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 26, 1998 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 -------------- Not Applicable -------------- Former name, former address, and former fiscal year, if changed since last report 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 24, 1998 ----- ---------------------------------- Common Stock, par value $ .01 12,219,669
KOPIN CORPORATION INDEX ----- Page No. ------- PART I - FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets at 3 September 26, 1998 and December 31, 1997 Consolidated Statements of Operations for the 4 Three and Nine months ended September 26, 1998 and September 27, 1997 Consolidated Statements of Stockholders' Equity 5 for the Nine months ended September 26, 1998 and September 27, 1997 Consolidated Statements of Cash Flows 6 for the Nine months ended September 26, 1998 and September 27, 1997 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial 8 Condition and Results of Operations PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 11 SIGNATURES 12 2
KOPIN CORPORATION CONSOLIDATED BALANCE SHEETS (UNAUDITED) <TABLE> <CAPTION> September 26, 1998 December 31, 1997 ------------------ ----------------- <S> <C> <C> ASSETS - ------ Current assets: Cash and equivalents $ 30,068,804 $ 14,425,400 Marketable securities 7,229,640 4,620,884 Accounts receivable, net of allowance of $158,700 and $152,700: Billed 4,950,357 3,209,482 Unbilled 490,189 1,091,806 Inventory 3,712,829 2,720,843 Prepaid expenses and other current assets 875,375 798,867 ------------ ------------ Total current assets 47,327,194 26,867,282 Equipment and improvements: Equipment 27,622,957 22,954,885 Leasehold improvements 808,884 772,717 Furniture and fixtures 352,109 331,955 Equipment under construction 159,472 1,904,198 ------------ ------------ 28,943,422 25,963,755 Accumulated depreciation and amortization 17,694,886 14,869,251 ------------ ------------ 11,248,536 11,094,504 Other assets 4,423,412 3,372,692 Intangible assets 2,165,806 2,059,918 ------------ ------------ Total assets $ 65,164,948 $ 43,394,396 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ Current liabilities: Note payable $ - $ 450,000 Accounts payable 2,402,149 2,683,671 Accrued payroll and expenses 1,694,561 725,187 Current portion of long-term obligations 2,229,585 1,542,818 ------------ ------------- Total current liabilities 6,326,295 5,401,676 Deferred rent - 165,166 Long-term obligations, less current portion 4,623,418 1,958,968 Minority interest 383,583 - 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, 20,000,000 shares; issued 12,213,669 shares in 1998 and 11,122,143 shares in 1997 122,137 111,221 Additional paid-in capital 108,546,599 90,514,233 Deferred compensation (181,780) (231,955) Accumulated other comprehensive gain (loss) 195,285 (6,001) Accumulated deficit (54,850,589) (54,518,912) ------------ ------------ Total stockholders' equity 53,831,652 35,868,586 ------------ ------------ Total liabilities and stockholders' equity $ 65,164,948 $ 43,394,396 ============ ============ </TABLE> See notes to consolidated financial statements. 3
KOPIN CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) <TABLE> <CAPTION> Three Months Ended Nine Months Ended -------------------------------------- -------------------------------------- September 26, September 27, September 26, September 27, 1998 1997 1998 1997 ------------------ ------------------ ------------------ ------------------ <S> <C> <C> <C> <C> Revenue: Product revenues $ 6,957,162 $ 2,940,578 $17,284,741 $ 8,940,129 Research and development revenues 878,745 966,749 2,701,650 2,562,485 ----------- ------------- ----------- ------------- 7,835,907 3,907,327 19,986,391 11,502,614 ----------- ------------- ----------- ------------- Costs and expenses: Cost of product revenues 4,126,560 1,891,218 10,361,425 5,974,403 Research and development 2,400,476 2,603,671 7,632,697 8,156,969 General, administrative and selling 1,174,315 1,068,636 3,127,442 3,256,782 Other 97,574 75,612 285,204 226,836 ----------- ------------- ----------- ------------- 7,798,925 5,639,137 21,406,768 17,614,990 ----------- ------------- ----------- ------------- Income (loss) from operations 36,982 (1,731,810) (1,420,377) (6,112,376) Other income and expense: Interest and other income 544,707 304,349 1,472,291 1,005,090 Interest expense (127,432) (61,677) (383,591) (172,192) ----------- ------------- ----------- ------------- Net income (loss) $ 454,257 ($ 1,489,138) ($ 331,677) ($ 5,279,478) =========== ============= =========== ============= Net income (loss) per share - Basic $.04 ($ .13) ($ .03) ($ .48) =========== ============= =========== ============= Net income (loss) per share - Diluted $.03 ($ .13) ($ .03) ($ .48) =========== ============= =========== ============= Weighted average number of common shares outstanding - Basic 12,192,952 11,031,431 12,009,242 10,973,323 =========== ============= =========== ============= Weighted average number of common shares outstanding - Diluted 13,001,328 11,031,431 12,009,242 10,973,323 =========== ============= =========== ============= </TABLE> See notes to consolidated financial statements. 4
KOPIN CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY NINE MONTHS ENDED SEPTEMBER 26, 1998 AND SEPTEMBER 27, 1997 (UNAUDITED) <TABLE> <CAPTION> Accumulated Common Stock Additional Other ------------------- Paid-in Deferred Comprehensive Shares Amount Capital Compensation Gain (loss) Deficit Total ------------------- ------------ ---------- ------------- ------- ----- <S> <C> <C> <C> <C> <C> <C> <C> Balance, December 31, 1996 10,931,408 $109,314 $ 88,605,451 ($227,706) $ 44,933 ($48,261,143) $40,270,849 Exercise of stock options 159,796 1,598 1,561,918 -- -- -- 1,563,516 Amortization of compensation relating to grant of stock -- -- -- 54,540 -- -- 54,540 options Net unrealized loss on marketable securities -- -- -- -- (53,433) -- (53,433) Net loss for the nine month period ended September 27, 1997 -- -- -- -- -- (5,279,478) (5,279,478) ---------- -------- ------------ ---------- -------- ------------ ----------- Balance, September 27, 1997 11,091,204 $110,912 $ 90,167,369 ($173,166) ($8,500) ($53,540,621) $36,555,994 ========== ======== ============ ========== ======== ============ =========== Balance, December 31, 1997 11,122,143 $111,221 $ 90,514,233 ($231,955) ($6,001) ($54,518,912) $35,868,586 Issuance of common stock, net of issuance costs of $1,829,000 1,000,000 10,000 17,161,418 -- -- -- 17,171,418 Exercise of stock options 91,526 916 870,948 -- -- -- 871,864 Amortization of compensation relating to grant of stock -- -- -- 50,175 -- -- 50,175 options Net unrealized gain on other comprehensive income -- -- -- -- 201,286 -- 201,286 Net loss for the nine month period ended September 26, 1998 -- -- -- -- -- (331,677) (331,677) ---------- -------- ------------ ---------- -------- ------------ ----------- Balance, September 26, 1998 12,213,669 $122,137 $108,546,599 ($181,780) $195,285 ($54,850,589) $53,831,652 ========== ======== ============ ========== ======== ============ =========== </TABLE> See notes to consolidated financial statements. 5
KOPIN CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) <TABLE> <CAPTION> Nine Months Ended ------------------------------------- September 26, September 27, 1998 1997 ---- ---- <S> <C> <C> Cash flows from operating activities: Net loss ($ 331,677) ($ 5,279,478) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 3,104,277 2,589,894 Amortization of compensation relating to grant of stock options 50,175 54,540 Decrease in unearned revenue - (80,484) Decrease in deferred rent (165,166) (162,000) Changes in assets and liabilities: Accounts receivable (1,142,295) 2,208,646 Inventory (999,169) 139,934 Prepaid expenses and other current assets (77,465) 379,204 Intangible assets (381,585) (378,786) Accounts payable and accrued expenses 691,055 (3,623,383) ----------- ------------- Net cash provided by (used in) operating activities 748,150 (4,151,913) ----------- ------------- Cash flows from investing activities: Marketable securities (2,591,078) 5,376,471 Other assets (1,051,608) (715,836) Capital expenditures (2,770,241) (2,544,985) ----------- ------------- Net cash provided by (used in) investing activities (6,412,927) 2,115,650 ----------- ------------- Cash flows from financing activities: Net proceeds from issuance of common stock 17,171,418 - Net proceeds from issuance of subsidiary stock 383,583 - Proceeds from notes payable - 450,000 Principal payment on notes payable (450,000) (500,000) Proceeds from long-term obligations 5,000,000 - Principal payment on long-term obligations (1,648,783) (1,254,878) Proceeds from exercise of stock options 871,864 1,563,516 ----------- ------------- Net cash provided by financing activities 21,328,082 258,638 ----------- ------------- Effect of exchange rate changes on cash (19,901) - ----------- ------------- Net increase (decrease) in cash and equivalents 15,643,404 (1,777,625) Cash and equivalents, beginning of period 14,425,400 16,511,291 ----------- ------------- Cash and equivalents, end of period $30,068,804 $ 14,733,666 =========== ============= Non-cash investing and financing transactions: Supplementary information -Interest paid in cash $ 362,661 $ 172,191 </TABLE> See notes to consolidated financial statements. 6
KOPIN CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION --------------------- The financial statements for the nine month periods ended September 26, 1998 and September 27, 1997 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. Certain reclassifications have been made to the September 27, 1997 amounts to conform to the 1998 presentation including the presentation of interest income, other income and interest expense shown as Other Income and Expense. These financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission (File No. 0-19882) for the year ended December 31, 1997. 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 and its wholly-owned and majority-owned subsidiaries. All intercompany transactions and balances have been eliminated. 2. NET INCOME (LOSS) PER SHARE --------------------------- Basic net income (loss) per share is computed using the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is computed using the weighted average number of common shares and common share equivalents outstanding during the period using the treasury stock method. Common share equivalents have not been included in any periods that the effect would be anti-dilutive. 3. LONG-TERM OBLIGATIONS --------------------- In March 1998, the Company entered into a $5,000,000 term loan which requires the Company to make quarterly principal payments of $250,000 plus interest at a floating rate based upon LIBOR. This term loan is secured by the Company's accounts receivable. 4. STOCKHOLDERS' EQUITY -------------------- In February 1998, the Company completed a public offering of 2,000,000 shares of common stock at a price of $19.00 per share. Of the total shares sold, 1,000,000 shares were sold by Kopin and the other 1,000,000 shares were sold by Telecom Holding Co., Ltd. of Thailand. Net proceeds to the Company totaled approximately $17,171,000. 5. RECENT PRONOUNCEMENTS --------------------- In January 1998, the Company adopted SFAS No.130, "Reporting Comprehensive Income," which became effective during the first quarter. SFAS No. 130 requires reporting of comprehensive income, which in the case of the Company, is a combination of reported net income (loss), the change in the marketable securities valuation, and changes in foreign currency translation adjustments. SFAS No. 130 had no impact on the Company's net income (loss). Comprehensive loss for the nine months ended September 26, 1998 and September 27, 1997 was $130,391 and $5,332,911, respectively. In January 1998, the Company adopted SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information." The Company will provide the required information about its reportable segments in the annual report on Form 10-K for the year ended December 31, 1998 and in its quarterly reports on Form 10-Q beginning in 1999. 7
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 small form factor displays. The Company was incorporated in 1984 to further develop and commercialize certain semiconductor expertise developed at MIT. Historically, the Company has derived most of its revenues from research and development contracts with agencies of the United States government. Beginning in 1995, the Company experienced a significant increase in revenues from sales of its device wafers, and in 1996, revenues from such sales for the first time exceeded revenues from research and development contracts. More recently, the Company has commenced sales of CyberDisplay products. The Company has been unprofitable on an annual basis since inception and, at September 26, 1998, the Company had an accumulated deficit of $54,850,589. RESULTS OF OPERATIONS REVENUES. The Company's total revenues were $7,835,907 and $19,986,391 for the three and nine months ended September 26, 1998 compared to $3,907,327 and $11,502,614 during the corresponding periods in 1997, an increase of $3,928,580 or 100.5% for the three months and $8,483,777 or 73.8% for the nine months ended September 26, 1998. The Company's product revenues were $6,957,162 and $17,284,741 for the three and nine months ended September 26, 1998 compared to $2,940,578 and $8,940,129 for the three and nine months ended September 27, 1997, increases of $4,016,584 or 136.6% and $8,344,612 or 93.3%, respectively. The increase in product revenues was due to an increase in sales of HBT device wafers and display products over the corresponding periods in the prior year. The increase in sales of the Company's device wafers was primarily due to the increased use of these wafers in various wireless telecommunications products, particularly by the Company's major customer, Rockwell International. Research and development revenues decreased 9.1% to $878,745 for the three months ended September 26, 1998 compared to $966,749 during the corresponding period in 1997 and increased 5.4% to $2,701,650 for the nine months ended September 26, 1998 compared to $2,562,485 for the same period in the prior year. As a result of the expirations of multi-year contracts with the federal government and the Company's increased emphasis on product revenues, the Company believes that research and development revenues will decline as a percentage of total revenues for the near future. COST OF PRODUCT REVENUES. Cost of product revenues, which is comprised of materials, labor and manufacturing overhead related to the Company's products, was $4,126,560, or 59.3% of product revenues, for the three months ended September 26, 1998 compared to $1,891,218, or 64.3% of product revenues, for the same period in the prior year. Cost of product revenues was $10,361,425, or 59.9% of product revenues, for the nine months ended September 26, 1998 compared to $5,974,403, or 66.8% of product revenues, for the same period in the prior year. The improvement in cost of product revenues as a percentage of product revenues in 1998 was primarily due to increased sales of device wafers resulting in lower unit costs. RESEARCH AND DEVELOPMENT. Research and development expenses include expenses incurred in support of internal development programs and programs funded by agencies of the federal government, including development programs for display devices and products, device wafers, circuit design costs, staffing, purchases of materials and laboratory supplies, and fabrication and packaging of the Company's display products. Funded research and development expenses were $983,818 and $3,299,968 for the three and nine months ended September 26, 1998 compared to $523,409 and $2,107,968 for the same periods in the prior year, increases of $460,409 and $1,192,000, respectively. Internal research and development expenses were $1,416,658 and $4,332,729 for the three and nine months ended September 26, 1998 compared to $2,080,262 and $6,049,001 during the corresponding periods in 1997. The decrease in internal research and development expenses was primarily a result of reduced development costs incurred for fabrication and packaging of the Company's display products. GENERAL, ADMINISTRATIVE AND SELLING. General, administrative and selling expenses consist of the expenses incurred by the Company's business development and sales personnel, marketing expenses, and administrative and general corporate expenses. General, administrative and selling expenses were $1,174,315 for the three months ended September 26, 1998 compared to $1,068,636 during the corresponding period in 1997, an increase of $105,679 primarily due to increased marketing activities. General, administrative and selling expenses were $3,127,442 for the nine months ended September 26, 1998 compared to $3,256,782 during the corresponding period in 1997, a decrease of $129,340. In addition, general, administrative and selling expenses include non-cash charges for compensation expense of $50,175 for the nine months ended September 26, 1998 compared to $54,540 for the nine months ended September 27, 1997 relating to the issuance of certain stock options. 8
OTHER. Other expenses were $97,574 and $285,204 for the three and nine months ended September 26, 1998 compared to $75,612 and $226,836 during the corresponding periods in 1997. OTHER INCOME, NET. Other income, net was $417,275 and $1,088,700 for the three and nine months ended September 26, 1998 compared to $242,672 and $832,898 during the corresponding periods in 1997. The increase was primarily due to an increase in interest income of $240,358 to $544,707 for the three months ended September 26, 1998 from $304,349 for the corresponding period in 1997 and an increase of $467,201 to $1,472,291 for the nine months ended September 26, 1998 from $1,005,090, resulting from higher cash balances in 1998. These increases were partially offset by increases in interest expense of $65,755 and $211,399 for the three and nine months ended September 26, 1998 from the corresponding periods in 1997 due to additional debt funding obtained by the Company. LIQUIDITY AND CAPITAL RESOURCES The Company has financed its operations primarily through public and private placements of its equity securities, research and development contract revenues, and sales of its device wafers and display devices and products. In February 1998, the Company completed a public offering of 2,000,000 shares of common stock at a price of $19.00 per share. Of the total shares sold, 1,000,000 shares were sold by Kopin and the other 1,000,000 shares were sold by Telecom Holding Co., Ltd. of Thailand. Net proceeds to the Company totaled approximately $17,171,000. As of September 26, 1998, the Company had cash and equivalents and marketable securities of $37,298,444 and working capital of $41,000,899 compared to $19,046,284 and $21,465,606, respectively, as of December 31, 1997. The increase in cash and equivalents and marketable securities was primarily due to the public offering of common stock resulting in net proceeds to the Company of $17,171,000 and the receipt of a term loan facility of $5,000,000, offset by an increase in other assets of $1,051,608, capital expenditures of $2,770,241, and principal payments on notes payable and long-term obligations of $2,098,783. The Company also has approximately $719,000 of marketable securities held in escrow as equipment financing collateral which is shown in other assets. The Company periodically enters into various long-term debt arrangements to finance equipment purchases and other activities. As of September 26, 1998, long-term debt obligations totaled $6,853,003, of which $2,229,585 is payable in the next twelve months. In March 1998, the Company entered into a $5,000,000 term loan which requires the Company to make quarterly principal payments of $250,000 plus interest at a floating rate based upon LIBOR. This term loan is secured by the Company's accounts receivable. In October 1993, the Company entered into a lease for a 74,000 square foot manufacturing facility. This facility, which includes 10,000 square feet of environmentally controlled clean rooms, is used primarily for the Company's production of display devices. This facility is occupied under a lease that expires in October 2000, with renewable options for up to four additional years at the Company's election. The Company will make lease payments of approximately $1.0 million per year over the remaining term of the lease. The Company expects to expend approximately $5,000,000 on capital expenditures over the next twelve months, primarily for the acquisition of equipment relating to the manufacturing, packaging and testing of CyberDisplay products and production of the Company's device wafers. 9
RECENT ACCOUNTING PRONOUNCEMENTS In January 1998, the Company adopted SFAS No.130, "Reporting Comprehensive Income," which became effective during the first quarter. SFAS No. 130 requires reporting of comprehensive income, which in the case of the Company, is a combination of reported net income (loss), the change in the marketable securities valuation, and changes in foreign currency translation adjustments. SFAS No. 130 had no impact on the Company's net income (loss). Comprehensive loss for the nine months ended September 26, 1998 and September 27, 1997 was $130,391 and $5,332,911, respectively. In January 1998, the Company adopted SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information." The Company will provide the required information about its reportable segments in the annual report on Form 10-K for the year ended December 31, 1998 and in its quarterly reports on Form 10-Q beginning in 1999. YEAR 2000 The Company has developed plans to address issues related to the impact on its systems from the "Year 2000 Problem". Financial and operational systems are being assessed and plans have been implemented to address systems modification requirements. The Company, utilizing both internal and external resources to address the Year 2000 issue, expects to be substantially complete with this project by the third quarter of calendar 1999. The current estimate of total project cost is approximately $500,000, which includes the cost of purchasing certain equipment and software which will be capitalized in accordance with normal policy. The cost of equipment and software account for approximately 50 percent of the total estimated project cost while internal resources (primarily salary costs) are 30 percent of the cost and external resources are the remaining 20 percent. Approximately 20 percent of the total project cost has been spent through September 26, 1998, with the majority of the remaining amount to be spent within the next year. The plan costs will be paid from cashflow generated from operations. The Year 2000 project will not result in the delay in implementation of any previously planned information technology projects. The Company's products, which are Year 2000 compliant, require high quality raw materials in order to achieve historical manufacturing yields and performance. The Company requires suppliers to meet stringent quality standards before the Company will accept their product. The Company is continually performing an assessment of its key suppliers' Year 2000 readiness and their plans for becoming Year 2000 compliant. Although the Company has multiple suppliers for each raw material, failure by one or more key suppliers to achieve Year 2000 readiness could impact the Company's ability to produce product at historical levels. FUTURE OPERATING RESULTS 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 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 industry and the gallium arsenide integrated circuit and materials industries, the impact of competitive products and pricing, availability of third party components, availability of integrated circuit fabrication facilities, cost and yields associated with production of the Company's CyberDisplay imaging devices and Wafer-Engineered device wafers, loss of significant customers, acceptance and commercialization of the Company's products, continued performance by Kopin and its key customers under strategic relationships, Year 2000 matters, 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 the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997. 10
PART II. OTHER INFORMATION Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 27 Financial Data Schedule (b) Reports on Form 8-K None 11
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 10, 1998 By: /s/ John C.C. Fan ------------------------------------------- John C.C. Fan President, Chief Executive Officer and Chairman of the Board of Directors Date: November 10, 1998 By: /s/ Richard A. Sneider ------------------------------------------- Richard A. Sneider Treasurer and Chief Financial Officer (Principal Financial and Accounting Officer) 12