Back to GetFilings.com
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, 1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-19882
KOPIN CORPORATION
-----------------
(Exact name of registrant as specified in its charter)
Delaware 04-2833935
--------------------- ----------
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
695 Myles Standish Blvd., Taunton, MA 02780-1042
------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (508) 824-6696
--------------
Securities registered pursuant to Section 12(b) of the Act: None
----
Name on each exchange on which registered: NASDAQ
------
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
--------------------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to filing requirements
for the past 90 days. Yes [X] No___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
As of March 24, 1997, the aggregate market value of outstanding shares of voting
stock held by non-affiliates of the registrant was $116,125,870.
As of March 24, 1997, 10,938,831 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 22, 1997 are incorporated by reference into Part III of this
Report.
Part I
Item 1. Business
- ------------------
General
Kopin Corporation ("the Company") is engaged in the development, manufacture
and sale of flat panel display devices and products and custom Wafer-Engineered
gallium arsenide ("GaAs") materials for commercial and consumer markets based
primarily on the Company's proprietary Wafer-Engineering technology. Wafer-
engineering is the process of splicing or layering selected dissimilar
materials, combining the desired properties of each, to provide optimal
performance for specific applications. This core technology has enabled the
Company to commercialize its wafer-engineered materials business and to develop
and make initial sales of the SMART SLIDE/TM/ imaging device, an active matrix
liquid crystal display (AMLCD) electronic imaging device which the Company
believes has performance characteristics superior to commercially available
high-definition cathode ray tube (CRT) and liquid crystal display (LCD) devices.
The Company manufactures and sells custom wafer-engineered electronic
materials, primarily epitaxial gallium arsenide for use primarily in advanced
wireless telecommunication applications. In addition, the Company performs
research and development, primarily under contracts with agencies of the United
States Government. These contracts help support the advancement of the Company's
proprietary core technology. The Company's policy is to retain its proprietary
rights with respect to the principal commercial applications of its technology.
The Company has focused its flat panel display activities on the development
of very small format (.7 inch or less diagonal) SMART SLIDE imaging devices.
The Company believes its ultra-small imaging devices are appropriate for
personal, portable communication system and component applications.
The Company was incorporated in 1984 to further develop and commercialize
certain wafer-engineering technology developed at Massachusetts Institute of
Technology ("MIT") by a team of scientists including Dr. John C.C. Fan, the
Chief Executive Officer and a founder of the Company. In 1985, the Company
obtained a license to certain MIT wafer-engineering and related technology to
make, have made, use and sell products for the life of the patents. This license
now covers 31 issued United States patents, 6 pending United States patent
applications and some foreign counterparts to these United States patents and
applications, and is exclusive with respect to commercial applications until
April 22, 1999. In addition, the Company owns 68 United States issued patents,
48 pending United States patent applications and some foreign counterparts to
these patents and applications.
Industry Background
Flat Panel Displays
There is presently a large market for electronic displays with improved
resolution and brightness, greater reliability and flat screens which minimize
perimeter distortion. In particular, displays with high image quality, smaller
dimensions and lower weight are desired for use in personal communication
devices such as cellular phones and pagers, as well as computer workstations,
high-end personal computers, computer-driven projectors, and head-mounted
display systems. Current CRT-based display products have been unable to attain
the desired performance in very large formats without also introducing excessive
weight and size, as well as relatively high cost. In small-format systems, the
CRT has been costly and difficult to miniaturize, in contrast to the well known
accomplishments in semiconductor miniaturization in many other areas of the
computer industry.
Due to these inherent CRT limitations, the display industry continues to
pursue means of creating a flat-screen, light-weight, cost effective replacement
of the CRT. The technology that has received the greatest attention is based on
the LCD, which is now in widespread use in laptop computers, watches,
calculators, and other electronic display products requiring
- --------------------------------------------------------------------------------
TRADEMARKS
"KOPIN," "SMART SLIDE", "Wafer-Engineering", "Wafer-Engineered",
"CyberDisplay"and "ISE" are trademarks of Kopin Corporation. "KOPIN" is
registered in the United States Patent and Trademark Office. "VFX1 HEADGEAR" is
a trademark of Forte Technologies, Inc.
2
light-weight, black and white or color solid state displays. These displays form
an image by either transmitting or blocking light from a light source behind the
LCD. Over the past decade, research and development has been carried out to make
LCDs higher in resolution, full color, faster (to display video images without
blur) and show a wider range of shades of grey. LCD products with improvements
in these areas have been introduced in the last several years by companies with
which the Company competes.
It is widely recognized in the LCD industry that the use of an integrated
circuit can improve the resolution, speed and grey scale of the LCD. For typical
computer applications, integrated circuits are formed on high quality silicon
wafers, which are thick and opaque, using well-established high-yield
manufacturing techniques. The integrated circuit used in the transmissive LCD,
however, should be nearly transparent to allow light to pass through.
Consequently, the display circuit cannot ultimately reside on a conventional
silicon wafer. Instead, a thin film of silicon must be placed on glass or
similar transparent material. For this reason, considerable research and
development efforts have been carried out in the United States, Japan and
elsewhere first to grow thin films of silicon on glass and afterwards to process
this material into an integrated circuit for use in advanced LCDs. This is known
as silicon-grown-on-glass or thin film transistor ("TFT") technology.
In Asia, a multi-billion dollar investment of capital has been made by
several companies to construct facilities dedicated to silicon-grown-on-glass
processing (dedicated facilities are required because standard silicon
integrated circuit manufacturers cannot process silicon-grown-on-glass). To
date, the quality of the silicon material grown on glass cannot yield the
performance that is obtained when high quality silicon wafers are used for the
integrated circuit. Currently, LCD-based displays have gained acceptance in
systems like lap-top computers, portable projectors and pocket-size televisions
where low weight and power consumption are more important than resolution, speed
or grey scale.
Wafer-Engineered Materials
Market demands for higher levels of performance in electronic systems have
produced an increasing number of varied, complex applications. The increased
capabilities and requirements of these new systems create new markets and a
further expansion of new, sophisticated applications. Many of these new
applications have emerged in the wireless communications and telecommunications
industries.
The wireless communications industry is experiencing rapid growth with the
advent of new applications such as digital cellular telephones, personal
communication systems ("PCS"), satellite communications, wireless local area
networks, wireless data transmission systems and wireless cable television. In
addition, many of these new applications require efficient use of battery power
to enhance portability. The proliferation of some of these new applications has
led to increased communication traffic resulting in congestion of the
historically assigned frequency bands. As a consequence, wireless
communications are moving to higher, less congested frequency bands. In
recognition of the potential for such applications, United States government
regulatory agencies have auctioned licenses for a new spectrum of radio
frequencies above 1.8 GHz, or approximately twice the frequency of previously
existing cellular networks. These licenses will be used as the United States
PCS is deployed. The Company believes the increasing demand for wireless
communications at higher frequencies may lead to entirely new high volume
applications for its products.
To address the market demands for higher performance, electronic system
manufacturers have relied heavily on advances in semiconductor technology. In
recent years, the predominant semiconductor technologies used in advanced
electronic systems have been silicon-based complementary metal oxide
semiconductor ("CMOS"), bipolar complementary metal oxide semiconductor
("BiCMOS") and emitter coupled logic ("ECL") process technologies.
However, GaAs semiconductor technology has emerged as an effective
alternative or complement to silicon in many high performance applications.
GaAs has inherent physical properties which allow its electrons to move up to
five times faster than those of silicon. This higher electron mobility permits
the manufacture of GaAs integrated circuits which operate at much higher speeds
than silicon devices, or operate at the same speeds with lower power
consumption. In many new applications, GaAs integrated circuits enable high
performance systems to process data more quickly, increasing system operating
rates. In addition, the use of GaAs integrated circuits can reduce system power
requirements, which is particularly important in battery powered portable
applications. The high performance characteristics of GaAs, combined with the
system requirements of the communications industry, have led to the first use of
GaAs components in high volumes to complement silicon devices in a wide range of
commercial systems.
3
The Company believes that the continuation and acceleration of these trends
will result in increasing demand for GaAs integrated circuits, thereby creating
substantial opportunities for the Company's wafer-engineered GaAs materials.
The Kopin Approach
Flat Panel Displays
In contrast to others in the AMLCD industry, the Company is able to transfer
high quality, single crystal, thin film silicon integrated circuits to glass
utilizing its proprietary and patented wafer-engineering technology. This
capability has enabled development of the SMART SLIDE, a new class of high-speed
electronic imaging device. The SMART SLIDE imaging device includes a thin film
integrated circuit and liquid crystal, enclosed between two glass panels. As
light is projected through a SMART SLIDE imaging device, it is filtered to
transform white light into a color image, like a photographic slide, except that
the SMART SLIDE is computer controlled to display video, data and graphic
images.
The Company has manufactured in limited commercial quantities active matrix
liquid crystal display ("AMLCD") SMART SLIDE imaging devices formed using the
Company's single crystal thin film silicon wafer-engineering technology. An
important advantage of its wafer-engineering technology is that high speed
signal processing and control logic can be integrated directly into the SMART
SLIDE imaging device, leading to the development of display products with higher
resolution, greater system speed, lower weight, less volume and simplified
manufacturing. These SMART SLIDE imaging devices may also provide further cost
advantages through the ability to use relatively standard small-format optical
components.
The Company believes that particularly for certain applications requiring
extremely small format, high resolution and speed, its SMART SLIDE imaging
device will serve as an alternative to commercially available CRT and LCD-based
imaging devices. Although LCDs are replacing certain CRT applications,
commercially available LCDs are limited in speed and resolution and are
relatively costly, since they are typically fabricated on specially designed
capital intensive manufacturing equipment. Integral to the Company's proprietary
approach is the ability to prepare thin film silicon integrated circuits using
existing manufacturing facilities. Since integrated circuit manufacturing
capacity is in place at multiple sites, the Company believes this approach
significantly reduces the substantial capital investment, significant process
development costs and long lead times typically needed for the establishment of
advanced LCD manufacturing capabilities.
Wafer-Engineered Materials
Over the past several years, the Company has developed process technology
enabling the production of high quality Heterojunction Bipolar Transistor
("HBT") gallium arsenide materials. The focus of this effort was development of
a reproducible HBT production process that would enable volume production of
high performance HBT devices and circuits, based primarily on the Company's
proprietary carbon doping growth process. The Company's stable, highly
reproducible carbon doped HBT material is presently designed into a majority of
the HBT circuit programs of the Company's customers. The Company continues to
work closely with customers and potential customers on design and development of
customized HBT material structures.
Current Business and Development Strategy
The Company's product development strategy for high resolution displays is to
continue developing smaller format and higher resolution SMART SLIDE imaging
devices as well as advanced display products such as head-mounted display
systems and personal, portable communication systems. SMART SLIDE imaging
device development and fabrication is being conducted by the Company in
collaboration with a number of domestic and foreign companies and research
laboratories. The Company has demonstrated the operation of high resolution
AMLCDs with integrated scanning and drive electronics fabricated using the
Company's proprietary wafer engineering technology combined with standard
silicon wafer processing and LCD assembly, and since 1995 has had limited
production and sale of these devices and products based upon these devices.
The Company has focused its flat panel display development efforts on very
small format active matrix SMART SLIDE imaging devices. In 1994, the Company
demonstrated a .7 inch diagonal 640 by 480 (VGA)SMART SLIDE with more than
300,000 pixels and a resolution of 1,100 lines per inch. This SMART SLIDE, in a
chip size of approximately one-half inch
4
by one-half inch, was developed in conjunction with MIT-Lincoln Laboratory. Also
in 1994, the Company achieved the development of SMART SLIDE imaging devices
capable of displaying full color video or computer images. Using a proprietary
color filter process developed by the Company for high-resolution displays,
these .7 inch diagonal SMART SLIDE imaging devices contain more than 300,000
pixels. In 1996, the Company demonstrated higher resolution SMART SLIDE imaging
devices including a 800 x 600 display and a 1280 by 1024 display. The Company is
continuing research and development and manufacturing process development
efforts on these SMART SLIDE imaging devices, as well as smaller and higher
resolution devices under government and internally funded development programs.
The Company is also developing an ultra-small, high density SMART SLIDE
imaging device called CyberDisplay. The Company believes the extremely small
size of the CyberDisplay (1/4" diagonal) and high image quality make them
suitable for personal communication devices, pagers, cellular phones and their
derivatives, where there is a need for enhanced functionality, particularly to
display more information while retaining the pocket-sized packaging of these
products. The Company intends to form business alliances and collaborations to
accelerate the use of CyberDisplay devices in personal, portable communication
systems and products, and has identified the rapidly growing wireless
communications markets and the companies providing portable communication
devices as business and collaboration opportunities.
The Company has formed business alliances and collaborations to advance its
business strategy. In October 1995, the Company entered into a strategic
alliance with Telecom Holding Co., Ltd., an affiliate of CP Group, which made an
equity investment in the Company of $27.1 million by privately purchasing
1,643,716 shares of Kopin common stock at $16.50 per share. In December 1995,
the Company entered into a foundry relationship with United Microelectronics
Corporation ("UMC"), under which UMC and its affiliate, Unipac Optoelectronics
Corporation ("Unipac"), also made an equity investment in the Company of $3.7
million by privately purchasing 225,000 shares of Kopin common stock at $16.50
per share. In August 1994, the Company entered into agreements with two
divisions of Philips Electronics North America Corporation ("Philips") to
develop advanced projection system products based on Kopin and Philips
technology, as well as license certain Philips technology. In May 1994, the
Company received a $10.6 million thirty-month contract from Defense Advanced
Research Projects Agency ("DARPA") to develop high resolution SMART SLIDE
imaging devices for head-mounted military applications.
The Company has entered into strategic foundry agreements with two integrated
circuit companies, UMC and GMT Microelectronics Corporation ("GMT"), to expand
its integrated circuit fabrication capability. During 1996, GMT, a domestic
integrated circuit foundry, provided IC fabrication for the Company's SMART
SLIDE imaging device. The Company's strategic foundry relationship with UMC, a
leader in the design and manufacture of integrated circuits based in Taiwan, was
entered into with the objective of establishing capability for volume production
and market penetration of the Company's SMART SLIDE imaging device. In
addition, the Company has a Cooperative Research and Development Agreement with
MIT Lincoln Laboratory for advanced development and fabrication of SMART SLIDE
imaging devices and related integrated circuits.
The Company is concurrently engaged in the design and development of head-
mounted display systems. The Company's product strategy for head-mounted
displays is directed at the development of system products for commercial and
consumer applications. The Company has developed SMART SLIDE imaging devices for
initial head-mounted display systems for industrial, personal computing and
communication, and training and simulation applications. SMART SLIDE imaging
devices for advanced, high resolution, head-mounted systems are also being
developed by the Company, as prime contractor to DARPA.
The development strategy for the Company's wafer-engineered materials
business is based on expanding its penetration of the high growth markets of the
wireless communication industry by teaming with its customers and offering them
a broad range of solutions through its wafer-engineered HBT materials.
Additionally, the Company continues to expand and improve its manufacturing
capability and infrastructure for wafer-engineered materials.
The Company manufactures and sells its wafer-engineered gallium arsenide
materials to customers including Rockwell, Northrup Grumman, Raytheon and Fuji
Electric for use primarily in advanced wireless telecommunication applications.
The Company's custom wafer-engineered materials include gallium arsenide spliced
with or layered on other related materials. The Company sells its custom wafer-
engineered materials directly in the United States and through sales
representatives abroad. The raw materials used for the Company's current
products are generally available from multiple sources within the United States
and abroad.
5
In addition, the Company collaborates or performs research and development,
primarily under contracts with agencies of the United States Government. These
contracts help support the advancement of the Company's proprietary core
technology. These agreements are subject to termination at the election of the
relevant agency.
Forte Technologies, Inc.
From October 1994 through January 1996, the Company made a series of equity
investments in and loans to Forte Technologies, Inc., a developer of virtual
reality head-mounted systems and peripherals for the personal computer and
entertainment markets, and currently owns approximately 60% of the equity of
Forte. Forte has marketed and sold its virtual reality system product, the VFX1
HEADGEAR Virtual Reality System, since May 1995 for use with personal computer
games. As a result of declining sales and results of operations at 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, and is evaluating its
strategic options regarding its investment. In March 1997, Forte filed a
voluntary petition seeking protection from its creditors under Chapter 11 of the
United States Bankruptcy Code. The Company does not believe this will have a
material adverse effect on its financial condition or results of operation.
Products and Product Applications
The Company's product strategy is to develop and produce advanced wafer-
engineered gallium arsenide materials for wireless telecommunication and
electronics applications and small format flat panel displays for use in
personal, portable communication systems as well as other business and personal
applications.
SMART SLIDE Imaging Device
The Company's SMART SLIDE imaging device is a small format active matrix
liquid crystal display device which the Company believes has performance
features superior to other commercially available liquid crystal display
devices. These imaging devices are based on the Company's Wafer-Engineering
technology, in which single crystal thin film silicon integrated circuits are
transferred to glass enabling production of high resolution displays. The key
benefits of this approach to the manufacture of AMLCDs are: 1) reduced AMLCD and
display system cost, 2) rapid market entry utilizing existing integrated circuit
manufacturing facilities, 3) high resolution active matrix pixel array in a
small format display (.7 inch or less diagonal), 4) high speed circuit operation
which provides for simple system interconnect, and 5) integrated drive circuits
which eliminate the need for more complex interconnect.
CyberDisplay
The Company is also developing an ultra-small, high density SMART SLIDE
imaging device called CyberDisplay. The Company believes the extremely small
size of the CyberDisplay (1/4 inch diagonal) and high image quality make them
suitable for personal communication devices, pagers, cellular phones and their
derivatives, where there is a need for enhanced functionality, particularly to
display more information while retaining the pocket-sized packaging of these
products.
The Company plans to sell CyberDisplay devices to original equipment
manufacturers ("OEMs") whose products need a low cost display with high
information content capability. The Company believes the ultra-small form
factor, light weight, low power consumption and low cost of the CyberDisplay
make possible innovative products that cannot be achieved with other display
technologies.
The CyberDisplay device is a virtual display. Although the display itself is
miniature in size, when viewed through a tiny acrylic lens the image is
equivalent to viewing a 20 inch diagonal screen from a distance of five feet.
This virtual display capability allows OEMs to build small products that use
CyberDisplay while at the same time providing easy viewing of high information
content images. The display can be held three inches or more from the eye and
comfortably viewed with both eyes open.
6
Wafer-Engineered Materials
The Company develops and manufactures application specific epitaxial wafer
materials for advanced semiconductor circuit applications. These advanced
structures are manufactured using metalorganic chemical vapor deposition (MOCVD)
semiconductor growth techniques. The Company believes it is one of the world's
leading suppliers of carbon doped Heterojunction Bipolar Transistor (HBT) wafer
materials and supports volume production of 3 inch, 4 inch and 6 inch wafers.
The HBT, unlike competing gallium arsenide devices, is a vertical device.
This feature enables the Company's customers, which design and fabricate
integrated circuits to design ultra-small circuits that can be manufactured at
costs that are highly competitive with gallium arsenide ion implant MESFET
circuits and silicon solutions. In addition, HBT circuits run a single power
supply voltage and have excellent signal linearity and power added efficiency;
which enables wireless handset designers to eliminate certain costly components
and use smaller, less bulky batteries.
The Company believes the overall market opportunities for gallium arsenide
HBT materials will continue to expand. HBT circuits based on the Company's
gallium arsenide materials have been inserted into a growing number of digital
cellular handsets. The Company believes HBT circuits are being designed into
fiber optic transmitter circuits, wide band amplifiers that will double the
frequency capability of certain cable television systems, and new applications
such as RF-ID (systems that enable the remote identification of a moving
object).
A substantial portion of the Company's wafer-engineered materials products
are designed to address the needs of individual customers. Frequent product
introductions by its customers make the Company's future success dependent on
its ability to select customer-specific development projects which will result
in sufficient production volume to enable the Company to achieve manufacturing
efficiencies. Because customer-specific products are developed for specific
applications, the Company expects that some of its current and future customer-
specific products may never be produced in high volume.
Head-Mounted Display Products
The Company believes its SMART SLIDE imaging devices will be useful in head-
mounted applications in industrial, commercial and military applications such as
field maintenance, equipment repair, aviation and air traffic control, 3-D
medical imaging and 3-D computer-aided design and graphics systems. Present
head-mounted display systems which utilize small CRTs are limited in application
by size, weight and cost. In addition, CRT-based head-mounted displays, which
typically operate at many thousands of volts, may not be considered safe for
consumer applications. The Company believes that its SMART SLIDE imaging devices
are well suited to high performance applications because of their potential for
higher resolution in a smaller format. The Company is currently developing SMART
SLIDE imaging devices with both 640 by 480 and 1280 by 1024 pixels in an
approximately .7 inch diagonal format. The Company believes that these displays
will have applications in industrial, consumer, commercial and military systems.
Projection System Products
The Company also has development activities for compact, high-performance
computer-driven projection products which have been designed to generate video
rate computer-controlled images. The high degree of miniaturization that is
possible with the Company's SMART SLIDE allows for the use of smaller optical
components in highly compact portable projector products. The Company believes
that applications exist for a small, high-definition computer-driven projector
product including training, general presentations, and work-group computing
sessions. The Company believes the greater reliability, resolution and speed of
its imaging systems make them advantageous for other advanced projection system
products, including large screen monitors and HDTV.
Technology Overview
The SMART SLIDE imaging device uses liquid crystals to filter light from an
external lamp and the way it produces an image is analogous to that of a
photographic slide; either forward or rear projection from a light source can be
used. The Company anticipates that a SMART SLIDE imaging device should be
capable of exceeding 2,000 lines per inch without reaching integrated circuit
miniaturization or optical diffraction limits and that the maximum theoretical
definitional limit of a SMART SLIDE imaging device could be approximately 10,000
lines per inch.
7
The SMART SLIDE uses conventional liquid crystals, color filters (or dichroic
mirrors) and digital control circuits to filter white light into a color image
in accordance with the input data stream. This conversion is achieved through
active control over pixels on the SMART SLIDE surface. The pixels are arranged
in a rectangular array (or matrix) to facilitate interconnection.
Each pixel within the matrix must receive digital commands from the control
circuitry. The pixels respond by attenuating light to the desired degree at the
required time. The ability of the pixel to respond quickly to a wide range of
control commands for varying degrees of brightness, termed grey scale dynamic
range, is one of the principal requirements for high performance displays. Due
to the importance of grey scale dynamic range to attainment of full color, rapid
and precise control of the pixel is required.
In the SMART SLIDE, varying degrees of light attenuation in each pixel are
obtained through the use of polarized light and the inherent polarizability of
liquid crystals. The degree of cross polarization, and hence the light
attenuation, are controlled by applying a selected voltage across the liquid
crystal at each pixel; this voltage causes a proportional degree of attenuation.
Various types of liquid crystals are suitable for this application and several
are already in wide use in LCD products.
In order to obtain rapid and accurate control over each pixel on the imaging
device, it is advantageous to have the voltage across each pixel controlled by
an adjacent transistor or other active device; this arrangement provides the
enhanced speed and control necessary for high performance. The transistors
should be co-located with the pixel circuitry in order to enhance speed and grey
scale and to reduce the complexity to the interconnections. Such design has been
termed active matrix. The active devices in the matrix permit the control logic
to set or refresh the pixel grey scale level much more rapidly than could
otherwise be obtained. When the transistors are formed from integrated-circuit-
quality (single crystal) silicon, the display can be made fast enough to enable
high (over one million) pixel counts, with excellent grey scale capability. If
silicon of lower quality is used in a high-definition display, the speed of the
active matrix electronics may not be adequate to prevent noticeable flicker,
loss of color definition and other undesirable distortion.
The number of pixels and therefore the number of transistors is extraordinary
in a high-definition display. For example, a conventional monochrome graphics
display is comprised of 640 by 480 pixels. Thus, 307,200 transistors are
required for the graphics active matrix. A high-definition color display
requires more than one million transistors. For this reason, the formation of
the active matrix approaches the complexity associated with integrated circuits
("ICs"). For liquid crystal displays, these transistors must be mounted on glass
or other transparent material. The conventional manufacturing approach pursued
worldwide involves the formation of the silicon material on glass or quartz,
followed by circuit processing that must be carried out in specialized glass-
compatible IC factories. A significant barrier to entry into this industry is
the substantial capital required to establish a circuit-on-glass fabrication
capability. The Company's use of its proprietary and patented wafer engineering
technology to mount the circuit on glass allows the Company to use conventional
silicon IC foundries.
The speed, size and leakage of the transistors in the active matrix are the
key factors governing suitability for high performance liquid crystal displays.
Currently, transistors are mainly formed in one of two ways. One 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 IC quality, single crystal silicon).
Consequently, amorphous thin film transistors have difficulty achieving the
speed and the grey 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 still
not well suited to certain high-definition, high performance applications (the
electrons are approximately 30 times slower than in 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 in specialized glass or quartz compatible IC
foundries.
The passive matrix approach now in use for simple watch and calculator
displays is receiving renewed attention in order to circumvent certain
limitations of the amorphous and polycrystalline active matrix approaches. The
new technologies - if successfully developed - could be used with or without the
active matrix. However, both active and passive approaches require integrated
circuit drivers for the rows and columns in the pixel matrix and therefore must
have integrated circuits mounted on glass (chip-on-glass), otherwise the number
of electrical connections to the display becomes too large to be
8
practical. The Company believes that passive systems of this type are not
capable of miniaturization to the same degree as a SMART SLIDE imaging device,
due to the limitations of chip-on-glass technology. The Company's SMART SLIDE
imaging device incorporates integrated circuit drivers and logic within the
SMART SLIDE itself. Thus, the Company believes that this approach will allow for
further miniaturization, reduced cost, greater reliability and high-definition.
In contrast to the current passive and active matrix approaches, the Company
utilizes high quality, single crystal silicon integrated circuits. This thin
film, single crystal silicon is not grown on glass; rather, it is first formed
on a silicon wafer (using the Company's patented and proprietary ISE/TM/
process) and is then transferred to glass. However, before it is transferred to
glass, a circuit (including the active matrix, driver circuitry and other logic)
is fabricated on the thin film by IC processes in a conventional silicon IC
foundry so that the transferred layer is a functional and tested active matrix
integrated circuit. By using this approach, the Company has successfully
demonstrated and manufactured in limited commercial quantities active matrix
LCDs comprised of 1280 by 1024 pixel displays, 800 by 600 pixel displays and 640
by 480 pixel displays.
Kopin's primary wafer-engineered gallium arsenide material product is the
aluminum gallium arsenide (AlGaAs) emitter, a carbon doped HBT wafer material.
In addition to working on higher performance and simpler, lower cost versions of
this structure, Kopin's development team is designing new materials structures
for future applications. Once such structure is the indium gallium
phosphide(InGaP) emitter HBT. The Company currently is delivering InGaP HBT
materials to certain customer development programs. The device performance
yielded by the Company's InGaP materials now approaches performance delivered by
the Company's AlGaAs materials.
Based on customer projections, the Company envisions InGaP HBT wafer-
engineered materials production moving toward volume production over the next
several years. The Company's InGaP HBTs are grown using the same equipment set
as its AlGaAs HBTs, therefore, current capacity can support InGaP production as
well as AlGaAs production.
Patents, Proprietary Rights and Licenses
An important part of the Company's product development strategy is to seek,
when appropriate, protection for anticipated display 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 68 issued United States patents and has 48 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, 6 pending
United States patent applications, and some foreign counterparts to these United
States patents and applications. The Company's material United States patents
expire during the period from May 2006 through June 2014. The material United
States patents licensed to the Company by MIT expire during the period from
April 1997 through November 2011.
In 1985, the Company obtained a license from MIT to certain wafer engineering
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. 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 Company pays
royalties to MIT equal to the greater of $30,000 per year or up to 3% of net
sales of products covered by the patents.
Patent applications in the United States are maintained in secrecy until
patents issue and since publication and discoveries in the scientific and patent
literature tends to lag behind actual discoveries, the Company cannot be certain
that it was the first creator 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 or
circumvent.
9
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. The defense and prosecution of
patent suits is both costly and time-consuming, even if the outcome is favorable
to the Company. These problems can be particularly severe in foreign countries.
An adverse outcome in the defense of a patent suit could subject the Company to
significant liabilities to third parties, require disputed rights to be licensed
from third parties, or require the Company to cease selling its products.
The Company also attempts to protect its proprietary information with
contractual arrangements and under trade secret laws. Company employees enter
into agreements providing for 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.
Competition
The market for high resolution flat panel displays is highly competitive and
subject to rapid technological change. The Company currently competes primarily
against products offered by large Asian electronics companies including Sharp,
Optrex, Hitachi, Seiko, Toshiba, Sony, Sanyo and DTI, a joint venture between
IBM and Toshiba, which have developed a dominant position in the market for
advanced active matrix LCDs using polycrystalline and amorphous silicon-grown-
on-glass. These companies have made monochrome and color LCD panels commercially
available. The Company believes that the primary application for these displays
is in notebook and laptop computers, although new smaller format products for
applications in projection systems and head-mounted systems are also being sold.
The Company believes that Asian manufacturers have made a multi-billion dollar
investment in the silicon-grown-on-glass technology and have attained
significant production economies. The Company may face an aggressive, well
financed competitive response which may include the misappropriation of the
Company's intellectual property or predatory pricing.
Other companies, including David Sarnoff Research Center, Xerox PARC, Texas
Instruments, Philips, Raychem, Hughes Aircraft and Hercules Display Systems, are
mainly involved in research and development and limited production of specialty
displays. Several companies, including Sony, Honeywell, Kaiser Electronics and
S-Tron, are engaged in head-mounted display development. The Company believes
that its imaging products will compete principally on the basis of performance
and cost.
The Company presently competes with approximately twelve large and small
corporations with respect to the sale of its custom wafer-engineered materials.
Additionally, the Company also competes with a large number of research
laboratories, companies and other institutions for research and development
funding. The Company believes that the principal competitive factors with
respect to the sale of its wafer-engineered materials are performance and price.
The production of GaAs integrated circuits has been and continues to be more
costly than the production of silicon devices. This cost differential relates
primarily to higher costs of the raw wafer material, lower production yields
associated with the relatively immature GaAs technology and higher unit costs
associated with lower production volumes. Although the Company has reduced
production costs of its gallium arsenide HBT materials 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 to its
customers of producing GaAs integrated circuits will continue to exceed the
costs associated with the production of silicon devices. As a result, the
Company must offer materials to producers of GaAs integrated circuits which
provide superior performance to that of silicon such that the perceived
price/performance of its customers' products is competitive with silicon
devices. 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 sufficiently
superior performance to offset the cost differentials.
10
Strategic Relationships and Major Collaborative Arrangements
The Company has formed business alliances and strategic relationships to
accelerate its technology, product development and capital formation
initiatives, and advance its overall business strategy. In addition, the Company
carries out development contracts and collaborative arrangements with private
industry and government to fund continued development of the Company's core
technology, as well as development of imaging devices for specific applications.
The Company's contracts with government agencies contain certain milestones
relating to technology development. These contracts may be terminated by such
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.
Strategic Relationships
Telecom Holding Co., Ltd. In October 1995, the Company entered into a
strategic alliance with Telecom Holding Co., Ltd., an affiliate of Thailand
based CP Group, which made an equity investment in the Company of $27.1
million by privately purchasing 1,643,716 shares of the Company's common
stock at $16.50 per share. In addition to the investment, Telecom Holding and
the Company intend to work closely on future business activities, including
joint investments in manufacturing and marketing display products based upon
the Company's SMART SLIDE imaging devices.
UMC. In December 1995, the Company entered into a strategic foundry
relationship and corporate alliance with UMC and its affiliate, Unipac. Under
the agreement, UMC and Unipac made an equity investment in the Company of
$3.7 million by privately purchasing a total of 225,000 shares of the
Company's common stock at $16.50 per share. Additionally, UMC agreed to
provide integrated circuit wafer fabrication for the Company's SMART SLIDE
imaging devices to establish volume production, and to work together with the
Company on various AMLCD technology issues, including packaging and testing
of displays.
GMT. In January 1995, the Company entered into a wafer processing
agreement with GMT, under which GMT provides integrated circuit wafer
fabrication for the Company's SMART SLIDE imaging devices. Additionally, the
Company has purchased a minority interest equity position in GMT for
approximately $950,000.
Philips. In August 1994, Kopin entered into agreements with two divisions
of Philips. Under a Joint Agreement with Philips Consumer Electronics
Company, the two companies plan to develop and manufacture full color AMLCD
systems using the Company's SMART SLIDE imaging device. Under a Cross
Licensing and Supply Agreement with Philips Laboratories, the Company has
licensed Philips' patented falling raster single panel technology, a time
sequential method of producing color images.
MIT. In October 1993, the Company entered into a Cooperative Research and
Development Agreement with MIT Lincoln Laboratory. Under the terms of the
agreement and subsequent amendments, the Company and MIT together perform
research on advanced display imaging devices for commercial and military
use.
Collaborative Development Arrangements
The Company is engaged in or has recently completed these contracts and
collaborative arrangements relating to the development of imaging devices using
thin film single crystal silicon, and the development of advanced integrated
circuits and advanced packaging techniques for digital circuits, as well as
applications of its wafer engineering process.
Defense Advanced Research Projects Agency. In May 1994, the Company
received a $10.6 million, 30-month contract from DARPA for continued
development of advanced, higher resolution SMART SLIDE imaging devices for
head-mounted military applications. The displays developed in this effort
have a 2560 x 2048 pixel resolution in a viewable area of approximately one
square inch. As prime contractor for this DARPA program, the Company directs
several participating subcontractors including David Sarnoff Research Center,
Planar Systems and AlliedSignal.
11
Department of Commerce-National Institute of Standards and Technology
("NIST"). In April 1995, the Company entered into a $12.4 million three-year
contract with the United States Department of Commerce, through the NIST
Advanced Technology Program. The Company and its subcontractor, Philips
Electronics North America Corporation, are collaborating to use the Company's
wafer engineering technology and certain Philips technology to develop high-
resolution color displays for high definition television applications.
Department of Defense (Army). During 1994 and 1995, the Company performed
research under a $2.0 million two-year contract from Department of Defense -
Army Natick Research, Development and Engineering Center for continued
development of high resolution, flat panel displays. The work performed under
this contract has been coordinated with the Company's DARPA program. As prime
contractor for this program, the Company is directing several participating
subcontractors including Sarnoff, ILC Technology and Honeywell.
Office of Naval Research. The Company is developing three-dimensional
silicon integrated circuits for high density electronics under a contract
which involves use of various techniques to form layered circuitry. The
Company believes that this development will be important to the creation of
highly integrated electronic imaging circuits.
Employees
The Company and its subsidiaries employ 116 full-time individuals and 6 part-
time individuals. Of these, 10 hold Ph.D. degrees in Material Science,
Electrical Engineering or Physics. The Company's management and professional
employees have significant prior experience in wafer-engineered materials,
processing and manufacturing, and other technologies related to flat panel
display devices and products; most have more than ten years of experience in the
electronics industry. The Company believes that it has been highly successful in
attracting experienced and capable scientific, engineering and business
personnel. None of the Company's employees is covered by collective bargaining
agreements. The Company considers relations with its employees to be good.
Item 2. Properties
- ------------------
The Company's headquarters are located in the Myles Standish Industrial Park
in Taunton, Massachusetts where it leases a custom designed 25,200 square foot
facility. The lease expires on October 31, 1998 with a two-year renewal option.
The facility includes 6,000 square feet of contiguous environmentally controlled
clean rooms for production. In October 1993, the Company entered into a five-
year lease for a 74,000 square foot manufacturing facility in Westborough,
Massachusetts. This facility includes 7,000 square feet of contiguous
environmentally controlled clean rooms for production. Forte's manufacturing
facility of approximately 20,000 square feet is located in Rochester, New York,
and leased under a five-year agreement which expires in 2000. In November, 1996,
the Company extended for one year the lease for a 2,800 square foot facility in
Los Gatos, California used as a design facility for prototyping personal,
portable display products. The Company believes that its existing space is
adequate for its immediately foreseeable business needs.
Item 3. Legal Proceedings
- -------------------------
In September 1996, Forte settled its suit against Virtual i-O, Inc. for
infringement of a Forte patent relating to a head-tracking device for use in a
headset. Virtual i-O, Inc. agreed to pay Forte a fixed sum of money and the
parties entered into a cross-license arrangement.
In March 1997, Forte filed a petition in federal bankruptcy court in the
Western District of New York seeking protection from its creditors under Chapter
11 of the United States Bankruptcy Code. The Company does not believe this will
have a material adverse effect on its financial condition or results of
operations.
The Company is not a party to any other 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.
12
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.............. 53 President and Chief Executive Officer;
Chairman of the Board of Directors
Paul J. Mitchell............ 44 Treasurer and Chief Financial Officer
Ronald P. Gale.............. 46 Vice President, Contract Research
Jeffrey J. Jacobsen......... 43 Vice President, Business Development
Meth Jiaravanont............ 38 Vice President, Strategic Marketing
Glen G. Kephart............. 53 Vice President of Marketing,
Display Products
Matthew J. Micci............ 40 Vice President, Sales
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.
Ronald P. Gale, Vice President, Contract Research. Dr. Gale has 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, Vice President, Business Development. Mr.
Jacobsen joined the Company as Vice President, Business Development in February
1990. From 1987 through 1989, Mr. Jacobsen served as Director of Strategic
Business at OKI Semiconductor Company, U.S.A.
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. 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.
13
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.
1996 High Low
----------------------------------------
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
1995
-----------------------------------------
First Quarter 11 3/4 7 1/2
Second Quarter 11 1/4 7 3/4
Third Quarter 18 1/2 9 1/2
Fourth Quarter 19 3/4 14
The Company has never paid dividends on its common stock and has no present
plans to do so.
As of December 31, 1996, there were 245 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.
14
Item 6. Selected Financial Data
- -------------------------------
Year Ended December 31,
-------------------------------------------------------
1996 1995 1994 1993 1992
------------ --------- --------- --------- --------
(In thousands, except per share data)
Statement of Operations Data:
Revenue:
Product sales $ 11,727 $ 7,161 $ 2,830 $ 2,456 $ 2,379
Research and development 6,291 8,628 10,453 8,642 5,086
Interest and other income 2,014 1,671 1,543 1,936 741
----------- -------- -------- -------- -------
20,032 17,460 14,826 13,034 8,206
----------- -------- -------- -------- -------
Expenses:
Cost of sales 9,489 6,059 1,981 1,769 1,798
Research and development 16,467 15,613 14,602 9,983 6,088
General, administrative and selling 7,070 4,013 4,575 2,591 1,694
Interest 338 363 107 53 111
Other 598 403 255 280 169
Write-down of subsidiary assets 3,900 - - - -
Non-recurring impairment charge 4,990 - - - -
----------- -------- -------- -------- -------
42,852 26,451 21,520 14,676 9,860
----------- -------- -------- -------- -------
Loss before minority interest (22,820) (8,991) (6,694) (1,642) (1,654)
Minority interest 1,224 - - - -
----------- -------- -------- -------- -------
Net loss $ (21,596) $ (8,991) $ (6,694) $ (1,642) $(1,654)
=========== ======== ======== ======== =======
Net loss per share $(1.98) $(.95) $(.72) $(.20) $(.27)
=========== ======== ======== ======== =======
Weighted average number of shares outstanding 10,921 9,462 9,267 8,242 6,219
=========== ======== ======== ======== =======
December 31,
-------------------------------------------------------
1996 1995 1994 1993 1992
------------ --------- --------- --------- --------
Balance Sheet Data:
Cash and equivalents and marketable securities $ 27,072 $ 41,997 $ 28,728 $ 39,231 $ 16,414
Working capital 27,687 44,727 30,566 42,169 17,921
Total assets 53,746 76,160 52,836 53,804 25,455
Long-term debt (excluding current maturities) 2,793 1,605 2,235 103 646
Accumulated deficit (48,261) (26,665) (17,674) (10,980) (9,337)
Stockholders' equity 40,271 61,842 43,451 50,549 21,123
15
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations
- -------------
Kopin Corporation and its subsidiaries ("the Company") are engaged in the
development, manufacture and sale of flat panel display devices and products,
and custom wafer-engineered electronic materials for commercial and consumer
markets. The Company's revenue is derived primarily from sales of its custom
wafer-engineered materials and flat panel display devices and products as well
as from development contracts with agencies of the federal government
Results of Operations
Years Ended December 31, 1996, 1995 and 1994
The Company's research and development and product sales revenue was
$18,018,253 in 1996, an increase of 14.1% from $15,789,526 in 1995. Research and
development revenue decreased to $6,291,172 in 1996 from $8,628,290 in 1995, a
decrease of 27.1%. The decrease in 1996 research and development revenue was
attributable to a reduction in contract revenue from agencies of the federal
government. In 1994, the Company received a $10,658,000 thirty-month contract
award from Defense Advanced Research Projects Agency. The Company recorded
revenue of $3,441,000 in 1996, $4,260,000 in 1995, and $2,465,000 in 1994 under
this contract. The Company's product sales increased 63.8% to $11,727,081 in
1996 from $7,161,236 in 1995. The product sales increase was primarily a result
of an increase in unit sales of the Company's wafer-engineered materials to
customers for use in various wireless telecommunications products. During the
year ended December 31, 1996, approximately 34% of the Company's revenue
resulted from product sales to a single customer.
The Company's research and development and product sales revenue was
$15,789,526 in 1995, an increase of 18.9% from $13,283,389 in 1994. Research and
development revenue decreased to $8,628,290 in 1995 from $10,453,050 in 1994, a
decrease of 17.5%. The change in 1995 research and development revenue was
primarily attributable to a decrease in contract revenue from agencies of the
federal government. The Company's product sales increased 153.0% to $7,161,236
in 1995 from $2,830,339 in 1994. The product sales increase was primarily due
to initial sales of the Company's head-mounted display products, as well as an
increase in unit sales of the Company's wafer-engineered materials.
Interest and other income was $2,013,642, $1,670,808, and $1,542,359 for the
years ended December 31, 1996, 1995 and 1994, respectively. The Company had
license fee income of $279,725 in 1996, compared to $92,004 in each of 1995 and
1994.
The Company's total operating expenses were $42,851,848 in 1996, an increase
of 62.0% from $26,451,333 in 1995. This increase was primarily due to the
increase in cost of sales associated with higher sales volume of wafer-
engineered materials and display products, increased costs incurred for internal
development programs, personnel increases and increased sales and marketing
costs for the Company's wafer-engineered materials and display products.
Expenses for the year ended December 31, 1996 include an increase of $4,990,412
related to a non-recurring charge for the write-down of certain intangible and
long-lived assets in connection with the Company's adoption of Statement of
Financial Accounting Standards No. 121, the expensing of purchased technology,
and the write-off of certain previously deferred expenses. Additionally,
expenses for the year ended December 31, 1996 include a $3,900,000 charge
incurred in connection with a write-down of the assets of the Company's
majority-owned subsidiary, Forte Technologies, Inc., and its investment in Forte
due to declining sales and results of operations of the subsidiary. Cost of
sales, which is comprised of materials, labor and manufacturing overhead, was
$9,488,702 in 1996, or 80.9% of product sales, compared to $6,059,440, or 84.6%
of product sales in 1995. The reduction in the cost of sales percentage was
primarily due to reduced manufacturing start-up costs incurred in the initial
production of the Company's head-mounted display systems from 1995 to 1996, and
an increase in unit production volumes of the Company's wafer-engineered
materials in 1996. Reducing cost of sales as a percentage of sales for the
Company's products is generally dependent on achieving manufacturing economies
of scale in order to manufacture at a lower per unit basis. Total operating
expenses in 1995 were $26,451,333, an increase of 22.9% from $21,520,005 in
1994. Cost of sales in 1995 was $6,059,440, or 84.6% of product sales, compared
to $1,980,701, or 70.0% of product sales in 1994. The increase in cost of sales
percentage in 1995 was primarily due to manufacturing start-up costs incurred in
the production of the Company's head-mounted display systems.
16
Research and development expenses include expenses incurred in support of
internal development programs and programs funded by agencies of the federal
government. Total research and development expenses have increased each year
since 1989, rising to $16,467,098 in 1996 from $15,613,287 in 1995 and
$14,601,820 in 1994, an increase of 5.5% in 1996 and 6.9% in 1995. The increase
in research and development expenses in 1996 was primarily due to increased
activity in the Company's internal development programs for electronic imaging
devices and display products, wafer-engineered materials 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 SMART SLIDE imaging devices. Expenses related to the Company's
internal development programs for electronic imaging and display products and
wafer-engineered materials were $9,278,481 for the year ended December 31, 1996,
compared to $6,240,299 and $4,070,329 for the years ended December 31, 1995 and
1994, respectively. These increases were partially offset by a decrease in
research and development expenses incurred in support of programs funded by
agencies of the federal government.
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 $7,070,275 in 1996, an increase of
76.2% from $4,012,764 in 1995. 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. General, administrative and selling expenses in 1995 were
$4,012,764, a decrease of 12.3% from $4,574,806 in 1994. General, administrative
and selling expenses were higher in 1994 than in 1995 as a result 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 general
and administrative in 1994, and as cost of sales and research and development
expense in 1995. In addition, general and administrative expenses include non-
cash charges for compensation expense of $66,776 in 1996, $130,188 in 1995 and
$135,312 in 1994, relating to the issuance of certain stock options. The Company
expects to incur additional increases in general, administrative and selling
expenses in the future as it commercializes its imaging devices and display
products and wafer-engineered materials.
As of December 31, 1996, the Company had tax loss carryforwards of
approximately $43,650,000.
On January 1, 1996, the Company adopted Statement of Financial Accounting
Standards (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 the carrying value of long-lived and certain
identifiable intangible assets. In January 1996, the Company incurred a
non-recurring charge of $4,990,412 which included a write-down associated with
the initial adoption of SFAS No. 121, the expensing of purchased technology, and
the write-off of certain previously deferred expenses.
In October 1995, the Financial Accounting Standards Board issued SFAS
No. 123, "Accounting for Stock-Based Compensation," which was effective for the
Company beginning January 1, 1996. SFAS No. 123 requires expanded disclosures
of stock-based compensation arrangements with employees and encourages (but does
not require) compensation costs to be measured based upon the fair value of the
equity instrument awarded. However, the Company, as permitted will continue to
apply APB Opinion No. 25, which recognizes compensation cost based on the
intrinsic value of the equity instrument awarded.
Liquidity and Capital Resources
The Company has financed its operations primarily though private placements
of its equity securities, the initial public offering of its common stock in
April 1992, another public offering in March 1993, research and development
revenue, and sales of its custom wafer-engineered materials and flat panel
display devices and products. The Company currently has an unused line of credit
of $500,000 at year end. The Company periodically enters into loan agreements to
finance equipment purchases and other activities. As of December 31, 1996, sales
of equity securities have raised approximately $92,500,000, including
$13,300,000 of net proceeds from the Company's initial public offering,
$26,500,000 of net proceeds from the Company's March 1993 public offering,
$3,300,000 from a private stock sale in November 1992, $4,375,000 from the
exercise of a 625,000 share stock warrant in December 1993, and $30,437,000 from
private stock sales to Telecom Holding Co.,Ltd. and United Microelectronics
Corporation and its affiliate in the fourth quarter of 1995. The Company has
commitments of approximately $5,500,000 under existing research and development
contracts and customer purchase orders to be fulfilled during 1997 and 1998.
However, some of these commitments are pursuant to contracts that
17
may be terminated prior to completion of funding. Funding for these contracts is
contingent upon satisfactory performance and the attainment of certain
milestones.
As of December 31, 1996, the Company had cash and equivalents and marketable
securities of $27,072,106 and working capital of $27,686,990 compared to
$41,996,977 and $44,727,410 as of December 31, 1995. During 1996, cash and
equivalents and marketable securities decreased $14,832,621. The decrease in
cash and equivalents and marketable securities is primarily due to $12,785,361
of cash used in operations and $3,779,919 for capital expenditures. These
decreases were partially offset by borrowings of $2,830,425 and $1,800,000 in
equity financing raised by one of the Company's subsidiaries from certain of its
minority stockholders. The Company also has approximately $1,640,000 of
marketable securities held in escrow as equipment financing collateral which is
shown in other assets.
Revenue from long-term 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 costs or hours.
Amounts received under long-term contracts are recognized as revenue is earned,
and amounts earned on contracts in progress in excess of billings are classified
as unbilled receivables. Unbilled receivables are billed based on dates
stipulated in the related agreement or in periodic installments based upon the
Company's invoicing cycle. The Company has unbilled accounts receivable of
$2,933,863 in 1996 compared to $3,438,766 in 1995.
The Company periodically enters into various long-term debt arrangements in
connection with acquisition of certain capital equipment. During 1996, the
Company entered into two equipment financings totalling $1,285,511, and a
capital lease obligation of $1,200,000. As of December 31, 1996, long-term debt
obligations totalled $4,140,697, of which $1,347,636 is payable in 1997. During
1996, the Company made principal payments on long-term debt of $924,421.
In October 1993, the Company entered into a five-year lease for a 74,000
square foot manufacturing facility. This facility, which includes 7,000 square
feet of environmentally controlled clean rooms, is being used for expansion of
the Company's manufacturing capabilities for production of wafer-engineered
materials and electronic imaging devices. The Company will make lease payments
of approximately $4.0 million over the five-year term.
The Company expects to expend approximately $8,000,000 on capital
expenditures over the next 36 months. Of this amount, approximately $6,000,000
is expected to be used for expansion of manufacturing equipment required for
development and manufacturing of electronic imaging devices and display
products, and wafer-engineered materials, and the balance is expected to be used
for the acquisition of laboratory and testing equipment and general facility
upgrades. The Company expects to use approximately $3,000,000 in 1997,
$2,500,000 in 1998 and $2,500,000 in 1999 for capital equipment and expansion of
the Company's manufacturing capabilities. The Company also expects to use
approximately $2,000,000 for development of advanced display circuit designs for
its electronic imaging devices.
The Company expects to incur significant additional research and development
and other costs, including costs related to the continued development and
commercialization of its electronic imaging devices and display products. The
Company's future capital requirements will depend on many factors, including the
establishment of collaborative arrangements, the cost of manufacturing
facilities, commercialization activities and arrangements, continued scientific
progress in its imaging device and display product development programs, the
magnitude of these programs, the costs involved in filing, prosecuting and
enforcing patent claims, and competing technological and market developments.
From time to time, Kopin may also make equity investments in other companies
engaged in certain aspects of the flat panel display and electronics industries
as part of its business strategy.
From October 1994 through December 31, 1996, the Company made a series of
investments in Forte Technologies, Inc., a developer and manufacturer of
virtual reality head-mounted systems, totalling $5,750,000. As a result of
declining sales and results of operations at 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, and is evaluating its strategic options
regarding its investment. 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 sales of Forte's products may
decline significantly from levels achieved in 1996, and Forte may be unable to
continue its operations.
The Company believes that its present cash and equivalents and marketable
securities will be adequate to finance its anticipated operating and capital
requirements and to meet liquidity needs through at least fiscal 1998.
18
RISK FACTORS
Certain of the statements contained in this Annual Report on Form 10-K are
forward looking statements that involve risks and uncertainties. Such statements
are subject to important factors that could cause actual results to differ
materially, including the following risk factors.
Imaging Devices and Display Products; Uncertainty of Successful
Commercialization
The Company's product sales have been derived primarily from its custom
wafer-engineered materials and not from its imaging devices and display
products. To date, the Company has demonstrated and had limited sales of active
matrix LCDs and related display products based on its core technology. Continued
development and testing are necessary before such a SMART SLIDE imaging device
or the Company's proposed display products will be generally available for wide-
spread commercial end-use applications. Delays in development may result in the
Company's introduction of a SMART SLIDE imaging device and its display products
later than anticipated, which may have an adverse effect on both the Company's
financial and competitive position. Moreover, there can be no assurance that the
Company will ever be successful in commercializing a SMART SLIDE imaging device
or any of its proposed display products. In addition, there is no assurance that
a SMART SLIDE imaging device or any of the Company's display products will be
technically or commercially successful.
Competition and Technological Advances
The markets for electronic imaging displays, display products and computer
peripherals are highly competitive. The Company's ability to compete will depend
in part upon the consistency of product quality and delivery, as well as
pricing, technical capability and servicing, in addition to factors within and
outside its control, including the success and timing of product introductions
by the Company and its competitors, product performance and price, product
distribution and customer support. There can be no assurance that the Company's
competitors will not succeed in developing technologies and products that are
equally or more effective than any which are being developed by the Company or
which would render the Company's technology, imaging devices or display products
obsolete and non-competitive. In addition, certain competitors have
substantially greater financial, technical and other resources than the Company.
The electronic imaging display, display product, computer peripheral and gallium
arsenide materials industries have been characterized by rapid and significant
technological advances. There can be no assurance that the Company's products
will be reflective of such advances or that the Company will have sufficient
funds to invest in new technologies or products or processes.
Patents and Protection of Proprietary Technology
The Company's ability to compete effectively with other companies will
depend, in part, on the ability of the Company and its licensors to maintain the
proprietary nature of their respective technologies. Although the Company has
been licensed under, awarded or has filed applications for numerous patents in
the United States and foreign countries, there can be no assurance as to the
degree of protection offered by these patents, or as to the likelihood that
pending patents will be issued. There can be no assurance that competitors, in
both the United States and foreign countries, many of which have substantially
greater resources and have made substantial investments in competing
technologies, will not seek to apply for and obtain patents that will prevent,
limit or interfere with the Company's ability to make and sell its products or
intentionally infringe the Company's patents. The defense and prosecution of
patent suits is both costly and time-consuming, even if the outcome is favorable
to the Company. This is particularly true in foreign countries because the
expenses associated with such proceedings can be prohibitive. In addition, there
is an inherent unpredictability regarding obtaining and enforcing patents in
foreign countries. An adverse outcome in the defense of a patent suit could
subject the Company to significant liabilities to third parties, require
disputed rights to be licensed from third parties, or require the Company to
cease selling its products. The Company also relies on unpatented proprietary
technology and there can be no assurance that others may not independently
develop the same or similar technology or otherwise obtain access to the
Company's proprietary technology.
Limited Manufacturing History; Dependence on Integrated Circuit Manufacturers
The Company has limited experience manufacturing imaging devices or display
products. The Company has developed manufacturing facilities and capabilities
and entered into arrangements contemplating the establishment of a full-scale
19
manufacturing capability for SMART SLIDE imaging devices. These arrangements
include relationships with third party integrated circuit fabrication companies.
The Company is dependent on these integrated circuit fabrication companies for
the manufacture of its SMART SLIDE imaging devices. The termination or
cancellation of the Company's agreements with these companies could adversely
affect the Company's ability to manufacture its proposed products. In such
event, the Company could be required to establish an alternative manufacturing
relationship or establish its own integrated circuit fabrication capability.
There can be no assurance that the Company would be able to establish such a
relationship on acceptable terms or its own capability; in any event the time
required to establish such a substitute relationship or capability could
substantially delay the commercialization of the Company's SMART SLIDE imaging
devices and display products, which in turn, could have a substantial adverse
impact on the Company's results of operations.
Dependence on Single Customer
The Company's gallium arsenide materials business is highly dependent on one
customer, Rockwell International. Either the loss of this customer or a
significant reduction in orders from this customer would have a material adverse
effect on the Company's gallium arsenide materials business and the Company's
results of operations as a whole.
Seasonality
The Company's business is not seasonal in nature.
Inflation
The Company does not believe that its operations have been materially
affected by inflationary forces.
Item 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-13. 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.
20
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 22,
1997 (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.
21
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, 1996 and 1995 F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1996, 1995 and 1994. F-4
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1996, 1995 and 1994. F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1995 and 1994. F-6
Notes to Consolidated Financial Statements. F-7 to F-13
(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 **
3.2 Amendment to Certificate of Incorporation
3.3 Amended and Restated By-laws **
4 Specimen Certificate of Common Stock *
10.1 Form of Employee Agreement with Respect to Inventions and Proprietary
Information *
+ 10.2 1985 Incentive Stock Option Plan, as amended *
+ 10.3 1992 Stock Option Plan Amendment
10.4 Form of Key Employee Stock Purchase Agreement *
10.5 Prudential Retirement Accumulation 401(K) Plan *
10.6 Subcontract by and between the Company and David Sarnoff Research Center
dated as of August 16, 1991, pursuant to an Agreement by and between David
Sarnoff Research Center and the U.S. Air Force *
10.7 Base Technology License Agreement by and between the Company and Prutech
dated December 31, 1986 *
10.8 Agreement for License or Sale of Technology by and between the Company and
Prutech dated December 31, 1986, as amended *
10.9 Contract for Research and Development by and between the Company and Prutech
dated December 31, 1986 *
10.10 License Agreement by and between the Company and Massachusetts Institute of
Technology dated April 22, 1985, as amended *
22
10.11 Letter Agreement by and between the Company and Boeing Defense and Space
Group dated February 11, 1992 *
10.12 Facility Lease, as amended, by and between the Company and Myles Standish
Associates Limited Partnership commencing November 1, 1985 *
10.13 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) **
10.14 Stock Purchase Agreement, dated as of November 6, 1992, by and between the
Company and Rockwell International Corporation **
10.15 Contract between the Company and the Defense Advanced Research Projects
Agency, dated September 25, 1992 **
10.16 Contract between the Company and the David Sarnoff Research Center, dated
July 17, 1992 **
10.17 Contract between the Company and Microelectronics and Computer Technology
Corporation, dated September 15, 1992 **
10.18 Contract between the Company and Standish Industries, dated November 30, 1992 **
10.19 Contract by and between the Company and ETDL, R&D Acquisition Office,
Labcom dated June 30, 1992 **
10.20 Contract by and between the Company and the Air Force Systems Command
dated April 24, 1992 **
10.21 Contract by and between the Company and the Office of Naval Research dated
September 30, 1992 **
10.22 Contract by and between the Company and the National Science Foundation
dated August 24, 1992 **
10.23 Contract by and between the Company and the United States Department of
Commerce dated September 16, 1992 **
10.24 Contract by and between the Company and the United States Army Natick RD&E
Center dated December 29, 1993 ***
10.25 Contract by and between the Company and the Office of Naval Research dated
July 22, 1993 ***
10.26 Contract by and between the Company and Department of the Air Force, Air Force
Material Command dated September 22, 1993 ***
10.27 Facility Lease, by and between the Company and Massachusetts Technology Park
Corporation dated October 15, 1993 ***
10.28 Contract amendment by and between the Company and Advanced Research Projects
Agency dated December 3, 1993 ***
10.29 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) ***
10.30 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) ***
10.31 Master Sublease - Purchase Agreement, by and between the Company and
Massachusetts Industrial Finance Agency dated June 23, 1994 ****
10.32 Contract by and between the Company and the Advanced Research Projects
Agency dated May 25, 1994(confidential portions on file with the Commission) ****
10.33 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) *****
10.34 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) *****
23
10.35 Securities Purchase Agreement, by and between the Company and Forte
Technologies, Inc. dated October 24, 1994(confidential portions on file
with the Commission) #
10.36 Contract by and between the Company and Office of Naval Research dated
September 30, 1994 #
10.37 Contract by and between the Company and Hughes Training, Inc. dated
September 15, 1994 #
10.38 Securities Purchase Agreement, by and between the Company
and GMT Microelectronics Corporation, dated January 6, 1995
(confidential portions on file with the Commission) ##
10.39 Note Agreement, by and between the Company and The First National
Bank of Boston dated March 1, 1995 ##
+ 10.40 Amended and Restated Employment Agreement between the Company and
Dr. John C.C. Fan, dated as of May 1, 1995 ###
10.41 Contract by and between the Company and the United States Department of
Commerce dated April 25,1995 ####
10.42 Securities Purchase Agreement, by and between the Company and Forte
Technologies, Inc. dated September 15, 1995 ####
10.43 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) ####
10.44 Stock Purchase Agreement, by and between the Company and Telecom Holding
dated November 24, 1995 &
10.45 Letter Agreement, by and between the Company and Telecom Holding Co., Ltd.
Co., Ltd. dated November 24, 1995 &
10.46 Stock Purchase Agreement, by and between the Company and United Microelectronics
Corporation dated November 29, 1995 ####
10.47 Stock Purchase Agreement, by and between the Company and Unipac Optoelectronics
Corporation dated November 29, 1995 ####
10.48 Letter Agreement, by and between the Company and United Microelectronics
Corporation dated November 29, 1995(confidential portions on file with the Commission) ####
10.49 Amendment Agreement, by and between the Company and Rockwell International
Corporation dated September 29, 1995 ####
10.50 Securities Purchase Agreement, by and between the Company and
Unitek Semiconductor, Inc. dated January 26, 1996 (S)
10.51 Chattel Leasing Promissory Note, by and between the Company
and BancBoston Leasing dated January 29, 1996 (S)
10.52 Securities Purchase Agreement, by and between the Company
and Forte Technologies, Inc. dated February 8, 1996. (S)
10.53 Securities Purchase Agreement, by and between Forte Technologies, Inc.
and Investors, dated June 27, 1996. (S)(S)
10.54 Master lease agreement, by and between the Company and BancBoston Leasing
dated December 23, 1996
11 Statement of Computation of Loss per Share
21.1 Subsidiaries of Kopin Corporation
23.1 Consent of Deloitte & Touche LLP, Independent Auditors of the Company
27 Financial Data Schedule
* Filed as an exhibit to Registration Statement on Form S-1, File No.
33-45853, and incorporated herein by reference.
** Filed as an exhibit to Registration Statement on Form S-1, File No.
33-57450, and incorporated herein by reference.
24
*** Filed as an exhibit to Annual Report on Form 10-K for the fiscal year
ended December 31, 1993 and incorporated herein by reference.
**** Filed as an exhibit to Quarterly Report on Form 10-Q for the quarterly
period ended July 2, 1994 and incorporated herein by reference.
***** Filed as an exhibit to Quarterly Report on Form 10-Q for the quarterly
period ended October 1, 1994 and incorporated herein by reference.
# Filed as an exhibit to Annual Report on Form 10-K for the fiscal year
ended December 31, 1994 and incorporated herein by reference.
## Filed as an exhibit to Quarterly Report on Form 10-Q for the quarterly
period ended April 1, 1995 and incorporated herein by reference.
### Filed as an exhibit to Quarterly Report on Form 10-Q for the quarterly
period ended July 1, 1995 and incorporated herein by reference.
#### Filed as an exhibit to Annual Report on Form 10-K for the fiscal year
ended December 31, 1995 and incorporated herein by reference.
& Filed as an exhibit to Schedule 13D for Telecom Holding, Co., Ltd. filed
on October 10, 1995 and incorporated herein by reference.
(S) Filed as an exhibit to Quarterly Report on Form 10-Q for the quarterly
period ended March 30, 1996 and incorporated herein by reference.
(S)(S) Filed as an exhibit to Quarterly Report on Form 10-Q for the
quarterly period ended June 29, 1996 and incorporated herein by
reference.
+ Management contract or compensatory plan required to be filed as an
exhibit to this form pursuant to Item 14(c) of this report.
(b) Reports on Form 8-K:
None
25
KOPIN CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report F-2
Consolidated Balance Sheets at December 31, 1996 and 1995 F-3
Consolidated Statements of Operations for the years ended December 31, 1996, 1995 and 1994 F-4
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1996,
1995 and 1994 F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994 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, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with 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, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, in
1996 the Company changed its method of accounting for the recognition of
impairment of long-lived assets and long-lived assets to be disposed of.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Boston, Massachusetts
February 10, 1997 (March 7, 1997 as to Note 13)
F-2
KOPIN CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31,
---------------------------------
1996 1995
---- ----
Assets
Current assets:
Cash and equivalents $16,511,291 $24,718,023
Marketable securities 10,560,815 17,278,954
Accounts receivable, net of allowance of $137,400 and $85,600
Billed 3,650,075 3,147,846
Unbilled 2,933,863 3,438,766
Inventory 3,073,643 6,402,190
Prepaid expenses and other current assets 1,257,781 1,984,612
----------- -----------
Total current assets 37,987,468 56,970,391
Equipment and improvements:
Equipment 20,862,918 19,258,354
Leasehold improvements 772,717 835,900
Furniture and fixtures 361,483 414,707
Equipment under construction 636,255 964,446
----------- -----------
22,633,373 21,473,407
Accumulated depreciation and amortization 11,731,828 9,902,444
----------- -----------
10,901,545 11,570,963
Other assets 2,962,149 3,438,334
Intangible assets 1,894,392 4,179,877
----------- -----------
Total assets $53,745,554 $76,159,565
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Note payable $500,000 $3,000,000
Accounts payable 6,945,053 7,712,508
Accrued payroll and expenses 1,427,305 808,826
Current portion of long-term obligations 1,347.636 629,643
Current portion of uncarned revenue 80,484 92,004
----------- -----------
Total current liabilities 10,300,478 12,242,981
Deferred rent 381,166 388,833
Unearned revenue, less current portion - 80,484
Long-term obligations, less current portion 2,793,061 1,605,050
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 10,931,408 shares in 1996 and 10,915,019 shares in 1995 109,314 109,150
Additional paid-in capital 88,605,451 88,355,145
Deferred compensation (227,706) (94,482)
Marketable securities valuation 44,933 137,183
Deficit (48,261,143) (26,664,779)
----------- -----------
Total stockholders' equity 40,270,849 61,842,217
----------- -----------
Total liabilities and stockholders' equity $53,745,554 $76,159,565
=========== ===========
See notes to consolidated financial statements.
F-3
KOPIN CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
-------------------------------------------------
1996 1995 1994
------ ------ ------
Revenue:
Product sales $ 11,727,081 $ 7,161,236 $ 2,830,339
Research and development 6,291,172 8,628,290 10,453,050
Interest and other income 2,013,642 1,670,808 1,542,359
--------------- ----------- ------------
20,031,895 17,460,334 14,825,748
--------------- ----------- ------------
Cost and expenses:
Cost of sales 9,488,702 6,059,440 1,980,701
Research and development 16,467,098 15,613,287 14,601,820
General, administrative and selling 7,070,275 4,012,764 4,574,806
Interest 337,418 363,288 107,186
Other 597,943 402,554 255,492
Write-down of subsidiary assets 3,900,000 - -
Non-recurring impairment charge 4,990,412 - -
--------------- ----------- ------------
42,851,848 26,451,333 21,520,005
--------------- ----------- ------------
Loss before minority interest (22,819,953) (8,990,999) (6,694,257)
Minority interest 1,223,589 - -
--------------- ----------- ------------
Net loss ($21,596,364) ($8,990,999) ($6,694,257)
=============== =========== ===========
Net loss per share ($1.98) ($.95) ($.72)
=============== =========== ===========
Weighted average number of shares outstanding 10,921,138 9,461,897 9,267,315
=============== =========== ============
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, 1994 9,231,803 $92,318 $61,748,948 $(312,482) - $(10,979,523) - $50,549,261
Issuance of common stock 5,000 50 66,200 - - - - 66,250
Exercise of stock options 61,908 619 64,088 - - - - 64,707
Compensation relating to
grant of stock options - - 47,500 (47,500) - - - -
Amortization of compensation
relating to grant of stock
options - - - 135,312 - - - 135,312
Net unrealized loss on
marketable securities - - - - (670,000) - - (670,000)
Net loss - - - - - (6,694,257) - (6,694,257)
----------------------------------------------------------------------------------------------------
Balance, December 31, 1994 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 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
========== ======== =========== ========== ======= ============= ======= ===========
See notes to consolidated financial statements.
F-5
KOPIN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
----------------------------------------
1996 1995 1994
---- ---- ----
Cash flows from operating activities:
Net loss ($21,596,364) ($8,990,999) ($6,694,257)
Adjusted to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 3,499,881 2,956,322 2,043,943
Write-down of subsidiary assets 3,900,000 - -
Amortization of compensation relating to
grant of stock options 66,776 130,188 135,312
Non-recurring impairment charge 4,990,412 - -
Decrease in unearned revenue (92,004) (92,004) (92,004)
Increase (decrease) in deferred rent (7,667) 34,001 354,832
Gain on sale/leaseback of capital equipment - - (65,530)
Minority interest in loss of subsidiary (1,223,589) - -
Changes in assets and liabilities:
Accounts receivable (558,326) (1,883,623) (1,247,328)
Inventory 1,480,547 (3,033,333) (1,214,769)
Prepaid expenses and other current assets (126,536) (861,003) (175,369)
Intangible assets (1,679,221) (1,043,407) (713,235)
Accounts payable and accrued expenses (1,439,270) 1,356,571 3,436,911
------------ ------------ -----------
Net cash used in operating activities (12,785,361) (11,427,287) (4,231,494)
------------ ------------ -----------
Cash flows from investing activities:
Acquisition of Forte Technologies, Inc., net
of cash acquired - (1,504,704) -
Marketable securities 6,625,889 10,368,699 5,828,751
Other assets 476,185 309,762 (3,748,096)
Capital expenditures (3,779,919) (3,755,147) (4,481,290)
------------ ------------ -----------
Net cash provided by (used in)
investing activities 3,322,155 5,418,610 (2,400,635)
------------ ------------ -----------
Cash flows from financing activities:
Net proceeds from issuance of common stock - 30,436,672 66,250
Purchase of common stock - (4,095,000) -
Net proceeds from issuance of subsidiary
preferred stock 1,800,000 - -
Principal payments on long-term obligations (924,421) (605,143) (503,411)
Proceeds from long-term obligations 2,830,425 - 3,000,000
Proceeds from note payable 500,000 3,000,000 -
Principal payments on note payable (3,000,000) - -
Proceeds from exercise of stock options 50,470 102,900 64,707
------------ ------------ -----------
Net cash provided by financing activities 1,256,474 28,839,429 2,627,546
------------ ------------ -----------
Net increase (decrease) in cash and equivalents (8,206,732) 22,830,752 (4,004,583)
Cash and equivalents, beginning of year 24,718,023 1,887,271 5,891,854
------------ ------------ -----------
Cash and equivalents, end of year $16,511,291 $24,718,023 $1,887,271
============ ============ ===========
Noncash investing and financing transactions:
Marketable securities valuation ($92,250) $807,183 ($670,000)
Supplementary cash flow information-Interest
paid in cash $328,824 $339,642 $168,662
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 custom wafer-engineered electronic materials
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 has consolidated the financial
statements of Forte with those of the Company since that date.
Revenue Recognition
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 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.
Product development and research contracts which have established prices for
distinct phases are accounted for as if each phase were a separate contract.
Amounts received under long-term contracts are recognized as revenue is earned,
amounts earned on contracts in progress in excess of billings are classified as
unbilled receivables, and amounts received in excess of amounts earned are
classified as unearned revenue. Unbilled receivables are billed based on dates
stipulated in the related agreement or in periodic installments based upon the
Company's invoicing cycle. At the time a loss on a contract becomes known, the
entire amount of the estimated ultimate loss is recognized in the financial
statements.
Research and Development Costs
Research and development costs are charged to operations as incurred.
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.
At December 31, 1996 and 1995, marketable securities consisted
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 these marketable securities as "available for
sale", and accordingly carries them as a current asset at market value. From
time to time, the Company sells marketable securities for working capital,
capital expenditure and investment purposes. Approximately $10,200,000 of these
marketable securities mature within one year, and substantially all the
remaining marketable securities mature within three years. Gross unrealized
holding gains of $44,933 are recorded in a valuation allowance in stockholders'
equity.
F-7
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:
1996 1995
---- ----
Raw materials $1,871,222 $3,148,467
Work in process 1,036,276 2,744,337
Finished goods 166,145 509,386
---------- ----------
$3,073,643 $6,402,190
========== ==========
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 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.
Concentration of Credit Risk
The Company invests its excess cash in high quality government and corporate
financial instruments which bear minimal risk. The Company sells its products to
customers worldwide. The Company maintains a reserve for potential credit losses
and such losses have been minimal.
Fair Market Value of Financial Instruments
Financial instruments consist of current assets (except inventories), current
liabilities and long-term obligations. Current assets and current liabilities
are carried at cost which approximates fair market value. Long-term obligations
are stated at cost which approximates fair market value.
Non-recurring 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 the carrying value of long-lived
and certain identifiable intangible assets. In January 1996, the Company
incurred a non-recurring charge of $4,990,412 which included a write-down of
approximately $4,400,000 associated with the initial adoption of SFAS No.121,
the expensing of purchased technology, and the write-off of certain previously
deferred expenses.
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."
F-8
KOPIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
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 May 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 $3,441,000 in 1996, $4,260,000 in 1995 and
$2,465,000 in 1994.
3. Other Assets
- ---------------
Other assets consist primarily of certain marketable securities held in escrow
as collateral under the Company's 5.625% equipment promissory note agreement.
4. Intangible Assets
- --------------------
Intangible assets consist of the following:
Estimated Useful
Life (years) 1996 1995
------------ ---- ----
Patents and application fees 10 $1,868,481 $1,814,108
Licenses 5-12 881,424 1,630,036
Costs in excess of fair value of net assets acquired 10 - 1,259,423
Organization and financing costs 1-5 - 206,915
Other deferred costs 5-10 9,049 377,541
---------- ----------
2,758,954 5,288,023
Less accumulated amortization (864,562) (1,108,146)
---------- ----------
$1,894,392 $4,179,877
========== ==========
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 are subordinated to the loans of the senior lender. The balance
of Forte's loans to the senior lender is $879,509 at December 31, 1996.
As a result of declining sales and results of operations at Forte, the
Company recorded in the fourth quarter of 1996 a write-down of Forte's assets to
their estimated net realizable value and its remaining investment in Forte
totaling $3,900,000.
F-9
KOPIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
6. Income Taxes
- ---------------
As of December 31, 1996, the Company has available for tax reporting purposes,
federal net operating loss and general business tax credit carryforwards of
approximately $43,650,000 and $360,000, respectively, expiring from 2000 to
2011.
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:
1996 1995
---- ----
Deferred tax assets:
Net operating loss carryforward $ 17,900,600 $10,660,000
Amortization of intangible assets 255,600 272,700
Deferred rent 156,300 159,400
Other 557,700 383,000
------------- -----------
18,870,200 11,475,100
------------- -----------
Deferred tax liabilities:
Patent costs 766,100 704,800
Depreciation 1,107,500 984,900
Deferred financing costs - 92,000
------------- -----------
1,873,600 1,781,700
------------- -----------
Net deferred tax assets 16,996,600 9,693,400
Valuation allowance (16,996,600) (9,693,400)
------------- -----------
$ - $ -
============= ===========
7. Note Payable and Long-term Obligations
- -----------------------------------------
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 is
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 note was repaid in 1996.
Long-term obligations consist of the following:
1996 1995
---- ----
5.625% equipment promissory note $1,605,050 $2,186,615
Capital lease obligations-equipment 1,200,000 48,078
8.19% equipment promissory note 611,224 -
9.02% equipment promissory note 379,509 -
Secured demand promissory note 344,914 -
---------- ----------
4,140,697 2,234,693
Less current portion 1,347,636 629,643
---------- ----------
$2,793,061 $1,605,050
========== ==========
The 5.625% equipment promissory note requires monthly payments of principal and
interest totalling $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.
F-10
KOPIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The equipment capital lease obligations require monthly payments of
approximately $31,032 through June 2000 unless an early termination and
equipment purchase option is exercised in December 1999. The capital lease
obligations are specifically collateralized by equipment with a carrying value
of $1,200,000 at December 31, 1996.
The 8.19% and 9.02% equipment promissory notes require monthly
payments of principal and interest totaling $26,680 and $16,708, respectively,
through January 1999. The loan obligations are collateralized by the equipment
financed under the agreements.
The secured demand promissory note represents debt incurred by Forte
to outside lenders. The promissory note is secured by all assets of Forte,
subordinated to the loans of Forte's senior lender and certain loans to Kopin.
The promissory note bears interest at 9%.
The aggregate maturities of long-term obligations, including capital
lease obligations, are as follows:
Year ending December 31,
Amount
- --------------------------------------------------------------------------------
1997 $1,441,273
1998 1,516,928
1999 754,734
2000 302,400
2001 344,914
------------
4,360,249
Less:
Amounts representing interest (219,552)
Current portion of long-term obligations
(1,347,636)
-----------
$2,793,061
==========
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.
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 2,350,000 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%
F-11
KOPIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
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 10-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 100,000
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, 1996, such compensation expense of
$66,776 was recorded and will aggregate to $227,706 over the remaining terms of
the options. At December 31, 1996, the Company has available 318,420 shares of
common stock for future grant under its stock option plans. A summary of option
activity is as follows:
1996 1995 1994
------------------------------------------------------------------------------------------------
Weighted Average Weighted Average Weighted Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
------------------------------------------------------------------------------------------------
Balance, beginning of year 1,560,326 $12.38 1,250,380 $13.23 697,138 $13.20
Options granted 1,126,750 9.09 990,250 12.61 622,650 12.04
Options cancelled (862,721) 12.47 (632,712) 15.18 (7,500) 12.93
Options exercised (16,389) 3.09 (47,592) 2.14 (61,908) 1.05
-----------------------------------------------------------------------------------------------
Balance, end of year 1,807,966 $10.47 1,560,326 $12.38 1,250,380 $13.23
========= ========= =========
Exercisable, end of year 587,000 446,000 245,000
Of the 1,807,966 options outstanding at December 31, 1996, 592,287
have exercise prices between $5.00 and $9.00, with a weighted average exercise
price of $8.20 and a weighted average remaining contractual life of 9.2 years.
Of these options, 97,447 are exercisable at a weighted average price of $8.11.
An additional 826,679 options outstanding at December 31, 1996 have exercise
prices between $9.25 and $11.75, with a weighted average exercise price of
$10.34 and a weighted average remaining contractual life of 8.3 years. Of these
options, 255,277 are exercisable at a weighted average price of $10.43. The
remaining 389,000 options have exercise prices between $12.00 and $17.25, with a
weighted average exercise price of $14.20 and a weighted average remaining
contractual life of 7.1 years. Of these options, 233,937 are exercisable at a
weighted average exercise price of $14.03. The weighted average exercise price
of all options exercisable at December 31, 1996 is $11.48.
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 compensation cost has been recognized
for the stock option plans. 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 1996 and 1995 consistent with the provisions of SFAS No. 123, the
Company's net loss and loss per share would have been $22,828,070 or $2.09 per
share in 1996 and $9,281,283 or $.98 per share in 1995.
F-12
KOPIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
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 1996 and 1995: no expected dividend yield; expected volatility of
61.2% in 1996 and 57.6% in 1995; risk-free interest rate of 6.55%; and
expected lives of four years. The weighted-average fair value of options on
grant date was $4.64 in 1996 and $6.65 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 $92,000 in 1996, $69,000 in 1995, and $62,000 in 1994.
11. Major Customers
- --------------------
During the years ended December 31, 1996, 1995, and 1994, approximately 31%,
49%, and 71%, 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 year ended December 31, 1996, approximately 34% 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 Rochester, New York, under
noncancelable operating leases. The Taunton lease expires in 1998 and has an
option for a two-year extension. The Westborough lease, entered into in 1993, is
a five-year lease with provisions to extend an additional six years. The
Rochester lease covers a five-year period terminating in 2000. 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,
1996:
Year ending December 31, Amount
- -------------------------------------------------------------------------------
1997 $1,355,285
1998 1,133,518
1999 164,768
2000 27,461
----------
Total minimum lease payments $2,681,032
==========
Costs incurred under operating leases are recorded as rent expense and
aggregated approximately $1,214,000 in 1996, $1,137,000 in 1995, and $1,191,000
in 1994.
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
$25,500 in 1996, $36,000 in 1995, and $29,700 in 1994.
13. Subsequent Event
- ---------------------
On March 7, 1997, the Company's subsidiary, Forte Technologies, Inc., filed a
voluntary petition seeking protection from its creditors under Chapter 11 of the
United States Bankruptcy Code. The Company does not believe this will have a
material adverse effect on its financial condition or results of operation.
F-13
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Kopin Corporation
Taunton, Massachusetts
We have audited the consolidated financial statements of Kopin Corporation
and Subsidiaries as of December 31, 1996 and 1995, and for each of the three
years in the period ended December 31, 1996, and have issued our report
thereon dated February 10, 1997 (March 7, 1997 as to Note 13); such
financial statements and report are included elsewhere in this Form 10-K.
Our audits also included the consolidated financial statement schedule of
Kopin Corporation and Subsidiaries listed in Item 14 of this Form 10-K. This
consolidated financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on
our audits. In our opinion, such consolidated 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 10, 1997 (March 7, 1997 as to Note 13)
KOPIN CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 1996, 1995, 1994
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:
1994 $28,000 $24,000 ($5,400) $46,600
1995 46,600 39,000 - 85,600
1996 85,600 72,000 (20,200) 137,400
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 28, 1997 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 28,1997
---------------------- Chief Executive Officer,
John C. C. Fan President and Director
(principal executive officer)
/s/ David E. Brook Director March 28, 1997
- -----------------------
David E. Brook
/s/ Morton Collins Director March 28, 1997
- -----------------------
Morton Collins
/s/ Andrew H. Chapman Director March 28, 1997
- -----------------------
Andrew H. Chapman
/s/ Anthony B. Evnin Director March 28, 1997
- -----------------------
Anthony B. Evnin
/s/ Chi Chia Hsieh Director March 28, 1997
- -----------------------
Chi Chia Hsieh
/s/ Vallobh Vimolvanich Director March 28, 1997
- -----------------------
Vallobh Vimolvanich
/s/ Michael A. Wall Director March 28, 1997
- -----------------------
Michael A. Wall
/s/ Paul J. Mitchell Treasurer and Chief March 28, 1997
- ----------------------- Financial Officer
Paul J. Mitchell (principal financial and
accounting officer)
Index to Exhibits
Sequential
page
Exhibits number
- -------- ------
3.1 Amended and Restated Certificate of Incorporation **
3.2 Amendment to Certificate of Incorporation
3.3 Amended and Restated By-laws **
4 Specimen Certificate of Common Stock *
10.1 Form of Employee Agreement with Respect to Inventions and Proprietary
Information *
+ 10.2 1985 Incentive Stock Option Plan, as amended *
+ 10.3 1992 Stock Option Plan Amendment
10.4 Form of Key Employee Stock Purchase Agreement *
10.5 Prudential Retirement Accumulation 401(K) Plan *
10.6 Subcontract by and between the Company and David Sarnoff Research Center
dated as of August 16, 1991, pursuant to an Agreement by and between David
Sarnoff Research Center and the U.S. Air Force *
10.7 Base Technology License Agreement by and between the Company and Prutech
dated December 31, 1986 *
10.8 Agreement for License or Sale of Technology by and between the Company and
Prutech dated December 31, 1986, as amended *
10.9 Contract for Research and Development by and between the Company and Prutech
dated December 31, 1986 *
10.10 License Agreement by and between the Company and Massachusetts Institute of
Technology dated April 22, 1985, as amended *
10.11 Letter Agreement by and between the Company and Boeing Defense and Space
Group dated February 11, 1992 *
10.12 Facility Lease, as amended, by and between the Company and Myles Standish
Associates Limited Partnership commencing November 1, 1985 *
10.13 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) **
10.14 Stock Purchase Agreement, dated as of November 6, 1992, by and between the Company
and Rockwell International Corporation **
10.15 Contract between the Company and the Defense Advanced Research Projects Agency,
dated September 25, 1992 **
10.16 Contract between the Company and the David Sarnoff Research Center, dated
July 17, 1992 **
10.17 Contract between the Company and Microelectronics and Computer Technology
Corporation, dated September 15, 1992 **
10.18 Contract between the Company and Standish Industries, dated November 30, 1992 **
10.19 Contract by and between the Company and ETDL, R&D Acquisition Office, Labcom
dated June 30, 1992 **
10.20 Contract by and between the Company and the Air Force Systems Command
dated April 24, 1992 **
10.21 Contract by and between the Company and the Office of Naval Research dated
September 30, 1992 **
10.22 Contract by and between the Company and the National Science Foundation
dated August 24, 1992 **
10.23 Contract by and between the Company and the United States Department of
Commerce dated September 16, 1992 **
10.24 Contract by and between the Company and the United States Army Natick RD&E
Center dated December 29, 1993 ***
10.25 Contract by and between the Company and the Office of Naval Research dated
July 22, 1993 ***
10.26 Contract by and between the Company and Department of the Air Force, Air Force
Material Command dated September 22, 1993 ***
10.27 Facility Lease, by and between the Company and Massachusetts Technology Park
Corporation dated October 15, 1993 ***
10.28 Contract amendment by and between the Company and Advanced Research Projects
Agency dated December 3, 1993 ***
10.29 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) ***
10.30 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) ***
10.31 Master Sublease - Purchase Agreement, by and between the Company and
Massachusetts Industrial Finance Agency dated June 23, 1994 ****
10.32 Contract by and between the Company and the Advanced Research Projects Agency
dated May 25, 1994 (confidential portions on file with the Commission) ****
10.33 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) *****
10.34 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) *****
10.35 Securities Purchase Agreement, by and between the Company and Forte
Technologies, Inc. dated October 24, 1994 (confidential portions on
file with the Commission) #
10.36 Contract by and between the Company and Office of Naval Research
dated September 30, 1994 #
10.37 Contract by and between the Company and Hughes Training, Inc. dated
September 15, 1994 #
10.38 Securities Purchase Agreement, by and between the Company and GMT
Microelectronics Corporation, dated January 6, 1995 (confidential portions on
file with the Commission) ##
10.39 Note Agreement, by and between the Company and The First National Bank of
Boston dated March 1, 1995 ##
+ 10.40 Amended and Restated Employment Agreement between the Company and
Dr. John C.C. Fan, dated as of May 1, 1995 ###
10.41 Contract by and between the Company and the United States Department of
Commerce dated April 25, 1995 ####
10.42 Securities Purchase Agreement, by and between the Company and Forte
Technologies, Inc. dated September 15, 1995 ####
10.43 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) ####
10.44 Stock Purchase Agreement, by and between the Company and Telecom Holding
dated November 24, 1995 &
10.45 Letter Agreement, by and between the Company and Telecom Holding Co., Ltd.
dated November 24, 1995 &
10.46 Stock Purchase Agreement, by and between the Company and United Microelectronics
Corporation dated November 29, 1995 ####
10.47 Stock Purchase Agreement, by and between the Company and Unipac Optoelectronics
Corporation dated November 29, 1995 ####
10.48 Letter Agreement, by and between the Company and United Microelectronics
Corporation dated November 29, 1995 (confidential portions on file with
the Commission) ####
10.49 Amendment Agreement, by and between the Company and Rockwell International
Corporation dated September 29, 1995 ####
10.50 Securities Purchase Agreement, by and between the Company and Unitek
Semiconductor, Inc. dated January 26, 1996 (S)
10.51 Chattel Leasing Promissory Note, by and between the Company and BancBoston
Leasing dated January 29, 1996 (S)
10.52 Securities Purchase Agreement, by and between the Company and Forte
Technologies, Inc. dated February 8, 1996. (S)
10.53 Securities Purchase Agreement, by and between Forte Technologies, Inc.
and Investors, dated June 27, 1996. (S)(S)
10.54 Master lease agreement, by and between the Company and BancBoston Leasing
dated December 23, 1996
11 Statement of Computation of Loss per Share
21.1 Subsidiaries of Kopin Corporation
23.1 Consent of Deloitte & Touche LLP, Independent Auditors of the Company
27 Financial Data Schedule
* Filed as an exhibit to Registration Statement on Form S-1, File
No. 33-45853, and incorporated herein by reference.
** Filed as an exhibit to Registration Statement on Form S-1, File
No. 33-57450, and incorporated herein by reference.
*** Filed as an exhibit to Annual Report on Form 10-K for the fiscal year
ended December 31, 1993 and incorporated herein by reference.
**** Filed as an exhibit to Quarterly Report on Form 10-Q for the quarterly
period ended July 2, 1994 and incorporated herein by reference.
***** Filed as an exhibit to Quarterly Report on Form 10-Q for the quarterly
period ended October 1, 1994 and incorporated herein by reference.
# Filed as an exhibit to Annual Report on Form 10-K for the fiscal year
ended December 31, 1994 and incorporated herein by reference.
## Filed as an exhibit to Quarterly Report on Form 10-Q for the quarterly
period ended April 1, 1995 and incorporated herein by reference.
### Filed as an exhibit to Quarterly Report on Form 10-Q for the quarterly
period ended July 1, 1995 and incorporated herein by reference.
#### Filed as an exhibit to Annual Report on Form 10-K for the fiscal year
ended December 31, 1995 and incorporated herein by reference.
& Filed as an exhibit to Schedule 13D for Telecom Holding, Co., Ltd.
filed on October 10, 1995 and incorporated herein by reference.
(S) Filed as an exhibit to Quarterly Report on Form 10-Q for the quarterly
period ended March 30, 1996 and incorporated here in by reference.
(S)(S) Filed as an exhibit to Quarterly Report on Form 10-Q for the quarterly
period ended June 29, 1996 and incorporated herein by reference.
+ Management contract or compensatory plan required to be filed as an
exhibit to this form pursuant to Item 14(c) of this report.