UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR l5(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended September 29, 2001 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 October 27, 2001 ----- ---------------------------------- Common Stock, par value $.01 65,422,952
KOPIN CORPORATION INDEX ----- Page No. ------- PART I - FINANCIAL INFORMATION Item 1. Consolidated Financial Statements: Consolidated Balance Sheets at 3 September 29, 2001 and December 31, 2000 Consolidated Statements of Operations and Comprehensive 4 Income (Loss) for the three and nine months ended September 29, 2001 and September 30, 2000 Consolidated Statements of Stockholders' Equity for the 5 nine months ended September 29, 2001 and September 30, 2000 Consolidated Statements of Cash Flows for the 6 nine months ended September 29, 2001 and September 30, 2000 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition 10 and Results of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk 13 PART II - OTHER INFORMATION Item 5. Other Matters 14 SIGNATURES 15 2
KOPIN CORPORATION CONSOLIDATED BALANCE SHEETS <TABLE> <CAPTION> September 29, 2001 December 31, 2000 ----------------------- ---------------------- (unaudited) <S> <C> <C> Assets Current assets: Cash and equivalents $ 2,613,731 $ 13,332,973 Marketable securities, at fair value 62,629,257 59,847,124 Accounts receivable, net of allowance of $1,050,000 and $450,000 Billed 6,169,229 14,365,808 Unbilled 312,252 467,540 Inventory 8,444,364 5,711,617 Refundable taxes - 5,505,000 Prepaid expenses and other current assets 3,317,024 4,336,724 ------------ ------------ Total current assets 83,485,857 103,566,786 Equipment and improvements: Land 735,246 758,393 Buildings 1,768,185 1,749,589 Equipment 48,813,541 48,598,638 Leasehold improvements 13,187,401 2,410,651 Furniture and fixtures 561,826 515,750 Equipment under construction 8,710,590 19,993,112 ------------ ------------ 73,776,789 74,026,133 Accumulated depreciation and amortization 30,226,180 24,935,045 ------------ ------------ 43,550,609 49,091,088 Other assets 23,935,541 15,521,801 Goodwill, net of accumulated amortization of $1,593,936 and $413,517 13,282,814 14,748,366 Intangible assets, net of accumulated amortization of $1,783,383 and $1,582,683 1,213,616 1,562,629 ------------ ------------ Total assets $165,468,437 $184,490,670 ============ ============ Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 10,432,003 $ 9,892,554 Accrued payroll and expenses 1,717,887 1,398,353 Other accrued liabilities 4,070,890 2,938,434 Current portion of long-term obligations 1,500,000 1,000,000 ------------ ------------ Total current liabilities 17,720,780 15,229,341 Long-term obligations, less current portion - 1,250,000 Minority interest 1,469,121 1,234,764 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, 65,396,446 shares in 2001 and 64,681,116 shares in 2000 653,964 646,811 Additional paid-in capital 218,771,410 216,274,520 Deferred compensation (13,750) (55,015) Accumulated other comprehensive income (loss) (7,062,932) 328,395 Deficit (66,070,156) (50,418,146) ------------ ------------ Total stockholders' equity 146,278,536 166,776,565 ------------ ------------ Total liabilities and stockholders' equity $165,468,437 $184,490,670 ============ ============ </TABLE> See notes to consolidated financial statements. 3
KOPIN CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) <TABLE> <CAPTION> Three Months Ended Nine Months Ended ------------------- ------------------ September 29, September 30, September 29, September 30, 2001 2000 2001 2000 --------------- ----------------- --------------- --------------- <S> <C> <C> <C> <C> Revenues: Product revenues $ 11,973,948 $23,279,680 $ 35,461,180 $66,922,088 Research and development revenues 288,767 551,051 1,012,791 1,043,050 ------------ ----------- -------------- ----------- 12,262,715 23,830,731 36,473,971 67,965,138 Expenses: Cost of product revenues 15,786,776 17,643,127 47,437,823 48,450,166 Research and development 3,716,779 1,713,681 11,081,651 6,241,616 Selling, general and administrative 3,120,778 1,520,358 11,869,557 6,501,474 Other 120,907 66,900 283,166 466,974 Impairment charges - - 5,341,784 - ------------ ----------- -------------- ----------- 22,745,240 20,944,066 76,013,981 61,660,230 ------------ ----------- -------------- ----------- Income (loss) from operations (10,482,525) 2,886,665 (39,540,010) 6,304,908 Other income and expense: Interest and other income 1,499,005 1,446,321 24,445,606 4,331,890 Interest expense (126,981) (94,290) (307,280) (280,336) ------------ ----------- -------------- ----------- Income (loss) before minority interest (9,110,501) 4,238,696 (15,401,684) 10,356,462 Minority interest in income of (124,033) ( 47,414) (250,326) (77,263) subsidiary ------------ ----------- -------------- ----------- Net income (loss) $ (9,234,534) $ 4,191,282 $ (15,652,010) $10,279,199 ============ =========== ============== =========== Net income (loss) per share: Basic ($ .14) $.07 ($ .24) $.16 ============ =========== ============== =========== Diluted ($ .14) $.06 ($ .24) $.15 ============ =========== ============== =========== Weighted average number of common shares outstanding: Basic 65,211,380 63,237,559 65,069,273 62,759,293 ============ =========== ============== =========== Diluted 65,211,380 67,278,717 65,069,273 67,714,654 ============ =========== ============== =========== </TABLE> CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited) <TABLE> <CAPTION> Three Months Ended Nine Months Ended ------------------- ------------------- September 29, September 30, September 29, September 30, 2001 2000 2001 2000 ---------------- -------------- ---------------- --------------- <S> <C> <C> <C> <C> Net income (loss) $ (9,234,534) $4,191,282 $ (15,652,010) $10,279,199 Foreign currency translation (20,765) (3,551) (32,718) 2,100 adjustments Unrealized gain (loss) on marketable (11,064,997) 74,141 (7,358,609) (42,061) securities, net ------------- ---------- ------------- ----------- Comprehensive income (loss) $ (20,320,296) $4,261,872 $ (23,043,337) $10,239,238 ============= ========== ============= =========== </TABLE> See notes to consolidated financial statements. 4
KOPIN CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY NINE MONTHS ENDED SEPTEMBER 29, 2001 AND SEPTEMBER 30, 2000 (UNAUDITED) <TABLE> <CAPTION> Accumulated Common Stock Additional Other -------------------- Paid-in Deferred Comprehensive Shares Amount Capital Compensation Income (Loss) Deficit Total ---------- -------- ------------ ------------ -------------- ------------ ------------ <S> <C> <C> <C> <C> <C> <C> <C> Balance, December 31, 1999 60,298,724 $602,987 $185,776,145 $(110,035) $ 509,725 $(56,711,530) $130,067,292 Exercise of stock options 3,120,073 31,201 6,373,575 -- -- -- 6,404,776 Amortization of compensation relating to grant of stock -- -- -- 41,265 -- -- 41,265 options Net unrealized loss on marketable securities -- -- -- -- (42,061) -- (42,061) Foreign currency translation adjustments -- -- -- -- 2,100 -- 2,100 Net income for the nine month period ended September 30, 2000 -- -- -- -- -- 10,279,199 10,279,199 ---------- -------- ------------ --------- ------------ ------------ ------------ Balance, September 30, 2000 63,418,797 $634,188 $192,149,720 $ (68,770) $ 469,764 $(46,432,331) $146,752,571 ========== ======== ============ ========= ============ ============ ============ 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 715,330 7,153 2,496,890 -- -- -- 2,504,043 Amortization of compensation relating to grant of stock -- -- -- 41,265 -- -- 41,265 options Net unrealized loss on marketable securities -- -- -- -- (7,358,609) -- (7,358,609) Foreign currency translation adjustments -- -- -- -- (32,718) -- (32,718) Net loss for the nine month period ended September 29, 2001 -- -- -- -- -- (15,652,010) (15,652,010) ---------- -------- ------------ --------- ------------ ------------ ------------ Balance, September 29, 2001 65,396,446 $653,964 $218,771,410 $ (13,750) $ (7,062,932) $(66,070,156) $146,278,536 ========== ======== ============ ========= ============ ============ ============ </TABLE> See notes to consolidated financial statements. 5
KOPIN CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) <TABLE> <CAPTION> Nine Months Ended ----------------- September 29, 2001 September 30, 2000 ------------------ ------------------ <S> <C> <C> Cash flows from operating activities: Net income (loss) $ (15,652,010) $ 10,279,199 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 9,442,752 5,508,197 Amortization of compensation relating to grant of stock options 41,265 41,265 Minority interest in income of subsidiary 275,794 77,263 Impairment Charge 5,341,784 - Net gain on investment activity (20,882,383) - Changes in assets and liabilities: Accounts receivable 8,313,123 (5,623,823) Inventory (3,112,548) 1,670,298 Prepaid expenses and other current assets 6,517,157 221,186 Intangible assets 148,313 (158,312) Accounts payable and accrued expenses 1,897,068 (717,795) ------------- ------------ Net cash provided by (used in) operating activities (7,669,685) 11,297,478 ------------- ------------ Cash flows from investing activities: Marketable securities (2,879,958) (17,987,169) Other assets 5,172,909 (5,581,295) Capital expenditures (7,032,548) (22,998,551) ------------- ------------ Net cash used in investing activities (4,739,597) (46,567,015) ------------- ------------ Cash flows from financing activities: Principal payment on long-term obligations (750,000) (1,677,586) Issuance of stock by subsidiary - 507,101 Proceeds from exercise of stock options 2,504,043 6,404,776 ------------- ------------ Net cash provided by financing activities 1,754,043 5,234,291 ------------- ------------ Effect of exchange rate changes on cash (64,003) 28,600 ------------- ------------ Net decrease in cash and equivalents (10,719,242) (30,006,646) Cash and equivalents, beginning of period 13,332,973 65,981,848 ------------- ------------ Cash and equivalents, end of period $ 2,613,731 $ 35,975,202 ============= ============ Supplementary information -Interest paid in cash $ 141,812 $ 271,766 </TABLE> See notes to consolidated financial statements. 6
KOPIN CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION --------------------- The consolidated financial statements for the nine month periods ended September 29, 2001 and September 30, 2000 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, except for adjustments described below, are of a normal recurring nature. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in 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, 2000. 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 accumulated as part of other comprehensive income and aggregate $10,033 of unrealized gain at September 29, 2001. Transaction gains or losses are recognized in income or loss currently. 3. NET INCOME 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 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: <TABLE> <CAPTION> September 29, 2001 December 31, 2000 ------------------ ----------------- <S> <C> <C> Raw materials $7,015,304 $4,396,631 Work in progress 1,145,937 1,016,146 Finished Goods 283,123 298,840 ========== ========== Total Inventory $8,444,364 $5,711,617 ========== ========== </TABLE> 7
5. OTHER ASSETS ------------ Other assets consist primarily of marketable and non-marketable equity securities in various companies and notes receivable. Non-marketable equity securities are carried at cost and aggregate $7,354,000 and $14,864,000 at September 29, 2001 and December 31, 2000 respectively. At December 31, 2000 the Company had a 20% interest in Kendin Communications, Inc. (Kendin), which was accounted for using the equity method. The carrying value of this investment at December 31, 2000 was $3,170,000. During the quarter ended June 30, 2001 the Company exchanged its interest in Kendin for shares of Micrel Incorporated (Micrel), as part of Micrel's acquisition of Kendin, and recorded a net gain of $24,900,000 on the exchange. Following this transaction, the Company discontinued the use of the equity method to account for this investment. Also during the quarter ended June 30, 2001 the Company recorded a $4,000,000 write- down of certain non-marketable securities as a result of a more than temporary decline in their value. Non-current marketable securities, which consist primarily of the investment in Micrel stock, are carried at fair-value. The fair-value of non-current marketable securities was $16,021,000 at September 29, 2001. Gross unrecognized losses on non-current marketable securities were $7,294,000 at September 29, 2001. The net gain recognized resulting from the gain on exchange of investment and write-down of certain non-marketable securities is included in interest and other income for the nine months ended September 29, 2001. 6. 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. SFAS No. 133 did not have a material effect on our financial position or results of operations. The SEC has released Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements", which sets forth their views regarding revenue recognition. The Company believes its revenue recognition practices are in compliance with this bulletin. In July 2001, the FASB issued Statement of Financial Accounting Standards No. 141 ("SFAS 141"), "Business Combinations." SFAS 141 requires the purchase method of accounting for business combinations initiated after June 30, 2001 and eliminates the pooling-of-interests method. The Company does not believe the adoption of SFAS 141 will have a significant impact on its financial statements. Also in July 2001, the FASB issued Statement of Financial Accounting Standards No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets", which is effective January 1, 2002. SFAS 142 requires, among other things, the discontinuance of goodwill amortization. The Company has not yet completed its evaluation of the impact the adoption of SFAS 142 will have on our financial statements. 7. IMPAIRMENT CHARGE ----------------- As a result of the decline in the Company's revenues during the three months ended June 30, 2001, the Company has assessed the recoverability of certain equipment used in its manufacturing operations. This equipment consists primarily of older manufacturing machines, utilized in the Company's III-V business. Because of softened current demand for the Company's wafer products, the machines in question are currently not used in manufacturing operations. Based on forecasts developed by the Company, the Company does not believe that these machines will be placed back into service in the foreseeable future; the Company anticipates that these machines will be replaced by newer, more efficient equipment before demand will recover. As a result of this analysis, and other analyses pertaining to the impact of the change in business conditions, the Company recorded a charge of $5,342,000 in the quarter ended June 30, 2001, representing the remaining un-amortized cost of the identified equipment, and other costs. 8
8. IN PROCESS RESEARCH AND DEVELOPMENT ----------------------------------- During the quarter ended December 31, 2000 the Company expensed $5,300,000 million associated with in-process research and development technologies which had not yet reached technological feasibility, and had no alternative uses, acquired as part of the acquisition of Super Epitaxial Products, Inc. in October 2000. 9
Item 2. 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 flat panel 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 III-V products, principally our Heterojunction Bipolar Transistor ("HBT") transistor wafers, and our CyberDisplay products. For the nine month period ended September 29, 2001, we had product revenues of $35.5 million, or 97.2% of total revenues compared to $66.9 million, or 98.5% of total revenues for the same period in 2000. Research and development revenues consist primarily of development contracts with agencies of the U.S. government. For the nine months ended September 29, 2001, research and development revenues were $1.0 million, or 2.8% of total revenues compared to $1.0 million, or 1.5% of total revenues for the same period in 2000. RESULTS OF OPERATIONS REVENUES. Our total revenues for the three and nine months ended September 29, 2001 were $12.3 million and $36.5 million, respectively, compared to $23.8 million and $67.9 million during the corresponding periods in 2000. This represents a decrease of approximately $11.6 million and $31.5 million for the three and nine months ended September 29, 2001, respectively. Our product revenues were $12.0 million and $35.5 million for the three and nine months ended September, 2001, compared to $23.3 million and $66.9 million for the same periods in 2000, decreases of approximately $11.3 million and $31.5 million respectively. For the nine months ended September 29, 2001, III-V and CyberDisplay product sales were $20.2 million and $15.2 million, respectively, as compared to $53.8 million and $13.1 million, respectively, for the nine months ended September 30, 2000. The decrease in III-V product revenues resulted from a decline in demand from customers who buy our HBT transistor wafers for integration into components used in wireless handsets. For the year ending December 31, 2001 we expect a decline in III-V product revenues as a result of worldwide inventory accumulation in the supply chain of wireless handsets and related components. In addition, industry analysts believe there will be a slowing of worldwide sales growth rates of wireless handsets, which may decrease the rate of consumption of the inventory in the supply chain. Research and development revenues for the three and nine months ended September 29, 2001 were $.3 million and $1.0 million compared to $.6 million and $1.0 million for the same period in 2000. COST OF PRODUCT REVENUES. Cost of product revenues, which is comprised of materials, labor and manufacturing overhead related to our products, was $16.1 million and $47.7 million for the three and nine months ended September 29, 2001 compared to $17.6 million and $48.5 million during the corresponding periods in 2000. For the nine months ended September 29, 2001 and September 30, 2000, cost of product revenues as a percentage of product sales was 134.5% and 71.3%, respectively. The increase in cost of product revenues as a percentage of sales is a result of the fixed cost nature of our business, whereby expenses did not decline at the same rate as the decline in sales, particularly III-V product sales and related expenses. RESEARCH AND DEVELOPMENT. Research and development expenses (R&D) are incurred in support of internal III-V and display product development programs or programs funded by agencies of the U.S. government, and commercial partners. R&D costs include staffing, purchases of materials and laboratory supplies, circuit design costs, fabrication and packaging of display products, and overhead. Funded R&D was $.6 million and $1.7 million for the three and nine months ended September 29, 2001 compared to $.3 million and $.9 million for the same periods in the prior year, increases of $.3 million and $.8 million, respectively. Internal R&D was $3.1 million and $9.4 million for the three and nine months ended September 29, 2001 compared to $1.4 million and $5.3 million during the corresponding periods in 2000. The increase in internal R&D was primarily the result of III-V development programs. 10
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 $3.1 million for the three months ended September 29, 2001 compared to $1.5 million during the corresponding period in 2000, an increase of $1.6 million, or 105.3%. S,G&A was $11.9 million for the nine months ended September 29, 2001 compared to $6.5 million during the corresponding period in 2000, an increase of $5.4 million, or 82.60%. The year to year increase in S,G&A was primarily due to an increase in goodwill amortization of $1.6 million, resulting from the purchase of Super Epitaxial Products, Inc., in October, 2000, bad debt expense of $1.0 million, depreciation expense of $.8 million and legal and patent maintenance of $1.6 million. In addition, S,G&A expenses include non- cash charges for compensation expense of $41,265 for both nine month periods in 2001 and 2000, relating to the issuance of certain stock options. OTHER. Other expenses, primarily amortization of patents and licenses, were $.1 million and $.3 million for the three and nine month periods ended September 29, 2001 compared to $.1 million and $.5 million during the corresponding periods in 2000. OTHER INCOME, NET. Other income, net was $1.4 million and $24.1 million for the three and nine months ended September 29, 2001 compared to $1.4 million and $4.1 million during the corresponding period in 2000. 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 have 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 a more than temporary decline in their value during the quarter ended June 30, 2001. During the quarter ended September 29, 2001 we sold a portion of the Micrel shares for $6.5 million, which had a cost basis of $5.9 million. This resulted in a gain of $.6 million which is included in Other Income, Net. Also in this quarter we marked to market our remaining investment in Micrel classified as an available-for-sale security, which resulted in an unrealized loss of $7.3 million. This loss was recorded as a component of Accumulated Other Comprehensive Income in Stockholders' Equity. IMPAIRMENT CHARGE. As a result of the decline in the Company's revenues during the three months ended June 30, 2001, the Company assessed the recoverability of certain equipment used in its manufacturing operations. This equipment consists primarily of older manufacturing machines, utilized in the Company's III-V business. Because of softened current demand for the Company's wafer products, the machines in question are currently not used in manufacturing operations. Based on forecasts developed by the Company, the Company does not believe that these machines will be placed back into service in the foreseeable future; the Company anticipates that these machines will be replaced by newer, more efficient equipment before demand will recover. As a result of this analysis, and other analysis pertaining to the impact of the change in business conditions, the Company recorded a charge of $5,342,000 in the quarter ended June 30, 2001, representing the remaining un-amortized cost of the identified equipment, and other costs. LIQUIDITY AND CAPITAL RESOURCES We have financed our operations primarily through public and private placements of our equity securities, research and development contract revenues, and sales of our III-V and CyberDisplay products. We believe our available cash resources will support our operations and capital needs for at least the next twelve months. As of September 29, 2001, we had cash and equivalents and marketable securities of $65.2 million and working capital of $65.8 million compared to $73.2 million and $88.3 million, respectively, as of December 31, 2000. The decrease in cash and equivalents and marketable securities was primarily due to net capital and investment expenditures of $4.7 million, principal payments on long-term obligations of $.75 million, and cash used by operations of $7.7 million, partially offset by proceeds from the exercise of stock options of $2.5 million. Other sources of cash during the period were accounts receivable, which have declined due to the decrease in revenues, and refundable taxes, which were collected in cash during the nine months ended September 29, 2001. We periodically enter into long-term debt arrangements to finance equipment purchases and other activities. As of September 29, 2001, debt obligations totaled $1.5 million, which 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 11
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 our facilities located in Taunton and Westborough, Massachusetts, and 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, with renewable options for up to two additional years at our election. The Los Gatos lease covers a five year period terminating in 2002. The Maryland lease expires in 2005. We will make lease payments of approximately $1.4 million per year over the remaining terms of these leases. We expect to expend approximately $10.0 million on capital expenditures over the next twelve months, primarily for the acquisition of equipment relating to the production of our III-V products and the manufacturing, packaging and testing of CyberDisplay products. 12
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 to us of SFAS No. 133 had no material effect on financial position or results of operations. The Securities and Exchange Commission ("SEC") has released staff accounting Bulletin No. 101, "Revenue Recognition in Financial Statements", which sets forth their views regarding revenue recognition. The Company believes its revenue recognition practices are substantially in compliance with this bulletin. In July 2001, the FASB issued Statement of Financial Accounting Standards No. 141 ("SFAS 141"), "Business Combinations." SFAS 141 requires the purchase method of accounting for business combinations initiated after June 30, 2001 and eliminates the pooling-of-interests method. The Company does not believe that the adoption of SFAS 141 will have a significant impact on its financial statements. Also in July 2001, the FASB issued Statement of Financial Accounting Standards No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets", which is effective January 1, 2002. SFAS 142 requires, among other things, the discontinuance of goodwill amortization. The Company has not yet completed its evaluation of the impact that the adoption of SFAS 142 will have on its financial statements. In August, 2001, the FASB released SFAS No. 144 ("SFAS 144"), "Accounting for the Impairment or Disposal of Long-Lived Assets", which is effective in 2002. SFAS 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. The Company has not yet completed its evaluation of the impact the adoption of SFAS 144 will have on its financial 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 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 impact of competitive products and pricing, availability of third party components and wafer substrates, availability of integrated circuit fabrication facilities, cost and yields associated with production of the Company's CyberDisplay imaging devices and HBT transistor wafers, successful completion and operation of our second gallium arsenide fabrication facility, loss of significant customers, acceptance of our products, continuation of strategic relationships, changes in foreign currency exchange rates, and the risk factors and cautionary statements listed from time to time in the Company's periodic reports and registration statements filed with the Securities and Exchange Commission, including but not limited to our Annual Report on Form 10-K for the fiscal year ended December 31, 2000. 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. We sell our products to customers worldwide. We maintain a reserve for potential credit losses and such losses have been minimal. We are exposed to changes in foreign currency exchange primarily through our translation of our foreign subsidiary's financial position, results of operations, and cash flows and the sale of CyberDisplay products to customers in Asia. Currency rate changes have not had a significant impact on operations to date, and had foreign currency rates changed by 10% during any period presented, the impact would not have been material to the consolidated financial statements. 13
PART II. OTHER INFORMATION Item 5. OTHER ----- In August 2001, the officers of the registrant have adopted "plans" under Rule 10b5-1 of the Securities Exchange Act of 1934, as amended, which provide for the periodic sales of shares of the Registrant's common stock. 14
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: November 6, 2001 By: /s/ John C.C. Fan ----------------- John C.C. Fan President, Chief Executive Officer and Chairman of the Board of Directors (Principal Executive Officer) Date: November 6, 2001 By: /s/ Richard A. Sneider ---------------------- Richard A. Sneider Treasurer and Chief Financial Officer (Principal Financial and Accounting Officer) 15