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 June 29, 2002 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 -------------- 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. Yes [X] No [_] Applicable only to corporate issuers: 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 July 31, 2002 ----- ------------------------------- Common Stock, par value $ .01 69,377,981 KOPIN CORPORATION INDEX Page No. ------- RISK FACTORS 3 PART I - FINANCIAL INFORMATION Item 1. Consolidated Financial Statements: Consolidated Balance Sheets at June 29, 2002 and 8 December 31, 2001 Consolidated Statements of Operations for the three and 9 six months ended June 29, 2002 and June 30, 2001 Consolidated Statements of Comprehensive Income (Loss) 10 for the three and six months ended June 29, 2002 and June 30, 2001 Consolidated Statements of Stockholders' Equity for the 10 six months ended June 29, 2002 and June 30, 2001 Consolidated Statements of Cash Flows for the 11 six months ended June 29, 2002 and June 30, 2001 Notes to Unaudited Consolidated Financial Statements 12 Item 2. Management's Discussion and Analysis of 14 Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures 16 About Market Risk PART II - OTHER INFORMATION Item 4. Submission of matters to a vote of security holders 16 Item 6. Exhibits 16 SIGNATURES 17 RISK FACTORS This Form 10-Q report contains forward-looking statements within the meaning of the securities laws that are based on current expectations, estimates, forecasts and projections about the industries in which Kopin operates, 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 Kopin. Words such as "expects", "anticipates", "intends", "plans", "believes", "could", "seeks", "estimates", and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements, whether as a result of new information, future events or otherwise. Factors that could cause or contribute to such differences in outcomes and 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 June 29, 2002 we had an accumulated deficit of $90.5 million. We cannot assure you 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. Historically, a few customers account for a substantial portion of our revenues. In 2002, Conexant Systems merged their wireless division with Alpha Industries to create Skyworks Solutions, Inc. On a proforma basis, assuming the merger occurred on January 1, 1999, sales of our HBT transistor wafers to Skyworks Solutions would have accounted for approximately 27%, 46%, and 49% of our total revenues for the years ended December 31, 2001, 2000, and 1999, respectively. Sales to Mitsubishi Electric Company, Ltd. were 11% and 13% of our total revenues for the years ended December 31, 2000 and 1999, respectively. For the years ended December 31, 2001, 2000 and 1999, revenues from multiple contracts with various U.S. governmental agencies accounted for approximately 3%, 2%, and 7%, respectively, of our total revenues. We anticipate that sales of our HBT transistor wafers to Skyworks Solutions will continue to represent a significant portion of our revenues for the near future. 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 and maintain profitability. If we are unable to significantly increase our CyberDisplay production capacity and reduce our CyberDisplay production costs, our business will suffer. Our CyberDisplay product line currently has significant fixed costs and our ability to achieve profitability in that product line depends upon achieving significant sales volumes and higher gross profit margins. We have limited experience manufacturing display products and have only recently produced our CyberDisplay products at volumes necessary to achieve profitability. If we are unable to maintain our CyberDisplay production levels and reduce manufacturing costs, we may lose customer orders and our display business will return to unprofitability. 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. Our success also depends upon the widespread consumer acceptance of our customers' products. Potential customers may be reluctant to adopt our CyberDisplay products because of concerns surrounding perceived risks relating to: o The introduction of our display technology generally; o Consumer acceptance of our CyberDisplay products; and o 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 Kopin for a critical component. We cannot assure you that prospective customers will adopt our CyberDisplay products or that consumers will accept our CyberDisplay products. If we fail to achieve market acceptance of our CyberDisplay products, our business may not be successful and the value of your investment in Kopin may decline. Our success depends on the continued growth and evolution of the wireless and fiber optic communications markets. Sales of products for wireless and fiber optic communications applications constitute a significant portion of our current and projected product revenues and cash flows. We are dependent on customer orders for these products for wireless and fiber optic communications applications, which in turn depend upon the current and anticipated market demand for wireless and fiber optic communications in general. For the year ended December 31, 2001, product revenues from the sale of our III-V products declined compared to the prior year as a result of worldwide inventory accumulation in the supply chain of wireless and fiber optic communications products and related components. The deferral or cancellation of customer orders due to excessive inventory or lack of demand will adversely impact our results of operations. 3 In addition, the implementation of higher bandwidth infrastructure will be needed to drive the development of the next generation of wireless communications services. These developments include data oriented services, such as Internet browsing capabilities and the ability to view e-mail and other information that should increase the demand for our products. Our future success will depend in large part on the widespread adoption of this infrastructure and the cost-effectiveness of these services to the consumer. 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 non-cancelable backlog, we typically plan our production and inventory levels based on internal forecasts of customer demand, which are highly unpredictable and can fluctuate substantially. Our operating results are difficult to forecast because we are continuing to invest in capital equipment and increasing our operating expenses for new product development. If we fail to accurately forecast our revenues and operating results, our business may not be successful and the value of your investment in Kopin may decline. 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: o The timing and successful introduction of additional manufacturing capacity; o The timing of the initial selection of our III-V and CyberDisplay products as a component in our customers' new products; o Availability of interface electronics for our CyberDisplay products supplied by Motorola and other vendors. o Competitive pressures on selling prices of our products; o The timing and cancellation of customer orders; o Our ability to introduce new products and technologies on a timely basis; o Our ability to successfully reduce costs; and o The cancellation of U.S. government contracts. 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, you 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. 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 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. Our ability to manufacture and distribute our CyberDisplay products would be severely limited if the third party that we rely on to manufacture integrated circuits for our CyberDisplay products fails to provide those services. We depend on United Microelectronics Corporation, or UMC, for the fabrication of integrated circuits for our CyberDisplay products. We have no long-term contracts with UMC. If UMC were to terminate its arrangement with us or become unable to 4 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 you that we would be able to establish alternative manufacturing and packaging relationships on acceptable terms. Our reliance on UMC involves certain risks, including: o The lack of control over production capacity and delivery schedules; o Limited control over quality assurance, manufacturing yields and production costs; and o 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. UMC, as well as several other third parties with which we do business, is 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 UMC, experienced related business interruptions. UMC has resumed normal operations; however, our business could suffer significantly if UMC's operations were disrupted again for an extended period of time. 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. Motorola currently produces all integrated circuit chip sets used with our CyberDisplay products in camcorders. If Motorola or any other third party were unable or unwilling to supply these integrated circuit chip sets and other critical raw materials, we would be unable to sell our CyberDisplay products until a replacement supplier could be found. We cannot assure you that a replacement supplier could be found on reasonable terms or in a timely manner. In the three month period ended September 30, 2000, two of 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. Any interruption in our ability to manufacture and distribute our CyberDisplay products could cause our display business to be unsuccessful and the value of your investment in Kopin may decline. 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 establishing a second internal facility to manufacture our III-V products. We also are increasing our CyberDisplay product manufacturing capabilities at our Korean subsidiary, Kowon Technology ("Kowon"). In particular, we expect to increasingly rely upon Kowon for back-end packaging of our CyberDisplay products. If we are unable to significantly 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: o The identification and availability of appropriate and affordable sites; o The management of facility construction and development timing and costs; o The transfer of our manufacturing techniques to additional sites, particularly Kowon; o The establishment of adequate management and information systems and financial controls; and o The adaptation of our complex manufacturing process in our additional sites. Additionally, we cannot be sure that any new 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 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 5 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. 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 your investment in Kopin may decline. Our products could infringe on the intellectual property rights of others. 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 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 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. Due to lower III-V product revenues resulting from the current slowdown in the market for wireless and fiber optic communications products, we have taken certain cost reduction measures, including reducing our workforce, reducing senior management pay and delaying salary increases. 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. Due to the current slowdown in the wireless and fiber optic communications markets and other general economic conditions, our 6 sales declined in 2001. We cannot assure you that sales will not continue to decrease. In addition, we cannot assure you 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 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 you that we have not, in the past, violated applicable laws or regulations which could result in required remediation or other liabilities. You 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 have experienced extreme price and trading volatility in recent months. This volatility has significantly affected the market prices of securities of many technology companies for reasons frequently unrelated to the operating performance of the specific companies. These broad market fluctuations may adversely affect the market price of our common stock. 7 PART I. FINANCIAL INFORMATION KOPIN CORPORATION CONSOLIDATED BALANCE SHEETS (unaudited) June 29, 2002 December 31, 2001 ------------- ----------------- Assets Current assets: Cash and equivalents $ 66,440,337 $ 74,425,853 Marketable securities, at fair value 45,806,591 30,009,300 Accounts receivable, net of allowance of $1,300,000 and $1,350,000 Billed 6,050,521 7,210,570 Unbilled - 33,975 Inventory 6,537,028 8,713,740 Prepaid taxes 720,675 419,671 Prepaid expenses and other current assets 1,369,074 3,349,729 ------------ ------------ Total current assets 126,924,226 124,162,838 Property, plant and equipment, net 38,027,262 40,813,240 Other assets 14,175,106 24,943,792 Goodwill, net - 12,582,383 Intangible assets, net 991,866 1,146,716 ------------ ------------ Total assets $180,118,460 $203,648,969 ============ ============ Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 11,288,665 $ 12,040,426 Accrued payroll and expenses 1,562,898 861,733 Other accrued liabilities 4,095,502 4,829,868 ------------ ------------ Total current liabilities 16,947,065 17,732,027 Minority interest 2,329,590 1,585,980 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: 69,374,540 shares in 2002 and 69,045,532 shares in 2001 693,745 690,455 Additional paid-in capital 260,293,364 259,141,718 Accumulated other comprehensive loss (9,624,804) (2,369,677) Deficit (90,520,500) (73,131,534) ------------ ------------ Total stockholders' equity 160,841,805 184,330,962 ------------ ------------ Total liabilities and stockholders' equity $180,118,460 $203,648,969 ============ ============ See notes to consolidated financial statements. 8 KOPIN CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) Three Months Ended Six Months Ended ------------------ ---------------- June 29, 2002 June 30, 2001 June 29, 2002 June 30, 2001 ------------- ------------- -------------- -------------- Revenues: Product revenues $ 20,114,618 $ 9,076,500 $ 37,470,506 $ 23,487,232 Research and development revenues 720,306 161,525 947,362 724,024 -------------- ------------- -------------- -------------- 20,834,924 9,238,025 38,417,868 24,211,256 Expenses: Cost of product revenues 15,405,542 15,281,644 30,051,134 31,651,047 Research and development 4,103,164 4,241,640 7,411,909 7,364,873 Selling, general and administrative 2,682,197 5,653,851 5,704,399 8,748,779 Other 253,700 45,001 519,126 162,258 Impairment charge - 5,341,784 - 5,341,784 -------------- ------------- -------------- -------------- 22,444,603 30,563,920 43,686,568 53,268,741 -------------- ------------- -------------- -------------- Loss from operations (1,609,679) (21,325,895) (5,268,700) (29,057,485) Other income and expense: Interest and other income 736,369 21,833,268 1,445,194 22,946,601 Interest and other expense (480,228) (88,463) (494,460) (180,299) -------------- ------------- -------------- -------------- Income (loss) before minority interest in (1,353,539) 418,910 (4,317,966) (6,291,183) income of subsidiary Minority interest in income of subsidiary (268,468) (67,243) (488,617) (126,293) -------------- ------------- -------------- -------------- Income (loss) before cumulative effect of (1,622,007) 351,667 (4,806,583) (6,417,476) accounting change Cumulative effect of accounting change - - (12,582,383) - -------------- ------------- -------------- -------------- Net income (loss) $ (1,622,007) $ 351,667 $ (17,388,966) $ (6,417,476) ============== ============= ============== ============== Income (loss) before cumulative effect of accounting change per share: Basic $ (.02) $ .01 $ (.07) $ (.10) ============== ============= ============== ============== Diluted $ (.02) $ .01 $ (.07) $ (.10) ============== ============= ============== ============== Cumulative effect of accounting change per share: Basic $ - $ - $ (.18) $ - ============== ============= ============== ============== Diluted $ - $ - $ (.18) $ - ============== ============= ============== ============== Net income (loss) per share: Basic $ (.02) $ .01 $ (.25) $ (.10) ============== ============= ============== ============== Diluted $ (.02) $ .01 $ (.25) $ (.10) ============== ============= ============== ============== Weighted average number of common shares outstanding: Basic 69,350,065 64,990,865 69,256,593 64,938,553 ============== ============= ============== ============== Diluted 69,350,065 67,917,847 69,256,593 64,938,553 ============== ============= ============== ============== See notes to consolidated financial statements. 9 KOPIN CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited) Three Months Ended Six Months Ended ------------------ ---------------- June 29, 2002 June 30, 2001 June 29, 2002 June 30, 2001 -------------- -------------- -------------- -------------- Net income (loss) $ (1,622,007) $ 351,667 $(17,388,966) $ (6,417,476) Foreign currency translation adjustments 535,460 (2,473) 522,425 (11,953) Reclassification of unrealized (loss) to realized (loss) (1,681,889) - (1,681,889) - Unrealized gain (loss) on marketable securities, net (4,932,892) 3,501,872 (6,095,663) 3,706,388 ------------ ----------- ------------ ------------- Comprehensive income (loss) $ (7,701,328) $ 3,851,066 $(24,644,093) $ (2,723,041) ============ =========== ============ ============= CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Six months ended June 29, 2002 and June 30, 2001 (unaudited) Common Stock Additional Accumulated Other ------------ Paid-in Deferred Comprehensive Shares Amount Capital Compensation Income (Loss) Deficit Total ------ ------ ------- ------------ ------------- ------- ----- Balance, December 31, 2000 64,681,116 $ 646,811 $ 216,274,520 $ (55,015) $ 328,395 $(50,418,146) $166,776,565 Exercise of stock options 384,470 3,845 1,180,742 -- -- -- 1,184,587 Amortization of compensation relating to grant of stock options -- -- -- 27,510 -- 27,510 Net unrealized gain on marketable securities -- -- -- -- 3,706,388 -- 3,706,388 Foreign currency translation adjustments -- -- -- -- (11,953) (11,953) Net loss for the six-month period ended June 30, 2001 -- -- -- -- -- (6,417,476) (6,417,476) ---------- ---------- ------------- --------- ------------ ------------ ------------ Balance, June 30, 2001 65,065,586 $ 650,656 $ 217,455,262 $ (27,505) $ 4,022,830 $(56,835,622) $165,265,621 ========== ========== ============= ========= ============ ============ ============ 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 329,008 3,290 1,151,646 -- -- -- 1,154,936 Net unrealized loss on marketable securities -- -- -- -- (7,777,552) -- (7,777,552) Foreign currency translation adjustments -- -- -- -- 522,425 -- 522,425 Net loss for the six-month period ended June 29, 2002 -- -- -- -- -- (17,388,966) (17,388,966) ---------- ---------- -------------- -------- ------------ ------------ ------------ Balance, June 29, 2002 69,374,540 $ 693,745 $ 260,293,364 -- $ (9,624,804) $(90,520,500) $160,841,805 ========== ========== ============== ======== ============ ============ ============ See notes to consolidated financial statements. 10 KOPIN CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) Six months ended ---------------- June 29, 2002 June 30, 2001 ------------- ------------- Cash flows from operating activities: Net loss $ (17,388,966) $ (6,417,476) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 5,151,586 6,264,847 Amortization of stock option compensation - 27,510 Minority interest in income of subsidiary 488,617 126,293 Impairment charge - 5,341,784 Net (gain) loss on investment activity 364,726 (20,882,382) Cumulative effect of accounting change 12,582,383 - Changes in assets and liabilities: Accounts receivable 1,405,841 9,024,283 Inventory 2,380,059 (3,474,002) Prepaid expenses and other current assets 1,742,131 5,884,698 Intangible assets - 148,313 Accounts payable and accrued expenses (1,165,172) 2,742,000 -------------- -------------- Net cash provided by (used in) operating activities 5,561,205 (1,214,132) -------------- -------------- Cash flows from investing activities: Marketable securities (16,241,164) 2,666,331 Other assets 3,074,004 (727,174) Capital expenditures (1,830,027) (6,934,367) -------------- -------------- Net cash used in investing activities (14,997,187) (4,995,210) -------------- -------------- Cash flows from financing activities: Principal payment on long-term obligations - (500,000) Proceeds from exercise of stock options 1,154,936 1,184,587 -------------- -------------- Net cash provided by financing activities 1,154,936 684,587 -------------- -------------- Effect of exchange rate changes on cash 295,530 (46,490) -------------- -------------- Net decrease in cash and equivalents (7,985,516) (5,571,245) Cash and equivalents, beginning of period 74,425,853 13,332,973 -------------- -------------- Cash and equivalents, end of period $ 66,440,337 $ 7,761,728 ============== ============== Supplementary information - Interest paid in cash $ - $ 106,279 See notes to consolidated financial statements. 11 KOPIN CORPORATION NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The consolidated financial statements for the six months ended June 29, 2002 and June 30, 2001 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 the Company recorded the cumulative effect of an accounting change resulting from the adoption of Statement of Financial Accounting Standard No.142 (SFAS No. 142), Goodwill and Other Intangible Assets. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in Kopin Corporation's (the "Company's") Annual Report on Form 10-K filed with the Securities and Exchange Commission (the "SEC") (File No. 0-19882) for the year ended December 31, 2001. 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 (67%) 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 income (loss) and aggregate $478,277 of unrealized gain at June 29, 2002. 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 market and consists of the following: June 29, 2002 December 31, 2001 ------------- ----------------- Raw Materials $ 3,816,610 $ 7,583,247 Work in Progress 2,073,666 900,889 Finished Goods 646,752 229,604 ------------ -------------- Total Inventory $ 6,537,028 $ 8,713,740 ============ ============== 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 $3,551,000 and $3,890,000 at June 29, 2002 and December 31, 2001, respectively. During the six months ended June 30, 2001, the Company exchanged its interest in Kendin Communications, Inc. (Kendin) for 986,054 shares of Micrel Incorporated (Micrel) common stock, as part of Micrel's acquisition of Kendin, and recorded a net gain of $24,600,000 on the exchange. Following this transaction, the Company has accounted for its investment in Micrel common stock as available-for-sale securities. Also during the six months ended June 30, 2001, the Company recognized a write-down of $5,667,000 of certain non marketable securities as a result of an other than temporary decline in their value. The net gain related to these transactions of $20.9 million is included in interest and other income in the consolidated statement of operations for the six months ended June 30, 2001. 12 During the quarter ended June 29, 2002, as the 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. During the quarter the Company sold 249,448 shares of Micrel and recognized a net loss of $.1 million on these transactions. The Company held 652,054 shares of Micrel common stock as of June 29, 2002. Non-current marketable securities, which consist primarily of the Company's investment in the common stock of Micrel, are carried at fair-value. The fair-value of non-current marketable securities was $9,356,975 at June 29, 2002. Gross unrecognized losses on non-current marketable securities were $9,754,404 at June 29, 2002. 6. RECENT ACCOUNTING PRONOUNCEMENTS Effective January 1, 2002, the Company 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. As of January 1, 2002, the Company had $12,582,383 of goodwill related to the October 2000 acquisition of Super Epitaxial Products, Inc. Using the SFAS No. 142 approach described above, the Company recorded a transitional goodwill impairment charge of $12,582,383, which is presented as a cumulative effect of accounting change in the consolidated statements of operations. The transitional impairment charge resulted from application of the new impairment methodology introduced by SFAS No. 142. The Company estimated the fair value of the impacted reporting unit using a discounted cash flow model. Effective January 1, 2002, goodwill amortization was discontinued. Goodwill amortization for periods prior to January 1, 2002 is included in selling, general and administrative expenses. The following tables reconcile net income (loss) and per share results adjusted for the implementation of SFAS No. 142 for all periods presented: Three months ended Six months ended ------------------ ---------------- June 29, 2002 June 30, 2001 June 29, 2002 June 30, 2001 ------------- ------------- ------------- ------------- Income (loss) before cumulative effect of accounting change $(1,622,007) $351,667 $ (4,806,583) $(6,417,476) Add back: goodwill amortization - 531,500 - 1,063,000 ----------- -------- ------------ ----------- Adjusted net income (loss) before cumulative effect of accounting change (1,622,007) 883,167 (4,806,583) (5,354,476) ----------- -------- ------------ ----------- Cumulative effect of accounting change - - (12,582,383) - Adjusted net income (loss) $(1,622,007) $883,167 $(17,388,966) $(5,354,476) =========== ======== ============ =========== Adjusted income (loss) per share for all periods presented are the same amounts for both basic and diluted earnings per share and are as follows: Three months ended Six months ended ------------------ ---------------- June 29, 2002 June 30, 2001 June 29, 2002 June 30, 2001 ------------- ------------- ------------- ------------- Adjusted net income (loss) before cumulative effect of accounting change per share - basic and diluted $ (.02) $ .01 $ (.07) $ (.08) Cumulative effect of accounting change per share - basic and diluted $ - $ - $ (.18) $ - ----------- -------- ------------ ----------- Net income (loss) per share - basic and diluted $ (.02) $ .01 $ (.25) $ (.08) =========== ======== ============ =========== In August 2001, the FASB released SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which is effective in 2002. SFAS No. 144 establishes standards for accounting for impairment of long-lived assets used by an entity or held for sale, and provides guidance on developing estimates of cash flows and fair values used in measuring impairments. 13 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD LOOKING STATEMENTS Certain of the statements contained in this Form 10-Q, including Management's Discussion and Analysis of Financial Condition and Results of Operations, are forward-looking statements that involve a number of risks and uncertainties. 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 of our CyberLite product, the impact of competitive products and pricing, availability of integrated circuit fabrication facilities, cost and yields associated with production of the Company's CyberDisplay imaging devices and HBT transistor wafers, 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 10K for the fiscal year ended December 31, 2001. BUSINESS MATTERS Kopin is a leading developer and manufacturer of advanced semiconductor materials and miniature flat panel displays. We use our proprietary technology to design, manufacture and market our III-V and CyberDisplay products for use in highly demanding commercial wireless communication 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. Product revenues consist of sales of our III-V products, principally gallium arsenide ("GaAs") HBT transistor wafers, and our line of CyberDisplay products. Our GaAs HBT transistor wafers and our CyberDisplay products are used primarily in wireless handsets and camcorders, respectively. For the six month period ended June 29, 2002, we had product revenues of $37.5 million, or 97.5% of total revenues compared to $23.5 million, or 97.0% of total revenues for the same period in 2001. Research and development revenues consist primarily of development contracts with agencies of the U.S. government for advanced displays. For the six months ended June 29, 2002, research and development revenues were $.9 million, or 2.5% of total revenues compared to $.7 million, or 3.0% of total revenues for the same period in 2001. Results of Operations Revenues. Our total revenues for the three and six months ended June 29, 2002 were $20.8 million and $38.4 million, respectively, compared to $9.2 million and $24.2 million during the corresponding periods in 2001. This represents an increase of approximately $11.6 million and $14.2 million for the three and six months ended June 29, 2002, respectively. Our product revenues were $20.1 million and $37.5 million for the three and six months ended June 29, 2002 compared to $9.1 million and $23.5 million for the corresponding periods in 2001, increases of approximately $11.0 million and $14.0 million respectively. For the six months ended June 29, 2002, III-V and CyberDisplay product sales were $17.1 million and $20.4 million, respectively, as compared to $14.6 million and $8.9 million, respectively, for the six months ended June 30, 2001. Research and development revenues for the three and six months ended June 29, 2002 were $.7 million and $.9 million compared to $.2 million and $.7 million for the same periods in 2001. The increase in III-V product revenues is attributable to increased demand from customers who incorporate our GaAs HBT transistor wafers into components used in wireless handsets. The increase in CyberDisplay product sales is a result of additional design wins from new camcorder customers and increased penetration into the product lines of existing camcorder customers. International sales represented 57% and 54% of revenues for the six months ended June 29, 2002 and June 30, 2001, respectively. The increase is attributable to an increase in sales of CyberDisplay 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 fluctuations. We have not taken any protective measures against exchange rate fluctuations, such as purchasing hedging instruments with respect to such fluctuations, because of the relatively stable exchange rate between the Japanese yen, the Korean won and the U.S. dollar. Cost of Product Revenues. Cost of product revenues, which is comprised of materials, labor and manufacturing overhead related to our products, was $15.4 million and $30.1 million, respectively, for the three and six months ended June 29, 2002 compared to $15.3 million and $31.7 million during the corresponding periods in 2001. For the six months ended June 29, 2002 and June 30, 2001, cost of product revenues as a percentage of product sales was 80.2% and 134.8%, respectively. The decrease in cost of product revenues as a percentage of sales for the six month period ended June 29, 2002 as compared to the six month period ended June 30, 2001 was primarily the result of fixed costs being leveraged over a higher sales volume, lower raw materials cost, and increased yields in CyberDisplay production, partially as a result of a design change in the display. Research and Development. Research and development expenses (R&D) are incurred under development programs for III-V products, CyberDisplay products and other products, including our recently announced CyberLite light emitting diode, in support of internal development programs or 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 $1.0 million and $1.8 million for the three and six months ended June 29, 2002 compared to $.7 million and $1.0 million for the same periods in the prior year, representing increases of $.3 million and $.8 million, respectively. Internal R&D expense was $3.1 million and $5.6 million for the three and six months ended June 29, 2002, respectively, compared to $3.5 million and $6.4 million during the corresponding periods in 2001. 14 Selling, General and Administrative. Selling, general and administrative expenses (S,G&A) consist of the expenses incurred by our sales and marketing personnel and related expenses, and administrative and general corporate expenses. S,G&A was $2.7 million and $5.7 million for the three and six months ended June 29, 2002 as compared to $5.7 million and $8.7 million during the corresponding periods in 2001. The reduction in S,G&A expense from the corresponding period in the prior year is the result of discontinuing goodwill amortization of approximately $1.0 million, as directed by SFAS No. 142, and lower legal and patent maintenance fees of $1.1 million and bad debt expenses of $1.0 million. Other. Other expenses, consisting of amortization of patents and our share of the net losses of our equity investments, were approximately $250,000 and $519,000 for the three and six month periods ended June 29, 2002, respectively, compared to approximately $45,000 and $162,000 during the corresponding periods in 2001. The increase is due to increased losses from our equity investments. Other Income and Expenses. Other income, net, was $.3 million and $1.0 million for the three and six months ended June 29, 2002 compared to $21.7 million and $22.8 million during the corresponding periods in 2001. Included in the three and six months ended June 29, 2002 were approximately $286,000 and $7,000 of foreign exchange losses, respectively, resulting from our Korean subsidiary, Kowon. During the three month period ended June 30, 2001 we exchanged our interest in Kendin Communications, Inc. (Kendin) for shares of Micrel, Incorporated (Micrel) as a result of Micrel's acquisition of Kendin. We recorded a net gain of $20.9 million as a result of this exchange and the write-down of certain investments in semiconductor companies due to an other than temporary decline in their value during the quarter ended June 30, 2001. 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 June 29, 2002, we had cash and equivalents and marketable securities of $112.2 million and working capital of $110.0 million compared to $104.4 million and $106.4 million, respectively, as of December 31, 2001. During the six month period ended June 29, 2002 the increase in cash and equivalents and marketable securities was primarily due to cash provided from operations of $5.6 million, and proceeds from the exercise of stock options of $1.2 million and the sale of investments of $3.0 million, partially offset by capital and investment expenditures of $1.8 million. We lease facilities located in Taunton and Westborough, Massachusetts, Los Gatos, California, and Columbia, Maryland, under non-cancelable operating leases. The Taunton leases expire through May 2010. The Westborough lease expires in October 2003. The Los Gatos lease expires in 2002. The Maryland lease expires in 2005. We are currently obligated to make lease payments of approximately $5.1 million over the remaining terms of these leases, however we expect to enter into new leases during 2002 for the Westborough and Los Gatos facilities. We expect to expend approximately $5.0 million on capital expenditures over the next twelve months, primarily for the acquisition of equipment relating to the production of our III-V, CyberDisplay and other products. Recent Accounting Pronouncements Effective January 1, 2002, the Company 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. As of January 1, 2002, the Company had $12,582,383 of goodwill related to the October 2000 acquisition of Super Epitaxial Products, Inc. Using the SFAS No. 142 approach described above, the Company recorded a transitional goodwill impairment charge of $12,582,383, which is presented as a cumulative effect of accounting change in the consolidated statements of operations. The transitional impairment charge resulted from application of the new impairment methodology introduced by SFAS No. 142. Effective January 1, 2002, goodwill amortization was discontinued. Goodwill amortization for periods prior to January 1, 2002 is included in selling, general and administrative expenses. 15 In August 2001, the FASB released SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which is effective in 2002. SFAS No. 144 establishes standards for accounting for impairment of long-lived assets used by an entity or held for sale, and provides guidance on developing estimates of cash flows and fair values used in measuring impairments. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We invest our excess cash in high quality government and corporate financial instruments which bear minimal 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, Inc. (Micrel) totaling $9,356,975 which is subject to declines in value because of either specific operating issues at Micrel or an overall decline in the stock market. We sell our products to customers worldwide. We maintain a reserve 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 and 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. PART II. OTHER INFORMATION Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS We published all of the information called for by this item in our Quarterly Report on Form 10Q for the quarter ended March 30, 2002 filed on May 15, 2002. Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.26 Amended and Restated Employment Agreement between the company and Dr. John C.C. Fan, dated as of February 20, 2002. (b) Reports on Form 8-K On June 10, 2002 we filed a current report on Form 8-K pursuant to Item 5 thereof, attaching as an exhibit a copy of a press release disseminated publicly on June 10, 2002 in which we reaffirmed guidance concerning our revenue expectations for the second quarter ending June 29, 2002. 16 SIGNATURES 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: August 12, 2002 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: August 12, 2002 By: /s/ Richard A. Sneider ---------------------------------- Richard A. Sneider Treasurer and Chief Financial Officer (Principal Financial and Accounting Officer)