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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR l5(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 29, 2002
Commission file number 0-19882
KOPIN CORPORATION
-----------------
(Exact name of registrant as specified in its charter)
Delaware 04-2833935
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(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
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or l5(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 such filing
requirements for the past 90 days. Yes [X] No [_]
Applicable only to corporate issuers:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding as of July 31, 2002
----- -------------------------------
Common Stock, par value $ .01 69,377,981
KOPIN CORPORATION
INDEX
Page No.
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RISK FACTORS 3
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets at June 29, 2002 and 8
December 31, 2001
Consolidated Statements of Operations for the three and 9
six months ended June 29, 2002 and June 30, 2001
Consolidated Statements of Comprehensive Income (Loss) 10
for the three and six months ended June 29, 2002 and
June 30, 2001
Consolidated Statements of Stockholders' Equity for the 10
six months ended June 29, 2002 and June 30, 2001
Consolidated Statements of Cash Flows for the 11
six months ended June 29, 2002 and June 30, 2001
Notes to Unaudited Consolidated Financial Statements 12
Item 2. Management's Discussion and Analysis of 14
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures 16
About Market Risk
PART II - OTHER INFORMATION
Item 4. Submission of matters to a vote of security holders 16
Item 6. Exhibits 16
SIGNATURES 17
RISK FACTORS
This Form 10-Q 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 Kopin. Words such as "expects", "anticipates",
"intends", "plans", "believes", "could", "seeks", "estimates", and 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. Since inception, we have incurred significant net operating losses. As
of June 29, 2002 we had an accumulated deficit of $90.5 million. We cannot
assure you that we will achieve 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.
Historically, a few customers account for a substantial portion of our revenues.
In 2002, Conexant Systems merged their wireless division with Alpha Industries
to create Skyworks Solutions, Inc. On a proforma basis, assuming the merger
occurred on January 1, 1999, sales of our HBT transistor wafers to Skyworks
Solutions would have accounted for approximately 27%, 46%, and 49% of our total
revenues for the years ended December 31, 2001, 2000, and 1999, respectively.
Sales to Mitsubishi Electric Company, Ltd. were 11% and 13% of our total
revenues for the years ended December 31, 2000 and 1999, respectively. For the
years ended December 31, 2001, 2000 and 1999, revenues from multiple contracts
with various U.S. governmental agencies accounted for approximately 3%, 2%, and
7%, respectively, of our total revenues. We anticipate that sales of our HBT
transistor wafers to Skyworks Solutions will continue to represent a significant
portion of our revenues for the near future. A reduction or delay in orders from
Skyworks Solutions 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.
Our CyberDisplay product line currently has significant fixed costs and our
ability to achieve profitability in that product line depends upon achieving
significant sales volumes and higher gross profit margins. We have limited
experience manufacturing display products and have only recently produced our
CyberDisplay products at volumes necessary to achieve profitability. If we are
unable to maintain our CyberDisplay production levels and reduce manufacturing
costs, we may lose customer orders and our display business will return to
unprofitability.
Our CyberDisplay products may not be widely accepted by the market. Our
success will in large part depend on the widespread adoption of the viewing
format of our CyberDisplay products. 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
and fiber optic communications markets. Sales of products for wireless and fiber
optic communications applications constitute a significant portion of our
current and projected product revenues and cash flows. We are dependent on
customer orders for these products for wireless and fiber optic communications
applications, which in turn depend upon the current and anticipated market
demand for wireless and fiber optic communications in general. For the year
ended December 31, 2001, product revenues from the sale of our III-V products
declined compared to the prior year as a result of worldwide inventory
accumulation in the supply chain of wireless and fiber optic communications
products and related components. The deferral or cancellation of customer orders
due to excessive inventory or lack of demand will adversely impact our results
of operations.
3
In addition, the implementation of higher bandwidth infrastructure will be
needed to drive the 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 future success
will depend in large part on the widespread adoption of this infrastructure and
the cost-effectiveness of these services to the consumer.
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, our customers may cease purchasing our
products at any time, which makes forecasting our revenues difficult. In
addition, due to the absence of substantial non-cancelable 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 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 adversely affect the price of our common stock. Our
quarterly and annual revenues and operating results may fluctuate significantly
for several reasons including:
o The timing and successful introduction of additional manufacturing
capacity;
o The timing of the initial selection of our III-V and CyberDisplay
products as a component in our customers' new products;
o Availability of interface electronics for our CyberDisplay products
supplied by Motorola and other vendors.
o Competitive pressures on selling prices of our 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.
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 new product development.
As a result of these and other factors, 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. 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 production of our III-V products 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 III-V products 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. 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 III-V products could be subject to especially wide
variations in manufacturing yields and efficiency. We may 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.
Our ability to manufacture and distribute our CyberDisplay products would
be severely limited if the third party that we rely on to manufacture integrated
circuits for our CyberDisplay products fails to provide those services. We
depend on United Microelectronics Corporation, or UMC, for the fabrication of
integrated circuits for our CyberDisplay products. We have no long-term
contracts with UMC. If UMC were to terminate its arrangement with us or become
unable to
4
provide the required capacity and quality on a timely basis, we would be able to
manufacture and ship our CyberDisplay products only in limited quantities until
replacement foundry 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 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, as well as several other third parties with which we do business, is
located in Taiwan. Due to the earthquake that occurred in Taiwan in 1999 and the
typhoon that occurred in Taiwan in September 2001, many Taiwanese companies,
including UMC, experienced related business interruptions. UMC has resumed
normal operations; however, our business could suffer significantly if UMC's
operations were disrupted again for an extended period of time.
We depend on third parties to provide integrated circuit chip sets and
other critical raw materials for use with our CyberDisplay products. We do not
manufacture the integrated circuit chip sets necessary for use with our
CyberDisplay products. Instead, we rely on third party independent contractors
for these integrated circuit chip sets and other critical raw materials.
Motorola currently produces all integrated circuit chip sets used with our
CyberDisplay products in camcorders. If Motorola or any other third party were
unable or unwilling to supply these integrated circuit chip sets and other
critical raw materials, we would be unable to sell our CyberDisplay products
until a replacement supplier could be found. We cannot assure you that a
replacement supplier could be found on reasonable terms or in a timely manner.
In the three month period ended September 30, 2000, two of our vendors could not
supply the quantity or quality of critical raw materials we needed. As a result,
we were unable to meet customer demand and our manufacturing yield and gross
margins were adversely affected. 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 both internally and using third party manufacturers. We are
establishing a second internal facility to manufacture our III-V products. We
also are increasing our CyberDisplay product manufacturing capabilities at our
Korean subsidiary, Kowon Technology ("Kowon"). In particular, we expect to
increasingly rely upon Kowon for back-end packaging of our CyberDisplay
products. If we are unable to significantly increase our manufacturing capacity
at Kowon, we may be able to manufacture and ship our CyberDisplay products only
in limited quantities until replacement foundry services could be obtained.
We are also considering the establishment of additional internal and third
party manufacturing capabilities to produce both our III-V and CyberDisplay
products. To date, we have operated only one facility for our III-V 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 transfer of our manufacturing techniques to additional sites,
particularly Kowon;
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.
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 and we may not
be able to compete successfully. 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
5
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 and substantially greater resources than we do. We
may not be able to sell our products to these customers and they may begin to
commercialize their internal capabilities and become our competitors. 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 protect our
intellectual property and proprietary rights. 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. These measures may not adequately protect our intellectual and
proprietary rights. Existing trade secret, trademark and copyright laws afford
only limited protection and our patents could be invalidated or circumvented.
Moreover, the laws of certain foreign countries in which our products are or may
be manufactured or sold may not fully protect our intellectual property rights.
Misappropriation of our technology and the costs of defending our intellectual
property rights from misappropriation could substantially impair our business.
If we are unable to protect our intellectual property and proprietary rights,
our business may not be successful and the value of your investment in Kopin may
decline.
Our products could infringe on the intellectual property rights of others.
Our products could be found to infringe on the intellectual property rights of
others. Other companies may hold or obtain patents or inventions or other
proprietary rights in technology necessary for our business. If we are forced to
defend against infringement claims, we may face costly litigation, diversion of
technical and management personnel, and product shipment delays, even if the
allegations of infringement are unwarranted. If there is a successful claim of
infringement against us and we are unable to develop non-infringing technology
or license the infringed or similar technology on a timely basis, or if we are
required to cease using one or more of our business or product names due to a
successful trademark infringement claim against us, it could adversely affect
our business.
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. Due to lower III-V product revenues resulting from the
current slowdown in the market for wireless and fiber optic communications
products, we have taken certain cost reduction measures, including reducing our
workforce, reducing senior management pay and delaying salary increases. If the
wireless and fiber optic communications markets experience an upturn, we may
need to increase our workforce. Due to the competitive nature of the labor
markets in which we operate, we may be unsuccessful in attracting and retaining
these personnel. Our inability to attract and retain key personnel could
adversely affect our ability to develop and manufacture our products.
We may be unable to grow at our historical growth rates or at all, and if
we grow we may be unable to manage our growth effectively. In 1999 and 2000, we
experienced significant growth in sales of our III-V and CyberDisplay products.
Due to the current slowdown in the wireless and fiber optic communications
markets and other general economic conditions, our
6
sales declined in 2001. We cannot assure you that sales will not continue to
decrease. In addition, 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 grow,
or, if we do grow, that we will be able to achieve 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 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 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 cash
dividends in the past, nor do we expect to pay cash 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 our
common stock has been subject to wide fluctuations in response to
quarter-to-quarter variations in results of operations, announcements of
technological innovations or new products by us or our 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 our common stock.
7
PART I. FINANCIAL INFORMATION
KOPIN CORPORATION
CONSOLIDATED BALANCE SHEETS
(unaudited)
June 29, 2002 December 31, 2001
------------- -----------------
Assets
Current assets:
Cash and equivalents $ 66,440,337 $ 74,425,853
Marketable securities, at fair value 45,806,591 30,009,300
Accounts receivable, net of allowance of $1,300,000 and $1,350,000
Billed 6,050,521 7,210,570
Unbilled - 33,975
Inventory 6,537,028 8,713,740
Prepaid taxes 720,675 419,671
Prepaid expenses and other current assets 1,369,074 3,349,729
------------ ------------
Total current assets 126,924,226 124,162,838
Property, plant and equipment, net 38,027,262 40,813,240
Other assets 14,175,106 24,943,792
Goodwill, net - 12,582,383
Intangible assets, net 991,866 1,146,716
------------ ------------
Total assets $180,118,460 $203,648,969
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 11,288,665 $ 12,040,426
Accrued payroll and expenses 1,562,898 861,733
Other accrued liabilities 4,095,502 4,829,868
------------ ------------
Total current liabilities 16,947,065 17,732,027
Minority interest 2,329,590 1,585,980
Commitments and contingencies
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, 120,000,000 shares;
issued: 69,374,540 shares in 2002 and 69,045,532 shares in 2001 693,745 690,455
Additional paid-in capital 260,293,364 259,141,718
Accumulated other comprehensive loss (9,624,804) (2,369,677)
Deficit (90,520,500) (73,131,534)
------------ ------------
Total stockholders' equity 160,841,805 184,330,962
------------ ------------
Total liabilities and stockholders' equity $180,118,460 $203,648,969
============ ============
See notes to consolidated financial statements.
8
KOPIN CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended Six Months Ended
------------------ ----------------
June 29, 2002 June 30, 2001 June 29, 2002 June 30, 2001
------------- ------------- -------------- --------------
Revenues:
Product revenues $ 20,114,618 $ 9,076,500 $ 37,470,506 $ 23,487,232
Research and development revenues 720,306 161,525 947,362 724,024
-------------- ------------- -------------- --------------
20,834,924 9,238,025 38,417,868 24,211,256
Expenses:
Cost of product revenues 15,405,542 15,281,644 30,051,134 31,651,047
Research and development 4,103,164 4,241,640 7,411,909 7,364,873
Selling, general and administrative 2,682,197 5,653,851 5,704,399 8,748,779
Other 253,700 45,001 519,126 162,258
Impairment charge - 5,341,784 - 5,341,784
-------------- ------------- -------------- --------------
22,444,603 30,563,920 43,686,568 53,268,741
-------------- ------------- -------------- --------------
Loss from operations (1,609,679) (21,325,895) (5,268,700) (29,057,485)
Other income and expense:
Interest and other income 736,369 21,833,268 1,445,194 22,946,601
Interest and other expense (480,228) (88,463) (494,460) (180,299)
-------------- ------------- -------------- --------------
Income (loss) before minority interest in (1,353,539) 418,910 (4,317,966) (6,291,183)
income of subsidiary
Minority interest in income of subsidiary (268,468) (67,243) (488,617) (126,293)
-------------- ------------- -------------- --------------
Income (loss) before cumulative effect of (1,622,007) 351,667 (4,806,583) (6,417,476)
accounting change
Cumulative effect of accounting change - - (12,582,383) -
-------------- ------------- -------------- --------------
Net income (loss) $ (1,622,007) $ 351,667 $ (17,388,966) $ (6,417,476)
============== ============= ============== ==============
Income (loss) before cumulative effect of
accounting change per share:
Basic $ (.02) $ .01 $ (.07) $ (.10)
============== ============= ============== ==============
Diluted $ (.02) $ .01 $ (.07) $ (.10)
============== ============= ============== ==============
Cumulative effect of accounting change per
share:
Basic $ - $ - $ (.18) $ -
============== ============= ============== ==============
Diluted $ - $ - $ (.18) $ -
============== ============= ============== ==============
Net income (loss) per share:
Basic $ (.02) $ .01 $ (.25) $ (.10)
============== ============= ============== ==============
Diluted $ (.02) $ .01 $ (.25) $ (.10)
============== ============= ============== ==============
Weighted average number of common shares
outstanding:
Basic 69,350,065 64,990,865 69,256,593 64,938,553
============== ============= ============== ==============
Diluted 69,350,065 67,917,847 69,256,593 64,938,553
============== ============= ============== ==============
See notes to consolidated financial statements.
9
KOPIN CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(unaudited)
Three Months Ended Six Months Ended
------------------ ----------------
June 29, 2002 June 30, 2001 June 29, 2002 June 30, 2001
-------------- -------------- -------------- --------------
Net income (loss) $ (1,622,007) $ 351,667 $(17,388,966) $ (6,417,476)
Foreign currency translation adjustments 535,460 (2,473) 522,425 (11,953)
Reclassification of unrealized (loss)
to realized (loss) (1,681,889) - (1,681,889) -
Unrealized gain (loss) on marketable
securities, net (4,932,892) 3,501,872 (6,095,663) 3,706,388
------------ ----------- ------------ -------------
Comprehensive income (loss) $ (7,701,328) $ 3,851,066 $(24,644,093) $ (2,723,041)
============ =========== ============ =============
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Six months ended June 29, 2002 and June 30, 2001
(unaudited)
Common Stock Additional Accumulated Other
------------ Paid-in Deferred Comprehensive
Shares Amount Capital Compensation Income (Loss) Deficit Total
------ ------ ------- ------------ ------------- ------- -----
Balance, December 31, 2000 64,681,116 $ 646,811 $ 216,274,520 $ (55,015) $ 328,395 $(50,418,146) $166,776,565
Exercise of stock options 384,470 3,845 1,180,742 -- -- -- 1,184,587
Amortization of compensation
relating to grant of stock options -- -- -- 27,510 -- 27,510
Net unrealized gain on marketable
securities -- -- -- -- 3,706,388 -- 3,706,388
Foreign currency translation
adjustments -- -- -- -- (11,953) (11,953)
Net loss for the six-month
period ended June 30, 2001 -- -- -- -- -- (6,417,476) (6,417,476)
---------- ---------- ------------- --------- ------------ ------------ ------------
Balance, June 30, 2001 65,065,586 $ 650,656 $ 217,455,262 $ (27,505) $ 4,022,830 $(56,835,622) $165,265,621
========== ========== ============= ========= ============ ============ ============
Balance, December 31, 2001 69,045,532 $ 690,455 $ 259,141,718 -- $ (2,369,677) $(73,131,534) $184,330,962
Exercise of stock options 329,008 3,290 1,151,646 -- -- -- 1,154,936
Net unrealized loss on marketable
securities -- -- -- -- (7,777,552) -- (7,777,552)
Foreign currency translation
adjustments -- -- -- -- 522,425 -- 522,425
Net loss for the six-month
period ended June 29, 2002 -- -- -- -- -- (17,388,966) (17,388,966)
---------- ---------- -------------- -------- ------------ ------------ ------------
Balance, June 29, 2002 69,374,540 $ 693,745 $ 260,293,364 -- $ (9,624,804) $(90,520,500) $160,841,805
========== ========== ============== ======== ============ ============ ============
See notes to consolidated financial statements.
10
KOPIN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Six months ended
----------------
June 29, 2002 June 30, 2001
------------- -------------
Cash flows from operating activities:
Net loss $ (17,388,966) $ (6,417,476)
Adjustments to reconcile net loss
to net cash provided by (used in) operating activities:
Depreciation and amortization 5,151,586 6,264,847
Amortization of stock option compensation - 27,510
Minority interest in income of subsidiary 488,617 126,293
Impairment charge - 5,341,784
Net (gain) loss on investment activity 364,726 (20,882,382)
Cumulative effect of accounting change 12,582,383 -
Changes in assets and liabilities:
Accounts receivable 1,405,841 9,024,283
Inventory 2,380,059 (3,474,002)
Prepaid expenses and other current assets 1,742,131 5,884,698
Intangible assets - 148,313
Accounts payable and accrued expenses (1,165,172) 2,742,000
-------------- --------------
Net cash provided by (used in) operating activities 5,561,205 (1,214,132)
-------------- --------------
Cash flows from investing activities:
Marketable securities (16,241,164) 2,666,331
Other assets 3,074,004 (727,174)
Capital expenditures (1,830,027) (6,934,367)
-------------- --------------
Net cash used in investing activities (14,997,187) (4,995,210)
-------------- --------------
Cash flows from financing activities:
Principal payment on long-term obligations - (500,000)
Proceeds from exercise of stock options 1,154,936 1,184,587
-------------- --------------
Net cash provided by financing activities 1,154,936 684,587
-------------- --------------
Effect of exchange rate changes on cash 295,530 (46,490)
-------------- --------------
Net decrease in cash and equivalents (7,985,516) (5,571,245)
Cash and equivalents, beginning of period 74,425,853 13,332,973
-------------- --------------
Cash and equivalents, end of period $ 66,440,337 $ 7,761,728
============== ==============
Supplementary information - Interest paid in cash $ - $ 106,279
See notes to consolidated financial statements.
11
KOPIN CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The consolidated financial statements for the six months ended June 29, 2002 and
June 30, 2001 are unaudited and include all adjustments which, in the opinion of
management, are necessary to present fairly the results of operations for the
periods then ended. All such adjustments are of a normal recurring nature.
Effective January 1, 2002 the Company recorded the cumulative effect of an
accounting change resulting from the adoption of Statement of Financial
Accounting Standard No.142 (SFAS No. 142), Goodwill and Other Intangible Assets.
These consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in Kopin
Corporation's (the "Company's") Annual Report on Form 10-K filed with the
Securities and Exchange Commission (the "SEC") (File No. 0-19882) for the year
ended December 31, 2001.
The results of the Company's operations for any interim period are not
necessarily indicative of the results of the Company's operations for any other
interim period or for a full fiscal year.
The consolidated financial statements include the accounts of the Company, its
wholly owned subsidiaries and Kowon Technology Co., Ltd. ("Kowon"), a majority
owned (67%) subsidiary located in Korea. All intercompany transactions and
balances have been eliminated.
2. FOREIGN CURRENCY TRANSLATION
Assets and liabilities of non-U.S. operations are translated into U.S. dollars
at period end exchange rates, and revenues and expenses at rates prevailing
during the quarter. Resulting translation adjustments are recorded as part of
accumulated other comprehensive income (loss) and aggregate $478,277 of
unrealized gain at June 29, 2002. Transaction gains or losses are recognized in
income or loss currently.
3. 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 consist of outstanding options issued under the
Company's stock option plans, and have not been included in any periods where
the effect would be anti-dilutive.
4. INVENTORY
Inventory is stated at the lower of cost (first in, first out method) or market
and consists of the following:
June 29, 2002 December 31, 2001
------------- -----------------
Raw Materials $ 3,816,610 $ 7,583,247
Work in Progress 2,073,666 900,889
Finished Goods 646,752 229,604
------------ --------------
Total Inventory $ 6,537,028 $ 8,713,740
============ ==============
5. OTHER CURRENT AND NON-CURRENT ASSETS
Other assets consist primarily of marketable and non-marketable securities in
various companies. Non-marketable equity securities are carried at cost and
aggregated $3,551,000 and $3,890,000 at June 29, 2002 and December 31, 2001,
respectively.
During the six months ended June 30, 2001, the Company exchanged its interest in
Kendin Communications, Inc. (Kendin) for 986,054 shares of Micrel Incorporated
(Micrel) common stock, as part of Micrel's acquisition of Kendin, and recorded a
net gain of $24,600,000 on the exchange. Following this transaction, the Company
has accounted for its investment in Micrel common stock as available-for-sale
securities. Also during the six months ended June 30, 2001, the Company
recognized a write-down of $5,667,000 of certain non marketable securities as a
result of an other than temporary decline in their value. The net gain related
to these transactions of $20.9 million is included in interest and other income
in the consolidated statement of operations for the six months ended June 30,
2001.
12
During the quarter ended June 29, 2002, as the result of the lapse of a
contingency period related to the sale of Kendin, the Company received 115,448
shares of Micrel common stock which were previously held in escrow. During the
quarter the Company sold 249,448 shares of Micrel and recognized a net loss of
$.1 million on these transactions. The Company held 652,054 shares of Micrel
common stock as of June 29, 2002.
Non-current marketable securities, which consist primarily of the Company's
investment in the common stock of Micrel, are carried at fair-value. The
fair-value of non-current marketable securities was $9,356,975 at June 29, 2002.
Gross unrecognized losses on non-current marketable securities were $9,754,404
at June 29, 2002.
6. RECENT ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2002, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets." This
statement changed the accounting for goodwill and indefinite-lived intangible
assets from an amortization approach to an impairment-only approach. In
addition, SFAS No. 142 ceased the amortization of goodwill.
As of January 1, 2002, the Company had $12,582,383 of goodwill related to the
October 2000 acquisition of Super Epitaxial Products, Inc. Using the SFAS No.
142 approach described above, the Company recorded a transitional goodwill
impairment charge of $12,582,383, which is presented as a cumulative effect of
accounting change in the consolidated statements of operations. The transitional
impairment charge resulted from application of the new impairment methodology
introduced by SFAS No. 142. The Company estimated the fair value of the impacted
reporting unit using a discounted cash flow model.
Effective January 1, 2002, goodwill amortization was discontinued. Goodwill
amortization for periods prior to January 1, 2002 is included in selling,
general and administrative expenses. The following tables reconcile net income
(loss) and per share results adjusted for the implementation of SFAS No. 142 for
all periods presented:
Three months ended Six months ended
------------------ ----------------
June 29, 2002 June 30, 2001 June 29, 2002 June 30, 2001
------------- ------------- ------------- -------------
Income (loss) before cumulative effect of
accounting change $(1,622,007) $351,667 $ (4,806,583) $(6,417,476)
Add back: goodwill amortization - 531,500 - 1,063,000
----------- -------- ------------ -----------
Adjusted net income (loss) before cumulative
effect of accounting change (1,622,007) 883,167 (4,806,583) (5,354,476)
----------- -------- ------------ -----------
Cumulative effect of accounting change - - (12,582,383) -
Adjusted net income (loss) $(1,622,007) $883,167 $(17,388,966) $(5,354,476)
=========== ======== ============ ===========
Adjusted income (loss) per share for all periods presented are the same amounts for both basic and diluted earnings
per share and are as follows:
Three months ended Six months ended
------------------ ----------------
June 29, 2002 June 30, 2001 June 29, 2002 June 30, 2001
------------- ------------- ------------- -------------
Adjusted net income (loss) before
cumulative effect of accounting change
per share - basic and diluted $ (.02) $ .01 $ (.07) $ (.08)
Cumulative effect of accounting change
per share - basic and diluted $ - $ - $ (.18) $ -
----------- -------- ------------ -----------
Net income (loss) per share - basic and diluted $ (.02) $ .01 $ (.25) $ (.08)
=========== ======== ============ ===========
In August 2001, the FASB released SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, which is effective in 2002. SFAS No. 144
establishes standards for accounting for impairment of long-lived assets used by
an entity or held for sale, and provides guidance on developing estimates of
cash flows and fair values used in measuring impairments.
13
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD LOOKING STATEMENTS
Certain of the statements contained in this Form 10-Q, including
Management's Discussion and Analysis of Financial Condition and Results of
Operations, are forward-looking statements that involve a number of risks and
uncertainties. In addition to the risks and uncertainties set forth in this Form
10-Q, other factors that could cause actual results to differ materially
include, without limitation, the following: general economic and business
conditions and growth in the flat panel display and the gallium arsenide
integrated circuit and materials industries, sales growth of the wireless
handset industry, the successful introduction of our CyberLite product, the
impact of competitive products and pricing, availability of integrated circuit
fabrication facilities, cost and yields associated with production of the
Company's CyberDisplay imaging devices and HBT transistor wafers, availability
of interface electronic chips to run our CyberDisplay products, loss of
significant customers, acceptance of our products, continuation of strategic
relationships, changes in foreign currency exchange rates, and the risk factors
and cautionary statements listed from time to time in the Company's periodic
reports and registration statements filed with the Securities and Exchange
Commission, including but not limited to our Annual Report on 10K for the fiscal
year ended December 31, 2001.
BUSINESS MATTERS
Kopin 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 our III-V and CyberDisplay products for use in
highly demanding commercial wireless communication 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. Product revenues consist of sales of our
III-V products, principally gallium arsenide ("GaAs") HBT transistor wafers, and
our line of CyberDisplay products. Our GaAs HBT transistor wafers and our
CyberDisplay products are used primarily in wireless handsets and camcorders,
respectively. For the six month period ended June 29, 2002, we had product
revenues of $37.5 million, or 97.5% of total revenues compared to $23.5 million,
or 97.0% of total revenues for the same period in 2001.
Research and development revenues consist primarily of development
contracts with agencies of the U.S. government for advanced displays. For the
six months ended June 29, 2002, research and development revenues were $.9
million, or 2.5% of total revenues compared to $.7 million, or 3.0% of total
revenues for the same period in 2001.
Results of Operations
Revenues. Our total revenues for the three and six months ended June
29, 2002 were $20.8 million and $38.4 million, respectively, compared to $9.2
million and $24.2 million during the corresponding periods in 2001. This
represents an increase of approximately $11.6 million and $14.2 million for the
three and six months ended June 29, 2002, respectively. Our product revenues
were $20.1 million and $37.5 million for the three and six months ended June 29,
2002 compared to $9.1 million and $23.5 million for the corresponding periods in
2001, increases of approximately $11.0 million and $14.0 million respectively.
For the six months ended June 29, 2002, III-V and CyberDisplay product sales
were $17.1 million and $20.4 million, respectively, as compared to $14.6 million
and $8.9 million, respectively, for the six months ended June 30, 2001. Research
and development revenues for the three and six months ended June 29, 2002 were
$.7 million and $.9 million compared to $.2 million and $.7 million for the same
periods in 2001. The increase in III-V product revenues is attributable to
increased demand from customers who incorporate our GaAs HBT transistor wafers
into components used in wireless handsets. The increase in CyberDisplay product
sales is a result of additional design wins from new camcorder customers and
increased penetration into the product lines of existing camcorder customers.
International sales represented 57% and 54% of revenues for the six
months ended June 29, 2002 and June 30, 2001, respectively. The increase is
attributable to an increase in sales of CyberDisplay products to consumer
electronic manufacturers primarily located in Japan and Korea. Our international
sales are primarily denominated in U.S. currency. Consequently, a strengthening
of the U.S. dollar could increase the price in local currencies of our products
in foreign markets and make our products relatively more expensive than
competitors' products that are denominated in local currencies, leading to a
reduction in sales or profitability in those foreign markets. In addition, sales
of our CyberDisplay products in Korea are transacted through our Korean
subsidiary, Kowon. Kowon's sales are primarily denominated in U.S. dollars,
however Kowon's operating costs are denominated in Korean won. As a result, our
financial position and results of operations are subject to exchange rate
fluctuations. We have not taken any protective measures against exchange rate
fluctuations, such as purchasing hedging instruments with respect to such
fluctuations, because of the relatively stable exchange rate between the
Japanese yen, the Korean won and the U.S. dollar.
Cost of Product Revenues. Cost of product revenues, which is comprised
of materials, labor and manufacturing overhead related to our products, was
$15.4 million and $30.1 million, respectively, for the three and six months
ended June 29, 2002 compared to $15.3 million and $31.7 million during the
corresponding periods in 2001. For the six months ended June 29, 2002 and June
30, 2001, cost of product revenues as a percentage of product sales was 80.2%
and 134.8%, respectively. The decrease in cost of product revenues as a
percentage of sales for the six month period ended June 29, 2002 as compared to
the six month period ended June 30, 2001 was primarily the result of fixed costs
being leveraged over a higher sales volume, lower raw materials cost, and
increased yields in CyberDisplay production, partially as a result of a design
change in the display.
Research and Development. Research and development expenses (R&D) are
incurred under development programs for III-V products, CyberDisplay products
and other products, including our recently announced CyberLite light emitting
diode, in support of internal development programs or programs funded by
agencies of the U.S. government. R&D costs include staffing, purchases of
materials and laboratory supplies, equipment, circuit design costs, fabrication
and packaging of display products, and overhead. Funded R&D expense was $1.0
million and $1.8 million for the three and six months ended June 29, 2002
compared to $.7 million and $1.0 million for the same periods in the prior year,
representing increases of $.3 million and $.8 million, respectively. Internal
R&D expense was $3.1 million and $5.6 million for the three and six months ended
June 29, 2002, respectively, compared to $3.5 million and $6.4 million during
the corresponding periods in 2001.
14
Selling, General and Administrative. Selling, general and administrative
expenses (S,G&A) consist of the expenses incurred by our sales and marketing
personnel and related expenses, and administrative and general corporate
expenses. S,G&A was $2.7 million and $5.7 million for the three and six months
ended June 29, 2002 as compared to $5.7 million and $8.7 million during the
corresponding periods in 2001. The reduction in S,G&A expense from the
corresponding period in the prior year is the result of discontinuing goodwill
amortization of approximately $1.0 million, as directed by SFAS No. 142, and
lower legal and patent maintenance fees of $1.1 million and bad debt expenses of
$1.0 million.
Other. Other expenses, consisting of amortization of patents and our share
of the net losses of our equity investments, were approximately $250,000 and
$519,000 for the three and six month periods ended June 29, 2002, respectively,
compared to approximately $45,000 and $162,000 during the corresponding periods
in 2001. The increase is due to increased losses from our equity investments.
Other Income and Expenses. Other income, net, was $.3 million and $1.0
million for the three and six months ended June 29, 2002 compared to $21.7
million and $22.8 million during the corresponding periods in 2001. Included in
the three and six months ended June 29, 2002 were approximately $286,000 and
$7,000 of foreign exchange losses, respectively, resulting from our Korean
subsidiary, Kowon. During the three month period ended June 30, 2001 we
exchanged our interest in Kendin Communications, Inc. (Kendin) for shares of
Micrel, Incorporated (Micrel) as a result of Micrel's acquisition of Kendin. We
recorded a net gain of $20.9 million as a result of this exchange and the
write-down of certain investments in semiconductor companies due to an other
than temporary decline in their value during the quarter ended June 30, 2001.
Liquidity and Capital Resources
We have financed our operations primarily through public and private
placements of our equity securities, research and development contract revenues,
and sales of our III-V and CyberDisplay products. We believe our available cash
resources will support our operations and capital needs for at least the next
twelve months.
As of June 29, 2002, we had cash and equivalents and marketable securities
of $112.2 million and working capital of $110.0 million compared to $104.4
million and $106.4 million, respectively, as of December 31, 2001. During the
six month period ended June 29, 2002 the increase in cash and equivalents and
marketable securities was primarily due to cash provided from operations of
$5.6 million, and proceeds from the exercise of stock options of $1.2 million
and the sale of investments of $3.0 million, partially offset by capital and
investment expenditures of $1.8 million.
We lease facilities located in Taunton and Westborough, Massachusetts, Los
Gatos, California, and Columbia, Maryland, under non-cancelable operating
leases. The Taunton leases expire through May 2010. The Westborough lease
expires in October 2003. The Los Gatos lease expires in 2002. The Maryland lease
expires in 2005. We are currently obligated to make lease payments of
approximately $5.1 million over the remaining terms of these leases, however we
expect to enter into new leases during 2002 for the Westborough and Los Gatos
facilities.
We expect to expend approximately $5.0 million on capital expenditures over
the next twelve months, primarily for the acquisition of equipment relating to
the production of our III-V, CyberDisplay and other products.
Recent Accounting Pronouncements
Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets."
This statement changed the accounting for goodwill and indefinite-lived
intangible assets from an amortization approach to an impairment-only approach.
In addition, SFAS No. 142 ceased the amortization of goodwill.
As of January 1, 2002, the Company had $12,582,383 of goodwill related to
the October 2000 acquisition of Super Epitaxial Products, Inc. Using the SFAS
No. 142 approach described above, the Company recorded a transitional goodwill
impairment charge of $12,582,383, which is presented as a cumulative effect of
accounting change in the consolidated statements of operations. The transitional
impairment charge resulted from application of the new impairment methodology
introduced by SFAS No. 142.
Effective January 1, 2002, goodwill amortization was discontinued. Goodwill
amortization for periods prior to January 1, 2002 is included in selling,
general and administrative expenses.
15
In August 2001, the FASB released SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, which is effective in 2002. SFAS
No. 144 establishes standards for accounting for impairment of long-lived assets
used by an entity or held for sale, and provides guidance on developing
estimates of cash flows and fair values used in measuring impairments.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We invest our excess cash in high quality government and corporate
financial instruments which 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. Included
in other assets is an equity investment in Micrel, Inc. (Micrel) totaling
$9,356,975 which is subject to declines in value because of either specific
operating issues at Micrel or an overall decline in the stock market. We sell
our products to customers worldwide. We maintain a reserve for potential credit
losses. We are exposed to changes in foreign currency exchange rates primarily
through our translation of our foreign subsidiary's financial position and
results of operations, and transaction gains and losses as a result of non U.S.
dollar denominated cash flows related to business activities in Asia.
PART II. OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We published all of the information called for by this item in our Quarterly
Report on Form 10Q for the quarter ended March 30, 2002 filed on May 15, 2002.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.26 Amended and Restated Employment Agreement between the company and Dr.
John C.C. Fan, dated as of February 20, 2002.
(b) Reports on Form 8-K
On June 10, 2002 we filed a current report on Form 8-K pursuant to
Item 5 thereof, attaching as an exhibit a copy of a press release
disseminated publicly on June 10, 2002 in which we reaffirmed guidance
concerning our revenue expectations for the second quarter ending
June 29, 2002.
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KOPIN CORPORATION
(Registrant)
Date: August 12, 2002 By: /s/ John C.C. Fan
----------------------------------
John C.C. Fan
President, Chief Executive Officer
and Chairman of the Board of
Directors (Principal Executive
Officer)
Date: August 12, 2002 By: /s/ Richard A. Sneider
----------------------------------
Richard A. Sneider
Treasurer and Chief Financial
Officer (Principal Financial and
Accounting Officer)