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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR l5(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 27, 2003
Commission file number 0-19882
KOPIN CORPORATION
(Exact name of Registrant as specified in its charter)
| Delaware | 04-2833935 | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| 695 Myles Standish Blvd., Taunton, MA | 02780-7331 | |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code (508) 824-6696
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or l5(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesx No¨
Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No ¨
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class | Outstanding as of October 31, 2003 | |
| Common Stock, par value $.01 | 69,705,974 |
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KOPIN CORPORATION
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This Form 10-Q report contains forward-looking statements within the meaning of the United States Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on current expectations, estimates, forecasts and projections about the industries in which we operate, management’s beliefs, and assumptions made by management. In addition, other written or oral statements which constitute forward-looking statements may be made by or on behalf of us. Words such as “expects”, “anticipates”, “intends”, “plans”, “believes”, “could”, “seeks”, “estimates”, variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements, whether as a result of new information, future events or otherwise. Forward-looking statements contained in this Form 10-Q include, but are not limited to, our expectation that total revenues will increase sequentially by 20% in the fourth quarter of 2003 and our expectation that we will make capital expenditures of between $5.0 and $7.0 million in 2003.
In addition to the risks and uncertainties set forth in this Form 10-Q, other factors that could cause actual results to differ materially include, without limitation, the following: general economic and business conditions and growth in the flat panel display and the gallium arsenide integrated circuit and materials industries, sales growth of the wireless handset industry, the successful introduction and commercialization of our CyberLite™ product, the impact of competitive products and pricing, possible litigation involving our third party patents or other intellectual property rights, availability of integrated circuit fabrication facilities, cost and yields associated with the production of our products, availability of interface electronic chips to run our CyberDisplay™ products, loss of significant customers, acceptance of our products, continuation of strategic relationships, changes in foreign currency exchange rates, and the risk factors and cautionary statements listed from time to time in the Company’s periodic reports and registration statements filed with the Securities and Exchange Commission (SEC), including but not limited to our Annual Report on Form 10-K for the fiscal year ended December 31 2002 and our Quarterly Reports on Form 10-Q for the periods ended March 29, 2003 and June 28, 2003..
Factors that could cause or contribute to differences in outcomes and results include, but are not limited to, those discussed below.
We have experienced a history of losses and have a significant accumulated deficit. Since inception, we have incurred significant net operating losses. As of September 27, 2003 we had an accumulated deficit of $111.3 million. We cannot assure investors that we will achieve profitability in the future.
Our revenue and cash flow could be negatively affected by the loss of any of the few customers who account for a substantial portion of our revenues. A few customers account for a substantial portion of our revenues. In 2002, Conexant Systems merged its wireless division with Alpha Industries to create Skyworks Solutions, Inc. On a pro forma basis, assuming the merger occurred on January 1, 2000, sales of our HBT transistor wafers to Skyworks Solutions would have accounted for approximately 26%, 24%, and 46% of our total revenues for the years ended December 31, 2002, 2001, and 2000, respectively. For the year ended December 31, 2002 Samsung, JVC and Panasonic accounted for 26%, 15% and 13% of our total revenues, respectively. For the year ended December 31, 2001 Samsung and Panasonic accounted for 22% and 15% of our total revenues, respectively. Sales to Mitsubishi Electric Company, Ltd. were 11% of our total revenues for the year ended December 31, 2000. For the years ended December 31, 2002, 2001 and 2000, revenues from multiple contracts with various U.S. governmental agencies accounted for approximately 3%, 3%, and 2%, respectively, of our total revenues.
We anticipate that sales to Skyworks Solutions, Samsung, JVC and Panasonic will continue to represent a significant portion of our revenues for the near future. We believe that historically we have provided Skyworks Solutions with the vast majority of its HBT transistor wafers. A reduction or delay in orders from Skyworks Solutions or any of our other significant customers would materially reduce our revenue and cash flow and adversely affect our ability to achieve profitability.
We may be unable to increase revenues from CyberDisplay™ products if new products and applications are not developed. CyberDisplay revenues for the years ended December 31, 2002, 2001, and 2000 were $44.1 million, $23.6 million and $20.4 million, respectively. The increase in CyberDisplay revenues has resulted primarily from increasing sales of our monochrome CyberDisplay 320 product to existing customers for use in camcorders. We believe we have captured significant market share in the camcorder market and future growth in this market is limited. In addition, we expect prices of our monochrome displays to decline. Accordingly, if we are unable to expand into new markets our revenues from CyberDisplay products may not grow which may impact our ability to become profitable.
An important factor in our ability to expand into new markets will be the development of new displays which have higher or lower resolution than current displays offered and which can provide color images. We have never produced displays which provide color images in volume. Accordingly, if we are unable to develop and market these new displays or if we are unable to manufacture them in a cost-effective manner our revenues may not grow which may impact our ability to become profitable.
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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. 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; |
| • | 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 such as ours 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 achieve profitability.
Our ability to manufacture and distribute our CyberDisplay™ products would be severely limited if the third parties that we rely on to manufacture integrated circuits for our CyberDisplay™ products fail to provide those services. We depend on a Taiwanese and a Korean company for the fabrication of integrated circuits for our CyberDisplay 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 in one company can not necessarily be supplied by the other company. 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 would be able to manufacture and ship our CyberDisplay products only in limited quantities until replacement foundry services could be obtained. Furthermore, we cannot assure 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:
| • | Lack of control over production capacity and delivery schedules; |
| • | Limited control over quality assurance, manufacturing yields and production costs; and |
| • | 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. |
One of the foundries and several other third parties with which we do business are located in Taiwan. Due to the earthquake that occurred in Taiwan in 1999 and the typhoon that occurred in Taiwan in September 2001, many Taiwanese companies, including the Taiwanese foundry we use, experienced related business interruptions. Our Taiwanese foundry has resumed normal operations; however, 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 or political unrest.
In 2003, there has been an outbreak of Severe Acute Respiratory Syndrome (“SARS”). There have been reports that consumer demand was negatively impacted by the outbreak of SARS. Since we conduct business in Asia, our sales, manufacturing and distribution processes, and in turn our overall business operations, may be adversely affected if the SARS situation continues or spreads.
We depend on third parties to provide integrated circuit chip sets and other critical raw materials for use with our CyberDisplay™ products. We do not manufacture the integrated circuit chip sets necessary for use with our CyberDisplay products. Instead, we rely on third party independent contractors for these integrated circuit chip sets and other critical raw materials such as special glasses and chemicals. Motorola currently produces all integrated circuit chip sets used with our CyberDisplay products in camcorders. These critical raw materials, including the glasses and chemicals used in manufacturing the CyberDisplay, are used by other display manufacturers, many of whom are much larger than Kopin. If Motorola or any other third party 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 CyberDisplay products until a replacement supplier could be found. We cannot assure investors that a replacement supplier could be found on reasonable terms or in a timely manner. In the past we have experienced situations when our vendors could not supply the quantity or quality of critical raw materials we needed. As a result, we were unable to meet customer demand and our manufacturing yield and gross margins were adversely affected. Currently there is strong demand for display materials because of their significant growth over the last few years. Any interruption in our ability to
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manufacture and distribute our CyberDisplay products could cause our display business to be unsuccessful and the value of investors’ investment in us may decline.
If we are unable to significantly increase our unit sales volume and reduce our production costs, our business will suffer. Our III-V and CyberDisplay product lines currently have significant fixed costs and our ability to achieve profitability depends upon achieving significant sales volumes and higher gross profit margins. In January 2003 we introduced our CyberLite light emitting diode (LED) product which together with our heterojunction bipolar transistor (HBT) products comprise our III-V product group. If we are unable to increase our III-V and CyberDisplay production levels and reduce manufacturing costs, we may lose customer orders and our business will remain unprofitable.
We may be unable to increase revenues from HBT transistor wafers if new product applications are not developed. A critical market for our HBTs is wireless handsets. The growth rate of the wireless handset market has been very unpredictable over the last several years. Some analysts believe that the wireless handset market growth could be in the range of 10 to 15 percent for the year ending December 31, 2003. We expect prices of our HBT transistor will decline by 10 to 15 percent during 2003. Accordingly, if we are unable to find additional applications for our HBT transistor wafers, revenue may not grow which may impact our ability to become profitable.
We have never manufactured CyberLite™ LEDs in volume and may not be able to achieve sales or production volume. We anticipate our CyberLiteLED products will be very important to our revenue growth and to achieving profitability. However, we have never manufactured our CyberLite LEDs in volume. Since our initial sales of CyberLite in January 2003 we have had low manufacturing yields and a negative gross margin. We currently do not sell our CyberLite LEDs in sufficient volume to cover their operating costs. Failure to achieve high sales volume production will affect our revenue growth, our ability to become profitable and acceptance of our CyberLite LEDs. Further, even if we are able to achieve volume production we may not be able to do so in a cost effective manner, which would negatively impact our ability to achieve profitability.
We generally do not have long-term contracts with our customers, which makes forecasting our revenues and operating results difficult. We generally do not enter into agreements with our customers obligating them to purchase our products. Our business is characterized by short-term purchase orders and shipment schedules and we generally permit orders to be canceled or rescheduled without significant penalty. As a result, our customers may cease purchasing our products at any time, which makes forecasting our revenues difficult. In addition, due to the absence of substantial noncancellable backlog, we typically plan our production and inventory levels based on internal forecasts of customer demand, which are highly unpredictable and can fluctuate substantially. Our operating results are difficult to forecast because we are continuing to invest in capital equipment and increasing our operating expenses for 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’ investment in us may decline.
We may not be able to realize any profits under a multi-year supply agreement with a significant HBT customer.In October 2003 we amended a supply agreement with a significant HBT customer that now expires in July 2006. Under the terms of this we 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 100% of 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 which are limited to a maximum of $45 million. The agreement obligates us to provide wafers at preset prices and as a result, our ability to make a profit under this agreement will be subject to fluctuations in the prices of raw materials and to any increases in costs of goods or services required for us to perform under the agreement. If we are unable to manufacture the HBT wafers below these preset prices we may not become profitable.
Potential fluctuations in operating results make financial forecasting difficult and could adversely affect the price of our common stock. Our quarterly and annual revenues and operating results may fluctuate significantly for several reasons,including:
| • | The timing and successful introduction of additional manufacturing capacity; |
| • | The timing of the initial selection of our III-V and CyberDisplay products as a component in our customers’ new products; |
| • | Availability of interface electronics for our CyberDisplay products supplied by Motorola and other vendors; |
| • | Competitive pressures on selling prices of our products; |
| • | The timing and cancellation of customer orders; |
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| • | Our ability to introduce new products and technologies on a timely basis; |
| • | 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 are continuing to invest in capital equipment and increasing 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.
We may not be able to operate multiple manufacturing facilities successfully. A critical part of our business strategy is the expansion of our production capacity both internally and using third party manufacturers. We are developing an internal facility to manufacture our CyberLite LED products. We increasingly rely on our Korean subsidiary, Kowon Technology Co., Ltd. (Kowon), for back-end packaging of our CyberDisplay products. If we are unable to maintain or increase our manufacturing capacity at Kowon, we may be able to manufacture and ship our CyberDisplay products only in limited quantities until replacement foundry services could be obtained.
We are also considering the establishment of additional internal and third party manufacturing capabilities to produce both our III-V and CyberDisplay products. To date, we have operated only one facility for our III-V product line.
Our ability to successfully operate additional manufacturing sites will depend on a number of factors, including:
| • | The identification and availability of appropriate and affordable sites; |
| • | The management of facility construction and development timing and costs; |
| • | The transfer of our manufacturing techniques to additional sites, particularly Kowon; |
| • | The establishment of adequate management and information systems and financial controls; and |
| • | The adaptation of our complex manufacturing processes in our additional sites. |
Additionally, we cannot be sure that any new or expanded manufacturing facilities will have operating results similar to those of our current facilities. Any failure to effectively implement our expansion strategy would adversely impact our ability to grow our business.
Increased competition may result in decreased demand or 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 primarily engaged in the business of designing, manufacturing and selling integrated circuits or alternative display technologies, as well as the supply of other discrete products. Our competitors could develop new process technologies that may be superior to ours, including technologies that target markets in which our products are sold. Many of our existing and potential competitors have strong market positions, considerable internal manufacturing capacity, established intellectual property rights and substantial technological capabilities. Furthermore, they also have greater financial, technical, manufacturing, marketing and personnel resources than we do, and we may not be able to compete successfully with them.
In addition, many of our existing and potential customers manufacture or assemble wireless communications devices and have substantial in-house technological capabilities and substantially greater resources than we do. We may not be able to sell our products to these customers and they may begin to commercialize their internal capabilities and become our competitors. If one of our large customers establishes internal design and manufacturing capabilities, it could have an adverse effect on our operating results.
We expect competition to increase. This could mean lower prices or reduced demand for our products. Any of these developments would have an adverse effect on our operating results.
Disruptions of our production of our III-V products would adversely affect our operating results. If we were to experience any significant disruption in the operation of our facilities, we would be unable to supply III-V products to our customers. Our manufacturing processes are highly complex and customer specifications are extremely precise. We periodically
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modify our processes in an effort to improve yields and product performance and to meet particular customer requirements. Process changes or other problems that occur in the complex manufacturing process can result in interruptions in production or significantly reduced yields. Additionally, as we introduce new equipment into our manufacturing processes, our III-V products could be subject to especially wide variations in manufacturing yields and efficiency. We may experience manufacturing problems that would result in delays in product introduction and delivery or yield fluctuations. We are also subject to the risks associated with the shortage of raw materials used in the manufacture of our products.
If we fail to keep pace with changing technologies, we may lose customers. The advanced semiconductor materials and display industries are characterized by rapidly changing customer requirements and evolving technologies and industry standards. To achieve our goals, we need to enhance our existing products and develop and market new products that keep pace with continuing changes in industry standards and requirements and customer preferences. If we cannot keep pace with these changes, our business could suffer.
We may not be successful in protecting our intellectual property and proprietary rights. Our success depends in part on our ability to protect our intellectual property and proprietary rights. We have obtained certain domestic and foreign patents and we intend to continue to seek patents on our inventions when appropriate. We also attempt to protect our proprietary information with contractual arrangements and under trade secret laws. Our employees and consultants generally enter into agreements containing provisions with respect to confidentiality and the assignment of rights to inventions made by them while in our employ. These measures may not adequately protect our intellectual and proprietary rights. Existing trade secret, trademark and copyright laws afford only limited protection and our patents could be invalidated or circumvented. Moreover, the laws of certain foreign countries in which our products are or may be manufactured or sold may not fully protect our intellectual property rights. Misappropriation of our technology and the costs of defending our intellectual property rights from misappropriation could substantially impair our business. If we are unable to protect our intellectual property and proprietary rights, our business may not be successful and the value of investors’ investment in us may decline.
Our products could infringe on the intellectual property rights of others. Companies in the light emitting diode (LED), 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. If we are forced to defend against infringement claims, we may face such costly litigation, diversion of technical and management personnel, and product shipment delays, even if the allegations of infringement are unwarranted. If there is a successful claim of infringement against us and we are unable to develop non-infringing technology or license the infringed or similar technology on a timely basis, or if we are required to cease using one or more of our business or product names due to a successful trademark infringement claim against us, it could adversely affect our business.
Our business could suffer if we lose the services of, or fail to attract, key personnel. In order to continue to provide quality products in our rapidly changing business, we believe it is important to retain personnel with experience and expertise relevant to our business. Our success depends in large part upon a number of key management and technical employees. The loss of the services of one or more key employees, including 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 wireless and fiber optic communications markets experience an upturn, we may need to increase our workforce. Due to the competitive nature of the labor markets in which we operate, we may be unsuccessful in attracting and retaining these personnel. Our inability to attract and retain key personnel could adversely affect our ability to develop and manufacture our products.
We may be unable to grow at our historical growth rates or at all, and if we grow we may be unable to manage our growth effectively. In 1999 and 2000, we experienced significant growth in sales of our III-V and CyberDisplay products. We believe that the high growth rates of 1999 and 2000, driven principally by sales of our HBT Transistor wafers, were the result of the adoption of digital wireless handsets. Due to a significant slowdown in the wireless and fiber optic communication markets and other general economic conditions, our sales declined in 2001. In addition, we cannot assure investors that our systems, procedures, controls and existing and planned space will be adequate to support our future operations. As a result of these concerns, we cannot be sure that we will grow, or, if we do grow, that we will be able to achieve our historical growth rate.
We may pursue acquisitions and investments that could adversely affect our business. In the past we have made, and in the future we may make, acquisitions of, and investments in, businesses, products and technologies that could complement or expand our business. If we identify an acquisition candidate, we may not be able to successfully negotiate or finance the acquisition or integrate the acquired businesses, products or technologies into our existing business and products. Future
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acquisitions could result in potentially dilutive issuances of equity securities, the incurrence of debt and contingent liabilities, amortization expenses and write-downs of acquired assets.
We may incur significant liabilities if we fail to comply with stringent environmental regulations or if we did not comply with these regulations in the past. We are subject to a variety of federal, state and local governmental regulations related to the use, storage, discharge and disposal of toxic or otherwise hazardous chemicals used in our manufacturing process. Although we believe our activities conform to environmental regulations, the failure to comply with present or future regulations could result in fines being imposed on us, suspension of production, or a cessation of operations. We cannot assure investors that we have not, in the past, violated applicable laws or regulations which could result in required remediation or other liabilities.
Investors should not expect to receive dividends from us. We have not paid cash dividends in the past, nor do we expect to pay cash dividends for the foreseeable future. We anticipate that earnings, if any, will be retained for the development of our businesses.
Our stock price may be volatile in the future. The trading price of our common stock has been subject to wide fluctuations in response to quarter-to-quarter variations in results of operations, announcements of technological innovations or new products by us or our competitors, general conditions in the wireless communications, semiconductor and display markets, changes in earnings estimates by analysts or other events or factors. In addition, the public stock markets 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.
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PART I. FINANCIAL INFORMATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
| September 27, 2003 | December 31, 2002 | |||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and equivalents | $ | 36,353,801 | $ | 35,297,639 | ||||
Marketable securities, at fair value | 78,102,240 | 82,693,673 | ||||||
Accounts receivable, net of allowance of $1,200,000 as of 2003 and 2002 | 9,185,756 | 6,680,538 | ||||||
Inventory | 6,292,604 | 4,773,333 | ||||||
Prepaid expenses and other current assets | 1,448,619 | 1,118,944 | ||||||
Total current assets | 131,383,020 | 130,564,127 | ||||||
Property, plant and equipment, net | 32,847,928 | 34,748,361 | ||||||
Other assets | 8,322,062 | 8,773,040 | ||||||
Intangible assets, net | 120,217 | 480,866 | ||||||
Total assets | $ | 172,673,227 | $ | 174,566,394 | ||||
Liabilities and Stockholders’ Equity | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 7,364,537 | $ | 7,414,774 | ||||
Accrued payroll and expenses | 2,550,427 | 2,105,206 | ||||||
Accrued warranty | 1,030,000 | 830,000 | ||||||
Unearned revenue | 1,957,330 | 1,108,180 | ||||||
Other accrued liabilities | 3,290,664 | 3,259,200 | ||||||
Total current liabilities | 16,192,958 | 14,717,360 | ||||||
Minority interest in subsidiary | 3,026,424 | 2,931,366 | ||||||
Commitments and contingencies | ||||||||
Stockholders’ equity: | ||||||||
Preferred stock, par value $.01 per share: authorized, 3,000 shares; none issued and outstanding | — | — | ||||||
Common stock, par value $.01 per share: authorized, 120,000,000 shares; issued, 69,705,578 shares in 2003 and 69,391,349 in 2002 | 697,056 | 693,913 | ||||||
Additional paid-in capital | 261,496,823 | 260,253,567 | ||||||
Accumulated other comprehensive income | 2,566,808 | 1,013,040 | ||||||
Accumulated deficit | (111,306,842 | ) | (105,042,852 | ) | ||||
Total stockholders’ equity | 153,453,845 | 156,917,668 | ||||||
Total liabilities and stockholders’ equity | $ | 172,673,227 | $ | 174,566,394 | ||||
See notes to unaudited condensed consolidated financial statements.
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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
| Three Months Ended | Nine Months Ended | |||||||||||||||
September 27, 2003 | September 28, 2002 | September 27, 2003 | September 28, 2002 | |||||||||||||
Revenues: | ||||||||||||||||
Product revenues | $ | 17,213,912 | $ | 21,232,887 | $ | 54,730,946 | $ | 58,703,393 | ||||||||
Research and development revenues | 300,000 | 653,933 | 700,000 | 1,601,295 | ||||||||||||
| 17,513,912 | 21,886,820 | 55,430,946 | 60,304,688 | |||||||||||||
Expenses: | ||||||||||||||||
Cost of product revenues | 14,764,386 | 15,387,140 | 44,662,098 | 45,438,274 | ||||||||||||
Research and development | 3,294,887 | 3,664,545 | 9,098,567 | 11,076,454 | ||||||||||||
Selling, general and administrative | 2,373,777 | 2,509,724 | 8,004,755 | 8,214,123 | ||||||||||||
Other | 120,216 | 55,500 | 360,648 | 210,350 | ||||||||||||
| 20,553,266 | 21,616,909 | 62,126,068 | 64,939,201 | |||||||||||||
Income (loss) from operations | (3,039,354 | ) | 269,911 | (6,695,122 | ) | (4,634,513 | ) | |||||||||
Other income and expense: | ||||||||||||||||
Interest and other income | 891,691 | 789,830 | 2,583,749 | 1,870,748 | ||||||||||||
Interest and other expense | (711,992 | ) | (121,668 | ) | (1,494,561 | ) | (616,128 | ) | ||||||||
Income (loss) before minority interest in income of subsidiary | (2,859,655 | ) | 938,073 | (5,605,934 | ) | (3,379,893 | ) | |||||||||
Minority interest in income of subsidiary | (166,588 | ) | (346,539 | ) | (658,056 | ) | (835,156 | ) | ||||||||
Income (loss) before cumulative effect of accounting change | (3,026,243 | ) | 591,534 | (6,263,990 | ) | (4,215,049 | ) | |||||||||
Cumulative effect of accounting change | — | — | — | (12,582,383 | ) | |||||||||||
Net income (loss) | $ | (3,026,243 | ) | $ | 591,534 | $ | (6,263,990 | ) | $ | (16,797,432 | ) | |||||
Income (loss) before cumulative effect of accounting change per share: | ||||||||||||||||
Basic | $ | (.04 | ) | $ | 0.01 | $ | (.09 | ) | $ | (.06 | ) | |||||
Diluted | $ | (.04 | ) | $ | 0.01 | $ | (.09 | ) | $ | (.06 | ) | |||||
Cumulative effect of accounting change per share: | ||||||||||||||||
Basic | $ | — | $ | — | $ | — | $ | (.18 | ) | |||||||
Diluted | $ | — | $ | — | $ | — | $ | (.18 | ) | |||||||
Income (loss) per share: | ||||||||||||||||
Basic | $ | (.04 | ) | $ | 0.01 | $ | (.09 | ) | $ | (.24 | ) | |||||
Diluted | $ | (.04 | ) | $ | 0.01 | $ | (.09 | ) | $ | (.24 | ) | |||||
Weighted average number of common shares outstanding: | ||||||||||||||||
Basic | 69,549,645 | 69,381,023 | 69,449,090 | 69,298,069 | ||||||||||||
Diluted | 69,549,645 | 70,014,745 | 69,449,090 | 69,298,069 | ||||||||||||
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(unaudited)
| Three Months Ended | Nine Months Ended | |||||||||||||||
September 27, 2003 | September 28, 2002 | September 27, 2003 | September 28, 2002 | |||||||||||||
Net income (loss) | $ | (3,026,243 | ) | $ | 591,534 | $ | (6,263,990 | ) | $ | (16,797,432 | ) | |||||
Foreign currency translation adjustments | 352,237 | (98,546 | ) | 410,922 | 423,879 | |||||||||||
Reclassification of unrealized loss to realized loss | (1,681,889 | ) | ||||||||||||||
Unrealized gain (loss) on marketable securities, net | 317,107 | (4,456,195 | ) | 1,142,846 | (10,551,858 | ) | ||||||||||
Comprehensive loss | $ | (2,356,899 | ) | $ | (3,963,207 | ) | $ | (4,710,222 | ) | $ | (28,607,300 | ) | ||||
See notes to unaudited condensed consolidated financial statements.
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CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Nine months ended September 27, 2003 and September 28, 2002
(unaudited)
| Common Stock | Additional Paid-in Capital | Accumulated Other Comprehensive Income (Loss) | Accumulated Deficit | Total | ||||||||||||||||
| Shares | Amount | |||||||||||||||||||
Balance, December 31, 2001 | 69,045,532 | $ | 690,455 | $ | 259,141,718 | $ | (2,369,677 | ) | $ | (73,131,534 | ) | $ | 184,330,962 | |||||||
Exercise of stock options | 334,618 | 3,346 | 1,181,370 | — | — | 1,184,716 | ||||||||||||||
Net unrealized holding loss on marketable securities | — | — | — | (12,233,747 | ) | — | (12,233,747 | ) | ||||||||||||
Foreign currency translation adjustments | — | — | — | 423,879 | — | 423,879 | ||||||||||||||
Net loss for the nine-month period ended September 28, 2002 | — | — | — | — | (16,797,432 | ) | (16,797,432 | ) | ||||||||||||
Balance, September 28, 2002 | 69,380,150 | $ | 693,801 | $ | 260,323,088 | $ | (14,179,545 | ) | $ | (89,928,966 | ) | $ | 156,908,378 | |||||||
Balance, December 31, 2002 | 69,391,349 | $ | 693,913 | $ | 260,253,567 | $ | 1,013,040 | $ | (105,042,852 | ) | $ | 156,917,668 | ||||||||
Exercise of stock options | 314,229 | 3,143 | 1,243,256 | — | — | 1,246,399 | ||||||||||||||
Net unrealized holding gain on marketable securities | — | — | — | 1,142,846 | — | 1,142,846 | ||||||||||||||
Foreign currency translation adjustments | — | — | — | 410,922 | — | 410,922 | ||||||||||||||
Net loss for the nine-month period ended September 27, 2003 | — | — | — | — | (6,263,990 | ) | (6,263,990 | ) | ||||||||||||
Balance, September 27, 2003 | 69,705,578 | $ | 697,056 | $ | 261,496,823 | $ | 2,566,808 | $ | (111,306,842 | ) | $ | 153,453,845 | ||||||||
See notes to unaudited condensed consolidated financial statements.
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
| Nine months ended | ||||||||
| September 27, 2003 | September 28, 2002 | |||||||
Cash flows from operating activities: | ||||||||
Net loss | $ | (6,263,990 | ) | $ | (16,797,432 | ) | ||
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | ||||||||
Depreciation and amortization | 7,665,336 | 7,364,565 | ||||||
Minority interest in income of subsidiary | 658,056 | 835,156 | ||||||
Net loss on investment activity | 1,033,933 | 604,878 | ||||||
Cumulative effect of accounting change | — | 12,582,383 | ||||||
Changes in assets and liabilities: | ||||||||
Accounts receivable | (2,348,844 | ) | 230,621 | |||||
Inventory | (1,416,450 | ) | 3,021,569 | |||||
Prepaid expenses and other current assets | (308,348 | ) | 2,197,323 | |||||
Accounts payable and accrued expenses | 1,313,141 | 1,926,232 | ||||||
Net cash provided by operating activities | 332,834 | 11,965,295 | ||||||
Cash flows from investing activities: | ||||||||
Marketable securities | 4,375,409 | (20,124,445 | ) | |||||
Other assets | 798,035 | 3,467,230 | ||||||
Purchase of minority interest in consolidated subsidiary | (694,282 | ) | — | |||||
Capital expenditures | (5,264,670 | ) | (3,416,060 | ) | ||||
Net cash used in investing activities | (785,508 | ) | (20,073,275 | ) | ||||
Cash flows from financing activities: | ||||||||
Proceeds from exercise of stock options | 1,246,399 | 1,184,716 | ||||||
Net cash provided by financing activities | 1,246,399 | 1,184,716 | ||||||
Effect of exchange rate changes on cash | 262,437 | 181,663 | ||||||
Net increase (decrease) in cash and equivalents | 1,056,162 | (6,741,601 | ) | |||||
Cash and equivalents, beginning of period | 35,297,639 | 74,425,853 | ||||||
Cash and equivalents, end of period | $ | 36,353,801 | $ | 67,684,252 | ||||
See notes to unaudited condensed consolidated financial statements.
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| 1. | BASIS OF PRESENTATION |
The condensed consolidated financial statements for the nine months ended September 27, 2003 and September 28, 2002 are unaudited and include all adjustments which, in the opinion of management, are necessary to present fairly the results of operations for the periods then ended. All such adjustments are of a normal recurring nature. Effective January 1, 2002, Kopin Corporation (the “Company”) recorded a transitional goodwill impairment charge of $12,582,383 as the cumulative effect of an accounting change resulting from the adoption of Statement of Financial Accounting Standard (“SFAS”) No.142, Goodwill and Other Intangible Assets. The Company estimated the fair value of the impacted reporting unit using a discounted cash flow model.
The condensed consolidated financial statements at September 27, 2002 and for the nine months then ended reflect the change in accounting as of the January 1, 2002 effective date. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in Kopin Corporation’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (File No. 0-19882) for the year ended December 31, 2002.
The results of the Company’s operations for any interim period are not necessarily indicative of the results of the Company’s operations for any other interim period or for a full fiscal year.
The consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries and Kowon Technology Co., Ltd. (“Kowon”), a majority owned (73%) subsidiary located in Korea. All intercompany transactions and balances have been eliminated.
| 2. | FOREIGN CURRENCY TRANSLATION |
Assets and liabilities of non-U.S. operations are translated into U.S. dollars at period-end exchange rates, and revenues and expenses at rates prevailing during the quarter. Resulting translation adjustments are recorded as part of accumulated other comprehensive loss and aggregate $997,000 of unrealized gain at September 27, 2003. Transaction gains or losses are recognized in income or loss currently.
| 3. | NET INCOME (LOSS) PER SHARE |
Basic net income (loss) per share is computed using the weighted average number of shares of common stock outstanding during the period. Diluted net income (loss) per share is computed using the weighted average number of common shares and potential common shares outstanding during the period using the treasury method. Potential common shares consist of outstanding options issued under the Company’s stock option plans, and have not been included in any periods where the effect would be anti-dilutive.
| 4. | INVENTORY |
Inventory is stated at the lower of cost (first in, first out method or specific identification method) or market and consists of the following:
| September 27, 2003 | December 31, 2002 | |||||
Raw Materials | $ | 3,972,369 | $ | 3,080,000 | ||
Work in Progress | 812,647 | 1,041,759 | ||||
Finished Goods | 1,507,588 | 651,574 | ||||
Total Inventory | $ | 6,292,604 | $ | 4,773,333 | ||
| 5. | OTHER CURRENT AND NON-CURRENT ASSETS |
Other assets consist primarily of marketable and non-marketable securities in various companies. Non-marketable equity securities are carried at cost and aggregated $3,179,000 and $4,213,000 at September 27, 2003 and December 31, 2002, respectively.
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At December 31, 2000, the Company had a 20% interest in Kendin Communications, Inc. (“Kendin”), which was accounted for using the equity method and had a carrying value of $3,170,000. During the second quarter of 2001, the Company exchanged its interest in Kendin for 986,054 shares of Micrel Incorporated (“Micrel”), as part of Micrel’s acquisition of Kendin, and recorded a net gain of $24,600,000 on the exchange. At the time of the exchange Micrel’s stock was trading at $29.31 per share. Following this transaction, the Company discontinued the use of the equity method to account for this investment and has accounted for its investment in Micrel common stock as available-for-sale securities and temporary changes in the value of the Micrel investment are reflected in other comprehensive income. During the third quarter of 2001 the Company sold 200,000 of its Micrel shares and recorded a gain of $700,000.
During the second quarter of 2002, as a result of the lapse of a contingency period related to the sale of Kendin, the Company received 115,448 shares of Micrel common stock which were previously held in escrow. Also during the quarter the Company sold 249,448 shares of Micrel and recognized a net loss of approximately $101,000 on these transactions. During the fourth quarter of 2002 the Company sold 150,000 shares of Micrel and recorded a loss on the disposition of $2,525,000.
On December 31, 2002 the closing price of Micrel’s common stock was $8.98 per share. As a result of the continuing decline in the price of Micrel common stock, the decline in fair value was considered to be other than temporary and accordingly a charge of $10,211,000 was recognized to record the Micrel investment at fair value.
During the third quarter of 2003 the Company sold 100,000 shares of Micrel and recorded a gain of approximately $300,000.
The gains and losses recognized from the exchange of the Micrel investment and subsequent activity related to Micrel is included in other income and expense. Since the receipt of the Micrel shares the Company has sold approximately 700,000 shares for total proceeds of $13,443,000. As of September 27, 2003, the Company held approximately 400,000 shares of Micrel common stock with a market value of $5,018,000.
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| Item 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
FORWARD LOOKING STATEMENTS
This Form 10-Q report contains forward-looking statements within the meaning of the United States Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on current expectations, estimates, forecasts and projections about the industries in which we operate, management’s beliefs, and assumptions made by management. In addition, other written or oral statements which constitute forward-looking statements may be made by or on behalf of us. Words such as “expects”, “anticipates”, “intends”, “plans”, “believes”, “could”, “seeks”, “estimates”, variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements, whether as a result of new information, future events or otherwise. Factors that could cause or contribute to such differences in outcomes and results include, but are not limited to, those discussed above under “Risk Factors.” Forward-looking statements contained in this Form 10-Q include, but are not limited to, our expectations that total revenue will increase sequentially by 20% in the fourth quarter of 2003 and we will make capital expenditures of between $5.0 million and $7.0 million in 2003.
In addition to the risks and uncertainties set forth in this Form 10-Q, other factors that could cause actual results to differ materially include, without limitation, the following: general economic and business conditions and growth in the flat panel display and the gallium arsenide integrated circuit and materials industries, sales growth of the wireless handset industry, the successful introduction and commercialization of our CyberLite product, the impact of competitive products and pricing, possible litigation involving our third party patents or other intellectual property rights, availability of integrated circuit fabrication facilities, cost and yields associated with the production of our products, availability of interface electronic chips to run our CyberDisplay products, loss of significant customers, acceptance of our products, continuation of strategic relationships, changes in foreign currency exchange rates, and the risk factors and cautionary statements listed from time to time in the Company’s periodic reports and registration statements filed with the Securities and Exchange Commission, including but not limited to our Annual Report on Form 10-K for the fiscal year ended December 31, 2002 and our Quarterly Reports on Form 10-Q for the periods ended March 29, 2003 and June 28, 2003.
BUSINESS MATTERS
Kopin is a leading developer and manufacturer of miniature flat panel displays and advanced semiconductor materials. We use our proprietary technology to design, manufacture and market our CyberDisplay and III-V products for use in highly demanding high resolution portable applications and wireless communication. Our products enable our customers to develop and market an improved generation of products for these target applications.
We have two principal components of revenues: product revenues and research and development revenues. Product revenues consist of sales of our line of CyberDisplay products and our III-V products, which include gallium arsenide (“GaAs”) HBT transistor wafers and CyberLite light emitting diodes (LEDs). Our CyberDisplay, GaAs HBT transistor wafers and CyberLite LED products are used primarily in camcorders, wireless handsets and mobile communication devices, respectively. Research and development revenues consist primarily of development contracts with agencies of the U.S. government for advanced displays. For the nine months ended September 27, 2003, we recognized $.7 million of research and development revenues, or 1.3% of total revenues, compared to $1.6 million, or 2.7% of total revenues, for the same period in 2002.
Results of Operations
Revenues. Our total revenues for the three and nine months ended September 27, 2003 were $17.5 million and $55.4 million, respectively, compared to $21.9 million and $60.3 million during the corresponding periods in 2002. This represents a decrease in total revenues of approximately $4.4 million and $4.9 million for the three and nine month periods, respectively. Our product revenues were $17.2 million and $54.7 million, respectively, for the three and nine months ended September 27, 2003, compared to $21.2 million and $58.7 million for the corresponding periods in 2002. This represents a decrease of approximately $4.0 million for the three and nine month periods, respectively. For the nine months ended September 27, 2003, III-V and CyberDisplay sales were $24.2 million and $31.3 million, respectively, as compared to $27.0 million and $33.3 million, respectively, for the nine months ended September 28, 2002. For the nine months ended September 27, 2003, the decrease in III-V revenues is attributable to a decrease in demand from customers who incorporate our GaAs HBT transistor wafers into components used in wireless handsets and lower sales prices of our HBT transistor wafers offset by the initial sales of our CyberLite product. The decrease in CyberDisplay sales is a result of a decline in demand from customers who incorporate
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the CyberDisplay into camcorders, lower sales prices of our CyberDisplays and lower revenues from research and development contracts.
For the three month period from September 28, 2003 through December 31, 2003 we expect revenues to increase approximately 20% as compared to the three month period ended September 27, 2003. We believe the increase will be primarily driven by an increase in demand for our HBT transistor wafers, as compared to the three month period ended September 27, 2003.
International sales represented 68% and 55% of revenues for the nine months ended September 27, 2003 and September 28, 2002, respectively. International sales are primarily sales of CyberDisplay and CyberLite products to consumer electronic manufacturers primarily located in Japan and Korea. Our international sales are primarily denominated in U.S. currency. Consequently, a strengthening of the U.S. dollar could increase the price in local currencies of our products in foreign markets and make our products relatively more expensive than competitors’ products that are denominated in local currencies, leading to a reduction in sales or profitability in those foreign markets. In addition, sales of our CyberDisplay products in Korea are transacted through our Korean subsidiary, Kowon. Kowon’s sales are primarily denominated in U.S. dollars; However, Kowon’s operating costs are denominated in Korean won. As a result, our financial position and results of operations are subject to exchange rate fluctuation. We have not taken any protective measures against exchange rate fluctuations, such as purchasing hedging instruments with respect to such fluctuations, because historically the exchange rate between the Japanese yen, Korean won and the U. S. dollar has been relatively stable.
Cost of Product Revenues. Cost of product revenues, which is comprised of materials, labor and manufacturing overhead related to our products, was $14.8 million and $44.7 million for the three months and nine months ended September 27, 2003, compared to $15.4 million and $45.4 million during the corresponding periods in 2002. For the three months ended September 27, 2003 and September 28, 2002, cost of product revenues as a percentage of product sales was 85.8% and 72.5%, respectively. For the nine months ended September 27, 2003 and September 28, 2002, cost of product revenues as a percentage of product sales was 81.6% and 77.4%, respectively. For the three month period ended September 27, 2003, cost of product revenue increased as a percentage of revenue as compared to the same period a year ago as a result of the decline in III-V revenue being greater than the associated decrease in production costs. This occurred as a result of the fixed cost nature of our III-V manufacturing process which requires significant investment in capital equipment. In addition, during the nine month period ended September 27, 2003 gross margins were negatively impacted by declining sale prices of some of our products and the start-up inefficiencies and low yields of CyberLite production, but were favorably impacted by lower raw material costs.
Research and Development. Research and development (R&D) expenses are incurred under development programs for III-V products, CyberDisplay products and other products and in support of development programs funded by agencies of the U.S. government. R&D costs include staffing, purchases of materials and laboratory supplies, equipment, circuit design costs, fabrication and packaging of display products, and overhead. Funded R&D expense was $.5 million and $1.3 million for the three and nine months ended September 27, 2003, compared to $.8 million and $2.6 million for the corresponding periods in 2002, representing a decrease of $.3 million and $1.3 million. Internal R&D expense was $2.8 million and $7.8 for the three and nine months ended September 27, 2003, compared to $2.9 million and $8.5 million during the corresponding periods in 2002.
Selling, General and Administrative. Selling, general and administrative expenses (S,G&A) consist of expenses incurred by our sales and marketing personnel and related expenses, and administrative and general corporate expenses. S,G&A was $2.4 million and $8.0 million for the three and nine months ended September 27, 2003 as compared to $2.5 million and $8.2 million during the corresponding periods in 2002.
Other.Other expenses, consisting primarily of amortization of patents, were approximately $.1 million and $.4 million for the three and nine month periods ended September 27, 2003, compared to approximately $.1 million and $.2 million during the corresponding periods in 2002.
Other Income and Expenses. Other income and expense, net, was $.2 million and $1.1 million for the three and nine months ended September 27, 2003 compared to $.7 million and $1.3 million during the corresponding periods in 2002. Included in Other Income and Expense for the three and nine months ended September 27, 2003 is the net losses of our equity investment in KTC of approximately $.5 million and $1.0 million, respectively.
Cumulative Effect of Change in AccountingEffective January 1, 2002, we adopted Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible Assets. This statement changed the accounting for goodwill and indefinite-lived intangible assets from an amortization approach to an impairment-only approach. In addition, SFAS No. 142 ceased the amortization of goodwill.
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As of January 1, 2002, we had $12.6 million of goodwill related to the October 2000 acquisition of Super Epitaxial Products, Inc. Using the SFAS No. 142 approach described above, we recorded a transitional goodwill impairment charge of $12.6 million which is presented as a cumulative effect of accounting change in the consolidated statements of operations. We estimated the fair value of the impacted reporting unit using a discounted cash flow model.
Liquidity and Capital Resources
We have financed our operations primarily through public and private placements of our equity securities, research and development contract revenues, and sales of our III-V and CyberDisplay products. We believe our available cash resources will support our operations and capital needs for at least the next twelve months.
As of September 27, 2003, we had cash and equivalents and marketable securities of $114.5 million and working capital of $115.2 million compared to $118.0 million and $115.8 million, respectively, as of December 31, 2002. During the nine month period ended September 27, 2003, the decrease in cash and equivalents and marketable securities was due to the use of cash for capital expenditures of $5.3 million and $.7 million to increase our investment in Kowon, offset by cash generated from operating activities of $.3 million, sales of Micrel stock which generated $1.2 million and proceeds from stock option exercises of $1.2 million.
We lease facilities located in Taunton and Westborough, Massachusetts, Scotts Valley, California, and Columbia, Maryland, under non-cancelable operating leases. The Taunton leases expire through May 2010. The Westborough lease expires in April 2008. The California lease expires in 2007. The Maryland lease expires in 2005. We are currently obligated to make lease payments of approximately $7.0 million over the remaining terms of these leases.
We expect to expend between $5.0 and $7.0 million on capital expenditures over the next twelve months, primarily for the acquisition of equipment relating to the production of our CyberLite and CyberDisplay products. The funding for these capital expenditures will come from available cash balances.
On October 9, 2002, we authorized the re-purchase of up to $15 million of our common stock over a two year period. We have not repurchased any stock through September 27, 2003.
During the second quarter of 2003, we increased our ownership percentage in our Korean subsidiary, Kowon Technology Ltd. Inc, from 67.2% to 73.2%, for approximately $.7 million.
| Item 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
We invest our excess cash in high-quality government and corporate financial 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. Included in other assets is an equity investment in Micrel, Incorporated (Micrel) totaling approximately $5.0 million which is subject to changes in value because of either specific operating issues at Micrel or an overall changes in the stock market. We sell our products to customers worldwide. We maintain a reserve of $1.2 million, or approximately 7% of quarterly revenues, for potential credit losses. We are exposed to changes in foreign currency exchange rates primarily through our translation of our foreign subsidiary’s financial position, results of operations, and transaction gains and losses as a result of non U.S. dollar denominated cash flows related to business activities in Asia. We do not believe that changes in currency will have a material impact on our financial position.
| Item 4. | CONTROLS AND PROCEDURES |
Within the 90 days prior to the date of this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information relating to us (including our subsidiaries) required to be included in our periodic filings with the Securities and Exchange Commission. Our management, including our Chief Executive Officer and Chief Financial Officer, reviewed our internal controls. There have been no significant changes in our internal controls or, to our knowledge, in other factors that could significantly affect such internal controls subsequent to the date of their evaluation.
Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the
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realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
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PART II. OTHER INFORMATION
| Item 6. | EXHIBITS AND REPORTS ON FORM 8-K |
| (a) | Exhibits |
| Exhibit No. | Description | |
| 31.1 | Certificate of John C.C. Fan, Chief Executive Officer of the Registrant, filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350). | |
| 31.2 | Certificate of Richard A. Sneider, Chief Financial Officer of the Registrant, filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350). | |
| 32.1 | Certificate of John C.C. Fan, Chief Executive Officer of the Registrant, furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350). | |
| 32.2 | Certificate of Richard A. Sneider, Chief Financial Officer of the Registrant, furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350). | |
| (b) | Reports on Form 8-K |
We published all of the information called for by this line Item in our Quarterly Report on Form 10-Q for the period ended June 28, 2003, filed with the SEC on August 11, 2003.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
KOPIN CORPORATION (Registrant) | ||||||||
| Date: November 12, 2003 | By: | /s/ John C.C. Fan | ||||||
John C.C. Fan President, Chief Executive Officer and Chairman of the Board of Directors (Principal Executive Officer) | ||||||||
| Date: November 12, 2003 | By: | /s/ Richard A. Sneider | ||||||
Richard A. Sneider Treasurer and Chief Financial Officer (Principal Financial and Accounting Officer) | ||||||||
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