UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-K

xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 201128, 2013

OR

¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from             to            

Commission file number 0-19882

KOPIN CORPORATION

(Exact Name of Registrant as Specified in its Charter)

Delaware04-2833935

(State or other jurisdiction

of incorporation or organization)

(I.R.S. Employer

Identification No.)

200 John Hancock Rd., Taunton, MADelaware04-2833935
(State or other jurisdiction
of incorporation or organization)
(I.R.S. Employer
Identification No.)
 
02780-1042125 North Drive, Westborough, MA01581-3335
(Address of principal executive offices)(Zip Code)

Registrant’s telephone number, including area code:

(508) 824-6696870-5959

Securities registered pursuant to Section 12(b) of the Act:

Common Stock, par value $.01 per share
                      (Title(Title of Class)

Name of each exchange on which registered

NASDAQ Global Market

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes¨ Nox

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes¨ Nox

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 such filing requirements for the past 90 days. Yesx No¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).x Yes¨ 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.¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer¨

¨Accelerated Filer xxNon-Accelerated Filer¨¨Smaller Reporting Company¨

Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act). Yes¨ Nox

As of June 25, 201129, 2013 (the last business day of the registrant's most recent second fiscal quarter) the aggregate market value of outstanding shares of voting stock held by non-affiliates of the registrant was $304,717,934.

$235,280,802.

As of March 9, 2012, 67,016,96314, 2014, 65,790,407 shares of the registrant’s Common Stock, par value $.01 per share, were issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive Proxy Statement relating to its 20122014 Annual Meeting of ShareholdersStockholders are incorporated by reference into Part III of this Annual Report on Form 10-K where indicated.


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Part I

Forward Looking Statements

This Annual Report on Form 10-K contains forward-looking statements within the meaning of the United States Private Securities Litigation Reform Act of 1995, including, without limitation, statements made relating to our expectation that sales to Skyworks Solutions and the customers who use our displays for military applications will represent a significant portion of our revenues for 2012; our expectation that we will continue developing HBT transistor wafers and other gallium arsenide products for advanced integrated circuit applications from other compound materials; our expectation that we will continue to pursue other U.S. government development contracts for applications that relate to our commercial product applications; our expectation that sales of our III-V products for wireless handset applications and our display products for consumer electronic applications will decline; our belief that products using HBT transistor wafers are easier to design, which can translate into reduced component costs and smaller equipment; our expectation that we will prosecute and defend our proprietary technology aggressively; our belief that it is important to retain personnel with experience and expertise relevant to our business;our belief that our products are targeted towards markets that are still developing and our competitive strength is creating new technologies;our belief that it is important to invest in research and development to remain profitableachieve profitability even during periods when we are not profitable; our belief that we are a leading developer and manufacturer of advanced semiconductor materials and miniature displays; our belief that our products enable our customers to develop and market an improved generation of products; our belief that therethat the technical nature of our products and markets demands a commitment to close relationships with our customers; our belief that our Golden-i industrial reference design will provide for increased worker productivity, safety and improved manufacturing quality; our belief that our ability to develop and expand the our wearable technologies and to market and license our wearable technologies will be increased salesimportant for our revenue growth and ability to achieve profitability and positive cash flow; the impact of 3G, 4Gthe timing of development of the market segment for our wearable computing products on our ability to grow revenues; our expectation that we will incur significant development and smart phonesmarketing costs in 2012;2014 to commercialize the our wearable technologies; our statement that we may make equity investments in companies; our expectation that KoBrite will incur additional losses in the near term; our expectation that the operations at our Korean facility, Kowon, will cease and the cash and marketable debt securities held by Kowon will eventually be remitted back to the U.S.; our expectation that revenue will be between $110between $18 million and $120$22 million for 2012; 2014;our ability to forecast our revenues and operating results;our expectation that 2012 revenueswe will primarily be to customers locatedhave a consolidated net loss in the range of $32 million to $40 million in 2014; our expectation that excluding the effects of working capital, stock buybacks, and other investing activities our cash usage will be between $30 million and $35 million to fund operations for fiscal year 2014; our expectation that the U.S.; government will significantly reduce funding for programs through which we sell high margin military products; our belief that a strengthening of the U.S. dollar could increase the price of our products in foreign markets; the impact of new regulations relating to conflict minerals on customer demands and increased costs related to compliance with such regulations; our expectationbelief that our future success will depend primarily upon the technical expertise, creative skills and management abilities of our officers and key employees rather than on patent ownership;our belief that our extensive portfolio of patents, trade secrets and non-patented know-how provides us with a manufacturing/distribution partner will commence selling Golden-icompetitive advantage in the wearable technologies market; our belief that our ability to develop innovative products enhances our opportunity to grow within our targeted markets; our belief that continued introduction of new products in 2012; our expectation that we will not receive additional amounts from the sale of patents;target markets is essential to our growth; our expectation that our CyberDisplaydisplay products will benefit from further general technological advances in the design and production of integrated circuits and active matrix LCDs, resulting in further improvements in resolution and miniaturization; our expectation that a significant reduction or delay in orders from any of our significant military customers could result in us not being able to achieve profitability in 2012; our belief that our HBT transistor wafers offer greater power efficiency, improved signal quality and less complexity over gallium arsenide field effect transistors; our belief that our manufacturing process offers greater miniaturization, reduced cost, higher pixel density, full color capability and lower power consumption compared to conventional active matrix LCD manufacturing approaches; our expectation not to pay cash dividends for the foreseeable future and to retain earnings for the development of our businesses; our expectation based on current negotiations with our customers and certain contractual obligations, that the sales prices of certain products will decline in fiscal year 2012; our expectation that sales prices of our displays for military applications will remain relatively flat in 2012; our plan to base production and inventory levels based on internal forecasts of customer demands; our belief that the overall increase or decrease in the average sales price of our display products will be dependent on the sales mix of commercial and military display sales; our belief that we may have impairment charges on Kowon’s long-lived assets; our expectation that we will expend between $5.0between $2.0 million and $8.0 $3.0 million on capital expenditures over the next twelve months; our intent to reduce our per unit production costs primarily through increasing manufacturing yield, lowering fixed costs per unit through increased sales volume, and increasing productivity and efficiency; our expectation that the market for display products for military applications will not be seasonal; our expectation that prices of our HBT transistor and display products sold for consumer electronic applications will decline by approximately 5 to 7 percent during fiscal year 2012, but may decline more depending on final negotiations with our customers; our expectation that competition will increase; our belief that our CyberDisplay products are well suited for new applications such as reading e-mail and browsing the Internet using digital wireless devices and other consumer electronics devices; our belief that small form factor displays will be a critical component in the development of advanced wireless communications systems; our belief that wireless handset makers are looking to create products that complement or eventually replace wireless handsets; our belief that general technological advances in the design and fabrication of integrated circuits, LCD technology and LCD manufacturing processes will allow us to continue to enhance our CyberDisplaydisplay product manufacturing process; our expectation that a significant market for new wireless communication devices, including personal entertainment systems, will develop; our belief that continued introduction of new products in

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our target markets is essential to our growth; our belief that our future success will depend primarily upon the technical expertise, creative skills and management abilities of our officers and key employees rather than on patent ownership; our belief that our available cash resources will support our operations and capital needs for at least the next twelve months; our expectation that we will have taxes based on federal alternative minimum tax rules and on our foreign operations in 2014; our expectation that we will have a state tax provision in 2014; our expectation that the adoption of certain accounting standards will not have a material impact on our financial position or results of operations;our belief that our business is not disproportionately affected by climate change regulations; our belief that our operations have not been materially affected by inflation; and our belief that the effect, if any, of reasonably possible near-term changes in interest rates on our financial position, results of operations, and cash flows should not be material. These forward-looking statements are based on current expectations, estimates, forecasts and projections about the industries in which we operate, management’smanagement's beliefs, and assumptions made by management. In addition, other written or oral statements, which constitute forward-looking statements, may be made by or on behalf of us. Words such as “expects”, “anticipates”, “intends”, “plans”, “believes”, “could”, “seeks”, “estimates”, and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions, which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements, whether as a result of new information, future events or otherwise. Factors that could cause or contribute to such differences in outcomes and


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results include, but are not limited to, those discussed below in Item 1A and those set forth in our other periodic filings filed with the Securities and Exchange Commission.

Except as required by law, we do not intend to update any forward-looking statements even if new information becomes available or other events occur in the future.

Item 1.Business

Introduction


We were incorporated in Delaware in 1984 and are a leading developer of Wearable technologies and manufacturerdisplay products.

On January 16, 2013, we completed the sale of our III-V product line, including all of the outstanding equity interest in KTC Wireless, LLC, a wholly-owned subsidiary which held the our investment in Kopin Taiwan Corporation (KTC), to IQE KC, LLC (IQE) and IQE plc (Parent, and collectively with IQE, the Buyer). Our III-V products primarily consisted of our Gallium Arsenide-based HBT transistor wafers. The aggregate purchase price was approximately $75 million, subject to certain adjustments, including working capital adjustments and escrow. Upon agreement of the final working capital and other adjustments the net purchase price was $70.2 million, and the gain on the sale, net of tax, was $20.1 million. Under the terms of the Purchase Agreement, $55 million was paid to us in January 2013, $0.2 million was paid in April 2013 and the remaining $15 million is scheduled to be paid to us on the third anniversary of the Closing Date. We have revised the prior period amounts in our consolidated financial statements for the impact of the sale of the III-V product line, which is reflected as discontinued operations.
The following table provides the pro forma revenues of the Company as if the sale of the III-V product line had been completed on December 26, 2010 (the first day of the Company’s fiscal year ended December 31, 2011) (in millions):
 2012 2011
 Consolidated III-V Product Line Pro Forma Consolidated III-V Product Line Pro Forma
Revenues$93.4
 $58.8
 $34.6
 $131.1
 $66.5
 $64.6
The following table provides the pro forma assets of the Company as if the sale of the III-V product line had been completed on December 29, 2012 (in millions):
 2012
 Consolidated III-V Product Line Pro Forma
Total Assets$176.2
 $50.7
 $125.5

Wearable technologies are used to create hands-free voice and gesture controlled wireless computing and communication systems primarily worn on the head, that include an optical pod featuring our proprietary miniature flat panel displays. We useWearable technologies integrate a variety of commercially available software packages such as Microsoft Windows CE, Nuance Dragon NaturallySpeaking and Hillcrest Labs with our proprietary semiconductor material technologysoftware and display products to create a reference design manufacture and market our products. Our products enable ourwhich we offer to license to customers who wish to develop and market an improved generation of products for applicationsmobile industrial products. We licensed our first reference design known as Golden-i® in wireless and consumer electronic devices. Our fiscal year ends on the last Saturday in December. The fiscal years ended December 31, 2011, December 25, 2010 and December 26, 2009 are referred to herein as fiscal years 2011, 2010 and 2009, respectively. Our principal executive offices are located at 200 John Hancock Road, Taunton, Massachusetts. Our telephone number is (508) 824-6696.

We commercially develop and manufacture Gallium Arsenide-based heterojunction bipolar transistor wafers (HBT transistor wafers) and other commercial semiconductor products that use Gallium Nitride and Gallium Arsenide-based substrates. We collectively refer to our customer began shipping products based on compound semiconductor materials,our technology in 2013. Through 2013 our revenues from licensing our Golden-i technologies has been de minimis. We have rebranded the category and refer to the headset reference designs and other technologies we developed as Kopin Wearable technologies of which primarily consists of our HBT transistor wafers, as our “III-V” products because we use elements categorized on the III and V columns ofGolden-i headset reference design is for the periodic table of elements to manufacture such products. industrial market segment.


Our HBT transistor wafers are customer-specific arrays of vertically oriented transistors that our customers use primarily to produce high performance integrated circuits for wireless communications products. Sales of our HBT transistor wafers to Skyworks Solutions, Inc. (Skyworks Solutions) accounted for approximately 28%, 25% and 20% of our total revenues for fiscal years 2011, 2010 and 2009, respectively. Skyworks Solutions also uses the foundry services of Advanced Wireless Semiconductor Company (AWSC) to process our HBT transistor wafers on its behalf. We sell HBT transistor wafers directly to AWSC for eventual resale by AWSC to Skyworks Solutions and its other customers. Although we do not know exactly how much of our sales to AWSC are for Skyworks we believe an investor should view our sales to Skyworks Solutions and AWSC in the aggregate when evaluating the importance of Skyworks Solutions as a customer to Kopin. Sales to AWSC were 9%, 12% and 8%, of our 2011, 2010 and 2009 revenues, respectively. In addition to Skyworks Solutions, original equipment manufacturers such as RF Micro Devices and TriQuint Semiconductor purchase our HBT transistor wafers.

Our CyberDisplay™display products consist of miniature, high performance, high resolution displays either sold separately or in various configurations with optical lenses and electronics contained in either plastic or metal housings. Current applications which include our CyberDisplayminiature, high performance, high resolution display products are military devices, such as thermal weapon sights, and consumer devices such as camcorders, digital cameras,cameras; and devices that are capable of browsingaccessing the Internet usingor digital wirelessstorage devices for viewing data or video. When our display products are configured as spatial light modulators, the applications include industrial equipment for 3D Automated Optical Inspection and viewing video from other consumer electronics devices such as MP3 or iPod™ storage devices.training simulation equipment. We have sold our CyberDisplay productdisplay products to Raytheon Company, DRS RSTA Inc., BAE Systems (directly and through a third party QiOptiq), and ITT for use in military applications and to Samsung Electronics Co., Ltd. (Samsung) for use in digital camcorders,, Eastman Kodak Company (Kodak), Olympus Corporation

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(Olympus) and Fuji Corporation (Fuji) for digital still cameras and DRS Technologies, BAE Systems (through a third party QiOptic), Raytheon and ITT for use in military applications.cameras. For fiscal years 2013, 2012 and 2011, 2010 and 2009, significant


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display customers were as follows: (Note theare shown below. The caption “Military Customers in Total” in the table below includes Raytheon, DRS Technologies and QiOptic but excludes research and development contractscontracts. We sell our displays to Japanese customers through Ryoden Trading Company. (“*” denotes that the customer’scustomer's revenues were less than 10% of our total company revenues))

Customer

  Percent of Total
Revenues		 
  2011  2010  2009 

Military Customers in Total

   30%   33%   45% 

Raytheon Company

   12%   18%   14% 

DRS Technologies

   *    *    19% 

  
Percent of Total
Revenues
Customer 2013 2012 2011
Military Customers in Total 38% 57% 60%
Raytheon Company 14% 22% 23%
DRS RSTA Inc. * 21% 18%
QiOptiq Defense Inc. * * 10%
Ryoden Trading Company 18% 12% 15%
U. S. Government funded research and development contracts 10% 10% 8%

Our Golden-i™ productfiscal year ends on the last Saturday in December. The fiscal years ended December 28, 2013, December 29, 2012, and December 31, 2011 are referred to herein as fiscal years 2013, 2012 and 2011, respectively. Our principal executive offices are located at 125 North Drive, Westborough, Massachusetts. Our telephone number is (508) 870-5959.
Industry Overview
Wearable Computing/Communicating
Over a head worn computer headset which we developed that includes a microprosessorbillion wireless hand-held devices are sold annually for communication, data input, storage and an optical pod which includes a CyberDisplay product. In 2010, we entered into a license agreement with a customer who acquiredretrieval, accessing the exclusive rights to develop Golden-i productsinternet, and other purposes. Derivative wireless devices such as Bluetooth headsets and Smart Watches are available for the industrial market. In 2011 we commenced selling Golden-i Developer Kits which providedpurpose of allowing the basic functionality in orderuser to spur interest from potential end customers of our licenseeaccess their wireless handsets' voice and also software application developers. Sales of the Golden-i Developer Kits were diminimis in 2011 and we do not expect significant revenue from this product in 2012.

Industry Overview

III-V Products

Advanced semiconductor materials are used in the manufacture of integrated circuits for high frequency, low power applications. The rapid growth intext communication features without holding the wireless communications industry has fueled demandhandset. Wearable computing devices also include body-worn devices such as scanners and terminals which are sold in industrial markets to improve worker productivity. The user interface for these integrated circuits for use indevices is typically either a key pad or a touch screen however some wireless handsets.

In first generationdevices include voice recognition software as an additional feature to allow the user to search the Internet. We believe wireless handset makers are looking to create products that work as a complement to the wireless handsets integrated circuits used in high frequency, low power amplifiers were generally constructed with silicon-based semiconductors. These integrated circuits, while relatively inexpensiveor to manufacture, were unable to delivereventually replace the ever increasing performance demanded by wireless handset manufacturers and their customers. This inability led tohandset. Wireless network companies are encouraging the development of gallium arsenidemore products that utilize their network capacity and other companies are developing products which provide continuous access to social media outlets. In order for usethe markets for these new products to develop further advances in wireless communications. Gallium arsenide is generally regarded as having better performance characteristics than silicon due, in part, to its inherent physical properties that permit gallium arsenide integrated circuits to operate at muchthe devices and application software will be required. Device improvements include smaller higher frequencies than silicon integrated circuits, or operate at the same frequency withresolution displays, lower power consumption. The reduction in system power requirements is particularly important in portable applications, such as wireless handsets, because it extends battery life.

The high performance characteristics of gallium arsenide have led to an increased use of gallium arsenide-based transistors to satisfy the industry’s need for even greater performance. Since the mid 1990s these gallium arsenide transistors include our HBT transistor wafer for use in wireless handset products which use digital signal processingprocessors, longer-life batteries, compact optics and generally operate at higher cellular frequencies. Air interface standards in these frequency bands include Global System Mobile, or GSM, Time Division Multiple Access, or TDMA,software including voice recognition and Code Division Multiple Access, or CDMA, and provide improved capacity, sound quality and capabilities at cellular and wireless frequency bands, but are incompatible with each other and have fragmentednoise cancellation. For the market for equipment. Suppliers of wireless handsets now offer multi-modethese devices to grow application software must be developed that exploit their new features and multi-band wireless handsets which are capable of switching from one high frequency band to another to enable consumers to use wireless handsets across various territories and different interface standards. This new generation of products is significantly more complex than the prior generation and requires certain key features, including:

functions.

Simpler system design;

Display Products

Support for higher frequencies;

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Lower power consumption;

Improved signal quality; and

Wider range of operating temperatures.

CyberDisplay™ Products

Small form factor displays are used in military, consumer electronic and industrial products such as thermal weapon sights, camcordersdigital cameras, training and digital cameras.simulation products and metrology tools. We expect the market for wireless communications devices, including personal entertainment systems, will continue to grow. In order for this market to develop, advances in wireless communications systems such as greater bandwidth and increased functionality, including real-time wireless data, broadband Internet access and mobile television, will be necessary. We believe small form factor displays will be a critical component in the development of advanced mobile wireless communications systems as these systems must provide high resolution images without compromising the portability of the product.


There are several display technologies currently available.commercially available including transmissive, reflective and emissive. The most commonly used technology in portable applications is based on the traditional liquid crystal display, or LCD, which is now in widespread use in products requiring a solid state monochrome or color display. Theseuse. We offer transmissive and reflective display solutions.These displays form an image by either transmitting or blockingreflecting light emitted from a source located either behind or in front of the LCD. The principal LCD technologies are passive and active matrix.

•

Passive Matrix LCD.    These displays are primarily used in calculators, watches, pagers and wireless handsets because of their relatively low cost and low power consumption. Their relatively low image quality, slow response time and limited viewing angle, however, make them inadequate for many demanding applications.

•

Active Matrix LCD.    These displays are used primarily in laptop computers, instrumentation

Passive Matrix LCD.    These displays are primarily used in calculators, simple watches and wireless handsets because of their relatively low cost and low power consumption. Their relatively low image quality, slow response time and limited viewing angle, however, make them inadequate for many demanding applications.
Active Matrix LCD.    These displays are used primarily in wireless handsets, tablets, laptop computers, televisions and projection systems. These displays are also being introduced on wireless handsets and storage devices such as Apple’s iPods™. In contrast to passive matrix LCDs, monochrome active matrix LCDs incorporate a transistor at every pixel location and color active matrix LCDs incorporate three transistors at every pixel location. This arrangement allows each pixel to be turned on and off independently which improves image quality and response time and also provides an improved side-to-side viewing angle of the display.
Our Solution

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Kopin Wearable Technology
Kopin Wearable technology is a collection of technologies and software which improves image quality and response time and also provides an improved side-to-side viewing angle of the display. The increased number of transistors required to produce those benefits, however, creates significant drawbacks, particularly in color applications. The high number of transistors used in conventional active matrix LCDs limits achievable pixel density and their relatively high power consumption makes them difficult to use in high information content ultra-portable electronics products.

We believe that the high growth potential for portable communications products can be realized effectively only if these products are available at a reasonable priceintegrated to create headset reference designs which use voice as the user interface and are able to clearly present to end users the information they wish to access without compromising the size of the product. These products, as well as future models of digital cameras and other consumer electronics, are well suited forthrough the use of wireless technologies can contact other users or information from the cloud. The headset reference designs range from a miniature, low cost display with low power consumption and sharp monochrome or rich, full color high resolution images. To date, display technologies have not fully addressed these needs due to constraints with respect to size, power consumption, resolution, cost or full color capability.

Golden-i™ Products

Laptop computers, PCs and tablets are used in the work place as stand alone devices or as part of systems. These devices requireheadset which resembles typical eyeglasses but include audio capabilities allowing the user to operatecommunicate with other users to our industrial headset reference design, called Golden-i, which includes an optical pod with one of our display products, a key board for data inputmicroprocessor, memory and information retrieval. Ifvarious commercially available software packages that we license such as Microsoft Windows CE or Android, Nuance Dragon NaturallySpeaking, Ask Ziggy natural speech, and Hillcrest Labs motion control. All of our headset reference designs utilize operating system software we developed and include our proprietary noise cancellation technologies. The optical pod allows the user of these devices works outdoorsto view information such as WEB data, technical diagrams, streaming video or in environments withface to face communication. When viewing schematics or similar conditions the device may have to be “ruggedized”, which adds weight, increases its size and adds cost. The display performance of these devices is affected by ambient lighting conditions. In addition ifdocuments the user is requiredcapable of zooming-in to wear gloves insee finer details or zooming out to see an entire system perspective. Some headset reference designs have a camera feature which enables the performanceuser to stream live video to a remote subject matter expert so that both the user and expert can analyze the issue at the same time.


We believe Kopin’s Wearable technology will provide for increased worker productivity, safety and improved manufacturing quality through more efficient issue resolution and improved communication. Kopin Wearable reference designs are targeted for markets where the user needs a much greater range of functionality than is typically provided by wireless devices such as handsets, smart phones, tablets or Bluetooth headsets and either due to the requirements of their responsibilitiesusage patterns, occupation, or for improved productivity the use ofuser is better served with voice recognition as the key board may be inefficient.

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Our Solution

III-Vprimary interface as opposed to a touch screen or keyboard.


Display Products

We manufacture our HBT transistor wafers using our proprietary metal organic chemical vapor deposition (MOCVD) semiconductor growth techniques and our Wafer Engineering™ process. Our Wafer Engineering™ process significantly reduces the number of defects which naturally occur when different semiconductor materials are combined. By depositing films of atomic-level thickness on gallium arsenide or indium phosphide wafers, we are able to create HBT transistor wafers that consist of a series of material layers which form a vertical transistor. This transistor structure enables the design of integrated circuits in which individual transistors are vertically arranged.

We believe that the vertical structure of an HBT transistor offers the following advantages to an integrated circuit manufacturer:

•

Smaller Size.    We believe integrated circuits fabricated from our HBT transistor wafers can be made smaller than integrated circuits fabricated from gallium arsenide field effect transistors. Smaller size enables more die per wafer, which can increase manufacturing yields and lead to reduced costs.

•

Faster Circuits.    We believe our HBT transistor wafers enable the design of faster integrated circuits than may be designed with gallium arsenide field effect transistors because the effective transistor gate length, or the distance an electron must travel within a transistor, is shorter. The transistor gate length of gallium arsenide field effect transistors is constrained by current optical lithography techniques to approximately 0.13 microns for commercial volumes. We currently manufacture our HBT transistor wafers in commercial volumes with an effective transistor gate length ranging from approximately 0.05 microns to 0.1 microns. We are able to achieve this result because the thickness of the vertical base layer of our HBT transistor wafers determines transistor gate length rather than the limitations of current optical lithography techniques.

We believe our HBT transistor wafers also offer the following additional advantages over gallium arsenide field effect transistors:

•

Greater Power Efficiency.    Efficiency is a measure of power output as a percentage of battery power consumed by the device. We believe our HBT transistor wafers are more efficient and use less power to transmit the same output power than comparable gallium arsenide field effect transistors. Increased efficiency can translate into improved battery life and increased talk time.

•

Improved Signal Quality.    Power amplifiers within wireless handsets are a key determinant of signal quality. We believe that power amplifiers based on our HBT transistor wafers can amplify signals with reduced distortion, providing increased signal quality. Improved signal quality is important for wireless networks that use digital air interface standards such as Time Division Multiple Access, or TDMA, and Code Division Multiple Access, or CDMA.

•

Less Complexity.    Power amplifiers and other integrated circuits based on our HBT transistor wafers run on a single power supply voltage. In contrast, gallium arsenide field effect transistors generally require both a positive and negative power supply, which results in the need to include a negative voltage generator and other additional components or circuitry in the end product. As a result, we believe products using our HBT transistor wafers are easier to design, which can translate into reduced component costs and smaller equipment.

CyberDisplay™ Products

Our principal CyberDisplayDisplay products are miniature high density color or monochrome active matrix LCDs with resolutions which range from approximately 320 x 240 resolution to 12802048 x 10242048 resolution sold in either a device withtransmissive or reflective format. We sell our displays individually, in an Electronic Viewfinder (EVF) which includes a single display, backlight and optics in a plastic housing which we call an Electronic Viewfinder or EVF,in a deviceHigher-Level Assembly (HLA) which contain two CyberDisplays,a display, light emitting diodes,diode based illumination, optics, and electronics in a plastic housingsealed housing. EVFs are sold to commercial and industrial customers and HLA’s are specifically configured and sold to military customers.

Our transmissive display products, which we call

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a Binocular Display Module or BDM, and thermal weapon sight eyepieces which contain a CyberDisplay, light emitting diode, optics, and electronics in a hermetically sealed housing. In contrastrefer to current passive matrix and active matrix LCD approaches, our CyberDisplayas CyberDisplay™ products, utilize high quality, single crystal silicon—thesilicon-the same high quality silicon used in conventional integrated circuits. This single crystal silicon is not grown on glass; rather, it is first formed on a silicon wafer and patterned into an integrated circuit (including the active matrix, driver circuitry and other logic circuits) in an integrated circuit foundry. The silicon wafer is then sent to our facilities and the integrated circuit is lifted off as a thin film and transferred to glass using our proprietary Wafer™ Engineering technology, so that the transferred layer is a fully functional active matrix integrated circuit.

circuit which now resides on a transparent substrate.


Our proprietary technology enables the production of transparent circuits on a transparent substrate, in contrast to conventional silicon circuits, which are on an opaque substrate. Our CyberDisplay products’products' imaging properties are a result of the formation of a liquid crystal layer between the active matrix integrated circuit glass and the transparent glass. We believe our manufacturing process offers several advantages over conventional active matrix LCD manufacturing approaches with regard to small form factor displays, including:

Greater miniaturization;

Higher pixel density;

Full color capability; and

Lower power consumption.


Our use of high quality single crystal silicon in the manufacture of our CyberDisplay products offers several performance advantages. The color CyberDisplay displays we sell generate colors by using color filters with a white backlight. Color filter technology is a process in which display pixels are patterned with materials, which selectively absorb or transmit the red, green or blue colors of light.


Our CyberDisplay displays have the additional advantage of being fabricated using conventional silicon integrated circuit lithography processes. These processes enable the manufacture of miniature active matrix circuits, resulting in comparable or higher resolution displays relative to passive and other active matrix displays that are fabricated on glass. Our productionfoundry partners United Microelectronics Corporation, or UMC, and MagnaChip, fabricate integrated circuits for our CyberDisplay displays in their foundries in Taiwan and Korea, respectively.Korea. The fabricated wafers are then returned to our facilities, where we lift the integrated circuits off the silicon wafers and transfer them to glass using our

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proprietary technology. The transferred integrated circuits are then processed, and packaged with liquid crystal at our Westborough, Massachusetts facility. The packaged units are thenand assembled into display panels at our Seoul Korea facility, Kowon Technology Co., Ltd. (Kowon), if the display is to be usedDisplay Manufacturing Center in a commercial application or at our Westborough, Massachusetts facility if the display is to be used in aMassachusetts.

For military application, and shipped to customers. This arrangement allows us to benefit from UMC’s and MagnaChip’s economiesapplications of scale and advanced fabrication processes. We expect our CyberDisplay displays will benefit from further general technological advances in the design and production of integrated circuits and active matrix LCDs, resulting in further improvements in resolution and miniaturization.

After the CyberDisplay display, has been packaged and if it is to be used in a weapon sight such as a thermal weapon sight, the packaged display is sentfabricated, tested and routed to our “Higher Level Assembly” or HLA assembly area, where it is incorporated in tointo a module we manufacture.module. We offer a variety of models with varying levels of complexity but common to all is a light emitting diode,our display, illuminations source, optics and electronics in a housingsealed unit.

Golden-i™ Technology


Our Golden-i™ technologyreflective displays products are miniature high density dual mode color sequential/monochrome reflective micro displays with resolutions which range from approximately 1280 x 720 pixels (720P) resolution to 2048 x 1536 pixels (QXGA) resolution. These displays are manufactured at our facility in Scotland, U.K. and we have also investigated the outsourcing of reflective displays from third party manufacturers. Our reflective displays are based on a proprietary, very high-speed, ferroelectric liquid crystal on silicon (FLCOS) platform. Our digital software and logic based drive electronics combined with the very fast switching binary liquid crystal enables our micro display to process images purely digitally and create red, green and blue gray scale in the time domain. This architecture has major advantages in visual performance over other liquid crystal, organic light-emitting diode and MEMS based technologies: precisely controlled full color or monochrome gray scale is achieved on a matrix of undivided high fill factor pixels, motion artifacts are reduced to an insignificant level and there are no sub-pixels, no moving mirrors and no analog conversions to detract from the quality of the image.

The FLCOS device is comprised of two substrates. The first is a head –worn computerpixelated silicon-based CMOS substrate which is manufactured by our foundry partner using conventional silicon integrated circuit lithography processes. The silicon substrate forms the display's backplane, serving as both the active matrix to drive individual pixels and as a reflective mirror. The second substrate is a front glass plate. Between the backplane and the front glass substrate is the ferroelectric liquid crystal material which, when switched, enables the incoming illumination to be modulated.
Strategy
Our strategy is to enable our customers to create differentiated products in their respective markets by offering technology and experience in the critical technology areas such as displays, optics, backlights, software, noise cancellation, packaging and ergonomics. We have developed several headset reference designs which use voice and gesture control as the primary interface between the user and the headset. The headset can send and receive both audio and video over wireless networks which allows for two-way communication with anyone who has access to similar capabilities. The headset reference designs are run by software that we developed that includesinternally and license from third parties. The video, documents and similar information (for example diagrams) are shown in an optical pod which includesis part of the device. The optical pod is comprised of one of our micro display products and other components (backlight, optical lens and Application Specific Integrated Circuits (ASIC) which are either made to our specifications or are standard parts that we purchase. Some of the reference designs have a CyberDisplay product, a microprocessor, memory and various software packages we licensed that are managed by an operating software we developed. The Golden-i product is placed on the user’s head as a stand alone unit or may be incorporated with a “hard” hat and performs its functions through voice

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commands and head gestures. The systemcamera feature which allows the user to access information or operate remote devices through the internet using WiFi or Bluetooth or potentially other wireless networks. The optical pod allows the user to view information such as technical diagrams, streaming video or face to face communication. When viewing schematics or similar documents the user is capable of zooming-in to see finer details or zooming out to see an entire system perspective. The Golden-i product has a camera feature which enables the user to stream livesend video to a Remote Subject Matter Expert so that both the user and expert can analyze the issue at the same time.remote third party. Our Golden-i products are significantly lighter than competing solutions such as laptops, PCs or tablets. We believe our Golden-i technology will provide for increased worker productivity, safety and improved manufacturing quality through more efficient issue resolution and improved communication.

Strategy

Our strategybusiness model is to develop products which are centered on the mobile world. Our III-V products improve the speedlicense our reference designs and volume of voice and data which can be transmitted wirelessly to mobile devices such as 3G and 4G smartphones, our micro display was created to be the destination pointenter into agreements for the data flowing oversale of the wireless networksoptical pod or to sell our display and components separately. We offer our Golden-i device is designedproducts to provide a hands-free remote access, controldevelopers and collaboration via the internet through the wireless networks. Our objective is to be the leading suppliermanufacturers of advanced semiconductor materials and miniature displays and display systems that enable our customers to develop and manufacture differentiated communications,industrial products, military industrial andproducts, consumer electronic devices in high volumes.products, 3d metrology equipment manufacturers and manufacturers of the next generation of mobile devices. The critical elements of our strategy include:

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Maintain Our Technological Leadership.    We believe our ability to develop innovative products based on our extensive materials science expertise enhances our opportunity to grow within our targeted markets. By continuing to invest in research and development, we are able to add to our expertise in the design of HBT transistor wafers, and innovative, high-resolution, miniature flat panel displays. We intend to continue to focus our development efforts on our proprietary HBT transistor wafers and miniature displays.

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Increase the Number of Product Designs That Use Our Components.    Our goal is to grow sales of our components and systems by increasing the number and type of products into which they are incorporated. Our product lines are subject to long design lead-times and we work closely with our customers to help them design and develop cost-effective products based on our III-V and CyberDisplay products. We use an aggressive pricing strategy as an inducement for manufacturers of consumer electronics and wireless communications products to integrate our products into their products.

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Reduce Production Costs.    We intend to reduce our per unit production costs primarily through increasing manufacturing yield, lowering fixed costs per unit through increased sales volume, and increasing productivity and efficiency. We plan to increase productivity and efficiency by migrating the CyberDisplay production line which uses 6 inch diameter wafers to a production line which uses 8 inch diameter wafers, and shifting III-V production from primarily production on 4 inch wafers to 6 inch wafers and consolidating facilities.

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Leverage Integrated Circuit and Display Technologies and Infrastructure.    We will continue to leverage our use of standard integrated circuit fabrication and LCD packaging technologies to achieve greater production capacity and to reduce capital investment and process development costs. Our use of these technologies allows us to engage third party manufacturers for certain portions of the fabrication of our CyberDisplay products and to take advantage of new technologies, cost-efficiencies and increased production capabilities of these third party manufacturers. We believe that general technological advances in the design and fabrication of integrated circuits, LCD technology and LCD manufacturing processes will allow us to continue to enhance our CyberDisplay product manufacturing process.

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Broad Portfolio of Intellectual Property. We believe that our extensive portfolio of patents, trade secrets and non-patented know-how provides us with a competitive advantage in the wearable computing industry and we have been accumulating, either by internal efforts or through acquisition, a significant patent and know-how portfolio. We own, exclusively license or have the sole right to sublicense more than 200 patents issued and pending worldwide. An important piece of our strategy is to continue to accumulate valuable patented and non-patented technical know-how relating to our micro display and wearable computing technologies.

Maintain Our Technological Leadership.    We are a recognized leader in the design, development and manufacture of high resolution micro displays and modules which incorporate our micro displays with backlights, optic and ASICs and we believe our ability to develop both components and innovative reference system designs enhances our opportunity to grow within our targeted markets. By continuing to invest in research and development, we are able to add to our expertise in the design of innovative, high-resolution, miniature flat panel displays, backlights, optics and ASICs and we intend to continue to focus our development efforts on proprietary wearable computing systems.


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License Headset Reference Designs with Key Product Manufacturers And Or Sell Critical Wearable Computing System Components.   Our strategy to monetize our headset reference designs is to licenses our technologies and know-how with manufacturers of wireless devices and also sell them critical components including display, backlights, optics and ASICs products. We may license them an entire reference design system which includes a license to our patents and know-how, a prototype product design and software or we may license individual elements of the reference design system. We have partners who are interested in developing their own devices which include the use of a micro display, backlights, optics and ASICs. In such cases we will offer these items for sale as standalone components. By licensing our reference designs our customers can significantly reduce time to market and, for certain components, obtain valid rights to use our intellectual property.

Strong U.S. Government Program Support. We perform a significant amount of work under research and development contracts with U.S. government agencies, such as the U.S. Night Vision Laboratory and the U.S. Department of Defense. Under these contracts, the U.S. Government funds a portion of our efforts to develop next-generation micro display related technologies. This enables us to supplement our internal research and development budget with additional funding.

Markets and Customers

III-V Products

We

Wearable computing products
Our business model is to generate revenues by licensing, for a royalty fee, our reference designs and know-how, which includes the operating software and patented product designs, and selling components to customers who develop and manufacture, customeror distribute, products based on our technology. We may also receive development fee from customers to help them integrate our technology into their products.

In 2010 we entered into an agreement with a company to license our Golden-i technology to it, which is our industrial headset reference design. The agreement gave Motorola an exclusive license in certain industrial fields, a non-exclusive in other fields and application specific HBT transistor wafers for advanced integrated circuit applications. We believe we are oneprohibits them from offering products in certain fields. Our revenues in 2013 from the license of the world’s leading suppliers of HBT transistor wafers and currently support volume production of four-inch and six-inch HBT transistor wafers. Our primary HBT transistor wafer products are based on indium gallium arsenide (InGaP), aluminum gallium arsenide (AlGaAs) and gallium nitride (GaN) vertical layer structures. We also offer customers pseudomorphic high electron mobility transistors (pHEMT) and BiHEMTs, a product which combines the HBT and pHEMTs into a single structure. We vary our manufacturing process to create customized HBT transistor wafer products for customers. For fiscal years 2011, 2010 and 2009, sales of III-V products accounted for 51%, 52% and 40% of our revenues, respectively.

Using our HBT transistor wafers, our customers have developed gallium arsenide power amplifiers for wireless handsets. Our HBT transistor wafers are used in Code Division Multiple Access, Global System Mobile and Time Division Multiple Access power amplifiers, third generation (3G) and fourth generation (4G) wireless handset standards.

In addition to wireless handset power amplifiers, our HBT transistor wafers are also being used in the fabrication of power amplifiers for devices which communicate using wireless fidelity or “WiFi” integrated circuits. Our HBT transistor wafers are also used in high-speed fiber optic switching.

WeGolden-i headset reference design our HBT transistor wafers in collaboration with our customers’ engineering teams in order to create customized products that meet their specific application needs. Our largest customer for our HBT transistor wafers is Skyworks Solutions. Skyworks Solutions also uses the foundry services of Advanced Wireless Semiconductor Company to process our HBT transistor wafers on its behalf. We sell HBT transistor wafers directly to AWSC for eventual resale by AWSC to Skyworks Solutions and their other customers. Other customers of our gallium arsenide products include RF Micro Devices and TriQuint Semiconductor. For fiscal years 2011, 2010 and 2009, sales of gallium arsenide products to Skyworks Solutions accounted for approximately 28%, 25%, and 20% of our total revenues, respectively. Sales to AWSC in 2011, 2010 and 2009 were 9%, 12% and 8% of our 2011, 2010 and 2009 revenues, respectively. Although we do not know exactly how much of our sales to AWSC are for products sold to Skyworks Solutions, we believe an investor should view our sales to Skyworks Solutions and AWSC in the aggregate for evaluating the importance of Skyworks Solutions as a customer to Kopin. We have a supply agreement with Skyworks Solutions which is scheduled to terminate in July 2012, excluding the agreement’s last buy option.

CyberDisplay™significant.

Display Products

We currently sell our CyberDisplaydisplay products to our customers as either a single display component, a unit which includes a lens and backlight (referred to as an electronic view finder or EVF), or a complete module, which includes the display, lens, backlight, focus mechanism and electronics, which are assembled in a plastic or metal housing (referred to as a binocular display module or BDM for commercial customers and higher level assemblies or HLA for military customers and optical pod for commercial customers). Eyewear is the term we use to describe a device which is worn in a similar fashion as eye glasses to view images. Our customers either buy individual displays or a BDM from us to create an Eyewear product. We provide our CyberDisplaydisplay products to Samsung,our customer for use in their product, which is based on our Golden-i reference design, Olympus, Fuji and Sanyo for use in digital camcorders and cameras and to the U.S. military prime contractors and certain foreign governments for use in military applications.


In order for our CyberDisplaydisplay products to function properly in their intended applications, integrated circuit chip setsASICs generally are required. Several companies have designed integrated circuit chip setsASICs to work with our CyberDisplaydisplay products and our customers can procure these chip sets directly from the manufacturer or through us.

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For fiscal years 2011, 20102013, 2012 and 2009,2011, sales to military customers, excluding research and development contracts, as a percentage of total revenue were 30%38%, 33%57% and 45%60%, respectively.


For fiscal years 2011, 20102013, 2012 and 2009,2011, research and development revenues, primarily from multiple contracts with various U.S. governmental agencies, accounted for approximately 4%10%, 3%10% and 6%8%, respectively, of our total revenues.

Golden-i™ Products

Our business model is to generate revenues by licensing for a royalty fee the Golden-i technology and knowhow, which includes the operating software and patented product designs, and selling a CyberDisplay product to a partner who develops and manufactures or distributes products based on the Golden-i technology. Our revenues in 2011 from the sale of Golden-i Development Kits were not significant and while we anticipate our licensee customer will introduce a product in 2012, we do not believe the revenues will be material in 2012.


For additional information with respect to our operating segments including sales and geographical information, see footnote 13Note 15 to our Financial Statementsfinancial statements for the year ended December 31, 201128, 2013, included with this Form 10-K.

Sales and Marketing

We principally sell


Our strategy is to license our III-V products directlyheadset reference designs to integrated circuit manufacturerscustomers who will develop end user products. Our reference designs are still in the United Statesdevelopment stage and Asia. our marketing strategy has been primarily focused on establishing partnerships with leading companies in specific markets in order to understand their product requirements.

We sell our consumer electronic CyberDisplaydisplay products both directly and through distributors to original equipment manufacturers. We sell our military CyberDisplaydisplay products directly to prime contractors of the U.S. government or to foreign governments.companies. Our strategy is to license our Golden-iKopin Wearable technology to customers who will develop end user products. For both our III-V and CyberDisplay

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display products we have a few customers who purchase in large volumes and many customers who buy in small volumes as part of their product development efforts. “Large volume” is a relative term. For consumer display customers, purchases may be in the tens of thousands per week, whereas industrial and military customers may purchase less than two thousanda hundred per month.


We believe that the technical nature of our products and markets demands a commitment to close relationships with our customers. Our sales and marketing staff, assisted by our technical staff and senior management, visit prospective and existing customers worldwide on a regular basis. We believe these contacts are vital to the development of a close, long-term working relationship with our customers, and in obtaining regular forecasts, market updates and information regarding technical and market trends. We also participate in industry specific trade shows and conferences.


Our design and engineering staff isare actively involved with a customercustomers during all phases of prototype design and production by providing engineering data, up-to-date product application notes, regular follow-up and technical assistance. In most cases, our technical staff workswork with each customer in the development stage to identify potential improvements to the design of the customer’scustomer's product in parallel with the customer’scustomer's effort. We have established a prototype product design group in Scotts Valley, California to assist our military CyberDisplayproduct customers, and Golden-iin Santa Clara California to assist our wearable product customers. These groups assist customers with incorporating our technologies and products into theirour customer's products and to accelerate theirthe design process, achieving cost-effective and manufacturable products, and ensuring a smooth transition into high volume production. ThisOur group in Scotts Valley is also actively involved with research and development contracts for military applications.

Product Development


We believe that continued introduction of new products in our target markets is essential to our growth. Our commercial display products tend to have one to three year life cycles. We have assembled a group of highly skilled engineers who work internally as well as with our customers to continue our product development efforts. For the Golden-i productsheadset reference designs we develop software using both internal and external resources. For fiscal years 2011,

20102013, 2012, and 20092011 we incurred total research and development expenses of $25.9$17.5 million, $19.7$14.3 million and $14.1

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$16.6 million, respectively. Included in total research and development expenses are our internal development programs for new HBT and CyberDisplay products and development of the processes to manufacture CyberDisplay products using 8 inch wafers, which were $22.1 million, $17.0 million and $10.6 million, respectively, for fiscal years 2011, 2010 and 2009.

Component Products

III-V Products

We intend to continue developing HBT transistor wafers and other gallium arsenide products for advanced integrated circuit applications from other compound materials. We are working with current and potential customers in the development of the next generation of HBT transistor wafers, including developing GaN (Gallium Nitride) HEMT (high electron mobility transistor) wafers.

CyberDisplay™ Products

Our display product development efforts are focused towards continually enhancing the resolution, performance and manufacturability of our CyberDisplaydisplay products. A principal focus of this effort is the improvement of manufacturing processes for very small active matrix pixels with our eight inch manufacturing line, which we will use in succeeding generations of our CyberDisplaydisplay products. The pixel size of our current CyberDisplaytransmissive display products ranges from 8.46.8 to 15 microns. These pixel sizes are much smaller than a pixel size of approximately 100 microns in a typical laptop computer display. The resolutions of our current commercially available CyberDisplaydisplay products are 320 x 240, 432 x 240, 640 x 480, 854 x 480, 800 x 600, and1,024 x 768, 1,280 x 1,024 pixels.and 2,048 x 1,536 pixels. In addition, we have demonstrated 2,048 x 2,048 resolution displays in a 0.96-inch diagonal size. We are also working on further decreasing the power consumption of our CyberDisplaydisplay products. The pixel size of our current reflective display products ranges from 8.2 to 13.6 microns. The resolutions of our current commercially available reflective display products are 1,024 x 768 and 1,280 x 1,024 pixels. Additional display development efforts include expanding the resolutions offered, increasing the quantity of CyberDisplay’sdisplay active matrix pixel arrays processed on each wafer by further reducing the display size, increasing the light throughput of our pixels, increasing manufacturing yields, and increasing the functionality of our HLA products.

Golden-i™


We offer components such as optical lenses, back lights and ASICs that we have made to our specifications or are standard items that we buy and resell. The components that are made to order include either intellectual property we developed or licensed from third parties.

Headset Reference Design Products


Our product developmentheadset reference design efforts are primarily focused on operating, application and applicationnoise cancellation software development, improving the optics ofin the display pod and reducing the size and power consumption of the unit.

unit and improving the overall fit and fashion of the reference design.

Funded Research and Development



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We have entered into various development contracts with agencies and prime contractors of the U.S. government. These contracts help support the continued development of our core technologies. We intend to continue to pursue U.S. government development contracts for applications that relate to our commercial and military product applications. Our contracts with U.S. government agencies and prime contractors to the U.S. government contain certain milestones relating to technology development and may be terminated by the government agencies prior to completion of funding. Our policy is to retain our proprietary rights with respect to the principal commercial applications of our technology. To the extent technology development has been funded by a U.S. federal agency, under applicable U.S. federal laws the federal agency has the right to obtain a non-exclusive, non-transferable, irrevocable, fully paid license to practice or have practiced this technology for governmental use. Revenues attributable to research and development contracts for fiscal years 2013, 2012 and 2011 2010 and 2009 totaled $5.7$2.3 million, $3.8$3.3 million and $6.5$5.1 million, respectively.

Competition

III-V

Component Products

With respect to our HBT transistor wafers, we presently compete with several companies, including IQE, Visual Photonics Epitaxy Co. Ltd. (VPEC), and Hitachi Cable, as well as integrated circuit manufacturers with in-house transistor growth capabilities, such as RF Micro Devices and Fujitsu. For our III-V products, pricing

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competition is intense. The production of gallium arsenide integrated circuits has been and continues to be more costly than the production of silicon integrated circuits. Although we have reduced production costs of our HBT transistor wafers by achieving higher volumes and reducing raw material costs, we cannot be certain we will be able to continue to decrease production costs. In addition, we believe the costs of producing gallium arsenide integrated circuits by our customers will continue to exceed the costs associated with the production of competing silicon integrated circuits. As a result, we must target markets where these higher costs are justified by their superior performance.

CyberDisplay™ Products


The commercial display market is highly competitive and is currently dominated by large Asian-based electronics companies including AUO, Himax, LG Display, Samsung, Sharp, Hitachi, Seiko, Toshiba, Sony, NEC and Sanyo.Sony. The display market consists of multiple segments, each focusing on different end-user applications applying different technologies. Competition in the display field is based on price and performance characteristics, product quality and the ability to deliver products in a timely fashion. The success of our display product offerings will also depend upon the adoption of our CyberDisplaydisplay products by consumers as an alternative to traditional active matrix LCDs and upon our ability to compete against other types of well-established display products and new emerging display products. Particularly significant is the consumer’sconsumer's willingness to use a near eye display device, a display viewed in a similar fashion as using a set of binoculars, as opposed to a direct view display which may be viewed from a distance of several inches to several feet. We cannot be certain that we will be able to compete against these companies and technologies, or that the consumer will accept the use of such eyewear in general or our form factor specifically.


There are also a number of active matrix LCD and alternative display technologies in development and production. These technologies include reflective, field emission display, plasma, organic light emitting diode (OLEDs) and virtual retinal displays, some of which target the high performance small form factor display markets in which our military display products are sold. There are many large and small companies that manufacture or have in development products based on these technologies. Our CyberDisplaydisplay products will compete with other displays utilizing these and other competing display technologies.

Golden-i™


There are many companies whose sole business is the development and manufacture of optical lenses, backlights, ASICs and software. These companies may have significantly more intellectual property and experience than we do in the design and development of these components. We do not manufacture optical lenses, backlights, or ASICs but we either have them made to our specifications or buy standard off-the-shelf products

Headset Reference Design Products


The markets Golden-i productsour headset reference designs are targetstargeted to currently use smartphones, laptop computers, personal computers, tablets, ruggedized portable computers referred to as ‘tough"tough books”, and a variety of hand-held devices. This market is extremely competitive and is served by companies such as Panasonic, Toshiba, Dell, HTC, Hewlett Packard, Apple, Sony and Samsung.

These companies are substantially larger than Kopin from revenue, cash flow and asset perspectives. In addition, Google has developed a device named Google Glass which is a headset product with similar form and function as our headsets. Google is substantially larger than Kopin from revenue, cash flow and asset perspectives.


Patents, Proprietary Rights and Licenses


An important part of our product development strategy is to seek, when appropriate, protection for our products and proprietary technology through the use of various United States and foreign patents and contractual arrangements. We intend to prosecute and defend our proprietary technology aggressively. Many of our United States patents and applications have counterpart foreign patents, foreign applications or international applications through the Patent Cooperation Treaty. In addition, we have licensed United States patents and some foreign counterparts to these United States patents from MIT.


The process of seeking patent protection can be time consuming and expensive and we cannot be certain that patents will be issued from currently pending or future applications or that our existing patents or any new patents that may be issued will

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be sufficient in scope or strength to provide meaningful protection or any commercial advantage to us. We may be subject to or may initiate interference proceedings in the United States Patent and Trademark Office, which can demand significant financial and management resources. Patent applications in the United States typically are maintained in secrecy until they are published about eighteen

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months after their earliest claim to priority and since publication of discoveries in the scientific and patent literature lags behind actual discoveries, we cannot be certain that we were the first to conceive of inventions covered by pending patent applications or the first to file patent applications on such inventions. We cannot be certain that our pending patent applications or those of our licensorslicensor's will result in issued patents or that any issued patents will afford protection against a competitor. In addition, we cannot be certain that others will not obtain patents that we would need to license, circumvent or cease manufacturing and sales of products covered by these patents, nor can we be sure that licenses, if needed, would be available to us on favorable terms, if at all.


We cannot be certain that foreign intellectual property laws will protect our intellectual property rights or that others will not independently develop similar products, duplicate our products or design around any patents issued or licensed to us. Our products might infringe the patent rights of others, whether existing now or in the future. For the same reasons, the products of others could infringe our patent rights. We may be notified, from time to time, that we could be or we are infringing certain patents and other intellectual property rights of others. Litigation, which could be very costly and lead to substantial diversion of our resources, even if the outcome is favorable, may be necessary to enforce our patents or other intellectual property rights or to defend us against claimed infringement of the rights of others. These problems can be particularly severe in foreign countries. In the event of an adverse ruling in litigation against us for patent infringement, we might be required to discontinue the use of certain processes, cease the manufacture, use and sale of infringing products, expend significant resources to develop non-infringing technology or obtain licenses to patents of third parties covering the infringing technology. We cannot be certain that licenses will be obtainable on acceptable terms, if at all, or that damages for infringement will not be assessed or that litigation will not occur. The failure to obtain necessary licenses or other rights or litigation arising out of any such claims could adversely affect our ability to conduct our business as we presently conduct it.


We also attempt to protect our proprietary information with contractual arrangements and under trade secret laws. We believe that our future success will depend primarily upon the technical expertise, creative skills and management abilities of our officers and key employees rather than on patent ownership. Our employees and consultants generally enter into agreements containing provisions with respect to confidentiality and employees generally assign rights to us for inventions made by them while in our employ. Agreements with consultants generally provide that rights to inventions made by them while consulting for us will be assigned to us unless the assignment of rights is prohibited by the terms of any agreements with their regular employers. Agreements with employees, consultants and collaborators contain provisions intended to further protect the confidentiality of our proprietary information. To date, we have had no experience in enforcing these agreements. We cannot be certain that these agreements will not be breached or that we would have adequate remedies for any breaches. Our trade secrets may not be secure from discovery or independent development by competitors.

Government Regulations


We are subject to a variety of federal, state and local governmental regulations related to the use, storage, discharge and disposal of toxic, volatile or otherwise hazardous chemicals used in our manufacturing process. The failure to comply with present or future regulations could result in fines being imposed on us, suspension of production or cessation of operations. Any failure on our part to control the use of, or adequately restrict the discharge of, hazardous substances, or otherwise comply with environmental regulations, could subject us to significant future liabilities. In addition, we cannot be certain that we have not in the past violated applicable laws or regulations, which violations could result in required remediation or other liabilities. We also cannot be certain that past use or disposal of environmentally sensitive materials in conformity with then existing environmental laws and regulations will protect us from required remediation or other liabilities under current or future environmental laws or regulations.


We are also subject to federal International Traffic in Arms Regulations (ITAR) laws which regulate the export of technical data and sale of products to other nations which may use these products for military purposes. The failure to comply with present or future regulations could result in fines being imposed on us, suspension of

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production, or a cessation of operations. Any failure on our part to control the use of, or adequately restrict the discharge of, hazardous substances, or otherwise comply with environmental regulations, could subject us to significant future liabilities. Any failure on our part to obtain any required licenses for the export of technical data and/or sales of our products or to otherwise comply with ITAR, could subject us to significant future liabilities. In addition, we cannot be certain that we have not in the past violated applicable laws or regulations, which violations could result in required remediation or other liabilities.



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We are also subject to federal importation laws which regulate the importation of raw materials and equipment from other nations which are used in our products. The failure to comply with present or future regulations could result in fines being imposed on us, suspension of production, or a cessation of operations.

Investments in Related Businesses

On January 11, 2011, we purchased


We own 100% of the outstanding common stock of Forth Dimension Displays Ltd. (FDD) for approximately $11,000,000 of cash plus contingent consideration. The contingent consideration could have been earned depending upon the revenue FDD achieved in 2011, however FDD did not achieve the required revenue milestone and no additional consideration was due. Commencing in the first quarter of 2011 we consolidatedconsolidate the financial results of FDD.

We own 78%FDD within our consolidated financial statements.


In 2013, we increased our ownership of Kowon Technology Co. LTD (Kowon) located in South Korea. We consolidatefrom 78% to 93% by purchasing stock from the financial statements of Kowonminority stockholders for $3.7 million as part of our financial statements.a plan to cease Kowon’s revenues are principally denominatedoperations. We closed Kowon’s manufacturing operations in U.S. dollars and its local expenses are principally denominated in South Korean won. 2013.

In addition, Kowon holds U.S. dollars to pay certain expenses including purchases from Kopin. Accordingly, Kowon’s operations are subject to exchange rate fluctuations. Kowon is an integral part of our consumer CyberDisplay assembly process, performing the back-end packaging processes to complete the display.

From Kopin Taiwan Corp’s (KTC) inception in 2002 through July 2009April 2013, the Company owned approximately 35% of KTC. In July 2009, the Company purchased 19,572,468 and 128,226 shares of KTC common stock for approximately $5,975,000 and $300,000, respectively, which increased the Company’s ownership to approximately 87%. Accordingly since July 2009 the Company has included KTC in its consolidated financial statements. In 2010, the Company purchased 14,349,809 shares of KTC common stock for approximately $6,150,000 to increase the Company’s ownership to approximately 90%.

One of our Directors is chairman of KTC and owns approximately 1%acquired 51% of the outstanding common stock of KTC.

eMDT America, Inc. (eMDT), a private company, for $400,000 and began consolidating eMDT, Inc into our financial statements in April of that year.


We own 58% of Ikanos Consulting, Ltd. (Ikanos), a private company, located in the United Kingdom. We acquired our interest in Ikanos through two equity purchases in 2012 which totaled $3.2 million. We began consolidating Ikanos into our financial statements on July 1, 2012.

We have a 12% interest in KoBrite, and are accounting for our ownership interest using the equity method. We recorded equity losses from our investment in KoBrite of $0.3$0.4 million, $0.6 million and $0.3 million in fiscal years 2013, 2012 and 2011, 2010respectively.

We have a 23% interest in Ask Ziggy which we accounted for under the equity method. As of year ended December 28, 2013 we determined the investment was impaired and 2009, respectively.

we wrote it down to $0.


On January 16, 2013, we completed the sale of our III-V product line, including our approximate 90% interest in Kopin Taiwan Corp (KTC). Previously we owned approximately 90% of KTC and consolidated the financial statements of KTC as part of our financial statements. The buyer renamed KTC to IQE Taiwan. One of our Directors is a chairman of IQE Taiwan and owns approximately 1% of the outstanding common stock of IQE Taiwan.

We may from time to time make further equity investments in these and other companies engaged in certain aspects of the display, electronics, optical and electronicssoftware industries as part of our business strategy. In addition the wearable computing product market is new and there may be other technologies we need to invest in to enhance our product offering. These investments may not provide us with any financial return or other benefit and any losses by these companies or associated losses in our investments may negatively impact our operating results. Certain of our officers and directors have invested in some of the companies we have invested in.


Employees


As of December 31, 2011,28, 2013, our consolidated business employed 365179 full-time and 51 part-time individuals. Of these, 1410 hold Ph.D. degrees in Material Science, Electrical Engineering or Physics. Our management and professional employees have significant prior experience in semiconductor materials, device transistor and display processing, manufacturing and other related technologies. However, our employees are located in the U.S., Europe and Asia and the laws regarding employee relationships are different by jurisdiction. None of our employees are covered by a collective bargaining agreement. We consider relations with our employees to be good.

Sources and Availability of Raw Materials and Components


We rely on third party independent contractors for certain integrated circuit chip sets and other critical raw materials such as special glasses and chemicals. In addition, our higher-level CyberDisplay assemblies, binocular

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display module, and other modules include lenses, backlights, printed circuit boards and other components, which we purchase from third party suppliers. Some of these third party contractors and suppliers are small companies with limited financial resources. In addition, relative to the commercial market, the military buys a small number of units which prevents us from qualifying and buying components


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economically from multiple vendors. As a result, we are highly dependent on a select number of third party contractors and suppliers.


In addition, we also are subject to rules promulgated by the Securities Exchange Commission (SEC) in 2012 pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 that require us to conduct due diligence on and disclose if we are able to determine whether certain materials (including tantalum, tin, gold and tungsten), known as conflict minerals, that originate from mines in the Democratic Republic of the Congo or certain adjoining countries (DRC), are used in our products. The first DRC minerals report is due in the second quarter of 2014 for the 2013 calendar year and we are conducting appropriate diligence measures to comply with such requirements.
Web Availability


We make available free of charge through our website, www.kopin.com, our annual reports on Form 10-K and other reports that we file with the Securities and Exchange Commission, as well as certain of our corporate governance policies, including the charters for the Board of Directors’Directors' audit, compensation and nominating and corporate governance committees and itsour code of ethics, corporate governance guidelines and whistleblower policy. We will also provide to any person without charge, upon request, a copy of any of the foregoing materials. Any such request must be made in writing to us, c/o Investor Relations, Kopin Corporation, 200 John Hancock Road, Taunton,125 North Drive, Westborough MA, 02780.

01581.

Executive Officers of the Registrant


The following sets forth certain information with regard to our executive officers as of March 4, 20117, 2014 (ages are as of December 31, 2011)28, 2013):

Officers

John C.C. Fan, age 68

President, Chief Executive Officer and Chairman

Founded Kopin in 1985

Richard A. Sneider, age 51

Treasurer and Chief Financial Officer

Joined Kopin 1998

Hong Choi, age 60

Vice President and Chief Technology Officer

Joined Kopin in 2000

Bor-Yeu Tsaur, age 56

John C.C. Fan, age 70Bor-Yeu Tsaur, age 58
ŸPresident, Chief Executive Officer and ChairmanŸExecutive Vice President—Display Operations
ŸFounded Kopin in 1984ŸJoined Kopin in 1997
Richard A. Sneider, age 53Michael Presz, age 60
ŸTreasurer and Chief Financial OfficerŸVice President—Government Programs and Special Projects
ŸJoined Kopin in 1998ŸJoined Kopin in 1994
Hong Choi, age 62
ŸVice President and Chief Technology Officer
ŸJoined Kopin in 2000

Executive Vice President—Display Operations


Joined Kopin in 1997

Michael Presz, age 58

Vice President—Government Programs and Special Projects

Joined Kopin in 1994

Daily Hill, age 54

Senior Vice President—III-V Operations

Joined Kopin in 1987

Item 1A.Risk Factors

The global economy in general and the United States economy specifically are experiencing a historic period of uncertainty which could impact our financial results and stock price, among other things.  The United States economy is experiencing high levels of unemployment as compared to the recent past,historic levels, large federal budget deficits and anticipated declining expenditures on military programs. These issues could have a severe adverse effect on our business and results of operation.


We have experienced a history of losses and have a significant accumulated deficit.  Since inception, we have incurred significant net operating losses. In January 2013 we sold our III-V product line including our 90% interest in Kopin Taiwan Corporation (KTC). Our III-V product line accounted for 62.9%, and 50.7% of our fiscal year 2012 and 2011 revenues, respectively. As of December 31, 201128, 2013, we hadhave an accumulated deficit of $124.0$148 million. We believe that our products are targeted towards markets that are still developing and our competitive strength is creating new technologies. Accordingly we believe it is important to continue to invest in research and development even during periods when we are not profitable. Our philosophy and strategies may result in our incurring losses from operations and negative cash flow.

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Our revenues, profitability and cash flows could be negatively affected if sales of our CyberDisplay products for military applications significantly decline.    A significant part of our fiscal year 2011 income from operations and our strategy to maintain profitability in fiscal year 2012 and beyond is to sell our CyberDisplay products for use in U.S. military applications because these products are sold with higher margins than our commercial display or III-V products. Our ability to continue to generate revenues and profits from sales to the U.S. military will be affected by the following events:

The U.S. federal government has incurred and is expected to continue to incur large federal budget deficits. As part of its plan to deal with the federal deficits the U.S. federal government has stated its intention to reduce spending on military programs. The current federal budget forecasts lower unit purchases of thermal weapon sights (TWS) that incorporate our display products.



We are currently selling our display products to three defense contractors who in turn incorporate our product in to their TWS product which they sell to the U.S. military. The U.S. military has stated its intention to reduce the number of suppliers for this TWS program. We sell different display products to each of the three suppliers. One supplier buys only a display while the other two buy a display module. Our sales price and profits are different by product type ; accordingly our revenues and profits will be affected by who the military decides to source the TWS product. In addition the winner of the program has the option to procure displays from our competition in which case we may significantly less revenue than we have historically from this program.

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There are new U.S. military production and development programs that we are bidding on such as the Enhanced Night Vision Goggle. We are competing against other display solutions and we may not be awarded contracts. In addition the government may delay awarding or implementing these programs.

If the U.S. government significantly reduces funding for the TWS programs, and we are not able to win additional programs, we will not be profitable.

Our revenues, profitability and cash flows could be negatively affected if certain wireless handset trends do not meet expectations.    Our Heterojunction Bipolar Transistor (HBT) wafers are sold to manufacturers who in turn produce Power Amplifier (PA) chip sets which are sold to wireless handset manufactures. The PA chip set amplifies signal strength in a wireless handset such as the voice signal. With the advent of smartphone the number of signals emitting from a wireless handset has increased. For instance the handset may have a voice signal, a GPS signal, and a WiFi signal. The number of our products which ultimately end up in a wireless handset is dependent on the number of signals emitting from a wireless handset. For instance smartphones, “3G” and “4G” wireless handsets typically contains more of our III-V products than a basic wireless handset. An important factor in our strategy to grow our III-V product sales is based on the expectation that the sales of smart phones, 3G and 4G wireless handsets and similar devices will become an increasing percentage of the overall sales of wireless handsets. Some industry estimates have smartphones growing at a constant annual rate of 25% or more over the next four to five years. We anticipate at least double digit growth rates for smartphones, 3G and 4G handsets and similar devices over the next few years.

In addition to the fact that a smartphone would generally contain more content of our product a smartphone typically requires our latest HBT products, called Bifets and BiHEMTs, which are more complex than the traditional HBT used in a basic wireless handset. Our Bifet and BiHEMT products have higher average selling prices than our traditional HBT. Our revenues, profits and cash flows may be negatively impacted if the following occur:

The rate of growth of smartphones, 3G and 4G wireless handset and similar devices is lower than expected;

Our customers are able to design and sell products which can meet the increasing needs of smartphones, 3G, 4G and similar devices without the need to increase the amount content of our products in their products so that our expectation of demand increase because of smartphone, 3G and 4G wireless handsets and similar devices does not happen; and

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We and our competitors overestimate the growth rate of smartphones, 3G and 4G wireless handsets and similar devices and we expand capacity at a rate in excess of demand. Historically this over capacity situation results in average sales prices declining at faster than normal rate.



The market segment for our Golden-i™ head-worn, hands-free cloudwearable computing products may not develop or may take longer to develop than we anticipate which may impact our ability to grow revenues. We have developed a head-worn, voice and gesture controlled, hands-free cloud computing product called Golden-i. This product platform is targeted for industrial, military and “prosumer” markets. Golden-i is a combination of our display technologies with wireless and voice activated software technologies, some ofheadset reference designs which we developed. The Golden-i productintend to license to customers. We also plan to sell our micro display and other components either as part of the license arrangement or as standalone products. We refer to our headset reference designs and components as our wearable computing products. Our success will in large part depend on the widespread adoption of the headset format. Customers may determine that the headset is significantly dependent on software which we have little experience in developingnot comfortable, weighs to much or selling. The Golden-i productthe size and format of the display is dependent on our ability to collaborate with software developers. We have licensed our Golden-i technology to a customer who anticipates launching a product incorporating our Golden-i technology in 2012.too small. If a market for Golden-iour wearable computing products does not develop our licensing partner decides not to sell products with Golden-i technology or we are unable to create and license the Golden-i product we may be unable to grow Golden-iour revenues which will adversely affect our expectation of our future revenue profit and results of operations. In January 2013, we sold our III-V product line including our 90% interest in Kopin Taiwan Corporation (KTC). Our III-V product line accounted for $58.8 million or 62.9% of our fiscal year 2012 revenues. As a result of the sale of our III-V product line, our success in commercializing our wearable computing products is very important in our ability to achieve positive cash flow growth rates.

and profitability. If we are unable to reduce the cost ofcommercialize our wearable computing products our financial results couldwe may not be negatively impacted.    The sales prices of our commercial products and, to a lesser extent, our military products, have historically declined each year. Our strategy to maintain our gross margin is to improve manufacturing efficiencies and yields, consolidate production facilities, shift production of legacy III-V products to Kopin Taiwan Corporation (KTC) which has is a lower cost production facility, increase production of larger diameter wafers (8-inch for display products) and use our purchasing power to obtain reduced raw material and component pricing from our vendors. In 2009, we obtained an 87% interest in KTCable to increase our capacity to produce 6-inch HBT transistor wafers. In order to use KTC’s production capacity KTC’s production processes must be qualified by our customers.revenues, achieve profitability or positive cash flow.


Our headset reference design is dependent on software which we have limited experience in developing, marketing or licensing. Our headset reference designs include a combination of commercially available software, such as Microsoft Windows CE and Android, voice activated software technologies, such as Nuance Dragon NaturallySpeaking, and operating and speech enhancement software that we internally developed or acquired. We have little experience in developing, marketing or licensing software. If we are unable to execute onintegrate internally developed and or acquired software in our cost reduction strategies, in particular, our transition to larger diameter wafers and raw material purchasing strategy, our productsheadset reference designs we may not be cost competitiveable to license the designs. The market demand for our headset reference designs or the products our customers may develop based on our reference designs is dependent on our ability to collaborate with software developers who write application software (“apps”) in order to create utility in our competitors’ products which,customer's products. If we are unable to develop, license or acquire software or we are unable to create a sufficient body of application software our reference designs may result in lower sales and reduced cash flow,not be accepted by the market and we may not be able to increase revenues, achieve profitability. profitability or positive cash flow.

The markets in which we operate are highly competitive and rapidly changing and we may be unable to compete successfully. There are a number of companies that develop or may develop products that compete in our targeted markets.
The individual components that we offer for sale (display, optical lenses, backlights and ASICs) are also offered by companies who's sole business is the individual component. For example, there are many companies whose sole business is to sell optical lenses. Accordingly, our strategy requires us to develop technologies and to compete in multiple markets. Some of our competitors are much larger than we are and have significantly greater financial, development and marketing resources than we do. The competition in these markets could adversely affect our operating results by reducing the volume of the products we sell or the prices we can charge. These competitors may be able to respond more rapidly than we can to new or emerging technologies or changes in customer requirements. They may also devote greater resources to the development, promotion and sale of their products than we do.

Our purchasing power is predicatedsuccess will depend substantially upon our ability to enhance our products and technologies and to develop and introduce, on a timely and cost-effective basis, new products and features that meet changing customer requirements and incorporate technological enhancements. If we are unable to develop new products and enhance functionalities or technologies to adapt to these changes, or if we are unable to realize synergies among our acquired products and technologies, our business will suffer.


The market for cloud-based applications may develop more slowly than we expect. Our success will depend, to some extent, on the volumeswillingness of raw materials we buy which is directly relatedbusinesses to accept cloud-based services for applications that they view as critical to the success of their business. Many companies have invested substantial effort and financial resources to integrate traditional enterprise software into their businesses and may be reluctant or unwilling to switch to a different application or to migrate these applications to cloud-based services. Other factors that may affect market acceptance of our application include:
the security capabilities, reliability and availability of cloud-based services;
our ability to implement upgrades and other changes to our salessoftware without disrupting our service;
the level of customization or configuration we offer; and
the price, performance and availability of competing products and services.

The market for these services may not develop further, or may develop more slowly than we expect, either of which would negatively affect our ability to grow revenues, achieve profitability and generate positive cash flow.

We may not be successful in protecting our intellectual property and proprietary rights and we may incur substantial costs in defending our intellectual property.    Our success depends in part on our ability to protect our intellectual property and proprietary rights. We have obtained certain significantdomestic and foreign patents and we intend to continue to seek patents on our inventions when appropriate. We also attempt to protect our proprietary information with contractual arrangements and under

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trade secret laws. Our employees and consultants generally enter into agreements containing provisions with respect to confidentiality and the assignment of rights to inventions made by them while in our employ. These measures may not adequately protect our intellectual and proprietary rights. Existing trade secret, trademark and copyright laws afford only limited protection and our patents could be invalidated or circumvented. Moreover, the laws of certain foreign countries in which our products are or may be manufactured or sold may not fully protect our intellectual property rights. Misappropriation of our technology and the costs of defending our intellectual property rights from misappropriation could substantially impair our business. If we are unable to protect our intellectual property and proprietary rights, our business may not be successful and the value of investors' investment in us may decline.

Our products could infringe on the intellectual property rights of others.    Companies in software generation and the display industries steadfastly pursue and protect intellectual property rights. This has resulted in considerable and costly litigation to determine the validity of patents and claims by third parties of infringement of patents or other intellectual property. Our products could be found to infringe on the intellectual property rights of others. Other companies may hold or obtain patents or inventions or other proprietary rights in technology necessary for our business. Periodically companies inquire about our products and technology in their attempts to assess whether we violate their intellectual property rights. If we are forced to defend against infringement claims, we may face costly litigation, diversion of technical and management personnel, and product shipment delays, even if the allegations of infringement are unwarranted. If there is a successful claim of infringement against us and we are unable to develop non-infringing technology or license the infringed or similar technology on a timely basis, or if we are required to cease using one or more of our business or product names due to a successful trademark infringement claim against us, our business could be adversely affected.

We license intellectual property rights of others.    Included in our headset reference designs are commercially available software which we license from other companies. Should we violate the terms of a license this could result in our license being canceled. The companies may decide to stop supporting the software we license or new versions of the software may not be compatible with our software which would require us to rewrite our software which we may not be able to do. The license fees we pay may be increased which would negatively affect our ability to achieve profitability and positive cash flow. If we are unable to obtain and or maintain existing software license relationships our ability to grow revenue and achieve profitability and positive cash flow may be negative affected.

Our headset reference design uses software that we license from other companies (Licensors) and requires us to access the Licensor's data centers and interruptions or delays in service from data center hosting facilities could impair our customer's products. Any damage to, or failure of, the systems of our Licensors generally could result in interruptions in service to our customers. Interruptions in service to our customers may reduce our revenue, cause us to issue credits or pay penalties, cause customers to terminate their contracts and reduce our ability to attract new customers.


Our revenuerevenues and cash flows could be negatively affected by the loss of any of the few customers who account for a substantial portion of our revenues.    A few customers account for a substantial portion of our revenues. In addition,if sales of our CyberDisplayDisplay products for military applications has been asignificantly decline.    A significant factor in our profitability. The table below indicates, for the past three fiscal years, percentagesportion of our totalfiscal year 2014 revenues from certain customers and for our sales for military applications. The symbol “*” indicates that sales to that particular customer for the given year were below 10 percent of our total revenues.

   Sales as a Percent
of Total Revenue		 

Customer

  2011  2010  2009 

Skyworks Solutions, Inc (A)

   28%   25%   20% 

Advanced Wireless Semiconductor Company

   9    12    8  

Military Customers (B)

   30    33    45  

United States Government Funded Research and Development Contracts

   4    3    6  

Raytheon Company (B)

   12    18    14  

DRS Technologies (B)

   *    *    19  

(A)In addition to its internal capacity Skyworks Solution, Inc. (Skyworks) also uses Advanced Wireless Semiconductor Company (AWSC) to perform processing. We sell our HBT wafers directly to AWSC for use in Skyworks products as well as other customers. If we assume all of the HBT products we sold to AWSC were for Skyworks’ use the combined sales to Skyworks and AWSC would be 37%, 37% and 28% of our revenues for the years ended 2011, 2010 and 2009, respectively.

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(B)Sales to Raytheon Company and DRS Technologies are included within the Military Customers category.

A significant reduction or delay in orders from any of our significant commercial customers would materially reduce our revenue and cash flow are expected to come from sales of military products. The U.S. federal government has incurred and adversely affectis expected to continue to incur large federal budget deficits and the U.S. federal government has stated its intention to reduce spending on military programs. Accordingly our ability to achieve or maintain profitabilitygenerate revenues and cash flow from sales to the U.S. military is dependent on our displays being qualified in new U.S. military programs and the future.U.S. military funding these new programs. If we experience a significant reductionare unable to be qualified into new U.S. military programs or delay in orders from any ofthese programs are not funded our significant military customers ourability to generate revenues, achieve profitability and positive cash flow will be negatively impacted and we will not achieve profitability in 2011, unless the other military customers increased orders to sufficiently offset the decline. The sales to Skyworks Solutions and, to some extent, AWSC have been under a purchase and supply agreement with Skyworks Solutions which expires in July 2012.impacted.


Disruptions of our production of our Display products would adversely affect our operating results.    If we do not renew the agreement on commercially reasonable terms our revenue, cash flow and our abilitywere to achieve or maintain profitabilityexperience any significant disruption in the futureoperation of our facilities, we would be adversely impacted.

Ifunable to supply our display products to our customers. In the past, we failexperienced several power outages at our facilities which ranged in duration from one to keep pace with changing technologies,four days. Additionally, as we may lose customers.    Rapidly changing customer requirements, evolving technologies and industry standards characterize the wireless communications, semiconductor materials andintroduce new equipment into our manufacturing processes, our display industries. To achieve our goals, we need to enhance our existing products and develop and market new products that keep pace with continuing changes in industry standards, requirements and customer preferences. If we cannot keep pace with these changes, our business could suffer.

If our security systems are penetrated and confidential and or proprietary information were taken we could be subject to fines, law suitsespecially wide variations in manufacturing yields and loss of customers.efficiency. We rely on our electronic information systems to perform the routine transactions to run our business.may experience manufacturing problems that would result in delays in product introduction and delivery or yield fluctuations. We transact business over the internet with customers, vendors electronically and our subsidiaries. We have implemented security measures to protect unauthorized access to this information. We haveare also implemented security policies which limit access via the internet from the companysubject to the outside world based onrisks associated with the individual’s positionshortage of raw materials used in the company. We routinely receive security patches for the software we use from the software providers. Our primary concerns are inappropriate access to personnel information, information covered under the International Traffic in Arms Regulation, product designs and manufacturing information, financial information andmanufacture of our intellectual property, trade secrets and know-how. If our security systems are penetrated and confidential and or proprietary information where taken we could be subject to fines, law suites and loss of customersproducts.


Our ability to manufacture and distribute our CyberDisplayDisplay products would be severely limited if the foundries that we rely on to manufacture integrated circuits for our CyberDisplayDisplay products fail to provide those services.    We depend on a Taiwanese foundry and a Korean foundry for the fabrication of integrated circuits for our CyberDisplaydisplay products. We have no long-term contracts with either of these two companies. These two companies use different methods to manufacture the integrated circuits and a shortage at one company cannot necessarily be supplied by the other company. One of the companies entered and exited bankruptcy in 2009. If either company were to terminate its arrangement with us or become unable to provide the required capacity and quality on a timely basis, we may not be able to manufacture and ship our CyberDisplaydisplay products or we may be forced to manufacture

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them in limited quantities until replacement foundry services can be obtained. Furthermore, we cannot assure investors that we would be able to establish alternative manufacturing and packaging relationships on acceptable terms.


Our reliance on these foundries involves certain risks, including but not limited to:

Lack of control over production capacity and delivery schedules;

Limited control over quality assurance, manufacturing yields and production costs;

The risks associated with international commerce, including unexpected changes in legal and regulatory requirements, changes in tariffs and trade policies and political and economic instability; and

Natural disasters such as earthquakes, tsunami, mudslides, drought, hurricanes and tornadoes.

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Due to natural disasters such as earthquakes and typhoons that have occasionally occurred in Taiwan, many Taiwanese companies, including the Taiwanese foundry we use, have experienced related business interruptions. Our business could suffer significantly if either of the foundries we use had operations which were disrupted for an extended period of time, due to natural disaster, political unrest or financial instability. In addition, our CyberDisplaysdisplay products are manufactured on 6-inch and 8-inch silicon wafers. We currently do not anticipate redesigning all of our displays made on 6-inch wafers so they can be manufactured on 8-inch wafers. Our current military products are primarily manufactured on 6-inch wafers. We cannot be assured that, if either the 6-inch or 8-inch manufacturing facilities we use were damaged, they would be restored, or whetherthat our foundry service providers may decide towill not discontinue the operation of their 6-inch manufacturing lines. If the 6-inch manufacturing lines were discontinued and the displays had to be redesigned we may need to have the displays re-qualified by our customers, which would adversely affect our business until such qualification is complete.


We depend on third parties to provide integrated circuit chip sets and other critical raw materials for use with our CyberDisplay™headset reference design and display products.    We do not manufacture the integrated circuit chip sets which are used to electronically interface between our CyberDisplaydisplay products and our customer’scustomer's products. Instead, we rely on third party independent contractors for these integrated circuit chip sets and other critical raw materials such as special glasses and chemicals. We also may use third parties to assemble our binocular display module (BDM). The critical raw materials, including the glasses and chemicals used in manufacturing the CyberDisplayour display products and other components are used by other display manufacturers, many of which are much larger than Kopin.us. In addition, our higher-level CyberDisplaydisplay assemblies, BDMs, and other modules include lenses, backlights, printed circuit boards and other components, which we purchase from third party suppliers. Some of these third party contractors and suppliers are small companies with limited financial resources. In addition, relative to the commercial market, the military buys a small number of units which prevents us from qualifying and buying components economically from multiple vendors. If any of these third party contractors or suppliers were unable or unwilling to supply these integrated circuit chip sets or other critical raw materials to us, we would be unable to manufacture and sell our CyberDisplaydisplay products until a replacement supplier could be found. The U.S. military is expected to reduce its purchases which may result in lower demand for our products. Lower volume purchases may make it uneconomical for some of our suppliers to provide raw materials we need. We cannot assure investors that a replacement third party contractor or supplier could be found on reasonable terms or in a timely manner. Since 2008 some of the vendors we use have experienced liquidity problems and had difficulty obtaining inventory financing. Any interruption in our ability to manufacture and distribute our CyberDisplaydisplay products could cause our display business to be unsuccessful and the value of investors’investors' investment in us may decline.


Our business could suffer if we lose the services of, or fail to attract, key personnel.    In order to continue to provide quality products in our rapidly changing business, we believe it is important to retain personnel with experience and expertise relevant to our business. Our success depends in large part upon a number of key management and technical employees. The loss of the services of one or more key employees, including Dr. John C.C. Fan, our President and Chief Executive Officer, could seriously impede our success. We do not maintain any “key-man” insurance policies on Dr. Fan or any other employees. In addition, due to the level of technical and marketing expertise necessary to support our existing and new customers, our success will depend upon our ability to attract and retain highly skilled management, technical, and sales and marketing personnel. Competition for highly skilled personnel is intense and there may be only a limited number of persons with the requisite skills to serve in these positions. If the display markets experience an upturn, we may need to increase our workforce. Due to the competitive nature of the labor markets in which we operate, we may be unsuccessful in attracting and retaining these personnel. Our inability to attract and retain key personnel could adversely affect our ability to develop and manufacture our products.

Our customers who purchase display products for military applications typically incorporate our products into their products which are sold to the U.S. government under contracts. U.S. government contracts generally are not fully funded at inception and may be terminated or modified prior to completion, which could adversely affect our business.    Congress funds the vast majority of the federal budget on an annual basis, and Congress often does not provide agencies with all the money requested in their budget. Many of our customers’customers' contracts cover multiple years and, as such, are not fully funded at contract award. If Congress or a U.S. government agency chooses to spend money on other programs, our customer contracts may be terminated for convenience. Federal laws, collectively called the Anti-Deficiency Act, prohibit involving the government in any

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obligation to pay money before funds have been appropriated for that purpose, unless otherwise allowed by law. Therefore, the Anti-Deficiency Act indirectly regulates how the agency awards our contracts and pays our invoices. Federal government contracts generally contain provisions, and are subject to laws and regulations, that provide the federal government rights and remedies not typically found in commercial contracts, including provisions permitting the federal government to, among other provisions: terminate our existing contracts; modify some of the terms and conditions in our existing contracts; subject the award to protest or challenge by competitors; suspend work under existing multiple year contracts and related delivery orders; and claim rights in technologies and systems invented, developed or produced by us.


The federal government may terminate a contract with us or our customer either “for convenience” (for instance, due to a change in its perceived needs) or if we default due to our failure or the failure of a

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subcontractor to perform under the contract. If the federal government terminates a contract with our customer our contract with our customers generally would entitle us to recover only our incurred or committed costs, settlement expenses and profit on the work completed prior to termination. However, under certain circumstances, our recovery costs upon termination for convenience of such a contract may be limited. As is common with government contractors, we have experienced occasional performance issues under some of our contracts. We may in the future receive show-cause or cure notices under contracts that, if not addressed to the federal government’sgovernment's satisfaction, could give the government the right to terminate those contracts for default or to cease procuring our services under those contracts.


In addition, U.S. government contracts and subcontracts typically involve long purchase and payment cycles, competitive bidding, qualification requirements, delays or changes in funding, extensive specification and performance requirements, price negotiations and milestone requirements. Each U.S. government agency often also maintains its own rules and regulations with which we must comply and which can vary significantly among agencies.


Most of our military sales are on a fixed-price basis, which could subject us to losses if there are cost overruns.    Under a fixed-price contract, we receive only the amount indicated in the contract, regardless of the actual cost to produce the goods. While firm fixed-price contracts allow us to benefit from potential cost savings, they also expose us to the risk of cost overruns. If the initial estimates that we use to calculate the sales price and the cost to perform the work prove to be incorrect, we could incur losses. In addition, some of our contracts have specific provisions relating to cost, scheduling, and performance. If we fail to meet the terms specified in those contracts, then our cost to perform the work could increase, which would adversely affect our financial position and results of operations. Some of the contracts we bid on have “Indefinite Delivery, Indefinite Quantity” or IDIQ provisions. This means we are bidding a fixed price but are not assured of the quantity the government will buy or when it will buy during the term of the contract. This means we are exposed to the risk of price increases for labor, overhead and raw materials during the term of the contract. We may incur losses on fixed-price and IDIQ contracts that we had expected to be profitable, or such contracts may be less profitable than expected, which could have a material adverse effect on our business, financial condition, results of operations, and cash flows.

Our competitors can provide integrated solutions which could result in reduced market share or impact our ability to grow.    Many portable consumer electronic devices, including camcorders and digital still cameras, have two displays for viewing images, an electronic viewfinder (EVF) and a flip-out or group view display. We only provide the display that is used as the electronic viewfinder. Our competitors may offer both EVF and flip-out displays and both displays may be run by the same interface electronics. A customer who buys our display is required to buy the flip-out display from another vendor who may compete with us. This may require our customer to purchase additional interface electronics to run our display. Our competitors may be able to offer a bundled solution of both displays and the interface electronics cheaper than the cost of buying our display and the other display and the interface electronics separately. If we are unable to offer displays with sufficient performance advantages over other displays to justify the additional cost of buying individual components versus a bundled solution or if our customers can not procure cost efficient interface electronics to run our display products we may lose market share or be unable to grow our business which in turn would adversely affect our ability to maintain profitability.

Our CyberDisplay™products may not be widely accepted by the market.    Our success will in large part depend on the widespread adoption of the viewing format of our CyberDisplay products in multiple applications. Our success also depends upon the widespread consumer acceptance of our customers’ products. CyberDisplay products work best when used close to the eye, which may not be acceptable to consumers. In addition, CyberDisplay products are not designed for a shared experience amongst multiple viewers at the same time. Potential customers may be reluctant to adopt our CyberDisplay products because of concerns surrounding perceived risks relating to:

The introduction of our display technology generally;

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Consumer acceptance of our CyberDisplay products; and

The relative complexity, reliability, usefulness and cost-effectiveness of our display products compared to other display products available in the market or that may be developed by our competitors. In addition, our customers may be reluctant to rely upon a relatively small company like us for a critical component. We cannot assure investors that prospective customers will adopt our CyberDisplay products or that consumers will accept our CyberDisplay products in future applications. If we fail to achieve market acceptance of our CyberDisplay products, our business may not be successful and we may not be able to maintain profitability.

We generally do not have long-term contracts with our CyberDisplay customers, which makes forecasting our revenues and operating results difficult.    We generally do not enter into long-term agreements with our commercial CyberDisplaydisplay customers obligating them to purchase our products. Our business is characterized by short-term purchase orders and shipment schedules and we generally permit orders to be canceled or rescheduled before shipment without significant penalty. As a result, our customers may cease purchasing our products at any time, which makes forecasting our revenues difficult. In addition, due to the absence of substantial non-cancelable backlog, we typically plan our production and inventory levels based on internal forecasts of customer demand, which are highly unpredictable and can fluctuate substantially. Our operating results are difficult to forecast because we are continuing to invest in capital equipment and increasing our operating expenses for new product development. If we fail to accurately forecast our revenues and operating results, our business may not be successful and the value of investors’investors' investment in us may decline.


We may haveIf we fail to record additional investment impairment losses.    In fiscal years 2011and 2009 we recorded impairment charges totaling $0.2 million and $0.9 million, respectively, related to realized and unrealized losses on investments. In addition, our KoBrite joint venture has historically had losses from operations. If the equity and bond markets declinekeep pace with changing technologies, we may lose customers.    Rapidly changing customer requirements, evolving technologies and industry standards characterize the display industries. To achieve our goals, we need to enhance our existing products and develop and market new products that keep pace with continuing changes in industry standards, requirements and customer preferences. If we cannot keep pace with these changes, our business could suffer.

If our security systems are penetrated and confidential and or proprietary information were taken we could be subject to fines, law suits and loss of customers.    We rely on our electronic information systems to perform the routine transactions to run our business. We transact business over the Internet with customers, vendors and our subsidiaries. We have implemented security measures to record additional losses. Ifprotect unauthorized access to this information. We have also implemented security policies which limit access via the KoBrite joint venture generates operating lossesInternet from the company to the outside world based on the individual's position in the futurecompany. We routinely receive security patches for the software we will record additional losses, which will impactuse from the software providers. Our primary concerns are inappropriate access to personnel information, information covered under the International Traffic in Arms Regulation, product designs and

16


manufacturing information, financial information and our abilityintellectual property, trade secrets and know-how. If our security systems are penetrated and confidential and or proprietary information were taken we could be subject to achieve or maintain profitability.

fines, law suites and loss of customers.


We may have to record additional intangible assets and/or goodwill impairment losses.   In fiscal year 2013 we recorded intangible asset impairment charges of $1.5 million related to our acquisitions of Ikanos and Forth Dimension Displays (FDD). In fiscal year 2011 we recorded an intangible asset impairment chargecharges of $2.0 million and a goodwill impairment charge totaling $3.0 million, both related to our acquisition of Forth Dimension Displays.FDD. In 2012 and 2011 we recorded goodwill impairment charges of $1.7 million and $3.0 million, respectively, related to our acquisition of FDD. During 2013 we recorded $0.4 million of goodwill related to our acquisition of eMDT, Inc. and in 2012, we recorded $0.7 million of goodwill and $0.6 million in intangible assets related to Ikanos. We may have to record additional intangible asset or goodwill write downs if Forth Dimension Displays does not achieve the operating results we expect, which will negatively affect our profitability.financial results.


A disruption to our information technology systems could significantly impact our operations and impact our revenue and profitability.    We maintain proprietary data processing systems and use customized software systems. We also use software packages which are no longer supported by their developer. An interruption to these systems for an extended period may impact our ability to operate the businesses and process transactions which could result in a decline in sales and affect our ability to achieve or maintain profitability.


Fluctuations in operating results make financial forecasting difficult and could adversely affect the price of our common stock.    Our quarterly and annual revenues and operating results may fluctuate significantly for severalnumerous reasons, including:

The timing and successful introduction of additional manufacturing capacity;

The timing of the initial selection of our III-VWearable technology and CyberDisplaydisplay products as a component in our customers’customers' new products;

Availability of interface electronics for our CyberDisplay;

display products;

Competitive pressures on selling prices of our products;

The timing and cancellation of customer orders;

Our ability to introduce new products and technologies on a timely basis;

21

Our ability to successfully reduce costs;

The cancellation of U.S. government contracts; and

Our ability to secure agreements from our major customers for the purchase of our products.


We typically plan our production and inventory levels based on internal forecasts of customer demand, which are highly unpredictable and can fluctuate substantially. Our operating results are difficult to forecast because we continue to invest in capital equipment and increase our operating expenses for new product development.


As a result of these and other factors, investors should not rely on our revenues and our operating results for any one quarter or year as an indication of our future revenues or operating results. If our quarterly revenues or results of operations fall below expectations of investors or public market analysts, the price of our common stock could fall substantially.


If we fail to comply with complex procurement laws and regulations, we could lose business and be liable for various penalties or sanctions.    We must comply with laws and regulations relating to the formation, administration and performance of federal government contracts. These laws and regulations affect how we conduct business with our federal government contracts. In complying with these laws and regulations, we may incur additional costs, and non-compliance may also allow for the assignment of fines and penalties, including contractual damages. Among the more significant laws and regulations affecting our business are the following:

The Federal Acquisition Regulation, which comprehensively regulates the formation, administration and performance of federal government contracts;

The Truth in Negotiations Act, which requires certification and disclosure of all cost and pricing data in connection with contract negotiations;

The Cost Accounting Standards and Cost Principles, which impose accounting requirements that govern our right to reimbursement under certain cost-based federal government contracts; and

Laws, regulations and executive orders restricting the use and dissemination of information classified for national security purposes and the export of certain products, services and technical data. We engage in international work falling under the jurisdiction of U.S. export control laws. Failure to comply with these control regimes can lead to severe penalties, both civil and criminal, and can include debarment from contracting with the U.S. government.



17


Our contracting agency customers may review our performance under and compliance with the terms of our federal government contracts. If a government review or investigation uncovers improper or illegal activities, we may be subject to civil or criminal penalties or administrative sanctions, including

Termination of contracts;

Forfeiture of profits;

Cost associated with triggering of price reduction clauses;

Suspension of payments;

•Fines; and

•Suspension or debarment from doing business with federal government agencies.


Additionally, the False Claims Act provides for potentially substantial civil penalties where, for example, a contractor presents a false or fraudulent claim to the government for payment or approval. Actions under the civil False Claims Act may be brought by the government or by other persons on behalf of the government (who may then share a portion of any recovery).

22


If we fail to comply with these laws and regulations, we may also suffer harm to our reputation, which could impair our ability to win awards of contracts in the future or receive renewals of existing contracts. If we are subject to civil and criminal penalties and administrative sanctions or suffer harm to our reputation, our current business, future prospects, financial condition, or operating results could be materially harmed.


The government may also revise its procurement practices or adopt new contracting rules and regulations, including cost accounting standards, at any time. Any new contracting methods could be costly to satisfy, be administratively difficult for us to implement and could impair our ability to obtain new contracts.


WeA decline in the U.S. government defense budget, changes in spending or budgetary priorities, prolonged U.S. government shutdown or delays in contract awards may be unable to modify our products to meet regulatory or customer requirements.    From time to time our products are subject to new domesticsignificantly and international requirements such as the European Union’s Restriction on Hazardous Substances (RoHS) Directive. If we are unable to comply with these regulations we may not be permitted to ship our products, which would adversely affect our future revenues, cash flow and financial results. The Budget Control Act of 2011 enacted 10-year discretionary spending caps which are expected to generate over $1 trillion in savings for the U.S. government, a substantial portion of which comes from Department of Defense baseline spending reductions. There remains much uncertainty about the level of cuts that will be required for government fiscal year 2014 and the impact those cuts will have on contractors supporting the government. In light of the current uncertainty, we are not able to predict the potential impact of reduced military expenditures on our Company or our financial results.

A government shutdown and related matters could harm our business. The current uncertainty regarding the federal budget and federal spending levels, including the possible impacts of a failure to increase the “debt ceiling,” could disrupt our business. The impacts to our business of a prolonged government shutdown or failure to increase the debt ceiling are uncertain at this time, but potential impacts include delay in payments owed to us by the U.S. government and loss of revenue and ability to maintain profitability.

Increased competition may resultprofit on contracts that did not have government funding in decreased demand or lower prices for our products.    Competition in the markets for our products is intense and we may not be able to compete successfully. We compete with several companies, mostplace, any of whom are much larger than us, who are primarily engaged in the business of designing, manufacturing and selling integrated circuits or alternative display technologies, as well as the supply of other discrete products. Our competitorswhich could develop new process technologies that may be superior to ours, including technologies that target markets in which our products are sold. Many of our existing and potential competitors have strong market position, considerable internal manufacturing capacity, established intellectual property rights and substantial technological capabilities. Furthermore, they also have greater financial, technical, manufacturing, and marketing resources than we do, and we may not be able to compete successfully with them.

In addition, many of our existing and potential customers manufacture or assemble displays and wireless communications devices and have substantial in-house technological capabilities and substantially greater resources than we do. We may not be able to sell our products to these customers and they may commercialize their internal capabilities to become our competitors. If one of our large customers establishes internal design and manufacturing capabilities, it could have an adverse effect on our operating results.

We expect competition to increase. This could mean lower prices or reduced demand for our products. Any of these developments would have an adverse effect on our operating results.

Disruptions of our production of our III-V and CyberDisplay products would adversely affect our operatingoperations, cash flow and financial results.    If we were


Customer demands and new regulations related to experience any significant disruptionconflict-free minerals may adversely affect us. The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Act”) imposes new disclosure requirements regarding the use of “conflict” minerals mined from the Democratic Republic of Congo and adjoining countries in the operation of our facilities, we would be unable to supply III-V and CyberDisplay products, to our customers. In 2011 we experienced several power outages at our facilities which ranged in duration from one to four days. Typicallywhether or not these power outages have been isolated to either our Taunton, Massachusetts or Westborough, Massachusetts facilities but not both. We have a III-V production facility located in Taiwan which periodically experiences earthquakes which mayproducts are manufactured by third parties. These new requirements could affect the abilitypricing, sourcing and availability of the facility to operate. Additionally, as we introduce new equipment into our manufacturing processes, our III-V and CyberDisplay products could be subject to especially wide variations in manufacturing yields and efficiency. We may experience manufacturing problems that would result in delays in product introduction and delivery or yield fluctuations. We are also subject to the risks associated with the shortage of raw materialsminerals used in the manufacture of semiconductor devices (including our products). We will incur additional costs associated with complying with the disclosure requirements, such as costs related to determining the source of any conflict minerals used in our products.

Our supply chain is complex and we may be unable to verify the origins for all metals used in our products. We purchase materials from foreign sources and they may not cooperate and provide us with the necessary information to allow us to comply with the Act. This may require us to find alternative sources which could delay product shipments. We may not be successful in protectingalso encounter challenges with our intellectual propertycustomers and proprietary rights.    Our success depends in part on our ability to protect our intellectual property and proprietary rights. We have obtained certain domestic and foreign patents and we intend to continue to seek patents on our inventions when appropriate. We also attempt to protect our proprietary information with contractual arrangements and under trade secret laws. Our employees and consultants generally enter into agreements containing provisions with respect to confidentiality and the assignment of rights to inventions made by them while in our employ. These measures may not adequately protect our intellectual and proprietary rights. Existing trade secret, trademark and copyright laws afford only limited protection and our patents could be invalidated or circumvented. Moreover, the laws of certain foreign countries in which our products are or may be manufactured or sold may not fully protect our

23

intellectual property rights. Misappropriation of our technology and the costs of defending our intellectual property rights from misappropriation could substantially impair our business. Ifstockholders if we are unable to protect our intellectual property and proprietary rights, our business may not be successful and the value of investors’ investment in us may decline.

Our products could infringe on the intellectual property rights of others.    Companies in the wireless communications, semiconductor and display industries steadfastly pursue and protect intellectual property rights. This has resulted in considerable and costly litigation to determine the validity of patents and claims by third parties of infringement of patents or other intellectual property. Our products could be found to infringe on the intellectual property rights of others. Other companies may hold or obtain patents or inventions or other proprietary rights in technology necessary for our business. Periodically companies inquire aboutcertify that our products and technology in their attempts to assess whether we violate their intellectual property rights. If we are forced to defend against infringement claims, we may face costly litigation, diversion of technical and management personnel, and product shipment delays, even if the allegations of infringement are unwarranted. If there is a successful claim of infringement against us and we are unable to develop non-infringing technology or license the infringed or similar technology on a timely basis, or if we are required to cease using one or more of our business or product names due to a successful trademark infringement claim against us, it could adversely affect our business.conflict free.


Our business could suffer if we lose the services of, or fail to attract, key personnel.    In order to continue to provide quality products in our rapidly changing business, we believe it is important to retain personnel with experience and expertise relevant to our business. Our success depends in large part upon a number of key management and technical employees. The loss of the services of one or more key employees, including Dr. John C.C. Fan, our President and Chief Executive Officer, could seriously impede our success. We do not maintain any “key-man” insurance policies on Dr. Fan or any other employees. In addition, due to the level of technical and marketing expertise necessary to support our existing and new customers, our success will depend upon our ability to attract and retain highly skilled management, technical, and sales and marketing personnel. Competition for highly skilled personnel is intense and there may be only a limited number of persons with the requisite skills to serve in these positions. If the III-V or CyberDisplay markets experience an upturn, we may need to increase our workforce. Due to the competitive nature of the labor markets in which we operate, we may be unsuccessful in attracting and retaining these personnel. Our inability to attract and retain key personnel could adversely affect our ability to develop and manufacture our products.

We may pursue acquisitions and investments that could adversely affect our business.    In the past we have made, and in the future we may make, acquisitions of, and investments in, businesses, products and technologies that could complement or expand our business. If we identify an acquisition candidate, we may not be able to successfully negotiate or finance the acquisition or integrate the acquired businesses, products or technologies into our existing business and products. Future acquisitions could result in potentially dilutive issuances of equity securities, the incurrence of debt and contingent liabilities, amortization expenses and write-downs of acquired assets. In January 2011 we acquired Forth Dimension Displays Ltd. (FDD). If we are unable to operate FDD profitably our results of operations will be negatively affected.

We may incur significant liabilities if we fail to comply with stringent environmental laws and regulations and the International Traffic in Arms Regulations or if we did not comply with these regulations in the past.    We are subject to a variety of federal, state and local governmental regulations related to the use, storage, discharge and disposal of toxic or otherwise hazardous chemicals used in our manufacturing process. We are also subject to federal International Traffic in Arms Regulations (ITAR) laws which regulate the export of technical data and sale of products to other nations which may use these products for military purposes. The failure to comply with present or future regulations could result in fines being imposed on us, suspension of production, or a cessation of operations. Any failure on our part to control the use of, or adequately restrict the discharge of, hazardous substances, or otherwise comply with environmental regulations, could subject us to significant future liabilities. Any failure on our part to obtain any required licenses for the export of technical data and/or sales of our products or to otherwise comply with ITAR, could subject us to significant future liabilities. In addition, we cannot be certain

24


18



that we have not in the past violated applicable laws or regulations, which violations could result in required remediation or other liabilities. We also cannot be certain that past use or disposal of environmentally sensitive materials in conformity with then existing environmental laws and regulations will protect us from required remediation or other liabilities under current or future environmental laws or regulations.


We may be unable to modify our products to meet regulatory or customer requirements.    From time to time our display products are subject to new domestic and international requirements such as the European Union's Restriction on Hazardous Substances (RoHS) Directive. If we are unable to comply with these regulations we may not be permitted to ship our products, which would adversely affect our revenue and ability to maintain profitability.

We may pursue acquisitions and investments that could adversely affect our business.    In the past we have made, and in the future we may make, acquisitions of, and investments in, businesses, products and technologies that could complement or expand our business. If we identify an acquisition candidate, we may not be able to successfully negotiate or finance the acquisition or integrate the acquired businesses, products or technologies into our existing business and products. Future acquisitions could result in potentially dilutive issuances of equity securities, the incurrence of debt and contingent liabilities, amortization expenses and write-downs of acquired assets. In 2013, 2012 and 2011 we acquired 51% of the outstanding shares of eMDT, Inc, 51% of the outstanding shares of Ikanos Consulting Ltd. and 100% of the outstanding shares of Forth Dimension Displays Ltd. (FDD), respectively. If we are unable to operate eMDT, Ikanos and FDD profitably, our results of operations will be negatively affected.

We have also made minority investments in private companies including KoBrite and Ask Ziggy, and may make future investments in similar companies. We perform periodic reviews to determine if these investments are impaired, but such reviews are difficult and rely on significant judgment about the company’s technology, ability to obtain customers, and ability to become cash flow positive and profitable. In 2013, we recorded impairment charges of $5.0 million for companyies in which we we were a minority investor. We may take future impairment charges which will have an adverse impact of on our results of operations.

Investors should not expect to receive dividends from us.    We have not paid cash dividends in the past norhowever in the future we may determine it is in the best interest of the stockholders do we expect to pay cash dividends for the foreseeable future. We anticipate thatso. Historically our earnings, if any, will behave been retained for the development of our businesses.


Our stock price may be volatile in the future.    The trading price of our common stock has been subject to wide fluctuations in response to quarter-to-quarter variations in results of operations, announcements of technological innovations or new products by us or our competitors, general conditions in the wireless communications, semiconductor and display markets, changes in earnings estimates by analysts or other events or factors. In addition, the public stock markets recently have experienced extreme price and trading volatility. This volatility has significantly affected the market prices of securities of many technology companies for reasons frequently unrelated to the operating performance of the specific companies. These broad market fluctuations may adversely affect the market price of our common stock.


Item 1B.Unresolved Staff Comments

None.

Item 2.Properties

We lease our domestic III-V product manufacturing facilities and corporate headquarters located in Taunton, Massachusetts. The Taunton facilities occupy 25,100 and 60,000 square feet, including 6,000 and 6,400 square feet of contiguous environmentally controlled production clean rooms under leases that expire in 2012 and 2020, respectively. We do not anticipate renewing the Taunton lease which expires in 2012.

We lease our 74,000 square foot CyberDisplay production facility in Westborough, Massachusetts, of which 10,000 square feet is contiguous environmentally controlled production clean rooms operated between Class 10 and Class 1,000 levels. The lease expires in March 2012 and we are in the process of extending the lease for an additional 10 years.2023. In addition to our Massachusetts facilities,facility, we lease a 5,800 square foot design facility in Scotts Valley, California for developing prototypes of products incorporating our CyberDisplay product. This facility’s lease expiresproduct and a 6,300 square foot facility in October 2012.

Santa Clara, California which houses our wearable computing Tech center. These facility leases expire in 2014 and 2016, respectively.

Our subsidiary, Kowon Technology Co., LTD, (Kowon) owns two adjacent facilities in Kyungii-Do, South Korea, in which it manufacturesmanufactured its products and in which its corporate headquarters are located. These facilities occupy an aggregate of 28,000 square feet. Our subsidiary, Kopin Taiwan Corp, owns aProduction ceased at the Kowon facility in Hsin Shu Science Park, Hsin Shu Taiwan, in which it manufactures its products and in which its corporate headquarters are located. This facility occupies 46,800 square feet.2013. Forth Dimension Displays, our subsidiary in Scotland, leases 20,000 square feet.feet in Dalgety Bay. This facility’s lease expires in 2013.

2016. Ikanos Consulting, Ltd., our subsidiary in the United Kingdom, leases two properties which occupy an aggregate of 7,000 square feet. These leases expire in 2016 and 2017.


19


At this time we believe these properties are suitable for our needs for the foreseeable future.

Item 3.Legal Proceedings

We may engage in legal proceedings arising in the ordinary course of business. Claims, suits, investigations and proceedings are inherently uncertain and it is not possible to predict the ultimate outcome of such matters and our business, financial condition, results of operations or cash flows could be affected in any particular period.

Item 4.Mine Safety Disclosures

Not applicable

25

applicable.


20




Part II


21


Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock is traded on the NASDAQ Global Market under the symbol “KOPN.” The following table sets forth, for the quarters indicated, the range of high and low sale prices for the Company’s common stock as reported on the NASDAQ Global Market for the periods indicated.

   High   Low 

Fiscal Year Ended December 31, 2011

    

First Quarter

  $4.40    $3.97  

Second Quarter

   5.22     4.29  

Third Quarter

   4.85     3.31  

Fourth Quarter

   4.24     3.07  

Fiscal Year Ended December 25, 2010

    

First Quarter

  $4.74    $3.60  

Second Quarter

   4.50     3.21  

Third Quarter

   3.85     2.75  

Fourth Quarter

   4.48     3.37  

 High Low
Fiscal Year Ended December 28, 2013   
First Quarter$3.71
 $3.17
Second Quarter3.78
 3.13
Third Quarter4.33
 3.30
Fourth Quarter4.28
 3.43
Fiscal Year Ended December 29, 2012   
First Quarter$4.08
 $3.30
Second Quarter4.05
 3.06
Third Quarter3.86
 3.23
Fourth Quarter3.87
 2.94
As of March 9, 2012,7, 2014, there were approximately 481458 stockholders of record of our common stock, which does not reflect those shares held beneficially or those shares held in “street” name.

In the past three years we have not sold any securities which were not registered under the Securities Act.

We have not paid cash dividends in the past, nor do we expect to pay cash dividends for the foreseeable future. We anticipate that earnings, if any, will be retained for the development of our businesses.

Equity Compensation Plan Information

The following table sets forth information as of December 31, 201128, 2013 about shares of the Company’s common stock issuable upon exercise of outstanding options, warrants and rights and available for issuance under our existing equity compensation plans.

Plan Category

  Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights		   Weighted-average
exercise price of
outstanding options,
warrants and rights		   Number of securities
remaining available
for future issuance
under equity
compensation plans
(excluding securities
reflected in column (a))		 
   (a)         

Total equity compensation plans approved by security holders (1)

   1,903,325    $5.07     580,178(2) 

Plan Category
Number of securities to be issued upon exercise of outstanding options,
warrants and rights (a)
 Weighted-average exercise price of outstanding options, warrants and rights Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column a) 
Total equity compensation plans approved by security holders (1)558,850
 $5.09
 1,237,080
(2)
(1)Consists of the 2001 Equity Incentive Plan and the 2010 Equity Incentive Plan.
(2)Shares available under the 2010 Equity Incentive Plan.

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Company Stock Performance

The following graph shows a five-year comparison of cumulative total shareholder return for the Company, the NASDAQ Stock Market and the S&P 500 Information Technology index. The graph assumes $100 was invested in each of the Company’s common stock, the NASDAQ Stock Market and the S&P 500 Information Technology index on December 31, 2006.xx, 2008. Data points on the graph are annual. Note that historical price performance is not necessarily indicative of future performance.


22


Kopin Corporation

S&P 500 Information Technology Index

Nasdaq Stock Market - U.S. Index

Issuer Purchase of Equity Securities

The following table provides information regarding repurchases of common stock made by us during the fiscal quarter ended December 31, 2011:

Period

 Total number
of Shares
Purchased		  Average
Price Paid
per Share		  Total Number
of Shares
Purchased as
Part of
Publicly
Announced
Plans or
Programs		  Maximum
Approximate
Dollar of
Shares that
May Yet Be
Purchased
Under the
Plans or
Programs		 
  (a)          

September 25, 2011 through October 22, 2011

  117,920   $3.62    117,920   $11,512,702  

October 23, 2011 through November 19, 2011

  99,694   $3.98    99,694   $11,116,085  

November 20, 2011 through December 31, 2011 (1)(2)

  383,785   $3.88    144,486   $10,585,373  
 

 

 

   

 

 

  

Total

  601,399   $3.84    362,100   
 

 

 

   

 

 

  

None






















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(1)
Amount in column (a) includes shares of our common stock withheld from employees in connection with the satisfaction of tax withholding obligations under restricted stock agreements between Kopin and certain of its key employees.
(2)On December 8, 2010 the Board of Directors of the Company approved a stock repurchase plan for up to $15 million of our common stock through December 8, 2012.

27

Item 6.Selected Financial Data

This information should be read in conjunction with our consolidated financial statements and notes thereto, and our “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of this Form 10-K.

  Fiscal Year Ended 
  2011  2010  2009  2008  2007 
  (in thousands, except per share data) 

Statement of Operations Data:

     

Revenues:

     

Net product revenues

 $125,465   $116,623   $108,118   $107,582   $94,191  

Research and development revenues

  5,680    3,763    6,537    7,223    3,958  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total revenues

  131,145    120,386    114,655    114,805    98,149  

Expenses:

     

Cost of product revenues

  82,110    81,224    75,983    77,980    78,625  

Research and development—funded programs

  3,742    2,693    3,586    5,076    3,157  

Research and development—internal

  22,133    17,041    10,561    10,898    8,300  

Selling, general and administrative

  18,929    14,838    14,136    15,980    18,009  

Impairment of intangible assets and goodwill

  5,000    —      —      —      —    
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
  131,914    115,796    104,266    109,934    108,091  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

(Loss) income from operations

  (769)   4,590    10,389    4,871    (9,942) 

Other income and expense:

     

Interest income

  1,305    2,192    2,181    3,281    4,451  

Other income and expense, net

  93    77    728    49    17  

Foreign currency transaction (losses) gains

  12    (419)   (1,005)   2,296    93  

Gain (loss) on loans to KTC

  —      —      1,188    (1,188)   —    

Gain on remeasurement of investment in KTC

  —      —      599    —      —    

Impairment of investment in Kenet

  —      —      —      (2,691)   —    

Other-than-temporary impairment of marketable debt securities

  (151)   —      (927)   (1,252)   —    

Other-than-temporary impairment of Micrel common stock

  —      —      —      (224)   (123) 

Gain on sales of investments

  369    2,598    —      —      —    

Gain on sales of patents

  156    770    6,324    —      —    
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
  1,784    5,218    9,088    271    4,438  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Income (loss) before benefit (provision) for income taxes, equity (losses) earnings in unconsolidated affiliates and net (income) loss of noncontrolling interest

  1,015    9,808    19,477    5,142    (5,504) 

Tax benefit (provision)

  3,541    (252)   (690)   (792)   (465) 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Income (loss) before equity (losses) earnings in unconsolidated affiliates and net (income) loss of noncontrolling interest

  4,556    9,556    18,787    4,350    (5,969) 

Equity (losses) earnings in unconsolidated affiliates

  (296)   (600)   483    (1,081)   (275) 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net income (loss)

 $4,260   $8,956   $19,270   $3,269   $(6,244) 

Net (income) loss attributable to the noncontrolling interest

  (662)   (22)   173    (683)   (312) 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net income (loss) attributable to the controlling interest

 $3,598   $8,934   $19,443   $2,586   $(6,556) 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net income (loss) per share:

     

Basic

 $0.06   $0.14   $0.29   $0.04   $(0.10) 

Diluted

 $0.06   $0.13   $0.29   $0.04   $(0.10) 

Weighted average number of common shares outstanding:

     

Basic

  64,406    66,020    66,850    67,876    67,544  

Diluted

  65,234    66,712    67,458    68,164    67,544  

   Fiscal Year Ended 
   2011   2010   2009   2008   2007 

Balance Sheet Data:

          

Cash and cash equivalents and marketable debt securities

   105,419     110,947     114,547     100,016     93,304  

Working capital

   123,948     132,098     134,198     116,841     107,931  

Total assets

   194,564     192,096     183,224     159,677     161,054  

Long-term obligations

   1,296     945     903     867     806  

Total stockholders’ equity

   170,788     170,625     164,302     141,394     141,034  

28

DISCUSSION REGARDING THE USE OF NON-GAAP FINANCIAL MEASURES

Our earnings release contains some or all We have revised the prior period amounts for the sale of the following financial measuresIII-V product line, which have not been calculated in accordance with United States Generally Accepted Accounting Principles (GAAP): (i) non-GAAP operating income and operating margin, (ii) non-GAAP net income, and (iii) non-GAAP net income per share (diluted). As set forth in the “Unaudited Reconciliation of Non-GAAP Financial Measures” table found below, we derive such non-GAAP financial measures by excluding certain expenses and other items from the respective GAAP financial measure that is most directly comparable to each non-GAAP financial measure. Management uses these non-GAAP financial measures to evaluate our operating performance and compare it against past periods, make operating decisions, forecast for future periods, compare operating performance against peer companies and determine payments under certain compensation programs. These non-GAAP financial measures provide management with additional means to understand and evaluate the operating results and trends in our ongoing business by eliminating certain non-recurring expenses (which may not occur in each period presented) and other items that management believes might otherwise make comparisons of our ongoing business with prior periods and competitors more difficult, obscure trends in ongoing operations or reduce management's ability to make useful forecasts.

We provide investors with non-GAAP operating income and operating margin and non-GAAP net income because we believe it is important for investors to be able to closely monitor and understand changes in our ability to generate income from ongoing businessreflected as discontinued operations. We believe these non-GAAP financial measures give investors an additional method to evaluate historical operating performance and identify trends, additional means of evaluating period-over-period operating performance and a method to facilitate certain comparisons of operating results to peer companies. We also believe that providing non-GAAP operating income and operating margin allows investors to assess the extent to which ongoing operations impact our overall financial performance. We further believe that providing non-GAAP net income and non-GAAP net income per share (diluted) allows investors to assess the overall financial performance of ongoing operations by eliminating the impact of certain tax items which may not occur in each period for which financial information is presented and which represent gains unrelated to our ongoing operations. We believe that disclosing these non-GAAP financial measures contributes to enhanced financial reporting transparency and provides investors with added clarity about complex financial performance measures.

We calculate non-GAAP operating income by excluding from GAAP operating income, stock compensation expense and intangible assets and goodwill impairment charges. We calculate non-GAAP net income and net income per share (diluted) by excluding from GAAP net income and net income per share (diluted), stock compensation expense, goodwill impairment charges, insurance proceeds, and certain tax items, which may not occur in all periods for which financial information is presented. We exclude the items identified above from the respective non-GAAP financial measure referenced above for the reasons set forth with respect to each such excluded item below:

Stock Compensation—we believe (1) the total amount of expense is partially outside of our control because it is based on factors such as stock price volatility and interest rates, which may be unrelated to our performance during the period in which the expense is incurred, (2) it is an expense based upon a valuation methodology premised on assumptions that vary over time, and (3) the amount of the expense can vary significantly between companies due to factors that can be outside of the control of such companies.

Impairment of Intangible Assets and Goodwill—we believe such losses reflect forecasted results and do not necessarily reflect the performance of our ongoing operations for the period in which such charges are recognized.

Gains from Insurance Proceeds—we believe such gains are outside the control of management and we do not believe that they reflect the underlying performance of ongoing business operations for such period.

Certain Income Tax Items—includes the release of the valuation allowance which was recorded against the deferred tax assets of our Taiwanese subsidiary which do not result in a current tax refund.

29

 Fiscal Year Ended
 2013 2012 2011 2010 2009
 (in thousands, except per share data)
Statement of Operations Data:         
Revenues:         
Net product revenues$20,575
 $31,299
 $59,509
 $54,969
 $62,512
Research and development revenues2,323
 3,343
 5,150
 3,172
 5,691
Total revenues22,898
 34,642
 64,659
 58,141
 68,203
Expenses:         
Cost of product revenues20,655
 22,042
 34,659
 35,597
 39,003
Research and development—funded programs1,551
 2,178
 3,341
 2,175
 3,060
Research and development—internal15,983
 12,121
 13,218
 10,972
 8,295
Selling, general and administrative19,125
 17,166
 15,991
 12,322
 13,047
Impairment of intangible assets and goodwill1,511
 1,705
 5,000
 —
 —
 58,825
 55,212
 72,209
 61,066
 63,405
(Loss) income from operations(35,927) (20,570) (7,550) (2,925) 4,798
Other income and expense:         
Interest income1,119
 1,126
 1,291
 1,978
 2,053
Other income and (expense), net235
 174
 143
 (31) 464
Foreign currency transaction (losses) gains(387) (1,032) 10
 (304) (942)
Impairment of investments(5,000) —
 —
 —
 —
Loss on remeasurement of investment in Ikanos—
 (558) —
 —
 —
Other-than-temporary impairment of marketable debt securities—
 —
 (151) —
 (927)
Gain on sales of investments1,899
 856
 369
 2,598
 —
Gain on sales of patents—
 —
 156
 770
 6,324
 (2,134) 566
 1,818
 5,011
 6,972
(Loss) income before benefit (provision) for income taxes, equity losses in unconsolidated affiliates and net loss (income) of noncontrolling interest(38,061) (20,004) (5,732) 2,086
 11,770
Tax benefit (provision)12,933
 (1,099) —
 54
 (690)
(Loss) income before equity losses in unconsolidated affiliates and net loss (income) of noncontrolling interest(25,128) (21,103) (5,732) 2,140
 11,080
Equity losses in unconsolidated affiliates(625) (680) (297) (600) (341)
(Loss) income from continuing operations$(25,753) $(21,783) $(6,029) $1,540
 $10,739
Income from discontinued operations, net of tax20,147
 2,789
 9,713
 7,300
 8,436

24

The non-GAAP financial measures presented in the table below should not be considered in isolation and are not an alternative for the respective GAAP financial measure that is most directly comparable to each such non-GAAP financial measure. Investors are cautioned against placing undue reliance on these non-GAAP financial measures and are urged to review and consider carefully the adjustments made by management to the most directly comparable GAAP financial measures to arrive at these non-GAAP financial measures. Non-GAAP financial measures may have limited value as analytical tools because they may exclude certain expenses that some investors consider important in evaluating operating performance or ongoing business. Further, non-GAAP financial measures are likely to have limited value for purposes of drawing comparisons between companies because different companies may calculate similarly titled non-GAAP financial measures in different ways because non-GAAP measures are not based on any comprehensive set of accounting rules or principles.

Fiscal year ended:  2011  2010 

GAAP operating (loss) income

   (769,339)  $4,589,969  

Share-based compensation expense

   3,924,000    2,584,000  

Impairment of intangible assets and goodwill

   4,999,512    —    

Insurance proceeds

   —      (1,500,000) 
  

 

 

  

 

 

 

Non-GAAP operating income

  $8,154,173   $5,673,969  
  

 

 

  

 

 

 

GAAP net income

  $3,597,927   $8,934,151  

Share-based compensation expense

   3,924,000    2,584,000  

Impairment of intangible assets and goodwill

   4,999,512    —    

Insurance proceeds

   —      (1,787,000) 

Release of valuation allowance

   (4,266,000)   —    
  

 

 

  

 

 

 

Non-GAAP net income

  $8,255,439   $9,731,151  
  

 

 

  

 

 

 

GAAP net income per share, diluted

  $0.06   $0.13  

Share-based compensation expense

   0.06    0.04  

Impairment of intangible assets and goodwill

   0.08    —    

Insurance proceeds

   —      (0.03) 

Release of valuation allowance

   (0.07)   —    
  

 

 

  

 

 

 

Non-GAAP net income per share, diluted

  $0.13   $0.15  
  

 

 

  

 

 

 

30



Net (loss) income(5,606) (18,994) 3,684
 8,840
 19,175
Net loss (income) attributable to the noncontrolling interest896
 632
 (605) (11) 268
Net (loss) income attributable to the controlling interest$(4,710) $(18,362) $3,079
 $8,829
 $19,443
Net (loss) income per share:         
Basic:

 

 

 

 

     Continuing operations$(0.40) $(0.33) $(0.10) $0.02
 $0.16
     Discontinued operations0.32
 0.04
 0.15
 0.12
 0.13
     Net (loss) income per share:$(0.08) $(0.29) $0.05
 $0.14
 $0.29
       Diluted:         
            Continuing operations$(0.40) $(0.33) $(0.10) $0.02
 $0.16
            Discontinued operations0.32
 0.04
 0.15
 0.11
 0.13
            Net (loss) income per share:$(0.08) $(0.29) $0.05
 $0.13
 $0.29
Weighted average number of common shares outstanding:         
Basic62,348
 63,618
 64,406
 66,020
 66,850
Diluted62,348
 63,618
 65,234
 66,712
 67,458
 Fiscal Year Ended
 2013 2012 2011 2010 2009
Balance Sheet Data:         
Cash and equivalents and marketable debt securities$112,729
 $92,485
 $105,419
 $110,947
 $114,547
Working capital108,369
 106,791
 123,257
 132,098
 134,198
Total assets146,132
 176,209
 193,872
 192,096
 183,224
Long-term obligations329
 946
 1,296
 945
 903
Total stockholders’ equity134,563
 155,086
 170,097
 170,625
 164,302



25


Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with our consolidated financial statements and notes to those statements and other financial information appearing elsewhere in this Form 10-K. The following discussion contains forward looking information that involves risks and uncertainties. Our actual results could differ materially from those anticipated in the forward looking statements as a result of a number of factors, including the risks discussed in Item 1A “Risk Factors”, and elsewhere in this Annual Report on Form 10-K.

Management’s

Management's discussion and analysis of our financial condition and results of operations are based upon our audited consolidated financial statements. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to revenue recognition under the percentage-of-completion method, bad debts, inventories, warranty reserves, investment valuations, valuation of stock compensation awards, recoverability of deferred tax assets, liabilities for uncertain tax positions and contingencies. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about carrying values of assets and liabilities that are not apparent from other sources. Actual results may differ from these estimates under different assumptions.

The prior period amounts have been revised for the impact of discontinued operations due to the sale of our III-V product line, including our KTC subsidiary. Our financial results for prior periods have also been revised, in accordance with GAAP, to reflect certain changes to the business and other matters.
We believe the following critical accounting policies are most affected by our more significant judgments and estimates used in the preparation of our consolidated financial statements:

Revenue Recognition

We recognize revenue if four basic criteria have been met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred and services rendered; (3) the price to the buyer is fixed or determinable; and (4) collectability is reasonably assured. We do not recognize revenue for products prior to customer acceptance unless we believe the product meets all customer specifications and has a history of consistently achieving customer acceptance of the product. Provisions for product returns and allowances are recorded in the same period as the related revenues. We analyze historical returns, current economic trends and changes in customer demand and acceptance of product when evaluating the adequacy of sales returns and other allowances. Certain product sales are made to distributors under agreements allowing for a limited right of return on unsold products. Sales to distributors are primarily made for sales to the distributors’distributors' customers and not for stocking of inventory. We delay revenue recognition for our estimate of distributor claims of right of return on unsold products based upon our historical experience with our products and specific analysis of amounts subject to return based upon discussions with our distributors or their customers.

We recognize revenues from long-term research and development government contracts on the percentage-of-completion method of accounting as work is performed, based upon the ratio of costs or hours already incurred to the estimated total cost of completion or hours of work to be performed. Revenue recognized at any point in time is limited to the amount funded by the U.S. government or contracting entity. We accountrecognize revenue for product development and research contracts that have established prices for distinct phases as ifwhen delivery and acceptance of the deliverable for each phase were a separate contract.has occurred. In some instances, we are contracted to create a deliverable which is anticipated to go into full production. In those cases, we discontinue the percentage-of-completion method after formal qualification of the deliverable has been completed and revenue is then recognized based on the criteria established for sale of products. In certain instances qualification may be achieved and delivery of production units may commence however our customer may have either identified new issues to be resolved or wish to incorporate a newer display technology. In these circumstances new units delivered will continue to be accounted for under the criteria established for sale of products.

We classify amounts earned on contracts in progress that are in excess of amounts billed as unbilled receivables and we classify amounts received in excess of amounts earned as billings in excess of revenues earned. We invoice based on dates specified in the related agreement or in periodic installments based upon our invoicing cycle. We recognize the entire amount of an estimated ultimate loss in our financial statements at the time the loss on a contract becomes known.

31

Accounting for design, development and production contracts requires judgment relative to assessing risks, estimating contract revenues and costs, and making assumptions for schedule and technical issues. Due to the size and nature of the work required to be performed on many of our contracts, the estimation of total revenue and cost at completion is complicated and subject to many variables. Contract costs include material, labor and subcontracting costs, as well as an allocation of indirect

26


costs. We have to make assumptions regarding the number of labor hours required to complete a task, the complexity of the work to be performed, the availability and cost of materials, and performance by our subcontractors. For contract change orders, claims or similar items, we apply judgment in estimating the amounts and assessing the potential for realization. These amounts are only included in contract value when they can be reliably estimated and realization is considered probable. We have accounting policies in place to address these as well as other contractual and business arrangements to properly account for long-term contracts. If our estimate of total contract costs or our determination of whether the customer agrees that a milestone is achieved is incorrect, our revenue could be overstated and profits would be negatively impacted.

Bad Debt

We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. This estimate is based on an analysis of specific customer creditworthiness and historical bad debts experience. If the financial condition of our customers were to deteriorate, resulting in their inability to make future payments, additional allowances may be required.

Inventory

We provide a reserve for estimated obsolete or unmarketable inventory based on assumptions about future demand and market conditions and our production plans. Inventories that are obsolete or slow moving are generally fully reserved (representing the estimated net realizable value) as such information becomes available. Our III-V products are made to each customer’s unique specifications and are generally produced upon receipt of a customer order. The manufacturing time to make our III-V products is less than one day; accordingly our III-V inventory consists primarily of raw material, primarily gallium arsenide wafers, or finished products. The finished product may be at our facilities or at our customer’s facilities under consignment programs. Our display products are manufactured based upon production plans whose critical assumptions include non-binding demand forecasts provided by our customers, lead times for raw materials, lead times for wafer foundries to perform circuit processing and yields. If a customer were to cancel an order or actual demand waswere lower than forecasted demand, we could not sell the excess III-V inventory and we may not be able to sell the excess display inventory and additional reserves would be required. If we were unable to sell the excess inventory, we would establish reserves to reduce the inventory to its estimated realizable value (generally zero).

Investment Valuation

At December 31, 2011 we held minority investments in Advance Wireless Semiconductor Company (AWSC) and WIN Semiconductor Corp. (WIN), publicly traded companies on the Taiwan stock exchange whose share prices have been, and may continue to be, highly volatile. We consider these investments to be “available for sale” and accordingly account for fluctuations in the value of these investments in accumulated other comprehensive income. The fair market values of AWSC and WIN were $1.6 million and $1.7 million, respectively, at December 31, 2011.

We periodically make equity investments in private companies, accounted for on the cost or equity method, whose values are difficult to determine. When assessing investments in private companies for an other-than-temporary decline in value, we consider such factors as, among other things, the share price from the investee’sinvestee's latest financing round, the performance of the investee in relation to its own operating targets and its business plan, the investee’sinvestee's revenue and cost trends, the liquidity and cash position, including its cash burn rate and market acceptance of the investee’sinvestee's products and services. Because these are private companies which we do not control we may not be able to obtain all of the information we would want in order to make a complete assessment of the investment on a timely basis. Accordingly, our estimates may be revised if other information becomes available at a later date.

32

In addition to the above we make investments in government and agency-backed securities and corporate debt securities. For all of our investments we provide for an impairment valuation if we believe a decline in the value of an investment is other-than-temporary, which may have an adverse impact on our results of operations. The determination of whether a decline in value is other-than-temporary requires that we estimate the cash flows we expect to receive from the security. We use publicly available information such as credit ratings and financial information of the entity that issued the security in the development of our expectation of the cash flows to be received. Historically, we have periodically recorded other than temporary impairment losses.

Product Warranty

We generally sell products with a limited warranty of product quality and a limited indemnification of customers against intellectual property infringement claims related to our products. We accrue for known warranty and indemnification issues if a loss is probable and can be reasonably estimated. As of December 31, 2011,28, 2013, we had a warranty reserve of $1.3$0.7 million, which represents the estimated liabilities for warranty claims in process, potential warranty issues customers have notified us about and an estimate based on historical failure rates. For the fiscal years 2011, 20102013, 2012 and 2009,2011, our warranty claims and reversals were approximately $1.4 million, $0.8 million, $2.2 million and $1.2$1.4 million, respectively. If our estimates for warranty claims are incorrect, our profits would be impacted.

Income Taxes

We have historically incurred domestic operating losses from both a financial reporting and tax return standpoint. We establish valuation allowances if it appears more likely than not that our deferred tax assets will not be realized. These judgments are based on our projections of taxable income and the amount and timing of our tax operating loss carryforwards and other deferred tax assets. Given our federal operating tax loss carryforwards, we do not expect to pay domestic federal

27


taxes in the near term. It is possible that we could pay domestic alternative minimum taxes and state income taxes. We are also subject to foreign taxes from our Korean Taiwanese and U.K. subsidiary operations.

Our income tax provision is based on calculations and assumptions that will be subject to examination by tax authorities. Despite our history of operating losses there can be exposures for state taxes, federal alternative minimum taxes or foreign tax that may be due. We regularly assess the potential outcomes of these examinations and any future examinations for the current or prior years in determining the adequacy of our provision for income taxes. Should the actual results differ from our estimates, we would have to adjust the income tax provision in the period in which the facts that give rise to the revision become known. Such adjustment could have a material impact on our results of operations. We have historically established valuation allowances against all of our net deferred tax assets because of our history of generating operating losses and restrictions on the use of certain items. Our evaluation of the recoverability of deferred tax assets has also included analysis of the expiration dates of net operating loss carryforwards. In forming our conclusions as to whether the deferred tax assets are more likely than not to be realized we consider the sources of our income and the projected stability of those sources and product life cycles. Over the last three fiscal years a significant component of our income has been derived from sales of higher margin military products to the U.S. government. If , as expected, the U.S. government significantly reduces funding for these programs weour results of operations will not be profitable.adversely affected. In assessing our ability to realize our domestic deferred tax assets in the future, we consider the potential impact of the U.S. government’sgovernment's federal budget deficit on both the U.S. military programs in which we currently participate and those programs in which we anticipate participating in the future. A similar analysis is performed with respect to our foreign subsidiaries.

Stock Compensation

There were no stock options granted in fiscal years 2011, 20102013, 2012 or 2009.2011. The fair value of nonvested restricted common stock awards is generally the market value of the Company’sCompany's equity shares on the date of grant. The nonvested common stock awards require the employee to fulfill certain obligations, including remaining employed by the Company for one, two or four yearscertain periods of time (the vesting period) and in certain cases meeting

33

performance or market criteria. The performance or market criteria primarilymay consist of the achievement of the Company’sCompany's annual incentive plan goals.goals, technology development or the Company’s stock attaining a certain price for a period of time. For nonvested restricted common stock awards which solely require the recipient to remain employed with the Company, the stock compensation expense is amortized over the anticipated service period. For nonvested restricted common stock awards which require the achievement of performance criteria, the Company reviews the probability of achieving the performance goals on a periodic basis. If the Company determines that it is probable that the performance criteria will be achieved, the amount of compensation cost derived for the performance goal is amortized over the service period. If the performance criteria are not met, no compensation cost is recognized and any previously recognized compensation cost is reversed. The Company recognizes compensation costs on a straight-line basis over the requisite service period for time vested awards.

We have an award to the CEO which vests For awards that vest upon our stock price achieving a certain price for 10 consecutive business days. Thea period of time the compensation expense associated with this award is recognized over the derived service period.


Results of Operations
On January 16, 2013, we completed the sale of our III-V product line, including all of the outstanding equity interest in KTC Wireless, LLC, a wholly-owned subsidiary which held our investment in Kopin Taiwan Corporation (KTC), to IQE KC, LLC (IQE) and IQE plc (Parent, and collectively with IQE, the Buyer). Our III-V products primarily consisted of our Gallium Arsenide-based HBT transistor wafers. The aggregate purchase price was approximately $75 million, subject to certain adjustments, including working capital adjustments and escrow. Upon agreement of the final working capital and other adjustments the net purchase price was $70.2 million, and the gain on the sale, net of tax, was $20.1 million. Under the terms of the Purchase Agreement, $55 million was paid to us in January 2013, $0.2 million was paid in April 2013 and the remaining $15 million is scheduled to be paid to us on the third anniversary of the Closing Date.
The following table provides the pro forma revenues of the Company as if the sale of the III-V product line had been completed on December 26, 2010 (the first day of the Company’s fiscal year ended December 31, 2011) (in millions):

 2012 2011
 Consolidated III-V Product Line Pro Forma Consolidated III-V Product Line Pro Forma
Revenues$93.4
 $58.8
 $34.6
 $131.1
 $66.5
 $64.6
The following table provides the pro forma assets of the Company as if the sale of the III-V product line had been completed on December 29, 2012 (in millions):

28


 2012
 Consolidated III-V Product Line Pro Forma
Total Assets$176.2
 $50.7
 $125.5
We are a leading developer and manufacturer of advanced semiconductor materialsminiature displays and miniature displays.in 2012 increased our software development capabilities with investments in two companies. We use our proprietary semiconductor material technology to design, manufacture and market our III-V and CyberDisplaydisplay products for use in highly demanding commercial wireless communications and high-resolution portable military, industrial and consumer electronic applications.applications, training and simulation equipment and 3D metrology equipment. Our products enable our customers to develop and market an improved generation of products for these target applications.

We have two principal sources of revenues: product revenues and research and development revenues. Product revenues consist of sales of our III-V products, principally gallium arsenide (GaAs) HBT transistor wafers, and CyberDisplay products. Research and development revenues consist primarily of development contracts with agencies or prime contractors of the U.S. government. Research and development revenues were $5.7$2.3 million, or 4.3%10.0% of total 2013 revenues, $3.3 million, or 9.6% of total 2012 revenues and $5.1 million, or 7.9% of total 2011 revenues, $3.8 million, or 3.1% of total 2010 revenues and $6.5 million, or 5.7% of total revenues in 2009.

Our III-V products are manufactured by us in our manufacturing facilities in Taunton, Massachusetts, U.S.A. and Kopin Taiwan Corporation (KTC), our Taiwanese subsidiary and one of our reportable segments. Our CyberDisplay products arerevenues.

We manufacture transmissive microdisplays and reflective displays. In fiscal year 2012 the initial manufacturing steps arefor our commercial transmissive display were performed in our Westborough, Massachusetts, U.S.A. facility and then the back end packaging steps for our commercial transmissive display products iswere performed at our Korean subsidiary, Kowon, whichKowon. If the transmissive display was for a U.S. military application the entire display manufacturing process was performed in our Westborough, Massachusetts facility. Commencing in 2013 both commercial and military transmissive display production is also one ofbeing performed entirely in our reportable segments.Westborough, Massachusetts facility. Forth Dimension Displays (FDD), our wholly-owned subsidiary, manufactures our reflective microdisplays in its facility located in Scotland and it too is a reportable segment.

Because our fiscal year ends on the last Saturday of December every seven years we have a fiscal year with 53 weeks. Our fiscal year 2011 was a 53years 2013 and 2012 were 52 week yearyears as compared to fiscal years 2010 and 20092011 which were both 52 week years.

was a 53 weeks year.

Fiscal Year 20112013 Compared to Fiscal Year 20102012
Revenues.

Revenues.    Our revenues, which include product sales and amounts earned from research and development contracts, for fiscal years 20112013 and 2010,2012, by category, were as follows (in millions):follows:

Revenues

  2011   2010 

III-V

  $66.5    $62.2  

Display

   64.6     58.2  
  

 

 

   

 

 

 

Total

  $131.1    $120.4  
  

 

 

   

 

 

 

34

The increase in our III-V revenues resulted from an increase in demand for our products, specifically HBT transistors, from customers that use our products in the production of components sold to makers of wireless handsets. We believe this increase in demand was the result of both an increase in the number of wireless handsets that were sold over the prior year and because the percentage of “3G” or “smartphones”, which is a more technologically advanced type of wireless handset, increased over the prior year as a percentage of the total wireless handsets sold. 3G and smart phones offer more functions, for example web browsing, than a standard wireless handset. 3G and smart phones require more HBT transistors than a standard wireless handset to support the increased functionality. We believe the increase in industry sales of 3G and smart phones will continue in 2012.

In July 2012, our purchase and supply agreement with our largest III-V customer, a customer which represented 37% of our 2011 revenues, expires (see Item 1A, Risk Factors for explanation of percent of revenue calculation), subject to a last time buy option. If we do not renew this agreement or increase HBT sales to other customers our sales may decline.

Display revenues for 2011 and 2010 were as follows:

Display Revenues by Category (in millions)

  2011   2010 

Military Applications

  $38.9    $40.0  

Consumer Electronic Applications

   16.5     10.9  

Eyewear Applications

   4.0     4.1  

Research & Development

   5.2     3.2  
  

 

 

   

 

 

 

Total

  $64.6    $58.2  
  

 

 

   

 

 

 

Display Revenues by Category (in millions)2013 2012
Military Applications$8.6 $19.6
Consumer Electronic Applications and other8.1 8.6
Eyewear Applications3.9 3.0
Research & Development2.3 3.4
Total$22.9 $34.6
Sales of our products for military applications declined in 20112013 because of reduced demand from the U.S. government. Based on recently proposed federal budgets and discussions with our customers, we expect our revenues from sales of defense related products to the U.S. government to decline approximately $20 million in our 2012 fiscal year. Our military products have higher profit margins than our other display products and have been a significant contributor to our overall profitability for the pasts several years. The U.S. government is projected to incur large budget deficits for the near future and is expected to reduce spending on military programs as part of the solution to decrease these deficits. In addition an anticipated overall decline in military spendingWe are currently designing several new weapon sight systems which encompass our military revenues may also decline because of a changedisplay within the weapon sight and overlays certain information onto the sight’s reticule. We expect to be in the U.S. government procurement process.design phase for most if not all of fiscal year 2014. We have been supplying our display products in support of a U.S. government thermal weapon sight program. Under this program we have had three customers. We have been notified that the U.S. government will most likely chose only one of the three to be the supplierexpect limited orders for the programnew sight systems in 2015 but we cannot be assured that our new designs will be selected by the future. We sell different products to each of the three customers. government for deployment or if we are selected it will be deployed in 2015.
The range of products consists of a single display to a module. The single display sells for approximately $300 as compared to the module which sells for more than $1,000. Depending on who the U.S. government awards the contract to support the thermal weapon sight program our revenues may be affected. We have been the sole supplier of displays to the U.S. military for several of its thermal weapon sight programs. We believe the U.S. military will evaluate competitors’ products for the next thermal weapon sight program. This could result in our receiving a lower percentage of these total programs than we historically have and while we do not believe it is probable, it is possible we may not receive any award. As a result of the factors above we anticipate a reduction in revenues from the sale of our military products in 2012.

The increasedecrease in the Consumer Electronic Applications and other category is the result of an increasea decrease in sales of our products for digital still cameras. Our ability to forecast our revenues in this category is very difficult as sales of our product ultimately depend on how successful our customers are in promoting their digital still camerascamera (DSC) models. There are many digital still cameraDSC models offered by a number of large consumer electronicelectronics companies and it is a very competitive product category. In addition we typically rebid to win this business each year. The customers for our eyewear products tend to be smaller companies and the economic down turn during the recent years has affected their ability to obtain credit with which to purchase our products. The increasedecrease in Research and

35

Development revenues is the result of an increasea decrease in funding from the U.S. government. We are unable to predict the amount of funding for research and development by the U.S. government as it addresses its fiscal deficit issues.

In 2011, we began offering a headworn, voice and gesture controlled, hands-free cloud computing productreference design for industrial applications that hashad an optical pod with our microdisplay and used Windows CE software. We referred to the reference design as our Golden-i technology. In 2013 and 2012, we created a microdisplaynumber of additional reference design headsets target at other markets and developed an Android software platform. We have rebranded the category and refer to the headset

29


reference designs and other technologies we developed as Kopin Wearable technologies of which the Golden-i headset reference design is for the industrial market segment. Our Kopin Wearable technology encompasses both software and component technologies. The software technology includes but is not limited to voice and gesture control, noise cancellation, android and Windows CE based operating systems and web browsing. The component technologies include our displays, optics, application specific integrated circuits (ASICs), backlights and ergonomic designs. Our strategy is to license the headset reference designs and sell the various components included in the reference design as a group or individually. Some of the technologies included in Kopin Wearable technologies are used with software or components which we referlicense or purchase from other companies. Customers may license only a subset of these technologies depending on whether they wish to as Golden-i. Sales of Golden-i in 2011 were diminimis and were primarily to demonstrate the product concept.develop a military, industrial or consumer product. We have entered into an agreement to license the Golden-i technologyreference design and know howknow-how to a company that is developing an industrializeddeveloped a product which they anticipateand commenced offering it in 2012.the second half of 2013. The license is exclusive for the industriala certain market; non-exclusive for certain other markets and prohibits sales to other markets. Under the terms of the license we will sell an optical pod which includes our display, optics and a back light. Sales of products based on the Golden-i reference design were de minimis in 2013 and 2012 and were primarily to demonstrate the product concept. We do not believe revenue will be significant in 2012 from sales of these products but we do believe in successive years products such as thisour ability to develop and expand the Kopin Wearable technologies and to market and license the Kopin Wearable technologies will be important for ourus to achieve revenue growth, positive cash flow and ability to maintainachieve profitability. This is the first product that we have developed that has a significant software component.

The markets the Kopin Wearable technologies can be used in already have a number of existing product offerings such as ruggedized lap-top computers and tablets. The companies that offer these products are significantly larger than we are. We expect to incur significant development and marketing costs in 2014 to commercialize the Kopin Wearable technologies. We have a product category which we refer to as “Eyewear Applications”. This category is the predecessor of wearable products as it refers to devices that use our display products to show entertainment, emails or similar data. We currently expect revenue of between $18 million and $22 million for fiscal year 2014, however our ability to forecast revenues derived from Kopin Wearable technologies, which may significantly impact our results of operations, is very limited. We currently expect to have a consolidated net loss in the range of $32 million to $40 million in 2014 and, excluding the impact of the effects of working capital, our stock buyback program, and other investing activities, we expect cash usage between $30 million and $35 million to fund operations for fiscal 2014..

We have provided estimated 2014 revenue and net loss ranges in order for the investor to understand the expected changes in our remaining business in 2014 as compared to 2013. However, we believe we have an opportunity to position ourselves in the growing wearable computing market and therefore our primary focus in 2014 is on developing technology and products and establishing relationships and not necessarily achieving revenue, or any other particular financial metric. Accordingly, our 2014 net losses may exceed our current estimates.
There are a number of different display technologies which can produce displays in small form factors. We believe one of the benefits of our display technology is the ability to produce high resolutionhigh-resolution displays in small form factors. The digital still camera (DSC) market is mature and the majority of these devices use low-resolution display products which results in our having limited, if any, competitive advantage over our competitors and, therefore, the ability to sell displays into these markets is very price dependent. Accordingly, for us to maintain or increase display revenues with above average gross margins, we will need to increase sales to customers who buy our higher resolution display products, such as the military, or develop new categories, such as our Golden-i product.

We also anticipate, based on current discussions with our customers and certain contractual obligations that the prices of certain of our products will decline in fiscal year 2012. We anticipate the average selling price of our HBT transistor wafers and display products sold to customers for consumer electronics applications will decline approximately 5% to 7% during fiscal year 2012 relative to 2011. We expect sales prices of our display products for military applications to remain relatively flat for 2012 as compared to 2011. The overall increase or decrease in the average sales price of our display products will be dependent on the sales mix of commercial and military displays.

We currently expect revenue of between $110 million and $120 million for fiscal year 2012, however due to the current worldwide economic situation our ability to forecast revenues and results of operations is very limited. Our forecasts are based on our discussions with customers and our expectations about the future global economy and are not based on firm non-cancellable orders.

Kopin Wearable technologies.

International sales represented 22%48% and 23%27% of product revenues for fiscal years 20112013 and 2010,2012, respectively. The increase in international sales is primarily attributable to an increase in sales of our CyberDisplay products for digital still cameras and III-V products to customers who sell components to manufacturers of wireless handsets. We expect our 2012 revenues will primarily be from customers located in the U.S. International sales are primarily sales of CyberDisplay products to consumer electronic manufacturers located in Japan, Korea and China. Our international sales are primarily denominated in U.S. currency. Consequently, a strengthening of the U.S. dollar could increase the price in local currencies of our products in foreign markets and make our products relatively more expensive than competitors’competitors' products that are denominated in local currencies, leading to a reduction in sales or profitability in those foreign markets. In addition, sales of our CyberDisplay products in Korea are transacted through our Korean subsidiary, Kowon, Technology Co., LTD. Kowon’s sales are primarily denominated in U.S. dollars. However, Kowon’s local operating costs are primarily denominated in Korean won. Kowon also holds U.S. dollars in order to pay various expenses. As a result, our financial position and results of operations are subject to exchange rate fluctuation in transactional and functional currency. We have not taken any protective measures against exchange rate fluctuations, such as purchasing hedging instruments with respect to such fluctuations, because of the historically stable exchange rate between the Japanese yen, Korean won and the U.S. dollar.

36


Cost of Product Revenues.

   2011  2010 

Cost of product revenues (in millions)

  $82.1   $81.2  

Cost of product revenues as a % of revenues

   65.4%   69.6% 

 2013 2012
Cost of product revenues (in millions)$20.7
 $22.0
Cost of product revenues as a % of revenues100.4% 70.3%
Cost of product revenues, which is comprised of materials, labor and manufacturing overhead related to the production of our products remained relatively consistent from 2010 to 2011increased as a percentage of revenues. Our gross margin is affected by increases or decreasesrevenues in 2013 as compared to 2012 due to a decrease in the sales pricessale of our products, changes in raw material prices, unit volume of sales, manufacturing efficiencies and the mix of products sold. As discussed above our sales prices historically decline on an annual basis. Our overhead costs and, to a lesser extent, our labor costs are normally stable and do not fluctuate significantly during any twelve month period. Essentially, we consider labor and overhead costs to be fixed in nature over the short term and therefore profitability is very dependent on the sales prices of our products and the volume of sales. Gross margins, as a percentage of sales, increased from 2010 to 2011 because of the increase in sales in 2011 by KTC and FDD, which have higher gross margins as a percentage than our 2010 consolidated gross margin percentage. For 2012, we anticipate sale prices of display products for military applications, to remain stablenormal price declines and lower unit sales prices of our III-Vdisplay products. Military products for wireless handset applications and our displays products for consumer electronic applications to decline. As a result, in order for us to increase

30


historically have higher gross margins we need to increase manufacturing efficiencies and/or increase the unitthan commercial products. The reduced volume of sales.

sales resulted in an increase in fixed cost per display which reduced the gross margin per display sale.

Research and Development.    Research and development (R&D) expenses are incurred in support of internal display and III-V product development programs or programs funded by agencies or prime contractors of the U.S. government and commercial partners. In fiscal year 2014 our R&D expenditures will be related to our display products, over lay weapon sights and Kopin Wearable technologies. R&D revenues associated with funded programs are presented separately in revenue in the statement of operations. Research and development costs include staffing, purchases of materials and laboratory supplies, circuit design costs, fabrication and packaging of display products, and overhead. For fiscal years 20112013 and 20102012 R&D expense was as follows (in millions):

Research and development expense

  2011   2010 

Funded

  $3.8    $2.7  

Internal

   22.1     17.0  
  

 

 

   

 

 

 

Total

  $25.9    $19.7  
  

 

 

   

 

 

 

Research and development expense2013 2012
Funded$1.5
 $2.2
Internal16.0
 12.1
Total$17.5
 $14.3
R&D expense increased in 20112013 as compared to the prior year primarily because of increases in costsinvestments made to develop III-V products for usewearable reference designs, including display development and software costs, partially offset by a decrease in 3G and smartphones and a new head-worn hands-free cloud computing display product.

government funded product development.

Selling, General and Administrative.    Selling, general and administrative (S,G&A) expenses consist of the expenses incurred by our sales and marketing personnel and related expenses, and administrative and general corporate expenses.

   2011  2010 

Selling, general and administrative expense (in millions)

  $18.9   $14.8  

Selling, general and administrative expense as a % of revenues

   14.4%   12.3% 

 2013 2012
Selling, general and administrative expense (in millions)$19.1
 $17.2
Selling, general and administrative expense as a % of revenues82.3% 49.6%
The increase in S,G&A expenses in 20112013 as compared to 20102012 is primarily attributable to additional stock compensation expense.
Impairment. In 2013, we performed an impairment analysis of our finite-lived intangible assets related to FDD and Ikanos. We performed our analysis of our finite-lived intangible assets based on the additionincome approach. As a result we recorded a non-cash charge of $1.5 million to write down the finite-lived intangible assets. In 2012, we performed an impairment analysis of our finite-lived intangible assets and goodwill balance related to FDD, as FDD's actual results were less than originally forecast. We performed our analysis of our finite-lived intangible assets based on a comparison of the undiscounted cash flows to the recorded carrying value of the intangible assets. As a result, there was no change in the carrying values of the finite-lived intangible assets, however, we recorded a non-cash charge of $1.7 million to write down the remaining carrying value of the goodwill to zero.
(in millions)
Intangible
Assets
Assets acquired with acquisition of FDD at January 11, 2011$4.6
Amortization(0.7)
Impairment(2.0)
As of December 31, 2011$1.9
Amortization(0.3)
Impairment of goodwill—
Foreign currency translation0.1
As of December 29, 2012$1.7
Amortization(0.4)
Impairment of goodwill(1.2)
Foreign currency translation0.1
As of December 28, 2013$0.2

Other Income and Expense.

31


(in millions)2013 2012
Interest income$1.1
 $1.1
Other income and expense, net0.3
 0.2
Foreign currency transaction losses(0.4) (1.0)
Subtotal1.0
 0.3
Gain on sales of investments1.9
 0.9
Impairment of investments(5.0) —
Loss on investment in Ikanos—
 (0.6)
Other income and expense$(2.1) $0.6

Other income and expense, net, as shown above, is composed of interest income, foreign currency transactions and remeasurement gains and losses incurred by our Korean and United Kingdom subsidiaries, other-than-temporary impairment on marketable debt securities, gains on sales of investments and license fees and the impairment of cost based investments. For 2013, we recorded $0.4 million of foreign currency losses as compared to $1.0 million foreign currency losses for 2012. This was primarily attributable to increased fluctuations in the U.S. dollar and Korean won currency exchange rate. In 2013 we recorded a $5.0 million impairment charge for two cost basis investments due their experiencing liquidity issues. Other income and expense, net for 2011 and a $1.4also includes expense of $0.2 million creditto record an impairment of certain marketable debt securities which were deemed other-than-temporarily impaired.
As our marketable debt securities have matured we have been reinvesting in 2010securities which, due to current interest rates and shorter maturities, have lower yields than the receiptsecurities which matured. As a result of insurance proceeds. We acquired FDDthese factors and our cash usage rate we anticipate that our interest income will decline in January2014.
Equity losses in unconsolidated affiliates.    Our equity losses in unconsolidated affiliates for 2013 consists of 2011 and its S,G,&A expense for 2011 was $2.6 million.

37

The Compensation Committeeour approximate 23% shares of the Company approvedlosses of Ask Ziggy, totaling $0.2 million, and our approximate 12% share of the following issuanceslosses of restricted stock:

Date of Issuance

Number of Shares Issued

September 2011

919,000

February 2011

905,793

April 2010

465,500

December 2009

778,213

April 2009

676,726

We issue restricted stock awards to either current employees as partKoBrite, totaling $0.4 million. Our equity losses in unconsolidated affiliates in 2012 consisted of our annual incentive plan (incentiveapproximate 12% share of the losses of KoBrite totaling $0.6 million, and our 25% share of the losses of Ikanos totaling $0.1 million. In July of 2012 we increased our investment in Ikanos to 51% and commenced consolidating Ikanos's results of operations into our results of operations.

Tax provision.    The benefit for income taxes for the fiscal year ended 2013 of $12.9 million represents the net of state and foreign tax and intra period tax allocations related to the Company's discontinued operations and withholding taxes related to closing our Korean facilities. For 2014 we expect to have taxes based on U.S. federal tax liabilities on federal alternative minimum tax rules and on our foreign operations. We also expect to have a state tax provision in 2014.
Net (income) loss attributable to noncontrolling interest.    In 2013 we acquired 51% of eMDT and in 2012 we acquired 51% of Ikanos Consulting Ltd. The remaining 49% of eMDT and Ikanos are held by other investors and employees of eMDT and Ikanos.We also own approximately 93% of the equity awards) orof Kowon as of December 28, 2013.
Net loss (income) attributable to current or prospective employeesthe noncontrolling interest on the consolidated statement of operations represents the portion of the results of operations of Kowon , Ikanos and eMDT which are allocated to remain with us or join us for at least a certain periodthe stockholders of time (retention equity awards).the approximately 7% of Kowon and 42% of Ikanos and 49% of eMDT not owned by us. The number of shareschange in the net loss (income) attributable to the noncontrolling interest of our common stock that an employee will ultimately receivesubsidiaries is as follows (in millions):
 2013 2012
Kowon$0.1 $0.3
Ikanos0.5 0.7
eMDT0.3 —
Total$0.9 $1.0

Fiscal Year 2012 Compared to Fiscal Year 2011
Revenues.    Our revenues, which include product sales and the compensation expense that we will ultimately recognize under an incentive equity award is based on achieving certain financial milestonesamounts earned from research and or remaining with the Company for a specific period of time. In the case of retention equity awards shares earned are solely a function of time employed. We filed a proxy statement on March 23, 2011 describing our 2010 Equity Incentive Plan, and we have also filed on behalf of certain officers and directors Form 4s with the Securities and Exchange Commission which detail the conditions under which our officers can earn the restricted stock awards. The 2011 proxy statement and Form 4s are available on our website www.kopin.com. In addition, as part of our Board of Director compensation in fiscal years 2011 and 2010, we issued a total of 60,000 shares of restricted stock each year to our board members representing annual grantsdevelopment contracts, for fiscal years 2012 and 2011, by category, were as follows (in millions):

32


Display Revenues by Category (in millions)2012 2011
Military Applications$19.6 $38.9
Consumer Electronic Applications8.6 16.5
Eyewear Applications3.0 4.0
Research & Development3.4 5.2
Total$34.6 $64.6

Sales of our products for military applications declined in 2012 because of reduced demand from the U.S. government. Our military products have higher profit margins than our other display products and 2010. have been a significant contributor to our overall profitability for the past several years.
The equity awardsincrease in the Consumer Electronic Applications category is the result of an increase in sales of our products for digital still cameras. The increase in Research and Development revenues is the result of an increase in funding from the U.S. government.

In 2011, we began offering an industrial headworn, voice and gesture controlled, hands-free cloud computing reference design that has an optical pod with a microdisplay which we refer to as Golden-i technology. Sales of Golden-i technology enabled products in 2012 and 2011 were de minimis and were primarily to demonstrate the Boardproduct concept.
International sales represented 27% and 24% of Directors vest 25% per year over the four years following the grant.

In connection with the issuance of the awards above, we recorded stock compensation expenses of $3.9 million and $2.6 millionproduct revenues for fiscal years 2012 and 2011, respectively. Our international sales are primarily denominated in U.S. currency. We have not taken any protective measures against exchange rate fluctuations, such as purchasing hedging instruments with respect to such fluctuations, because of the historically stable exchange rate between the Japanese yen, Korean won and 2010, respectively.

the U.S. dollar.


Cost of Product Revenues.
 2012 2011
Cost of product revenues (in millions)$22.0
 $34.7
Cost of product revenues as a % of revenues70.3% 58.2%
Cost of product revenues, which is comprised of materials, labor and manufacturing overhead related to the production of our products increased as a percentage of revenues in 2012 as compared to 2011 due to a decrease in the sale of our display products for military applications, normal price declines and lower unit sales of our display products. Military products historically have higher gross margins than commercial products.
Impairment.Research and Development.    Research and development (R&D) expenses are incurred in support of internal display development programs or programs funded by agencies or prime contractors of the U.S. government and commercial partners. In fiscal year 2013 our R&D expenditures will be related to our display products and Golden-i technologies. R&D revenues associated with funded programs are presented separately in revenue in the statement of operations. Research and development costs include staffing, purchases of materials and laboratory supplies, circuit design costs, fabrication and packaging of display products, and overhead. For fiscal years 2012 and 2011 R&D expense was as follows (in millions):
Research and development expense2012 2011
Funded$2.2
 $3.3
Internal12.1
 13.2
Total$14.3
 $16.5
R&D expense decreased in 2012 as compared to the prior year primarily because of decreases in government funded display activities and costs to develop display products partially offset by an increase in costs to develop the Golden-i technologies.
Selling, General and Administrative.    Selling, general and administrative (S,G&A) expenses consist of the expenses incurred by our sales and marketing personnel and related expenses, and administrative and general corporate expenses.

33


 2012 2011
Selling, general and administrative expense (in millions)$17.2
 $16.0
Selling, general and administrative expense as a % of revenues49.6% 24.7%
The increase in S,G&A expenses in 2012 as compared to 2011 is primarily attributable to additional stock compensation expense.
Impairment.   On January 11, 2011, we purchased 100% of the outstanding common stock of FDD for approximately $11.0 million plus contingent consideration. In accounting for the acquisition of FDD, we allocated $4.3 million to identifiable intangible assets and $4.6 million to goodwill. The allocations were based on estimated cash flows as of the acquisition date. Subsequent to the acquisition date and duringDuring fiscal year 2011 the actual operating results and cash flows generated by FDD were less than originally forecasted and at year end, using revised forecasts, we performed our annual review of intangible assets and goodwill. As a result of this review we recorded a non-cash charge of $5.0 million to write down the carrying value of the intangible assets and the goodwill to its implied fair market value based on projected discounted cash flows. The impairment of goodwill represented a 64% decrease in its recorded value. As of June 30, 2012, we performed an interim impairment analysis of our finite-lived intangible assets and goodwill balance related to FDD, as FDD's actual results were less than originally forecast for the six-month period then ended. We performed our analysis of our finite-lived intangible assets based on a comparison of the undiscounted cash flows to the recorded carrying value of the intangible assets. As a result, there was no change in the carrying values of the finite-lived intangible assets, however, we recorded a non-cash charge of $1.7 million to write down the remaining carrying value of the goodwill to zero. No additional impairments were taken in 2012. FDD produces a very high resolution micro display for niche markets. The majority of its current and forecasted revenues are derived from a small group of customers (less than 10). In addition approximately 50% of FDD’sFDD's forecasted sales over the next 10 years are dependent on relatively new customers. If FDD loses any of its significant customers, or the products which it is projecting to provide significant revenue in the future fail to meet expectations and are not complimentedcomplemented by other revenue sources, additional impairment charges may be necessary. The below table reports the activity during the year ended December 31, 2011.29, 2012.

   Intangible
Assets		  Goodwill 

Assets acquired with acquisition of FDD at Jan. 11, 2011,

  $4,620,000   $4,604,459  

Amortization

   (665,066)   —    

Impairment

   (2,035,399)   (2,964,114) 

Foreign currency translation

   34,125    24,112  
  

 

 

  

 

 

 

As of December 31, 2011

  $1,953,660   $1,664,457  
  

 

 

  

 

 

 

38

    
(in millions)
Intangible
Assets  
 
Goodwill 
 
Assets acquired with acquisition of FDD at Jan. 11, 2011$4.6 $4.6
Amortization(0.7) —
Impairment(2.0) (2.9)
Foreign currency translation— —
As of December 31, 2011$1.9 $1.7
Amortization(0.3) —
Impairment of goodwill— (1.7)
Foreign currency translation0.1 —
As of December 29, 2012$1.7 $—
Other Income and Expense.

(in millions)

  2011  2010 

Interest income

  $1.3   $2.2  

Other income and expense, net

   0.1    0.0  

Foreign currency transaction (losses) gains

   —      (0.4) 

Other-than-temporary impairment of marketable debt securities

   (0.2)   —    
  

 

 

  

 

 

 

Subtotal

   1.2    1.8  

Gain on sales of investments

   0.4    2.6  

Gain on sales of patents

   0.2    0.8  
  

 

 

  

 

 

 

Other income and expense

  $1.8   $5.2  
  

 

 

  

 

 

 

(in millions)2012
 2011
Interest income$1.1
 $1.3
Other income and expense, net0.2
 0.1
Foreign currency transaction losses(1.0) —
Other-than-temporary Impairment of marketable debt securities—
 (0.2)
Subtotal0.3
 1.2
Gain on sales of investments0.9
 0.4
Gain on sales of patents(0.6) 0.2
Other income and expense$0.6
 $1.8
Other income and expense, net, as shown above, is composed of interest income, foreign currency transactions and remeasurement gains and losses incurred by our Korean Taiwanese and United Kingdom subsidiaries, other-than temporaryother-than-temporary impairment

34


on marketable debt securities, gains on sales of investments and license fees. For 2011,2012, we recorded $0 of foreign currency gains (losses) as compared to ($0.4)$1.0 million of foreign currency (losses)losses as compared to $0 foreign currency gains for 2010.2011. This was primarily attributable to decreasedincreased fluctuations in the U.S. dollar and Korean won currency exchange rate. Other income and expense, net for 2011 also includes expense of $0.2 million to record an impairment of certain marketable debt securities which were deemed other-than-temporarily impaired.

As our marketable debt securities have matured we have been reinvesting in securities which, due to current interest rates, have lower yields than the securities which matured, accordingly we anticipate that our interest income will decline in 2012.

We havehad entered into agreements to sell certain patents which we were not using and that had a carrying value of $0.using. The total consideration the Company receiveswe receive for the sale of the patents is a percentage of any sublicense fees, after expenses, the buyer receives. InUnder the agreements, in 2011 and 2010 we sold certain additional patents we were no longer usingthat had a carrying value of $0 for $0.2 million and $0.8 million, respectively.million. There is no additional consideration to be received for the patents sold. We continue to evaluate the patents in our portfolio for opportunities to monetize these assets.

Equity losses in unconsolidated affiliates.    Our equity losses in unconsolidated affiliates in 2012 consists of our approximate 12% share of the losses of KoBrite totaling $0.6 million, and our 25% share of the losses of Ikanos totaling $0.1 million. In July 2012 we increased our investment in Ikanos to 51% and commenced consolidating Ikanos's results of operations into our results of operations. Our equity losses in unconsolidated affiliates in 2011 consists of our approximate 12% share of the losses of KoBrite totaling $0.3 million in 2011 and our approximate 19% share of the losses of KoBrite totaling $0.6 million in 2010.million.

Tax benefit (provision).provision.    The benefit (provision)provision for income taxes for the fiscal yearsyear ended 2011 and 2010 represent alternative minimum2012 of $1.1 million represents withholding taxes owedrelated to U.S. federal and state taxing authorities of $0.4 million and $0.3 million, respectively, offset by the release of a $4.3 million valuation allowance which had been recorded against the deferred tax assets of KTC. Based on KTC’s results of operations for 2011 and its projected future results of operations, we concluded that the valuation allowance was not required.closing our Korean facilities. For 20122013 we expect to have taxes based on U.S.U.S federal tax liabilities based on federal alternative minimum tax rules and on our foreign operations. We also expect to have a state tax provision in 2012. Taiwan tax law requires a 10% tax on unappropriated earnings of our subsidiary, KTC. We recorded $0.5 million for this liability as of December 31, 2011.2013.

Net (income) loss attributable to noncontrolling interest.    During the three month period ended March 31, 2012 we acquired a 25% interest in Ikanos, for $0.7 million and in the three month period ended September 29, 2012, we purchased from Ikanos an additional 70,748 newly issued shares of its common stock for approximately $2.5 million. As a result of these transactions we own approximately 51% of the outstanding common stock of Ikanos. The remaining 49% is held by other investors and employees of Ikanos. 
We ownowned approximately 78% of the equity of Kowon and 90%as of the equity of KTC. Net (income) loss attributable to the noncontrolling interest on the consolidated statement of operations represents the portion of the results of operations of Kowon and KTC which are allocated to the shareholders of the approximately 22% of Kowon and 10% of KTC not owned by us. The change in the net (income) loss attributable to the noncontrolling interest of our subsidiaries is as follows (in millions):

   2011  2010 

Kowon

  $—     $—    

KTC

   (0.7)  —    
  

 

 

  

 

 

 

Total

  $(0.7) $—    
  

 

 

  

 

 

 

39

Fiscal Year 2010 Compared to Fiscal Year 2009

Revenues.    Our revenues, which include product sales and amounts earned from research and development contracts, for fiscal years 2010 and 2009 were as follows (in millions):

Revenues

  2010   2009 

III-V

  $62.2    $46.5  

CyberDisplay

   58.2     68.2  
  

 

 

   

 

 

 

Total

  $120.4    $114.7  
  

 

 

   

 

 

 

The increase in our III-V revenues resulted from an increase in demand for our products, specifically HBT transistors, from customers that use our products in the production of components sold to makers of wireless handsets. We believe this increase in demand was the result of both an increase in the number of wireless handsets that were sold over the prior year and because the percentage of “3G” or “smartphones”, which is a more technologically advanced type of wireless handset, increased over the prior year as a percentage of the total wireless handsets sold. 3G and smart phones offer more functions, for example web browsing, than a standard wireless handset. 3G and smart phones require more HBT transistors than a standard wireless handset to support the increased functionality.

Display revenues for 2010 and 2009 were as follows:

Display Revenues by Category (in millions)

  2010   2009 

Military Applications

  $40.0    $51.5  

Consumer Electronic Applications

   10.9     9.2  

Eyewear Applications

   4.1     1.8  

Research & Development

   3.2     5.7  
  

 

 

   

 

 

 

Total

  $58.2    $68.2  
  

 

 

   

 

 

 

Sales of our products for military applications declined in 2010 because of reduced demand from the U.S. government. The U.S. government is projected to incur large budget deficits for the near future and is expected to reduce spending on military programs as part of the solution to decrease these deficits. As a result of this anticipated reduction in military spending demand for our military products may decline. Our military products have higher profit margins than our other display products. The increase in the Consumer Electronic Applications category is the result of an increase in sales of our products for digital still cameras. Our ability to forecast our revenues in this category is very difficult as sales of our product ultimately depend on how successful our customers are in promoting their digital still cameras models. There are many digital still camera models offered by a number of large consumer electronic companies and it is a very competitive product category. The customers for our eyewear products tend to be smaller companies and the economic down turn in 2008 and 2009 affected their ability to obtain credit with which to purchase our products. The increase in sale of our products in 2010 to customers that use them for eyewear products is the result of a few of these customers being able to obtain financing in 2010. We believe that some of the increase is from these customers refilling their inventory as well as for meeting current demand. The decline in Research and Development revenues is the result of a decline in funding from the U.S. government. We believe the amount of funding for research and development which is funded by the U.S. government may decline as it addresses its fiscal deficit issues.

In 2011 we anticipate offering a head-worn, hands-free cloud computing product that has an optical pod with a microdisplay. We do not believe revenue will be significant in 2011 from sales of these products but we do believe in successive years products such as this will be important for our revenue growth and ability to maintain profitability. This is the first product that we have developed that has a significant software component. We anticipate a business model whereby we will sell the optical pod and license the software.

40

We have been the sole supplier of displays to the US military for its thermal weapon sight programs, TWS, TWS II and currently TWS-Bridge. We believe the U.S. military will evaluate competitors’ products for the next thermal weapon sight program, TWS III. This could result in our receiving a lower percentage of these total programs than we historically have. There are a number of different display technologies which can produce displays in small form factors. We believe one of the benefits of our display technology is the ability to produce high resolution displays in small form factors. The digital still camera market is mature and the majority of these devices use low-resolution display products which results in our having limited, if any, competitive advantage over our competitors and, therefore, the ability to sell displays into these markets is very price dependent. Accordingly for us to maintain or increase display revenues with above average gross margins, we will need to increase sales to customers who buy our higher resolution display products, such as the military, or develop new categories, such as eyewear.

We also anticipate, based on current discussions with our customers and certain contractual obligations that the prices of certain of our products will decline in fiscal year 2011. We anticipate the average selling price of our HBT transistor wafers and display products sold to customers for consumer electronics applications will decline approximately 5% during fiscal year 2011 relative to 2010. We expect sales prices of our display products for military applications to remain relatively flat for 2011 as compared to 2010. The overall increase or decrease in the average sales price of our display products will be dependent on the sales mix of commercial and military display sales.

International sales represented 23% and 17% of product revenues for fiscal years 2010 and 2009 respectively. The increase in international sales is primarily attributable to an increase in sales of our CyberDisplay products for digital still cameras and III-V products to customers who sell components to manufacturers of wireless handsets. We expect our 2011 revenues will primarily be from customers located in the U.S. International sales are primarily sales of CyberDisplay products to consumer electronic manufacturers located in Japan, Korea and China. Our international sales are primarily denominated in U.S. currency. Consequently, a strengthening of the U.S. dollar could increase the price in local currencies of our products in foreign markets and make our products relatively more expensive than competitors’ products that are denominated in local currencies, leading to a reduction in sales or profitability in those foreign markets. In addition, sales of our CyberDisplay products in Korea are transacted through our Korean subsidiary, Kowon Technology Co., LTD. Kowon’s sales are primarily denominated in U.S. dollars. However, Kowon’s local operating costs are primarily denominated in Korean won. Kowon also holds U.S. dollars in order to pay various expenses. As a result, our financial position and results of operations are subject to exchange rate fluctuation in transactional and functional currency. We have not taken any protective measures against exchange rate fluctuations, such as purchasing hedging instruments with respect to such fluctuations, because of the historically stable exchange rate between the Japanese yen, Korean won and the U.S. dollar.

Cost of Product Revenues.

   2010  2009 

Cost of product revenues (in millions)

  $81.2   $76.0  

Cost of product revenues as a % of revenues

   69.6%   70.3% 

Cost of product revenues, which is comprised of materials, labor and manufacturing overhead related to the production of our products remained relatively consistent from 2009 to 2010 as a percentage of revenues. Our gross margin is affected by increases or decreases in the sales prices of our products, changes in raw material prices, unit volume of sales, manufacturing efficiencies and the mix of products sold. As discussed above our sales prices historically decline on an annual basis. Our overhead costs and, to a lesser extent, our labor costs are normally stable and do not fluctuate significantly during any twelve month period. Essentially, we consider labor and overhead costs to be fixed in nature over the short term and therefore profitability is very dependent on the sales prices of our products and the volume of sales. Gross margins, as a percentage of sales, remained relatively consistent from 2009 to 2010 because the gross margins as a percent of sales for our III-V products increased

41

which offset the reduced gross margin contribution resulting from the decline in military display product sales. The gross margins on our III-V products increased because of the increase in unit volume of sales. Essentially the fixed cost per unit declined as we produced more units for approximately the same infrastructure cost as the prior year.

Research and Development.    Research and development (R&D) expenses are incurred in support of internal display and III-V product development programs or programs funded by agencies or prime contractors of the U.S. government and commercial partners. R&D revenues associated with funded programs are presented separately in revenue in the statement of operations. Research and development costs include staffing, purchases of materials and laboratory supplies, circuit design costs, fabrication and packaging of display products, and overhead. For fiscal years 2010 and 2009 R&D expense was as follows (in millions):

Research and development expense

  2010   2009 

Funded

  $2.7    $3.6  

Internal

   17.0     10.5  
  

 

 

   

 

 

 

Total

  $19.7    $14.1  
  

 

 

   

 

 

 

R&D expense increased in 2010 as compared to the prior year primarily because of increases in costs to develop III-V products for use in 3G and smartphones and a new head-worn hands-free cloud computing display product.

Selling, General and Administrative.    Selling, general and administrative (S,G&A) expenses consist of the expenses incurred by our sales and marketing personnel and related expenses, and administrative and general corporate expenses.

   2010  2009 

Selling, general and administrative expense (in millions)

  $14.8   $14.1  

Selling, general and administrative expense as a % of revenues

   12.3%   12.3% 

The increase in S,G&A expenses in 2010 as compared to 2009 is attributable to an increase in investor relations expense of $0.4 million, insurance expense of $0.2 million, labor expense of $0.3 million and bad debts of $0.3 million partially offset by a reduction in professional fees of $1.0 million. The decrease in bad debts expense was not a true increase per se but rather in 2009 there was a credit in bad debt expense as a result of a reversal of $0.5 million allowance for doubtful accounts established at December 27, 2008 for the possible uncollectible receivables from KTC. This allowance was reversed when we acquired control of KTC in the third quarter of 2009. The reduction in professional fees was the result of insurance proceeds which reimbursed the Company for expenses previously incurred in dealing with certain legal actions.

In April 2010, December 2009 and April 2009, the Compensation Committee of the Company approved the issuance of 465,500, 778,213 and 676,726, respectively, of restricted stock awards to certain of our employees. We issue restricted stock awards either as part of our annual incentive plan (incentive equity awards) or to induce a prospective employee to join us or current employee to remain with us for at least a certain period of time (retention equity awards). The number of shares of our common stock that an employee will ultimately receive and the compensation expense that we will ultimately recognize under an incentive equity award is based on achieving certain financial milestones and remaining with the Company for a specific period of time. In the case of retention equity awards shares earned are solely a function of time employed. We filed a proxy statement on March 17, 2010 describing our 2010 equity incentive plan, and we have also filed on behalf of certain officers and directors Form 4s with the Securities and Exchange Commission which detail the conditions under our

42

officers can earn the restricted stock awards. The 2010 proxy statement and Form 4s are available on our website www.kopin.com. In December 2008 the Compensation Committee approved the issuance of 363,191 restricted stock awards to our employees, subject to certain conditions. These conditions were essentially the same conditions for the awards made in 2009. In addition, as part of its Board of Director compensation in fiscal years 2010 and 2009 we issued 120,000 shares of restricted stock to our board members representing the annual grants for fiscal years 2010 and 2009. The equity awards to the Board of Directors vest 25% per year over the four years following the grant.

In connection with the issuance of the awards above, and the amortization of awards issued before fiscal year 2008, we recorded stock compensation expenses of $2.6 million and $1.9 million for fiscal years 2010 and 2009, respectively.

Other Income and Expense.

(in millions)

  2010  2009 

Interest income

  $2.2   $2.2  

Other income and expense, net

   0.0    0.7  

Foreign currency transaction (losses) gains

   (0.4)   (1.0) 

Other-than-temporary Impairment of marketable debt securities

   —      (0.9) 
  

 

 

  

 

 

 

Subtotal

   1.8    1.0  

Gain on sales of investments

   2.6    —    

Gain on loans to KTC

   —      1.2  

Gain on remeasurement of investment in KTC

   —      0.6  

Gain on sales of patents

   0.8    6.3  
  

 

 

  

 

 

 

Other income and expense

  $5.2   $9.1  
  

 

 

  

 

 

 

Other income and expense, net, as shown above, is composed of interest income, foreign currency transaction and remeasurement gains and losses incurred by our Korean and Taiwanese subsidiaries, other-than temporary impairment on marketable debt securities, gains resulting from our obtaining a controlling interest in KTC and license fees. For 2010, we recorded $0.4 million of foreign currency losses as compared to $1.0 million of foreign currency losses for 2009. This was primarily attributable to decreased fluctuations in the US dollar and Korean won currency exchange rate. Other income and expense, net for 2009 also includes expense of $0.9 million to record an impairment of certain marketable debt securities which were deemed other-than-temporarily impaired.

As announced in our 2010 earnings released on March 3, 2011 and as filed in the Current Report on Form 8-K, our income from operations was $4.1 million. Subsequent to the release we reclassified $0.4 million from other income and expense, net, to income from operations.

As our marketable debt securities have matured we have been reinvesting in securities which, due to current interest rates, have lower yields than the securities which matured, accordingly we anticipate that our interest income will decline in 2011.

In conjunction with our obtaining a controlling interest in KTC in 2009 we recorded a gain of $0.6 million for the remeasurement of our investment in KTC to fair market value and $1.2 million related to the repayment of loans from KTC which had been previously written-off. A more complete explanation of the impact on our financial statements from our obtaining a controlling interest in KTC is below.

In fiscal year 2008 we entered into an agreement to sell certain patents which we were not using and that had a carrying value of $0 to a buyer who would attempt to sublicense the patents. The total consideration the Company would receive for the sale of the patents would be a percentage of any sublicense fees, after expenses,

43

the buyer received. In 2009 we recorded $6.3 million of income which represented the Company’s share of sublicense fees income. In 2010 we sold certain additional patents we were no longer using for $0.8 million. We do not expect to receive any material additional amounts from the sales of these patents.Equity earnings (losses) in unconsolidated affiliates. Our equity earnings (losses) in unconsolidated affiliates consists of our approximate 19% share of the losses of KoBrite totaling $0.6 million in 2010 and $0.3 million in 2009, offset by the effects of the repayment of a loan by KTC which is discussed in more detail below, in 2009 of $0.8 million.

Tax (provision) benefit.    The provision for income taxes for the fiscal years ended 2010 and 2009 represent alternative minimum taxes owed to U.S. federal and state taxing authorities of $0.3 million and $0.7 million, respectively. For 2011 we expect to have taxes based on U.S. federal tax liabilities based on Alternative Minimum Tax rules and on our foreign operations. We also expect to have a state tax provision for financial reporting purposes in 2011.

Net (income) loss attributable to noncontrolling interest.    We own approximately 78% of the equity of Kowon Technology Co. Ltd. (Kowon) and 90% of the equity of KTC.29, 2012. Net loss (income) attributable to the noncontrolling interest on the consolidated statement of operations represents the portion of the results of operations of Kowon and KTCIkanos which are allocated to the shareholdersstockholders of the approximately 22% of Kowon and 10%49% of KTCIkanos not owned by us. The change in the net (income) loss (income) attributable to the noncontrolling interest of our subsidiaries is as follows (in millions):

   2010   2009 

Kowon

  $—      $0.3  

KTC

   —       (0.1) 
  

 

 

   

 

 

 

Total

  $—      $0.2  
  

 

 

   

 

 

 

Acquisition of the controlling interest in Kopin Taiwan Corporation (KTC).

From Kopin Taiwan Corp’s (KTC) inception in 2002 through July 2009 the Company owned approximately 35% of KTC. In July 2009, the Company purchased 19,572,468 and 128,226 shares of KTC common stock for approximately $5,975,000 and $300,000, respectively which increased the Company’s ownership to approximately 87%. Subsequent to the purchase of additional shares in July 2009, KTC repaid the outstanding balance of loans due to us from KTC in the aggregate amount of approximately $2,012,000. We began consolidating KTC on July 31, 2009. In 2010, the Company purchased 14,349,809 shares of KTC common stock for approximately $6,150,000 to increase the Company’s ownership to approximately 90%.

The consolidated statement of operations for the periods shown below includes the following amounts (in millions) which were related to transactions with KTC:

   2009 

Gain on remeasurement of Kopin’s previous investment in KTC

  $0.6  

Repayment of loan by KTC which was previously written-off

   2.0  

Reduction (increase) in bad debt allowance

   0.5  

In the year ended December 27, 2008 we recorded equity losses of approximately $0.8 million and a loan loss reserve of approximately $1.2 million in connection with $2.0 million we loaned KTC in fiscal 2008. As a result of the acquisition in July 2009 the loan was repaid, and in 2009 we recorded a gain on the loan repayment of approximately $1.2 million and equity in earnings of unconsolidated affiliates of $0.8 million.

In fiscal 2008, due to KTC’s liquidity problems we recorded allowances for possible bad debts for the excess amount KTC owed to us over what we owed KTC. At December 27, 2008, the allowance for possible bad debts was approximately $0.5 million. During the nine months ended September 26, 2009 we reduced the allowance to $0, resulting in a reduction of selling, general and administrative expenses of $0.5 million.

44

Prior to July 2009 we recorded our investment in KTC under the equity method and wrote down the investment to $0. We remeasured and wrote-up our investment in KTC by approximately $0.6 million which represented the fair market value of the investment immediately prior to the acquisition in July 2009.

 2012
 2011
Kowon$0.3
 $—
Ikanos0.7
 —
Total$1.0
 $—
Liquidity and Capital Resources

As of December 31, 2011,28, 2013, we had cash and equivalents and marketable debt securities of $105.4$112.7 million and working capital of $123.9$108.4 million compared to $111.0$92.5 million and $132.1$106.8 million, respectively, as of December 25, 2010.29, 2012. The increase in cash and equivalents and marketable securities was primarily due to cash from the sale of the III-V product line of $55.2 million, proceeds from sales of investments of $2.6 million, offset by the net of cash used in operating activities of $19.0 million, capital expenditures of $0.7 million, the acquisition of certain cost based investments for $3.5 million, repurchase of our common stock for $8.0 million and the purchase of incremental investment in Kowon of $3.7 million.
As of December 29, 2012, we had cash and equivalents and marketable debt securities of $92.5 million and working capital of $106.8 million compared to $105.4 million and $123.3 million, respectively, as of December 31, 2011. The decrease in cash and equivalents and marketable securities was primarily due to cash provided by operating activities of approximately $19.3 million and proceeds from sales of investments of $0.4$0.9 million, which were offset by capital expenditures of $7.3$9.8 million, the acquisition of FDDcertain cost based investments for $10.0$2.2 million, net of cash acquired, repurchase of our common stock for $4.4$3.5 million and the net purchase of marketable debt securities and other assets of $3.6$2.5 million offset cash provided by operating activities of approximately $3.8 million. The increase in capital expenditures is primarily the result of our investments in capacity for our III-V product line in response to customer demand.

Cash and marketable debt securities held in U.S. dollars

Domestic

  $89,803,174  

Foreign

   11,160,189  
  

 

 

 

Subtotal cash and marketable debt securities

   100,963,363  

Cash and marketable debt securities held in other currencies and converted to U.S. dollars

   4,455,187  
  

 

 

 

Total cash and marketable debt securities

  $105,418,550  
  

 

 

 

at December 28, 2013 were:


35


Domestic$99,206,478
Foreign10,394,377
Subtotal cash and marketable debt securities109,600,855
Cash and marketable debt securities held in other currencies and converted to U.S. dollars3,128,346
Total cash and marketable debt securities$112,729,201
We have no plans to repatriate the foreign cash and marketable debt securities held in our foreign subsidiaries FDD and Ikanos and as such that we have not recorded any deferred tax liability.

We have entered into a product development agreement under In 2013, we ceased operations at our Korean facility, Kowon. Kowon has approximately $13.1 million of cash and marketable debt securities which we have agreed to fund up to $2.4 million of development expenses if certain milestones are achieved.

Included in the $2,467,461 of Billings in excess of revenue earned on the consolidated balance sheet at December 31, 2011 is approximately $2.2 million which we received from the state of Massachusetts as an incentive to retain jobs in Massachusetts. We earn amounts under the agreement by meeting certain employment milestones each year and amounts not earnedanticipate will eventually be repaidremitted to the state of Massachusetts at the end of the agreement in 2017. The agreement also contains repayment provisions which require us to repay certain amounts back to the state of Massachusetts if we fail to achieve certain employment milestones after years threeU.S. and five of the agreement, or if we move certain parts of our operations out of the state. Based on our current estimates we believe that we may be required to repay $1.0 million to the state of Massachusetts in 2012.

We have a purchase and supply agreement with a significant HBT customer that expires in July 2012. This agreement also provides for a last time buy option. Under the terms of this agreementaccordingly we have agreed to maintain capacity levels for manufacturing HBT wafers and we committed to a pricing schedule under certain circumstances. The agreement also requires us to give prior notice if we exit our HBT product line. In consideration for this agreement the customer agreed to source a certain percentage ofrecorded deferred tax liabilities associated with its HBT wafer needs from us subject to the customer’s right to source HBT wafers from other sources if we are unable to meet their requirements under certain circumstances. We agreed that failure to meet our supply obligations under the agreement would allow our customer to obtain court ordered specific performance and if we do not perform we could then be liable for monetary damages up to a maximum of $40 million.

unremitted earnings.

We lease facilities located in Taunton and Westborough, Massachusetts, Santa Clara, California and Scotts Valley, California, under non-cancelable operating leases. We have two Taunton facilities, one whoseThe Westborough lease expires in 2020 and2023, the other in 2012. The TauntonSanta Clara lease which expires in 2020 may be extended for a 10 year term. The Westborough lease, which was extended subsequent to December 31, 2011, expires in 20232016 and the Scotts Valley lease expires in 2012.

45

November 2014.

We also lease a facility in Dalgety Bay, Scotland which expires in April 2013.

2016, and also lease two facilities in Nottingham, United Kingdom, which expire in 2016 and 2017.

We expect to expend between $5.0$2.0 million and $8.0$3.0 million on capital expenditures over the next twelve months, primarily related to infrastructure changes resulting from the sale of our III-V product line and for the acquisition of equipment to increase capacity insupport some of our III-V product line.

cost based investments.

As of December 31, 2011,28, 2013, we had substantial tax loss carry-forwards, which may be used to offset future federal taxes due. We may record a tax provision in our financial statements but we may be able to offset some or all of the amounts that are payable with our tax loss carry-forwards. We may be subject to alternative minimum taxes, foreign taxes and state income taxes depending on our taxable income and sources of taxable income.

Historically we have financed our operations primarily through public and private placements of our equity securities. Over the past several years we have generated sufficient cash from operations to fund the business. We believe our available cash resources, including the proceeds from the sale of our III-V product line, will support our operations and capital needs for at least the next twelve months.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

Seasonality

The markets for our III-V and consumer electronic CyberDisplay products

Our revenues have been traditionally seasonal, with sales of these products strongest in the third quarternot followed by our second quarter then our fourth quarter and our first quarter being our lowest sales quarter. However thisa seasonal pattern didfor the past two years and we do not existanticipate any seasonal trend to our revenues in fiscal year 2011. The timing of new product introductions by our customers may have disrupted the seasonality of our business.

2014.

Climate Change

We do not believe there is anything unique to our business which would result in climate change regulations having a disproportional affecteffect on us as compared to U.S. industry overall.

Inflation

We do not believe our operations have been materially affected by inflation in the last 3three fiscal years.


Contractual Obligations

The following is a summary of our contractual payment obligations for operating leases as of December 31, 2011:

Contractual Obligations

 Total  Less than 1 year  1-3 Years  3-5 years  More than 5 years 

Operating Lease Obligations

 $4,986,820   $1,031,419   $1,490,276   $1,706,625   $758,500  

46

28, 2013:

Contractual ObligationsTotal Less than 1 year 1-3 Years 3-5 years More than 5 years
Operating Lease Obligations$7,353,133
 $1,266,185
 $2,678,281
 $1,279,333
 $2,129,334

36
KOPIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


Item 7A.Quantitative and Qualitative Disclosures About Market Risk

We invest our excess cash in high-quality U.S. government, government-backed (Fannie Mae, FDIC guaranteed bonds and certificates of deposit) and corporate debt instruments, which bear lower levels of relative risk. We believe that the effect, if any, of reasonably possible near-term changes in interest rates on our financial position, results of operations and cash flows should not be material to our cash flows or income. It is possible that interest rate movements would increase our unrecognized gain or loss on interest rate securities. Included in other assets are equity investments in Advanced Wireless Semiconductor Company (AWSC) and WIN Semiconductor Corp. (WIN) of approximately $1.6 million and $1.7 million, respectively, which are subject to changes in value because of either specific operating issues or overall changes in the stock market.

We are exposed to changes in foreign currency exchange rates primarily through our translation of our foreign subsidiary’s financial positions, results of operations, and transaction gains and losses as a result of non U.S.non-U.S. dollar denominated cash flows related to business activities in Asia, and remeasurement of United StatesU.S. dollars to the functional currency of our foreign subsidiaries. We are also exposed to the affectseffects of exchange rates in the purchase of certain raw materials whose price is in U.S. dollars but the price on future purchases is subject to change based on the relationship of the Japanese Yen to the U.S. dollar. We do not currently hedge our foreign currency exchange rate risk. We estimate that any market risk associated with our international operations is unlikely to have a material adverse effect on our business, financial condition or results of operation. Our portfolio of marketable debt securities is subject to interest rate risk although our intent is to hold securities until maturity. The credit rating of our investments may be affected by the underlying financial health of the guarantors of our investments. We use Gallium Arsenide and Silicon wafers but do not enter into forward or futures hedging contracts.

Item 8.Financial Statements and Supplementary Data

The financial statements required by this Item are included in this Report on pages 5345 through 82.72. Reference is made to Item 15 of this Report.

Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Not Applicable.

applicable.
Item 9A.Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We conducted an evaluation of the effectiveness of the design and operation of our “disclosure controls and procedures” (Disclosure Controls), as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of December 31, 2011.28, 2013. The controls evaluation was conducted under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer. Disclosure Controls are controls and procedures designed to reasonably assure that information required to be disclosed in our reports filed under the Exchange Act, such as this Form 10-K, is recorded, processed, summarized and reported within the time periods specified in the U.S. Securities and Exchange Commission’s (SEC’s) rules and forms. Disclosure Controls are also designed to reasonably assure that such information is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Our quarterly evaluation of Disclosure Controls includes an evaluation of some components of our internal control over financial reporting, and internal control over financial reporting is also separately evaluated on an annual basis for purposes of providing the management report which is set forth below.

Our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this Annual Report on Form 10-K, our disclosure controls and procedures were effective.

47


Management’s Annual Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the Company’s Board of Directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and include those policies and procedures that:


37


Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;

Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made in accordance with authorizations of management and directors of the company; and

Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2011,28, 2013, based on the criteria outlined inInternal Control—Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

Based on their assessment, management concluded that, as of December 31, 2011,28, 2013, the Company’s internal control over financial reporting is effective based on those criteria.

Our independent registered public accounting firm that audited our consolidated financial statements included in this Form 10-K has issued an attestation report on our internal control over financial reporting. This report appears below.

Changes in Internal Control Over Financial Reporting

During our last fiscal quarter, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

48



38



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Kopin Corporation

Taunton,

Westborough, Massachusetts

We have audited the internal control over financial reporting of Kopin Corporation and subsidiaries (the “Company”) as of December 31, 2011,28, 2013, based on criteria established inInternal Control—Integrated Framework(1992)issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for itstheir assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report On Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011,28, 2013, based on the criteria established inInternal Control—Integrated Framework (1992)issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule as of and for the year ended December 31, 2011,28, 2013, of the Company and our report dated March 15, 201217, 2014 expressed an unqualified opinion on those financial statements and financial statement schedule.

schedule and included an explanatory paragraph regarding the Company's sale of its III-V product line, including its investment in subsidiary Kopin Taiwan Corporation.

/s/ Deloitte & Touche LLP

Boston, Massachusetts

March 15, 2012

49

17, 2014


39


None
Part III
Item 9B.
Other Information.

None

Part III

Item 10.Directors, Executive Officers and Corporate Governance

The information required under this item is incorporated herein by reference from our Proxy Statement relating to our 20122014 Annual Meeting of Shareholders (the Proxy Statement). In addition to the disclosures made in our Proxy Statement and incorporated by reference herein, information with respect to executive officers required by this item is set forth in Part I of this Report.

Code of Ethics.    We have adopted a Code of Business Conduct and Ethics (the Code) that applies to all of our employees (including our CEO and CFO) and directors. The Code is available on our website at www.kopin.com. We intend to satisfy the disclosure requirement regarding any amendment to or waiver of a provision of the Code applicable to any executive officer or director, by posting such information on our website.

Our corporate governance guidelines, whistleblower policy and the charters of the audit committee, compensation committee and nominating and corporate governance committee of the Board of Directors as well as other corporate governance document materials are available on our website at www.kopin.com under the heading “Investors”, then “Corporate Governance” then “Governance Documents”.

Item 11.Executive Compensation

The information required under this item is contained in our Proxy Statement under the caption “Stock Ownership of Principal Stockholders and Management” and is incorporated herein by reference from the Proxy Statement.

Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information required by this item is incorporated herein by reference from the Proxy Statement. Refer also to the equity compensation plan information set forth in Part II Item 5 of this Annual Report on Form 10-K.

Item 13.Certain Relationships and Related Transactions, and Director Independence

The information required by this item is incorporated herein by reference from the Proxy Statement.

Item 14.Principal AccountantAccounting Fees and Services

The information required by this item is incorporated herein by reference from the Proxy Statement.

Item 15.Exhibits, and Financial Statement Schedules

(a) Documents filed as part of the Report:

(1)Consolidated Financial Statements:


40


 Page

Report of Independent Registered Public Accounting Firm

45
 54 

Consolidated Balance Sheets

46
 55 

Consolidated Statements of Operations

47
 56 

Consolidated Statements of Comprehensive (Loss) Income

47
 56 

Consolidated Statements of Stockholders’ Equity

48
 57 

Consolidated Statements of Cash Flows

49
 58 

Notes to Consolidated Financial Statements

59
50

50


(2)Financial Statement Schedule:

Schedule II—Valuation and Qualifying Accounts

84
72

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 consolidated financial statements or the notes thereto.

(3)Exhibits

 3.1    Amended and Restated Certificate of Incorporation   (2) 
 3.2    Amendment to Certificate of Incorporation   (5) 
 3.3    Amendment to Certificate of Incorporation   (5) 
 3.4    Fourth Amended and Restated By-laws   (8) 
 4    Specimen Certificate of Common Stock   (1) 
 10.1    Form of Employee Agreement with Respect to Inventions and Proprietary Information   (1) 
 10.2    Amended and Restated 1992 Stock Option Plan   (2)* 
 10.3    1992 Stock Option Plan Amendment   (5)* 
 10.4    1992 Stock Option Plan Amendment   (6)* 
 10.5    Kopin Corporation 2001 Equity Incentive Plan   (7)* 
 10.6    Kopin Corporation 2001 Equity Incentive Plan Amendment   (9)* 
 10.7    Kopin Corporation 2001 Equity Incentive Plan Amendment   (10)* 
 10.8    Kopin Corporation 2001 Equity Incentive Plan Amendment   (11)* 
 10.9    Kopin Corporation 2001 Equity Incentive Plan Amendment   (13)* 
 10.10    Kopin Corporation 2001 Supplemental Equity Incentive Plan   (6)* 
 10.11    Form of Key Employee Stock Purchase Agreement   (1)* 
 10.12    

License Agreement by and between the Company and Massachusetts Institute of Technology dated April 22, 1985, as amended

   (1) 
 10.13    

Facility Lease, by and between the Company and Massachusetts Technology Park Corporation, dated October 15, 1993

   (3) 
 10.14    

Joint Venture Agreement, by and among the Company, Kowon Technology Co., Ltd., and Korean Investors, dated as of March 3, 1998

   (4) 
 10.15    

Seventh Amended and Restated Employment Agreement between the Company and Dr. John C.C. Fan, dated as of December 8, 2010

  
 10.16    

Kopin Corporation Form of Stock Option Agreement under 2001 and 2010 Equity Incentive Plans

   (12)* 
 10.17    

Kopin Corporation 2001 and 2010 Equity Incentive Plan Form of Restricted Stock Purchase Agreement

   (12)* 
 10.18    

Kopin Corporation Fiscal Year 2012 Incentive Bonus Plan

   *  
 10.19    

Kopin Corporation Stock Purchase Agreement of 19,572,468 shares of Kopin Taiwan Corporation, (KTC) common stock

   (14) 
 10.20    

Kopin Corporation 2010 Equity Incentive Plan

   (15) 
 21.1    

Subsidiaries of Kopin Corporation

  
 23.1    

Consent of Independent Registered Public Accounting Firm

  
 31.1    

Chief Executive Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

  

51


41


3.1 Amended and Restated Certificate of Incorporation(2) 
3.2 Amendment to Certificate of Incorporation(5) 
3.3 Amendment to Certificate of Incorporation(5) 
3.4 Fourth Amended and Restated By-laws(8) 
4 Specimen Certificate of Common Stock(1) 
10.1 Form of Employee Agreement with Respect to Inventions and Proprietary Information(1) 
10.5 Kopin Corporation 2001 Equity Incentive Plan(7)* 
10.6 Kopin Corporation 2001 Equity Incentive Plan Amendment(9)* 
10.7 Kopin Corporation 2001 Equity Incentive Plan Amendment(10)* 
10.8 Kopin Corporation 2001 Equity Incentive Plan Amendment(11)* 
10.9 Kopin Corporation 2001 Equity Incentive Plan Amendment(13)* 
10.10 Kopin Corporation 2001 Supplemental Equity Incentive Plan(6)* 
10.11 Form of Key Employee Stock Purchase Agreement(1)* 
10.12 License Agreement by and between the Company and Massachusetts Institute of Technology dated April 22, 1985, as amended(1) 
10.13 Facility Lease, by and between the Company and Massachusetts Technology Park Corporation, dated October 15, 1993(3) 
10.14 Joint Venture Agreement, by and among the Company, Kowon Technology Co., Ltd., and Korean Investors, dated as of March 3, 1998(4) 
10.15 Seventh Amended and Restated Employment Agreement between the Company and Dr. John C.C. Fan, dated as of December 8, 2010(16) 
10.16 Kopin Corporation Form of Stock Option Agreement under 2001 and 2010 Equity Incentive Plans(12)* 
10.17 Kopin Corporation 2001 and 2010 Equity Incentive Plan Form of Restricted Stock Purchase Agreement(12)* 
10.18 Kopin Corporation Fiscal Year 2013 Incentive Bonus Plan*
  
10.20 Kopin Corporation 2010 Equity Incentive Plan(15) 
10.21 Purchase Agreement, dated January 10, 2013, by and among Kopin Corporation, IQE KC, LLC and IQE plc  
21.1 Subsidiaries of Kopin Corporation  
23.1 Consent of Independent Registered Public Accounting Firm  
31.1 Chief Executive Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002  
31.2 Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002  
32.1 Chief Executive Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002**
 
32.2 Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002**
 
101 The following materials from the Company’s Annual Report on Form 10-K for the fiscal year ended December 28, 2013, formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive (Loss), (iv) Consolidated Statements of Stockholder's Equity, (v)Consolidated Statements of Cash Flows, and (vi) Notes to Consolidated Financial Statements, tagged as blocks of text  









42


*
31.2

Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1

Chief Executive Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2

Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101

The following materials from the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011, formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Cash Flows, and (iv) Notes to Consolidated Financial Statements, tagged as blocks of text

*
 Management contract or compensatory plan required to be filed as an Exhibit to this Form 10-K.
(1)**
This exhibit shall not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that Section, nor shall it be deemed incorporated by reference in any filings under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language in any filing.
(1) Filed as an exhibit to Registration Statement on Form S-1, File No. 33-45853, and incorporated herein by reference.
(2)(2) Filed as an exhibit to Registration Statement on Form S-1, File No. 33-57450, and incorporated herein by reference.
(3)(3) Filed as an exhibit to Annual Report on Form 10-K for the fiscal year ended December 31, 1993 and incorporated herein by reference.
(4)(4) Filed as an exhibit to Annual Report on Form 10-Q for the quarterly period ended June 27, 1998 and incorporated herein by reference.
(5)(5) Filed as an exhibit to Quarterly Report on Form 10-Q for the quarterly period ended July 1, 2000 and incorporated herein by reference.
(6)(6) Filed as an exhibit to Registration Statement on Form S-8, filed on November 13, 20012011 and incorporated herein by reference.
(7)(7) Filed as an appendix to Proxy Statement filed on April 20, 2001 and incorporated herein by reference.
(8)(8) Filed as an exhibit to Current Report on Form 8-K filed on December 12, 2008 and incorporated herein by reference.
(9)(9) Filed as an exhibit to Registration Statement on Form S-8 filed on August 16, 2002 and incorporated herein by reference.reference
(10)(10)Filed as an exhibit to Registration Statement on Form S-8 filed on March 15, 2004 and incorporated herein by reference.
(11)(11)Filed as an exhibit to Registration Statement on Form S-8 filed on May 10, 2004 and incorporated herein by reference.
(12)(12)Filed as an exhibit to Annual Report on Form 10-K for the fiscal year ended December 25, 2004 and incorporated herein by reference.
(13)(13)Filed as an exhibit to Registration Statement on Form S-8 filed on April 15, 2008 and incorporated herein by reference.
(14)(14)Filed as an exhibit to Annual Report on Form 10-K for the fiscal year ended December 26, 2009 and incorporated by reference herein.
(15)(15)Filed with the Corporation’sCompany's Definitive Proxy Statement on Schedule 14 filed as of March 17,April 5, 2013 and incorporated by reference herein.
(16)Filed as an exhibit to Annual Report on Form 10-K for the fiscal year ended December 25, 2010 and incorporated by reference herein.
(17)Filed as an exhibit to Current Report on Form 8-K on January 10, 2013 and incorporated by reference herein.

52



43



KOPIN CORPORATION

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 Page

Report of Independent Registered Public Accounting Firm

54
45

Consolidated Balance Sheets at December 31, 201128, 2013 and December 25, 201029, 2012

55
46

Consolidated Statements of Operations for the years ended December 31, 2011,28, 2013, December 25, 201029, 2012, and December  26, 200931, 2011

56
47

Consolidated Statements of Comprehensive (Loss) Income for the years ended December 31, 2011,28, 2013, December 25, 201029, 2012, and December  26, 200931, 2011

56
47

Consolidated Statements of Stockholders’ Equity for the years ended December  31, 2011,28, 2013, December 25, 201029, 2012 and December 26, 200931, 2011

57
48

Consolidated Statements of Cash Flows for the years ended December 31, 2011,28, 2013, December  25, 201029, 2012 and December 26, 200931, 2011

58
49

Notes to Consolidated Financial Statements

59
50

53


44



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Kopin Corporation

Taunton,

Westborough, Massachusetts

We have audited the accompanying consolidated balance sheets of Kopin Corporation and subsidiaries (the “Company”) as of December 31, 201128, 2013 and December 25, 2010,29, 2012, and the related consolidated statements of operations, comprehensive (loss) income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2011.28, 2013. Our audits also included the financial statement schedule listed in the Index at Item 15(a)(2). These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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, 201128, 2013 and December 25, 2010,29, 2012, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2011,28, 2013, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.


As discussed in Note 2 to the consolidated financial statements, the Company sold its III-V product line, including its investment in subsidiary, Kopin Taiwan Corporation, on January 16, 2013. The results of the III-V product line are included in income from discontinued operations, net of tax, for all periods presented and assets and liabilities of the III-V product line are classified as held for sale as of December 29, 2012.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2011,28, 2013, based on the criteria established inInternal Control—Integrated Framework(1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 15, 201217, 2014 expressed an unqualified opinion on the Company’s internal control over financial reporting.

/s/ Deloitte & Touche LLP

Boston, Massachusetts

March 15, 2012

54

17, 2014



45



KOPIN CORPORATION

CONSOLIDATED BALANCE SHEETS

  December 31,
2011		  December 25,
2010		 
ASSETS  

Current assets:

  

Cash and equivalents

 $43,095,163   $49,834,547  

Marketable debt securities, at fair value

  62,323,387    61,112,843  

Accounts receivable, net of allowance of $513,000 and $737,000 in 2011 and 2010, respectively

  16,510,851    14,539,664  

Accounts receivable from unconsolidated affiliates

  1,340,788    2,558,513  

Unbilled receivables

  36,115    391,171  

Inventory

  21,415,517    21,462,871  

Prepaid taxes

  412,068    664,320  

Prepaid expenses and other current assets

  1,294,368    2,060,833  
 

 

 

  

 

 

 

Total current assets

  146,428,257 ��  152,624,762  

Property, plant and equipment, net

  32,369,441    32,613,961  

Deferred tax assets

  4,201,627    —    

Goodwill

  1,664,457    —    

Intangible assets, net

  1,953,660    —    

Other assets

  7,946,087    6,857,675  
 

 

 

  

 

 

 

Total assets

 $194,563,529   $192,096,398  
 

 

 

  

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY  

Current liabilities:

  

Accounts payable

 $12,384,870   $11,317,865  

Accrued payroll and expenses

  4,182,505    2,741,004  

Accrued warranty

  1,318,000    1,300,000  

Billings in excess of revenue earned

  2,467,461    3,210,895  

Other accrued liabilities

  2,126,954    1,956,642  
 

 

 

  

 

 

 

Total current liabilities

  22,479,790    20,526,406  

Asset retirement obligations

  1,295,670    944,617  

Commitments and contingencies

  

Stockholders’ equity:

  

Preferred stock, par value $.01 per share: authorized, 3,000 shares; none issued

  —      —    

Common stock, par value $.01 per share: authorized, 120,000,000 shares; issued 76,123,940 shares in 2011 and 74,604,442 shares in 2010; outstanding 64,361,491 in 2011 and 64,775,234 in 2010

  732,263    725,708  

Additional paid-in capital

  315,710,160    313,311,889  

Treasury stock (8,864,767 and 7,795,605 shares in 2011 and 2010, respectively, at cost)

  (30,995,449)   (26,580,823) 

Accumulated other comprehensive income

  4,146,024    5,985,345  

Accumulated deficit

  (124,008,273)   (127,606,200) 
 

 

 

  

 

 

 

Total Kopin Corporation stockholders’ equity

  165,584,725    165,835,919  

Noncontrolling interest

  5,203,344    4,789,456  
 

 

 

  

 

 

 

Total stockholders’ equity

  170,788,069    170,625,375  
 

 

 

  

 

 

 

Total liabilities and stockholders’ equity

 $194,563,529   $192,096,398  
 

 

 

  

 

 

 

 December 28,
2013		 December 29, 2012
ASSETS   
Current assets:   
Cash and equivalents$16,756,666
 $27,135,387
Marketable debt securities, at fair value95,972,535
 65,349,962
Accounts receivable, net of allowance of $202,000 and $311,000 in 2013 and 2012, respectively2,388,461
 5,254,549
Accounts receivable from unconsolidated affiliates—
 84,780
Unbilled receivables—
 178,036
Inventory3,078,055
 5,789,753
Prepaid taxes233,642
 683,032
Prepaid expenses and other current assets1,178,643
 917,841
Current assets held for sale—
 21,573,729
Total current assets119,608,002
 126,967,069
Property, plant and equipment, net6,034,963
 8,486,406
Goodwill1,016,132
 684,789
Intangible assets, net1,581,502
 2,316,924
Other assets3,024,458
 8,607,882
Notes receivable14,866,666
 —
Noncurrent assets held for sale—
 29,145,732
Total assets$146,131,723
 $176,208,802
LIABILITIES AND STOCKHOLDERS’ EQUITY   
Current liabilities:   
Accounts payable$3,868,865
 $5,121,324
Accrued payroll and expenses1,436,391
 2,147,512
Accrued warranty716,000
 716,000
Billings in excess of revenue earned547,681
 1,220,395
Other accrued liabilities3,157,394
 2,563,797
Deferred tax liabilities1,512,771
 1,304,513
Current liabilities held for sale—
 7,102,895
Total current liabilities11,239,102
 20,176,436
Asset retirement obligations329,435
 322,477
Noncurrent liabilities held for sale—
 623,979
Commitments and contingencies

 

Stockholders’ equity:   
Preferred stock, par value $.01 per share: authorized, 3,000 shares; none issued—
 —
Common stock, par value $.01 per share: authorized, 120,000,000 shares; issued 77,567,631 shares in 2013 and 75,979,695 shares in 2012; outstanding 62,560,946 in 2013 and 63,835,508 in 2012, respectively745,935
 736,966
Additional paid-in capital320,511,458
 318,928,495
Treasury stock (12,032,537 and 9,861,139 shares in 2013 and 2012, respectively, at cost)(42,442,932) (34,450,978)
Accumulated other comprehensive income3,441,997
 6,512,792
Accumulated deficit(147,703,211) (142,993,595)
Total Kopin Corporation stockholders’ equity134,553,247
 148,733,680
Noncontrolling interest9,939
 6,352,230
Total stockholders’ equity134,563,186
 155,085,910
Total liabilities and stockholders’ equity$146,131,723
 $176,208,802
See Accompanying Notes to Consolidated Financial Statements.

55


46



KOPIN CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

Fiscal year ended

 2011  2010  2009 

Revenues:

   

Net product revenues

 $125,464,687   $116,622,692   $108,118,271  

Research and development revenues

  5,679,908    3,763,074    6,536,486  
 

 

 

  

 

 

  

 

 

 
  131,144,595    120,385,766    114,654,757  

Expenses:

   

Cost of product revenues

  82,110,464    81,224,350    75,982,694  

Research and development-funded programs

  3,741,602    2,692,488    3,586,372  

Research and development-internal

  22,133,360    17,041,440    10,560,662  

Selling, general and administrative

  18,928,996    14,837,519    14,136,482  

Impairment of intangible assets and goodwill

  4,999,512    —      —    
 

 

 

  

 

 

  

 

 

 
  131,913,934    115,795,797    104,266,210  
 

 

 

  

 

 

  

 

 

 

(Loss) income from operations

  (769,339)   4,589,969    10,388,547  

Other income and expense:

   

Interest income

  1,305,240    2,192,334    2,180,678  

Other income and expense, net

  93,125    77,202    728,686  

Foreign currency transaction gains (losses)

  12,403    (418,710)   (1,005,184) 

Gain on loans to KTC

  —      —      1,187,937  

Gain on remeasurement of investment in KTC

  —      —      599,328  

Gain on sales of investments

  368,641   2,597,505   —    

Other-than-temporary impairment of marketable debt securities

  (150,644)  —      (926,630) 

Gain on sales of patents

  155,658    769,797    6,323,934  
 

 

 

  

 

 

  

 

 

 
  1,784,423    5,218,128    9,088,749  
 

 

 

  

 

 

  

 

 

 

Income before benefit (provision) for income taxes, and equity (losses) earnings in unconsolidated affiliates and net (income) loss of noncontrolling interest

  1,015,084    9,808,097    19,477,296  

Tax benefit (provision)

  3,541,000    (252,000)   (690,200) 
 

 

 

  

 

 

  

 

 

 

Income before equity (losses) earnings in unconsolidated affiliates and net (income) loss of noncontrolling interest

  4,556,084    9,556,097    18,787,096  

Equity (losses) earnings in unconsolidated affiliates

  (296,451)   (600,299)   483,057  
 

 

 

  

 

 

  

 

 

 

Net income

 $4,259,633   $8,955,798   $19,270,153  

Net (income) loss attributable to the noncontrolling interest

  (661,706)   (21,647)   173,217  
 

 

 

  

 

 

  

 

 

 

Net income attributable to the controlling interest

 $3,597,927   $8,934,151   $19,443,370  
 

 

 

  

 

 

  

 

 

 

Net income per share

   

Basic

 $0.06   $0.14   $0.29  
 

 

 

  

 

 

  

 

 

 

Diluted

 $0.06   $0.13   $0.29  
 

 

 

  

 

 

  

 

 

 

Weighted average number of common shares outstanding:

   

Basic

  64,405,776    66,019,847    66,849,890  
 

 

 

  

 

 

  

 

 

 

Diluted

  65,234,212    66,711,501    67,457,751  
 

 

 

  

 

 

  

 

 

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Fiscal years ended

  2011  2010  2009 

Net income

  $4,259,633   $8,955,798   $19,270,153  

Foreign currency translation adjustments

   (1,368,829)   2,216,793    1,682,514  

Holding (loss) gain on marketable securities

   (135,519)   1,274,580    4,615,316  

Reclassifications of gains in net income

   (457,808)   (1,732,568)   (172,466) 
  

 

 

  

 

 

  

 

 

 

Comprehensive income

  $2,297,477   $10,714,603   $25,395,517  

Comprehensive loss attributable to the noncontrolling interest

  $(413,888)  $(351,920)  $(188,854) 
  

 

 

  

 

 

  

 

 

 

Comprehensive income attributable to the controlling interest

  $1,883,589   $10,362,683   $25,206,663  
  

 

 

  

 

 

  

 

 

 

Fiscal year ended2013 2012 2011
Revenues:     
Net product revenues$20,574,812
 $31,298,419
 $59,508,959
Research and development revenues2,322,897
 3,343,441
 5,149,644
 22,897,709
 34,641,860
 64,658,603
Expenses:     
Cost of product revenues20,655,216
 22,041,953
 34,659,020
Research and development-funded programs1,550,873
 2,178,472
 3,341,075
Research and development-internal15,983,147
 12,121,689
 13,218,018
Selling, general and administrative19,124,750
 17,165,870
 15,990,881
Impairment of intangible assets and goodwill1,511,414
 1,704,770
 4,999,512
 58,825,400
 55,212,754
 72,208,506
Loss from operations(35,927,691) (20,570,894) (7,549,903)
Other income and expense:     
Interest income1,118,617
 1,126,344
 1,291,591
Other income and (expense), net235,917
 173,829
 142,948
Foreign currency transaction (losses) gains(387,351) (1,032,588) 9,672
Gain on sales of investments1,899,291
 856,170
 368,641
Loss on investment in Ikanos—
 (557,594) —
Other-than-temporary impairment of marketable debt securities—
 —
 (150,644)
Impairment of investments(5,000,442) —
 —
Gain on sales of patents—
 —
 155,658
 (2,133,968) 566,161
 1,817,866
Loss from continuing operations before benefit (provision) for income taxes, and equity losses in unconsolidated affiliates and net loss (income) of noncontrolling interest(38,061,659) (20,004,733) (5,732,037)
Tax benefit (provision)12,933,209
 (1,099,000) —
Loss before equity losses in unconsolidated affiliates and net loss (income) of noncontrolling interest(25,128,450) (21,103,733) (5,732,037)
Equity losses in unconsolidated affiliates(625,098) (679,587) (296,451)
Loss from continuing operations(25,753,548) (21,783,320) (6,028,488)
Income from discontinued operations, net of tax20,147,532
 2,789,048
 9,713,059
Net (loss) income$(5,606,016) $(18,994,272) $3,684,571
Net loss (income) attributable to the noncontrolling interest896,400
 632,342
 (605,207)
Net (loss) income attributable to the controlling interest$(4,709,616) $(18,361,930) $3,079,364
Net (loss) income per share:     
Basic:     
    Continuing operations$(0.40) $(0.33) $(0.10)
    Discontinued operations0.32
 0.04
 0.15
    Net (loss) income per share$(0.08) $(0.29) $0.05
Diluted:

 

 

           Continuing operations$(0.40) $(0.33) $(0.10)
           Discontinued operations0.32
 0.04
 0.15
           Net (loss) income per share$(0.08) $(0.29) $0.05
Weighted average number of common shares outstanding:     
Basic62,347,852
 63,617,680
 64,405,776
Diluted62,347,852
 63,617,680
 65,234,212
See Accompanying Notes to Consolidated Financial Statements.

56

KOPIN CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

  Common Stock  Additional
Paid-in
Capital		  Treasury
Stock		  Accumulated
Other
Comprehensive
Income		  Accumulated
Deficit		  Total Kopin
Corporation
Stockholders’
Equity		  Noncontrolling
interest		  Total
Stockholders’
Equity		 
  Shares  Amount        

Balance December 27, 2008

  71,873,228   $718,732   $310,241,805   $(14,552,865)  $(168,303)  $(157,757,433)   $138,481,936   $2,912,519   $141,394,455  

Exercise of stock options

  32,010    320    123,055    —      —      —      123,375    —      123,375  

Vesting of restricted stock

  555,604    5,556    (5,556)   —      —      —      —      —      —    

Stock based compensation expense

  —      —      1,884,340    —      —      —      1,884,340    —      1,884,340  

Net unrealized holding gain on marketable securities

  —      —      —      —      4,442,850    —      4,442,850    —      4,442,850  

Foreign currency translation adjustments

  —      —      —      —      1,320,443    —      1,320,443    362,071    1,682,514  

Cumulative effect adjustment as of March 29, 2009 related to non credit-related losses on investments recorded in operations

  —      —      —      —      (1,773,712)   1,773,712    —      —      —    

Change in other-than-temporary impairment loss recorded in other comprehensive income (loss)

  —      —      —      —      735,535    —      735,535    —      735,535  

Acquisition of KTC equity interest

  —      —      (259,739)   —      —      —      (259,739)   1,014,381    754,642  

Restricted stock for tax withholding obligations

  (193,000)   (1,930)   (684,193)   —      —      —      (686,123)   —      (686,123) 

Treasury stock purchase

  —      —      —      (5,299,451)   —      —      (5,299,451)   —      (5,299,451) 

Net income

  —      —      —      —      —      19,443,370    19,443,370    (173,217)   19,270,153  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balance December 26, 2009

  72,267,842   $722,678   $311,299,712   $(19,852,316)  $4,556,813   $(136,540,351)   $160,186,536   $4,115,754   $164,302,290  

Exercise of stock options

  9,665    97    36,147    —      —      —      36,244    —      36,244  

Vesting of restricted stock

  419,838    4,198    (4,198)   —      —      —      —      —      —    

Stock based compensation expense

  —      —      2,583,728    —      —      —      2,583,728    —      2,583,728  

Net unrealized holding gain on marketable securities

  —      —      —      —      (1,243,327)   —      (1,243,327)   —      (1,243,327) 

Foreign currency translation adjustments

  —      —      —      —      1,886,520    —      1,886,520    330,273    2,216,793  

Change in other-than-temporary impairment loss recorded in other comprehensive income (loss)

  —      —      —      —      785,339    —      785,339    —      785,339  

Acquisition of KTC equity interest

  —      —      (72,882)   —      —      —      (72,882)   321,782    248,900  

Restricted stock for tax withholding obligations

  (126,510)   (1,265)   (530,618)   —      —      —      (531,883)   —      (831,883) 

Treasury stock purchase

  —      —      —      (6,728,507)   —      —      (6,728,507)   —      (6,728,507) 

Net income

  —      —      —      —      —      8,934,151    8,934,151    21,647    8,955,798  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balance December 25, 2010

  72,570,835   $725,708   $313,311,889   $(26,580,823)  $5,985,345   $(127,606,200)   $165,835,919   $4,789,456   $170,625,375  

Exercise of stock options

  19,700    197    72,248    —      —      —      72,445    —      72,445  

Vesting of restricted stock

  897,953    8,980    (8,980)   —      —      —      —      —      —    

Stock based compensation expense

  —      —      3,361,948    —      —      —      3,361,948    —      3,361,948  

Net unrealized holding loss on marketable securities

  —      —      —      —      (971,148)   —      (971,148)   —      (971,148) 

Foreign currency translation adjustments

  —      —      —      —      (1,121,011)   —      (1,121,011)   (247,818)   (1,368,829) 

Change in other-than-temporary impairment loss recorded in other comprehensive income

  —      —      —      —      252,838    —      252,838    —      252,838  

Restricted stock for tax withholding obligations

  (262,230)   (2,622)   (1,026,945)   —      —      —      (1,029,567)   —      (1,029,567) 

Treasury stock purchase

  —      —      —      (4,414,626)   —      —      (4,414,626)   —      (4,414,626) 

Net income

  —      —      —      —      —      3,597,927    3,597,927    661,706    4,259,633  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balance December 31, 2011

  73,226,258   $732,263   $315,710,160   $(30,995,449)  $4,146,024   $(124,008,273)   $165,584,725   $5,203,344   $170,788,069  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

COMPREHENSIVE (LOSS) INCOME

Fiscal years ended2013 2012 2011
Net (loss) income$(5,606,016) $(18,994,272) $3,684,571
Other comprehensive (loss) income:     
          Foreign currency translation adjustments231,321
 2,687,344
 (1,368,829)
          Unrealized holding (loss) gain on marketable securities(116,134) 730,967
 (260,502)
          Reclassifications of gains in net loss(1,936,121) (586,433) (457,808)
Other comprehensive (loss) income$(1,820,934) $2,831,878
 $(2,087,139)
Comprehensive (loss) income(7,426,950) (16,162,394) 1,597,432
Comprehensive gain (loss) attributable to the noncontrolling interest871,867
 167,232
 (357,389)
Comprehensive (loss) income attributable to the controlling interest$(6,555,083) $(15,995,162) $1,240,043

See Accompanying Notes to Consolidated Financial Statements.

57



47



KOPIN CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

Fiscal year ended

 2011  2010  2009 

Cash flows from operating activities:

   

Net income

 $4,259,633   $8,955,798   $19,270,153  

Adjustments to reconcile net income to net cash provided by operating activities:

   

Depreciation and amortization

  8,598,672    6,565,365    5,990,951  

Accretion (amortization) of premium or discount on marketable debt securities

  (152,665)   69,891    (260,687) 

Stock-based compensation

  3,923,628    2,583,728    1,884,340  

Net gain on investment transactions

  (368,641)   (2,597,505)   —    

Losses (earnings) in unconsolidated affiliates

  296,451    600,299    (483,057) 

Impairment on marketable debt securities

  150,644    —      926,630  

Impairment of intangible assets and goodwill

  4,999,512    —      —    

Release of valuation allowance on deferred tax assets

  (4,266,000)   —      —    

Gain on loans to KTC

  —      —      (1,187,937) 

Gain on remeasurement of investment in KTC

  —      —      (599,328) 

Foreign currency losses

  14,150    418,710    942,462  

Change in allowance for bad debt

  (224,644)   154,000    (588,066) 

Change in other non-cash items

  379,246    (203,526)   564,252  

Changes in assets and liabilities:

   

Accounts receivable

  256,190    1,926,676    3,703,840  

Inventory

  162,575    (4,287,717)   (2,666,190) 

Prepaid expenses and other current assets

  1,311,173    (718,074)   132,458  

Accounts payable and accrued expenses

  655,611    338,863    (4,228,801) 

Billings in excess of revenue earned

  (743,434)   126,833    (43,861) 
 

 

 

  

 

 

  

 

 

 

Net cash provided by operating activities

  19,252,101    13,933,341    23,357,159  
 

 

 

  

 

 

  

 

 

 

Cash flows from investing activities:

   

Proceeds from sale of marketable debt securities

  40,732,353    47,956,856    31,328,136  

Purchase of marketable debt securities

  (42,345,935)   (48,730,506)   (48,712,270) 

Other assets

  16,906    196,578    (41,781) 

Proceeds from sale of investments

  392,196    4,223,536    —    

Net cash received from KTC equity interest investment

  —      —      212,380  

Cash paid to acquire FDD, net of cash acquired

  (10,084,307)   —      —    

Purchase of cost based investment

  (1,980,609)   —      —    

Proceeds from sale of property and equipment

  —      —      426,537  

Capital expenditures

  (7,132,371)   (15,849,823)   (3,684,630) 
 

 

 

  

 

 

  

 

 

 

Net cash used in investing activities

  (20,401,767)   (12,203,359)   (20,471,628) 
 

 

 

  

 

 

  

 

 

 

Cash flows from financing activities:

   

Treasury stock purchases

  (4,414,626)   (6,728,507)   (5,299,451) 

Investment in KTC as controlling interest was acquired

  —      (72,085)   (300,000) 

Issuance of KTC shares to noncontrolling interest

  —      111,144    —    

Settlements of restricted stock for tax withholding obligations

  (1,029,567)   (531,883)   (686,123) 

Proceeds from exercise of stock options

  72,445    36,244    123,375  
 

 

 

  

 

 

  

 

 

 

Net cash used in financing activities

  (5,371,749)   (7,185,087)   (6,162,199) 
 

 

 

  

 

 

  

 

 

 

Effect of exchange rate changes on cash

  (217,970)   456,908    159,963  
 

 

 

  

 

 

  

 

 

 

Net decrease in cash and equivalents

  (6,739,384)   (4,998,197)   (3,116,705) 

Cash and equivalents:

   

Beginning of year

  49,834,547    54,832,744    57,949,449  
 

 

 

  

 

 

  

 

 

 

End of year

  43,095,163   $49,834,547   $54,832,744  
 

 

 

  

 

 

  

 

 

 

Supplemental disclosure of cash flow information:

   

Income taxes paid

 $186,000   $221,000   $1,304,000  
 

 

 

  

 

 

  

 

 

 

Supplemental schedule of noncash investing activities:

   

Construction in progress included in accrued expenses

 $469,000   $1,194,000   $124,058  
 

 

 

  

 

 

  

 

 

 

STOCKHOLDERS’ EQUITY

 Common Stock 
Additional
Paid-in
Capital
 
Treasury
Stock
 
Accumulated
Other
Comprehensive
Income
 
Accumulated
Deficit
 
Total Kopin
Corporation
Stockholders’
Equity
 
Noncontrolling
interest
 
Total
Stockholders’
Equity
 Shares Amount 
Balance December 25, 201072,570,835
 $725,708
 $313,311,889
 $(26,580,823) $5,985,345
 $(127,711,030) $165,731,089
 $4,778,034
 $170,509,123
Exercise of stock options19,700
 197
 72,248
 —
 —
 —
 72,445
 —
 72,445
Vesting of restricted stock897,953
 8,980
 (8,980) —
 —
 —
 —
 —
 —
Stock based compensation expense—
 —
 3,361,948
 —
 —
 —
 3,361,948
 —
 3,361,948
Other comprehensive loss—
 —
 —
 —
 (1,839,321) —
 (1,839,321) (247,818) (2,087,139)
Restricted stock for tax withholding obligations(262,230) (2,622) (1,026,945) —
 —
 —
 (1,029,567) —
 (1,029,567)
Treasury stock purchase—
 —
 —
 (4,414,626) —
 —
 (4,414,626) —
 (4,414,626)
Net income—
 —
 —
 —
 —
 3,079,364
 3,079,364
 605,207
 3,684,571
Balance December 31, 201173,226,258
 732,263
 315,710,160
 (30,995,449) 4,146,024
 (124,631,666) 164,961,332
 5,135,423
 170,096,756
Exercise of stock options

 

 

 $—
 $—
 $—
 $—
 $—
 $—
Vesting of restricted stock671,568
 6,716
 (6,716) —
 —
 —
 —
 —
 —
Stock based compensation expense—
 —
 3,851,672
 —
 —
 —
 3,851,672
 —
 3,851,672
Other comprehensive income—
 —
 —
 —
 2,366,768
 —
 2,366,768
 465,110
 2,831,878
Foreign currency translation adjustments—
 —
 —
 —
 

 —
 

 —
 —
Acquisition of Ikanos equity interest—
 —
 —
 —
 —
 —
 —
 1,384,039
 1,384,039
Restricted stock for tax withholding obligations(201,182) (2,013) (626,621) —
 —
 —
 (628,634) —
 (628,634)
Treasury stock purchase—
 —
 —
 (3,455,529) —
 —
 (3,455,529) —
 (3,455,529)
Net loss—
 —
 —
 —
 —
 (18,361,930) (18,361,930) (632,342) (18,994,272)
Balance, December 29, 201273,696,644
 $736,966
 $318,928,495
 $(34,450,978) $6,512,792
 $(142,993,595) $148,733,680
 $6,352,230
 $155,085,910
Vesting of restricted stock1,216,900
 12,169
 (12,169) —
 —
 —
 —
 —
 —
Stock based compensation expense—
 —
 3,804,408
 —
 —
 —
 3,804,408
 —
 3,804,408
Other comprehensive loss—
 —
 —
 —
 (1,845,466) —
 (1,845,466) 24,532
 (1,820,934)
Sale of III-V product line—
 —
 —
 —
 (1,580,629) —
 (1,580,629) (2,673,051) (4,253,680)
Acquisition of eMDT—
 —
 —
 —
 —
 —
 —
 200,198
 200,198
Acquisition of noncontrolling interest in Kowon—
 —
 (1,020,130) —
 355,300
 —
 (664,830) (2,997,570) (3,662,400)
Restricted stock for tax withholding obligations(320,061) (3,200) (1,189,146) —
 —
 —
 (1,192,346) —
 (1,192,346)
Treasury stock purchase—
 —
 —
 (7,991,954) —
 —
 (7,991,954) —
 (7,991,954)
Net loss—
 —
 —
 —
 —
 (4,709,616) (4,709,616) (896,400) (5,606,016)
Balance, December 28, 201374,593,483
 $745,935
 $320,511,458
 $(42,442,932) $3,441,997
 $(147,703,211) $134,553,247
 $9,939
 $134,563,186
See Accompanying Notes to Consolidated Financial Statements.

58


48



KOPIN CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal year ended2013 2012 2011
Cash flows from operating activities:     
Net (loss) income$(5,606,016) $(18,994,272) $3,684,571
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:     
Depreciation and amortization3,646,725
 9,111,943
 8,598,672
Accretion (amortization) of premium or discount on marketable debt securities360,403
 (287,439) (152,665)
Stock-based compensation4,203,408
 4,486,990
 3,923,628
Net gain on investment transactions(1,899,291) (856,170) (368,641)
Losses in unconsolidated affiliates625,098
 679,587
 296,451
Impairment on marketable debt securities—
 —
 150,644
Impairment of intangible assets and goodwill1,511,414
 1,704,770
 4,999,512
Gain on sale of III-V product line(33,452,176) —
 —
Release of valuation allowance on deferred tax assets—
 —
 (4,266,000)
Deferred income taxes252,687
 2,162,246
 —
Foreign currency losses341,590
 1,236,194
 14,150
Loss on remeasurement of investment in Ikanos—
 557,594
 —
Impairment of investments5,000,442
 —
 —
Change in allowance for bad debt(107,694) (129,370) (224,644)
Other non-cash items733,428
 402,938
 379,246
Changes in assets and liabilities:     
Accounts receivable4,853,073
 4,363,447
 256,190
Inventory2,262,547
 3,466,568
 993,328
Prepaid expenses and other current assets(179,858) 126,580
 1,055,482
Accounts payable and accrued expenses(773,471) (2,996,339) 655,611
Billings in excess of revenue earned(672,714) (1,247,066) (743,434)
Net cash (used in) provided by operating activities(18,900,405) 3,788,201
 19,252,101
Cash flows from investing activities:     
Proceeds from sale of marketable debt securities17,130,488
 37,305,871
 40,732,353
Purchase of marketable debt securities(49,329,891) (39,853,837) (42,345,935)
Proceeds from sale of III-V product line55,188,020
 —
 —
Cash included in current assets held for sale—
 (2,388,812) —
Cash paid to acquire Ikanos, net of cash acquired—
 93,872
 —
Cash paid to acquire eMDT, net of cash acquired211,484
 —
 —
Cash paid to acquire FDD, net of cash acquired—
 94,351
 (10,084,307)
Purchases of cost based investment(3,583,611) (2,249,784) (1,980,609)
Proceeds from sale of investments2,597,289
 856,170
 392,196
Other assets(10,552) 43,564
 16,906
Capital expenditures(741,543) (9,831,967) (7,132,371)
Net cash provided by (used in) investing activities21,461,684
 (15,930,572) (20,401,767)
Cash flows from financing activities:     
Treasury stock purchases(7,991,954) (3,455,529) (4,414,626)
Purchase of noncontrolling interest in Kowon(3,662,400) —
 —
Settlements of restricted stock for tax withholding obligations(1,192,346) (628,634) (1,029,567)
Proceeds from exercise of stock options—
 —
 72,445
Net cash used in financing activities(12,846,700) (4,084,163) (5,371,748)
Effect of exchange rate changes on cash(93,300) 266,758
 (217,970)
Net decrease in cash and equivalents(10,378,721) (15,959,776) (6,739,384)
Cash and equivalents:     
Beginning of year27,135,387
 43,095,163
 49,834,547
End of year$16,756,666
 $27,135,387
 $43,095,163
Supplemental disclosure of cash flow information:     
Income taxes paid$95,000
 $75,000
 $186,000
Supplemental schedule of noncash investing activities:     
Construction in progress included in accrued expenses$105,000
 $360,000
 $469,000
Non-cash proceeds from sale of III-V product line$14,866,000
 $—
 $—
See Accompanying Notes to Consolidated Financial Statements.


49


KOPIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.    Summary of Significant Accounting Policies

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America 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.

Fiscal Year

The Company’s fiscal year ends on the last Saturday in December. The fiscal years ended December 28, 2013 and December 29, 2012 include 52 weeks, and the fiscal year ended December 31, 2011 includes 53 weeks, the fiscal years ended December 25, 2010 and December 26, 2009 each include 52 weeks, and are referred to as fiscal years 2011, 20102013, 2012 and 2009,2011, respectively, herein.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries, a majority owned (78%)93% subsidiary, Kowon Technology Co., Ltd. (Kowon), located in Korea, a majority owned (58)% subsidiary, Ikanos Consulting Ltd. (Ikanos), located in the United Kingdom, and a majority owned (90%)(51)% subsidiary, Kopin Taiwan Corporation (KTC)eMDT America Inc (eMDT), located in TaiwanCalifornia (collectively the “Company”)Company). All inter-companyintercompany transactions and balances have been eliminated. Amounts of Kowon, Ikanos and KTCeMDT not attributable to the Company are referred to as noncontrolling interests in the consolidated statements of operations. Investmentoperations and consolidated statements of comprehensive (loss) income. Investments in business entities in which the Company does not have control but has the ability to exercise significant influence over operating and financial policies are accounted for by the equity method.

In 2013, the Company paid approximately $3.7 million to acquire an additional 15% ownership in its Kowon subsidiary which raised its ownership from 78% to 93%. The Company ceased its production activities at its Kowon facility in 2013 but as of December 28, 2013, the closure of this facility did not meet the criteria for assets held for sale.
Revenue Recognition

The Company recognizes revenue if four basic criteria have been met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred and services rendered; (3) the price to the buyer is fixed or determinable; and (4) collectability is reasonably assured. The Company does not recognize revenue for products prior to customer acceptance unless it believes the product meets all customer specifications and the Company has a history of consistently achieving customer acceptance of the product. Provisions for product returns and allowances are recorded in the same period as the related revenues. The Company analyzes historical returns, current economic trends and changes in customer demand and acceptance of product when evaluating the adequacy of sales returns and other allowances. Certain product sales are made to distributors under agreements allowing for a limited right of return on unsold products. Sales to distributors are primarily made for sales to the distributor’s customers and not for their stocking of inventory. The Company delays revenue recognition for its estimate of distributor claims of right of return on unsold products based upon its historical experience with the Company’s products and specific analysis of amounts subject to return based upon discussions with the Company’s distributors or their customers.

The Company recognizes revenues from long-term research and development contracts on the percentage-of-completion method of accounting as work is performed, based upon the ratio of costs or hours already incurred to the estimated total cost of completion or hours of work to be performed. Revenue recognized at any point in time is limited to the amount funded by the U.S. government or contracting entity. The Company accounts for product development and research contracts that have established prices for distinct phases as if each phase were a separate contract. In some instances, the Company is contracted to create a deliverable which is anticipated to be qualified and go into full rate production stages. In those cases, the revenue recognition methodology will change from the percentage of completion method to the units-of-delivery method as new contracts are received after formal qualification has been completed.

59

KOPIN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The Company classifies amounts earned on contracts in progress that are in excess of amounts billed as unbilled receivables and classifies amounts received in excess of amounts earned as billings in excess of revenues earned. The Company invoices based on dates specified in the related agreement or in periodic installments based upon its invoicing cycle. The Company recognizes the entire amount of an estimated ultimate loss in its financial statements at the time the loss on a contract becomes known.

Research and Development Costs


50
KOPIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Research and development expenses are incurred in support of internal display and III-V product development programs or programs funded by agencies or prime contractors of the U.S. government and commercial partners. Research and development costs include staffing, purchases of materials and laboratory supplies, circuit design costs, fabrication and packaging of experimental display products, and overhead, and are expensed immediately.

Cash and Equivalents and Marketable Securities

The Company considers all highly liquid, short-term debt instruments with original maturities of three months or less to be cash equivalents.

Marketable debt securities consist primarily of commercial paper, medium-term corporate notes, and United States government and agency backed securities. The Company classifies these marketable debt securities as available-for-sale at fair value in “Marketable Securities.debt securities, at fair value.” TheIn fiscal year 2013, the investment in Vuzix Corporation (Vuzix) was included in "Other Assets" as available-for-sale and at fair value. In fiscal year 2012, the investments in Advanced Wireless Semiconductor Company (AWSC) and WIN Semiconductor Corp. (WIN) arewere included in “Other Assets”assets” as available-for-sale and at fair value.value and these securities were sold in 2013. The Company records the amortization of premium and accretion of discounts on marketable debt securities in the results of operations.

The Company uses the specific identification method as a basis for determining cost and calculating realized gains and losses with respect to marketable debt securities. The gross gains and losses realized related to sales of marketable debt securities were not material during fiscal years 2011, 20102013, 2012 and 2009.

2011.

Inventory

Inventory is stated at the lower of cost (determined on the first-in, first-out or specific identification method) or market and consists of the following at December 31, 201128, 2013 and December 25, 2010:

   2011   2010 

Raw materials

  $9,934,724    $10,775,935  

Work-in-process

   5,220,353     4,159,064  

Finished goods

   6,260,440     6,527,872  
  

 

 

   

 

 

 
  $21,415,517    $21,462,871  
  

 

 

   

 

 

 

Inventory on consignment at customer locations was $3.9 million and $4.4 million at December 31, 2011 and December 25, 2010, respectively. Included in prepaid expenses and other current assets is a deposit of $0.4 million for raw materials in advance of delivery.

29, 2012:

 2013 2012
Raw materials$1,441,569
 $2,540,497
Work-in-process1,003,540
 1,880,202
Finished goods632,946
 1,369,054
 $3,078,055
 $5,789,753
Property, plant and equipment

Property, plant and equipment are recorded at cost. Depreciation and amortization are provided using the straight-line method over the estimated useful lives of the assets, generally 3 to 10 years.years. Leasehold

60

KOPIN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

improvements and leased equipment are amortized over the shorter of the term of the lease or the useful life of the improvement or equipment. As discussed below, obligations for asset retirement are accrued at the time property, plant and equipment is initially purchased or as such obligations are generated from use.


Intangible assets

Intangible assets include patents, customer relationships, developed technology and trademarks. Customer relationships represent the fair value of the underlying relationships with customers. Developed technology represents the fair value of technology as it exists in current products and has value through its continued use or reuse. The trademark represents the brand and name recognition associated with the marketing of products and was determined to have a finite life.
Identifiable intangible assets are amortized using the straight-line method over the estimated useful lives of the assets, generally three to seven years.

Product Warranty

The Company generally sells products with a limited warranty of product quality and a limited indemnification of customers against intellectual property infringement claims related to the Company’s products. The Company accrues for known warranty and indemnification issues if a loss is probable and can be reasonably estimated, and accrues for estimated incurred but unidentified issues based on historical activity. As of December 31, 201128, 2013 and December 25, 2010,29, 2012, the Company had warranty reserves of $1.3 million.$0.7 million. For the fiscal years 2011, 20102013, 2012 and 20092011 warranty claims and reversals were approximately $1.4$0.8 million $0.8, $2.2 million and $1.2$1.4 million, respectively.


51
KOPIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Asset Retirement Obligations

The Company recorded asset retirement obligations (ARO) liabilities of $1.3$0.3 million at December 28, 2013 and $0.9 million at December 31, 2011 and December 25, 2010,29, 2012, respectively. This represents the legal obligations associated with retirement of the Company’s assets when the timing and/or method of settling the obligation are conditional on a future event that may or may not be within the control of the Company. The Company also recorded accumulated depreciation charges of $0.6 million and $0.6 million, at December 31, 2011 and December 25, 2010, respectively, which represents the cumulative amortization of the capitalized long-lived asset associated with this obligation. The Company estimated the ARO using a discounted cash flow model that considered the Company’s cost of capital as well as increases in costs prior to settlement of the obligations and considered the probability that performance would be required.

   2011   2010 

Asset retirement obligation as of December 25, 2010

  $944,617    $903,133  

Additions liabilities incurred

   309,119    —    

Accretion

   41,934     —    
  

 

 

   

 

 

 

Asset retirement obligation as of December 31, 2011

  $1,295,670    $944,617  
  

 

 

   

 

 

 

 2013 2012
Beginning balance$322,477
 $1,295,670
Additions—
 32,360
Charges—
 (424,785)
Accretion and exchange rate change6,958
 43,211
Reclassified to noncurrent liabilities held for sale—
 (623,979)
Ending balance$329,435
 $322,477
Income Taxes

The consolidated financial statements reflect provisions for federal, state, local and foreign income taxes. The Company recognizes deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis, as well as operating loss and tax credit carryforwards. The Company measures deferred tax assets and liabilities using enacted tax rates expected to apply to taxable income in the years in which those temporary differences and carryforwards are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company provides valuation allowances if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.

Taiwan tax law requires a 10% tax on unappropriated earnings of the Company’s subsidiary KTC. The Company records this tax in the year the earnings are recorded.

61

KOPIN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


Foreign Currency

Assets and liabilities of non-U.S. operations where the functional currency is other than the U.S. dollar are translated from the functional currency into U.S. dollars at year end exchange rates, and revenues and expenses at average rates prevailing during the year. Resulting translation adjustments are accumulated as part of accumulated other comprehensive income. Transaction gains or losses are recognized in income or loss in the period in which they occur.

Net (Loss) Income Per Share

Basic net (loss) income per share is computed using the weighted-average number of shares of common stock outstanding during the period less any unvested restricted shares. Diluted earnings per common share is calculated using weighted-average shares outstanding and contingently issuable shares, less weighted-average shares reacquired during the period. The net outstanding shares are adjusted for the dilutive effect of shares issuable upon the assumed conversion of the Company’s common stock equivalents, which consist of outstanding stock options and unvested restricted stock units.

stock.

Weighted-average common shares outstanding used to calculate earnings per share, is as follows:

   2011   2010   2009 

Weighted-average common shares outstanding—basic

   64,405,776     66,019,847     66,849,890  

Stock options and nonvested restricted common stock

   828,436     691,654     607,861  
  

 

 

   

 

 

   

 

 

 

Weighted-average common shares outstanding—diluted

   65,234,212     66,711,501     67,457,751  
  

 

 

   

 

 

   

 

 

 

 2013 2012 2011
Weighted-average common shares outstanding—basic62,347,852
 63,617,680
 64,405,776
Stock options and nonvested restricted common stock—
 —
 828,436
Weighted-average common shares outstanding—diluted62,347,852
 63,617,680
 65,234,212
The following were not included in weighted-average common shares outstanding- diluted because they are anti-dilutive.

   2011   2010   2009 

Nonvested restricted common stock

   613,934     229,159     419,213  

Stock options

   1,561,925     2,544,411     3,953,387  
  

 

 

   

 

 

   

 

 

 

Total

   2,175,859     2,773,570     4,372,600  
  

 

 

   

 

 

   

 

 

 

anti-dilutive or performance conditions have not been met at the end of the period.

 2013 2012 2011
Nonvested restricted common stock3,024,148
 2,283,048
 613,934
Stock options558,850
 983,680
 1,561,925
Total3,582,998
 3,266,728
 2,175,859

52
KOPIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentration of credit risk other than marketable securities consist principally of trade accounts receivable and the note receivable from IQE, plc. Trade receivables are primarily derived from sales to manufacturers of consumer electronic devices and wireless components or military applications.
The Company primarily invests its excess cash in government backed and corporate financial instruments that management believes to be of high credit worthiness, which bear lower levels of relative credit risk. The Company relies on rating agencies to ascertain the credit worthiness of its marketable securities and, where applicable, guarantees by the Federal Deposit Insurance Company. The Company sells its products to customers worldwide and generally does not require collateral. The Company maintains a reserve for potential credit losses.

Fair Value of Financial Instruments

Financial instruments consist of current assets (except inventories, income tax receivables and prepaid assets) and certain current liabilities. Current assets (excluding marketable securities which are recorded at fair value) and current liabilities are carried at cost, which approximates fair value.

Stock-Based Compensation

The fair value of stock option awards is estimated on the date of grant using the Black-Scholes-Merton option-pricing model. There were no stock options granted in fiscal years 2011, 20102013, 2012 or 2009.

62

KOPIN CORPORATION2011

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued).

The fair value of nonvested restricted common stock awards is generally the market value of the Company’s equity shares on the date of grant. The nonvested restricted common stock awards require the employee to fulfill certain obligations, including remaining employed by the Company for one, two or four years (the vesting period) and in certain cases also require meeting either performance criteria or the Company’s stock achieving a certain price. The performance criteria primarily consist of the achievement of the Company’s annual incentive plan goals. For nonvested restricted common stock awards which solely require the recipient to remain employed with the Company, the stock compensation expense is amortized over the anticipated service period. For nonvested restricted common stock awards which require the achievement of performance criteria, the Company reviews the probability of achieving the performance goals on a periodic basis. If the Company determines that it is probable that the performance criteria will be achieved, the amount of compensation cost derived for the performance goal is amortized over the service period. If the performance criteria are not met, no compensation cost is recognized and any previously recognized compensation cost is reversed. The Company recognizes compensation costs on a straight-line basis over the requisite service period for time vested awards.


In 2011,2013, the Company granted compensation awards to its Chief Executive Officer that consisted of a granttwo grants of 260,000150,000 shares of restricted stock and a granteach. One of 380,000 shares of phantom stock to be settled in cash. The 260,000 shares of restricted stock and the 380,000 shares of phantom stockgrants will vest at the end of the first 10 consecutive trading day period following the grant date during which the Company’s common stock trades at a price per share equal to or greater than $5.25,$6.00. The other award will vest at the end of the first 10 consecutive trading day period following the grant date during which the Company’s common stock trades at a price per share equal to or greater than $7.00. In 2011, the Company granted compensation awards to its Chief Executive Officer that consisted of a grant of 260,000 shares of restricted stock and a grant of 380,000 shares of phantom stock to be settled in cash. The 260,000 shares of restricted stock and the 380,000 shares of phantom stock will vest at the end of the first 10 consecutive trading day period following the grant date during which the Company’s common stock trades at a price per share equal to or greater than $5.25, prior to September 12, 2016.2016. The vesting of the awards upon achieving a closing stock price of $6.00, $7.00 and $5.25 for 10 consecutive days is considered a market condition. The accounting for the 150,000, 150,000 and 260,000 shares requires that the fair market value of the shares is determineto be determined on the grant day and then this fair market value is expensed straight-line over the derived service period. The accounting for the phantom stock award requires the Company to periodically assess the fair market value of the award, with increases or decrease in the fair market value being reflected in the statementstatements of operations.

In 2013, the Company granted a compensation award to its Chief Executive Officer that consisted of a grant of 300,000 shares of restricted stock that will vest upon the Company shipping 50,000 units of a new display. The fair market valuecompensation cost of the awardsthis award will be expensedrecognized over a derived service period currently estimated to be approximately 12 months. However, if the market condition occurs before the estimated service period of 12 months or if there are material changes in the underlying data used in the fair market valuation, the fair market valuation may increase or decrease and the period over which the fair market valuation is recognized inCompany ships the statementdisplays. As of operations may increase or decrease.

December 28, 2013, these awards were not yet earned and no compensation expense has been recorded.

Comprehensive (Loss) Income

Comprehensive (loss) income is the total of net income and all other non-owner changes in equity including such items as unrealized holding (losses) gains (losses) on marketable equity and debt securities classified as available-for-sale and foreign currency translation adjustments.


53
KOPIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


The components of accumulated other comprehensive income (loss) isare as follows:

   Cumulative
Translation
Adjustment		  Unrealized��Holding
(Loss) Gain on
Marketable
Securities		  Non-Credit
Related
Losses on
Investments		  Accumulated Other
Comprehensive
Income (Loss)		 

Balance as of December 27, 2008

  $(766,082)  $597,779   $—     $(168,303) 

Changes during year

   1,320,443    4,442,850    (1,038,177)   4,725,116  
  

 

 

  

 

 

  

 

 

  

 

 

 

Balance as of December 26, 2009

   554,361    5,040,629    (1,038,177)   4,556,813  

Changes during year

   1,886,520    (1,243,327)   785,339    1,428,532  
  

 

 

  

 

 

  

 

 

  

 

 

 

Balance as of December 25, 2010

   2,440,881    3,797,302    (252,838)   5,985,345  

Changes during year

   (1,121,011)   (971,148)   252,838    (1,839,321) 
  

 

 

  

 

 

  

 

 

  

 

 

 

Balance as of December 31, 2011

  $1,319,870   $2,826,154   $—     $4,146,024  
  

 

 

  

 

 

  

 

 

  

 

 

 

63

KOPIN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 
Cumulative
Translation
Adjustment
 
Unrealized Holding
(Loss) Gain on
Marketable
Securities
 
Non-Credit
Related
Losses on
Investments
 
Accumulated Other
Comprehensive
Income (Loss)
Balance as of December 25, 2010$2,440,881
 $3,797,302
 $(252,838) $5,985,345
Changes during year(1,121,011) (971,148) 252,838
 (1,839,321)
Balance as of December 31, 20111,319,870
 2,826,154
 —
 4,146,024
Changes during year2,222,234
 144,534
 —
 2,366,768
Balance as of December 29, 20123,542,104
 2,970,688
 —
 6,512,792
Changes during year(1,017,403) (2,053,392) —
 (3,070,795)
Balance as of December 28, 2013$2,524,701
 $917,296
 $—
 $3,441,997

Assets Held for Sale
Assets and liabilities held for sale as of December 29, 2012 pertain to applicable assets and liabilities of the Company's III-V product line and its investment in Kopin Taiwan Corporation. The Company finalized the sale on January 16, 2013.

Impairment of Long-Lived Assets

The Company periodically reviews the carrying value of our long-lived assets to determine if facts and circumstances suggest that they may be impaired or that the amortization or depreciation period may need to be changed. The carrying value of a long-lived asset is considered impaired when the anticipated identifiable undiscounted cash flows from such asset are less than its carrying value. For assets that are to be held and used, impairment is measured based upon the amount by which the carrying amount of the asset exceeds its fair value. The carrying value of the Company’s long-lived assets was $32.4$6.0 million at December 31, 2011.

28, 2013.

Recently Adopted Accounting Pronouncements

Intangibles, Goodwill and Other

Statement of Comprehensive Income
In December 2010 and September 2011,February 2013, the FASBFinancial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.  ASU 2010-28 and ASU 2011-08Intangibles—Goodwill and Other, respectively, which both modifyNo. 2013-02 requires an entity to provide information about the annual goodwill impairment testing procedures. ASU 2010-28 focusesamounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the carrying amount of goodwill for purposes of performing step oneface of the goodwill test andstatement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under United States Generally Accepted Accounting Principles (U.S. GAAP) to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail about those amounts. ASU 2011-08 focuses on allowing entities the ability to first assess the qualitative factors to determine whether itNo. 2013-02 is necessary to perform the two-step quantitative goodwill impairment test. Both of these updates are effective for annual and interim reporting periods beginning after December 15, 2011 and early adoption is permitted. ASU 2010-28 requires retrospective application.2012. The Company elected not to early adopt either of these updates and does not expect the adoption will have a material impactadopted this ASU on its goodwill impairment calculation, financial position or results of operations.

Fair Value Measurement

In May 2011, the FASB issued ASU-2011-04Fair Value Measurement that modifies the fair value measurements and disclosure requirements in U.S. GAAP and IFRS. This newly issued accounting standard clarifies the application of certain existing fair value measurement guidance and expands the disclosures for fair value measurements that are estimated using significant unobservable inputs. This guidance is effective on a prospective basis for annual and interim reporting periods beginning after December 15, 2011. The Company does not expect that adoption of this standard will have a material30, 2012 with no impact on its financial position or results of operations.statements.

Statement of Comprehensive Income


In June 2011,During the FASB issued ASU 2011-05Statement of Comprehensive Income which (1) eliminatestwelve months ended December 28, 2013, the option to presentchange in the components ofCompany's accumulated other comprehensive income as partwas the net of $0.2 million cumulative translation adjustment, $(0.1) million unrealized holding losses on marketable securities, $(1.9) million of reclassified holding gains, $(1.6) million related to the sale of its III-V product line and $0.4 million million related to its acquisition of additional noncontrolling interest in Kowon.
2. Discontinued Operations
On January 16, 2013, (the Closing Date), the Company sold its III-V product line, including all of the statement of changesoutstanding equity interest in stockholders’ equity; (2) requires the consecutive presentationKTC Wireless, LLC, a wholly owned subsidiary of the statementCompany that held the Company's investment in KTC, to IQE KC, LLC (IQE) and IQE plc (Parent, and collectively with IQE, the Buyer) pursuant to a Purchase Agreement (the Purchase Agreement) entered into on January 10, 2013 for an aggregate purchase price of net incomeapproximately $75 million, subject to certain adjustments, including working capital adjustments and other comprehensive income;escrow (the Sale). After adjustments for working capital items the final purchase price was $70.2 million of which $55.2 million was paid to the Company in 2013 and (3) requires an entity to present reclassification adjustments on the face of the financial statements from other comprehensive income to net income. The FASB has deferred the third requirement under this ASU. This amendment does not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income nor does this amendment affect how earnings per share is calculated or presented. This guidance is required to be applied retrospectively and is effective for fiscal years and interim periods beginning after December 15, 2011. The Company does not expect that adoption of this standardremaining $15 million will have a material impact on its financial position or results of operations.

64


54

KOPIN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

be paid to the Company on the third anniversary of the Closing Date. Payment of the

2.$15 million was recorded at its estimated discount value of $14.8 million and is secured by liens on certain assets of the business sold.

The operating results of the III-V product line prior to the sale are reported within Income from discontinued operations, net of tax, in the consolidated statement of operations and have been excluded from segment results. The assets and liabilities associated with the III-V product line are presented in current assets held for sale, noncurrent assets held for sale, current liabilities held for sale and noncurrent liabilities held for sale in the Consolidated Balance Sheet as of December 29, 2012.
The following table summarizes the results from discontinued operations:
 Fiscal Years Ended (in millions)
 December 28, 2013 December 29, 2012 December 31, 2011
Net product and research and development revenues$2.3
 $58.8
 $66.5
(Loss) gain from discontinued operations before income taxes(0.2) 4.5
 5.9
(Provision) benefit for income taxes on discontinued operations—
 (1.7) 3.8
Discontinued operations, net of tax(0.2) 2.8
 9.7
Gain on sale, net of $13.1 million of tax20.4
 —
 —
Income from discontinued operations, net of tax$20.2
  $2.8
 $9.7

The following table summarizes the assets and the liabilities held for sale in the Company's consolidated balance sheet as of December 29, 2012:

  (in millions)
Current assets   
     Cash and equivalents $2.4
     Accounts receivable, net of allowance of $0.1 million  7.6
     Accounts receivable from unconsolidated affiliates 0.6
     Inventory  10.6
     Prepaid taxes 0.2
     Prepaid expenses and other current assets  0.2
           Total current assets held for sale  21.6
Property, plant and equipment, net 25.7
Deferred tax assets 3.3
Other assets 0.1
           Total noncurrent assets held for sale  29.1
           Total assets held for sale $50.7
Current liabilities   
     Accounts payable $3.7
     Accrued payroll and expenses 1.8
     Accrued warranty 0.2
     Other accrued liabilities 1.4
           Total current liabilities held for sale  $7.1
Total noncurrent liabilities held for sale $0.6


3.    Property, Plant and Equipment

Property, plant and equipment consisted of the following at December 31, 201128, 2013 and December 25, 2010:

   Useful Life  2011  2010 

Land

    $831,387   $867,573  

Buildings

  10 years   5,773,270    5,106,251  

Equipment

  3-5 years   68,794,841    48,225,704  

Leasehold improvements

  Life of the lease   15,263,804    14,357,251  

Furniture and fixtures

  3 years   400,304    404,143  

Equipment under construction

     1,889,396    16,536,645  
    

 

 

  

 

 

 
     92,953,002    85,497,567  

Accumulated depreciation and amortization

     (60,583,561)   (52,883,606) 
    

 

 

  

 

 

 
    $32,369,441   $32,613,961  
    

 

 

  

 

 

 

29, 2012:


55
KOPIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 Useful Life 2013 2012
Land  $915,595
 $901,934
Buildings10 years 2,398,188
 2,424,152
Equipment3-5 years 20,993,220
 23,219,534
Leasehold improvementsLife of the lease 3,441,553
 11,157,960
Furniture and fixtures3 years 910,270
 783,030
Equipment under construction  623,503
 1,673,390
   29,282,329
 40,160,000
Accumulated depreciation and amortization  (23,247,366) (31,673,594)
Net property, plant and equipment  $6,034,963
 $8,486,406
There were no material gains or losses on disposals of long-lived assets in fiscal years 2011, 20102013, 2012 and 2009.2011. Depreciation expense for the fiscal years 2011, 20102013, 2012 and 20092011 was approximately $7,934,000, $6,565,000$2.4 million, $3.5 million and $5,991,000$3.8 million, respectively.

3.

4.    Other Assets and Amounts Due To / Due From Affiliates

Note Receivable

Other assets consist of the following as of December 31, 201128, 2013 and December 25, 2010:

   2011   2010 

Marketable Equity Securities

    

AWSC.

  $1,602,096    $4,001,937  

WIN

   1,709,189     —    

Non-Marketable Securities—Equity Method Investments

    

KoBrite

   2,401,669     2,698,120  

Non-Marketable Securities-Cost Based Investments

   1,980,609     —    

Other

   252,525     157,618  
  

 

 

   

 

 

 
  $7,946,087    $6,857,675  
  

 

 

   

 

 

 

29, 2012:

 2013 2012
Marketable Equity Securities   
AWSC$—
 $1,764,657
WIN—
 1,410,388
        Vuzix Corporation1,433,102
 —
Non-Marketable Securities—Equity Method Investments   
KoBrite1,421,592
 1,828,404
Non-Marketable Securities-Cost Based Investments—
 3,485,394
Other169,764
 119,039
 $3,024,458
 $8,607,882
Marketable Equity Securities

As of December 31, 201128, 2013, the Company had an investment in Vuzix with a fair market value of $1.4 million and an adjusted cost basis of $0. In 2013, the Company sold its investments in Advanced Wireless Semiconductor Company (AWSC) and WIN Semiconductor Corp. (WIN) for $1.2 million and $1.4 million, respectively, and recorded a gain on the sale of the investments of $1.9 million. As of December 25, 201029, 2012, the Company had an investment in WIN, with a fair market value of $1.4 million and an adjusted cost basis of $0. In the twelve month period ended December 29, 2012 the Company sold 500,000 shares of WIN and recorded a gain of $0.9 million. As of December 29, 2012, the Company had an investment in AWSC, with a fair market value of $1.6$1.8 million and $4.0 million, respectively and an adjusted cost basis of $0.7 million and $0.7 million, respectively. During the second quarter of 2011 the Company sold 300,000 shares of AWSC and recorded a gain of $0.4 million.


The table below shows amounts sold by the Company (revenues) from AWSC:

   2011   2010   2009 

AWSC

  $11,800,000    $14,466,000    $8,641,000  
  

 

 

   

 

 

   

 

 

 

AWSC which are reflected in discontinued operations:

 2013 2012 2011
AWSC$—
 $8,192,000
 $11,800,000
As of December 31, 201129, 2012 the Company was owed $1.1$0.5 million from AWSC and $0.2$0.1 million from other related parties. As of December 25, 2010, the Company was owed $2.6 million from AWSC.

65

KOPIN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

One of the Company’s Directors is a director of AWSC and several directors and officers of Kopin own amounts ranging from 0.1% to 0.5% of the outstanding stock of AWSC.

As of December 31, 2011 the Company had an investment in WIN, with a fair market value of $1.7 million and an adjusted cost basis of $0. In 2011 WIN completed an initial public offering on a Taiwanese stock market. The investment is now classified as an available-for-sale marketable equity security and its fair market value is determined by reference to quoted market prices. The Company had previously written the investment off. As a result of the reclassification as an available for sale marketable security the Company recorded an unrealized gain of $1.7 million in accumulated other comprehensive income.

AWSC and WIN are listed on the Gre Tai stock exchange in Taiwan. The Company determines the fair market value of these investments based on the quoted prices from this exchange.

During the year ended December 25, 2010 the Company sold its investment in Micrel, Inc. for $2.2 million and recorded a gain of $0.7 million and sold shares of AWSC for $1.7 million and recorded a gain of $1.6 million. In addition, in 2010 the Company received and recorded a gain of $0.3 million representing an amount escrowed from the sale of the Company’s Kenet investment in 2008.

Non-Marketable Securities—Equity Method Investments

Equity (losses) gainslosses in unconsolidated affiliates recorded in the consolidated statement of operations are as follows:

   2011  2010  2009 

KoBrite

  $(296,451)  $(600,299)  $(341,219) 

KTC

   —      —      824,276  
  

 

 

  

 

 

  

 

 

 

Total

  $(296,451)  $(600,299)  $483,057  
  

 

 

  

 

 

  

 

 

 


56
KOPIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 2013 2012 2011
KoBrite$(406,811) $(573,265) $(296,451)
Ikanos—
 (106,322) —
Ask Ziggy$(218,287) $—
 $—
Total$(625,098) $(679,587) $(296,451)
The Company has an approximate 12% interest in KoBrite at December 31, 2011.28, 2013. The Company accounts for its interest using the equity method and at December 31, 201128, 2013 the carrying value of the investment was $2.4 million.$1.4 million. KoBrite’s results are recorded one quarter in arrears. One of the Company’s Directors, who is the chairman of KTC,IQE Taiwan, is a member of the Board of Directors of Bright LED, one of the other principal investors of KoBrite.

In

During the yearthree months ended December 27, 2008March 31, 2012, the Company acquired a 25% interest in Ikanos, a private company, for $0.7 million. On July 10, 2012, the Company invested an additional $2.5 million, which increased the Company’s interest in Ikanos to 51%. For the six month period ended June 30, 2012, the Company recorded the results of operation of Ikanos on the equity lossesmethod of approximately $0.8 millionaccounting and commencing in the third quarter of 2012 the Company consolidated Ikanos.
In 2012, the Company acquired a loan loss reserve of approximately $1.2 million in connection with $2.0 million it loaned KTC in fiscal 2008. Subsequent to the close of the July 2009 acquisition of additional equity5% interest in KTC (described in Note 4) the loan was repaida private company Ask Ziggy (AZ), for $1.0 million. In January and in 2009August of 2013, the Company recordedacquired an additional 10% and 5.8% for $900,000 and $700,000, respectively. During the third quarter of 2013, AZ repurchased shares of its common stock from an unrelated third party stockholder and as a gain onresult the loan repaymentCompany now owns approximately 23.0% of approximately $1.2AZ. At December 28, 2013, the Company determined that the AZ investment of $2.5 million was impaired and equity in earningswrote the investment down to $0. The Company has also entered into an agreement to purchase an additional 2.0% of unconsolidated affiliates of approximately $0.8 million.

AZ for $200,000 if certain milestones are achieved.

Summarized financial information for KTC from2011 includes KoBrite for the year ended September 30, 2011. (Kobrite's results are recorded one quarter in arrears). Summarized financial information for 2012 includes Kobrite for the period ended September 30, 2012 and Ikanos, operating results only, for the six month period January 1, 2010 to July 31, 2010 and2012 through June 30, 2012. Summarized financial information for 2013 includes Kobrite for the year ended December 31, 2009September 30, 2013 and for KoBriteAZ for the years ended September 30, 2011, 2010five month period August 1, 2013 through December 28, 2013, and 2009 are as follows:

   2011  2010  2009 

Current assets

  $12,468,000   $8,952,000   $19,378,000  

Non current assets

   15,927,000    15,389,000    18,782,000  

Current liabilities

   5,397,000    9,052,000    12,487,000  

Revenues

   7,938,000    12,288,000    13,573,000  

Margin loss

   (794,000)   (1,316,000)   (389,000) 

Loss from operations

   (2,685,000)   (3,292,000)   (2,793,000) 

Net loss

  $(2,526,000)  $(3,091,000)  $(2,410,000) 

66

 2013 2012 2011
Current assets$7,769,000
 $9,581,000
 $12,468,000
Noncurrent assets10,663,000
 12,701,000
 15,927,000
Current liabilities1,207,000
 1,215,000
 5,397,000
Revenues5,085,000
 6,010,000
 7,938,000
Margin loss(2,501,000) (2,732,000) (794,000)
Loss from operations(6,114,000) (4,938,000) (2,685,000)
Net loss(5,526,000) (5,308,000) (2,526,000)
KOPIN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Non-Marketable Securities—Cost Method Investments

In the fourth quarter of 2011 the Company invested approximately $2.0 million in a private company which makes display related products.

The Company has a loan to a non-officer employee for approximately $140,000$140,000 at December 31, 2011,28, 2013, which is currently due.

During the first quarter of 2013, the Company acquired four patents for $1.8 million and hired the patents' inventor. Upon commencement of employment the Company issued to the employee 400,000 shares of the Company's common stock, of which 100,000 shares were immediately vested and 300,000 shares will vest upon the achievement of certain milestones.
During the twelve months ended December 28, 2013, the Company recorded impairment charges of $2.5 million related to the write-off of a cost based investment.

The Company has entered into agreements to sell certain patents which it is not using and that had a carrying value of $0. The total consideration the Company receives for the sale of the patents is a percentage of any sublicense fees, after expenses, the buyer received. In 2011, 2010 and 2009 the Company recorded $0.2$14.9 million $0.8 million and $6.3 million of income, respectively, which represented the Company’s share of sublicense fees income. The Company does not expect to receive any material additional amounts from the sales of these patents. There is no additional consideration to be received for the patents sold. The Company continues to evaluate the patents in its portfolio for opportunities to moneterize these assets.

4.    Business Combinations

Kopin Taiwan Corp

From Kopin Taiwan Corp’s (KTC) inception in 2002 through July 2009 the Company owned approximately 35% of KTC. In July 2009, the Company purchased 19,572,468 and 128,226 shares of KTC common stock for approximately $5,975,000 and $300,000, respectively, which increased the Company’s ownership to approximately 87%. In 2010, the Company purchased 14,349,809 shares of KTC common stock for approximately $6,150,000 to increase the Company’s ownership to approximately 90%.

The consolidated statements of operations for the periods includes the following amounts which were recorded receivable as a result of the transaction in 2009:

   2009 

Gain on remeasurement of Kopin’s previous investment in KTC

  $599,000  

Repayment of loan by KTC which was previously written-off

   2,012,000  

Reduction in bad debt allowance

   507,000  

In fiscal 2008, the Company recorded allowances for possible bad debts for the excesssale of what KTC owed the Company over what the Company owed KTC. During the nine months ended September 26, 2009 the Company reduced the allowance to $0, resulting in a reduction of selling, generalits III-V product line and administrative expenses of approximately $0.5 million.

Prior to July 2009 the Company recorded its investment in KTC underwhich is due January 16, 2016. The receivable is collateralized by certain assets of the Buyer of III-V product line. The Buyer has outstanding debt and the repayment of the receivable is subject to the Buyer remaining within its debt compliance obligations at the time of repayment.



57
KOPIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

5.    Business Combinations

Ikanos
During the three month period ended March 31, 2012 the Company acquired a 25% interest in Ikanos, a private company, for $0.7 million and accounted for its interest using the equity method of accounting. On July 10, 2012, the Company purchased an additional 70,748 newly issued shares of Ikanos common stock for approximately $2.5 million, from Ikanos (the "Transaction"). As a result of this transaction and had written down the Company's previous investment to $0. in Ikanos, the Company owns approximately 51% of the outstanding stock of Ikanos. The remaining 49% is held by other investors and employees of Ikanos. The Company began consolidating Ikanos on July 1, 2012.

The total purchase price was $2,581,000 and is comprised of
Cash consideration$2,500,000
Fair market value of Kopin's previously held equity method investment in Ikanos81,000
Total purchase price$2,581,000

The purchase price was as follows:
 July 10, 2012 (As initially reported) Measurement period adjustments July 10, 2012 (As adjusted)
Cash and marketable securities$2,594,000
 $—
 $2,594,000
Accounts receivable167,000
 —
 167,000
Property, plant and equipment277,000
 —
 277,000
Customer Relationships—
 400,000
 400,000
Trade name—
 170,000
 170,000
Goodwill1,141,000
 (456,000) 685,000
Other identifiable assets111,000
 —
 111,000
Identifiable liabilities(325,000) (114,000) (439,000)
Noncontrolling interest in Ikanos(1,384,000) —
 (1,384,000)
Total$2,581,000
 $—
 $2,581,000
The Company remeasured and wrote-updecreased its investment in KTCIkanos by approximately $0.6 million$558,000 within the statement of operations which represented the fair market value of the investment immediately prior to the purchaseTransaction.

The results of operations of the sharesIkanos acquisition have been included in the consolidated statements of operations from the time the Company assumed majority ownership, approximately July 2009.

One1, 2012. Ikanos' net loss from operations included in the consolidated results of operation for the Company’s Directors is chairmanyear ended December 29, 2012 was $1.5 million. The transaction related costs associated with the Ikanos acquisition were considered immaterial and are included within selling, general and administrative expense for the fiscal year ended December 29, 2012. The goodwill will not be deductible for tax purposes. In 2013, Ikanos repurchased some of KTCits outstanding common stock and owns approximately 1%the Company increased its ownership of Ikanos to 58%.


eMDT
In April 2013, the Company acquired 51% of the outstanding common stock of KTC. This director is alsoeMDT, a private company, for $400,000. The Company has an employee and stockholder of MTI and is a memberoption to acquire an additional 25% of the BoardCompany for $200,000. In connection with the acquisition, the Company has preliminarily allocated excess purchase price in the amount of Directorsapproximately $400,000 to goodwill.  The Company's has finalized the purchase accounting.

The results of KoBrite.

67

operations of the eMDT acquisition have been included in the consolidated statements of operations from the time the Company assumed majority ownership, approximately April 17, 2013. eMDT's net loss from operations included in the consolidated results of operation for the year ended December 28, 2013 was $0.3 million. The transaction related costs associated with the eMDT acquisition were considered immaterial and are included within selling, general and administrative expense for the fiscal year ended December 28, 2013. The goodwill will not be deductible for tax purposes.



58

KOPIN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Included in


The unaudited pro forma financial results for the Company’s consolidated statement of operations for 2009 is $0.6 million of net income from KTC which represents KTC’sfiscal years ended December 28, 2013 and December 29, 2012 combine the unaudited historical results of operations from July 30, 2009, the date the Company took a controlling interest in KTC, through December 26, 2009.along with the unaudited historical results of Ikanos and eMDT. The following supplementalresults include the effects of unaudited pro forma disclosures are provided for the year ended December 26, 2009 assuming the acquisition of the controlling interest in KTC had occurredadjustments as December 28, 2008if Ikanos and eMDT were acquired on January 1, 2012 (the first day of the Company’s 2009Company's fiscal year)year 2012). All intercompany transactions have been eliminated.

   December 26,
2009		 

Revenues

  $115,114,000  

Net income

   16,629,000  

Forth Dimension Displays

On January 11, 2011,There were no material nonrecurring pro forma adjustments in the Company purchased 100%calculation of revenue or earnings. The pro forma financial results presented below do not include any anticipated synergies or other expected benefits of the outstanding common stockacquisition. These results are presented for informational purposes only and are not necessarily indicative of Forth Dimension Displays Ltd. (FDD) for approximately $11.0 million plus contingent consideration. In addition to the approximate $11.0 million cash paid there were provisions for contingent consideration if certain revenue milestones were met. The revenue milestones were not metfuture operations.


 Twelve Months Ended
 December 28, 2013December 29, 2012
Revenue$23,103,000
$36,142,000
Net Loss(4,670,000)(18,805,000)

6.    Goodwill and no additional consideration was owed. Commencing in the first quarter of 2011, the Company consolidated the financial results of FDD. Accounting standards for business combinations require that an acquiring entity measures and recognizes identifiable assets acquired and liabilities assumed at the acquisition date fair value of the acquired company with limited exceptions.

The 2011 purchase of FDD shares was accounted for as follows:

Cash consideration

  $ 11,000,000 

Contingent consideration

   —    
  

 

 

 

Total purchase price

  $11,000,000  
  

 

 

 

The allocation of the purchase price is as follows:

   Jan 11, 2011
(As adjusted (A))		 

Cash and marketable securities

  $1,000,605  

Accounts receivable

   341,156  

Inventory

   638,331  

Plant and equipment

   1,500,202  

Other identifiable assets

   247,711  

Customer relationships

   3,300,000  

Developed technology

   1,100,000  

Trademark portfolio

   220,000  

Identifiable liabilities

   (1,952,464) 

Goodwill

   4,604,459  
  

 

 

 

Total

  $11,000,000  

(A)At the acquisition date the Company estimated that the contingent consideration would be $1.3 million and during 2011 it revised its estimate to $0.

68

Intangibles


KOPIN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The Company’s goodwill balance is as follows:

Goodwill, December 26, 2010

  $—   

Goodwill from the acquisition of FDD at Jan. 11, 2011

   5,538,491  

Reduction in goodwill as a result of change in contingent consideration

   (934,032) 

Goodwill from the acquisition of FDD at Jan. 11, 2011, as adjusted

   4,604,459  

Impairment of goodwill

   (2,964,114) 

Foreign currency translation

   24,112  
  

 

 

 

Goodwill, December 31, 2011

  $1,664,457  
  

 

 

 

 Fiscal Year Ended
 December 28, 2013 December 29, 2012
Beginning Balance$684,789
 $1,664,457
Acquisition of Ikanos—
 684,789
Acquisition of eMDT395,713
 —
Adjustments(64,370) (1,704,770)
Translation adjustments—
 40,313
Ending Balance$1,016,132
 $684,789
The Company performs impairment tests of goodwill at its reporting unit level. The Company conducts its annual goodwill impairment test on the last day of each fiscal year.

Onyear unless factors indicate that an impairment may have occurred. As of December 28, 2013, the Company performed a qualitative analysis in determining no impairment of the Company's goodwill was indicated. Goodwill is included in the Kopin reportable segment.

At December 28, 2013, the Company performed a review of the FDD intangibles assets and determined that the customer relationships, technology and trademarks were impaired. The Company performed a remeasurement of the fair value of the intangible assets using the income approach and as a result the Company wrote down the value of the intangible assets by $1.2 million in the year ended December 28, 2013. At December 28, 2013, the Company determined that as a result of a change in the strategic direction of Ikanos the value of its customer relationships were impaired and the Company wrote down the value of the intangible assets by $0.3 million.
During the twelve month period ended June 30, 2012, the Company determined that FDD was not achieving the operating results identified in the model that was used to determine the goodwill impairment at December 31, 2011. The Company performed the goodwill impairment test discussed below and determined that the remaining goodwill was impaired and accordingly the Company recorded a $1.7 million goodwill impairment charge in the year ended December 29, 2012. The Company performed its annual goodwill impairment test on Ikanos goodwill using the income approach. At December 29, 2012, no impairment of Ikanos goodwill was indicated.
On December 31, 2011, the Company performed an impairment analysis of its finite-lived intangible assets based on a comparison of the undiscounted cash flows to the recorded carrying value of the intangible assets. This analysis resulted in the determinationAs of December 31, 2011, it was determined that a potential impairment was present. As a result of this analysis, the Company was required to determine the fair value of its finite-lived intangible assets and compare their respective fair values to their carrying values. The fair value of the acquired customer relationships is based on the benefit derived from the incremental revenue and related cash flows as a direct result of the customer relationships. The fair values of the acquired developed technology and trademark portfolio were determined by estimating the royalty expense that would be expected to be paid for the technology and trade name portfolio had they not been owned by the Company using market participant royalty rates and discounting the expected expense that is avoided given the Company’s ownership of these intangible assets. These forecasted cash flows are discounted to present value using an appropriate discount rate. As a result, the carrying values of the finite-lived intangible assets exceeded their fair values and the Company recorded impairments of $1.5$1.5 million related to customer relationships, $0.4$0.4 million related to developed technology, and $57,000$57,000 related to trademark portfolio.

portfolio during the year ended December 29, 2012.

After completing its finite-lived intangible asset impairment test, the Company completed its impairment analysis of the goodwill derived from the FDD acquisition and determined the goodwill was impaired. The Company’s impairment analysis for goodwill consisted of comparing the implied fair value of goodwill to its carrying value as of December 31, 2011. Determining2011. Based on

59
KOPIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

this analysis, during the fair value of goodwill required determining the fair value of the FDD reporting unit using certain assumptions, including the consideration of two generally accepted valuation methodologies: (i) the income approach and (ii) the market approach. The income approach is based upon the present value of the expected income that can be generated through the ownership of the property. The market approach is a process by which the market value estimate is derived analyzing similar assets that have been recently sold or licensed and then comparing them to the subject. The Company concluded that, given the size of FDD and its relatively niche business, the income approach provided the most accurate method of valuation.

Based on this analysis,year ended December 31, 2011, the Company recorded a $3.0 million goodwill impairment charge of $3.0 million, as of and for the year ended December 31, 2011.

2011.

The discount rate used was the value-weighted average of the Company’s estimated cost of equity and debt (“cost of capital”) derived using both known and estimated customary market metrics.

69

KOPIN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The identified intangible assets will be amortized on a straight-line basis over the following lives:

 Years

Customer relationships

7
Developed technology7

Developed technology

Trademark portfolio7

Trademark portfolio

7

The Company recognized $170,000 and $665,000$0.3 million in amortization for the threefiscal years ended December 28, 2013 and twelve monthsDecember 29, 2012, respectively, and $0.7 million for the fiscal year ended December 31, 2011, related to its intangible assets.

Customer relationships represent the fair value of the underlying relationships and agreements with FDD customers. Developed technology represents the fair value of FDD’s technology The estimated aggregate annual amortization expense relating to acquired intangible assets is as it exists in current products and has value through its continued use or reuse. The trademark represents the brand and name recognition associated with the marketing of FDD products and was determined to have a finite life.

The results of operations of the FDD acquisition have been included in the consolidated statements of operations from its acquisition date of January 11, 2011. FDD contributed approximately $4.9 million of net revenue to the consolidated results of operations for the fiscal year ended December 31, 2011. FDD’s net loss from operations included in the consolidated results of operation for the year ended December 31, 2011 was $6.9 million. The transaction related costs associated to the FDD acquisition were considered immaterial and included within selling, general and administrative expense for the fiscal year ended December 31, 2011.

The unaudited pro forma financial results for the fiscal year ended December 25, 2010 combine the unaudited historical results of the Company along with the unaudited historical results of FDD. The results include the effects of unaudited pro forma adjustments as if FDD was acquired on December 27, 2009 (the first day of the Company’s fiscal year 2010). There were no material nonrecurring pro forma adjustments in the calculation of revenue or earnings. The pro forma financial results presented below do not include any anticipated synergies or other expected benefits of the acquisition. The results of operations of FDD for the period January 1, 2011 through January 10, 2011 were immaterial. These results are presented for informational purposes only and are not necessarily indicative of future operations (in thousands, except per share amounts):

   Three Months Ended
December 25, 2010		   Twelve Months Ended
December 25, 2010		 

Revenue

  $34,590,000    $126,049,000  

Net Income

  $4,637,000    $8,497,000  

5.follows.

Fiscal Year ending,Amount
2014$711,324
2015710,422
201694,266
201721,830
201821,830
Thereafter21,830
Total annual amortization expense$1,581,502

7.    Financial Instruments

Fair Value Measurements

Financial

Under accounting guidance, financial instruments are categorized as Level 1, Level 2 or Level 3 based upon the method by which their fair value is computed. An investment is categorized as Level 1 when its fair value is based on unadjusted quoted prices in active markets for identical assets that the Company has the ability to access at the measurement date. An investment is categorized as Level 2 if its fair market value is based on quoted market prices for similar assets in active markets, quoted prices for identical or similar assets in markets that are not active, based on observable inputs such as interest rates, yield curves, or derived from or corroborated by observable market data by correlation or other means. An investment is categorized as Level 3 if its fair value is based on assumptions developed by the Company about what a market participant would use in pricing the assets.

70

The Company’s investments are either held by brokers or in the case of publicly-held corporation, by the Company. The brokers who hold the Company’s investments provide periodic reporting on both the cost and fair value of the securities. The Company performs various procedures to corroborate the fair value provided by the brokers. Debt securities reflected in the table below include investments such as certificates of deposit, commercial paper, corporate bonds, government bonds, and money market fund deposits. When the Company uses observable market prices for identical securities that are traded in less active markets, its debt investments are classified as Level 2. When observable market prices for identical securities are not available, the Company prices our debt investments using non-binding market consensus prices that are corroborated with observable market data; quoted market prices for similar instruments; or pricing models, such as a discounted cash flow model, with all significant inputs derived from or corroborated with observable market data. Non-binding market consensus prices are based on quotes from brokers. The discounted cash flow model uses observable market inputs, such as US treasury-based yield curves.

60

KOPIN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


The following table details the fair value measurements within the fair value hierarchy of the Company’s financial assets:

       Fair Value Measurement at December 31, 2011 Using: 
   Total           Level 1                   Level 2                   Level 3         

Money Markets and Cash Equivalents

  $43,095,163    $43,095,163    $—      $—    

U.S. Government Securities

   32,145,653     12,892,670     19,252,983     —    

Corporate Debt

   18,754,992     —       18,754,992     —    

Certificates of Deposit

   11,422,742     —       11,422,742     —    

WIN Semiconductor Corp.

   1,709,189     1,709,189      

Advanced Wireless Semiconductor Company

   1,602,096     1,602,096     —       —    
  

 

 

   

 

 

   

 

 

   

 

 

 
  $108,729,835    $59,299,118    $49,430,717    $—    
  

 

 

   

 

 

   

 

 

   

 

 

 

       Fair Value Measurement at December 25, 2010 Using: 
   Total           Level 1                   Level 2                   Level 3         

Money Markets and Cash Equivalents

  $49,834,547    $49,834,547    $—      $—    

U.S. Government Securities

   24,194,630     9,806,380     14,388,250    —    

Corporate Debt

   23,212,833     —       23,212,833     —    

Certificates of Deposit

   13,705,380     —       13,705,380    —    

Advanced Wireless Semiconductor Company

   4,001,937     4,001,937     —       —    
  

 

 

   

 

 

   

 

 

   

 

 

 
  $114,949,327    $63,642,864    $51,306,463    $—    
  

 

 

   

 

 

   

 

 

   

 

 

 

   Fair Value Measurement at December 28, 2013 Using:
 Total Level 1         Level 2         Level 3        
Money Markets and Cash Equivalents$16,756,666
 $16,756,666
 $—
 $—
U.S. Government Securities68,284,392
 16,542,003
 51,742,389
 —
Corporate Debt12,984,331
 —
 12,984,331
 —
Certificates of Deposit14,703,812
 —
 14,703,812
 —
Vuzix Corporation1,433,102
 1,433,102
 —
 —
 $114,162,303
 $34,731,771
 $79,430,532
 $—
   Fair Value Measurement at December 29, 2012 Using:
 Total Level 1         Level 2         Level 3        
Money Markets and Cash Equivalents$27,135,387
 $27,135,387
 $—
 $—
U.S. Government Securities38,582,956
 17,576,878
 21,006,078
 —
Corporate Debt11,095,227
 —
 11,095,227
 —
Certificates of Deposit15,671,779
 —
 15,671,779
 —
WIN Semiconductor Corp.1,410,388
 1,410,388
 —
 —
Advanced Wireless Semiconductor Company1,764,657
 1,764,657
 —
 —
 $95,660,394
 $47,887,310
 $47,773,084
 $—
The corporate debt consists of floating rate notes with a maturity that is over multiple years but has interest rates which are reset every three months based on the then current three month London Interbank Offering Rate (3 month Libor). The Company determines the fair market values of these corporate debt instruments through the use of a model which incorporates the 3 month Libor, the credit default swap rate of the issuer and the bid and ask price spread of same or similar investments which are traded on several markets.

The carrying amounts of cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate fair value because of their short term nature. The carrying amount of accrued liabilities is classified as Level 2 in the fair value hierarchy.
Marketable Debt Securities

Investments in available-for-sale marketable debt securities are as follows at December 31, 201128, 2013 and December 25, 2010:

   Amortized Cost   Unrealized Gains   Unrealized Losses  Fair Value 
   2011   2010       2011           2010           2011          2010      2011   2010 

U.S. government and agency backed securities

  $31,480,482    $23,899,218    $665,171    $295,412    $—     $—     $32,145,653    $24,194,630  

Corporate debt and certificates of deposits

   30,879,717     36,949,546     —       —       (701,983)   (31,333)   30,177,734     36,918,213  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

  

 

 

  

 

 

   

 

 

 

Total

  $62,360,199    $60,848,764    $665,171    $295,412    $(701,983)  $(31,333)  $62,323,387    $61,112,843  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

  

 

 

  

 

 

   

 

 

 

71

29, 2012KOPIN CORPORATION:

 Amortized Cost Unrealized Gains Unrealized Losses Fair Value
 2013 2012 2013 2012 2013 2012 2013 2012
U.S. government and agency backed securities$68,970,505
 $38,074,136
 $—
 $508,820
 $(686,113) $—
 $68,284,392
 $38,582,956
Corporate debt and certificates of deposits27,767,513
 27,031,866
 —
 —
 (79,370) (264,860) 27,688,143
 26,767,006
Total$96,738,018
 $65,106,002
 $—
 $508,820
 $(765,483) $(264,860) $95,972,535
 $65,349,962
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The contractual maturity of the Company’s marketable debt securities is as follows at December 31, 2011:

   Less than
One year		   One to
Five years		   Greater than
Five years		   Total 

U.S. government and agency backed securities

  $5,301,740    $25,061,877    $1,782,036   $32,145,653  

Corporate debt and certificates of deposits

   21,089,896     8,405,338     682,500     30,177,734  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $26,391,636    $33,467,215    $2,464,536    $62,323,387  
  

 

 

   

 

 

   

 

 

   

 

 

 

28, 2013:

 
Less than
One year
 
One to
Five years
 
Greater than
Five years
 Total
U.S. government and agency backed securities$12,207,098
 $44,260,888
 $11,816,406
 $68,284,392
Corporate debt and certificates of deposits22,768,523
 3,919,620
 1,000,000
 27,688,143
Total$34,975,621
 $48,180,508
 $12,816,406
 $95,972,535

61
KOPIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Other-than-Temporary Impairments

The Company reviews its marketable debt securities on a quarterly basis for the presence of other-than-temporary impairment (OTTI).

If the Company determines that an OTTI has occurred it further estimates the amount of OTTI resulting from a decline in the credit worthiness of the issuer (credit-related OTTI) and the amount of non credit-related OTTI. Noncredit-related OTTI can be caused by such factors as market illiquidity. Credit-related OTTI is recognized in earnings while noncredit-related OTTI on securities not expected to be sold is recognized in other comprehensive income (OCI). The Company reclassified $1.8 million of noncredit-relateddid not record any OTTI recognized in its earnings prior to March 29, 2009 from retained earnings to accumulated OCI as a cumulative effect adjustment when it adopted a new accounting standard infor the second quarter of 2009.

fiscal years 2013 and 2012. Included in other income and expense is an impairment charge on investments in corporate debt instruments of $0.2$0.2 million and $0.9 million for fiscal years 2011 and 2010, respectively.

6.year 2011.

8.    Stockholders’ Equity and Stock-Based Compensation

In December 2010March 2013, the Company’s Board of Directors authorized the repurchase of up to $15$30 million of the Company’s common stock in open market or negotiated transactions through December 2012.March 2014. Since the plan’s inception through December 31, 201128, 2013, the Company has purchased 1,069,1622,171,400 shares of its common stock for $4,414,626.

$7,991,954.

The Company has stock-based awards outstanding under several plans. In 2001, the Company adopted a 2001 Equity Incentive Plan (the Equity Plan) and a 2001 Supplemental Equity Plan (the Supplemental Plan). The Equity Plan authorized 7,100,000 shares of common stock, to be issued to employees, non-employees, and members of the Board of Directors (the Board). The Supplemental Plan authorized 1,300,000 shares of common stock, to be issued to employees and certain non-employees and only permits the issuance of nonqualified stock options and restricted common stock awards. The Equity Plan and the Supplemental had a ten year liveslife and therefore no new equity awards may be issued under these plans.this plan. In 2010, the Company adopted a 2010 Equity Incentive Plan (the 2010 Equity Plan) which authorized the issuance of shares of common stock to employees, non-employees, and the Board. The 2010 Equity Plan has been subsequently amended to increase the number of authorized shares. The number of shares authorized is 1,800,0002,600,000 plus the number of shares of common stock which were available for grant under the Equity Plan, the number of shares of common stock which were the subject of awards outstanding under the Equity Plan and are forfeited, terminated, cancelledcanceled or expire after the adoption of the 2010 Equity Plan and the number of shares of common stock delivered to the Company either in exercise of a Equity Plan award or in satisfaction of a tax withholding obligation. The option price of statutory incentive stock options shall not be less than 100% of the fair market value of the stock at the date of grant, or in the case of certain statutory incentive stock options, at 110% of the fair market value at the time of the grant. The

72

KOPIN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

option price of nonqualified stock options is determined by the Board or Compensation Committee. Options must be exercised within a ten-yearten-year period or sooner if so specified within the option agreement. The term and vesting period for restricted stock awards and options granted under the 2010 Equity Plan are determined by the Board’s compensation committee.

The Company has available approximately 0.61.2 million shares of common stock available for issuance under the Company’s 2010 Equity Plan in excess of shares of common stock which have already been reserved for under previously issued equity awards.

Stock Options

A summary of stock option activity under the stock award plans as of December 31, 201128, 2013 and changes during the twelve month period is as follows:

   2011 
   Shares  Weighted
Average
Exercise
Price		 

Balance, beginning of year

   2,899,261   $6.45  

Options forfeited/cancelled

   (976,236)   9.19  

Options exercised

   (19,700)    3.68  
  

 

 

  

Balance, end of year

   1,903,325   $5.07  
  

 

 

  

Exercisable, end of year

   1,903,325   
  

 

 

  

 2013
 Shares 
Weighted
Average
Exercise
Price
Balance, beginning of year983,680
 $5.26
Options forfeited/canceled(424,830) 5.48
Options exercised—
 —
Balance, end of year558,850
 $5.09
Exercisable, end of year558,850
  
The following table summarizes information about stock options outstanding and exercisable at December 31, 2011:

   Options Outstanding   Options Exercisable 

Range of Exercise Prices

  Number
Outstanding		   Weighted
Average
Remaining
Contractual
Life (Years)		   Weighted
Average
Exercise
Price		   Number
Exercisable		   Weighted
Average
Exercise
Price		 

$  0.01—$  3.50

   130,000     4.00    $3.49     130,000    $3.49  

$  3.75—$  4.82

   1,077,010     1.60     4.45     1,077,010     4.45  

$  5.00—$  8.72

   596,215     2.13     5.70     596,215     5.70  

$10.00—$10.42

   100,100     4.00     10.00     100,100     10.00  
  

 

 

       

 

 

   
   1,903,325     2.06    $5.07     1,903,325    $5.07  
  

 

 

       

 

 

   

Aggregate intrinsic value on December 31, 2011

  $78,637        $78,637    
  

 

 

       

 

 

   

28, 2013:


62
KOPIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 Options Outstanding Options Exercisable
Range of Exercise Prices
Number
Outstanding
 
Weighted
Average
Remaining
Contractual
Life (Years)
 
Weighted
Average
Exercise
Price
 
Number
Exercisable
 
Weighted
Average
Exercise
Price
$ 0.01—$ 3.50130,000
 2.00 $3.49
 130,000
 $3.49
$ 3.75—$ 4.82328,850
 1.00 4.23
 328,850
 4.23
$ 5.00—$ 8.03—
 2.23 5.40
 —
 5.40
$10.00—$10.00100,000
 1.00 10.00
 100,000
 10.00
 558,850
 1.23 $5.09
 558,850
 $5.09
Aggregate intrinsic value on December 28, 2013$182,643
     $182,643
  
No stock options were issued in 2011, 20102013, 2012 or 2009.2011. The intrinsic value of options exercised in 2011, 20102013, 2012 and 20092011 was approximately $23,000, $41,000$0, $0 and $81,000,$23,000, respectively. In June 2010 theThe Company has issued a warrantwarrants to purchase 200,000 shares of the Company’s stock at $3.49. The warrant vests ratably over a two$3.49. During the year period and as ofended December 31, 2011 150,000 shares had29, 2012, the warrants became fully vested. The intrinsic value of the warrant at December 31, 2011 was approximately $78,000.

73

KOPIN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Cash received from option exercises under all share-based payment arrangements was approximately $0.1$0.1 million and $0.1 million for fiscal years 2011 and 2010, respectively. year 2011. No tax benefits were realized during the three year period ended 20112013 due to the existence of tax net operating loss carryforwards.

NonVested Restricted Common Stock

The Company has issued shares of nonvested restricted common stock to certain employees. Each award requires the employee to fulfill certain obligations, including remaining employed by the Company for one, two or four years (the vesting period) and in certain cases also meeting performance criteria. A summary of the activity for nonvested restricted common stock awards as of December 31, 201128, 2013 and changes during the twelve months then ended is presented below:

   Shares  Weighted
Average
Grant
Fair Value		 

Balance December 25, 2010

   2,033,607   $3.79  

Granted

   1,891,012    4.12  

Forfeited

   (128,988)   4.17  

Vested

   (897,949)   3.13  
  

 

 

  

Balance, December 31, 2011

   2,897,682   $4.20  
  

 

 

  

 Shares 
Weighted
Average
Grant
Fair Value
Balance, December 29, 20122,283,048
 $4.76
Granted2,135,000
 3.22
Forfeited(227,000) 3.87
Vested(1,216,900) 3.46
Balance, December 28, 20132,974,148
 $4.25
The forfeitures in 20112013 were primarily due to fact that the performance criteria were not met related to these awards.

Stock-Based Compensation

The following table summarizes stock-based compensation expense related to employee stock options and nonvested restricted common stock awards for the fiscal years 2011, 20102013, 2012 and 20092011 (no tax benefits were recognized):

   2011   2010   2009 

Cost of product revenues

  $613,274    $590,950    $475,461  

Research and development

   577,514     428,123     231,890  

Selling, general and administrative

   2,732,840     1,564,655     1,176,989  
  

 

 

   

 

 

   

 

 

 

Total

  $3,923,628    $2,583,728    $1,884,340  
  

 

 

   

 

 

   

 

 

 

 2013 2012 2011
Cost of product revenues$414,842
 $513,789
 $613,274
Research and development423,548
 366,443
 577,514
Selling, general and administrative3,365,018
 3,606,758
 2,732,840
Total$4,203,408
 $4,486,990
 $3,923,628
Total unrecognized compensation expense for the nonvested restricted common stock as of December 31, 201128, 2013 totals $7,388,000$6.2 million and is expected to be recognized over a period of 3two years.

7.    Concentrations of Risk

Financial instruments that potentially subject the Company to concentration of credit risk other than marketable securities consist principally of trade accounts receivable. Trade receivables are primarily derived from sales to manufacturers of consumer electronic devices and wireless components or military applications.

74


63

KOPIN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


9.    Concentrations of Risk
Ongoing credit evaluations of customers’ financial condition are performed and collateral, such as letters of credit, are generally not required. The following table depicts the customer’s trade receivable balance as a percentage of gross trade receivables as of the end of the year indicated:

   Percent of Gross
Accounts Receivable		 

Customer

  2011  2010 

Skyworks Solutions, Inc.

   28%   24% 

Advanced Wireless Semiconductor Co.

   *    14  

DRS Technologies

   *    11  

Raytheon Company

   14    11  

indicated. (The symbol “*” indicates that accounts receivables from that customer were less than 10% of the Company’s total accounts receivable.)

 
Percent of Gross
Accounts Receivable
Customer2013 2012
Company A22 *
Company B12 *
Company C12 *
Company D* 37
Company E* 12
Sales to significant non-affiliated customers for fiscal years 2011, 20102013, 2012 and 2009,2011, as a percentage of total revenues, is shown in the table below. Note the caption “Military Customers in Total” in the table below includes Raytheon and DRS Technologies but excludes research and development contracts. The Company sells its displays to Japanese customers through Ryoden Trading Company. (The symbol “*” indicates that sales to that customer were less than 10% of the Company’s total revenues.)

   Sales as a Percent
of Total Revenue		 
   Fiscal Year 

Customer

  2011  2010  2009 

Skyworks Solutions, Inc.

   28%   25%   20% 

Advanced Wireless Semiconductor Company

   9    12    8  

DRS Technologies

   *    *    19  

Raytheon Company

   12    18    14  

Military Customers in Total

   30    33    45  

United States Government Funded Research and Development Contracts

   4    3    6  

Skyworks Solutions, Inc. (Skyworks Solutions) also uses the foundry services of Advanced Wireless Semiconductor Company (AWSC) to process the Company’s HBT transistor wafers on their behalf. The Company sells HBT transistor wafers directly to AWSC for eventual resale by AWSC to Skyworks Solutions. AWSC also purchases HBT transistor wafers from the Company for the processing and sale to other customers. The Company does not know exactly how many HBT transistor wafers sold to AWSC are for eventual delivery to Skyworks Solutions but believes the sales to Skyworks Solutions and AWSC should be aggregated for purposes of assessing the concentration of risk.

75

 
Sales as a Percent
of Total Revenue
 Fiscal Year
Customer2013 2012 2011
Military Customers in Total38 57 60
Company A18 12 15
Company D13 22 23
Company E* 21 18
Company F* * 10
United States Government Funded Research and Development Contracts7 10 8


64

KOPIN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

8.


10.    Income Taxes

The (benefit) provision for income taxes from continuing operations consists of the following for the fiscal years indicated:

   Fiscal Year 
   2011  2010  2009 

Current

    

Federal

  $150,000   $141,000   $251,000  

State

   242,000    231,000    468,000  

Foreign

   333,000    (120,000)   (29,000) 
  

 

 

  

 

 

  

 

 

 

Total current provision

   725,000    252,000    690,000  

Deferred

    

Federal

   3,977,000    10,253,000    6,532,000  

State

   (30,000)   513,000    1,414,000  

Foreign

   (467,000)   (700,000)   (100,000) 

Change in valuation allowance

   (7,746,000)   (10,066,000)   (7,846,000) 
  

 

 

  

 

 

  

 

 

 

Total deferred provision

   (4,266,000)  —      —    
  

 

 

  

 

 

  

 

 

 

Total (benefit) provision for income taxes

  $(3,541,000)  $252,000   $690,000  
  

 

 

  

 

 

  

 

 

 

 Fiscal Year
 2013 2012 2011
Current     
Federal$(13,124,000) $—
 $52,000
State12,000
 64,000
 88,000
Foreign(34,000) —
 (137,000)
Total current (benefit) provision(13,146,000) 64,000
 3,000
Deferred     
Federal(3,616,000) (2,878,000) 3,977,000
State644,000
 (505,000) (30,000)
Foreign(565,000) 73,000
 (898,000)
Change in valuation allowance3,750,000
 4,345,000
 (3,052,000)
Total deferred provision213,000
 1,035,000
 (3,000)
Total (benefit) provision for income taxes$(12,933,000) $1,099,000
 $—
Net operating losses utilized in 2011, 20102013, 2012 and 20092011 to offset federal and state taxes were $2,698,000, $2,743,000$0, $0 and $6,923,000,$2,698,000, respectively.

The actual income tax provision (benefit) provision reported from operations are different than those which would have been computed by applying the federal statutory tax rate to loss before income tax benefit. A reconciliation of income tax benefit(benefit) provision from continuing operations as computed at the U.S. federal statutory income tax rate to the provision for income tax benefit is as follows:

   Fiscal Year 
   2011  2010  2009 

Tax provision at federal statutory rates

  $355,000   $3,212,000   $6,817,000  

State tax liability

   158,000    150,000    1,718,000  

Foreign deferred

   663,000    (203,000)   10,000  

Goodwill

   771,000    —      —    

Nondeductible expenses

   415,000    (35,000)   (40,000) 

Utilized/expired net state operating loss carryforwards

   —      (28,000)   (134,000) 

Provision to tax return adjustments and state tax rate change

   1,191,000    544,000    (1,432,000) 

Tax credits

   (858,000)   (312,000)   (636,000) 

Non-deductible equity compensation

   1,542,000    2,630,000    3,882,000  

Other, net

   (32,000)   (47,000)   (1,649,000) 

Change in valuation allowance

   (7,746,000)   (5,659,000)   (7,846,000) 
  

 

 

  

 

 

  

 

 

 
  $(3,541,000)  $252,000   $690,000  
  

 

 

  

 

 

  

 

 

 

 Fiscal Year
 2013 2012 2011
Tax provision at federal statutory rates$(13,322,000) $(7,002,000) $(2,006,000)
State tax liability8,000
 42,000
 57,000
Foreign deferred(644,000) 734,000
 611,000
Foreign withholding308,000
 1,170,000
 —
Outside basis in KTC and Kowon, net(202,000) 2,422,000
 —
Goodwill—
 417,000
 771,000
Nondeductible expenses864,000
 180,000
 415,000
Increase in net state operating loss carryforwards(2,868,000) —
 —
Provision to tax return adjustments and state tax rate change(33,000) (462,000) 888,000
Tax credits(390,000) (100,000) 1,188,000
Non-deductible equity compensation(418,000) 136,000
 1,542,000
Other, net14,000
 (783,000) (414,000)
Change in valuation allowance3,750,000
 4,345,000
 (3,052,000)
 $(12,933,000) $1,099,000
 $—
Pretax foreign (losses) earningslosses from continuing operations were approximately $(4,559,000)$(4,966,000), 237,000$(6,870,000) and ($401,000)$(6,879,000) for fiscal years 2011, 20102013, 2012 and 2009,2011, respectively. The Company has not received remittance of any earnings from its foreign operations nor does it intendmade the decision to in the foreseeable future. Accordingly, U.S. income taxes were not providedclose Kowon and accordingly reflected a liability for approximately $10.2 million of undistributed earnings of the Company’s Korean subsidiary and $6.5 million of undistributed earnings of the Company’s Taiwan subsidiary.

76

unremitted earnings.


65

KOPIN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


The benefit for income taxes for the fiscal year ended 2013 of $12.9 million represents the net of state and foreign tax and intra period tax allocations related to the Company's discontinued operations and withholding taxes related to ceasing operations at the Korean facility.

Deferred income 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:

   Fiscal Year 
   2011  2010 

Deferred tax liability:

   

Intangible asset

  $(508,000)   —    

Deferred tax assets:

   

Federal net operating loss carryforwards

   3,398,000    6,137,000  

State net operating loss carryforwards

   13,000   —    

Foreign net operating loss carryforwards

   5,533,000    4,080,000  

Equity awards

   886,000    2,491,000  

Tax credits

   5,599,000    4,576,000  

Equipment

   5,068,000    5,300,000  

Investments

   3,867,000    3,818,000  

Other

   3,903,000    4,342,000  
  

 

 

  

 

 

 

Net deferred tax assets

   27,759,000    30,744,000  

Valuation allowance

   (23,493,000)   (30,744,000) 
  

 

 

  

 

 

 
  $4,266,000  $—    
  

 

 

  

 

 

 

 Fiscal Year
 2013 2012
Deferred tax liability:   
Intangible asset$(141,000) $(636,000)
       Foreign withholding liability(1,478,000) (1,170,000)
       Foreign unremitted earnings(3,276,000) (3,478,000)
Deferred tax assets:   
Federal net operating loss carryforwards15,322,000
 9,493,000
State net operating loss carryforwards624,000
 580,000
Foreign net operating loss carryforwards3,202,000
 3,028,000
Equity awards1,666,000
 1,111,000
Tax credits5,657,000
 5,267,000
Equipment838,000
 4,131,000
Investments4,594,000
 4,760,000
Other3,365,000
 3,582,000
Net deferred tax assets30,373,000
 26,668,000
Valuation allowance(31,886,000) (27,973,000)
 $(1,513,000) $(1,305,000)
As of December 31, 2011,28, 2013, the Company has available for tax purposes federal net operating loss carryforwards (NOLs) of $9.7$43.7 millionexpiring through 2021.2032. The Company has recognized a full valuation allowance on its net deferred tax assets excluding the net deferred tax assets of KTC, as the Company has concluded that such assets are not more likely than not to be realized. Based upon KTC’s 2011 results of operations and 2012 projected results of operations the Company concluded that it was more likely than not that the benefit of the net deferred tax assets would be realized and removed the valuation allowance. The $7.7$3.7 million decrease increase in valuation allowance during fiscal year 20112013 was primarily due to the reversal of the $4.9 million KTC valuation allowance partially offset by a net decrease in deferred tax assets of approximately $1.7 million and utilization of net operating losses generated of $1.1 million.$8.6 million and the sale of III-V assets. The change in valuation allowance during fiscal year 20102012 was due to a net decrease in deferred tax assets of approximately $2.5 million and utilization of net operating losses generated of $3.1$6.0 million and significant equipment disposals of $2.0 million. The Company has not historically recorded, nor does it intend to record the tax benefits from stock awards until realized. Unrecorded benefits from stock awards approximated $12.9$10.1 million at December 31, 2011.

28, 2013.

The Company has suspended operations and terminated the majority of employees at its Korean subsidiary, Kowon. The assets, primarily buildings and land, have been put up for sale. It is more likely than not that the Company's share of the net book value of its Korean investment would be repatriated to the U.S. resulting in a Korean withholding tax of $1.5 million. As a result of the Company no longer being permanently reinvested in Korea, a deferred tax liability for the outside basis in the Korean subsidiary has been booked for $3.3 million.

In September 2013, the U.S. Department of the Treasury and the Internal Revenue Service released final regulations relating to guidance on applying tax rules to amounts paid to acquire, produce or improve tangible personal property as well as rules for materials and supplies. The Company is currently assessing these rules and the impacts to the financial statements, if any.
The Company’s income tax returns have not been examined by the Internal Revenue Service and are subject to examination for all years since 2002.2001. State income tax returns are generally subject to examination for a period of 3three to 5five years after filing of the respective return. The state impact of any federal changes remains subject to examination by various states for a period of up to one year after formal notification to the states.

International jurisdictions have statutes of limitations generally ranging from 3three to 7seven years after filing of the respective return. Years still open to examination by tax authorities in major jurisdictions include Korea (2006 onward)(2006 onward), Japan (2006 onward)

66
KOPIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(2006 onward), Hong Kong (2008 onward)(2008 onward) and Taiwan (2010 onward) and UK returns (2011 onwards)United Kingdom (2011 onward). The Company is not currently under examination in these jurisdictions.

9.

11.    Accrued Warranty

The Company warrants its products against defect for 12 months. A provision for estimated future costs and estimated returns for credit relating to warranty is recorded in the period when product is shipped and revenue

77

KOPIN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

recognized, and is updated as additional information becomes available. The Company’s estimate of future costs to satisfy warranty obligations is based primarily on historical warranty expense experienced and a provision for potential future product failures. Changes in the accrued warranty for fiscal years 20112013 and 20102012 are as follows:

   Fiscal Year Ended 
   December 31,
2011		  December 25,
2010		 

Beginning Balance

  $1,300,000   $1,600,000  

Additions

   1,442,000    757,000  

Claim and reversals

   (1,424,000)   (1,057,000) 
  

 

 

  

 

 

 

Ending Balance

  $1,318,000   $1,300,000  
  

 

 

  

 

 

 

10.

 Fiscal Year Ended
 December 28,
2013		 December 29, 2012
Beginning Balance$716,000
 $1,318,000
Additions798,000
 1,777,000
Claim and reversals(798,000) (2,229,000)
Reclassified to current liabilities held for sale—
 (150,000)
Ending Balance$716,000
 $716,000
12.    Employee Benefit Plan

The Company has an employee benefit plan pursuant to Section 401(k) of the Internal Revenue Code of 1986, as amended. In 2011,2013, the plan allowed employees to defer an amount of their annual compensation up to a current maximum of $16,500$17,000 if they are under the age of 50 and $22,000$22,500 if they are over the age of 50.50. The Company matches 50% of all deferred compensation up to a maximum of on the first 3% of each employee’s annualdeferred compensation. The amount charged to operations in connection with this plan was approximately $229,000, $238,000$146,000, $210,000 and $200,000$229,000 in fiscal years 2011, 20102013, 2012 and 2009,2011, respectively.

11.

13.    Commitments and Contingencies

Leases
Leases

The Company leases facilities located in Taunton and Westborough, Massachusetts, Santa Clara, California, Scotts Valley, California, and Dalgety Bay, Scotland and Nottingham, United Kingdom, under non-cancelable operating leases. The Taunton leases expire in 2012 and 2020. The Westborough lease expires in 2023.2023. The Santa Clara lease expires in 2016. The Scotts Valley lease terminatesexpires in 2012.TheNovember 2014. The Dalgety Bay lease expires in 2013.2016. The Company also leases two facilities in Nottingham, United Kingdom which expire in 2016 and 2017. Substantially all real estate taxes, insurance and maintenance expenses under these leases are the Company’s obligations and are expensed as incurred and were immaterial. The following is a schedule of minimum rental commitments under non-cancelable operating leases at December 31, 2011:

Fiscal Year ending,

  Amount 

2012

   1,031,000  

2013

   496,000  

2014

   461,000  

2015

   533,000  

2016

   569,000  

Thereafter

   1,897,000  
  

 

 

 

Total minimum lease payments

  $4,987,000  
  

 

 

 

28, 2013:

Fiscal Year ending,Amount
2014$1,266,000
20151,177,000
2016836,000
2017665,000
2018641,000
Thereafter2,768,000
Total minimum lease payments$7,353,000
Amounts incurred under operating leases are recorded as rent expense on a straight-line basis and aggregated approximately $1.8$1.3 million in fiscal year 2011, $1.62013, $0.8 million in fiscal year 20102012 and $1.5$1.1 million in fiscal year 2009.

2011.

Other Agreements


67
KOPIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The Company has entered into various license agreements which require payment of royalties based upon a set percentage of product sales, subject in some cases, to certain minimum amounts. Total royalty expense approximated $18,000, $27,000$20,000, $18,000 and $20,000,$18,000, respectively, in fiscal years 2011, 20102013, 2012 and 2009.

78

KOPIN CORPORATION2011

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued).


The Company hasreceived a purchase and supply agreement with$3.0 million grant in fiscal year 2008 from the Commonwealth of Massachusetts as an incentive to retain jobs in Massachusetts. As a significant HBT customer that expires in July 2012, excluding a last time buy option contained inresult of the agreement. Undersale of the terms of this agreement,III-V product line the Company agreed to maintain capacity levels for manufacturing HBT wafers and the Company committed to a pricing schedule under certain circumstances. The agreement also requires the Company to give prior notice if the Company exits its HBT product line. In consideration for this agreement the customer agreed to source a certain percentage of its HBT wafer needs from the Company subject to the customer’s right to source HBT wafers from other sources if the Company is unable to meet their requirements under certain circumstances. The Company agreed that failure to meet its supply obligations under the agreement would allow the Company’s customer to obtain court ordered specific performance and if the Company does not perform it could then be liable for monetary damages up to a maximum of $40.0 million. To date the Company has met its commitments under this agreement.

Included in Billings in excess of revenue earned is $2.2 million which was received in 2008 from a state grant. Amounts from this grant are earned by achieving certain employment levels and other conditions through 2017. In the event the Company does not achieve these employment levels some orrepaid all of the $2.2 million will be refunded. The agreement also contains repayment provisions which require us to repay certainsuch amounts back to the state if the Company fails to achieve certain employment milestones after years three and five of the agreement, or if we move certain parts of the Company’s operations out of the state. Based on current the Company has estimated that it may be required to repay $1.0 million to the state in 2012.

12.2013.

14.    Litigation

The Company may engage in legal proceedings arising in the ordinary course of business. Claims, suits, investigations and proceedings are inherently uncertain and it is not possible to predict the ultimate outcome of such matters and our business, financial condition, results of operations or cash flows could be affected in any particular period.

13.

15.    Segments and Geographical Information

The Company’s chief operating decision maker is its Chief Executive Officer. The Company’s chief operating decision maker evaluatesDuring the operating resultsyear ended December 28, 2013, the Company transferred the manufacturing operations of Kowon to the Company’sCompany's manufacturing facility in the United States and sold its III-V product line including, its investment in KTC. As a result of these transactions, the Company has reorganized its operations to align with its new strategy to primarily focus on developing its wearable computing systems and its reflective display products. Accordingly, the Company has determined it has two reportable segments, based on revenuesFDD, the manufacturer of its reflective display products for test and net income (loss).

79

simulation products, and Kopin, which is comprised of Kopin Corporation, Kowon, Ikanos and eMDT. The segment information for the prior periods presented has been recast to reflect the change in reportable segments.

 Kopin FDD Total
2013     
Revenues$19,883
 $3,014
 $22,898
Net income (loss) attributable to the controlling interest(2,003) (2,707) (4,710)
Total assets from continuing operations143,953
 2,179
 146,132
Long-lived assets from continuing operations5,488
 547
 6,035
2012     
Revenues$31,879
 $2,763
 $34,642
Net (loss) income attributable to the controlling interest(17,067) (4,083) (21,150)
Total assets from continuing operations134,375
 4,202
 138,577
Long-lived assets from continuing operations7,728
 758
 8,486
2011     
Revenues$59,785
 $4,874
 $64,659
Net income (loss) attributable to the controlling interest244
 (6,878) (6,634)
Total assets from continuing operations187,215
 6,657
 193,872
Long-lived assets from continuing operations31,331
 1,038
 32,369


68

KOPIN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Effective as of January 11, 2011, when the Company acquired FDD, FDD is now a reportable segment. The Company has four operating and reportable segments: i) Kopin US, which includes the operations in the United States and the Company’s equity method investments, ii) Kowon iii) KTC and iv) FDD (commencing in 2011). The following table presents the Company’s reportable segment results for the years ended 2011, 2010 and 2009:

  Kopin U.S.  Kowon  KTC  FDD  Adjustments  Total 

2011

      

Revenues

 $125,961,000   $10,989,000   $20,995,000   $ 4,874,000   $(31,674,000)  $131,145,000  

Net income (loss) attributable to the controlling interest

  4,887,000    134,000    6,117,000    (6,878,000)   (662,000)   3,598,000  

Total assets

  183,555,000    19,287,000    29,618,000    6,657,000    (44,553,000)   194,564,000  

Long lived assets

  14,022,000    2,689,000    14,624,000    1,038,000    (4,000)   32,369,000  

2010

      

Revenues

 $117,476,000   $11,603,000   $8,766,000   $—     $(17,459,000)  $120,386,000  

Net income (loss) attributable to the controlling interest

  8,577,000    (112,000)   433,000    —      36,000    8,934,000  

Total assets

  174,973,000    19,992,000    19,652,000    —      (22,521,000)   192,096,000  

Long lived assets

  15,945,000    2,950,000    13,723,000    —      (4,000)   32,614,000  

2009

      

Revenues

 $113,183,000   $8,644,000   $3,346,000   $—     $(10,518,000)  $114,655,000  

Net income (loss) attributable to the controlling interest

  19,642,000    (1,095,000)   723,000    —      173,000    19,443,000  

Total assets

  168,603,000    19,316,000    9,691,000    —      (14,386,000)   183,224,000  

Long lived assets

  13,906,000    2,969,000    3,882,000    —      (4,000)   20,753,000  

The Company has $1.7 million of goodwill related to its FDD segment.

The adjustments to reconcile to the consolidated financial statement total revenue, net income (loss) and total assets include the elimination of intercompany sales and intercompany receivables and the recording of the noncontrolling interest in Kowon and KTC.


Geographical revenue information for the three years ended December 28, 2013, December 29, 2012 and December 31, 2011 December 25, 2010 and December 26, 2009 was based on the location of the customers and is as follows:

   Fiscal Year 
   2011  2010  2009 
   Revenue   % of Total  Revenue   % of Total  Revenue   % of Total 

Asia-Pacific

  $28,246,000     22%  $27,977,000     23%  $19,822,000     17% 

Americas

   102,899,000     78%   92,409,000     77%   94,833,000     83% 
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 
  $131,145,000     100%  $120,386,000     100%  $114,655,000     100% 
  

 

 

    

 

 

    

 

 

   

Revenues by product group consisted of approximately the following:

   Fiscal Year 
   2011   2010   2009 

III-V

  $66,486,000    $62,244,000    $46,452,000  

Display

   64,659,000     58,142,000     68,203,000  
  

 

 

   

 

 

   

 

 

 

Total revenues

  $131,145,000    $120,386,000    $114,655,000  
  

 

 

   

 

 

   

 

 

 

80

KOPIN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 Fiscal Year
 2013 2012 2011
 Revenue % of Total Revenue % of Total Revenue % of Total
US$11,927,000
 53% $25,356,000
 73% $48,707,000
 75%
Other Americas230,000
 1% 93,000
 —% 632,000
 1%
Total Americas12,157,000
 54% 25,449,000
 73% 49,339,000
 76%
Asia-Pacific8,292,000
 36% 7,132,000
 21% 12,300,000
 19%
Europe2,449,000
 10% 2,061,000
 6% 3,020,000
 5%
  Total Revenues$22,898,000
 100% $34,642,000
 100% $64,659,000
 100%


Long-lived assets by geographic area are as follows:

   Fiscal Years 
   2011   2010 

United States of America

  $14,022,000    $15,944,000  

United Kingdom

   1,038,000     —    

Republic of Korea

   2,685,000     2,947,000  

Taiwan, ROC

   14,624,000     13,723,000  
  

 

 

   

 

 

 
  $32,369,000    $32,614,000  
  

 

 

   

 

 

 

14.

 Fiscal Years
 2013 2012
United States of America$3,050,000
 $4,840,000
United Kingdom795,000
 1,072,000
Republic of Korea2,190,000
 2,574,000
 $6,035,000
 $8,486,000
16.    Selected Quarterly Financial Information (Unaudited)

The following tables present Kopin’s quarterly operating results for the fiscal years ended December 31, 201128, 2013 and December 25, 2010.29, 2012. The information for each of these quarters is unaudited and has been prepared on the same basis as the audited consolidated financial statements. In the opinion of management, all necessary adjustments, consisting only of normal recurring adjustments, have been included to present fairly the unaudited consolidated quarterly results when read in conjunction with Kopin’s audited consolidated financial statements and related notes. These operating results are not necessarily indicative of the results of any future period.

Quarterly Periods During Fiscal Year Ended December 31, 2011:28, 2013

   Three months
ended
March 26,
2011		   Three months
ended
June 25,
2011		   Three months
ended
September 24,
2011		   Three months
ended
December 31,
2011		 
   (In thousands, except per share data) 

Revenue

  $34,934    $31,431    $29,566    $35,213  

Gross profit (2)

   10,974     10,482     9,467     12,431  

Net income attributable to the controlling interest

  $2,066    $802    $797    $(67) 

Net income per share (1):

        

Basic

  $0.03    $0.01    $0.01    $0.00  

Diluted

  $0.03    $0.01    $0.01    $0.00  

Shares used in computing net income per share:

        

Basic

   64,737     64,529     64,292     64,065  

Diluted

   65,655     66,775     65,441     64,065  

(1)Net income per share is computed independently for each of the quarters presented; accordingly, the sum of the quarterly net income per share may not equal the total computed for the year.
(2)Gross profit is defined as net product revenue less cost of product revenues.

81

:

 Three months ended March 30, 2013 Three months ended June 29, 2013 Three months ended September 28, 2013 Three months
ended
December 28,
2013 (3)
 (In thousands, except per share data)
Revenue$6,319
 $6,079
 $4,950
 $5,550
Gross profit (2)$(396) $(595) $267
 $645
(Loss) income from continuing operations$1,168
 $(8,062) $(9,015) $(9,844)
Net loss attributable to the controlling interest$21,634
 $(7,910) $(8,771) $(9,660)
Net loss per share from continuing operations (1):       
Basic$0.34
 $(0.13) $(0.14) $(0.16)
Diluted$0.34
 $(0.13) $(0.14) $(0.16)
Shares used in computing net loss per share from continuing operations:       
Basic63,936
 62,492
 63,542
 61,529
Diluted63,936
 62,492
 63,542
 61,529

69

KOPIN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Quarterly Periods During Fiscal Year Ended December 25, 2010:

   Three months
ended
March 27
2010		   Three months
ended
June 26
2010		   Three months
ended
September 25
2010		   Three months
ended
December 25,
2010 (3)		 
   (In thousands, except per share data) 

Revenue

  $25,454    $30,189    $31,602    $33,140  

Gross profit (2)

   6,338     7,275     10,054     11,731  

Net income attributable to the controlling interest

  $1,037    $1,861    $1,361    $4,676  

Net income per share (1):

        

Basic

  $0.02    $0.03    $0.02    $0.07  

Diluted

  $0.02    $0.03    $0.02    $0.07  

Shares used in computing net income per share:

        

Basic

   66,588     66,626     66,115     64,751  

Diluted

   67,311     67,357     66,779     65,399  


(1)Net income (loss) per share is computed independently for each of the quarters presented; accordingly, the sum of the quarterly net income per share may not equal the total computed for the year.
(2)Gross profit is defined as net product revenue less cost of product revenues.
(3)TheIncludes $4.0 million impact in loss from continuing operations and net incomeloss attributable to the controlling interest attributable to the impairment of intangibles and write off of investments for the fourth quarterthree month period ended December 28, 2013, as described in Notes 4 and 6.

Quarterly Periods During Fiscal Year Ended December 29, 2012:
 Three months ended March 31, 2012 Three months ended June 30, 2012 Three months ended September 29, 2012 Three months ended December 29, 2012
 (In thousands, except per share data)
Revenue$10,866
 $7,012
 $8,190
 $8,574
Gross profit (2)$3,253
 $1,127
 $2,451
 $2,425
(Loss) income from continuing operations$(2,712) $(6,456) $(6,849) $(5,766)
Net loss attributable to the controlling interest$(2,578) $(5,199) $(6,724) $(3,861)
Net loss per share from continuing operations (1):       
Basic$(0.04) $(0.08) $(0.11) $(0.06)
Diluted$(0.04) $(0.08) $(0.11) $(0.06)
Shares used in computing net loss per share from continuing operations:       
Basic64,225
 63,078
 63,415
 63,836
Diluted64,225
 63,078
 63,415
 63,836
(1)Net loss per share is computed independently for each of fiscal year 2010 was impacted by gainsthe quarters presented; accordingly, the sum of $1.4 million related to reimbursementthe quarterly net income per share may not equal the total computed for the year.
(2)Gross profit is defined as net product revenue less cost of insurance claims.product revenues.

82






70



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 15, 2012

17, 2014
KOPIN CORPORATION
By: 

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 

John C.C. Fan

 

Chairman of the Board, Chief Executive Officer, President and Director (Principal Executive Officer)

 March 15, 201217, 2014
John C.C. Fan

/s/    JAMES BREWINGTON   

James Brewington

 Director March 15, 201217, 2014
James Brewington

/s/    DAVID E. BROOK   

David E. Brook

 Director March 15, 201217, 2014
David E. Brook

/s/    MORTON COLLINS 

Morton Collins

 Director March 15, 201217, 2014
Morton Collins

/s/    ANDREW H. CHAPMAN 

Andrew H. Chapman

 Director March 15, 201217, 2014
Andrew H. Chapman

/s/    CHI CHIA HSIEH        

Chi Chia Hsieh

 Director March 15, 201217, 2014
Chi Chia Hsieh

/s/    MICHAEL J. LANDINE

Michael J. Landine

 Director March 15, 201217, 2014
Michael J. Landine

/s/    RICHARD A. SNEIDER

Richard A. Sneider

 

Treasurer and Chief Financial Officer (Principal Financial and Accounting Officer)

 March 15, 201217, 2014
Richard A. Sneider

83



71



KOPIN CORPORATION

SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS

Fiscal Years Ended December 31, 2011,28, 2013, December 25, 201029, 2012 and December 26, 2009

Description

  Balance at
Beginning
of Year		   Additions
Charged
to
Income		   Deductions
from
Reserve		  Balance at
End of
Year		 

Reserve deducted from assets—allowance for doubtful accounts:

       

2009

  $1,171,000     114,000     (702,000)   583,000  

2010

   583,000     156,000     (2,000)   737,000  

2011

   737,000     182,000     (406,000)   513,000  

84

31, 2011

Description
Balance at
Beginning
of Year
 
Additions
Charged
to
Income
 
Deductions
from
Reserve
 
Balance at
End of
Year
Reserve deducted from assets—allowance for doubtful accounts:       
2011$737,000
 $182,000
 $(406,000) $513,000
2012513,000
 139,000
 (341,000) 311,000
2013311,000
 19,000
 (128,000) 202,000


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INDEX TO EXHIBITS

Exhibits

      Sequential
page number		 
 3.1     Amended and Restated Certificate of Incorporation   (2) 
 3.2     Amendment to Certificate of Incorporation   (5) 
 3.3     Amendment to Certificate of Incorporation   (5) 
 3.4     Fourth Amended and Restated By-laws   (8) 
 4     Specimen Certificate of Common Stock   (1) 
 10.1     Form of Employee Agreement with Respect to Inventions and Proprietary Information   (1) 
 10.2     Amended and Restated 1992 Stock Option Plan   (2)* 
 10.3     1992 Stock Option Plan Amendment   (5)* 
 10.4     1992 Stock Option Plan Amendment   (6)* 
 10.5     Kopin Corporation 2001 Equity Incentive Plan   (7)* 
 10.6     Kopin Corporation 2001 Equity Incentive Plan Amendment   (9)* 
 10.7     Kopin Corporation 2001 Equity Incentive Plan Amendment   (10)* 
 10.8     Kopin Corporation 2001 Equity Incentive Plan Amendment   (11)* 
 10.9     Kopin Corporation 2001 Equity Incentive Plan Amendment   (13)* 
 10.10    Kopin Corporation 2001 Supplemental Equity Incentive Plan   (6)* 
 10.11    Form of Key Employee Stock Purchase Agreement   (1)* 
 10.12    License Agreement by and between the Company and Massachusetts Institute of Technology dated April 22, 1985, as amended   (1) 
 10.13    Facility Lease, by and between the Company and Massachusetts Technology Park Corporation, dated October 15, 1993   (3) 
 10.14    Joint Venture Agreement, by and among the Company, Kowon Technology Co., Ltd., and Korean Investors, dated as of March 3, 1998   (4) 
 10.15    Seventh Amended and Restated Employment Agreement between the Company and Dr. John C.C. Fan, dated as of December 8, 2010   (16) 
 10.16    Kopin Corporation Form of Stock Option Agreement under 2001 and 2010 Equity Incentive Plans   (12)* 
 10.17    Kopin Corporation 2001 and 2010 Equity Incentive Plan Form of Restricted Stock Purchase Agreement   (12)* 
 10.18    Kopin Corporation Fiscal Year 2012 Incentive Bonus Plan   *  
 10.19    Kopin Corporation Stock Purchase Agreement of 19,572,468 shares of Kopin Taiwan Corporation, (KTC) common stock   (14) 
 10.20    Kopin Corporation 2010 Equity Incentive Plan   (15) 
 21.1     Subsidiaries of Kopin Corporation  
 23.1     Consent of Independent Registered Public Accounting Firm  
 31.1     Chief Executive Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002  
 31.2     Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002  
 32.1     Chief Executive Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002  

85

Exhibits
  
Sequential
page number
 
3.1
 Amended and Restated Certificate of Incorporation(2) 
3.2
 Amendment to Certificate of Incorporation(5) 
3.3
 Amendment to Certificate of Incorporation(5) 
3.4
 Fourth Amended and Restated By-laws(8) 
4
 Specimen Certificate of Common Stock(1) 
10.1
 Form of Employee Agreement with Respect to Inventions and Proprietary Information(1) 
10.5
 Kopin Corporation 2001 Equity Incentive Plan(7)* 
10.6
 Kopin Corporation 2001 Equity Incentive Plan Amendment(9)* 
10.7
 Kopin Corporation 2001 Equity Incentive Plan Amendment(10)* 
10.8
 Kopin Corporation 2001 Equity Incentive Plan Amendment(11)* 
10.9
 Kopin Corporation 2001 Equity Incentive Plan Amendment(13)* 
10.10
 Kopin Corporation 2001 Supplemental Equity Incentive Plan(6)* 
10.11
 Form of Key Employee Stock Purchase Agreement(1)* 
10.12
 License Agreement by and between the Company and Massachusetts Institute of Technology dated April 22, 1985, as amended(1) 
10.13
 Facility Lease, by and between the Company and Massachusetts Technology Park Corporation, dated October 15, 1993(3) 
10.14
 Joint Venture Agreement, by and among the Company, Kowon Technology Co., Ltd., and Korean Investors, dated as of March 3, 1998(4) 
10.15
 Seventh Amended and Restated Employment Agreement between the Company and Dr. John C.C. Fan, dated as of December 8, 2010(16) 
10.16
 Kopin Corporation Form of Stock Option Agreement under 2001 and 2010 Equity Incentive Plans(12)* 
10.17
 Kopin Corporation 2001 and 2010 Equity Incentive Plan Form of Restricted Stock Purchase Agreement(12)* 
10.18
 Kopin Corporation Fiscal Year 2012 Incentive Bonus Plan*
  
10.20
 Kopin Corporation 2010 Equity Incentive Plan(15) 
10.21
 Purchase Agreement, dated January 10, 2013, by and among Kopin Corporation, IQE KC, LLC and IQE plc(17) 
21.1
 Subsidiaries of Kopin Corporation  
23.1
 Consent of Independent Registered Public Accounting Firm  
31.1
 Chief Executive Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002  
31.2
 Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002  
32.1
 Chief Executive Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002  

Exhibits

  
Sequential
page number
 Sequential
page number
32.2
32.2  
 Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 
101
101   
 

The following materials from the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011,29, 2012, formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income,Operations, (iii) Consolidated Statements of Comprehensive (Loss), (iv) Consolidated Statements of Stockholder's Equity, (v) Consolidated Statements of Cash Flows, and (iv)(vi) Notes to Consolidated Financial Statements, tagged as blocks of text

 


73


*
Management contract or compensatory plan required to be filed as an Exhibit to this Form 10-K.
    (1)**
This exhibit shall not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that Section, nor shall it be deemed incorporated by reference in any filings under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language in any filing.
(1)Filed as an exhibit to Registration Statement on Form S-1, File No. 33-45853, and incorporated herein by reference.
    (2)(2)Filed as an exhibit to Registration Statement on Form S-1, File No. 33-57450, and incorporated herein by reference.
    (3)(3)Filed as an exhibit to Annual Report on Form 10-K for the fiscal year ended December 31, 1993 and incorporated herein by reference.
    (4)(4)Filed as an exhibit to Annual Report on Form 10-Q for the quarterly period ended June 27, 1998 and incorporated herein by reference.
    (5)(5)Filed as an exhibit to Quarterly Report on Form 10-Q for the quarterly period ended July 1, 2000 and incorporated herein by reference.
    (6)(6)Filed as an exhibit to Registration StatementQuarterly Report on Form S-8, filed on November 13, 200110-Q for the quarterly period ended July 1, 2000 and incorporated herein by reference.
    (7)(7)Filed as an appendix to Proxy Statement filed on April 20, 2001 and incorporated herein by reference.
    (8)(8)Filed as an exhibit to Current Report on Form 8-K filed on December 12, 2008 and incorporated herein by reference.
    (9)(9)Filed as an exhibit to Registration StatementCurrent Report on Form S-88-K filed on August 16, 2002December 12, 2008 and incorporated herein by reference.
  (10)(10)Filed as an exhibit to Registration Statement on Form S-8 filed on March 15, 2004 and incorporated herein by reference.
  (11)(11)Filed as an exhibit to Registration Statement on Form S-8 filed on May 10, 2004 and incorporated herein by reference.
  (12)(12)Filed as an exhibit to Annual Report on Form 10-K for the fiscal year ended December 25, 2004 and incorporated herein by reference.
  (13)(13)Filed as an exhibit to Registration Statement on Form S-8 filed on April 15, 2008 and incorporated herein by reference.
  (14)(14)Filed as an exhibit to Annual Report on Form 10-K for the fiscal year ended December 26, 2009 and incorporated by reference herein.
  (15)(15)Filed with the Corporation’sCompany's Definitive Proxy Statement on Schedule 14 filed as of March 17, 2010April 5, 2013 and incorporated by reference herein.
  (16)(16)Filed as an exhibit to Annual Report on Form 10-K for the fiscal year ended December 25, 2010 and incorporated by reference herein.
(17)Filed as an exhibit to Current Report on Form 8-K on January 10, 2013 and incorporated by reference herein.

86


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