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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, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-19882
KOPIN CORPORATION
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(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
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (508) 824-6696
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act: Common Stock, par
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value $.01 per share
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(Title of Class)
Name of each exchange on which registered: NASDAQ
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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, 1998 the aggregate market value of outstanding shares of voting
stock held by non-affiliates of the registrant was $189,917,480.
As of March 23, 1998, 12,146,660 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 21, 1998 are incorporated by reference into Part III of this
Report.
PART I
ITEM 1. BUSINESS
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General
Kopin Corporation ("the Company") is a leading developer and manufacturer of
advanced semiconductor materials and small form factor displays. The Company has
used its proprietary technology to design, manufacture and market enabling
products used in highly demanding commercial wireless communications and high
resolution portable applications. The Company's customers use Kopin's products
to develop and market an improved generation of products for these target
applications. In April 1997, the Company introduced the CyberDisplay product, a
miniature active matrix liquid crystal display (''AMLCD''). A key strategy of
the Company is to enter into agreements with leading manufacturers of digital
wireless handsets, pagers, smart card viewers, digital and video cameras and
other personal communications and consumer electronic devices to incorporate
CyberDisplay products in these devices. To date, the Company has entered into
agreements with Motorola, Inc. (''Motorola''), Siemens Business Communication
Systems, Inc. (''Siemens''), FujiFilm Microdevices Co., Ltd. (''FujiFilm'') and
Gemplus S.C.A. (''Gemplus'') to supply CyberDisplay products and to assist in
further development of product applications.
Kopin produces advanced device wafers used by manufacturers of gallium
arsenide (''GaAs'') power amplifiers and other integrated circuits for digital
wireless handsets and other high frequency communications devices. The Company's
principal semiconductor wafer product is a heterojunction bipolar transistor
(''HBT'') GaAs device wafer. The Company currently sells its device wafers
primarily to manufacturers of microwave integrated circuits for high performance
wireless communications devices. The Company believes that integrated circuits
manufactured using its HBT device wafers are well suited for applications that
require lower power consumption and high frequency performance. Kopin's
principal customer for its HBT device wafers is Rockwell International
Corporation (''Rockwell''). Rockwell, as well as other customers, primarily use
these HBT device wafers in the fabrication of integrated circuits used in
digital wireless handsets. The Company is actively marketing its device wafers
by working with customers who are developing integrated circuits for use in
these and other applications.
Kopin was founded in 1984 to commercialize semiconductor expertise developed
at the Massachusetts Institute of Technology (''MIT''). The Company's technology
expertise centers on its Wafer-Engineering technology, a process of splicing or
layering selected semiconductor materials to provide optimal performance for
specific applications. With this expertise, the Company has developed a process
to produce single crystal silicon integrated circuits and transfer those
circuits to glass and other media. This proprietary technology enabled the
development of the CyberDisplay product. The Company also uses Wafer-Engineering
technology for the manufacturing of advanced HBT device wafers that enable the
production of differentiated, higher performance integrated circuits.
The Company believes that the CyberDisplay product is the world's smallest,
high performance, high resolution, low cost AMLCD, based upon the Company's
review of industry developments, trade shows and specialized periodicals. The
CyberDisplay product is a miniature display (0.24 inch diagonal) which uses a
lens and backlight to deliver high resolution data and video images equivalent
to viewing a 20 inch monitor from a distance of five feet. The Company believes
CyberDisplay products are well-suited for high resolution, high information
content applications, including reading e-mail and facsimile messages using
digital wireless handsets and pagers, viewing images in digital cameras, viewing
information stored in smart cards and for other personal communications and
consumer electronics devices.
The Company currently manufactures all of its device wafers at its facility in
Taunton, Massachusetts. The Company's facility in Westborough, Massachusetts is
used in the development and packaging of CyberDisplay products. The integrated
circuit portion of CyberDisplay products are produced by United Microelectronics
Corporation (''UMC''). The Company is also establishing packaging capability for
CyberDisplay products with Unipac Optoelectronics Corp. (''Unipac''), an
affiliate of UMC. The Company anticipates that it will continue to use third-
party contractors in the manufacture of CyberDisplay products.
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INDUSTRY OVERVIEW
Display Products
The Company believes there is an emerging and potentially large market for
small form factor displays that are capable of displaying significant amounts of
information. Driven by consumers' desire for smaller, more compact electronics
products capable of displaying ever increasing amounts of information, these
displays are expected to be used in portable information, imaging and
communications products. To date, the growth of some of these markets has been
inhibited by the limitations of available display technologies. To meet consumer
demands for a highly portable, small form factor, high information content
display, the display must have high resolution, low power consumption,
durability, low cost and be available in both monochrome and full color.
The markets for high resolution, small form factor displays include digital
wireless handsets, pagers, digital cameras and smart card viewers. The growth of
these markets is being driven, in part, by rapid advances in technology that are
making possible new applications. For example, advances in wireless
communications systems such as higher bandwidths and increases in intelligence
embedded in digital wireless handsets, pagers and other portable communications
devices (''PCDs'') have created the potential for mobile data users to obtain
real-time, wireless access to data. An industry source estimates that the annual
worldwide production of digital wireless handsets will exceed 174 million units
by 2001. Similarly, an industry source estimates that the annual worldwide
market for pagers will exceed 57 million units by 2001. An industry source
estimates that annual worldwide digital camera shipments will exceed eight
million units by 2001. The rapid growth in the use of smart cards
(semiconductor-based cards that can store large amounts of information)
throughout the world and the increased applications for the technology is
creating a demand for low cost smart card viewers that can read and display the
large amount of varied information (data and images) that can be stored in such
credit card-sized cards. An industry source estimates that the annual shipments
of smart cards will exceed 1.18 billion units by 2001.
There are several display technologies currently available. The most commonly
used technology in portable applications is based on the traditional liquid
crystal display (''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 passive matrix LCD is primarily used in displays for calculators,
watches, pagers and laptop computers because of its relatively low cost and
power consumption. Its relatively low image quality, slow response time and
limited viewing angle, however, make it inadequate for many demanding
applications. In contrast, AMLCDs incorporate a transistor at every pixel
location. This 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. AMLCDs are used primarily in laptop
computers, instrumentation and projection systems.
The speed, size and leakage of the transistors in AMLCDs are the key factors
governing their suitability for use as high performance digital displays.
Currently, transistors in the active matrix are primarily formed in one of two
ways. The first method involves the use of a thin film of amorphous silicon
grown on glass. It is termed ''amorphous'' because a silicon film grown directly
on glass has very high crystal disorder and low electronic quality (the speed of
electrons in amorphous silicon is approximately 500 times slower than in
integrated-circuit-quality, single crystal silicon). Consequently, amorphous
silicon thin-film transistors have difficulty achieving the speed and the gray
scale dynamic range required for digital high definition imaging systems. The
other method of transistor formation utilizes polycrystalline silicon thin films
that are grown on glass at high temperatures. This process requires special high
temperature glass or expensive quartz panels. Although better than amorphous
films, polycrystalline silicon films are not well suited for high definition,
high performance applications because the speed of electrons in these films is
still approximately 30 times slower than in integrated circuit-quality, single
crystal silicon. Both approaches currently require the development and
manufacture of large scale, active matrix integrated circuits in material that
is already formed on glass or quartz substrates, which limits the pixel density
of the resulting displays, making this approach more suitable for larger AMLCDs.
The commercial manufacture of circuits on these substrates is currently
performed in purpose-built facilities rather than in conventional silicon
integrated circuit foundries, resulting in an inability to take advantage of
low-cost manufacturing available in the silicon integrated circuit industry.
High-information content displays require a large number of pixels, and an
equal number of transistors. For example, a conventional monochrome LCD with a
resolution of 320 x 240 pixels is comprised of 76,800 pixels (and 76,800
transistors). For conventional color LCDs, three times that number of pixels are
required to provide a color display. The generation of color images is usually
accomplished by three color filters (red, green and blue) lithographically
located over each pixel.
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Thus, a 320 x 240 color AMLCD requires 230,400 transistors. Due to this
requirement, current conventional AMLCD technologies have difficulty in
achieving the levels of pixel density required in a small form factor
appropriate for use in portable devices.
The Company believes that the potential for high growth PCD markets can be
realized effectively, however, only if these devices are able to present clearly
to the end-user the information they wish to access, without compromising the
form factor of the device. These devices, as well as the next generation of
digital cameras and other consumer electronics devices, require a small display
with low power consumption and rich, full color high resolution images. To date,
display technologies have been limited in addressing these needs due to
constraints with respect to size, power consumption, resolution, cost or full
color capability.
Advanced Semiconductor Device Wafers
The Company believes there is a growing need for advanced semiconductor
materials used in the manufacture of microwave integrated circuits and other
integrated circuits used in high frequency, low power applications. The demand
for these microwave integrated circuits is being driven by the rapid growth in
the wireless communications equipment industry, resulting from new transmission
technologies, such as personal communications systems (''PCS''), wireless local
loop, satellite communications, wireless local area networks (WLANs) and local
multipoint distribution system (LMDS). The increasingly shorter product cycles
of systems products in these markets is another factor driving the growth of
demand for integrated circuits used in these applications. In addition to the
cellular and PCS markets, telecommunications and data communications equipment
markets represent other significant applications opportunities for integrated
circuits with these features. The Company believes that emerging markets for
integrated circuits made from GaAs device wafers include power devices for base
station applications in broadband wireless services, high data rate fiber optic
receivers used in telecommunications, and other specialized integrated circuits
used in data communications and other applications.
Until recently, integrated circuits used in high frequency, low power
applications were generally constructed with hybrid solutions such as silicon
bipolar transistors or silicon metal oxide semiconductor field effect
transistors (''MOSFET''). GaAs semiconductor technology has emerged as an
effective alternative or complement to silicon in many of these high performance
applications, in particular, high frequency microwave telecommunications
systems. GaAs has inherent physical properties which allow electrons to move up
to five times faster than in silicon. This higher electron mobility permits GaAs
integrated circuits to operate at much higher frequencies than silicon devices,
or operate at the same frequency with lower power consumption. The reduction in
system power requirements is particularly important in portable applications.
The high performance characteristics of GaAs have led to the increased use of
GaAs field effect transistors (''FETs'') in a wide range of commercial systems.
Hybrid solutions are relatively inexpensive to manufacture but have lower power
efficiency, while the Company believes GaAs FET wafers have better performance
characteristics than hybrid solutions but are more costly and create greater
system complexity.
Even as device manufacturers are increasingly adopting GaAs FET technology in
the manufacture of high frequency integrated circuits such as those used in
microwave applications, industry demands are calling for even greater
performance. To address the increasingly demanding requirements of the
telecommunications and data communications markets, microwave and other high
frequency integrated circuits must incorporate certain key features. These
features include simpler system design, support for higher frequencies, lower
power consumption, improved signal linearity, and effective operation at a wider
range of temperatures.
THE KOPIN SOLUTION
CyberDisplay
The Company's CyberDisplay product is a miniature display (0.24 inch diagonal)
which uses a lens and backlight to deliver high resolution data and video
images. In contrast to current passive matrix LCD and AMLCD approaches, the
CyberDisplay product utilizes high quality, single crystal silicon--the same
high quality silicon that is 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 the Company's Wafer-
Engineering technology. Before it is transferred to glass, the thin film is
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patterned into an integrated circuit (including the active matrix, driver
circuitry and other logic circuits) in an integrated circuit foundry, so that
the transferred layer is a fully-functional active matrix integrated circuit.
The Company's Wafer-Engineering technology enables the production of transparent
circuits, in contrast to conventional silicon circuits, which are opaque to
light. As with conventional AMLCDs, the display's imaging properties are a
result of the formation of a liquid crystal layer over the transparent active
matrix integrated circuit. The Company believes that this manufacturing process
offers several advantages over other manufacturing approaches with regard to
small form factor displays, including greater miniaturization, reduced cost,
improved reliability, full color capability and higher definition.
The Company's use of high quality single crystal silicon in the manufacture of
CyberDisplay products offers several advantages. High quality silicon enables
high speed displays which operate at 180 frames per second, compared to 60
frames per second for most AMLCDs. At this higher cycle speed, the Company is
able to produce full color displays without using color filters. Colors are
generated by using a backlight comprised of three LEDs that generate 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, in turn decreasing the size, weight, and power
requirements of the color display. Furthermore, the color pixels are not
spatially separated as in conventional AMLCDs, resulting in sharper color
images.
The Company's display products have the additional advantage of being
fabricated using conventional integrated circuit lithography processes. These
processes enable the manufacture of smaller active matrix circuits, resulting in
comparable or higher resolution AMLCDs relative to conventional displays. The
Company expects that its display products will benefit from further general
technology advances in the design and production of integrated circuits and
AMLCDs, resulting in further improvements in resolution and miniaturization.
The Company believes that the CyberDisplay product's lower power consumption,
high resolution, cost-effectiveness and color capability makes it well-suited
for portable, high information content applications. The Company's customers are
currently developing an improved generation of high resolution portable products
incorporating its CyberDisplay products for a number of target applications.
Advanced Semiconductor Device Wafers
Over the past several years, the Company has developed HBT device wafers based
on its proprietary Wafer-Engineering technology. HBT device wafers, unlike
competing GaAs FET wafers, consist of a series of material layers of atomic-
level thickness, which form a vertical transistor on the wafer. This wafer
structure enables the design of integrated circuits in which individual
transistors are vertically arranged. The three-dimensional nature of an HBT
device wafer, as opposed to the two-dimensional nature of a competing GaAs FET
wafer, offers several advantages to an integrated circuit manufacturer. The
principal advantage of this vertical structure is a higher transistor density
for a given surface area, resulting in better yields and greater processing
speed. Furthermore, current limitations on optical lithography result in
transistor gate length limits (the distance an electron must travel within a
transistor) on GaAs FET wafers of approximately 0.2 microns (for commercial
volumes). In the case of HBT device wafers, the transistor gate length is
determined by the thickness of the vertical base layer, which is a function of
the device manufacturer's process expertise rather than a limitation of current
optical lithography techniques. Kopin is currently manufacturing device wafers
in commercial volumes with a vertical base layer thickness of approximately 0.05
microns, therefore enabling the design of faster circuits.
HBT device wafers also offer other advantages over GaAs FET wafers for certain
applications. For example, power amplifier circuits based on the Company's
device wafers run on a single power supply voltage and have excellent signal
linearity and power efficiency that enable digital wireless handset designers to
eliminate certain costly components and contribute to longer battery life.
Kopin's HBT device wafers also enable the design of integrated circuits that
operate at a wider range of temperatures, especially as temperatures increase,
due to their greater resistance to noise. This resistance is due to the higher
voltages that vertical base layers support compared to conventional gates used
in GaAs FET devices. Kopin's HBT technology, expertise and processes also offer
a number of advantages when compared to those of other manufacturers of HBT
wafers, such as the uniform, repeatable growth of atomic layers, higher
frequency performance, greater manufacturing throughput, the ability to make
larger diameter HBT device wafers, and the development of device wafers from new
compounds, such as indium gallium phosphide (''InGaP'').
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STRATEGY
The Company's objective is to become a leading supplier of miniature displays
and advanced semiconductor device wafers that enable its customers to develop
and manufacture high volume, differentiated communications and consumer
electronics devices. The critical elements of the Company's strategy include:
. TARGET COMMUNICATIONS AND CONSUMER ELECTRONICS INDUSTRIES. The Company's
products are targeted at high growth applications, including digital
wireless handsets, pagers, smart card viewers, digital and video cameras and
other electronic devices in the communications and consumer electronics
industries. The Company believes that its display and device wafer products
are well-suited for these applications and will allow its customers to
develop and market an improved generation of products for these target
industries.
. DEVELOP STRONG RELATIONSHIPS WITH STRATEGIC CUSTOMERS. The Company seeks
to develop relationships with key customers in targeted industries to
promote the use of CyberDisplay products and Kopin's device wafers. In
addition to its established device wafer customer, Rockwell, the Company has
recently entered into agreements with respect to CyberDisplay products with
Siemens, Motorola, Gemplus and FujiFilm. The Company works closely with its
customers to help them design and develop cost-effective products based on
its display and device wafer solutions. With respect to its display
products, the Company believes that these relationships will allow the
Company to increase its marketing reach and more rapidly increase its sales
volume. Furthermore, the Company believes that this anticipated increased
sales volume may result in an acceptance of the Company's display products
as an industry standard reference platform, which in turn will serve as a
greater incentive for manufacturers of portable products and related
components to integrate the Company's display products into their products.
. MAINTAIN TECHNOLOGICAL LEADERSHIP. The Company believes that its ability
to develop innovative products based on its extensive Wafer-Engineering
technology capabilities, enhances the opportunity for growth within its
targeted markets. By continuing to invest in research and development, Kopin
is able to add to its expertise in the design of innovative, high
resolution, small form factor displays and GaAs device wafers. The Company
intends to continue to focus its development efforts on proprietary
miniature displays and advanced semiconductor device wafers, both of which
the Company believes have a broad range of applications.
. MAXIMIZE PRODUCTION EFFICIENCIES. The Company believes that its success
will depend in part on its ability to be a low cost manufacturer. The
Company continually strives to reduce the cost of its device wafers by
refining its advanced processes to increase manufacturing efficiencies while
maintaining the quality of its products. Since late 1996, the Company has
added two production lines at its device wafer facility, with one currently
operational and the other expected to become operational in the first half
of 1998.
. LEVERAGE INTEGRATED CIRCUIT AND DISPLAY INDUSTRIES' INFRASTRUCTURE. The
Company believes that an important advantage of its approach to
manufacturing CyberDisplay products is the use of standard integrated
circuit fabrication and LCD packaging technologies. This capability leads to
greater production capacity and allows the Company to reduce greatly the
substantial capital investment and significant process development costs
typically needed for the manufacture of advanced LCDs. Additionally, the
Company believes it will continue to be aided by general technological
advances in the design and fabrication of integrated circuits, as well as
advances in LCD technology and manufacturing processes, that can be applied
to the manufacture of its display products. This capability enables the
Company to engage third-party manufacturers for certain fabrication and
packaging of CyberDisplay products, and allows the Company to rapidly take
advantage of new technologies, cost-efficiencies and increased production
capabilities of these third-party manufacturers.
PRODUCTS, MARKETS AND CUSTOMERS
CyberDisplay
The CyberDisplay product, launched in April 1997, is a miniature (0.24 inch
diagonal) high density 320 x 240 color or monochrome AMLCD. When illuminated by
a backlight and viewed through a lens, the CyberDisplay product displays high
resolution data and video images equivalent to viewing a 20 inch diagonal screen
from a distance of five feet. Kopin sells
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CyberDisplay products to customers either as a single component or together with
a lens and backlight as a unit. The Company believes that the extremely small
size and high image quality of the CyberDisplay product makes it suitable for
PCDs such as digital wireless handsets, pagers and other applications, where
there is a demand for enhanced functionality, particularly to display more
information while retaining the portability of these products.
There are several potential applications for the CyberDisplay product.
CyberDisplay products are expected to be incorporated in PCDs to allow the user
to interactively view data such as e-mail, facsimiles, Internet web pages and
other information. The CyberDisplay product is expected to be used in digital
cameras to allow the user to view previously stored images as well as for
replacement of traditional viewfinders. The CyberDisplay product is expected to
be incorporated into smart card viewers to allow portable access and visual
review of information stored on a smart card. The Company believes that there
may be numerous other applications for CyberDisplay products, including use in
video cameras and other consumer electronics devices.
The Company's customers for CyberDisplay products are currently developing
applications for digital wireless handsets and accessories, pagers and other
portable communications devices, digital cameras and smart card viewers. The
Company's strategy is to enter into relationships with these and other customers
to expand the market for its display devices and to become an industry standard
platform. Products using CyberDisplay products are expected to be introduced in
the second half of 1998. Highlighted below are summaries of Kopin's existing
CyberDisplay agreements:
SIEMENS. In May 1997, the Company entered into a three-year agreement with
Siemens pursuant to which the parties will jointly develop a wireless telephone
accessory containing CyberDisplay components. Under the terms of the agreement,
Siemens is required to purchase a minimum quantity of CyberDisplay components
from the Company by September 30, 1999. In addition, the Company granted Siemens
a non-exclusive license for certain Kopin technology used in wireless phones,
accessories and related products.
MOTOROLA. In September 1997, the Company entered into a five-year agreement
with Motorola Semiconductor Product Sector pursuant to which Motorola is
required to purchase certain minimum quantities of CyberDisplay components
annually through December 31, 2002. Under the terms of the agreement, Motorola
has the right to use and resell CyberDisplay components worldwide. Under certain
circumstances, Motorola has the right to obtain from Kopin a royalty-based
license to manufacture up to 20% of its internal requirements for CyberDisplay
components.
GEMPLUS. In October 1997, the Company entered into a three-year agreement
with Gemplus, the world's largest provider of smart cards, pursuant to which the
parties agreed to jointly develop and design a smart card personal viewing
system and collaborate with certain phone manufacturers and financial
institutions to produce products based on CyberDisplay components. Until such
time as Gemplus has met certain minimum purchase requirements, Gemplus is
required to use CyberDisplay products in applications requiring small form
factor displays. Pursuant to the agreement, each party will have a license to
make, sell, market or distribute products jointly developed under the agreement.
FUJIFILM. In October 1997, the Company entered into a three-year agreement
with FujiFilm pursuant to which FujiFilm agreed to develop image processing
integrated circuits to interface directly with CyberDisplay products. Under the
terms of the agreement, FujiFilm has the right to use and resell CyberDisplay
components worldwide as part of a developed product, but not on a standalone
basis.
For each of the above agreements, after the expiration of the initial period,
each agreement is renewable for an additional term upon the mutual agreement of
the parties. Each agreement also provides for a management council, consisting
of appointees from each party. These management councils will address matters of
mutual interest, including marketing strategies, manufacturing requirements and
technological improvements. In addition, each of the agreements may be
terminated by the respective parties upon a material breach of the agreement
after a specified cure period.
Additionally, the Company sells its CyberDisplay products to other customers
for incorporation into their products, and has entered into first-stage
development and evaluation agreements with several companies under which these
companies will develop, for evaluation purposes, prototype digital cameras and
wireless communications products incorporating CyberDisplay products.
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Advanced Semiconductor Device Wafers
The Company develops and manufactures application specific HBT device wafers
for advanced integrated circuit applications. These device wafers are
manufactured using metal organic chemical vapor deposition (''MOCVD'')
semiconductor growth techniques. The Company believes it is one of the world's
leading suppliers of HBT device wafers and is currently supporting volume
production of three-inch and four-inch device wafers, with production of six-
inch device wafers anticipated in 1998. Kopin's primary HBT device wafer product
is the aluminum gallium arsenide (''AlGaAs'') emitter. Using Wafer-Engineering
technology, the Company deposits films of atomic-level thickness on substrate
materials, creating vertically oriented devices. The Company can vary the
manufacturing process to create products with different characteristics to suit
the demands of particular customers.
Using Kopin's HBT device wafers, the Company's customers have developed power
amplifiers for wireless handsets, which the Company believes have performance
advantages over GaAs FET solutions. These components, in addition to operating
at very high frequencies, have low distortion and are power efficient. At
present, the Company's HBT device wafer products have been used predominantly in
Code Division Multiple Access (CDMA) power amplifiers, but the Company believes
that these wafer products are applicable in and can provide the same benefits to
the Global System Mobile (GSM) and Time Division Multiple Access (TDMA) markets.
In particular, 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, which equipment is likely to require higher performance
semiconductor technology such as the Company's HBT device wafers.
The Company's device wafers are typically manufactured for customer-specific
integrated circuits. Once an integrated circuit manufacturer has designed in a
particular device wafer, the Company believes that it is difficult for the
supplier of that device wafer to be replaced with respect to that particular
integrated circuit. The Company's largest customer for its device wafers is
Rockwell, with whom the Company has collaborated on the manufacturing and
development of HBT device wafers and related integrated circuits for several
years. For the year ended December 31, 1997, 73% of Kopin's total revenues were
derived from the sale of GaAs device wafers. Other customers of the Company's
device wafers include Raytheon Company, Northrop Grumman Corporation, Siemens,
Mitsubishi Electric Corporation, Hewlett Packard Company and Northern Telecom
Limited.
SALES AND MARKETING
The Company principally sells its device wafer products directly to integrated
circuit manufacturers in the United States and Europe. Sales of the Company's
device wafers to customers in Japan are made primarily through a foreign
distributor. The Company sells CyberDisplay products to OEM customers on a
direct basis. Under the terms of its September 1997 agreement with the Company,
Motorola has commenced the marketing of CyberDisplay products on a worldwide
basis.
The Company believes that the technical nature of its products and markets
demands a commitment to close relationships with its customers. The sales and
marketing staff, assisted by the technical staff and senior management, visit
prospective and existing customers worldwide on a regular basis and stay in
close contact with customers. The Company believes that these contacts are vital
to the development of a close, long-term working relationship with its
customers, and in obtaining regular forecasts, market updates, and information
regarding technical and market trends. The Company also participates in
industry-specific trade shows and conferences.
Kopin's design and engineering staff is actively involved with a customer
during all phases of prototype design and production by providing the customer
with engineering data, up-to-date product application notes, following up with
the customer's engineers on a regular basis, and assisting in resolving
technical problems by working with the customer's engineers both on and off
site. In most cases the Company's technical staff work 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. The Company has
established a prototype product design facility in Los Gatos, California to
assist the Company's customers in incorporating the Company's products into
their own and to reduce the time required to bring such end-products to the
marketplace. This strategy helps customers accelerate their design process,
achieve cost-effective and manufacturable designs, and ensure a smooth
transition into high volume production.
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PRODUCT DEVELOPMENT
The Company believes that continued introduction of new products in its target
markets is essential to its growth. The Company has assembled a group of highly
skilled engineers to work internally and with its customers to continue the
Company's product development efforts. For the years ended December 31, 1997,
1996 and 1995, the Company incurred total research and development expenses of
$10,424,285, $16,467,098 and $15,613,287, respectively, including research and
development expenses related to the Company's internal development programs for
its display products and device wafers of $7,622,614, $9,876,082 and $6,856,437,
respectively.
CyberDisplay
The Company's product development efforts are focused towards continually
enhancing the features and functions of the CyberDisplay product. A principal
focus of this effort is the Company's development of, and ability to manufacture
very small active matrix pixels, which it will use in succeeding generations of
the CyberDisplay product. The pixel size of the current CyberDisplay product is
15 microns and the Company believes it can achieve a pixel size of less than 10
microns in commercial production. This 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. The
Company expects future CyberDisplay products to have resolutions of 640 x 480
and higher. While Kopin is working on the commercialization of even higher
resolutions for the CyberDisplay product, the Company has already demonstrated
640 x 480 and 800 x 600 resolution displays in a 0.75 inch format as well as
1,280 x 1,024 and 2,560 x 2,048 resolution displays in a 1.5 inch format. The
Company is also working on further decreasing the already low power consumption
of the CyberDisplay product by continuing to evolve its display designs to
improve the power efficiency of products which incorporate CyberDisplay
products. Additional display development efforts include further automation of
final display assembly processes, and increasing the quantity of CyberDisplay
active matrix pixel arrays processed on each wafer by further reducing the
display size and using increasingly precise manufacturing techniques.
Advanced Semiconductor Device Wafers
Kopin intends to continue developing semiconductor device wafers for advanced
integrated circuit applications from other compound materials. The Company is
working closely with several of its major customers in the development of the
next generation of device wafers, particularly with respect to increasing the
application of its InGaP technology. The Company believes that InGaP device
wafers are simpler to process and result in greater yields for certain products
made by the Company's customers. Kopin is currently manufacturing device wafers
with a layer thickness of approximately 0.05 microns, and is currently
developing manufacturing processes to reduce this thickness further. The
decrease in base layer thickness will provide faster transistor performance,
thus producing faster circuits. The Company has equipment and facilities in
place to manufacture, and is currently developing manufacturing processes for
production of six-inch device wafers, in anticipation of six-inch GaAs
substrates becoming commercially available to the Company in 1998.
Other Wafer-Engineering Technology Applications
The Company is exploring the potential for using its innovative integrated
circuit lift-off technology for other advanced electronics applications. The
Company has developed techniques to transfer thin film displays and integrated
circuits to alternative materials, such as plastic and other flexible surfaces,
which the Company believes could enable a new class of applications, including
three-dimensional stacked integrated circuits, flexible displays, conformal
electronics and next generation flexible smart cards.
Funded Research and Development
The Company has entered into various development contracts with agencies of
the federal government. These contracts help support the continued development
of the Company's core technologies. The Company intends to continue to pursue
other federal government development contracts for applications that relate to
the Company's commercial product
9
applications. The Company's contracts with government agencies contain certain
milestones relating to technology development and may be terminated by the
government agencies prior to completion of funding. The Company's policy is to
retain its proprietary rights with respect to the principal commercial
applications of its technology. To the extent technology development has been
funded by a federal agency, under applicable federal laws, such agency has the
right to obtain a non-exclusive, non-transferable, irrevocable, fully-paid
license to practice or have practiced such technology for governmental use.
Revenues attributable to research and development contracts for the years ended
December 31, 1997, 1996 and 1995, totaled $3,282,974, $6,291,172 and $8,628,290,
respectively.
COMPETITION
Displays
The display market is highly competitive and is currently dominated by large
Asian electronics companies including Sharp Corporation, Hitachi, Ltd., Seiko
Corporation, Toshiba Corporation (''Toshiba''), Sony Corporation, NEC
Corporation, Sanyo Electric Co., Ltd. and Display Technologies, Inc., a joint
venture of IBM Corporation and Toshiba. The display market consists of multiple
segments, each focusing on different end-user applications applying different
technologies. Flat panel AMLCDs have experienced rapid growth as the market for
laptop computers has grown with the improvements in performance and cost. Most
of the companies that manufacture AMLCDs have substantially greater financial,
technical, marketing, manufacturing, and personnel resources than the Company.
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 the Company's display product offerings will also depend
upon its ability to compete against other types of more well-established
products such as traditional AMLCD-based products as well as the adoption of the
CyberDisplay product in the industry as an alternative to traditional AMLCD-
based products. There can be no assurance that the Company will be able to
compete against these companies and technologies.
There are also a number of alternative display technologies in production and
under development including passive matrix LCD and light emitting diode
(''LED''), reflective, field emission display, plasma, organic LED and virtual
retinal displays, some of which target the high performance small form factor
display markets in which the Company's display products are sold. There are many
large and small companies that manufacture or have in development products based
on these technologies. The CyberDisplay product will compete with other displays
utilizing these and other competing display technologies. There can be no
assurance that the Company will be able to compete successfully against these
companies.
Advanced Semiconductor Device Wafers
With respect to its device wafer products, the Company presently competes with
several companies, including The Furakawa Electric Co., Ltd., Epitronics, Emcore
Corporation, Epitaxial Products International and Hitachi Cable, as well as
integrated circuit manufacturers with in-house wafer growth capabilities, such
as TRW Inc. and Fujitsu Limited. In the device wafer business, competition could
become increasingly intense as new entrants emerge to address the high growth
markets that Kopin's products address. The production of GaAs integrated
circuits has been and continues to be more costly than the production of silicon
integrated circuits. Although the Company has reduced production costs of its
HBT device wafers by achieving higher volumes, there can be no assurance that
the Company will be able to continue to decrease production costs. In addition,
the Company believes the costs of producing GaAs integrated circuits by its
customers will continue to exceed the costs associated with the production of
competing silicon integrated circuits. As a result, the Company must target
markets where the higher cost associated with GaAs integrated circuits is
justified by their superior performance. There can be no assurance that the
Company can continue to identify markets which require performance superior to
that offered by silicon solutions or that the Company will continue to offer
products which provide superior performance to offset the cost differentials.
The GaAs materials industry has been characterized by rapid and significant
technological advances. There can be no assurance that the Company will be able
to enhance its products to include these advances on a timely basis, if at all,
or that the Company will have sufficient funds to invest in new technologies or
products or processes.
10
PATENTS, PROPRIETARY RIGHTS AND LICENSES
An important part of the Company's product development strategy is to seek,
when appropriate, protection for its products and proprietary technology through
the use of various United States and foreign patents and contractual
arrangements. The Company intends to prosecute and defend its proprietary
technology aggressively. The Company owns more than 50 issued United States
patents and more than 50 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, the Company is exclusively licensed by MIT
under 31 issued United States patents, 5 pending United States patent
applications, and some foreign counterparts to these United States patents and
applications. The Company's United States patents expire during the period
running from December 1997 through September 2014. The United States patents
licensed to the Company by MIT expire during the period running from March 1998
through November 2011.
In 1985, the Company obtained a license from MIT to certain patents and patent
applications directed to device wafers and related technology. The license
grants to the Company a worldwide license to make, have made, use, and sell
products covered by the licensed patents for the life of these patents. The
license is exclusive with respect to commercial applications until April 22,
1999, and becomes non-exclusive thereafter. During the period of exclusivity,
the Company also has a right of first refusal to negotiate a license for MIT
improvements that fall within the claims of the licensed patents. In 1995, the
Company obtained an additional license from MIT to certain optical technology.
The license grants to the Company 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 there can be no assurance that patents will issue from currently pending or
future applications or that the Company's 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 the Company. The Company 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, the Company cannot be certain
that it was the first to conceive of inventions covered by pending patent
applications or the first to file patent applications on such inventions. There
can be no assurance that the Company's pending patent applications or those of
its licensors will result in issued patents or that any issued patents will
afford protection against a competitor. In addition, there can be no assurance
that others will not obtain patents that the Company would need to license,
circumvent or cease manufacturing and sales of products covered by such patents,
or that such licenses, if needed, would be available to the Company on favorable
terms, if at all.
There can be no assurance that foreign intellectual property laws will protect
the Company's intellectual property rights. Furthermore, there can be no
assurance that others will not independently develop similar products, duplicate
the Company's products or design around any patents issued to the Company. The
Company's 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 the patent rights of the Company. Although the Company is not aware of
any pending or threatened patent litigation against the Company, the Company may
be notified, from time to time, that it could be or is infringing certain
patents and other intellectual property rights of others. Litigation, which
could result in substantial cost to, and diversion of resources of, the Company
even if the outcome is favorable to the Company, may be necessary to enforce
patents or other intellectual property rights of the Company or to defend the
Company 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 the Company for patent infringement, the Company 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. No assurance can be given 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 have a material adverse effect on the Company's business, results of
operations and financial condition.
The Company also attempts to protect its proprietary information with
contractual arrangements and under trade secret laws. The Company believes that
its future success will depend primarily upon the technical expertise, creative
skills and management abilities of its officers and key employees rather than on
patent ownership. Company employees and consultants generally enter into
agreements containing provisions with respect to confidentiality and the
assignment of rights
11
to inventions made by them while in the employ of the Company. Agreements with
consultants generally provide that rights to inventions made by them while
consulting for the Company will be assigned to the Company unless such
assignment is prohibited by the terms of any agreements with their regular
employers. Agreements with employees, consultants and collaborators contain
provisions intended to protect further the confidentiality of the Company's
proprietary information. To date, the Company has had no experience in enforcing
such agreements. There can be no assurance that these agreements will not be
breached, that the Company would have adequate remedies for any breaches, or
that the Company's trade secrets will not otherwise become known or be
independently developed by competitors.
GOVERNMENT REGULATIONS
The Company is 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 its manufacturing process.
Although the Company believes that its activities conform to presently
applicable environmental regulations, the failure to comply with present or
future regulations could result in fines being imposed on the Company,
suspension of production or a cessation of operations. Any failure of the
Company to control the use of, or adequately restrict the discharge of,
hazardous substances, or otherwise comply with environmental regulations, could
subject it to significant future liabilities. In addition, although the Company
believes that its past operations conformed with then applicable environmental
laws and regulations, there can be no assurance that the Company has not in the
past violated applicable laws or regulations, which violations could result in
remediation or other liabilities, or that past use or disposal of
environmentally sensitive materials in conformity with then existing
environmental laws and regulations will not result in remediation or other
liabilities under current or future environmental laws or regulations.
INVESTMENTS IN RELATED BUSINESSES
The Company has made certain equity investments in and loans to Forte, a
developer and manufacturer of virtual reality headsets and related peripherals,
GMT Microelectronics, Inc. (''GMT''), a merchant integrated circuit foundry, and
Kendin Semiconductor, Inc. (''Kendin''), a developer and manufacturer of
integrated circuits for smart card and data communications applications. The
Company made its investment in Forte over a period of two years, commencing in
October of 1994. At the time, the Company believed that a growing market for the
Company's then-recently developed small, flat panel displays would be virtual
reality headsets. After the Company performed an analysis of the market, it
decided that Forte was the candidate that best met the Company's strategy at the
time and that the Company could incorporate its displays into Forte's existing
products. As a result of declining sales and results of operations of Forte,
especially the failure of anticipated holiday season sales to materialize in the
fourth quarter of 1996, the Company recorded a write-off of the value of the
Company's investment in Forte at December 31, 1996, totaling $3,900,000. Neither
Kopin nor any of its directors, officers or affiliates had any prior
relationship with Forte prior to the initial investment. In March 1997, Forte
filed a voluntary petition seeking protection from its creditors under Chapter
11 of the United States Bankruptcy Code. In November 1997, Interactive Imaging
Systems, Inc. (previously named Kaotech Corporation), a newly organized entity
(of which the Company owns approximately 19.5%) purchased substantially all of
the assets of Forte, subject to certain liens, for approximately $60,000. This
purchase price was determined by arms-length negotiations among the Company, the
debtor-in-possession and the creditor's committee, and approved by the
bankruptcy court with notice to all creditors. At December 31, 1997, the
Company's investments in GMT and Kendin totaled approximately $1,100,000 and
$1,575,000, respectively, representing approximately 7% and 19.5% of the
outstanding equity of each company, respectively. GMT and Kendin are privately
held companies. As part of its initial investment in GMT, GMT agreed to perform
certain of the Company's integrated circuit processing. The Company may from
time to time make further equity investments in these and other companies
engaged in certain aspects of the flat panel display and electronics industries
as part of its business strategy. These investments may not provide the Company
with any financial return or other benefit and there can be no assurance that
any losses by these companies or associated losses in the Company's investments
will not have a material adverse effect on the Company's business, results of
operations and financial condition.
12
EMPLOYEES
As of December 31, 1997, the Company and its subsidiaries employed 113 full-
time and 6 part-time individuals. Of these, 11 hold Ph.D. degrees in Material
Science, Electrical Engineering or Physics. The Company's management and
professional employees have significant prior experience in semiconductor
materials, device wafer and display processing, manufacturing and other related
technologies. None of the Company's employees is covered by a collective
bargaining agreement. The Company considers relations with its employees to be
good.
ITEM 2. PROPERTIES
- ------------------
Kopin leases separate device wafer manufacturing and CyberDisplay product
fabrication facilities. The Company's device wafer manufacturing facility is
located, together with the Company's 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 on October 31, 2002.
Kopin's 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. This facility prepares the Wafer-Engineered silicon materials from
which the CyberDisplay products are produced. These wafers are then fabricated
into integrated circuits by Kopin's production partner, UMC, in its foundry in
Taiwan. Currently, the fabricated wafers are returned to Kopin's facilities,
where the integrated circuits are lifted off the silicon substrates and
transferred to glass using Kopin's Wafer-Engineering technology. The transferred
integrated circuits are then processed and packaged with liquid crystal and
assembled into display panels for shipment to customers. The Westborough
facility is occupied under a lease that expires in October 1999, with renewable
options for up to five additional years at the Company's election.
In order to expand CyberDisplay production capacity, Kopin has entered into
agreements with UMC and its affiliate, Unipac, under which Unipac will assemble
and package CyberDisplay products at its facility in Taiwan. The Company
believes that the capabilities and capacity of UMC and Unipac, together with its
existing facility in Westborough, provide Kopin with sufficient production
capacity through at least 1998.
In addition to its Massachusetts facilities, Kopin leases a 5,280 square foot
design facility in Los Gatos, California for developing prototypes of products
incorporating the CyberDisplay product. This facility is occupied under a lease
that expires in November 2002.
ITEM 3. LEGAL PROCEEDINGS
- -------------------------
The Company is not a party to any material litigation and is not aware of any
pending or threatened litigation that could have a material adverse effect upon
the Company's business, operating results or financial condition.
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
- -----------------------------------------------------------
Not Applicable.
13
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........................ 54 President and Chief Executive Officer;
Chairman of the Board of Directors
Paul J. Mitchell...................... 45 Treasurer and Chief Financial Officer
Bor-Yeu Tsaur......................... 42 Executive Vice President, Display Operations
Ronald P. Gale........................ 47 Chief Technology Officer and Vice President
Jeffrey J. Jacobsen....... 44 Senior Vice President, Business Development
Daily S. Hill............. 41 Vice President, Gallium Arsenide Operations
Meth Jiaravanont...................... 39 Vice President, Strategic Marketing
Glen G. Kephart....................... 54 Vice President of Marketing, Display Products
Matthew J. Micci...................... 41 Vice President of Sales, Gallium Arsenide Products
Matthew Zavracky...................... 42 Vice President, Engineering
John C. C. Fan, President, Chief Executive Officer, Chairman of the
Board of Directors. Dr. Fan, a founder of the Company, has served as Chief
Executive Officer and Chairman of the Board of Directors of the Company since
its organization in 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.
Paul J. Mitchell, Treasurer and Chief Financial Officer. Mr. Mitchell
has served as Chief Financial Officer of the Company since April 1985 and has
been Treasurer of the Company since July 1987. Mr. Mitchell is a Certified
Public Accountant.
Bor-Yeu Tsaur, Executive Vice President, Display Operations. Dr.
Tsaur joined the Company 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 Vice
President of the Company 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.
Jeffrey J. Jacobsen, Senior Vice President, Business Development. Mr.
Jacobsen joined the Company as Vice President, Business Development in February
1990, and became Senior Vice President in 1997. From 1987 through 1989, Mr.
Jacobsen served as Director of Strategic Business at OKI Semiconductor Company,
U.S.A.
14
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 Director of Gallium Arsenide
Operations for the Company. From November 1987 to January 1995, Mr. Hill served
as a manager of the Company's device wafer product group.
Meth Jiaravanont, Vice President, Strategic Marketing. Mr. Jiaravanont
joined the Company as Vice President, Strategic Marketing in December 1995
pursuant to an agreement between the Company and Telecom Holding Co., Ltd. Prior
to joining the Company, Mr. Jiaravanont served as a Vice President and Director
in several different capacities for affiliates of CP Group in Asia and North
America.
Glen G. Kephart, Vice President, Marketing Display Products. Mr.
Kephart joined the Company as Vice President, Marketing Display Products in
December 1995. Prior to joining the Company, Mr. Kephart served as General
Manager, Conference Products, for Coherent Communications Systems for four years
and previously served as a Director of National Distribution for Motorola.
Matthew J. Micci, Vice President, Sales, Gallium Arsenide Products.
Mr. Micci joined the Company in January 1988 as Regional Director of Sales and
became Vice President, Sales in July 1990. Prior to joining the Company, 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.
15
PART II
-------
ITEM 5. MARKET FOR COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
- -------------------------------------------------------------------------
The Company's Common Stock trades on the Nasdaq Stock Market. The following
table sets forth the high and low sale prices per share of Common Stock as
reported on the Nasdaq Stock Market for the periods indicated.
1997 High Low
- --------------------------------------------------------------------
First Quarter 15 3/4 9 7/8
Second Quarter 16 3/4 10 1/2
Third Quarter 24 5/8 14 3/4
Fourth Quarter 29 16 5/8
1996
- --------------------------------------------------------------------
First Quarter 14 3/4 9 3/4
Second Quarter 11 1/4 8 1/4
Third Quarter 10 3/4 7
Fourth Quarter 13 1/4 7 1/4
The Company has never paid dividends on its common stock and has no present
plans to do so.
As of December 31, 1997, there were 257 stockholders of record of the
Company's Common Stock. These numbers do not reflect persons or entities who
hold their stock through nominee or "street" name.
16
ITEM 6. SELECTED FINANCIAL DATA
- -------------------------------
Years ended December 31,
-----------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
(In thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
Revenues:
Product revenues $ 13,110 $ 11,727 $ 7,161 $ 2,830 $ 2,456
Research and development revenues 3,283 6,291 8,628 10,453 8,642
-------- -------- -------- -------- --------
16,393 18,018 15,789 13,283 11,098
-------- -------- -------- -------- --------
Expenses:
Cost of product revenues 8,636 9,489 6,059 1,981 1,769
Research and development-funded programs 2,802 6,591 8,757 10,531 7,802
Research and development-internal 7,623 9,876 6,856 4,070 2,181
General, administrative and selling 4,292 7,070 4,013 4,575 2,591
Other 327 598 403 255 280
Write-down of subsidiary assets - 3,900 - - -
Impairment charge - 4,990 - - -
-------- -------- -------- -------- --------
23,680 42,514 26,088 21,412 14,623
-------- -------- -------- -------- --------
Loss from operations (7,287) (24,496) (10,299) (8,129) (3,525)
Other income and expense:
Interest and other income 1,264 2,014 1,671 1,543 1,936
Interest expense (235) (338) (363) (108) (53)
-------- -------- -------- -------- --------
Loss before minority interest (6,258) (22,820) (8,991) (6,694) (1,642)
Minority interest in loss of subsidiary - 1,224 - - -
-------- -------- -------- -------- --------
Net loss $ (6,258) $(21,596) $ (8,991) $ (6,694) $ (1,642)
======== ======== ======== ======== ========
Net loss per share - basic and diluted $(.57) $(1.98) $(.95) $(.72) $(.20)
======== ======== ======== ======== ========
Weighted average number of common shares outstanding 11,010 10,921 9,462 9,267 8,242
======== ======== ======== ======== ========
December 31,
-----------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- ---------
BALANCE SHEET DATA:
Cash and equivalents and marketable securities $ 19,046 $ 27,072 $ 41,997 $ 28,728 $ 39,231
Working capital 21,466 27,687 44,727 30,566 42,169
Total assets 43,394 53,746 76,160 52,836 53,804
Long-term debt (excluding current maturities) 1,959 2,793 1,605 2,235 103
Accumulated deficit (54,519) (48,261) (26,665) (17,674) (10,980)
Stockholders' equity 35,869 40,271 61,842 43,451 50,549
17
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 small form factor displays. The Company was incorporated in 1984
to further develop and commercialize certain semiconductor expertise developed
at MIT. Historically, the Company has derived most of its revenues from
research and development contracts with agencies of the United States
government. Beginning in 1995, the Company experienced a significant increase
in revenues from sales of its device wafers, and in 1996 revenues from such
sales for the first time exceeded revenues from research and development
contracts. More recently, the Company has commenced sales of CyberDisplay
products. The Company has been unprofitable since inception and, at December
31, 1997, the Company had an accumulated deficit of $54,518,912.
For the years ended December 31, 1996 and 1995, the Company's consolidated
financial statements include the results of operations of Forte, a majority-
owned subsidiary of the Company. As a result of declining sales and results of
operations of Forte, the Company recorded a write-down of the value of Forte's
assets and its investment in Forte at December 31, 1996 totaling $3,900,000. In
March 1997, Forte filed a voluntary petition seeking protection from its
creditors under Chapter 11 of the United States Bankruptcy Code. As a result of
such filing, the financial statements of Forte are not consolidated with those
of the Company as of December 31, 1997 and for the year then ended.
RESULTS OF OPERATIONS
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
REVENUES. The Company's total revenues were $16,393,018 for the year ended
December 31, 1997 compared to $18,018,253 ($15,476,221 excluding Forte) during
the corresponding period in 1996, a decrease of $1,625,235. The Company's
product revenues were $13,110,044 for the year ended December 31, 1997 compared
to $11,727,081 ($9,185,049 excluding Forte) in 1996, an increase of $1,382,963.
Product revenues from sales of the Company's device wafers were $11,950,428 in
1997 compared to $8,346,377 in 1996, an increase of $3,604,051. The increase in
product revenues was due to a $3,924,995 increase in sales of device wafers and
display products over the corresponding period in the prior year, partially
offset by the inclusion of Forte revenues in 1996. The increase in sales of the
Company's device wafers was primarily due to the increased use of these wafers
in various wireless telecommunications products, particularly by the Company's
major customer, Rockwell. Research and development revenues were $3,282,974 for
the year ended December 31, 1997 compared to $6,291,172 in 1996, a decrease of
$3,008,198. The decrease in research and development revenues was primarily
attributable to a decrease in contract revenues from agencies of the federal
government. In 1994, the Company received a $10,658,000 multi-year contract
award from Defense Advanced Research Projects Agency. The Company recorded
revenues under this contract of $492,000 in 1997 compared to $3,441,000 in 1996,
a decrease of $2,949,000. As a result of the expirations of multi-year contracts
with the federal government and the Company's increased emphasis on product
revenues, the Company believes that research and development revenues will
continue to decline as a percentage of total revenues for the near future.
COST OF PRODUCT REVENUES. Cost of product revenues, which is comprised of
materials, labor and manufacturing overhead related to the Company's products,
was $8,636,199 for the year ended December 31, 1997 compared to $9,488,702
($6,733,054 excluding Forte) in 1996. The improvement in cost of product
revenues as a percentage of product revenues in 1997 was primarily due to
increased sales of device wafers, resulting in lower unit costs, and the
inclusion in the 1996 financial results of shipments of head-mounted display
systems by Forte.
RESEARCH AND DEVELOPMENT. 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 display
devices and products, device wafers and head-mounted display systems, circuit
design costs, staffing, purchases of materials and laboratory supplies, and
fabrication and packaging of the Company's display products. Funded research and
development expenses were $2,801,671 for the year ended December 31, 1997
compared to $6,591,016 in 1996, a decrease of $3,789,345. The decrease in funded
research and development expenses in 1997 was primarily due to a reduction in
programs funded by agencies of the federal government. Internal research and
development expenses were $7,622,614 in 1997 compared to $9,876,082 ($9,278,537
excluding Forte) in 1996, a decrease of $2,253,468. The decrease in internal
research and development expenses was primarily a result of reduced development
costs incurred for fabrication and packaging of the Company's display products,
as well as the inclusion of $597,545 of such expenses incurred by Forte during
the corresponding period in 1996.
18
GENERAL, ADMINISTRATIVE AND SELLING. General, administrative and selling
expenses consist of the expenses incurred by the Company's business development
and sales personnel, marketing expenses, and administrative and general
corporate expenses. General, administrative and selling expenses were $4,292,383
for the year ended December 31, 1997 compared to $7,070,275 ($4,188,658
excluding Forte) in 1996, a decrease of $2,777,892. The decrease in general,
administrative and selling expenses in 1997 was primarily due to the inclusion
of expenses of $2,881,617 incurred by Forte in 1996. In addition, general,
administrative and selling expenses include non-cash charges for compensation
expense of $75,857 for the year ended December 31, 1997 compared to $66,776 in
the year ended 1996 relating to the issuance of certain stock options.
OTHER. Other expenses were $327,102 in 1997 compared to $597,943 ($280,807
excluding Forte) in 1996, a decrease of $270,841. The reduced expense in 1997
was primarily due to amortization expense incurred in 1996 related to the
goodwill resulting from the Company's investment in Forte.
OTHER INCOME, NET. Other income, net was $1,029,182 in 1997 compared to
$1,676,224 in 1996, a decrease of $647,042. The decrease in 1997 was primarily
due to lower interest income earned as a result of lower cash balances during
1997 in comparison to 1996.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
REVENUES. The Company's total revenues were $18,018,253 ($15,476,221
excluding Forte) in 1996 compared to $15,789,526 ($12,276,379 excluding Forte)
in 1995, an increase of $2,228,727. The Company's product revenues were
$11,727,081 ($9,185,049 excluding Forte) in 1996 compared to $7,161,236
($3,648,089 excluding Forte) in 1995, an increase of $4,565,845. Product
revenues from sales of the Company's device wafers were $8,346,377 in 1996
compared to $3,294,233 in 1995, an increase of $5,052,144. The increase in
product revenues was primarily a result of an increase in unit sales of the
Company's HBT device wafers to customers for use in various wireless
telecommunications products. The Company believes that the decrease in product
revenues relating to Forte resulted from a smaller than anticipated overall
market size for head-mounted virtual reality peripheral devices and the
corresponding reduction in demand for these products. Research and development
revenues were $6,291,172 in 1996 compared to $8,628,290 in 1995, a decrease of
$2,337,118. The decrease in research and development revenues in 1996 was
attributable to a reduction in contract revenues from agencies of the federal
government. In 1994, the Company received a $10,658,000 multi-year contract
award from Defense Advanced Research Projects Agency. The Company recorded
revenues under this contract of $3,441,000 in 1996 and $4,260,000 in 1995. As a
result of the expirations of multi-year contracts with the federal government
and the Company's increased emphasis on product revenues, the Company believes
that research and development revenues will continue to decline as a percentage
of total revenues for the near future.
COST OF PRODUCT REVENUES. Cost of product revenues was $9,488,702
($6,733,054 excluding Forte) in 1996 compared to $6,059,440 ($2,880,557
excluding Forte) in 1995. The reduction in the cost of product revenues as a
percentage of product revenues in 1996 was primarily due to reduced
manufacturing costs and increased unit production volumes of the Company's
device wafers.
RESEARCH AND DEVELOPMENT. Funded research and development expenses were
$6,591,016 in 1996 compared to $8,756,850 in 1995, a decrease of $2,165,834, as
a result of a corresponding reduction in research and development revenues.
Internal research and development expenses were $9,876,082 ($9,278,537 excluding
Forte) in 1996 compared to $6,856,437 ($6,240,299 excluding Forte) in 1995, an
increase of $3,019,645. The increase in internal research and development
expenses was primarily due to increased development of the Company's display
products, device wafers and head-mounted display systems, including increases in
circuit design costs, staffing, purchases of materials and laboratory supplies,
and fabrication and packaging of the Company's displays.
GENERAL, ADMINISTRATIVE AND SELLING. General, administrative and selling
expenses were $7,070,275 ($4,188,658 excluding Forte) in 1996 compared to
$4,012,764 ($2,917,389 excluding Forte) in 1995, an increase of $3,057,511. The
increase in general, administrative and selling expenses in 1996 was primarily
due to increases in display product marketing costs, advertising and trade show
costs, and increased personnel and related costs. In addition, general,
administrative and selling expenses include non-cash charges for compensation
expense of $66,776 in 1996 compared to $130,188 in 1995 relating to the issuance
of certain stock options.
19
OTHER. Other expenses were $597,943 ($280,807 excluding Forte) in 1996
compared to $402,554 ($289,622 excluding Forte) in 1995, an increase of
$195,389. The increase was primarily due to higher amortization expenses
incurred in 1996 related to the goodwill resulting from the Company's investment
in Forte.
OTHER INCOME, NET. Other income, net was $1,676,224 in 1996 compared to
$1,307,520 in 1995, an increase of $368,704. The increase was primarily due to
greater interest income earned as a result of higher cash balances during the
period in comparison to 1995.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
REVENUES. The Company's total revenues were $15,789,526 ($12,276,379
excluding Forte) in 1995 compared to $13,283,389 in 1994, an increase of
$2,506,137. The Company's product revenues increased to $7,161,236 ($3,648,089
excluding Forte) in 1995 from $2,830,339 in 1994, an increase of $4,330,897.
Product revenues from sales of the Company's device wafers were $3,294,233 in
1995 compared to $2,518,584 in 1994, an increase of $775,649. The increase in
product revenues was primarily due to an increase in sales of the Company's
device wafers and displays and sales by Forte of $3,513,147 in 1995. Research
and development revenues were $8,628,290 in 1995 compared to $10,453,050 in
1994, a decrease of $1,824,760. This decrease was primarily attributable to a
decrease in contract revenues from agencies of the federal government. As a
result of the expirations of multi-year contracts with the federal government
and the Company's increased emphasis on product revenues, the Company believes
that research and development revenues will continue to decline as a percentage
of total revenues for the near future.
COST OF PRODUCT REVENUES. Cost of product revenues in 1995 was $6,059,440
($2,880,557 excluding Forte) compared to $1,980,701 in 1994. The increase in
cost of product revenues as a percentage of product revenues in 1995 was
primarily due to scale-up of manufacturing capacity without a commensurate level
of sales of head-mounted display systems by Forte to absorb manufacturing
overhead.
RESEARCH AND DEVELOPMENT. Funded research and development expenses were
$8,756,850 in 1995 compared to $10,531,491 in 1994, a decrease of $1,774,641, as
a result of a corresponding reduction in research and development revenues.
Internal research and development expenses were $6,856,437 ($6,240,299 excluding
Forte) in 1995 compared to $4,070,329 in 1994, an increase of $2,786,108. The
increase in internal research and development expenses was primarily due to
increased development of the Company's display products and device wafers,
including increases in circuit design costs, staffing, purchases of materials
and supplies, and fabrication and packaging of the Company's displays.
GENERAL, ADMINISTRATIVE AND SELLING. General, administrative and selling
expenses were $4,012,764 ($2,917,389 excluding Forte) in 1995 compared to
$4,574,806 in 1994, a decrease of $562,042. General, administrative and selling
expenses decreased as a result of the reclassifications of costs incurred
relating to the Company's lease of a manufacturing facility in October 1993, and
the modification of the facility prior to the commencement of development and
manufacturing activities. These costs were classified as cost of sales and
research and development expense in 1995 and as general and administrative in
1994.
OTHER. Other expenses were $402,554 ($289,622 excluding Forte) in 1995
compared to $255,492 in 1994, an increase of $147,062. The increase in 1995 was
primarily due to higher amortization expenses incurred in 1995 related to the
goodwill resulting from the Company's investment in Forte.
OTHER INCOME, NET. Other income, net was $1,307,520 in 1995 compared to
$1,435,173 in 1994, a decrease of $127,653. The decrease in 1995 was primarily
due to lower interest income earned as a result of lower cash balances during
the period in comparison to balances in 1994.
20
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations primarily through public and private
offerings of its equity securities, research and development contract revenues,
and sales of its Wafer-Engineered device wafers and display devices and
products. As of December 31, 1997, sales of equity securities have raised
approximately $90,000,000 from (i) private equity financings prior to the
Company's initial public offering, (ii) the Company's initial public offering in
April 1992, (iii) the Company's March 1993 public offering, (iv) the exercise of
a 625,000 share stock warrant in December 1993, (v) $30,437,000 from private
stock sales to Telecom Holding Co., Ltd. and United Microelectronics Corporation
and its affiliate in 1995, and (vi) the periodic exercise of stock options under
the Company's stock option plans. In February 1998, the Company completed a
further public offering of its common stock involving net proceeds to the
Company of approximately $17,800,000.
As of December 31, 1997, the Company had cash and equivalents and marketable
securities of $19,046,284 and working capital of $21,465,606 compared to
$27,072,106 and $27,686,990 as of December 31, 1996. During 1997, cash and
equivalents and marketable securities decreased $7,974,888. The decrease in cash
and equivalents and marketable securities was primarily due to $5,495,665 of
cash used in operations primarily as a result of net operating losses, and
$3,555,266 for capital expenditures. These decreases were partially offset by
proceeds from exercise of stock options of $1,830,583. The Company also has
$1,080,000 of marketable securities held in escrow as equipment financing
collateral which is shown in "other assets."
The Company periodically enters into various long-term debt arrangements to
finance equipment purchases and other activities. As of December 31, 1997, long-
term debt obligations totaled $3,501,786, of which $1,542,818 is payable in the
next twelve months.
In December 1997, the Company received a commitment letter for a $5,000,000
term loan facility from a commercial lender. Under the terms of the proposed
facility, the loan would be payable on a quarterly basis with a floating
interest rate to be based on LIBOR, and would be secured by the Company's
accounts receivable. The Company completed this transaction in February 1998.
In October 1993, the Company entered into a five-year lease for a 74,000
square foot manufacturing facility. This facility, which includes 10,000 square
feet of environmentally controlled clean rooms, is used primarily for the
Company's production of display devices. This facility is occupied under a lease
that expires in October 1999, with renewable options for up to five additional
years at the Company's election. The Company will make lease payments of
$1,000,000 per year over the remaining term of the lease.
The Company currently expects to expend approximately $5,000,000 on capital
expenditures in 1998, primarily for the acquisition of equipment relating to the
manufacturing, packaging and testing of CyberDisplay products and production of
the Company's device wafers.
As of December 31, 1997, the Company had tax loss carryforwards of
approximately $51,000,000 which may be used to offset future taxable income.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 128, "Earnings Per Share," which became effective during the fourth
quarter of 1997. The new pronouncement's requirements will not impact the
Company's previously reported loss per share.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which is effective for the Company for the period commencing January
1, 1998. SFAS No. 130 has no impact on net income and requires that certain
components of stockholders' equity from non-owner sources be reclassified and
presented as "other comprehensive income." Currently, the Company's
consolidated balance sheets contain no material components of stockholders'
equity that would be reclassified as "other comprehensive income."
21
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which is effective for the Company for the
period commencing January 1, 1998. The impact of SFAS No. 131 on the Company has
not yet been determined.
The Company is conducting a review of its computer systems to identify those
areas that could be affected by the "Year 2000" issue and is developing an
implementation plan to resolve the issue. The Company presently believes, with
modification to existing software and converting to new software, the Year 2000
problem will not pose significant operational problems and is not anticipated to
be material to its financial position or results of operations in any given
year.
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.
RISK FACTORS
Certain of the statements contained in this Annual Report on Form 10-K are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, that involve risks and uncertainties. The Company's
actual results could differ materially from those discussed here. Factors that
could cause or contribute to such differences include, but are not limited to,
those discussed below.
POTENTIAL LACK OF MARKET ACCEPTANCE. The Company's product sales have been
derived primarily from its custom Wafer-Engineered device wafers. To date, the
Company has had limited sales of its display products. The CyberDisplay product
is a miniature display which uses a lens and backlight to deliver high
resolution data and video images. The Company's success will in large part
depend on the widespread adoption of this viewing format in the marketplace as
compared to a direct view display. The Company's success will also be dependent
upon the widespread acceptance of its customers' products. The Company's
competitors are investing substantial resources in the development and
manufacture of displays using a number of different technologies. In the event
these efforts result in the development of products that offer advantages over
the Company's products, and the Company is unable to improve its technology or
develop or acquire alternative technology that is competitive, the Company's
business, results of operations and financial condition will be materially and
adversely affected. Kopin's prospective customers for its display products are
principally manufacturers in the wireless handset, pager, digital camera, smart
card and other consumer electronics industries that would use CyberDisplay
products in their products. These companies may be reluctant to adopt Kopin's
products because of perceived risks relating to the introduction of the
Company's display technology generally, concerns about end-user acceptance of
CyberDisplay products and the complexity, reliability, usefulness and cost-
effectiveness of the Company's display products compared to traditional AMLCDs.
In addition, these companies may be reluctant to rely upon a relatively small
company such as Kopin for a critical component. There can be no assurance that
the Company's prospective customers will adopt CyberDisplay products or that the
end-users of these prospective customers will accept CyberDisplay products. The
failure of Kopin to achieve such market acceptance of CyberDisplay products will
have a material adverse effect on the Company's business, results of operations
and financial condition.
Kopin's customers for its HBT device wafer products are principally
manufacturers of integrated circuits for the telecommunications and data
communications markets. Current and prospective customers may be reluctant to
adopt Kopin's products to an extent greater than at present because of perceived
risks relating to GaAs technology generally or HBT GaAs technology in
particular. In addition, these customers may be reluctant to rely upon a
relatively small company such as Kopin for a critical component. There can be no
assurance that additional companies in Kopin's target markets will adopt its HBT
technology or that the companies that currently use the Company's HBT device
wafer products will continue to do so in the future.
22
HISTORY OF OPERATING LOSSES; ACCUMULATED DEFICIT. The Company has not been
profitable in any quarter of its last five fiscal years. As of December 31,
1997, the Company had an accumulated deficit of $54,518,912. For the years ended
December 31, 1997, 1996, and 1995, the Company incurred net losses of
$6,257,769, $21,596,364, and $8,990,999, respectively. There can be no assurance
that the Company will achieve or maintain profitability in the future. If the
Company continues to incur losses, the Company is likely to require additional
financing and there can be no assurance that the Company would be able to secure
additional financing or that such financing will be available on favorable
terms.
POTENTIAL FLUCTUATIONS IN RESULTS OF OPERATIONS. The Company's quarterly and
annual results of operations are affected by a wide variety of factors that
could have a material adverse effect on total revenues and profitability from
period to period, including competitive pressures on selling prices; the timing
and cancellation of customer orders; availability of integrated circuit foundry
capacity and raw materials; fluctuations in yields; changes in product mix; the
Company's ability to introduce new products and technologies on a timely basis;
introduction of products and technologies by the Company's competitors; market
acceptance of the Company's and its customers' products; the level of orders
received which can be shipped in a quarter; the Company's ability to
successfully reduce costs; and the cyclical nature of the semiconductor
industry. Sales of end-user products incorporating the Company's products may
exhibit cyclical fluctuations based on factors such as capital expenditure
cycles of customers and new product introductions. Historically, average selling
prices in the semiconductor industry have decreased over the life of a product,
and as a result, the average selling prices of the Company's products are likely
to be subject to pricing pressures in the future. The Company's business is
characterized by short-term orders and shipment schedules, and the Company
generally permits orders to be canceled or rescheduled without significant
penalty to the customer. Due to the absence of substantial noncancellable
backlog, the Company typically plans its production and inventory levels based
on internal forecasts of customer demand, which are highly unpredictable and can
fluctuate substantially. Because the Company is continuing to invest in capital
equipment and to increase its operating expenses for personnel and new product
development, the Company's business, results of operations and financial
condition would be materially and adversely affected if increased sales are not
achieved. As a result of the foregoing or other factors, the Company may
experience fluctuations in future results of operations on a quarterly or annual
basis which could have a material adverse effect on its business, results of
operations and financial condition.
SUBSTANTIAL RELIANCE ON CERTAIN CUSTOMERS. Relatively few customers account
for a substantial portion of the Company's revenues. For the years ended
December 31, 1997 and 1996, revenues from multiple contracts with various United
States governmental agencies accounted for approximately 20% and 35%,
respectively, of the Company's total revenues. Sales to Rockwell accounted for
approximately 63%, and 39% of the Company's total revenues for the years ended
December 31, 1997 and 1996, respectively. The Company expects that device wafer
sales to Rockwell will continue to represent a significant portion of the
Company's revenues for the near future. A reduction in research and development
contracts from the United States government or a reduction or delay in orders
from Rockwell or the Company's other customers, including reductions or delays
due to market, economic or competitive conditions in the semiconductor or
display industries, could have a material adverse effect on the Company's
business, results of operations and financial condition. Although some of the
Company's customers have entered into agreements obligating them to purchase a
certain amount of the Company's products, the Company's customers generally do
not enter into such agreements. In addition, customer orders generally can be
canceled and volume levels changed or delayed. The timely replacement of
canceled, delayed or reduced orders cannot be assured. The Company's results of
operations have been adversely affected in the past by the failure of
anticipated orders to be realized and by deferrals or cancellations of orders as
a result of changes in customer requirements. Canceled, delayed, or reduced
commitments from any of the Company's major customers, particularly Rockwell,
would have a material adverse effect on the Company's business, results of
operations and financial condition.
UNCERTAIN DEMAND FOR HIGH INFORMATION CONTENT IN PORTABLE PRODUCTS. The
Company's success in the display business will depend on the availability of
cost-effective wireless applications that support customer demand for high
resolution portable displays. Deployment of higher bandwidth infrastructure will
be needed to drive the development of value added wireless services (such as
wireless e-mail, facsimile and Internet access) to increase the demand for the
Company's display products. The Company's success will depend in large part on
the widespread implementation of this infrastructure and the cost-effectiveness
to the end-user of these services. Either a delay in such deployment or an
unacceptably high cost to the consumer would delay the rate of market adoption
of products based on Kopin's display technology.
DEPENDENCE ON MARKETING AND DISTRIBUTION RELATIONSHIPS. The Company has
entered into agreements with Motorola, Siemens, FujiFilm and Gemplus for the
marketing and distribution of certain of its current and anticipated display
23
products, and intends to continue to pursue these arrangements with other
potential customers. There can be no assurance that the Company will be
successful in maintaining current alliances or forming additional relationships
or that the Company's strategic customers will devote adequate resources to
accomplish such marketing and distribution or be successful in such efforts. The
failure of the Company to enter into these key relationships or the failure of
these customers to devote adequate resources to market or distribute the
Company's products could have a have a material adverse effect on the Company's
business, results of operations and financial condition.
MANUFACTURING RISKS; MANUFACTURING CAPACITY LIMITATIONS. The Company is
subject to significant manufacturing risks. The manufacturing processes utilized
by the Company are highly complex and are periodically modified in an effort to
improve yields and product performance. Process changes or other problems that
occur in the complex manufacturing process can result in interruptions in
production or significantly reduced yields. From time to time, the Company has
experienced these problems, many of which are difficult to diagnose and time-
consuming or expensive to remedy. In particular, new process technologies or new
products can be subject to especially wide variations in manufacturing yields
and efficiency. There can be no assurance that the Company will not experience
manufacturing problems that result in delays in product introduction, delivery
delays or yield fluctuations, including problems associated with increases in
production volumes and increases in the complexity of the Company's products.
The Company is also subject to the risks associated with the shortage of raw
materials such as unprocessed wafers and packaging used in the manufacture or
assembly of the Company's products. The Company's business, results of
operations and financial condition would be materially and adversely affected if
it were to experience any significant disruption in the operation of its
facilities.
The Company currently manufactures all of its device wafers at its
manufacturing facility located in Taunton, Massachusetts. The Company intends to
increase its production capacity in its Taunton facility to produce device
wafers up to six inches in diameter. Along with adding production equipment, the
Company will be required to successfully hire, train and manage additional
production personnel in order to successfully increase its production capacity
in accordance with its time schedule. The Company has no prior experience in
producing finished six-inch device wafers. In the event the Company's expansion
plans are not implemented on a timely basis for any reason, the Company could
become subject to production capacity constraints. Such constraints could have a
material adverse effect on the Company's business, results of operations and
financial condition.
The Company has limited experience manufacturing display products. The Company
is subject to the risk that the manufacture of such a small display may not ever
be commercially viable, as Kopin believes that no other company currently
manufactures a display of a size equivalent to the CyberDisplay product at
commercial quantities and prices. The Company's fabrication facility in
Westborough, Massachusetts is used in the development and packaging of
CyberDisplay products. The integrated circuit portion of the CyberDisplay
product is commercially produced by UMC. The Company is also establishing
packaging capability of CyberDisplay products at UMC's affiliate, Unipac. There
are certain significant risks associated with the Company's reliance on outside
foundries, including the lack of control over production capacity and delivery
schedules and limited control over quality assurance, manufacturing yields and
production costs. In addition, the operations of UMC and Unipac, both located in
Taiwan, are subject to risks associated with international commerce, including
unexpected changes in legal and regulatory requirements, changes in tariffs and
trade policies, and political and economic instability. There can be no
assurance that UMC and Unipac will be able to provide the required capacity and
quality on a timely basis to meet the Company's requirements. The Company is
dependent on these third-party manufacturers for the fabrication of integrated
circuits and the packaging of its display products. The termination or
cancellation of the Company's agreements with these companies, or the inability
of these companies to produce required components, would materially and
adversely affect the Company's ability to manufacture its products and would
require the Company to establish alternative manufacturing relationships. There
can be no assurance that the Company would be able to establish such
relationships on acceptable terms; in any event, the time required to establish
such substitute relationships could substantially delay the commercialization of
the Company's display products, which in turn, could have a material adverse
effect on the Company's business, results of operations and financial condition.
COMPETITION. The display market is highly competitive and is currently
dominated by large Asian electronics companies including Sharp Corporation,
Hitachi, Ltd., Seiko Corporation, Toshiba Corporation (''Toshiba''), Sony
Corporation, NEC Corporation, Sanyo Electric Co., Ltd. and Display Technologies,
Inc., a joint venture of IBM Corporation and Toshiba. Most of these companies
have substantially greater financial, technical, marketing, manufacturing, and
personnel resources than the Company. 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 the Company's display
product
24
offerings will also depend upon its ability to compete against other types of
more well-established products such as traditional AMLCD-based products as well
as the adoption of the CyberDisplay product in the industry as an alternative to
traditional AMLCD-based products. There can be no assurance that the Company
will be able to compete successfully against these companies.
There are also a number of alternative display technologies in production and
under development including passive matrix liquid crystal display (''LCD''),
light emitting diode (''LED''), reflective, field emission display, plasma,
organic LED and virtual retinal displays, some of which target the high
performance small form factor display markets in which the Company's display
products are sold. There are many large and small companies that manufacture or
have in development products based on these technologies. The CyberDisplay
product will compete with other displays utilizing these and other competing
display technologies. There can be no assurance that the Company will be able to
compete successfully against these companies.
With respect to its device wafer products, the Company presently competes with
several companies, including The Furakawa Electric Co., Ltd., Epitronics, Emcore
Corporation, Epitaxial Products International and Hitachi Cable, as well as
integrated circuit manufacturers with in-house wafer growth capabilities, such
as TRW Inc. and Fujitsu Limited. In the device wafer business, competition could
become increasingly intense as new entrants emerge to address the high growth
markets that Kopin's products address. The production of GaAs integrated
circuits has been and continues to be more costly than the production of silicon
integrated circuits. Although the Company has reduced production costs of its
HBT device wafers by achieving higher volumes, there can be no assurance that
the Company will be able to continue to decrease production costs. In addition,
the Company believes the costs of producing GaAs integrated circuits by its
customers will continue to exceed the costs associated with the production of
competing silicon integrated circuits. As a result, the Company must target
markets where the higher cost associated with GaAs integrated circuits is
justified by their superior performance. There can be no assurance that the
Company can continue to identify markets which require performance superior to
that offered by silicon solutions or that the Company will continue to offer
products which provide superior performance to offset the cost differentials.
The GaAs materials industry has been characterized by rapid and significant
technological advances. There can be no assurance that the Company will be able
to enhance its products to include these advances on a timely basis, if at all,
or that the Company will have sufficient funds to invest in new technologies,
products or processes.
NEW PRODUCTS AND RAPID TECHNOLOGICAL CHANGE. The advanced semiconductor
wafer and display industries have been characterized by rapid technological
change and evolving industry requirements and standards. The Company believes
that these trends will continue. The Company's ability to compete will depend
upon its ability to enhance its existing products and to develop and market new
products to meet customer requirements. Successful product commercialization
depends on a number of factors, including new product definition, timely
completion, introduction and market acceptance of the Company's products and its
customers' products. There can be no assurance that the Company will adjust to
changing market conditions or be successful in introducing products or product
enhancements on a timely basis, if at all, or that the Company will be able to
market successfully these products and product enhancements once developed.
Further, there can be no assurance that the Company's products will not be
rendered obsolete by new industry standards or changing technology.
DEPENDENCE ON WIRELESS COMMUNICATIONS MARKETS. Substantially all of the
Company's product revenues are presently derived from, and are expected to
continue to be derived from, sales of products for wireless communications
applications. These markets are characterized by intense competition, rapid
technological change and short product life cycles. In addition, the wireless
communications equipment markets have undergone a period of rapid growth and
consolidation in the last few years. The Company's business, results of
operations, and financial condition would be materially and adversely affected
in the event of a significant slowdown in these markets. Products for wireless
communications applications are based on industry standards, which are
continually evolving. The emergence of new industry standards could render the
Company's products unmarketable or obsolete. There can be no assurance that the
Company will be able to successfully develop and introduce new products based on
emerging industry standards and the failure of the Company to introduce such
products on a timely basis, or at all, would have a material adverse effect on
the Company's business, results of operations and financial condition.
UNCERTAINTY RELATING TO PATENTS AND PROPRIETARY RIGHTS. The Company's
success depends in part on its ability to obtain patents and licenses and to
preserve other intellectual property rights covering its products and
manufacturing processes. To that end, the Company has obtained certain domestic
and foreign patents and intends to continue to seek patents on its inventions
when appropriate. With respect to CyberDisplay products, the Company relies upon
a combination
25
of patent applications, patents and trade secrets to protect its related
technology and many of the applications for these products. With respect to
Wafer-Engineered materials, the Company primarily relies on trade secrets to
protect its processing technology.
The process of seeking patent protection can be time consuming and expensive
and there can be no assurance that patents will issue from currently pending or
future applications or that the Company's 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 the Company. The Company 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, the Company cannot be certain
that it was the first to conceive of inventions covered by pending patent
applications or the first to file patent applications on such inventions. There
can be no assurance that the Company's pending patent applications or those of
its licensors will result in issued patents or that any issued patents will
afford protection against a competitor. In addition, there can be no assurance
that others will not obtain patents that would require the Company to license,
circumvent or cease manufacturing and sales of products covered by such patents,
or that such licenses, if needed, would be available to the Company on favorable
terms, if at all.
There can be no assurance that foreign intellectual property laws will protect
the Company's intellectual property rights. Furthermore, there can be no
assurance that others will not independently develop similar products, duplicate
the Company's products or design around any patents issued to the Company. The
Company's 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 the patent rights of the Company. Although the Company is not aware of
any pending or threatened patent litigation against the Company, the Company may
be notified, from time to time, that it could be or is infringing certain
patents and other intellectual property rights of others. Litigation, which
could result in substantial cost to, and diversion of resources of, the Company
even if the outcome is favorable to the Company, may be necessary to enforce
patents or other intellectual property rights of the Company or to defend the
Company 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 the Company for patent infringement, the Company 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. No assurance can be given 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 have a material adverse effect on the Company's business, results of
operations and financial condition.
The Company also attempts to protect its proprietary information with
contractual arrangements and under trade secret laws. Company 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 the employ of the Company. Agreements with consultants generally provide that
rights to inventions made by them while consulting for the Company will be
assigned to the Company unless such assignment is prohibited by the terms of any
agreements with their regular employers. Agreements with employees, consultants
and collaborators contain provisions intended to protect further the
confidentiality of the Company's proprietary information. To date, the Company
has had no experience in enforcing such agreements. There can be no assurance
that these agreements will not be breached, that the Company would have adequate
remedies for any breaches, or that the Company's trade secrets will not
otherwise become known or be independently developed by competitors.
LOSS OF EXCLUSIVITY OF MIT LICENSE. In 1985, the Company obtained a license
to certain patents and patent applications from the Massachusetts Institute of
Technology (''MIT'') for device wafers and related technology to make, have
made, use and sell products for the life of the patents. The Company's revenues
from products covered under this exclusive license arrangement have not been
material to date. This license is exclusive with respect to commercial
applications until April 22, 1999 and becomes non-exclusive thereafter. There
can be no assurance that MIT will continue to license such technology to the
Company on an exclusive basis after such date. Although revenues from the
Company's products covered under this exclusive license arrangement have not
been material to date, the Company believes that the loss of such exclusivity
could result in competitors of the Company developing competing products
utilizing this technology if MIT were to grant additional licenses. Should MIT
license such technology to third parties, there can be no assurance that such
licensing will not have a material adverse effect on the Company's business,
results of operations and financial condition.
26
DEPENDENCE ON KEY PERSONNEL. The Company's 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, the Company's
President and Chief Executive Officer, could have a material adverse effect on
the Company. The Company does not maintain any ''key-man'' insurance policies on
Dr. Fan or any other employees. In addition, the Company's success will depend
in significant part upon its ability to attract and retain highly-skilled
management, technical, and sales and marketing personnel. Competition for such
personnel is intense and there can be no assurance that the Company will be
successful in attracting and retaining such personnel.
RISKS ASSOCIATED WITH MANAGING AN EXPANDING BUSINESS. Due to the level of
technical and marketing expertise necessary to support its existing and new
customers, the Company must attract highly qualified and well-trained personnel.
There may be only a limited number of persons with the requisite skills to serve
in these positions and it may become increasingly difficult for the Company to
hire such personnel. The Company has historically derived its revenues primarily
from research and development contracts with various agencies of the federal
government and sales of its device wafers. In order to achieve its business
objectives, the Company must continue to undergo substantial changes in its
operations to transition to a company which develops and manufactures advanced
semiconductor device wafer products and small form factor displays and markets
them to a broader commercial marketplace. This transition has placed, and is
expected to continue to place, significant strain on the Company's limited
administrative, operational and financial resources. Future expansion by the
Company may also significantly strain the Company's management, manufacturing,
financial and other resources, including required spending on capital
expenditures. There can be no assurance that the Company's systems, procedures,
controls and existing space will be adequate to support the Company's
operations. There can also be no assurance that the Company will be able to
finance such improvements. Failure to manage the Company's growth properly could
have a material adverse effect on the Company's business, results of operations
and financial condition.
RISKS ASSOCIATED WITH POSSIBLE ACQUISITIONS AND INVESTMENTS. The Company may
pursue potential acquisitions of businesses, products and technologies that
could complement or expand the Company's business. The Company currently has no
commitments or agreements with respect to any acquisitions and there can be no
assurance that the Company will be able to identify any appropriate acquisition
candidates. If the Company identifies an acquisition candidate, there can be no
assurance that the Company will be able to successfully negotiate the terms of
any such acquisition, finance such acquisition or integrate such acquired
businesses, products or technologies into the Company's existing business and
products. The negotiation of potential acquisitions as well as the integration
of an acquired business could cause diversion of management's time and
resources, and require the Company to use its capital to consummate a potential
acquisition. Future acquisitions by the Company could result in potentially
dilutive issuances of equity securities, the incurrence of debt and contingent
liabilities, amortization expenses and write-downs of acquired assets. For
example, the Company recorded a write-down of $3,900,000 in 1996 associated with
its investment in Forte Technologies, Inc., a developer of virtual reality head-
mounted systems and peripherals for the computer and entertainment markets. In
addition, the Company has made, and may from time to time in the future make,
investments in companies engaged in certain aspects of the flat panel display
and electronics industries as part of its business strategy. If the Company were
to complete any acquisitions or investments in the future, there can be no
assurance that, whether or not consummated, any such acquisition or investment
would not have a material adverse effect on the Company's business, results of
operations and financial condition.
ENVIRONMENTAL REGULATION. The Company is 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 its
manufacturing process. Although the Company believes that its activities conform
to presently applicable environmental regulations, the failure to comply with
present or future regulations could result in fines being imposed on the
Company, suspension of production or a cessation of operations. Any failure of
the Company to control the use of, or adequately restrict the discharge of,
hazardous substances, or otherwise comply with environmental regulations, could
subject it to significant future liabilities. In addition, although the Company
believes that its past operations conformed with then applicable environmental
laws and regulations, there can be no assurance that the Company has not in the
past violated applicable laws or regulations, which violations could result in
remediation or other liabilities, or that past use or disposal of
environmentally sensitive materials in conformity with then existing
environmental laws and regulations will not result in remediation or other
liabilities under current or future environmental laws or regulations.
27
STOCK PRICE VOLATILITY. 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 volume 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-16. 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.
28
PART III
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 21, 1998 (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
- -----------------------------------------------------------------------
The information required by this item is incorporated herein by reference from
the Company's Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
The information required by this item is incorporated herein by reference from
the Company's Proxy Statement.
29
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, 1997 and 1996 F-3
Consolidated Statements of Operations for the Years Ended F-4
December 31, 1997, 1996 and 1995.
Consolidated Statements of Stockholders' Equity for the F-5
Years Ended December 31, 1997, 1996 and 1995.
Consolidated Statements of Cash Flows for the Years Ended F-6
December 31, 1997, 1996 and 1995.
Notes to Consolidated Financial Statements. F-7 to F-16
(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 (13)
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 Letter Agreement by and between the Company and Boeing
Defense and Space Group dated February 11, 1992 (1)
10.7 Facility Lease, as amended, by and between the Company
and Myles Standish Associates Limited Partnership
commencing November 1, 1985 (1)
10.8 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)
10.9 Stock Purchase Agreement, dated as of November 6, 1992, by
and between the Company and Rockwell International Corporation (2)
30
10.10 Contract between the Company and the Defense Advanced Research
Projects Agency, dated September 25, 1992 (2)
10.11 Contract between the Company and the David Sarnoff Research
Center, dated July 17, 1992 (2)
10.12 Contract between the Company and Microelectronics and Computer
Technology Corporation, dated September 15, 1992 (2)
10.13 Contract by and between the Company and the United States
Department of Commerce dated September 16, 1992 (2)
10.14 Contract by and between the Company and the United States Army
Natick RD&E Center dated December 29, 1993 (3)
10.15 Contract by and between the Company and Department of the Air
Force, Air Force Material Command dated September 22, 1993 (3)
10.16 Facility Lease, by and between the Company and Massachusetts
Technology Park Corporation dated October 15, 1993 (3)
10.17 Contract amendment by and between the Company and Advanced
Research Projects Agency dated December 3, 1993 (3)
10.18 Cooperative Research and Development Agreement, by and between
the Company and Massachusetts Institute of Technology Lincoln
Laboratory dated September 14, 1993 (confidential portions
on file with the Commission) (3)
10.19 Immersion Display System Development Agreement, by and between
the Company and Honeywell Technology Center dated October 19,
1993 (confidential portions on file with the Commission) (3)
10.20 Master Sublease - Purchase Agreement, by and between the
Company and Massachusetts Industrial Finance Agency dated
June 23, 1994 (4)
10.21 Contract by and between the Company and the Advanced Research
Projects Agency dated May 25, 1994 (confidential portions on
file with the Commission) (4)
10.22 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)
10.23 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)
10.24 Securities Purchase Agreement, by and between the Company
and Forte Technologies, Inc. dated October 24, 1994
(confidential portions on file with the Commission) (6)
10.25 Securities Purchase Agreement, by and between the Company
and GMT Microelectronics Corporation, dated January 6, 1995
(confidential portions on file with the Commission) (7)
10.26 Amended and Restated Employment Agreement between the Company
and Dr. John C.C. Fan, dated as of May 1, 1995 (8)
10.27 Contract by and between the Company and the United States
Department of Commerce dated April 25,1995 (9)
10.28 Securities Purchase Agreement, by and between the Company and
Forte Technologies, Inc. dated September 15, 1995 (9)
10.29 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)
10.30 Stock Purchase Agreement, by and between the Company and
Telecom Holding dated November 24, 1995 (10)
10.31 Letter Agreement, by and between the Company and Telecom
Holding Co., Ltd. Co., Ltd. dated November 24, 1995 (10)
10.32 Stock Purchase Agreement, by and between the Company and
United Microelectronics Corporation dated November 29, 1995 (9)
10.33 Stock Purchase Agreement, by and between the Company and
Unipac Optoelectronics Corporation dated November 29, 1995 (9)
31
10.34 Letter Agreement, by and between the Company and United
Microelectronics Corporation dated November 29, 1995
(confidential portions on file with the Commission) (9)
10.35 Amendment Agreement, by and between the Company and Rockwell
International Corporation dated September 29, 1995 (9)
10.36 Securities Purchase Agreement, by and between the Company and
Unitek Semiconductor, Inc. dated January 26, 1996 (11)
10.37 Chattel Leasing Promissory Note, by and between the Company
and BancBoston Leasing dated January 29, 1996 (11)
10.38 Securities Purchase Agreement, by and between the Company
and Forte Technologies, Inc. dated February 8, 1996 (11)
10.39 Securities Purchase Agreement, by and between Forte
Technologies, Inc. and Investors, dated June 27, 1996 (12)
10.40 Master lease agreement, by and between the Company and
BancBoston Leasing dated December 23, 1996 (13)
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.
(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.
32
(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.
(b) Reports on Form 8-K:
None
33
KOPIN CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report F-2
Consolidated Balance Sheets at December 31, 1997 and 1996 F-3
Consolidated Statements of Operations for the years ended December 31, 1997, 1996 and 1995 F-4
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1997,
1996 and 1995 F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995 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, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1997. Our audits also
included the financial statement schedule listed in the index at Item 14. These
financial statements and financial statement schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and the financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
Also, in our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Boston, Massachusetts
February 20, 1998
F-2
KOPIN CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31,
----------------------------
1997 1996
------------- -------------
Assets
Current assets:
Cash and equivalents $ 14,425,400 $ 16,511,291
Marketable securities 4,620,884 10,560,815
Accounts receivable, net of allowance of $152,700 and $137,400
Billed 3,209,482 3,650,075
Unbilled 1,091,806 2,933,863
Inventory 2,720,843 3,073,643
Prepaid expenses and other current assets 798,867 1,257,781
------------ ------------
Total current assets 26,867,282 37,987,468
Equipment and improvements:
Equipment 22,954,885 20,862,918
Leasehold improvements 772,717 772,717
Furniture and fixtures 331,955 361,483
Equipment under construction 1,904,198 636,255
------------ ------------
25,963,755 22,633,373
Accumulated depreciation and amortization 14,869,251 11,731,828
------------ ------------
11,094,504 10,901,545
Other assets 3,372,692 2,962,149
Intangible assets 2,059,918 1,894,392
------------ ------------
Total assets $ 43,394,396 $ 53,745,554
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Note payable $ 450,000 $ 500,000
Accounts payable 2,683,671 6,945,053
Accrued payroll and expenses 725,187 1,427,305
Unearned revenue - 80,484
Current portion of long-term obligations 1,542,818 1,347,636
------------ ------------
Total current liabilities 5,401,676 10,300,478
Deferred rent 165,166 381,166
Long-term obligations, less current portion 1,958,968 2,793,061
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, 20,000,000 shares;
issued 11,122,143 shares in 1997 and 10,931,408 shares in 1996 111,221 109,314
Additional paid-in capital 90,514,233 88,605,451
Deferred compensation (231,955) (227,706)
Marketable securities valuation (6,001) 44,933
Deficit (54,518,912) (48,261,143)
------------ ------------
Total stockholders' equity 35,868,586 40,270,849
------------ ------------
Total liabilities and stockholders' equity $ 43,394,396 $ 53,745,554
============ ============
See notes to consolidated financial statements.
F-3
KOPIN CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31,
------------------------------------------
1997 1996 1995
------------ ------------- -------------
Revenues:
Product revenues $13,110,044 $ 11,727,081 $ 7,161,236
Research and development revenues 3,282,974 6,291,172 8,628,290
----------- ------------ ------------
16,393,018 18,018,253 15,789,526
Expenses:
Cost of product revenues 8,636,199 9,488,702 6,059,440
Research and development-funded programs 2,801,671 6,591,016 8,756,850
Research and development-internal 7,622,614 9,876,082 6,856,437
General, administrative and selling 4,292,383 7,070,275 4,012,764
Other 327,102 597,943 402,554
Write-down of subsidiary assets - 3,900,000 -
Impairment charge - 4,990,412 -
----------- ------------ ------------
23,679,969 42,514,430 26,088,045
----------- ------------ ------------
Loss from operations (7,286,951) (24,496,177) (10,298,519)
Other income and expense:
Interest and other income 1,264,052 2,013,642 1,670,808
Interest expense (234,870) (337,418) (363,288)
----------- ------------ ------------
Loss before minority interest (6,257,769) (22,819,953) (8,990,999)
Minority interest in loss of subsidiary - 1,223,589 -
----------- ------------ ------------
Net loss $(6,257,769) $(21,596,364) $ (8,990,999)
=========== ============ ============
Net loss per share - basic and diluted $(0.57) $(1.98) $(0.95)
=========== ============ ============
Weighted average number of common shares outstanding 11,010,160 10,921,138 9,461,897
=========== ============ ============
See notes to consolidated financial statements.
F-4
KOPIN CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock Additional
--------------------- Paid-in Deferred Securities Treasury
Shares Amount Capital Compensation Valuation Deficit Stock Total
----------------------------------------------------------------------------------------------------------
Balance, January 1, 1995 9,298,711 $ 92,987 $61,926,736 $(224,670) $(670,000) $(17,673,780) - $ 43,451,273
Issuance of common stock,
net of issuance costs of
$397,143 1,868,716 15,687 26,325,985 - - - 4,095,000 30,436,672
Purchase of common stock (300,000) - - - - - (4,095,000) (4,095,000)
Exercise of stock options 47,592 476 102,424 - - - - 102,900
Amortization of compensation
relating to grant of
stock options - - - 130,188 - - - 130,188
Net unrealized gain on
marketable securities - - - - 807,183 - - 807,183
Net loss - - - - - (8,990,999) - (8,990,999)
-------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 10,915,019 109,150 88,355,145 (94,482) 137,183 (26,664,779) - 61,842,217
Exercise of stock options 16,389 164 50,306 - - - - 50,470
Compensation relating to
grant of stock options - - 200,000 (200,000) - - - -
Amortization of compensation
relating to grant of
stock options - - - 66,776 - - - 66,776
Net unrealized loss on
marketable securities - - - - (92,250) - - (92,250)
Net loss - - - - - (21,596,364) - (21,596,364)
-------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 10,931,408 109,314 88,605,451 (227,706) 44,933 (48,261,143) - 40,270,849
Exercise of stock options 190,735 1,907 1,828,676 - - - - 1,830,583
Compensation relating to
grant of stock options - - 80,106 (80,106) - - - -
Amortization of compensation
relating to grant of stock - - - 75,857 - - - 75,857
options
Net unrealized loss on
marketable securities - - - - (50,934) - - (50,934)
Net loss - - - - - (6,257,769) - (6,257,769)
-------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 11,122,143 $111,221 $90,514,233 $(231,955) $ (6,001) $(54,518,912) - $ 35,868,586
========== ======== =========== ========== ========== ============ ========== ============
See notes to consolidated financial statements.
F-5
KOPIN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
-------------------------------------------
1997 1996 1995
------------- -------------- -------------
Cash flows from operating activities:
Net loss ($6,257,769) ($21,596,364) ($8,990,999)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 3,512,272 3,499,881 2,956,322
Write-down of subsidiary assets - 3,900,000 -
Amortization of compensation relating to grant of stock 75,857 66,776 130,188
options
Impairment charge - 4,990,412 -
Decrease in unearned revenue (80,484) (92,004) (92,004)
Increase (decrease) in deferred rent (216,000) (7,667) 34,001
Minority interest in loss of subsidiary - (1,223,589) -
Changes in assets and liabilities:
Accounts receivable 1,754,988 (558,326) (1,883,623)
Inventory (7,875) 1,480,547 (3,033,333)
Prepaid expenses and other current assets 458,914 (126,536) (861,003)
Intangible assets (501,677) (1,679,221) (1,043,407)
Accounts payable and accrued expenses (4,233,891) (1,439,270) 1,356,571
------------ ------------- ------------
Net cash used in operating activities (5,495,665) (12,785,361) (11,427,287)
------------ ------------- ------------
Cash flows from investing activities:
Acquisition of Forte Technologies, Inc., net of cash acquired - - (1,504,704)
Marketable securities 5,888,997 6,625,889 10,368,699
Other assets (410,543) 476,185 309,762
Capital expenditures (3,555,266) (3,779,919) (3,755,147)
------------ ------------- ------------
Net cash provided by investing activities 1,923,188 3,322,155 5,418,610
------------ ------------- ------------
Cash flows from financing activities:
Net proceeds from issuance of common stock - - 30,436,672
Purchase of common stock - - (4,095,000)
Net proceeds from issuance of subsidiary preferred stock - 1,800,000 -
Principal payments on long-term obligations (1,553,829) (924,421) (605,143)
Proceeds from long-term obligations 1,259,832 2,830,425 -
Proceeds from note payable 450,000 500,000 3,000,000
Principal payment on note payable (500,000) (3,000,000) -
Proceeds from exercise of stock options 1,830,583 50,470 102,900
------------ ------------- ------------
Net cash provided by financing activities 1,486,586 1,256,474 28,839,429
------------ ------------- ------------
Net increase (decrease) in cash and equivalents (2,085,891) (8,206,732) 22,830,752
Cash and equivalents, beginning of year 16,511,291 24,718,023 1,887,271
------------ ------------- ------------
Cash and equivalents, end of year $ 14,425,400 $ 16,511,291 $ 24,718,023
============ ============= ============
Noncash investing and financing transactions:
Marketable securities valuation ($50,934) ($92,250) $ 807,183
Supplementary cash flow information-Interest paid in cash $ 229,328 $ 328,824 $ 339,642
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.
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 wafer-engineered device wafers 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 and
its wholly owned and majority owned subsidiaries. All intercompany transactions
and balances have been eliminated. From 1994 through 1996, the Company made
equity investments in Forte Technologies, Inc. In May 1995, the Company
obtained a controlling interest in Forte and consolidated the financial
statements of Forte with those of the Company through December 31, 1996.
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 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. Under Statement of
Financial Accounting Standards ("SFAS") No. 115, the Company classifies
marketable
F-7
KOPIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
securities included in Current Assets as "available for sale," and accordingly
carries them as a current asset 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. Approximately $13,200,000 of these marketable securities
mature within one year, and substantially all the remaining marketable
securities mature within three years. Gross unrealized holding gains or losses
are recorded in a valuation allowance in stockholders' equity.
Investments in marketable securities are as follows:
Amortized Unrealized Fair
1996 Cost Gains Losses Value
----------------- ----------------- ----------------- -----------------
AVAILABLE FOR SALE SECURITIES:
U.S. government and agency securities $ 7,981,356 $63,954 $ 8,402 $ 8,036,908
Corporate debt securities 2,534,526 5,371 15,990 2,523,907
----------- ------- ------- -----------
Total available for sale securities $10,515,882 $69,325 $24,392 $10,560,815
=========== ======= ======= ===========
Amortized Unrealized Fair
1997 Cost Gains Losses Value
----------------- ----------------- ----------------- -----------------
AVAILABLE FOR SALE SECURITIES:
U.S. government and agency securities $ 2,585,254 $ - $ 751 $ 2,584,503
Corporate debt securities 2,041,631 983 6,233 2,036,381
----------- ------- ------- -----------
Total available for sale securities $ 4,626,885 $ 983 $ 6,984 $ 4,620,884
=========== ======= ======= ===========
F-8
KOPIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Inventory
Inventory is stated at the lower of cost (first-in, first-out method) or market,
and consists of the following:
1997 1996
---------- ----------
Raw materials $1,172,913 $1,871,222
Work in process 1,529,463 1,036,276
Finished goods 18,467 166,145
---------- ----------
$2,720,843 $3,073,643
========== ==========
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.
Net Loss Per Share
Net loss per share data is computed using the weighted average number of shares
of common stock outstanding during the period. Common share equivalents have not
been included because the effect would be anti-dilutive. The Company has
adopted SFAS No. 128, "Earnings per Share," which became effective during the
fourth quarter of 1997. The new pronouncement's requirements had no impact on
the Company's previously reported loss per share.
Concentration of Credit Risk
The Company invests its excess cash in high quality government and corporate
financial instruments which bear minimal risk. 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
On January 1, 1996, the Company adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of." This
statement establishes accounting standards for evaluating the carrying value of
long-lived and certain identifiable intangible asets. SFAS No. 121 requires the
carrying value of long-lived assets to be compared to estimates of expected
future cash flows to be derived from these assets. In accordance with the
adoption of SFAS No. 121, the Company estimated future cash flows from its
product lines and compared the cash flows against the product lines' related
capitalized development costs and related equipment. In January 1996 (the time
at which the recognition criteria was first applied and met), the Company
recorded an impairment charge of $4,990,412 which consisted primarily of the
expensing of previously capitalized patent infringement legal costs and the
write-down of purchased technology, prepaid license fees, certain patents and
equipment. The $4,990,412 represents 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.
F-9
KOPIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Stock-Based Compensation
The Company accounts for stock-based awards to employees using the intrinsic
value method in accordance with APB No. 25, "Accounting for Stock Issued to
Employees."
Reclassifications
Certain reclassifications have been made to the December 31, 1996 and 1995
amounts to conform to the 1997 presentation. The reclassifications consisted of
presenting interest income, other income and interest expense as Other Income
and Expense. In addition, previously reported research and development expense
has been separated into research and development-funded programs and research
and development-internal.
2. Contracts
- -------------
The Company has entered into research and development contracts with various
entities. The costs incurred in the performance of these contracts generally
approximate the revenues earned thereon. In 1994, the Company entered into a
$10,658,000 thirty-month contract with an agency of the federal government. The
Company recognizes revenue on this contract in accordance with performance of
tasks and recognized revenue of $492,000 in 1997, $3,441,000 in 1996 and
$4,260,000 in 1995.
3. Other Assets
- ---------------
Other assets consist primarily of certain marketable debt securities, which are
carried at cost, held in escrow as collateral under the Company's 5.625%
equipment promissory note agreement, and minority interest investments in GMT
Microelectronics, Inc. and Kendin Semiconductor, Inc.
4. Intangible Assets
- --------------------
Intangible assets consist of the following:
Estimated Useful
Life (years) 1997 1996
---------------- ----------- ----------
Patents and application fees 10 $ 2,316,376 $1,868,481
Licenses 5-12 935,207 881,424
Other deferred costs 5-10 - 9,049
----------- ----------
3,251,583 2,758,954
Less accumulated amortization (1,191,665) (864,562)
----------- ----------
$ 2,059,918 $1,894,392
=========== ==========
5. Investment in Forte Technologies, Inc.
- ------------------------------------------
Forte Technologies, Inc. was founded in July 1994. From October 1994 through
December 31, 1996, Kopin made a series of equity investments in Forte totaling
$5,750,000 resulting in an equity ownership of 59% at December 31, 1996.
At December 31, 1996, Kopin had loans outstanding to Forte of $2,433,675.
Additionally, in January 1996, Kopin guaranteed an aggregate of $1,000,000 of
equipment and working capital loans of Forte made by a senior lender. All Kopin
loans to Forte were subordinated to the loans of the senior lender. Loans to
the senior lender were paid in 1997.
F-10
KOPIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
As a result of declining sales and results of operations at Forte, the Company
recorded, in the fourth quarter of 1996, write-downs of Forte's accounts
receivable of $561,000, inventory of $1,848,000, equipment, improvements and
other of $823,000 and its remaining investment of $668,000 in Forte, totaling
$3,900,000. The write-downs of the long-lived assets, including equipment and
improvements, represents the difference between the assets' carrying value and
their fair market value. The fair market value was based on valuation
techniques utilizing the present value of estimated expected future cash flows
to be derived from the assets.
On March 7, 1997, Forte filed a voluntary petition seeking protection from its
creditors under Chapter 11 of the United States Bankruptcy Code. In conjunction
with the filing, the Company's representatives resigned from Forte's board of
directors. As a result of the Chapter 11 filing, subsequent to March 7, 1997,
the Company no longer consolidates the results of operations or assets and
liabilities of Forte. In November 1997, Interactive Imaging Systems, Inc.
(formerly named Kaotech Corporation), a newly organized entity (of which the
Company owns approximately 19.5%), purchased substantially all of the assets of
Forte, subject to certain liens, for approximately $60,000.
6. Income Taxes
- ---------------
As of December 31, 1997, the Company has available for tax reporting purposes,
federal net operating loss and general business tax credit carryforwards of
approximately $51,000,000 and $595,000, respectively, expiring from 2000 to
2012.
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:
1997 1996
------------ ------------
Deferred tax assets:
Net operating loss carryforward $ 20,910,000 $ 17,900,600
Amortization of intangible assets 342,500 255,600
Deferred rent 67,700 156,300
Other 317,000 557,700
------------ ------------
21,637,200 18,870,200
------------ ------------
Deferred tax liabilities:
Patent costs 950,000 766,100
Depreciation 1,146,000 1,107,500
------------ ------------
2,096,000 1,873,600
------------ ------------
Net deferred tax assets 19,541,200 16,996,600
Valuation allowance (19,541,200) (16,996,600)
------------ ------------
$ - $ -
============ ============
F-11
KOPIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
7. Note Payable and Long-term Obligations
- -----------------------------------------
In 1997, the Company entered into a $450,000 demand note payable with a bank
bearing interest at .75% above prime, or 9.25% at December 31, 1997.
In 1996, the Company entered into a $500,000 demand note payable with a bank
bearing interest at 1.75% above prime, or 10% at December 31, 1996. The note
was collateralized by certain assets of Forte. In 1995, the Company entered
into a $3,000,000 demand note payable with a bank bearing interest at .5% above
prime. The $3,000,000 demand note and the $500,000 demand note were repaid in
1996 and 1997, respectively.
Long-term obligations consist of the following:
1997 1996
---------- ----------
5.625% equipment promissory note $ 989,915 $1,605,050
Capital lease obligations-equipment 2,181,086 1,200,000
8.19% equipment promissory note 330,785 611,224
9.02% equipment promissory note - 379,509
Secured demand promissory note - 344,914
---------- ----------
3,501,786 4,140,697
Less current portion 1,542,818 1,347,636
---------- ----------
$1,958,968 $2,793,061
========== ==========
The 5.625% equipment promissory note requires monthly payments of principal and
interest totaling $57,477 through June 1999. The loan obligation is specifically
collateralized by the equipment financed under the agreement and certain
marketable securities. These securities are shown as other assets on the
Company's balance sheet, since they are not available for working capital
purposes.
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 1999 and December 2000, respectively, for the
outstanding capital lease obligations. The capital lease obligations are
specifically collateralized by equipment with a carrying value of $2,202,691 at
December 31, 1997.
The 8.19% equipment promissory notes require monthly payments of principal and
interest totaling $26,680 through January 1999. The loan obligations are
collateralized by the equipment financed under the agreements.
The 9.02% equipment promissory note and the secured demand promissory note
represent debt incurred by Forte to outside lenders. The 9.02% note was repaid
in 1997. The secured demand promissory note was secured by all assets of Forte,
subordinated to the loans of Forte's senior lender and certain loans to Kopin.
As a result of Forte's petition for bankruptcy protection on March 7, 1997, this
note is no longer an obligation of the Company.
F-12
KOPIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
The aggregate maturities of long-term obligations, including capital lease
obligations, as of December 31, 1997 are as follows:
Year ending December 31, Amount
- -------------------------------------------------------------
1998 $ 1,772,312
1999 1,133,967
2000 692,444
2001 317,100
-----------
3,915,823
Less:
Amounts representing interest (414,037)
Current portion of long-term obligations (1,542,818)
-----------
$ 1,958,968
===========
8. Stockholders' Equity
- -----------------------
In November 1995, the Company entered into a stock purchase agreement with
Telecom Holding Co., Ltd., an affiliate of CP Group, providing for the sale of
1,643,716 shares of its common stock at $16.50 per share. Net proceeds to the
Company were approximately $26,724,000.
In November 1995, the Company entered into an agreement with Rockwell
International under which the Company purchased 300,000 shares of its common
stock from Rockwell at $13.65 per share.
In December 1995, the Company entered into a stock purchase agreement with
United Microelectronics Corp. and its affiliate, Unipac Optoelectronics Corp.,
providing for the sale of 225,000 shares of its common stock at $16.50 per
share. Net proceeds to the Company were approximately $3,700,000.
F-13
KOPIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
9. Stock Options
- -----------------
The Company's 1992 Stock Option Plan permits the granting of both nonqualified
stock options and incentive stock options. The plan covers 2,700,000 shares of
common stock (including shares issued upon exercise of options granted pursuant
to, or options remaining outstanding under, 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 175,000 shares are issuable
under the plan.
During 1996, a total of 573,500 outstanding options were cancelled in exchange
for the grant of 516,150 options with an exercise price equal to the fair market
value of the common stock on the date of grant of $8.25 per share. These
options vest over four years. During 1995, a total of 441,950 outstanding
options were cancelled in exchange for the grant of 412,150 options with an
exercise price equal to the fair market value of the common stock on the date of
grant of $10.00 per share. These options vest over three years.
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, 1997, such compensation expense of
$75,857 was recorded and will aggregate to $231,955 over the remaining terms of
the options. At December 31, 1997, the Company has available 149,004 shares of
common stock for future grant under its stock option plans. A summary of option
activity is as follows:
1997 1996 1995
-------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
-------------------------------------------------------------------------------------
Balance,beginning of year 1,807,966 $10.47 1,560,326 $12.38 1,250,380 $13.23
Options granted 683,650 14.31 1,126,750 9.09 990,250 12.61
Options cancelled (89,234) 11.07 (862,721) 12.47 (632,712) 15.18
Options exercised (190,735) 9.60 (16,389) 3.09 (47,592) 2.14
-------------------------------------------------------------------------------------
Balance, end of year 2,211,647 $11.66 1,807,966 $10.47 1,560,326 $12.38
========= ========= =========
Exercisable, end of year 967,000 587,000 446,000
========= ========= =========
Of the 2,211,647 options outstanding at December 31, 1997, 541,822 have
exercise prices between $1.00 and $9.00, with a weighted average exercise price
of $7.94 and a weighted average remaining contractual life of 8.3 years. Of
these options, 270,173 are exercisable at a weighted average price of $8.16. An
additional 789,925 options outstanding at December 31, 1997 have exercise prices
between $9.25 and $11.75, with a weighted average exercise price of $10.48 and a
weighted average remaining contractual life of 7.6 years. Of these options,
400,605 are exercisable at a weighted average price of $10.40. The remaining
879,900 options have exercise prices between $12.00 and $22.00, with a weighted
average exercise price of $15.02 and a weighted average remaining contractual
life of 8.5 years. Of these options, 298,062 are exercisable at a weighted
average exercise price of $14.37. The weighted average exercise price of all
options exercisable at December 31, 1997 is $11.00.
F-14
KOPIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
The Company has two fixed option plans which reserve shares of common stock for
issuance to executives, key employees and directors. The Company has adopted
the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation." Accordingly, no additional compensation cost has been recognized
for the stock option plans under SFAS No. 123. 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 1997, 1996 and 1995, consistent with the provisions of
SFAS No. 123, the Company's net loss and loss per share would have been
$7,763,328 or $.71 per share in 1997, $22,828,070 or $2.09 per share in 1996,
and $9,281,283 or $.98 per share in 1995.
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 1997, 1996, and 1995: no expected dividend yield; expected volatility
of 61.3% in 1997, 57.6% in 1996, and 61.2% in 1995; risk-free interest rate of
5.72% in 1997 and 6.55% in 1996 and 1995; and expected lives of four years. The
weighted-average fair value of options on grant date was $7.44 in 1997, $4.64 in
1996, and $6.25 in 1995.
10. 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 $9,500. 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 $91,000 in 1997, $92,000 in 1996, and $69,000 in 1995.
11. Major Customers
- --------------------
During the years ended December 31, 1997, 1996, and 1995, approximately 20%,
35%, and 55%, 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. Additionally,
during the years ended December 31, 1997, 1996 and 1995, approximately 63%, 39%
and 11% of the Company's revenue resulted from sales to a single customer.
12. 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, entered into in 1993, is a five-year lease and has been
extended one additional year. 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 subsequent to December 31, 1997:
Year ending December 31, Amount
- ------------------------------------------------------
1998 $1,242,994
1999 1,138,671
2000 267,223
2001 270,908
2002 253,916
----------
Total minimum lease payments $3,173,712
==========
F-15
KOPIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
Costs incurred under operating leases are recorded as rent expense and
aggregated approximately $979,000 in 1997, $1,214,000 in 1996 and $1,137,000 in
1995.
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
$24,000 in 1997, $25,500 in 1996 and $36,000 in 1995.
13. 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.
14. Recent Pronouncements
- -------------------------
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income,"
which is effective for the Company for the period commencing January 1, 1998.
SFAS No. 130 has no impact on net income and requires that certain components of
stockholders' equity from non-owner sources be reclassified and presented as
"other comprehensive income." Currently, the Company's consolidated balance
sheets contain no material components of stockholders' equity that would be
reclassified as "other comprehensive income."
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which is effective for the Company for the
period commencing January 1, 1998. The impact of SFAS No. 131 on the Company
has not yet been determined.
15. Subsequent Event
- --------------------
In February 1998, the Company issued 1,000,000 shares of common stock in a
public offering and received net proceeds of approximately $17,800,000.
F-16
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 24, 1998 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 24, 1998
- ------------------------ Chief Executive Officer,
John C. C. Fan President and Director
(principal executive officer)
/s/ David E. Brook Director March 24, 1998
- ------------------------
David E. Brook
/s/ Morton Collins Director March 24, 1998
- ------------------------
Morton Collins
/s/ Andrew H. Chapman Director March 24, 1998
- ------------------------
Andrew H. Chapman
/s/ Chi Chia Hsieh Director March 24, 1998
- ------------------------
Chi Chia Hsieh
/s/ Vallobh Vimolvanich Director March 24, 1998
- ------------------------
Vallobh Vimolvanich
/s/ Michael A. Wall Director March 24, 1998
- ------------------------
Michael A. Wall
/s/ Paul J. Mitchell Treasurer and Chief March 24, 1998
- ------------------------ Financial Officer
Paul J. Mitchell (principal financial and
accounting officer)
KOPIN CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1997, 1996, 1995
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:
1995 $ 46,600 $39,000 $ - $ 85,600
1996 85,600 72,000 (20,200) 137,400
1997 137,400 72,000 (56,700) 152,700
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 (13)
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 Letter Agreement by and between the Company and Boeing Defense and Space
Group dated February 11, 1992 (1)
10.7 Facility Lease, as amended, by and between the Company and Myles Standish
Associates Limited Partnership commencing November 1, 1985 (1)
10.8 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)
10.9 Stock Purchase Agreement, dated as of November 6, 1992, by and between
the Company and Rockwell International Corporation (2)
10.10 Contract between the Company and the Defense Advanced Research Projects
Agency, dated September 25, 1992 (2)
10.11 Contract between the Company and the David Sarnoff Research Center,
dated July 17, 1992 (2)
10.12 Contract between the Company and Microelectronics and Computer
Technology Corporation, dated September 15, 1992 (2)
10.13 Contract by and between the Company and the United States Department
of Commerce dated September 16, 1992 (2)
10.14 Contract by and between the Company and the United States Army
Natick RD&E Center dated December 29, 1993 (3)
10.15 Contract by and between the Company and Department of the Air Force,
Air Force Material Command dated September 22, 1993 (3)
10.16 Facility Lease, by and between the Company and Massachusetts
Technology Park Corporation dated October 15, 1993 (3)
10.17 Contract amendment by and between the Company and Advanced Research
Projects Agency dated December 3, 1993 (3)
10.18 Cooperative Research and Development Agreement, by and between the
Company and Massachusetts Institute of Technology Lincoln Laboratory
dated September 14, 1993 (confidential portions on file with the
Commission) (3)
10.19 Immersion Display System Development Agreement, by and between the
Company and Honeywell Technology Center dated October 19, 1993
(confidential portions on file with the Commission) (3)
10.20 Master Sublease - Purchase Agreement, by and between the Company and
Massachusetts Industrial Finance Agency dated June 23, 1994 (4)
10.21 Contract by and between the Company and the Advanced Research Projects
Agency dated May 25, 1994(confidential portions on file with the
Commission) (4)
10.22 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)
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EXHIBITS NUMBER
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10.23 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)
10.24 Securities Purchase Agreement, by and between the Company and Forte
Technologies, Inc. dated October 24, 1994(confidential portions on
file with the Commission) (6)
10.25 Securities Purchase Agreement, by and between the Company
and GMT Microelectronics Corporation, dated January 6, 1995
(confidential portions on file with the Commission) (7)
10.26 Amended and Restated Employment Agreement between the Company and
Dr. John C.C. Fan, dated as of May 1, 1995 (8)
10.27 Contract by and between the Company and the United States Department
of Commerce dated April 25, 1995 (9)
10.28 Securities Purchase Agreement, by and between the Company and Forte
Technologies, Inc. dated September 15, 1995 (9)
10.29 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)
10.30 Stock Purchase Agreement, by and between the Company and Telecom
Holding dated November 24, 1995 (10)
10.31 Letter Agreement, by and between the Company and Telecom Holding
Co., Ltd. dated November 24, 1995 (10)
10.32 Stock Purchase Agreement, by and between the Company and United
Microelectronics Corporation dated November 29, 1995 (9)
10.33 Stock Purchase Agreement, by and between the Company and Unipac
Optoelectronics Corporation dated November 29, 1995 (9)
10.34 Letter Agreement, by and between the Company and United Microelectronics
Corporation dated November 29, 1995(confidential portions on file with
the Commission) (9)
10.35 Amendment Agreement, by and between the Company and Rockwell
International Corporation dated September 29, 1995 (9)
10.36 Securities Purchase Agreement, by and between the Company and
Unitek Semiconductor, Inc. dated January 26, 1996 (11)
10.37 Chattel Leasing Promissory Note, by and between the Company
and BancBoston Leasing dated January 29, 1996 (11)
10.38 Securities Purchase Agreement, by and between the Company
and Forte Technologies, Inc. dated February 8, 1996 (11)
10.39 Securities Purchase Agreement, by and between Forte Technologies, Inc.
and Investors, dated June 27, 1996 (12)
10.40 Master lease agreement, by and between the Company and BancBoston
Leasing dated December 23, 1996 (13)
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.
(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.