earned are classified as unearned revenue. Unbilled
receivables primarily result from the time necessary to accumulate costs,
including costs incurred by subcontractors, for invoice preparation after the
work has been performed by the Company. Unbilled receivables are billed based
on dates stipulated in the related agreement or in periodic installments based
upon the Company's monthly invoicing cycle.
Research and Development Costs
Research and development expenses include expenses incurred in support of
internal development programs and programs funded by agencies of the federal
government, including development programs for
F-7
KOPIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
display devices and products, device wafers, circuit design costs, staffing,
purchases of materials and laboratory supplies, and fabrication and packaging
of the Company's display products.
Cash and Equivalents and Marketable Securities
The Company considers all highly liquid, short-term debt instruments with a
maturity of three months or less at the date of purchase to be cash
equivalents.
Marketable securities consist primarily of commercial paper, medium-term
notes, and United States government and agency securities. The Company
classifies marketable securities included in Current Assets as "available for
sale" and accordingly carries them at market value. Marketable securities
included in Other Assets are classified as "held to maturity" and carried at
cost as the Company has the ability and intent to hold them until maturity.
From time to time, the Company sells marketable securities for working
capital, capital expenditure and investment purposes. Substantially all the
marketable securities mature within one year. Gross unrealized holding gains
or losses are recorded in other comprehensive income.
Investments in marketable securities are as follows:
Amortized Cost Unrealized Gains
---------------------- ----------------------
December 31, December 31,
---------------------- ----------------------
1999 1998 1999 1998
----------- ---------- ----------- ----------
Available for sale securities:
U.S. government and agency
securities.................... $14,658,199 $5,001,073 $ $ 5,710
Corporate debt securities...... 18,462,715 993,490 3,195 610
----------- ---------- ----------- ----------
Total available for sale
securities.................. $33,120,914 $5,994,563 $ 3,195 $ 6,320
=========== ========== =========== ==========
Unrealized Losses Fair Value
---------------------- ----------------------
December 31, December 31,
---------------------- ----------------------
1999 1998 1999 1998
----------- ---------- ----------- ----------
Available for sale securities:
U.S. government and agency
securities.................... $ 6,554 $ -- $14,651,645 $5,006,783
Corporate debt securities...... -- -- 18,465,910 994,100
----------- ---------- ----------- ----------
Total available for sale
securities.................. $ 6,554 $ -- $33,117,555 $6,000,883
=========== ========== =========== ==========
The gross gains and losses realized related to sales of marketable
securities were not material. Kopin uses the specific identification method as
a basis for determining cost and calculating realized gains or losses.
Inventory
Inventory is stated at the lower of cost (first-in, first-out method) or
market, and consists of the following:
1999 1998
---------- ----------
Raw materials............................................. $4,787,158 $2,672,230
Work in process........................................... 1,164,027 333,996
Finished goods............................................ 206,010 330,952
---------- ----------
$6,157,195 $3,337,178
========== ==========
F-8
KOPIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Equipment and Improvements
Equipment and improvements are recorded at cost. Depreciation and
amortization are provided using the straight-line method over the estimated
lives of the assets, generally 3 to 10 years, or, in the case of leasehold
improvements and leased equipment, over the term of the lease.
Intangible Assets
Amortization of intangible assets is on a straight-line basis over the
estimated useful lives.
Foreign Currency Translation
Assets and liabilities of non-U.S. operations are translated into U.S.
dollars at year end exchange rates, and revenues and expenses at rates
prevailing during the year. Resulting translation adjustments are accumulated
as part of other comprehensive income and aggregate $513,084 and $414,492 of
unrealized gain at December 31, 1999 and 1998, respectively. Transaction gains
or losses are recognized in income or loss currently.
Net Income (Loss) Per Share
Basic net income (loss) per share is computed using the weighted average
number of shares of common stock outstanding during the period. Diluted net
income (loss) per share is computed using the weighted average number of common
shares and potential common shares outstanding during the period using the
treasury method. Potential common shares have not been included in any periods
in which the effect would be anti-dilutive. Had the impact of stock options,
using the treasury stock method, been included in the computation, weighted
average shares would have increased by approximately 1,934,000 and 1,356,000,
for the years ended December 31, 1998 and 1997, respectively.
Concentration of Credit Risk
The Company invests its excess cash in high quality government and corporate
financial instruments which bear minimal risk. The Company sells its products
to customers worldwide. The Company maintains a reserve for potential credit
losses and such losses have been minimal.
Fair Market Value of Financial Instruments
Financial instruments consist of current assets (except inventories),
current liabilities and long-term obligations. Current assets and current
liabilities are carried at cost which approximates fair market value. Long-term
obligations are stated at cost which approximates fair market value.
Impairment Charge
The Company periodically assesses the recoverability of its long-lived
assets by comparing the undiscounted cash flows expected to be generated by
those assets to their carrying value. If the sum of the undiscounted cash flows
is less than the carrying value of the assets, an impairment charge is
recognized.
In December 1998, due to the modification of certain manufacturing
processes, the Company recorded an impairment charge of $1,800,000 which
consisted of the write-down of certain patents and equipment. The $1,800,000
represented the amount that the carrying value of the assets exceeded their
fair market value. The fair market value of the assets was determined based on
valuation techniques utilizing the present value of estimated expected future
cash flows.
Stock-Based Compensation
Compensation cost associated with the grant of options and other stock
awards to employees is determined using the intrinsic value method.
Compensation cost associated with the grant of options and other stock awards
to non-employees is determined using the fair value method.
F-9
KOPIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. Other Assets
Other assets consist primarily of equity investments in various companies
and notes receivable. Equity investments are non-marketable and are carried at
cost and aggregate $3,384,000 and $4,695,000 at December 31, 1999 and 1998,
respectively. The Company periodically assesses possible impairment of these
investments. Notes receivable bear interest at rates ranging from 7.75% to
11.75% and are due in varying installments through August, 2003. The Company's
interest in any of these companies is less than 20% of any investees voting
interest.
3. Intangible Assets
Intangible assets consist of the following:
Estimated Useful
Life (years) 1999 1998
---------------- ----------- -----------
Patents and application fees......... 10 $ 2,536,999 $ 2,096,406
Licenses............................. 5-12 716,274 987,714
----------- -----------
3,253,273 3,084,120
Less accumulated amortization........ (1,315,083) (1,239,972)
----------- -----------
$ 1,938,190 $ 1,844,148
=========== ===========
4. Income Taxes
As of December 31, 1999, the Company has available for tax reporting
purposes, federal net operating loss and general business tax credit
carryforwards of approximately $44,680,000 and $595,000, respectively, expiring
through 2013.
Deferred taxes are provided to recognize the effect of temporary differences
between tax and financial reporting. Deferred income tax assets and liabilities
consist of the following:
1999 1998
------------ ------------
Deferred tax assets:
Net operating loss carryforward................ $ 18,319,000 $ 18,450,000
Research and development expenses.............. 1,867,000 2,200,000
Amortization of intangible assets.............. 406,000 315,000
Other.......................................... 336,000 300,000
------------ ------------
20,928,000 21,265,000
------------ ------------
Deferred tax liabilities:
Patent costs................................... 1,040,000 850,000
Depreciation................................... 1,471,000 1,200,000
Other.......................................... 306,000 --
------------ ------------
2,817,000 2,050,000
------------ ------------
Net deferred tax assets........................ 18,111,000 19,215,000
Valuation allowance............................ (18,111,000) (19,215,000)
------------ ------------
$ -- $ --
============ ============
The provision for income taxes consists of the following for the years ended
December 31:
1999 1998 1997
--------- ---------- -----------
Current
Federal $ 186,000 $ (297,000) $(1,502,999)
State 57,500 (45,000) (594,000)
Foreign 16,250 18,800 --
Deferred
Federal (111,750) 165,000 (729,000)
State (17,000) 51,000 (184,000)
Generation of (Use of) loss
carryforwards (131,000) 107,200 3,009,000
--------- ---------- -----------
Provision for income taxes $ -- $ -- $ --
========= ========== ===========
F-10
KOPIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. Long-Term Obligations
Long-term obligations consist of the following:
1999 1998
----------- -----------
Secured term note.................................. $ 3,750,000 $ 4,250,000
Capital lease obligations--equipment............... 959,474 1,593,200
5.625% equipment promissory note................... -- 339,272
8.19% equipment promissory note.................... -- 26,496
----------- -----------
4,709,474 6,208,968
Less current portion............................... (2,142,373) (1,999,494)
----------- -----------
$ 2,567,100 $ 4,209,474
=========== ===========
In March 1998, the Company entered into a $5,000,000 secured term note which
requires the Company to make quarterly principal payments of $250,000 plus
interest at a floating rate based upon LIBOR, 8.0% at December 31, 1999. This
term note is secured by the Company's accounts receivable.
The equipment capital lease obligations require monthly payments of
approximately $63,500 through June 2000, decreasing to approximately $32,500
thereafter until June 2001. Early termination and equipment purchase options
may be exercised in December 2000, respectively, for the outstanding capital
lease obligations. The capital lease obligations are collateralized by
equipment with a carrying value of $1,589,869 at December 31, 1999.
The 5.625% equipment promissory note required monthly payments of principal
and interest totaling $57,477 through June 1999. The loan obligation was
specifically collateralized by the equipment financed under the agreement and
certain marketable securities.
The aggregate maturities of long-term obligations, including capital lease
obligations, as of December 31, 1999 are as follows:
Year ending December 31, Amount
------------------------ ----------
2000.......................................................... $2,192,444
2001.......................................................... 1,317,100
2002.......................................................... 1,250,000
----------
4,759,544
Less:
Amounts representing interest.................................. (50,071)
Current portion of long-term obligations....................... (2,142,373)
----------
$2,567,100
==========
6. Stockholders' Equity
In October 1999, the Company completed a public offering of 4,600,000 shares
of common stock at a price of $16.97 per share. Net proceeds to the Company
totaled approximately $73,150,000. In February 1998, the Company completed a
public offering of 4,000,000 shares of common stock at a price of $9.50 per
share. Of the total shares sold, 2,000,000 shares were sold by the Company and
the other 2,000,000 shares were sold by a shareholder. Net proceeds to the
Company totaled approximately $17,171,000.
7. Stock Options
The Company's 1992 Stock Option Plan permits the granting of both
nonqualified stock options and incentive stock options. The plan covers
6,500,000 shares of common stock (including shares issued upon
F-11
KOPIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
exercise of options granted pursuant the 1985 Plan). The option price of
incentive stock options shall not be less than 100% of the fair market value of
the stock at the date of grant, or in the case of certain incentive stock
options, at 110% of the fair market value at the time of the grant. Options
must be exercised within a ten-year period or sooner if so specified within the
option agreement. Options granted generally vest over four years.
In 1994, the Company adopted the Director Stock Option Plan, which provides
for the automatic granting, pursuant to a formula, of nonqualified stock
options to the Company's non-employee directors. A maximum of 350,000 shares
are issuable under the plan.
For certain options granted, the Company recognizes as compensation expense
the excess of the fair market value of the common shares issuable upon exercise
of such options over the aggregate exercise price of such options. This
compensation expense is amortized ratably over the vesting period of each
option. For the year ended December 31, 1999, such compensation expense of
$55,020 was recorded and will aggregate to $110,035 over the remaining terms of
the options. At December 31, 1999 the Company has available 93,916 shares of
common stock for future grant under its stock option plans. A summary of option
activity is as follows:
1999 1998 1997
-------------------- ------------------- -------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------- -------- --------- -------- --------- --------
Balance, beginning of
period................. 4,488,676 $ 5.98 4,423,294 $5.83 3,615,932 $5.24
Options granted....... 1,122,566 17.59 647,450 6.58 1,367,300 7.16
Options cancelled..... (213,398) 5.74 (289,232) 6.52 (178,468) 5.54
Options exercised..... (1,077,600) 5.41 (292,836) 5.03 (381,470) 4.80
---------- --------- ---------
Balance, end of period.. 4,320,244 9.09 4,488,676 $5.98 4,423,294 $5.83
========== ========= =========
Exercisable, end of
period................. 2,696,371 3,005,866 1,934,000
========== ========= =========
Of the 4,320,244 options outstanding at December 31, 1999, 950,014 have
exercise prices between $.50 and $5.00, with a weighted average exercise price
of $4.42 and a weighted average remaining contractual life of 5.9 years. Of
these options, 842,144 are exercisable at a weighted average price of $4.38. An
additional 1,958,908 options outstanding at December 31, 1999 have exercise
prices between $5.06 and $7.50, with a weighted average exercise price of $6.46
and a weighted average remaining contractual life of 7.0 years. Of these
options, 1,465,821 are exercisable at a weighted average price of $6.49. At
December 31, 1999 there are also 566,006 options which have exercise prices
between $7.63 and $9.94, with a weighted average exercise price of $9.10 and a
weighted average remaining contractual life of 8.1 years. Of these options,
241,656 are exercisable at a weighted average price of $7.72. The remaining
845,316 options have exercise prices between $10.19 and $39.63, with a weighted
average exercise price of $19.39 and a weighted average remaining contractual
life of 9.6 years. Of these options, 146,750 are exercisable at a weighted
average exercise price of $17.79. The weighted average exercise price of all
options exercisable at December 31, 1999 is $7.43.
The Company has two fixed option plans which reserve shares of common stock
for issuance to executives, key employees and directors. Had compensation cost
for the Company's two stock option plans been determined based on the fair
value at the grant date for awards in 1999, 1998 and 1997 the Company's net
loss and net loss per share would have been $2,821,000 or $.10 per share in
1999, $4,857,414 or $0.20 per share in 1998 and $7,763,328 or $0.35 per share
in 1997.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following assumptions used for
grants in 1999, 1998 and 1997: no expected dividend
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KOPIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
yield; expected volatility of 62.21% in 1999, 61.9% in 1998 and 61.3% in 1997;
risk-free interest rate of 6.5% in 1999, 4.69% in 1998 and 5.72% in 1997; and
expected lives of four years. The weighted-average fair value of options on
grant date was $9.46 in 1999, $3.38 in 1998 and $3.72 in 1997.
8. Employee Benefit Plan
The Company has an employee benefit plan pursuant to Section 401(k) of the
Internal Revenue Code. The plan allows employees to defer up to 15% of their
annual compensation to a current maximum of $10,000. The Company will match 50%
of all deferred compensation up to a maximum of 3% of each employee's annual
compensation. The amount charged to operations in connection with this plan was
approximately [$129,000] in 1999, $108,000 in 1998, and $91,000 in 1997.
9. Major Customers and Geographic Information
Approximately 49%, 59% and 63% of the Company's revenue resulted from sales
to a single customer during the years ended December 31, 1999, 1998, and 1997,
respectively. Approximately 13% of the Company's revenues resulted from sales
to a second customer in 1999. In addition, during the years ended December 31,
1999, 1998, and 1997, approximately 7%, 14% and 20%, respectively, of the
Company's revenues resulted from multiple contracts with various agencies of
the United States government. These contracts are subject to termination at the
election of the relevant agency.
Sales to foreign customers during the years ended December 31, 1999, 1998,
and 1997 were approximately 36%, 29% and 2%, respectively, of the Company's
revenues. Sales to customers in Japan for 1999 and 1998 were approximately 18%
and 4%, respectively.
10. Commitments
Leases
The Company leases certain machinery and equipment, and its facilities
located in Taunton and Westborough, Massachusetts, and Los Gatos, California,
under noncancelable operating leases. The Taunton lease expires in 2002. The
Westborough lease expires in October 2001, with renewal options for up to three
additional years at the Company's election. The Los Gatos lease covers a five-
year period terminating in 2002. Substantially all real estate taxes, insurance
and maintenance expenses under these leases are obligations of the Company. The
following is a schedule of minimum rental commitments under noncancelable
operating leases:
Amount
----------
Years ended December 31:
2000............................................................. $1,300,033
2001............................................................. 1,145,904
2002............................................................. 245,567
2003............................................................. 8,339
----------
Total minimum lease payments..................................... $2,669,843
==========
Costs incurred under operating leases are recorded as rent expense and
aggregated approximately $1,321,000 in 1999, $1,090,000 in 1998, and $979,000
in 1997.
Other Agreements
The Company has entered into various license agreements which require the
Company to pay royalties based upon a set percentage of product sales, subject,
in some cases, to certain minimum amounts. Total royalty expense approximated
$26,040 in 1999, $25,000 in 1998 and $24,000 in 1997.
F-13
KOPIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Litigation
The Company is engaged in legal proceedings arising in the ordinary course
of business. The Company believes that the ultimate outcome of these
proceedings will not have a material adverse impact on the Company's
consolidated financial position, results of operations or cash flows.
11. Product Revenues
Product Revenues consisted of approximately the following:
1999 1998 1997
----------- ----------- -----------
Gallium Arsenide Products................... $31,491,300 $20,292,900 $11,950,400
Display Products............................ 4,634,500 2,932,500 1,150,300
Other....................................... -- 9,300
----------- ----------- -----------
Total Product Sales......................... $36,125,800 $23,225,400 $13,110,000
=========== =========== ===========
12. Recent Accounting Pronouncements
The Financial Accounting Standards Board ("FASB") has issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities", which is
effective for fiscal years commencing after June 15, 2000. SFAS No. 133
requires fair value accounting for all stand-alone derivatives and many
derivatives embedded in other financial instruments and contracts. The impact
of SFAS No. 133 on the Company has not yet been determined.
F-14