UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 1
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-19882
KOPIN CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 04-2833935
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
695 Myles Standish Blvd., Taunton, MA 02780-1042
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (508) 824-6696
Securities registered pursuant to Section 12(b) of the Act: None
Name on each exchange on which registered: NASDAQ
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to filing requirements
for the past 90 days. Yes [X] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
As of March 23, 2000, the aggregate market value of outstanding shares of voting
stock held by non-affiliates of the registrant was $2,227,219,803.
As of March 23, 2000, 31,369,293 shares of the registrant's Common Stock, par
value $.01 per share, were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement relating to the Annual Meeting of Shareholders
to be held on May 25, 2000 are incorporated by reference into Part III of this
Report. Other documents incorporated by reference are listed in the Exhibit
Index.
This Annual Report on Form 10-K/A ("Form 10-K/A") is being filed as Amendment
No. 1 to the Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1999. This Form 10-K/A is filed with the Securities and Exchange
Commission (the "Commission") solely for the purpose of revising and restating
the following items in their entirety.
PART II
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Kopin is a leading developer and manufacturer of advanced semiconductor
materials and miniature displays. We use our proprietary technology to design,
manufacture and market products used in highly demanding commercial wireless
communications and high resolution portable applications. Our products enable
our customers to develop and market an improved generation of products for these
target applications.
We have two principal components of revenues: product revenues and research
and development revenues. Historically, product revenues have consisted of sales
of our HBT transistor wafers. For the year ended December 31, 1997, we had
product revenues of $13.1 million, or 80.0% of total revenues. For the year
ended December 31, 1998, product revenues were $23.2 million, or 86.3% of total
revenues. Product revenues were $36.1 million, or 93.4% of total revenues for
the year ended December 31, 1999. We began shipping our CyberDisplay product in
1998. This product line represented 13% of our product revenues for the year
ended December 31, 1999.
Research and development revenues consist primarily of development
contracts with agencies of the U.S. government. For the year ended December 31,
1997, as management intensified its efforts on the marketing and sales of its
commercial products, research and development revenues declined to $3.3 million,
or 20.0% of total revenues. For the year ended December 31, 1998, research and
development revenues were $3.7 million, or 13.7% of total revenues. Research and
development revenues were $2.5 million, or 6.6% of total revenues for the year
ended December 31, 1999. We believe that research and development revenues will
continue to decline on an annual basis as a percentage of total revenues for the
near future.
We recognize revenues when a product is shipped or when a service is
performed. We typically provide customers with a twelve month warranty from the
date of sale for some of our products. Based upon historical and anticipated
warranty costs, we account for estimated sales return and warranty reserves in
the period the sale is made. We recognize revenues from long-term 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. We account for product development
and research contracts that have established prices for distinct phases as if
each phase were a separate contract. 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 unearned revenues. We
bill unbilled receivables 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.
Results of Operations
Year Ended December 31, 1999 ("1999") Compared to Year Ended December 31, 1998
("1998")
Revenues. Our total revenues for the year ended December 31, 1999 were
$38.7 million compared to $26.9 million in 1998, an increase of approximately
$11.8 million or 43.7%. Our product revenues for the year ended December 31,
1999 were $36.1 million compared to $23.2 million for the year ended December
31, 1998, an increase of approximately $12.9 million or 55.5%. This increase in
product revenues was primarily due to an increase in sales of our gallium
arsenide products as well as our CyberDisplay products in the year ended
December 31, 1999 compared to year ended December 31, 1998. For the year ended
1999 gallium arsenide product sales and CyberDisplay product sales were $31.5
million and $4.6 million, respectively, versus $20.3 million and $2.9 million,
respectively, for 1998. Research and development revenues for the year ended
December 31, 1999 were $2.5 million, compared to $3.7 million in 1998, a
decrease of $1.1 million, or 31.1%. Research and development revenues declined
primarily due to the expirations of multi-year contracts with the U.S.
government.
Cost of Product Revenues. Cost of product revenues, which is comprised of
materials, labor and manufacturing overhead related to our products, was $26.3
million for the year ended December 31, 1999 compared to $15.5 million in 1998,
an increase of approximately $10.8 million or 69.4%. The increase in cost of
product revenues as a percentage of product revenues in 1999 primarily is
attributable to increased production staffing as we increased production
capacity, re-deployed certain assets and personnel previously involved in
development activities to manufacturing activities and increased sales of our
CyberDisplay products as a percentage of total sales.
15
Research and Development. Research and development expenses are incurred
under development programs for gallium arsenide and display products either in
support of internal development programs or programs funded by agencies of the
U.S. government. Research and development costs include staffing, purchases of
materials and laboratory supplies, circuit design costs, fabrication and
packaging of display products, and overhead. Funded research and development
expenses were $2.9 million for the year ended December 31, 1999 compared to $4.0
million in 1998, a decrease of $1.1 million, or 27.5% due to reduced
subcontractor expenses caused by the expiration of multi-year contracts with
agencies of the U.S. government. Internal research and development expenses were
$4.3 million for the year ended December 31, 1999 compared to $5.7 million in
1998, a decrease of $1.4 million, or 24.7%. The decrease in internal research
and development was primarily a result of the re-deployment of certain assets
and personnel from development activities into manufacturing activities.
Selling, General and Administrative. Selling, general and administrative
expenses consist of the expenses incurred by our sales and marketing personnel
and related expenses, and administrative and general corporate expenses.
Selling, general and administrative expenses were $5.8 million for the year
ended December 31, 1999 compared to $4.0 million in 1998, an increase of $1.7
million, or 43.4%. The increase in selling, general and administrative expense
is primarily due to increases in headcount in the sales and marketing staff and
significant travel associated with new customer support. In addition, selling,
general and administrative expenses include non-cash charges for compensation
expense of $55,020 for the year ended December 31, 1999 compared to $66,900 in
1998, relating to the issuance of certain stock options.
Other. Other expenses, primarily amortization of patents and licenses, were
$366,079 for the year ended December 31, 1999 compared to $384,349 in 1998.
Other Income, Net. Other income, net was $1.7 million for the year ended
December 31, 1999 compared to $1.5 million in 1998. This increase was primarily
due to a decrease in interest expense as a result of reduced debt.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Revenues. Our total revenues were $26.9 million for 1998 compared to $16.4
million in 1997, an increase of $10.5 million, or 64.1%. Our product revenues
were $23.2 million for 1998 compared to $13.1 million in 1997, an increase of
$10.1 million, or 77.2%. The increase in product revenues was primarily due to
an increase in sales of our gallium arsenide products as well as our
CyberDisplay product sales for the year ended December 31, 1998 versus December
31, 1997. Gallium arsenide product sales and CyberDisplay product sales were
$20.3 million and $2.9 million for the year ended 1998, respectively, versus
$1.2 million, respectively, in 1997. The increase in sales of our gallium
arsenide products was primarily due to the increased use of our advanced
semiconductor transistors in various wireless telecommunications products,
particularly by our major customer, Conexant. Research and development revenues
were $3.7 million for 1998 compared to $3.3 million in 1997, an increase of
$396,608. The increase in research and development revenues was primarily
attributable to an increase in contract revenues from agencies of the U.S.
government.
Cost of Product Revenues. Cost of product revenues was $15.5 million for
1998 compared to $8.6 million in 1997. Included in 1998 cost of product revenues
is a charge totaling approximately $1.7 million associated with the write-down
of inventory resulting from modification of certain processes in the production
of our CyberDisplay products to improve manufacturing flexibility and to meet
customer requirements. Excluding this inventory write- down, cost of product
revenues decreased as a percentage of product revenues because of manufacturing
efficiencies derived from the increase in unit volume production. The benefit
from manufacturing efficiencies was offset in part from an increase in display
products as a percentage of total product revenues.
Research and Development. Funded research and development expenses were
$4.0 million for 1998 compared to $2.8 million in 1997, an increase of $1.2
million. The increase in funded research and development expenses in 1998 was
primarily due to an increase in programs funded by agencies of the U.S.
government. Internal research and development expenses were $5.7 million in 1998
compared to $7.6 million in 1997, a decrease of $1.9 million. The decrease in
internal research and development expenses was primarily a result of reduced
research costs incurred for developing our display products.
Selling, General and Administrative. Selling, general and administrative
expenses were $4.0 million for 1998 compared to $4.3 million in 1997, a decrease
of $277,521. In addition, selling, general and administrative expenses include
16
non-cash charges for compensation expense of $66,900 for 1998 compared to
$75,857 in 1997 relating to the issuance of certain stock options.
Impairment Charge. In 1998, we recorded a non-cash impairment charge
totaling approximately $1.8 million associated with the write-down of equipment
and intangible assets resulting from modification of certain processes in the
production of our CyberDisplay products to improve manufacturing flexibility.
Other. Other expenses were $384,349 for 1998 compared to $327,102 in 1997,
an increase of $57,247.
Other Income, Net. Other income, net was $1.5 million in 1998 compared to
$1.0 million in 1997, an increase of $478,921. The increase was primarily due to
an increase in interest income of $779,834 to $2.0 million in 1998 from $1.3
million in 1997, resulting from higher cash balances in 1998. This increase was
partially offset by an increase in interest expense of $300,913 due to
additional debt funding.
Liquidity and Capital Resources
We have financed our operations primarily through public offerings and
private placements of our equity securities, research and development contract
revenues, and sales of our gallium arsenide and display products. We believe our
available cash resources will support our operations and capital needs for at
least the next twelve months.
As of December 31, 1999, we had cash and equivalents and marketable
securities of $99.1 million and working capital of $106.5 million compared to
$36.8 million and $39.4 million, respectively, as of December 31, 1998. The
increase in cash and equivalents and marketable securities was primarily due to
proceeds from an October 1999 public common stock offering that resulted in net
proceeds to the Company of $73.2 million and proceeds from the exercise of stock
options of $4.6 million, partially offset by cash used in operations of
$366,000, capital expenditures of $15.0 million, and principal payments on
long-term obligations of $1.5 million. The increase in capital expenditures is
primarily for our expansion programs to increase manufacturing capacity for our
gallium arsenide and display products.
We periodically enter into long-term debt arrangements to finance equipment
purchases and other activities. As of December 31, 1999, long-term debt
obligations totaled $4.7 million, of which $2.1 million is payable in the next
twelve months.
Our CyberDisplay products are targeted at large sales volume consumer
electronic and wireless communication applications. We believe that in order to
obtain customers in these markets, it has been necessary to make significant
investments in equipment and infrastructure. We believe that it will be
necessary to continue to make significant investments in equipment and
development in order to produce current and future CyberDisplay products. As a
result of the current cost structure of our CyberDisplay product line, our
ability to achieve profitability in that product line depends upon achieving
significant sales volumes and higher gross profit margins. We have not yet
produced our CyberDisplay products at volumes necessary to achieve
profitability. Accordingly, we may not be able to obtain sufficient sales
volumes, or if sufficient sales volumes are achieved, we may not be able to
produce our CyberDisplay products at a gross margin which will allow the product
line to generate a profit.
We lease equipment and our facilities located in Taunton and Westborough,
Massachusetts, and Los Gatos, California, under non-cancelable operating leases.
The Taunton lease expires in October 2002. The Westborough lease expires in
October 2001, with renewable options for up to three additional years at our
election. The Los Gatos lease covers a five year period terminating in 2002. We
record costs incurred under operating leases as rent expense and this expense
aggregated approximately $1.3 million for 1999.
We expect to expend approximately $30.0 million on capital expenditures
over the next twelve months, primarily for the acquisition of equipment relating
to the production of our HBT transistor wafers and the manufacturing, packaging
and testing of CyberDisplay products, including the establishment of a second
manufacturing product facility for our HBT transistor wafers.
As of December 31, 1999, we had tax loss carryforwards of approximately
$44.7 million, which may be used to offset future taxable income.
17
Recent Accounting Pronouncements
The Financial Accounting Standards Board ("FASB") has issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which is effective for fiscal years
commencing after June 15, 2000. SFAS No. 133 requires fair value accounting for
all stand-alone derivatives and many derivatives embedded in other financial
instruments and contracts. The impact of SFAS No. 133 on us has not yet been
determined.
Seasonality
The Company's business is not seasonal in nature.
Inflation
The Company does not believe that its operations have been materially
affected by inflationary forces.
18
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 27, 2000 KOPIN CORPORATION
By:
-------------------------------------
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
--------- ----- ----
Chairman of the Board, March 27, 2000
- ------------------------------- Chief Executive Officer,
John C. C. Fan President and Director
(principal executive officer)
Director March 27, 2000
- -------------------------------
David E. Brook
Director March 27, 2000
- -------------------------------
Morton Collins
Director March 27, 2000
- -------------------------------
Andrew H. Chapman
Director March 27, 2000
- -------------------------------
Chi Chia Hsieh
Director March 27, 2000
- -------------------------------
Michael A. Wall
/s/ Richard A. Sneider Treasurer and Chief March 27, 2000
- ------------------------------- Financial Officer
Richard A. Sneider (principal financial and
accounting officer)
Item 8.Financial Statements
KOPIN CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report............................................. F-2
Consolidated Balance Sheets at December 31, 1999 and 1998................ F-3
Consolidated Statements of Operations and Comprehensive Income (Loss) for
the years ended
December 31, 1999, 1998 and 1997........................................ F-4
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1999, 1998 and 1997........................................ F-5
Consolidated Statements of Cash Flows for the years ended December 31,
1999, 1998 and 1997..................................................... F-6
Notes to Consolidated Financial Statements............................... F-7
F-1
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Kopin Corporation
Taunton, Massachusetts
We have audited the accompanying consolidated balance sheets of Kopin
Corporation and subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of operations, comprehensive income (loss),
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999 in conformity with accounting principles generally accepted
in the United States of America.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Boston, Massachusetts
March 17, 2000
F-2
KOPIN CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31,
--------------------------
1999 1998
------------ ------------
ASSETS
Current assets:
Cash and equivalents............................. $ 65,981,848 $ 30,807,335
Marketable securities............................ 33,117,555 6,000,883
Accounts receivable, net of allowance of $450,800
and $150,800
Billed......................................... 10,547,762 2,743,211
Unbilled....................................... 655,220 910,787
Inventory........................................ 6,157,195 3,337,178
Prepaid expenses and other current assets........ 1,651,905 743,069
------------ ------------
Total current assets......................... 118,111,485 44,542,463
Equipment and improvements:
Equipment........................................ 32,849,431 24,953,456
Leasehold improvements........................... 808,884 808,884
Furniture and fixtures........................... 459,097 426,084
Equipment under construction..................... 7,207,812 25,131
------------ ------------
41,325,224 26,213,555
Accumulated depreciation and amortization........ 20,653,963 16,867,698
------------ ------------
20,671,261 9,345,857
------------ ------------
Other assets....................................... 4,352,793 6,173,153
Intangible assets.................................. 1,938,190 1,844,148
------------ ------------
TOTAL ASSETS....................................... $145,073,729 $ 61,905,621
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................. $ 7,564,070 $ 1,728,596
Accrued payroll and expenses..................... 1,923,656 1,455,640
Current portion of long-term obligations......... 2,142,373 1,999,494
------------ ------------
Total current liabilities.................... 11,630,099 5,183,730
------------ ------------
Long-term obligations, less current portion........ 2,567,100 4,209,474
Minority interest.................................. 809,238 665,994
Commitments
Stockholders' equity:
Preferred stock, par value $.01 per share;
authorized, 3,000 shares; none issued and
outstanding..................................... -- --
Common stock, par value $.01 per share;
authorized, 60,000,000 shares; issued,
30,149,362 shares in 1999 and 24,537,122 shares
in 1998......................................... 301,494 245,372
Additional paid-in capital....................... 186,077,638 108,832,093
Deferred compensation............................ (110,035) (165,055)
Accumulated other comprehensive income .......... 509,725 420,812
Deficit.......................................... (56,711,530) (57,486,799)
------------ ------------
Total stockholders' equity................... 130,067,292 51,846,423
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY......... $145,073,729 $ 61,905,621
============ ============
See notes to consolidated financial statements.
F-3
KOPIN CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31,
-------------------------------------
1999 1998 1997
----------- ----------- -----------
Revenues:
Product revenues..................... $36,125,822 $23,225,415 $13,110,044
Research and development revenues.... 2,536,188 3,679,582 3,282,974
----------- ----------- -----------
38,662,010 26,904,997 16,393,018
----------- ----------- -----------
Costs and expenses:
Cost of product revenues............. 26,280,390 15,509,316 8,636,199
Research and development-funded
programs............................ 2,858,233 3,953,875 2,801,671
Research and development-internal.... 4,262,235 5,659,362 7,622,614
Selling, general and administrative.. 5,757,288 4,014,862 4,292,383
Other................................ 366,079 384,349 327,102
Impairment charge.................... -- 1,800,000 --
----------- ----------- -----------
39,524,225 31,321,764 23,679,969
----------- ----------- -----------
Loss from operations................... (862,215) (4,416,767) (7,286,951)
Other income and expense:
Interest and other income............ 2,133,613 2,043,886 1,264,052
Interest expense..................... (405,972) (535,783) (234,870)
----------- ----------- -----------
Income (loss) before minority
interest.............................. 865,426 (2,908,664) (6,257,769)
Minority interest in (income) loss of
subsidiary............................ (90,157) (59,223) --
----------- ----------- -----------
Net income (loss)...................... $ 775,269 $(2,967,887) $(6,257,769)
=========== =========== ===========
Net income (loss) per share:
Basic................................. $ 0.03 $ (0.12) $ (0.28)
=========== =========== ===========
Diluted............................... $ 0.03 $ (0.12) $ (0.28)
=========== =========== ===========
Weighted average number of common
shares outstanding:
Basic................................ 25,881,517 24,136,956 22,020,320
Diluted.............................. 28,160,957 24,136,956 22,020,320
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Years Ended December 31,
-------------------------------------
1999 1998 1997
----------- ----------- -----------
Net income (loss)...................... $ 775,269 $(2,967,887) $(6,257,769)
Foreign currency translation
adjustments........................... 98,592 414,492 --
Unrealized gain (loss) on marketable
securities, net....................... (9,679) 12,321 (50,934)
----------- ----------- -----------
Comprehensive income (loss)............ $ 864,182 $(2,541,074) $(6,308,703)
=========== =========== ===========
See notes to consolidated financial statements.
F-4
KOPIN CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Accumulated
Common Stock Additional Other
-------------------- Paid-in Deferred Comprehensive
Shares Amount Capital Compensation Income (Loss) Deficit Total
---------- -------- ------------ ------------ ------------- ------------ ------------
Balance, January 1,
1997................... 21,862,816 $218,628 $ 88,496,137 $(227,706) $ 44,933 $(48,261,143) $ 40,270,849
Exercise of stock
options............... 381,470 3,814 1,826,769 -- -- -- 1,830,583
Compensation relating
to grant of stock
options............... -- -- 80,106 (80,106) -- -- --
Amortization of
compensation relating
to grant of stock
options............... -- -- -- 75,857 -- -- 75,857
Net unrealized loss on
marketable
securities............ -- -- -- -- (50,934) -- (50,934)
Net loss............... -- -- -- -- -- (6,257,769) (6,257,769)
---------- -------- ------------ --------- -------- ------------ ------------
Balance, December 31,
1997................... 22,244,286 222,442 90,403,012 (231,955) (6,001) (54,518,912) 35,868,586
Issuance of common
stock, net of issuance
costs of $1,829,000... 2,000,000 20,000 17,151,418 -- -- -- 17,171,418
Exercise of stock
options............... 292,836 2,930 1,277,663 -- -- -- 1,280,593
Amortization of
compensation relating
to grant of stock
options............... -- -- -- 66,900 -- -- 66,900
Net unrealized gain on
marketable
securities............ -- -- -- -- 12,321 -- 12,321
Foreign currency
translation
adjustments........... -- -- -- -- 414,492 -- 414,492
Net loss............... -- -- -- -- -- (2,967,887) (2,967,887)
---------- -------- ------------ --------- -------- ------------ ------------
Balance, December 31,
1998................... 24,537,122 245,372 108,832,093 (165,055) 420,812 (57,486,799) 51,846,423
Issuance of common
stock, net of issuance
costs of $4,902,000... 4,600,000 46,000 73,107,802 -- -- -- 73,153,802
Repurchase of common
stock................. (65,360) (654) (499,346) -- -- -- (500,000)
Exercise of stock
options............... 1,077,600 10,776 4,637,089 -- -- -- 4,647,865
Amortization of
compensation relating
to grant of stock
options............... -- -- -- 55,020 -- -- 55,020
Net unrealized loss on
marketable
securities............ -- -- -- -- (9,679) -- (9,679)
Foreign currency
translation
adjustments........... -- -- -- -- 98,592 -- 98,592
Net income............. -- -- -- -- -- 775,269 775,269
---------- -------- ------------ --------- -------- ------------ ------------
Balance, December 31,
1999.................. 30,149,362 $301,494 $186,077,638 $(110,035) $509,725 $(56,711,530) $130,067,292
========== ======== ============ ========= ======== ============ ============
See notes to consolidated financial statements.
F-5
KOPIN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
-------------------------------------
1999 1998 1997
----------- ----------- -----------
Cash flows from operating activities:
Net income (loss)...................... $ 775,269 $(2,967,887) $(6,257,769)
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities:
Depreciation and amortization......... 4,093,176 4,275,202 3,512,272
Amortization of compensation relating
to grant of stock options............ 55,020 66,900 75,857
Impairment charge..................... -- 1,800,000 --
Decrease in unearned revenue.......... -- -- (80,484)
Decrease in deferred rent............. -- (165,166) (216,000)
Minority interest in income of
subsidiary........................... 90,157 59,223 --
Changes in assets and liabilities:
Accounts receivable.................... (7,526,441) 682,103 1,754,988
Inventory.............................. (2,795,274) (594,151) (7,875)
Prepaid expenses and other current
assets................................ (903,245) 63,114 458,914
Intangible assets...................... (445,642) (509,175) (501,677)
Accounts payable and accrued expenses.. 6,291,289 (372,105) (4,233,891)
----------- ----------- -----------
Net cash provided by (used in)
operating activities............... (365,691) 2,338,058 (5,495,665)
----------- ----------- -----------
Cash flows from investing activities:
Marketable securities.................. (27,126,351) (1,367,678) 5,888,997
Other assets........................... 1,820,540 (2,799,751) (410,543)
Capital expenditures................... (15,003,438) (2,945,784) (3,555,266)
----------- ----------- -----------
Net cash provided by (used in)
investing activities............... (40,309,249) (7,113,213) 1,923,188
----------- ----------- -----------
Cash flows from financing activities:
Net proceeds from issuance of common
stock................................. 73,153,802 17,171,418 --
Net proceeds from issuance of
subsidiary stock...................... -- 383,583 --
Repurchase of common stock............. (500,000) -- --
Principal payments on long-term
obligations........................... (1,499,495) (2,292,818) (1,553,829)
Proceeds from long-term obligations.... -- 5,000,000 1,259,832
Proceeds from note payable............. -- -- 450,000
Principal payment on note payable...... -- (450,000) (500,000)
Proceeds from exercise of stock
options............................... 4,647,865 1,280,593 1,830,583
----------- ----------- -----------
Net cash provided by financing
activities......................... 75,802,172 21,092,776 1,486,586
----------- ----------- -----------
Effect of exchange rate changes on
cash................................... 47,281 64,314 --
----------- ----------- -----------
Net increase (decrease) in cash and
equivalents............................ 35,174,513 16,381,935 (2,085,891)
Cash and equivalents:
Beginning of period.................... 30,807,335 14,425,400 16,511,291
----------- ----------- -----------
End of period.......................... $65,981,848 $30,807,335 $14,425,400
=========== =========== ===========
Supplementary cash flow information--
Interest paid in cash.................. $ 426,471 $ 501,691 $ 229,328
See notes to consolidated financial statements.
F-6
KOPIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Significant
estimates included within the financial statements include net realizable value
of subsidiary assets, sales return reserves, warranty reserves, inventory
reserves, allowances for doubtful accounts and the economic life of intangible
assets.
References herein to "1999", "1998" and "1997" are for and as of the fiscal
years ended December 31, 1999, 1998 and 1997.
Industry Segment
Kopin Corporation and its subsidiaries (the "Company") operate in one
industry segment which includes the development, manufacture and sale of flat
panel display devices and products and gallium arsenide transistor wafers and
products for commercial and consumer markets, and the performance of related
research and development under contracts.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company,
its wholly owned subsidiary and Kowon Technology Co., Ltd., a majority owned
(65%) subsidiary located in Korea. All intercompany transactions and balances
have been eliminated.
Stock Split
All shares, income (loss) per share, and related information give
retroactive effect to the 2 for 1 stock split effected in the form of a stock
dividend for shareholders of record as of December 20, 1999, and effected on
December 29, 1999.
Revenue Recognition
Product revenue is recognized when a product is shipped or when a service is
performed. For certain of its products, the Company provides customers with a
twelve-month warranty from the date of sale. Estimated sales return and
warranty reserves are provided at the time of sale based upon historical and
anticipated warranty costs.
Revenue from long-term research and development contracts is recognized on
the percentage-of-completion method of accounting as work is performed, based
upon the ratio that incurred costs or hours bear to estimated total completion
cost or hours. At the time a loss on a contract becomes known, the entire
amount of the estimated ultimate loss is recognized in the financial
statements. Amounts earned on contracts in progress in excess of the billings
of such contracts are classified as unbilled receivables and amounts received
in excess of amounts earned are classified as unearned revenue. Unbilled
receivables primarily result from the time necessary to accumulate costs,
including costs incurred by subcontractors, for invoice preparation after the
work has been performed by the Company. Unbilled receivables are billed based
on dates stipulated in the related agreement or in periodic installments based
upon the Company's monthly invoicing cycle.
Research and Development Costs
Research and development expenses include expenses incurred in support of
internal development programs and programs funded by agencies of the federal
government, including development programs for
F-7
KOPIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
display devices and products, device wafers, circuit design costs, staffing,
purchases of materials and laboratory supplies, and fabrication and packaging
of the Company's display products.
Cash and Equivalents and Marketable Securities
The Company considers all highly liquid, short-term debt instruments with a
maturity of three months or less at the date of purchase to be cash
equivalents.
Marketable securities consist primarily of commercial paper, medium-term
notes, and United States government and agency securities. The Company
classifies marketable securities included in Current Assets as "available for
sale" and accordingly carries them at market value. Marketable securities
included in Other Assets are classified as "held to maturity" and carried at
cost as the Company has the ability and intent to hold them until maturity.
From time to time, the Company sells marketable securities for working
capital, capital expenditure and investment purposes. Substantially all the
marketable securities mature within one year. Gross unrealized holding gains
or losses are recorded in other comprehensive income.
Investments in marketable securities are as follows:
Amortized Cost Unrealized Gains
---------------------- ----------------------
December 31, December 31,
---------------------- ----------------------
1999 1998 1999 1998
----------- ---------- ----------- ----------
Available for sale securities:
U.S. government and agency
securities.................... $14,658,199 $5,001,073 $ $ 5,710
Corporate debt securities...... 18,462,715 993,490 3,195 610
----------- ---------- ----------- ----------
Total available for sale
securities.................. $33,120,914 $5,994,563 $ 3,195 $ 6,320
=========== ========== =========== ==========
Unrealized Losses Fair Value
---------------------- ----------------------
December 31, December 31,
---------------------- ----------------------
1999 1998 1999 1998
----------- ---------- ----------- ----------
Available for sale securities:
U.S. government and agency
securities.................... $ 6,554 $ -- $14,651,645 $5,006,783
Corporate debt securities...... -- -- 18,465,910 994,100
----------- ---------- ----------- ----------
Total available for sale
securities.................. $ 6,554 $ -- $33,117,555 $6,000,883
=========== ========== =========== ==========
The gross gains and losses realized related to sales of marketable
securities were not material. Kopin uses the specific identification method as
a basis for determining cost and calculating realized gains or losses.
Inventory
Inventory is stated at the lower of cost (first-in, first-out method) or
market, and consists of the following:
1999 1998
---------- ----------
Raw materials............................................. $4,787,158 $2,672,230
Work in process........................................... 1,164,027 333,996
Finished goods............................................ 206,010 330,952
---------- ----------
$6,157,195 $3,337,178
========== ==========
F-8
KOPIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Equipment and Improvements
Equipment and improvements are recorded at cost. Depreciation and
amortization are provided using the straight-line method over the estimated
lives of the assets, generally 3 to 10 years, or, in the case of leasehold
improvements and leased equipment, over the term of the lease.
Intangible Assets
Amortization of intangible assets is on a straight-line basis over the
estimated useful lives.
Foreign Currency Translation
Assets and liabilities of non-U.S. operations are translated into U.S.
dollars at year end exchange rates, and revenues and expenses at rates
prevailing during the year. Resulting translation adjustments are accumulated
as part of other comprehensive income and aggregate $513,084 and $414,492 of
unrealized gain at December 31, 1999 and 1998, respectively. Transaction gains
or losses are recognized in income or loss currently.
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 have not been included in any periods
in which the effect would be anti-dilutive. Had the impact of stock options,
using the treasury stock method, been included in the computation, weighted
average shares would have increased by approximately 1,934,000 and 1,356,000,
for the years ended December 31, 1998 and 1997, respectively.
Concentration of Credit Risk
The Company invests its excess cash in high quality government and corporate
financial instruments which bear minimal risk. The Company sells its products
to customers worldwide. The Company maintains a reserve for potential credit
losses and such losses have been minimal.
Fair Market Value of Financial Instruments
Financial instruments consist of current assets (except inventories),
current liabilities and long-term obligations. Current assets and current
liabilities are carried at cost which approximates fair market value. Long-term
obligations are stated at cost which approximates fair market value.
Impairment Charge
The Company periodically assesses the recoverability of its long-lived
assets by comparing the undiscounted cash flows expected to be generated by
those assets to their carrying value. If the sum of the undiscounted cash flows
is less than the carrying value of the assets, an impairment charge is
recognized.
In December 1998, due to the modification of certain manufacturing
processes, the Company recorded an impairment charge of $1,800,000 which
consisted of the write-down of certain patents and equipment. The $1,800,000
represented the amount that the carrying value of the assets exceeded their
fair market value. The fair market value of the assets was determined based on
valuation techniques utilizing the present value of estimated expected future
cash flows.
Stock-Based Compensation
Compensation cost associated with the grant of options and other stock
awards to employees is determined using the intrinsic value method.
Compensation cost associated with the grant of options and other stock awards
to non-employees is determined using the fair value method.
F-9
KOPIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. Other Assets
Other assets consist primarily of equity investments in various companies
and notes receivable. Equity investments are non-marketable and are carried at
cost and aggregate $3,384,000 and $4,695,000 at December 31, 1999 and 1998,
respectively. The Company periodically assesses possible impairment of these
investments. Notes receivable bear interest at rates ranging from 7.75% to
11.75% and are due in varying installments through August, 2003. The Company's
interest in any of these companies is less than 20% of any investees voting
interest.
3. Intangible Assets
Intangible assets consist of the following:
Estimated Useful
Life (years) 1999 1998
---------------- ----------- -----------
Patents and application fees......... 10 $ 2,536,999 $ 2,096,406
Licenses............................. 5-12 716,274 987,714
----------- -----------
3,253,273 3,084,120
Less accumulated amortization........ (1,315,083) (1,239,972)
----------- -----------
$ 1,938,190 $ 1,844,148
=========== ===========
4. Income Taxes
As of December 31, 1999, the Company has available for tax reporting
purposes, federal net operating loss and general business tax credit
carryforwards of approximately $44,680,000 and $595,000, respectively, expiring
through 2013.
Deferred taxes are provided to recognize the effect of temporary differences
between tax and financial reporting. Deferred income tax assets and liabilities
consist of the following:
1999 1998
------------ ------------
Deferred tax assets:
Net operating loss carryforward................ $ 18,319,000 $ 18,450,000
Research and development expenses.............. 1,867,000 2,200,000
Amortization of intangible assets.............. 406,000 315,000
Other.......................................... 336,000 300,000
------------ ------------
20,928,000 21,265,000
------------ ------------
Deferred tax liabilities:
Patent costs................................... 1,040,000 850,000
Depreciation................................... 1,471,000 1,200,000
Other.......................................... 306,000 --
------------ ------------
2,817,000 2,050,000
------------ ------------
Net deferred tax assets........................ 18,111,000 19,215,000
Valuation allowance............................ (18,111,000) (19,215,000)
------------ ------------
$ -- $ --
============ ============
The provision for income taxes consists of the following for the years ended
December 31:
1999 1998 1997
--------- ---------- -----------
Current
Federal $(112,200) $ (297,000) $(1,502,999)
State (35,800) (45,000) (594,000)
Foreign 16,250 18,800 --
Deferred
Federal 245,750 165,000 (729,000)
State 17,000 51,000 (184,000)
Generation of (Use of) loss
carryforwards (131,000) 107,200 3,009,000
--------- ---------- -----------
Provision for income taxes $ -- $ -- $ --
========= ========== ===========
F-10
KOPIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. Long-Term Obligations
Long-term obligations consist of the following:
1999 1998
----------- -----------
Secured term note.................................. $ 3,750,000 $ 4,250,000
Capital lease obligations--equipment............... 959,474 1,593,200
5.625% equipment promissory note................... -- 339,272
8.19% equipment promissory note.................... -- 26,496
----------- -----------
4,709,474 6,208,968
Less current portion............................... (2,142,373) (1,999,494)
----------- -----------
$ 2,567,100 $ 4,209,474
=========== ===========
In March 1998, the Company entered into a $5,000,000 secured term note which
requires the Company to make quarterly principal payments of $250,000 plus
interest at a floating rate based upon LIBOR, 8.0% at December 31, 1999. This
term note is secured by the Company's accounts receivable.
The equipment capital lease obligations require monthly payments of
approximately $63,500 through June 2000, decreasing to approximately $32,500
thereafter until June 2001. Early termination and equipment purchase options
may be exercised in December 2000, respectively, for the outstanding capital
lease obligations. The capital lease obligations are collateralized by
equipment with a carrying value of $1,589,869 at December 31, 1999.
The 5.625% equipment promissory note required monthly payments of principal
and interest totaling $57,477 through June 1999. The loan obligation was
specifically collateralized by the equipment financed under the agreement and
certain marketable securities.
The aggregate maturities of long-term obligations, including capital lease
obligations, as of December 31, 1999 are as follows:
Year ending December 31, Amount
------------------------ ----------
2000.......................................................... $2,192,444
2001.......................................................... 1,317,100
2002.......................................................... 1,250,000
----------
4,759,544
Less:
Amounts representing interest.................................. (50,071)
Current portion of long-term obligations....................... (2,142,373)
----------
$2,567,100
==========
6. Stockholders' Equity
In October 1999, the Company completed a public offering of 4,600,000 shares
of common stock at a price of $16.97 per share. Net proceeds to the Company
totaled approximately $73,154,000. In February 1998, the Company completed a
public offering of 4,000,000 shares of common stock at a price of $9.50 per
share. Of the total shares sold, 2,000,000 shares were sold by the Company and
the other 2,000,000 shares were sold by a shareholder. Net proceeds to the
Company totaled approximately $17,171,000.
7. Stock Options
The Company's 1992 Stock Option Plan permits the granting of both
nonqualified stock options and incentive stock options. The plan covers
6,500,000 shares of common stock (including shares issued upon
F-11
KOPIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
exercise of options granted pursuant the 1985 Plan). The option price of
incentive stock options shall not be less than 100% of the fair market value of
the stock at the date of grant, or in the case of certain incentive stock
options, at 110% of the fair market value at the time of the grant. Options
must be exercised within a ten-year period or sooner if so specified within the
option agreement. Options granted generally vest over four years.
In 1994, the Company adopted the Director Stock Option Plan, which provides
for the automatic granting, pursuant to a formula, of nonqualified stock
options to the Company's non-employee directors. A maximum of 350,000 shares
are issuable under the plan.
For certain options granted, the Company recognizes as compensation expense
the excess of the fair market value of the common shares issuable upon exercise
of such options over the aggregate exercise price of such options. This
compensation expense is amortized ratably over the vesting period of each
option. For the year ended December 31, 1999, such compensation expense of
$55,020 was recorded and will aggregate to $110,035 over the remaining terms of
the options. At December 31, 1999 the Company has available 93,916 shares of
common stock for future grant under its stock option plans. A summary of option
activity is as follows:
1999 1998 1997
-------------------- ------------------- -------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------- -------- --------- -------- --------- --------
Balance, beginning of
period................. 4,488,676 $ 5.98 4,423,294 $5.83 3,615,932 $5.24
Options granted....... 1,122,566 17.59 647,450 6.58 1,367,300 7.16
Options cancelled..... (213,398) 5.74 (289,232) 6.52 (178,468) 5.54
Options exercised..... (1,077,600) 5.41 (292,836) 5.03 (381,470) 4.80
---------- --------- ---------
Balance, end of period.. 4,320,244 9.09 4,488,676 $5.98 4,423,294 $5.83
========== ========= =========
Exercisable, end of
period................. 2,696,371 3,005,866 1,934,000
========== ========= =========
Of the 4,320,244 options outstanding at December 31, 1999, 950,014 have
exercise prices between $.50 and $5.00, with a weighted average exercise price
of $4.42 and a weighted average remaining contractual life of 5.9 years. Of
these options, 842,144 are exercisable at a weighted average price of $4.38. An
additional 1,958,908 options outstanding at December 31, 1999 have exercise
prices between $5.06 and $7.50, with a weighted average exercise price of $6.46
and a weighted average remaining contractual life of 7.0 years. Of these
options, 1,465,821 are exercisable at a weighted average price of $6.49. At
December 31, 1999 there are also 566,006 options which have exercise prices
between $7.63 and $9.94, with a weighted average exercise price of $9.10 and a
weighted average remaining contractual life of 8.1 years. Of these options,
241,656 are exercisable at a weighted average price of $7.72. The remaining
845,316 options have exercise prices between $10.19 and $39.63, with a weighted
average exercise price of $19.39 and a weighted average remaining contractual
life of 9.6 years. Of these options, 146,750 are exercisable at a weighted
average exercise price of $17.79. The weighted average exercise price of all
options exercisable at December 31, 1999 is $7.43.
The Company has two fixed option plans which reserve shares of common stock
for issuance to executives, key employees and directors. Had compensation cost
for the Company's two stock option plans been determined based on the fair
value at the grant date for awards in 1999, 1998 and 1997 the Company's net
loss and net loss per share would have been $2,821,000 or $.10 per share in
1999, $4,857,414 or $0.20 per share in 1998 and $7,763,328 or $0.35 per share
in 1997.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following assumptions used for
grants in 1999, 1998 and 1997: no expected dividend
F-12
KOPIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
yield; expected volatility of 62.21% in 1999, 61.9% in 1998 and 61.3% in 1997;
risk-free interest rate of 6.5% in 1999, 4.69% in 1998 and 5.72% in 1997; and
expected lives of four years. The weighted-average fair value of options on
grant date was $9.46 in 1999, $3.38 in 1998 and $3.72 in 1997.
8. Employee Benefit Plan
The Company has an employee benefit plan pursuant to Section 401(k) of the
Internal Revenue Code. The plan allows employees to defer up to 15% of their
annual compensation to a current maximum of $10,000. The Company will match 50%
of all deferred compensation up to a maximum of 3% of each employee's annual
compensation. The amount charged to operations in connection with this plan was
approximately [$129,000] in 1999, $108,000 in 1998, and $91,000 in 1997.
9. Major Customers and Geographic Information
Approximately 49%, 59% and 63% of the Company's revenue resulted from sales
to a single customer during the years ended December 31, 1999, 1998, and 1997,
respectively. Approximately 13% of the Company's revenues resulted from sales
to a second customer in 1999. In addition, during the years ended December 31,
1999, 1998, and 1997, approximately 7%, 14% and 20%, respectively, of the
Company's revenues resulted from multiple contracts with various agencies of
the United States government. These contracts are subject to termination at the
election of the relevant agency.
Sales to foreign customers during the years ended December 31, 1999, 1998,
and 1997 were approximately 36%, 29% and 2%, respectively, of the Company's
revenues. Sales to customers in Japan for 1999 and 1998 were approximately 18%
and 4%, respectively.
10. Commitments
Leases
The Company leases certain machinery and equipment, and its facilities
located in Taunton and Westborough, Massachusetts, and Los Gatos, California,
under noncancelable operating leases. The Taunton lease expires in 2002. The
Westborough lease expires in October 2001, with renewal options for up to three
additional years at the Company's election. The Los Gatos lease covers a five-
year period terminating in 2002. Substantially all real estate taxes, insurance
and maintenance expenses under these leases are obligations of the Company. The
following is a schedule of minimum rental commitments under noncancelable
operating leases:
Amount
----------
Years ended December 31:
2000............................................................. $1,300,033
2001............................................................. 1,145,904
2002............................................................. 245,567
2003............................................................. 8,339
----------
Total minimum lease payments..................................... $2,699,843
==========
Costs incurred under operating leases are recorded as rent expense and
aggregated approximately $1,321,000 in 1999, $1,090,000 in 1998, and $979,000
in 1997.
Other Agreements
The Company has entered into various license agreements which require the
Company to pay royalties based upon a set percentage of product sales, subject,
in some cases, to certain minimum amounts. Total royalty expense approximated
$26,040 in 1999, $25,000 in 1998 and $24,000 in 1997.
F-13
KOPIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Litigation
The Company is engaged in legal proceedings arising in the ordinary course
of business. The Company believes that the ultimate outcome of these
proceedings will not have a material adverse impact on the Company's
consolidated financial position, results of operations or cash flows.
11. Product Revenues
Product Revenues consisted of approximately the following:
1999 1998 1997
----------- ----------- -----------
Gallium Arsenide Products................... $31,491,300 $20,292,900 $11,950,400
Display Products............................ 4,634,500 2,932,500 1,150,300
Other....................................... -- 9,300
----------- ----------- -----------
Total Product Sales......................... $36,125,800 $23,225,400 $13,110,000
=========== =========== ===========
12. Recent Accounting Pronouncements
The Financial Accounting Standards Board ("FASB") has issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities", which is
effective for fiscal years commencing after June 15, 2000. SFAS No. 133
requires fair value accounting for all stand-alone derivatives and many
derivatives embedded in other financial instruments and contracts. The impact
of SFAS No. 133 on the Company has not yet been determined.
F-14