<PAGE>
As filed with the Securities and Exchange Commission on September 20, 1999
Registration No. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
----------------
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 Boulevard
Taunton, Massachusetts 02780
(508) 824-6696
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
----------------
John C.C. Fan
Chairman of the Board of Directors, President and Chief Executive Officer
Kopin Corporation
695 Myles Standish Boulevard
Taunton, Massachusetts 02780
(508) 824-6696
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
----------------
with copies to:
John J. Concannon III, Esq. William J. Schnoor, Jr.
Bingham Dana LLP Testa, Hurwitz & Thibeault, LLP
150 Federal Street 125 High Street
Boston, MA 02110 Boston, MA 02110
(617) 951-8000 (617) 248-7000
----------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [_]
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
----------------
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
Proposed Maximum
Title Of Each Class Of Proposed Maximum Aggregate
Securities To Be Amount To Be Offering Price Offering Amount Of
Registered Registered(1) Per Share(2) Price(2) Registration Fee
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common stock, $0.01 par
value.................. 2,070,000 $30.53 $63,197,100 $17,569
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</TABLE>
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(1) Includes up to 270,000 shares of common stock which the Underwriters have
the option to purchase from the Company to cover over-allotments, if any.
See "Underwriting."
(2) Estimated solely for the purpose of determining the registration fee in
accordance with Rule 457 under the Securities Act of 1933.
----------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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- --------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED SEPTEMBER 20, 1999
1,800,000 Shares
[LOGO]
Kopin Corporation
Common Stock
--------
Our common stock is quoted on The Nasdaq Stock Market's National Market under
the symbol "KOPN." On September 17, 1999, the last reported sale price of our
common stock on The Nasdaq National Market was $31.50 per share.
The underwriters have an option to purchase a maximum of 270,000 additional
shares to cover over-allotments of shares.
Investing in the common stock involves risks. See "Risk Factors" on page 3.
<TABLE>
<CAPTION>
Underwriting
Price Discounts
to and Proceeds
Public Commissions to Us
------ ------------ --------
<S> <C> <C> <C>
Per Share.................................. $ $ $
Total...................................... $ $ $
</TABLE>
Delivery of the shares of common stock will be made on or about , .
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
Credit Suisse First Boston
CIBC World Markets
Pacific Growth Equities, Inc.
C.E. Unterberg, Towbin
The date of this prospectus is , .
<PAGE>
[Text description of inside front cover]
The Kopin logo appears in the upper left corner with "HBT Transistor Wafer"
appearing underneath. Text in the upper right hand corner reads, "Developer and
provider of customer-specific advanced semiconductor HBT transistor wafers." The
top half of the page is captioned "Kopin's Technology" and provides an
illustration depicting a wafer with layers of atomic particles and text that
reads:
-- Splicing of dissimilar materials
-- Combining desired properties of each
-- Optimizes performance for specific applications
-- Enables transfer of integrated circuits to glass and other media
-- Makes possible new classes of materials and devices.
The bottom half of the page is captioned "Wireless handset Applications"
and provides a cross-sectional diagram of an "HBT Transistor Wafer Cross
Section" on the left, a GaAs integrated circuit in the middle, and a picture of
a wireless handset on the right.
[End of text description of inside front cover]
<PAGE>
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary.................. 1
Risk Factors........................ 3
Special Note Regarding Forward-
looking Statements................. 8
Use of Proceeds..................... 9
Price Range of Common Stock......... 9
Dividend Policy..................... 9
Capitalization...................... 10
Dilution............................ 11
Selected Consolidated Financial
Data............................... 12
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 13
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Business......................... 20
Management....................... 32
Underwriting..................... 34
Notice to Canadian Residents..... 36
Legal Matters.................... 37
Experts.......................... 37
Where You Can Find More
Information..................... 38
Index to Consolidated Financial
Statements...................... F-1
</TABLE>
You should rely only on the information contained in this document or to
which we have referred you. We have not authorized anyone to provide you with
information that is different. This document may only be used where it is legal
to sell these securities. The information contained in this document may only
be accurate on the date of this document.
Except as otherwise indicated, all information in this prospectus assumes
that the underwriters' over-allotment option is not exercised.
"KOPIN", the KOPIN logo and "CyberDisplay" are trademarks and servicemarks
of Kopin Corporation. Other product, company or organization names cited in
this prospectus may be trademarks or registered trademarks of their respective
companies or organizations.
(i)
<PAGE>
Prospectus Summary
The items in the following summary are described in more detail later in
this prospectus. This summary provides an overview of selected information and
does not contain all the information you should consider. Therefore, you should
also read the more detailed information set out in this prospectus and the
financial statements.
Kopin Corporation
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 wireless
communications and high resolution portable consumer electronics applications.
Our products enable our customers to develop and market an improved generation
of products for these target applications.
There is high demand for wireless communications services and products.
According to Dataquest, in a report dated September 1999, the number of
worldwide wireless communications subscribers increased from 133 million in
1996 to 312 million in 1998. Furthermore, Dataquest projects a 20% compound
annual growth rate for wireless communications subscribers for the five year
period through 2003. We believe that in addition to an overall increase in
demand for these services, consumers are seeking higher performance personal
communications products with enhanced capabilities, such as longer battery
life, better range and more features. As the next generation of wireless
communications products emerges, we expect that these products will
increasingly include data-oriented services, such as broadband Internet access
and the ability to view e-mail and other information. We anticipate that these
changes will result in increased demand for new, higher performance components
for mobile communications and consumer electronics.
There is also a strong demand for high resolution, low cost, small form
factor displays for use in consumer electronics products including camcorders
and digital cameras. According to a Dataquest report dated June 1999, the
annual worldwide factory revenue for camcorders will exceed $7.2 billion by
2003. International Data Corporation projects that annual worldwide shipments
of digital cameras will exceed 22 million units in 2003.
We produce two types of high performance components: our heterojunction
bipolar transistor wafers, or HBT transistor wafers, and our CyberDisplay
products.
. Our HBT transistor wafer product is a customer specific array of
vertically oriented transistors based on a gallium arsenide wafer. Our
customers use our HBT transistor wafers to produce high performance
integrated circuits used primarily in wireless communications products.
We believe that integrated circuits manufactured with our HBT transistor
wafers are well suited for applications that require low power
consumption and high frequency performance. Our product enables our
customers to manufacture components for wireless handsets that feature
reduced size, extended battery life, increased talk time and improved
signal quality.
. Our CyberDisplay products are miniature, high performance, high
resolution, low cost displays for consumer electronics and mobile
communications devices. Our commercially available CyberDisplay product
is a 0.24 inch diagonal display which uses a lens and backlight to
deliver high resolution video and data images equivalent to viewing a 20
inch diagonal monitor from a distance of five feet. We believe our
CyberDisplay products are well suited for high resolution, high
information content applications, including viewing images in camcorders
and digital cameras, and reading e-mail and browsing the Internet using
digital wireless handsets, pagers and other consumer electronics devices.
We are currently experiencing rapidly increasing demand for both of our
principal products and are significantly increasing our production capacity.
The principal customer for our HBT transistor wafers is Conexant Systems,
which, along with other customers, uses these HBT transistor wafers primarily
to make integrated circuits for digital wireless handsets. Due to the strength
of our gallium arsenide technology, we are the single external supplier of HBT
transistor wafers to many customers. In addition to Conexant, original
equipment manufacturers including Nortel Networks and Hewlett-Packard use our
HBT transistor wafers. We currently provide our CyberDisplay product to JVC for
use in two of its CyberCam digital camcorder models and to Mustek for use in
digital cameras.
We were incorporated in Delaware in 1984. Our principal executive offices
are located at 695 Myles Standish Boulevard, Taunton, Massachusetts, 02780. Our
telephone number is (508) 824-6696 and our web site is located at
www.kopin.com. Information contained in our web site is not a part of this
prospectus.
1
<PAGE>
The Offering
<TABLE>
<C> <S>
Common stock offered............................... 1,800,000 shares
Common stock to be outstanding after the offering.. 14,282,694 shares
Use of proceeds.................................... Production capacity
expansion for our HBT
transistor wafer and
CyberDisplay products and
general corporate
purposes, including
capital expenditures and
working capital.
Nasdaq National Market Symbol...................... KOPN
</TABLE>
The number of shares of common stock to be outstanding after the offering
excludes an aggregate of 2,442,494 shares of common stock that we have reserved
for issuance under our stock option plans, of which 1,986,499 shares were
subject to outstanding options as of July 3, 1999 at a weighted average
exercise price of $12.32 per share.
Summary Consolidated Financial Data
The following tables present our summary consolidated financial data. We
have derived the information for the six months ended June 27, 1998 and July 3,
1999 from unaudited consolidated financial statements. We have adjusted the
balance sheet data information as of July 3, 1999 to give effect to our sale of
1,800,000 shares of common stock in the offering, assuming a public offering
price of $31.50 per share. You should read the following information together
with our consolidated financial statements and related notes beginning on page
F-1 of this prospectus, the information under "Selected Consolidated Financial
Data" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations." See Note 1 of the Notes to our consolidated financial
statements for an explanation of the shares used in computing basic and diluted
income (loss) per share.
Statement of Operations Data:
<TABLE>
<CAPTION>
Six Months
Years Ended December 31, Ended
-------------------------------------------- ----------------
June
27, July 3,
1994 1995 1996 1997 1998 1998 1999
------- ------- -------- ------- ------- ------- -------
(in thousands, except per share data) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Product revenues........ $ 2,830 $ 7,161 $11,727 $13,110 $23,225 $10,328 $13,911
Research and development
revenues............... 10,453 8,628 6,291 3,283 3,680 1,822 1,433
------- ------- -------- ------- ------- ------- -------
Total revenues.......... 13,283 15,789 18,018 16,393 26,905 12,150 15,344
Operating loss.......... (8,130) (10,299) (24,496) (7,287) (4,417) (1,457) (347)
Net income (loss)....... (6,694) (8,991) (21,596) (6,258) (2,968) (786) 352
Net income (loss) per
share:
Basic................. $ (0.72) $ (0.95) $ (1.98) $ (0.57) $ (0.25) $ (0.07) $ 0.03
Diluted............... $ (0.72) $ (0.95) $ (1.98) $ (0.57) $ (0.25) $ (0.07) $ 0.03
Weighted average number
of common shares
outstanding:
Basic................. 9,267 9,462 10,921 11,010 12,068 11,915 12,412
Diluted............... 9,267 9,462 10,921 11,010 12,068 11,915 13,144
</TABLE>
Balance Sheet Data:
<TABLE>
<CAPTION>
July 3, 1999
-------------------
(unaudited)
Actual As Adjusted
------- -----------
<S> <C> <C>
Cash and equivalents and marketable securities.............. $27,938 $ 80,686
Working capital............................................. 35,721 88,469
Total assets................................................ 63,894 116,642
Long-term obligations, less current portion................. 3,241 3,241
Stockholders' equity........................................ 53,438 106,186
</TABLE>
2
<PAGE>
RISK FACTORS
This offering involves a high degree of risk. You should carefully consider
the risks described below and the other information in this prospectus before
purchasing our common stock.
We have experienced a history of losses and have a significant accumulated
deficit.
We have never achieved profitability on an annual basis. We did not achieve
profitability on a quarterly basis until the third quarter of 1998 and
sustained a significant loss in the following quarter and for the full year
1998. Since inception, we have incurred significant net operating losses. For
the years ended December 31, 1996, 1997, and 1998, we incurred net losses of
$21.6 million, $6.3 million and $3.0 million, respectively, and as of July 3,
1999 we had an accumulated deficit of $57.1 million. We cannot assure you that
we will achieve or maintain profitability in the future.
Our revenue and cash flow could be negatively affected by the loss of any of
the few customers who account for a substantial portion of our revenues.
A few customers account for a substantial portion of our revenues. Sales of
our HBT transistor wafers to Conexant Systems accounted for approximately 39%,
63%, 59%, and 49% of our total revenues for the years ended December 31, 1996,
1997 and 1998, and for the six months ended July 3, 1999, respectively. For the
years ended December 31, 1996, 1997 and 1998 and for the six months ended July
3, 1999, revenues from multiple contracts with various U.S. governmental
agencies accounted for approximately 35%, 20%, 14% and 9%, respectively, of our
total revenues. We anticipate that sales of our HBT transistor wafers to
Conexant will continue to represent a significant portion of our revenues for
the near future. A reduction in research and development contracts from the
U.S. government or a reduction or delay in orders from Conexant 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.
We have limited experience manufacturing display products. We expect to
significantly increase our CyberDisplay production capacity by the end of the
first quarter of 2000 in an attempt to meet anticipated increased demand. We
are also embarking on an initiative to automate portions of our display
manufacturing process to increase throughput and lower unit production costs.
If we are unable to successfully increase our CyberDisplay production capacity
and reduce manufacturing costs, we may lose customer orders and our display
business will remain unprofitable.
Our CyberDisplay products may not be accepted by the market.
We have had limited sales of our CyberDisplay products to date. Our success
will in large part depend on the widespread adoption of the viewing format of
our CyberDisplay. 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:
. The introduction of our display technology generally;
. Consumer acceptance of our CyberDisplay products; and
. The relative complexity, reliability, usefulness and cost-effectiveness
of our display products compared to other display products available in
the market or that may be developed by our competitors.
In addition, our customers may be reluctant to rely upon a relatively small
company such as Kopin for a critical component. We cannot assure you that
prospective customers will adopt our CyberDisplay products or
3
<PAGE>
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
communications market.
Sales of products for wireless communications applications constitute
substantially all of our current, and a significant portion of our projected,
product revenues and cash flows. 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
success will depend in large part on the widespread adoption of this
infrastructure and the cost-effectiveness of these services to the consumer. We
may be unable to grow or sustain our business if there is a slowdown in the
wireless communications market.
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, forecasting our revenues
is difficult. In addition, due to the absence of substantial noncancellable
backlog, we typically plan our production and inventory levels based on
internal forecasts of customer demand, which are highly unpredictable and can
fluctuate substantially. Our operating results are difficult to forecast
because we are continuing to invest in capital equipment and increasing our
operating expenses for personnel and 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 affect the price of our common stock.
Our quarterly and annual revenues and operating results are difficult to
predict and may fluctuate significantly from quarter to quarter. 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. Our revenues and our
results of operations may fluctuate for several reasons including:
. The timing and successful introduction of additional manufacturing
capacity;
. The timing of the initial selection of our HBT transistor wafers and
CyberDisplay products as a component in our customers' new products;
. Market acceptance of our and our customers' products;
. Competitive pressures on selling prices of our CyberDisplay products;
. The timing and cancellation of customer orders;
. Our ability to introduce new products and technologies on a timely basis;
. Our ability to successfully reduce costs; and
. The cancellation of U.S. government contracts.
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.
4
<PAGE>
Disruptions of our HBT transistor wafer production 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 HBT transistor wafers 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. We intend to broaden our production capabilities to
produce HBT transistor wafers up to six inches in diameter, but we have limited
experience in producing finished six-inch HBT transistor wafers in commercial
quantities. 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 HBT transistor wafer 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.
We would be unable to manufacture and distribute our CyberDisplay products if
the third parties we rely on for manufacturing and packaging fail to provide
those services.
We depend on United Microelectronics Corporation, or UMC, and its affiliate,
Unipac Optoelectronics, for the fabrication of integrated circuits and a
portion of the packaging of our CyberDisplay products. We have no long-term
contracts with these companies, both of which are located in Taiwan. If these
companies were to terminate their arrangements with us or become unable to
provide the required capacity and quality on a timely basis, we would be unable
to manufacture and ship our CyberDisplay products until replacement foundry or
packaging 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 and Unipac involves certain risks, including:
. The lack of control over production capacity and delivery schedules;
. Limited control over quality assurance, manufacturing yields and
production costs; and
. The risks associated with international commerce, including unexpected
changes in legal and regulatory requirements, changes in tariffs and
trade policies and political and economic instability.
We also depend on third parties to provide integrated circuit chip sets for
use with our CyberDisplay products. Motorola currently produces integrated
circuit chip sets for use with our CyberDisplay products in camcorders. If
Motorola or any other third party were unable to supply these integrated
circuit chip sets, we would be unable to sell our CyberDisplay products until a
replacement supplier could be found. 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. We plan to establish a second facility to manufacture our HBT
transistor wafers and we are also considering the establishment of additional
internal or third party manufacturing capability to produce our CyberDisplay
products. To date, we have operated only one facility for each of our product
lines, and we have no experience operating multiple facilities to manufacture a
single product line.
Our ability to successfully operate additional manufacturing sites will
depend on a number of factors including:
. The identification and availability of appropriate and affordable sites;
. The management of facility construction and development timing and costs;
. The establishment of adequate management and information systems and
financial controls; and
. The adaptation of our complex manufacturing process in our additional
sites.
5
<PAGE>
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. We compete with
several companies primarily engaged in the business of designing, manufacturing
and selling integrated circuits or alternative display technologies, as well as
the supply of other discrete products. Our competitors could develop new
process technologies that may be superior to ours, including technologies that
target markets in which our products are sold. Many of our existing and
potential competitors have strong market positions, considerable internal
manufacturing capacity, established intellectual property rights and
substantial technological capabilities. Furthermore, they also have greater
financial, technical, manufacturing, marketing and personnel resources than we
do, and we may not be able to compete successfully with them.
In addition, many of our existing and potential customers manufacture or
assemble wireless communications devices and have substantial in-house
technological capabilities. 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. For more information, see "Business--Competition."
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 obtain patents and licenses
and to preserve other intellectual property rights covering our products and
manufacturing processes. To that end, 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. If these measures fail to adequately protect our
intellectual and proprietary rights, our business will not be successful and
the value of your investment in Kopin may decline. For more information, see
"Business--Patents, Proprietary Rights and Licenses."
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. We may be unsuccessful in attracting and retaining these personnel.
6
<PAGE>
We may be unable to continue to grow at our historical growth rates or to
manage our growth effectively.
In 1998 and 1999, we have experienced significant growth in our HBT
transistor wafer business and we anticipate growth in our CyberDisplay
business. This growth has placed, and our anticipated growth is expected to
place, significant strain on our limited administrative, operational and
financial resources. 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
continue to grow, or, if we do grow, that we will be able to maintain 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. We currently have no commitments or agreements with
respect to any acquisitions or investments. 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 that 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.
Problems related to the Year 2000 issue could require us to incur unanticipated
delays and expenses in the operation of our business.
We are currently undergoing efforts to ensure that our critical business
systems will not fail or make miscalculations as a result of the Year 2000 date
change. We cannot be sure that we will not have to spend significantly more
than we currently anticipate on remediation efforts for our critical systems,
or that implementation of any contingency plans we develop to deal with
problems resulting from the Year 2000 date change will successfully avoid or
alleviate any problems that may occur. Additionally, although we believe that
our products are Year 2000 compliant, we cannot assure you that the systems of
our raw materials suppliers or the products and systems of our customers will
not be adversely affected. Any interruption in these third parties' operations
could significantly delay our ability to manufacture our products or reduce our
customers' demand for our products.
We have wide discretion as to our use of the proceeds from this offering and
may allocate these proceeds in ways with which you may not agree.
The primary purposes of this offering include the purchase of new HBT
transistor wafer manufacturing equipment, the establishment of an additional
HBT transistor wafer manufacturing facility, the automation of the assembly of
our CyberDisplay products, the increase of our CyberDisplay production
capability and the increase of our working capital. Accordingly, our management
will retain broad discretion as to the allocation of the net proceeds from this
offering. For more information, see "Use of Proceeds."
7
<PAGE>
Our stock price may be volatile in the future.
The trading price of our common stock could be subject to wide fluctuations
in response to:
. Quarter-to-quarter variations in results of operations;
. Announcements of technological innovations or new products by Kopin or
our competitors;
. General conditions in the wireless communications, semiconductor and
display markets;
. Changes in earnings estimates by analysts; and
. Other events or factors.
In addition, the public stock markets experience extreme price and trading
volume volatility, particularly for technology companies like us. 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.
You should not expect to receive dividends from us.
We have not paid dividends in the past, nor do we expect to pay dividends
for the foreseeable future. We anticipate that earnings, if any, will be
retained for the development of our businesses.
You will suffer immediate and substantial dilution as a result of this
offering.
There will be immediate and substantial dilution to new investors in this
offering. The public offering price will be higher than the net tangible book
value per share of the outstanding common stock will be immediately after the
offering. Any common stock you purchase in the offering will have a post-
offering net tangible book value per share of approximately $24.19 less than
the price you paid for the share, assuming a public offering price of $31.50
per share. For more information, see "Dilution."
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve risks and
uncertainties. These statements relate to future events or our future financial
performance and include statements about our manufacturing capabilities and
cash flows. In some cases, you can identify forward-looking statements by
terminology such as "may, " "will," "should," "expects," "plans,"
"anticipates," "believes," "estimates," "predicts," "potential" or "continue"
or the negative of such terms or other comparable terminology. These statements
are only predictions and involve known and unknown risks, uncertainties and
other factors, including the risks outlined under "Risk Factors," that may
cause our or our industry's actual results, levels of activity, performance or
achievements to be materially different from any future results, levels or
activity, performance or achievements expressed or implied by such forward-
looking statements.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. We are under no duty to update any of
the forward-looking statements after the date of this prospectus to conform
such statements to actual results.
8
<PAGE>
USE OF PROCEEDS
Our net proceeds from the sale of 1,800,000 shares of common stock we are
offering are estimated to be approximately $52.7 million, or $60.7 million if
the underwriters' over-allotment option is exercised in full, at an assumed
public offering price of $31.50 per share after deducting the estimated
underwriting discounts and commissions and offering expenses payable by us.
The principal purposes of this offering are for general corporate purposes,
including:
. The purchase of new HBT transistor wafer manufacturing equipment;
. The establishment of an additional HBT transistor wafer manufacturing
facility;
. The purchase of equipment to automate the assembly and increase the
production capacity of our CyberDisplay products; and
. An increase in working capital.
Pending the uses described above, the net proceeds will be invested in
short-term, interest bearing, investment grade securities.
PRICE RANGE OF COMMON STOCK
Our common stock is traded on the Nasdaq National Market under the symbol
"KOPN." The following table sets forth, for the quarters indicated, the range
of high and low sale prices for the common stock as reported on the Nasdaq
National Market for the periods indicated.
<TABLE>
<CAPTION>
High Low
------- -------
<S> <C> <C>
Fiscal Year Ended December 31, 1997
First Quarter................................................ $15.750 $ 9.875
Second Quarter............................................... 16.750 10.500
Third Quarter................................................ 24.625 14.750
Fourth Quarter............................................... 29.000 15.500
Fiscal Year Ended December 31, 1998
First Quarter................................................ $22.375 $14.000
Second Quarter............................................... 22.375 16.000
Third Quarter................................................ 21.000 11.438
Fourth Quarter............................................... 21.250 11.375
Fiscal Year Ending December 31, 1999
First Quarter................................................ $24.875 $12.000
Second Quarter............................................... 24.875 13.000
Third Quarter (through September 17, 1999)................... 40.750 21.250
</TABLE>
As of September 2, 1999, there were approximately 222 stockholders of record
of our common stock, which does not reflect those shares held beneficially or
those shares held in "street" name. On September 17, 1999, the last sale price
reported on the Nasdaq National Market for our common stock was $31.50 per
share.
DIVIDEND POLICY
We have not paid dividends in the past, nor do we expect to pay dividends
for the foreseeable future. We anticipate that earnings, if any, will be
retained for the development of our businesses.
9
<PAGE>
CAPITALIZATION
The following table sets forth our cash and equivalents and marketable
securities and capitalization as of July 3, 1999 on an actual basis and as
adjusted to give effect to our sale of 1,800,000 shares of common stock at an
assumed public offering price of $31.50. This table should be read in
conjunction with our consolidated financial statements and the notes to those
financial statements included elsewhere in this prospectus.
<TABLE>
<CAPTION>
As of July 3, 1999
---------------------
Actual As Adjusted
-------- -----------
(In thousands)
(unaudited)
<S> <C> <C>
Cash and equivalents and marketable securities........... $ 27,938 $ 80,686
======== ========
Long-term obligations, less current portion.............. $ 3,241 $ 3,241
-------- --------
Stockholders' equity:
Preferred stock, $0.01 par value; 3,000 shares
authorized;
none issued and outstanding.......................... -- --
Common stock, $0.01 par value, 20,000,000 shares
authorized; 12,482,694 shares outstanding, actual;
and 14,282,694 shares outstanding, as adjusted(1)... 125 143
Additional paid-in capital............................. 110,124 162,854
Deferred compensation.................................. (138) (138)
Accumulated other comprehensive income................. 461 461
Accumulated deficit.................................... (57,134) (57,134)
-------- --------
Total stockholders' equity............................... 53,438 106,186
-------- --------
Total capitalization..................................... $ 56,679 $109,427
======== ========
</TABLE>
- --------
(1) Excludes outstanding options as of July 3, 1999 to purchase 1,986,499
shares of common stock at a weighted average exercise price of $12.32 per
share, 1,171,594 of which were exercisable.
10
<PAGE>
DILUTION
As of July 3, 1999, we had 12,482,694 shares of common stock outstanding and
a net tangible book value of $51.6 million or $4.13 per share. "Net tangible
book value per share" represents our tangible net worth (total tangible assets
less total liabilities) divided by the number of shares of common stock
outstanding. After giving effect to our sale of 1,800,000 shares at the assumed
public offering price of $31.50 per share and after deduction of the estimated
underwriting discount and offering expenses, our net tangible book value at
July 3, 1999 would have been $104.3 million or $7.31 per share. This represents
an immediate increase in the net tangible book value of $3.18 per share to
existing stockholders and an immediate dilution of the net tangible book value
of $24.19 per share to purchasers of shares from this offering. The following
table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Public offering price per share................................... $31.50
Net tangible book value per share before offering................ $4.13
Increase attributable to new investors........................... 3.18
-----
Net tangible book value per share after offering.................. 7.31
------
Dilution per share to purchasers.................................. $24.19
======
</TABLE>
The above calculations do not take into account the exercise of outstanding
stock options after July 3, 1999. If the 1,986,499 options outstanding at July
3, 1999 were exercised, there would be further dilution to new investors.
11
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The statement of operations data for the years ended December 31, 1996, 1997
and 1998 and balance sheet data as of December 31, 1997 and 1998 have been
derived from our audited consolidated financial statements and the notes to
those consolidated financial statements that are included elsewhere in this
prospectus. The selected consolidated financial data for the six months ended
June 27, 1998 and July 3, 1999, and the balance sheet data as of July 3, 1999,
have been derived from our unaudited consolidated financial statements and the
notes to those consolidated financial statements included elsewhere in this
prospectus. In our opinion, these unaudited consolidated financial statements
include all adjustments, consisting only of normal recurring adjustments,
necessary for the fair presentation of the results for these periods. The
statement of operations data for the years ended December 31, 1994 and 1995,
and the balance sheet data as of December 31, 1994, 1995 and 1996 have been
derived from our audited financial statements which are not included in this
prospectus. The financial statements of Forte Technologies, Inc. from June 1,
1995 through December 31, 1996 are consolidated with our financial statements.
The selected consolidated financial data should be read in conjunction with our
consolidated financial statements and the notes to those financial statements,
and the other financial data included elsewhere in this prospectus.
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, ----------------
--------------------------------------------- June 27, July 3,
1994 1995 1996 1997 1998 1998 1999
------- -------- -------- ------- ------- -------- -------
(in thousands, except per share data) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues:
Product revenues....... $ 2,830 $ 7,161 $ 11,727 $13,110 $23,225 $10,328 $13,911
Research and
development revenues.. 10,453 8,628 6,291 3,283 3,680 1,822 1,433
------- -------- -------- ------- ------- ------- -------
Total revenues........ 13,283 15,789 18,018 16,393 26,905 12,150 15,344
------- -------- -------- ------- ------- ------- -------
Expenses:
Cost of product
revenues.............. 1,981 6,059 9,489 8,636 15,509 6,235 9,821
Research and
development--funded
programs.............. 10,532 8,757 6,591 2,802 3,954 2,316 1,749
Research and
development--
internal.............. 4,070 6,856 9,876 7,623 5,659 2,743 1,598
Selling, general and
administrative........ 4,575 4,013 7,070 4,292 4,015 2,126 2,344
Other.................. 255 403 598 327 385 187 179
Write-down of
subsidiary assets..... -- -- 3,900 -- -- -- --
Impairment charge...... -- -- 4,990 -- 1,800 -- --
------- -------- -------- ------- ------- ------- -------
21,413 26,088 42,514 23,680 31,322 13,607 15,691
------- -------- -------- ------- ------- ------- -------
Loss from operations.... (8,130) (10,299) (24,496) (7,287) (4,417) (1,457) (347)
Other income, net....... 1,436 1,308 1,676 1,029 1,508 671 725
------- -------- -------- ------- ------- ------- -------
Income (loss) before
minority interest...... (6,694) (8,991) (22,820) (6,258) (2,909) (786) 378
Minority interest in
(income) loss of
subsidiary............. -- -- 1,224 -- (59) -- (26)
------- -------- -------- ------- ------- ------- -------
Net income (loss)....... $(6,694) $ (8,991) $(21,596) $(6,258) $(2,968) $ (786) $ 352
======= ======== ======== ======= ======= ======= =======
Net income (loss) per
share:
Basic.................. $ (0.72) $ (0.95) $ (1.98) $ (0.57) $ (0.25) $ (0.07) $ 0.03
======= ======== ======== ======= ======= ======= =======
Diluted................ $ (0.72) $ (0.95) $ (1.98) $ (0.57) $ (0.25) $ (0.07) $ 0.03
======= ======== ======== ======= ======= ======= =======
Weighted average number
of common shares
outstanding:
Basic.................. 9,267 9,462 10,921 11,010 12,068 11,915 12,412
======= ======== ======== ======= ======= ======= =======
Diluted................ 9,267 9,462 10,921 11,010 12,068 11,915 13,144
======= ======== ======== ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
December 31,
--------------------------------------- July 3,
1994 1995 1996 1997 1998 1999
------- ------- ------- ------- ------- -----------
(in thousands) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and equivalents and
marketable securities.... $28,728 $41,997 $27,072 $19,046 $36,808 $27,938
Working capital........... 30,566 44,727 27,687 21,466 39,359 35,721
Total assets.............. 52,836 76,160 53,746 43,394 61,906 63,894
Long-term obligations,
less current portion..... 2,235 1,605 2,793 1,959 4,209 3,241
Stockholders' equity...... 43,451 61,842 40,271 35,869 51,846 53,438
</TABLE>
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial
condition and results of our operations in conjunction with "Selected
Consolidated Financial Data", our consolidated financial statements and related
notes that appear elsewhere in this prospectus, and other financial information
incorporated by reference in this prospectus. This discussion and analysis
contains forward-looking statements that involve risks and uncertainties. Our
actual results may differ materially from those anticipated in the forward-
looking statements as a result of a number of factors, including those set
forth in "Risk Factors" and elsewhere in this prospectus.
Overview
Kopin is a leading developer and manufacturer of advanced semiconductor
materials and miniature displays. We use our proprietary technology to design,
manufacture and market products used in highly demanding commercial wireless
communications and high resolution portable applications. Our products enable
our customers to develop and market an improved generation of products for
these target applications.
We have two principal components of revenues: product revenues and research
and development revenues. Historically, product revenues have consisted of
sales of our HBT transistor wafers. For the year ended December 31, 1996, we
had product revenues of $11.7 million ($9.2 million excluding Forte, a company
which we consolidated as a subsidiary through December 31, 1996), or 65.1% of
total revenues. Product revenues were $13.1 million for the year ended December
31, 1997, or 80.0% of total revenues. For the year ended December 31, 1998,
product revenues were $23.2 million, or 86.3% of total revenues. Product
revenues were $13.9 million, or 90.7% of total revenues for the six months
ended July 3, 1999. We began shipping our CyberDisplay product in 1998. This
product line represented 10.0% of our product revenues for the six months ended
July 3, 1999.
Research and development revenues consist primarily of development contracts
with agencies of the U.S. government. For the year ended December 31, 1996, we
had research and development revenues of $6.3 million, or 34.9% of total
revenues. As management intensified its efforts on the marketing and sales of
its commercial products, research and development revenues declined to $3.3
million, or 20.0% of total revenues for the year ended December 31, 1997. For
the year ended December 31, 1998, research and development revenues were $3.7
million, or 13.7% of total revenues. Research and development revenues were
$1.4 million, or 9.3% of total revenues for the six months ended July 3, 1999.
We believe that research and development revenues will continue to decline on
an annual basis as a percentage of total revenues for the near future.
We recognize revenues when a product is shipped or when a service is
performed. We typically provide customers with a twelve month warranty from the
date of sale for some of our products. Based upon historical and anticipated
warranty costs, we account for estimated sales return and warranty reserves in
the period the sale is made. We recognize revenues from long-term contracts on
the percentage-of-completion method of accounting as work is performed, based
upon the ratio of costs or hours already incurred to the estimated total cost
of completion or hours of work to be performed. We account for product
development and research contracts that have established prices for distinct
phases as if each phase were a separate contract. We classify amounts earned on
contracts in progress that are in excess of amounts billed as unbilled
receivables and we classify amounts received in excess of amounts earned as
unearned revenues. We bill unbilled receivables based on dates specified in the
related agreement or in periodic installments based upon our invoicing cycle.
We recognize the entire amount of an estimated ultimate loss in our financial
statements at the time the loss on a contract becomes known.
13
<PAGE>
On January 1, 1996, we adopted Statement of Financial Accounting Standards
(SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-
Lived Assets to be Disposed Of." This Statement establishes accounting
standards for the carrying value of long-lived and certain identifiable
intangible assets. In January 1996, we incurred a charge of $5.0 million which
included a write-down associated with the initial adoption of SFAS No. 121, the
expensing of purchased technology, and the write-off of certain previously
deferred expenses.
Results of Operations
Six Months Ended July 3, 1999 Compared to Six Months Ended June 27, 1998
Revenues. Our total revenues for the six months ended July 3, 1999 were
$15.3 million compared to $12.2 million during the corresponding period in
1998, an increase of approximately $3.1 million or 26.3%. Our product revenues
for the six months ended July 3, 1999 were $13.9 million compared to $10.3
million for the six months ended June 27, 1998, an increase of approximately
$3.6 million or 34.7%. This increase in product revenues was primarily due to
an increase in sales of our HBT transistor wafers and other gallium
arsenide products as well as our CyberDisplay products in the six months ended
July 3, 1999 compared to the six months ended June 27, 1998. Research and
development revenues for the six months ended July 3, 1999 were $1.4 million,
compared to $1.8 million during the corresponding period in 1998, a decrease of
$389,972, or 21.4%. Research and development revenues declined primarily due to
the expirations of multi-year contracts with the U.S. government.
Cost of Product Revenues. Cost of product revenues, which is comprised of
materials, labor and manufacturing overhead related to our products, was $9.8
million for the six months ended July 3, 1999 compared to $6.2 million during
the corresponding period in 1998, an increase of approximately $3.6 million or
57.5%. The increase in cost of product revenues as a percentage of product
revenues for the first six months of 1999 primarily is attributable to
increased production staffing as we increased production capacity, re-deployed
certain assets and personnel previously involved in development activities to
manufacturing activities and increased sales of our CyberDisplay products as a
percentage of total sales.
Research and Development. Research and development expenses are incurred
under development programs for gallium arsenide and display products either in
support of internal development programs or programs funded by agencies of the
U.S. government. Research and development costs include staffing, purchases of
materials and laboratory supplies, circuit design costs, fabrication and
packaging of display products, and overhead. Funded research and development
expenses were $1.7 million for the six months ended July 3, 1999 compared to
$2.3 million during the corresponding period in 1998, a decrease of $567,385,
or 24.5% due to reduced subcontractor expenses caused by the expiration of
multi-year contracts with agencies of the U.S. government. Internal research
and development expenses were $1.6 million for the six months ended July 3,
1999 compared to $2.7 million during the corresponding period in 1998, a
decrease $1.1 million, or 41.7%. The decrease in internal research and
development was primarily a result of the re-deployment of certain assets and
personnel from development activities into manufacturing activities.
Selling, General and Administrative. Selling, general and administrative
expenses consist of the expenses incurred by our sales and marketing personnel
and related expenses, and administrative and general corporate expenses.
Selling, general and administrative expenses were $2.3 million for the six
months ended July 3, 1999 compared to $2.1 million during the corresponding
period in 1998, an increase of $217,870, or 10.2%. The increase in selling,
general and administrative expense is primarily due to increases in headcount
in the sales and marketing staff and significant travel associated with new
customer support. In addition, selling, general and administrative expenses
include non-cash charges for compensation expense of $27,510 for the six months
ended July 3, 1999 compared to $33,450 during the corresponding period in 1998,
relating to the issuance of certain stock options.
14
<PAGE>
Other. Other expenses, primarily amortization of patents and licenses, were
$179,275 for the six months ended July 3, 1999 compared to $187,630 during the
corresponding period in 1998.
Other Income, Net. Other income, net was $725,476 for the six months ended
July 3, 1999 compared to $671,425 during the corresponding period in 1998.
This increase was primarily due to a decrease in interest expense as a result
of reduced debt.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Revenues. Our total revenues were $26.9 million for 1998 compared to $16.4
million in 1997, an increase of $10.5 million, or 64.1%. Our product revenues
were $23.2 million for 1998 compared to $13.1 million in 1997, an increase of
$10.1 million, or 77.2%. The increase in product revenues was primarily due to
an increase in sales of our HBT transistor wafers and other gallium arsenide
products to $20.3 million in 1998 compared to $12.0 million in 1997, an
increase of $8.3 million, or 69.8%. The increase in sales of our HBT
transistor wafers was primarily due to the increased use of advanced
semiconductor transistors in various wireless telecommunications products,
particularly by our major customer, Conexant. Research and development
revenues were $3.7 million for 1998 compared to $3.3 million in 1997, an
increase of $396,608. The increase in research and development revenues was
primarily attributable to an increase in contract revenues from agencies of
the U.S. government.
Cost of Product Revenues. Cost of product revenues was $15.5 million for
1998 compared to $8.6 million in 1997. Included in 1998 cost of product
revenues is a charge totaling approximately $1.7 million associated with the
write-down of inventory resulting from modification of certain processes in
the production of our CyberDisplay products to improve manufacturing
flexibility and to meet customer requirements. Excluding this inventory write-
down, cost of product revenues decreased as a percentage of product revenues
because of manufacturing efficiencies derived from the increase in unit volume
production. The benefit from manufacturing efficiencies was offset in part
from an increase in display products as a percentage of total product
revenues.
Research and Development. Funded research and development expenses were
$4.0 million for 1998 compared to $2.8 million in 1997, an increase of $1.2
million. The increase in funded research and development expenses in 1998 was
primarily due to an increase in programs funded by agencies of the U.S.
government. Internal research and development expenses were $5.7 million in
1998 compared to $7.6 million in 1997, a decrease of $2.0 million. The
decrease in internal research and development expenses was primarily a result
of reduced research costs incurred for developing our display products.
Selling, General and Administrative. Selling, general and administrative
expenses were $4.0 million for 1998 compared to $4.3 million in 1997, a
decrease of $277,521. In addition, selling, general and administrative
expenses include non-cash charges for compensation expense of $66,900 for 1998
compared to $75,857 in 1997 relating to the issuance of certain stock options.
Impairment Charge. In 1998, we recorded a non-cash impairment charge
totaling approximately $1.8 million associated with the write-down of
equipment and intangible assets resulting from modification of certain
processes in the production of our CyberDisplay products to improve
manufacturing flexibility.
Other. Other expenses were $384,349 for 1998 compared to $327,102 in 1997,
an increase of $57,247.
Other Income, Net. Other income, net was $1.5 million in 1998 compared to
$1.0 million in 1997, an increase of $478,921. The increase was primarily due
to an increase in interest income of $779,834 to $2.0 million in 1998 from
$1.3 million in 1997, resulting from higher cash balances in 1998. This
increase was partially offset by an increase in interest expense of $300,913
due to additional debt funding.
15
<PAGE>
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
For the year ended December 31, 1996, our consolidated financial statements
include the results of operations of Forte, a majority-owned subsidiary. As a
result of declining sales and results of operations of Forte, we recorded a
$3.9 million write-down of the value of Forte's assets and our investment in
Forte at December 31, 1996. In March 1997, Forte filed a voluntary petition
seeking protection from its creditors under Chapter 11 of the United States
Bankruptcy Code. The financial statements of Forte are not consolidated with
our financial statements after December 31, 1996.
Revenues. Our total revenues were $16.4 million for 1997 compared to $18.0
million ($15.5 million excluding Forte) during the corresponding period in
1996, a decrease of $1.6 million. Our product revenues were $13.1 million for
1997 compared to $11.7 million ($9.2 million excluding Forte) in 1996, an
increase of $1.4 million. Product revenues from sales of our HBT transistor
wafers and other gallium arsenide products were $12.0 million in 1997 compared
to $8.3 million in 1996, an increase of $3.6 million, or 43%. The increase in
product revenues was due to a $3.9 million increase in sales of our HBT
transistor wafers and display products over the corresponding period in the
prior year, partially offset by the inclusion of Forte revenues in 1996. The
increase in sales of our HBT transistor wafers was primarily due to the
increased use of advanced semiconductor transistors in various wireless
telecommunications products, particularly by our major customer, Conexant.
Research and development revenues were $3.3 million for 1997 compared to $6.3
million in 1996, a decrease of $3.0 million. The decrease in research and
development revenues was primarily attributable to a decrease in contract
revenues from agencies of the U.S. government. In 1994, we received a $10.7
million multi-year contract award from Defense Advanced Research Projects
Agency. We recorded revenues under this contract of $492,000 in 1997 compared
to $3.4 million in 1996, a decrease of $2.9 million.
Cost of Product Revenues. Cost of product revenues was $8.6 million for 1997
compared to $9.5 million ($6.8 million excluding Forte) in 1996. The
improvement in cost of product revenues as a percentage of product revenues in
1997 was primarily due to increased sales of our HBT transistor wafers,
resulting in lower unit costs, and the inclusion in the 1996 financial results
of shipments by Forte.
Research and Development. Funded research and development expenses were $2.8
million for 1997 compared to $6.6 million in 1996, a decrease of $3.8 million.
The decrease in funded research and development expenses in 1997 was primarily
due to a reduction in programs funded by agencies of the U.S. government.
Internal research and development expenses were $7.6 million in 1997 compared
to $9.9 million ($9.3 million excluding Forte) in 1996, a decrease of $2.3
million. The decrease in internal research and development expenses was
primarily a result of reduced development costs incurred for fabrication and
packaging of our display products, as well as the inclusion of $597,545 of such
expenses incurred by Forte during the corresponding period in 1996.
Selling, General and Administrative. Selling, general and administrative
expenses were $4.3 million for 1997 compared to $7.1 million ($4.2 million
excluding Forte) in 1996, a decrease of $2.8 million. The decrease in selling,
general and administrative expenses in 1997 was primarily due to the inclusion
of expenses of $2.9 million incurred by Forte in 1996. In addition, selling,
general and administrative expenses include non-cash charges for compensation
expense of $75,857 for 1997 compared to $66,776 in the year ended 1996 relating
to the issuance of certain stock options.
Other. Other expenses were $327,102 in 1997 compared to $597,943 ($280,807
excluding Forte) in 1996, a decrease of $270,841. The reduced expense in 1997
was primarily due to amortization expense incurred in 1996 related to the
goodwill resulting from our investment in Forte.
Other Income, Net. Other income, net was $1.0 million in 1997 compared to
$1.7 million in 1996, a decrease of $647,042. The decrease in 1997 was
primarily due to lower interest income earned as a result of lower cash
balances during 1997 in comparison to 1996.
16
<PAGE>
Selected Unaudited Quarterly Results of Operations
The following table presents our unaudited results of operations for the
eight most recently ended fiscal quarters. We believe that all necessary
adjustments, consisting only of normal recurring adjustments, have been
included in the amounts below to present fairly the selected quarterly
information when read in conjunction with the consolidated financial statements
included elsewhere in this prospectus. Our results from operations may vary
substantially from quarter to quarter; accordingly, the results of operations
for a quarter are not necessarily indicative of results for any subsequent
quarter or for the full year.
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------------------------------------------------------
September 27, December 31, March 28, June 27, September 26, December 31, April 3, July 3,
1997 1997 1998 1998 1998 1998 1999 1999
------------- ------------ --------- -------- ------------- ------------ -------- -------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Product revenues........ $ 2,941 $ 4,170 $4,661 $5,667 $6,957 $ 5,940 $5,985 $7,926
Research and development
revenues............... 967 720 806 1,016 879 979 745 688
------- ------- ------ ------ ------ ------- ------ ------
Total revenues.......... 3,908 4,890 5,467 6,683 7,836 6,919 6,730 8,614
------- ------- ------ ------ ------ ------- ------ ------
Costs and expenses:
Cost of product
revenues............... 1,891 2,662 2,723 3,512 4,127 5,147 3,930 5,891
Research and
development............ 2,604 2,267 2,550 2,509 2,573 1,981 1,999 1,348
Selling, general and
administrative......... 1,069 1,036 992 1,134 1,002 887 923 1,421
Other................... 75 100 92 95 98 100 88 91
Impairment charges...... -- -- -- -- -- 1,800 -- --
------- ------- ------ ------ ------ ------- ------ ------
Total costs and
expenses............... 5,639 6,065 6,357 7,250 7,800 9,915 6,940 8,751
------- ------- ------ ------ ------ ------- ------ ------
Income (loss) from
operations............. (1,731) (1,175) (890) (567) 36 (2,996) (210) (137)
Other income, net....... 242 196 279 392 417 420 416 309
------- ------- ------ ------ ------ ------- ------ ------
Income (loss) before
minority interest...... (1,489) (979) (611) (175) 453 (2,576) 206 172
Minority interest in
(income) of
subsidiary............. -- -- -- -- -- (59) -- (26)
------- ------- ------ ------ ------ ------- ------ ------
Net income (loss)....... $(1,489) $ (979) $ (611) $ (175) $ 453 $(2,635) $ 206 $ 146
======= ======= ====== ====== ====== ======= ====== ======
</TABLE>
Product revenues have increased quarter over quarter in six of the seven
quarters ended July 3, 1999. These increases were primarily due to increased
sales of our HBT transistor wafer and CyberDisplay products. Quarterly product
revenues in 1998 fluctuated due, in part, to the timing of shipments of
CyberDisplay products to customers for their evaluation purposes. In the
quarter ended July 3, 1999, we commenced shipments of our CyberDisplay products
for use by JVC in two of its CyberCam camcorder models. In 1999, we initiated
an aggressive pricing policy with respect to our CyberDisplay products in order
to gain adoption by manufacturers of consumer electronics. As a result of this
strategy, cost of product revenues as a percentage of total revenues has
increased as CyberDisplay product revenues have increased.
17
<PAGE>
Liquidity and Capital Resources
We have financed our operations primarily through public offerings and
private placements of our equity securities, research and development contract
revenues, and sales of our gallium arsenide and display products. We believe
our available cash resources, together with the proceeds from this offering,
will support our operations and capital needs for at least the next twelve
months.
As of July 3, 1999, we had cash and equivalents and marketable securities of
$27.9 million and working capital of $35.7 million compared to $36.8 million
and $39.4 million, respectively, as of December 31, 1998. The decrease in cash
and equivalents and marketable securities was primarily due to cash used in
operations of $2.9 million, capital expenditures of $5.9 million, and principal
payments on long-term obligations of $1.2 million, offset by proceeds from the
exercise of stock options of $1.2 million. The increase in capital expenditures
is primarily for our expansion program to increase manufacturing capacity for
our gallium arsenide and display products.
We periodically enter into long-term debt arrangements to finance equipment
purchases and other activities. As of July 3, 1999, long-term debt obligations
totaled $5.0 million, of which $1.8 million is payable in the next twelve
months.
Our CyberDisplay products are targeted at large sales volume consumer
electronic and wireless communication applications. We believe that in order to
obtain customers in these markets, it has been necessary to make significant
investments in equipment and infrastructure. In addition, we have spent
approximately $5.0 million and $7.0 million annually in 1998 and 1997,
respectively, to develop and improve CyberDisplay products. We believe that it
will be necessary to continue to make significant investments in equipment and
development in order to produce current and future CyberDisplay products. As a
result of the current cost structure of our CyberDisplay product line, our
ability to achieve profitability in that product line depends upon achieving
significant sales volumes and higher gross profit margins. We have not yet
produced our CyberDisplay products at volumes necessary to achieve
profitability. Accordingly, we may not be able to obtain sufficient sales
volumes, or if sufficient sales volumes are achieved, we may not be able to
produce our CyberDisplay products at a gross margin which will allow the
product line to generate a profit.
We lease equipment and our facilities located in Taunton and Westborough,
Massachusetts, and Los Gatos, California, under non-cancelable operating
leases. The Taunton lease expires in October 2002. The Westborough lease
expires in October 2001, with renewable options for up to three additional
years at our election. The Los Gatos lease covers a five year period
terminating in 2002. We record costs incurred under operating leases as rent
expense and this expense aggregated approximately $1.1 million for 1998.
We expect to expend approximately $30.0 million on capital expenditures over
the next twelve months, primarily for the acquisition of equipment relating to
the production of our HBT transistor wafers and the manufacturing, packaging
and testing of CyberDisplay products, including the establishment of a second
manufacturing product facility for our HBT transistor wafers.
As of December 31, 1998, we had tax loss carryforwards of approximately
$45.0 million, which may be used to offset future taxable income.
Recent Accounting Pronouncements
The Financial Accounting Standards Board ("FASB") has issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which is effective for fiscal years
commencing after June 15, 2000. SFAS No. 133 requires fair value accounting for
all stand-alone derivatives and many derivatives embedded in other financial
instruments and contracts. The impact of SFAS No. 133 on us has not yet been
determined.
18
<PAGE>
Year 2000
The Year 2000 issue refers to the potential for disruption to business
activities caused by system failures or miscalculations that are triggered by
advancement of date records past the year 1999. For example, if software that
uses the calendar year in computations is not ready for the millennial calendar
change, it may interpret a 21st century date as a 20th century date (for
example, mistaking 2001 for 1901).
We have developed plans to address issues related to the impact on our
systems from the Year 2000 issue. Financial and operational systems are being
assessed and plans have been implemented to address systems modification
requirements.
Utilizing both internal and external resources to address the Year 2000
issue, we expect to substantially complete this project by the end of October
1999. The current estimate of total project cost is approximately $700,000,
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 30 percent of the total estimated project
cost while internal resources, primarily salary costs, will account for
approximately 30 percent of the cost and external resources are expected to
account for approximately the remaining 40 percent. Approximately 75 percent of
the total project cost has been spent through July 3, 1999, with the remaining
amount to be spent in 1999. The plan costs will be paid from cash flow
generated from operations. The Year 2000 project will not result in the delay
in implementation of any previously planned information technology projects.
Our products, which are Year 2000 compliant, require high quality raw
materials in order to achieve historical manufacturing yields and performance.
We require suppliers to meet stringent quality standards before we will accept
their product. We are continually assessing our key suppliers' Year 2000
readiness and their plans for becoming Year 2000 compliant. Although we have
multiple suppliers for each raw material, failure by one or more key suppliers
to achieve Year 2000 readiness could impact our ability to produce product at
historical levels on a timely basis. In addition, certain critical suppliers
allocate capacity to us. Accordingly, there can be no assurance that if one or
more suppliers are unable to meet their commitments to us, the remaining
suppliers will be able to make up the shortfall. We are developing contingency
plans, however, there can be no assurance that we will adequately address the
Year 2000 problem, that any contingency plans we implement would be adequate to
meet our needs without materially impacting our operations, that any such plan
would be successful or that our results of operations and financial condition
would not be materially and adversely affected by the delays and inefficiencies
in conducting operations in an alternative manner.
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 our
CyberDisplay products to customers in Asia.
19
<PAGE>
BUSINESS
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 wireless
communications and high resolution portable consumer electronics applications.
Our products enable our customers to develop and market an improved generation
of products for these target applications.
We produce two types of high performance components-our heterojunction
bipolar transistor wafers, or HBT transistor wafers, and our CyberDisplay
products. Our HBT transistor wafer product is a customer specific array of
vertically oriented transistors that our customers use primarily to produce
high performance integrated circuits for wireless communications products. Our
CyberDisplay products are miniature, high performance, high resolution, low
cost displays well suited for high resolution, high information content
applications. These applications include viewing images in camcorders and
digital cameras, and reading e-mail and browsing the Internet using digital
wireless handsets, pagers and other consumer electronics devices.
We are currently experiencing rapidly increasing demand for both of our
principal products and we are significantly increasing our production capacity.
The principal customer for our HBT transistor wafers is Conexant Systems. In
addition to Conexant, original equipment manufacturers including Nortel
Networks and Hewlett-Packard purchase our HBT transistor wafers. We currently
sell our CyberDisplay product to JVC for use in two of its CyberCam digital
camcorder models and to Mustek, a leading Taiwanese manufacturer of digital
still cameras, scanners and other consumer electronics products, for use in
digital cameras.
Industry Overview
Gallium Arsenide Products
Advanced semiconductor materials are used in the manufacture of integrated
circuits for high frequency, low power applications. The rapid growth in the
wireless communications industry, as well as the increasingly shorter product
cycles of wireless products, has fueled demand for these integrated circuits,
which are predominantly used in wireless handsets. Dataquest, in a report dated
September 1999, expects that by 2003 the worldwide digital wireless subscriber
base will exceed 868 million users, and annual worldwide shipments of digital
wireless handsets will reach nearly 415 million units.
In first generation wireless handsets, integrated circuits used in high
frequency, low power applications were generally constructed with silicon-based
semiconductors. These integrated circuits, while relatively inexpensive to
manufacture, were unable to deliver the performance demanded by wireless
handset manufacturers and their customers. This inability led to the
development of gallium arsenide products for use in wireless communications.
Gallium arsenide is generally regarded as having better performance
characteristics than silicon due, in part, to its inherent physical properties
that permit gallium arsenide integrated circuits to operate at much higher
frequencies than silicon integrated circuits, or operate at the same frequency
with lower power consumption. The reduction in system power requirements is
particularly important in portable applications, such as wireless handsets,
because it extends battery life. The high performance characteristics of
gallium arsenide have led to the increased use of gallium arsenide field effect
transistors, commonly known as MESFETs, in a wide range of commercial systems.
Even as device manufacturers are increasingly adopting gallium arsenide
field effect transistor technology in the manufacture of high frequency
integrated circuits, the industry is calling for even greater performance.
Second generation wireless communications products use digital signal
processing and generally operate at higher cellular frequencies. Air interface
standards in these frequency bands have increased in recent years. These
standards, which include Global System Mobile, or GSM, Time Division Multiple
Access, or TDMA, and Code Division Multiple Access, or CDMA, provide improved
capacity, sound quality and capabilities at
20
<PAGE>
cellular and wireless frequency bands, but are incompatible with each other and
have fragmented the market for equipment. Suppliers of wireless handsets have
begun to offer multi-mode and multi-band wireless handsets that allow users to
switch from one high frequency band to another to enable consumers to use
wireless handsets across various territories and different interface standards.
This new generation of products is significantly more complex than the prior
generation and requires certain key features, including:
. Simpler system design;
. Support for higher frequencies;
. Lower power consumption;
. Improved signal quality; and
. Wider range of operating temperatures.
Display Products
Small form factor displays are used in the consumer electronics industry in
products such as camcorders and digital cameras. These industry segments are
expected to grow significantly over the next five years:
. According to a Dataquest report dated June 1999, the annual worldwide
factory revenues for camcorders will exceed $7.2 billion by 2003; and
. International Data Corporation projects that annual worldwide shipments
of digital cameras will exceed 22 million units in 2003.
We also expect that a large market for new wireless communications devices,
including third generation wireless handsets and enhanced pagers will develop.
In order for this market to develop, advances in wireless communications
systems such as greater bandwidth and increased functionality, including real-
time wireless data and broadband Internet access, will be necessary. Small form
factor displays will be a critical component in the development of advanced
wireless communications systems, as these systems must provide high resolution
images without compromising the portability of the product. International Data
Corporation estimates that annual worldwide production of "smart hand-held
devices" which are comprised of hand-held computers/organizers, smart phones
and other devices, will exceed 35 million units by 2003, representing almost
$17 billion in revenues.
There are several display technologies currently available. The most
commonly used technology in portable applications is based on the traditional
liquid crystal display, or LCD, which is now in widespread use in products
requiring a solid state monochrome or color display. These displays form an
image by either transmitting or blocking light emitted from a source located
behind the LCD. The principal LCD technologies are passive and active matrix.
. Passive Matrix LCD. These displays are primarily used in calculators,
watches, pagers and wireless handsets because of their relatively low
cost and low power consumption. Their relatively low image quality, slow
response time and limited viewing angle, however, make them inadequate
for many demanding applications.
. Active Matrix LCD. These displays are used primarily in laptop computers,
instrumentation and projection systems. In contrast to passive matrix
LCDs, monochrome active matrix LCDs incorporate a transistor at every
pixel location and color active matrix LCDs incorporate three transistors
at every pixel location. This arrangement allows each pixel to be turned
on and off independently which improves image quality and response time
and also provides an improved side-to-side viewing angle of the display.
The increased number of transistors required to produce those benefits,
however, creates significant drawbacks, particularly in color
applications. The high number of transistors used in conventional active
matrix LCDs limits achievable pixel density and their relatively high
power consumption makes them difficult to use in high information content
ultra-portable electronics products.
21
<PAGE>
The high growth potential for portable communications products can be
realized effectively only if these products are able to clearly present to end
users the information they wish to access without compromising the size of the
product. These products, as well as future models of digital cameras and other
consumer electronics, require a miniature, low cost display with low power
consumption and sharp monochrome or rich, full color high resolution images. To
date, display technologies have not fully addressed these needs due to
constraints with respect to size, power consumption, resolution, cost or full
color capability.
The Kopin Solution
HBT Transistor Wafers
We manufacture our HBT transistor wafers using our proprietary metal organic
chemical vapor deposition semiconductor growth techniques. By depositing films
of atomic-level thickness on gallium arsenide wafers, we are able to create HBT
transistor wafers that consist of a series of material layers which form a
vertical transistor. This transistor structure enables the design of integrated
circuits in which individual transistors are vertically arranged.
[Text description of illustration appearing here]
This illustration is captioned "HBT Transistor Wafer Manufacturing and
Applications" utilizing five pictures. The first picture depicts an untreated
wafer with the text "Gallium Arsenide Wafer" above the picture and the text
"Third Party Supplier" below the picture. The second picture depicts an HBT
transistor wafer being showered with sub-atomic particles with an arrow from the
left pointing into the HBT transistor wafer with the text "Purchase" on the
arrow, the text "Kopin's Proprietary Process" above the picture, the Kopin logo
below the picture, and an arrow pointing away from the HBT transistor wafer. The
third picture depicts a finished HBT transistor wafer with the text "Finished
HBT Transistor wafer" above the picture and an arrow pointing away from the
finished HBT transistor wafer and into the fourth picture with the text "Sale"
on the arrow. The fourth picture depicts a completed HBT integrated circuit
with the text "HBT Integrated Circuit" above the picture and an arrow pointing
away from the completed HBT integrated circuit and into the fifth picture. The
fifth picture depicts a wireless handset with the text "Product Applications"
above the picture. The first, second, and third arrows and the second and third
pictures, and the text above and below those pictures is enclosed in a box.
[End of text description of illustration appearing here]
The vertical structure of an HBT transistor wafer, as opposed to the
horizontal structure of a competing gallium arsenide field effect transistor,
offers advantages to an integrated circuit manufacturer:
. Smaller Size. We believe that integrated circuits fabricated from our HBT
transistor wafers can be made smaller than integrated circuits fabricated
from gallium arsenide field effect transistors. Smaller size enables more
die per wafer, which can increase manufacturing yields and lead to
reduced costs.
. Faster Circuits. We believe that our HBT transistor wafers enable the
design of faster integrated circuits than may be designed with gallium
arsenide field effect transistors because the effective transistor gate
length, or the distance an electron must travel within a transistor, is
shorter. The transistor gate length of gallium arsenide field effect
transistors is constrained by current optical lithography techniques to
approximately 0.2 microns for commercial volumes. We currently
manufacture our HBT transistor wafers in commercial volumes with an
effective transistor gate length ranging from approximately 0.05 microns
to 0.1 microns. We are able to achieve this result because the thickness
of the vertical base layer of our HBT transistor wafers determines
transistor gate length rather than the limitations of current optical
lithography techniques.
22
<PAGE>
We believe that our HBT transistor wafers also offer the following
additional advantages over gallium arsenide field effect transistors:
. Greater Power Efficiency. Efficiency is a measure of power output as a
percentage of battery power consumed by the device. We believe that our
HBT transistor wafers are more efficient and use less power to transmit
the same output power than comparable gallium arsenide field effect
transistors. Increased efficiency can translate into improved battery
life and increased talk time.
. Improved Signal Quality. Power amplifiers within wireless handsets are a
key determinant of signal quality. We believe that power amplifiers based
on our HBT transistor wafers can amplify signals with reduced distortion,
providing increased signal quality. Improved signal quality is important
for wireless networks that use digital air interface standards such as
Time Division Multiple Access, or TDMA, and Code Division Multiple
Access, or CDMA.
. Less Complexity. Power amplifiers and other integrated circuits based on
our HBT transistor wafers run on a single power supply voltage. In
contrast, gallium arsenide field effect transistors generally require
both a positive and negative power supply, which results in the need to
include a negative voltage generator and other additional components or
circuitry. As a result, we believe that integrated circuits using our HBT
transistor wafers are easier to design, which can translate into reduced
component costs and smaller equipment.
CyberDisplay Products
Our principal CyberDisplay product is a miniature, 0.24 inch diagonal, high
density 320 x 240 resolution color or monochrome active matrix LCD. In contrast
to current passive matrix and active matrix LCD approaches, our CyberDisplay
products utilize high quality, single crystal silicon-the same high quality
silicon used in conventional integrated circuits. This single crystal silicon
is not grown on glass; rather, it is first formed on a silicon wafer and then
lifted off as a thin film using our proprietary technology. The thin film is
patterned into an integrated circuit (including the active matrix, driver
circuitry and other logic circuits) in an integrated circuit foundry and
transferred to glass, so that the transferred layer is a fully-functional
active matrix integrated circuit.
[Text description of illustration appearing here]
This illustration is captioned "CyberDisplay Manufacturing Process". It
consists of a series of six steps portraying the manufacture of the CyberDisplay
product. Each of the six steps is captioned as follows: "1. Prepare silicon
wafer", "2. Fabricate integrated circuits", "3. Mount onto glass," "4. Circuits
transferred from wafer to glass", "5. Fill with liquid crystal", and "6. Scribe
and break into individual displays".
[End of text description of illustration appearing here]
23
<PAGE>
Our proprietary technology enables the production of transparent circuits,
in contrast to conventional silicon circuits, which are opaque. Our
CyberDisplay products' imaging properties are a result of the formation of a
liquid crystal layer over the transparent active matrix integrated circuit. We
believe that our manufacturing process offers several advantages over
conventional active matrix LCD manufacturing approaches with regard to small
form factor displays, including:
. Greater miniaturization;
. Reduced cost;
. Higher pixel density;
. Full color capability; and
. Lower power consumption.
Our use of high quality single crystal silicon in the manufacture of our
CyberDisplay products offers several performance advantages. High quality
silicon enables high speed displays which operate at 180 frames per second,
compared to 60 frames per second for most active matrix LCDs. At this higher
cycle speed, we are able to produce full color displays without using color
filters. Our color CyberDisplay products generate colors by using a backlight
composed of three light emitting diodes, commonly known as LEDs, that emit a
sequence of red, green and blue light. Each pixel either blocks or transmits
the colored light 180 times per second,
which allows the generation of color images without using three separate
pixels, decreasing the size, weight, and power requirements of the color
display. Furthermore, the color pixels are not spatially separated as in
conventional active matrix LCDs, resulting in sharper color images.
Our CyberDisplay products have the additional advantage of being fabricated
using conventional silicon integrated circuit lithography processes. These
processes enable the manufacture of miniature active matrix circuits, resulting
in comparable or higher resolution displays relative to passive and other
active matrix displays that are fabricated on glass. Our production partner,
United Microelectronics Corporation, or UMC, fabricates integrated circuits for
our CyberDisplay products in its foundry in Taiwan. The fabricated wafers are
then returned to our facilities, where we lift the integrated circuits off the
silicon wafers and transfer them to glass using our proprietary technology. The
transferred integrated circuits are then processed and packaged with liquid
crystal and assembled into display panels for shipment to customers. This
arrangement allows us to benefit from UMC's economies of scale and advanced
fabrication processes. We expect that our CyberDisplay products will benefit
from further general technological advances in the design and production of
integrated circuits and active matrix LCDs, resulting in further improvements
in resolution and miniaturization.
24
<PAGE>
Our CyberDisplay products, when illuminated by a backlight and viewed
through a lens, display high resolution video and data images equivalent to
viewing a 20 inch diagonal screen from a distance of five feet.
RIDER V
-------
[Text description of illustration appearing here]
This illustration is captioned "Viewing a CyberDisplay Product". It
consists of, from left to right, a small picture of a human face in profile,
dotted lines running from his eye out to a lens, then to the CyberDisplay
integrated circuit and blacklight, then finally to a larger picture captioned
"Virtual Display".
[End of text description of illustration appearing here]
Strategy
Our objective is to be the leading supplier of advanced semiconductor
materials and miniature displays that enable our customers to develop and
manufacture differentiated communications and consumer electronic devices in
high volumes. The critical elements of our strategy include:
. Increase Our Production Capacity in Response to Increased Demand. We have
recently experienced increased demand in both our product lines and
anticipate that demand will continue to increase in the future. We will
position ourselves to add new customers through substantial increases in
production capacity. Sufficient capacity is a key criteria for
prospective customers in their vendor selection process. In July 1999, we
began the installation of two additional production lines at our HBT
transistor wafer facility, and we anticipate adding more production lines
that should become fully operational in the first half of 2000. We plan
to use a portion of the proceeds of this offering to purchase new
equipment and to establish an additional facility to enable us to
increase our HBT transistor wafer production capacity. We also plan to
establish additional manufacturing capability for our CyberDisplay
products to meet the demands of our customers.
. Increase the Number of Product Designs That Use Our Components. Our goal
is to grow sales of our components by increasing the number and type of
products into which they are incorporated. Both of our product lines are
subject to long design lead-times, and we work closely with our customers
to help them design and develop cost-effective products based on our HBT
transistor wafer and CyberDisplay products. We use an aggressive pricing
strategy as an inducement for manufacturers of consumer electronics and
wireless communications products to integrate our CyberDisplay products
into their products.
. Reduce CyberDisplay Production Costs. We intend to reduce our per unit
production costs for our CyberDisplay product line. We plan to achieve
this primarily through automation and also by investing in additional
equipment and utilizing third party vendors in order to increase the
volume and speed with which we manufacture our products.
25
<PAGE>
. Maintain Our Technological Leadership. We believe that our ability to
develop innovative products based on our extensive materials science
expertise enhances our opportunity to grow within our targeted markets.
By continuing to invest in research and development, we are able to add
to our expertise in the design of HBT transistor wafers and innovative,
high-resolution, miniature flat panel displays. We intend to continue to
focus our development efforts on our proprietary HBT transistor wafers
and miniature displays.
. Leverage Integrated Circuit and Display Technologies and Infrastructure.
We will continue to leverage our use of standard integrated circuit
fabrication and LCD packaging technologies to achieve greater production
capacity and to reduce capital investment and process development costs.
Our use of these technologies allows us to engage third party
manufacturers for certain fabrication and packaging of our CyberDisplay
products and to rapidly take advantage of new technologies, cost-
efficiencies and increased production capabilities of these third party
manufacturers. We believe that general technological advances in the
design and fabrication of integrated circuits, LCD technology and LCD
manufacturing processes will allow us to continue to enhance our
CyberDisplay product manufacturing process.
Markets and Customers
HBT Transistor Wafers
We develop and manufacture customer and application specific HBT transistor
wafers for advanced integrated circuit applications. We believe that we are one
of the world's leading suppliers of HBT transistor wafers and currently support
volume production of three-inch and four-inch HBT transistor wafers. In
addition, we currently provide sample quantities of six-inch HBT transistor
wafers to a limited number of customers for evaluation. Our primary HBT
transistor wafer product is based on an aluminum gallium arsenide vertical
layer structure. We also supply customers with HBT transistor wafers based on
an indium gallium phosphide vertical layer structure. We vary our manufacturing
process to create customized HBT transistor wafer products for customers. For
the years ended December 31, 1996, 1997 and 1998, and for the six months ended
July 3, 1999, sales of gallium arsenide products constituted 71%, 92%, 87% and
90% of our product revenues, respectively.
Using our HBT transistor wafers, our customers have developed gallium
arsenide power amplifiers for wireless handsets. At present, our HBT transistor
wafers have been used predominantly in Code Division Multiple Access power
amplifiers, but we believe that our HBT transistor wafers can be used in, and
provide the same benefits to, the Global System Mobile, Time Division Multiple
Access and third generation wireless handset standards. In those countries
where one uniform standard has not yet been adopted, the diversity of standards
requires equipment capable of operating in dual modes and bands. This equipment
is likely to require higher performance semiconductor technology such as our
HBT transistor wafers.
In addition to wireless handset power amplifiers, our HBT transistor wafers
are also being used in the fabrication of integrated circuits for other
applications. In particular, our HBT transistor wafers are also used in high
speed fiber optic switching equipment used in broadband Internet data
transmission and high speed instrumentation.
We design our HBT transistor wafers in collaboration with our customers'
engineering teams in order to create customized products that meet their
specific application needs. Once our HBT transistor wafers have been "designed
in" a customer's product, we believe that it would be costly and difficult for
that customer to switch to an alternate supplier. Our largest customer for our
HBT transistor wafers is Conexant, with which we have collaborated on the
manufacturing and development of our HBT transistor wafers and related
integrated circuits for several years. Other customers of our gallium arsenide
products include Hewlett-Packard, Mitsubishi Electric, Nortel Networks,
Northrop Grumman, Raytheon, and Siemens. For the years ended December 31, 1996,
1997 and 1998 and for the six months ended July 3, 1999, sales of gallium
arsenide products to Conexant constituted 39%, 63%, 59% and 49% of our total
revenues, respectively.
26
<PAGE>
CyberDisplay Products
We currently sell our CyberDisplay products to customers either as a single
component or together with a lens and backlight as a unit. We provide our
CyberDisplay products to JVC for use in two of its CyberCam digital camcorder
models and to Mustek for use in digital cameras. In addition, we are actively
working with numerous other customers, including IBM and British Telecom, to
develop additional and new applications for our CyberDisplay products.
In order for our CyberDisplay products to function properly in their
intended applications, integrated circuit chip sets generally are required.
Several companies have designed integrated circuit chip sets to work with our
CyberDisplay products. Motorola has designed the integrated circuit chip set
currently used with our CyberDisplay product in camcorders. Motorola and other
companies are designing other integrated circuit chip sets based on our
CyberDisplay products for use in camcorders and other consumer electronics
products.
Sales and Marketing
We principally sell our HBT transistor wafer products directly to integrated
circuit manufacturers in the United States, Europe and Asia. We sell our
CyberDisplay products directly to original equipment manufacturers and co-
market our CyberDisplay products with Motorola on a worldwide basis under the
terms of an agreement that it has with us. Sales of our HBT transistor wafers
and our CyberDisplay products to customers in Japan are made primarily through
a foreign distributor.
We believe that the technical nature of our products and markets demands a
commitment to close relationships with our customers. Our sales and marketing
staff, assisted by the technical staff and senior management, visits
prospective and existing customers worldwide on a regular basis. We believe
that these contacts are vital to the development of a close, long-term working
relationship with our customers, and in obtaining regular forecasts, market
updates and information regarding technical and market trends. We also
participate in industry specific trade shows and conferences.
Our design and engineering staff is actively involved with a customer during
all phases of prototype design and production by providing engineering data,
up-to-date product application notes, regular follow-up and technical
assistance. In most cases, our technical staff works with each customer in the
development stage to identify potential improvements to the design of the
customer's product in parallel with the customer's effort. We have established
a prototype product design group in Los Gatos, California to assist our
CyberDisplay customers to incorporate our products into their own and to reduce
the time required to bring end products to the marketplace. This group helps
customers accelerate their design process, achieve cost-effective and
manufacturable designs, and ensure a smooth transition into high volume
production.
Product Development
We believe that continued introduction of new products in our target markets
is essential to our growth. We have assembled a group of highly skilled
engineers that work internally as well as with our customers to continue our
product development efforts. For the years ended December 31, 1996, 1997 and
1998 and for the six months ended July 3, 1999, we incurred total research and
development expenses of $16.5 million, $10.4 million, $9.6 million and $3.3
million, respectively. Research and development expenses related to our
internal development programs for our HBT transistor wafers and CyberDisplay
products were $9.9 million, $7.6 million, $5.7 million and $1.6 million,
respectively. Although research and development expenses have declined as we
have shifted from initial product development to application specific
engineering, we expect that these expenses will increase in the future.
Gallium Arsenide Products
We intend to continue developing HBT transistor wafers and other gallium
arsenide products for advanced integrated circuit applications from other
compound materials. We are working closely with several of our
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<PAGE>
major customers in the development of the next generation of HBT transistor
wafers, primarily by modifying the composition and nature of the vertical
transistor structure. In particular, we have developed extensive technology and
expertise in the use of indium gallium phosphide as a vertical transistor
structure. We believe that indium gallium phosphide HBT transistor wafers are
simpler to process than our gallium arsenide HBT transistor wafers and result
in greater yields for certain products made by our customers. In 1998, we began
commercial shipments of HBT transistor wafers using indium gallium phosphide.
We are currently manufacturing HBT transistor wafers with a base layer
thickness ranging from approximately 0.05 microns to 0.1 microns, and we are
developing manufacturing processes to further reduce this thickness. In
addition, we are developing manufacturing processes for production of six-inch
HBT transistor wafers and are currently providing sample quantities of these
wafers to a limited number of customers for evaluation.
CyberDisplay Products
Our product development efforts are focused towards continually enhancing
the features, functions and manufacturability of our CyberDisplay products. A
principal focus of this effort is the improvement of manufacturing processes
for very small active matrix pixels, which we will use in succeeding
generations of our CyberDisplay products. The pixel size of our current
CyberDisplay products is 15 microns and we believe that we can achieve a pixel
size of less than 10 microns in commercial production. This pixel size is in
contrast to a pixel size of approximately 100 microns in a typical laptop
computer display. The resolution of the current commercially available
CyberDisplay product is 320 x 240. We have already demonstrated and are
providing our customers with samples of 640 x 480 resolution CyberDisplay
products in a 0.38 inch diagonal display. In addition, we have demonstrated
1,280 x 1,024 resolution CyberDisplay products in a 0.96 inch diagonal display,
as well as 2,560 x 2,048 resolution CyberDisplay products in a 1.5 inch
diagonal display and we are working on the commercialization of these products.
We are also working on further decreasing the already low power consumption of
our CyberDisplay products. Additional display development efforts include
further automating our final display assembly processes and increasing the
quantity of CyberDisplay active matrix pixel arrays processed on each
transistor by further reducing the display size and using increasingly precise
manufacturing techniques.
Funded Research and Development
We have entered into various development contracts with agencies of the U.S.
government. These contracts help support the continued development of our core
technologies. We intend to continue to pursue other U.S. government development
contracts for applications that relate to our commercial product applications.
Our contracts with U.S. government agencies contain certain milestones relating
to technology development and may be terminated by the government agencies
prior to completion of funding. Our policy is to retain our proprietary rights
with respect to the principal commercial applications of our technology. To the
extent technology development has been funded by a U.S. federal agency, under
applicable U.S. federal laws, the federal agency has the right to obtain a non-
exclusive, non-transferable, irrevocable, fully-paid license to practice or
have practiced this technology for governmental use. Revenues attributable to
research and development contracts for the years ended December 31, 1996, 1997,
and 1998, and for the six months ended July 3, 1999 totaled $6.3 million, $3.3
million, $3.7 million, and $1.4 million, respectively.
Competition
Gallium Arsenide Products
With respect to our HBT transistor wafers, we presently compete with several
companies, including Epitronics, Emcore and Hitachi Cable, as well as
integrated circuit manufacturers with in-house transistor growth capabilities,
such as TRW, RF Micro Devices, and Fujitsu. We believe that TRW and RF Micro
Devices are the only other companies currently producing HBT transistor wafers
in commercial quantities, however, we
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<PAGE>
believe they produce these transistor wafers solely for use by RF Micro
Devices. In the gallium arsenide HBT transistor wafer market, competition could
become increasingly intense as new entrants emerge. The production of gallium
arsenide integrated circuits has been and continues to be more costly than the
production of silicon integrated circuits. Although we have reduced production
costs of our HBT transistor wafers by achieving higher volumes, we cannot
assure you that we will be able to continue to decrease production costs. In
addition, we believe the costs of producing gallium arsenide integrated
circuits by our customers will continue to exceed the costs associated with the
production of competing silicon integrated circuits. As a result, we must
target markets where these higher costs are justified by their superior
performance. Competition in the display field is based on price and performance
characteristics, product quality and the ability to deliver products in a
timely fashion.
CyberDisplay Products
The display market is highly competitive and is currently dominated by large
Asian electronics companies including Sharp, Hitachi, Seiko, Toshiba, Sony,
NEC, Sanyo and Display Technologies, a joint venture of IBM and Toshiba. The
display market consists of multiple segments, each focusing on different end-
user applications applying different technologies. Competition in the display
field is based on price and performance characteristics, product quality and
the ability to deliver products in a timely fashion. The success of our display
product offerings will also depend upon the adoption of our CyberDisplay
products in the industry as an alternative to traditional active matrix LCDs
and upon our ability to compete against other types of well-established display
products. We cannot assure you that we will be able to compete against these
companies and technologies.
There are also a number of active matrix LCD and alternative display
technologies in development and production. These technologies include LED,
reflective, field emission display, plasma, organic light emitting diode and
virtual retinal displays, some of which target the high performance small form
factor display markets in which our display products are sold. There are many
large and small companies that manufacture or have in development products
based on these technologies. Our CyberDisplay products will compete with other
displays utilizing these and other competing display technologies.
Patents, Proprietary Rights and Licenses
An important part of our product development strategy is to seek, when
appropriate, protection for our products and proprietary technology through the
use of various United States and foreign patents and contractual arrangements.
We intend to prosecute and defend our proprietary technology aggressively. We
own more than 60 issued United States patents and more than 40 pending United
States patent applications. Many of these United States patents and
applications have counterpart foreign patents, foreign applications or
international applications through the Patent Cooperation Treaty. In addition,
we are licensed by MIT under 28 issued United States patents, six pending
United States patent applications, and some foreign counterparts to these
United States patents and applications. Our United States patents expire at
various dates through April 2016. The United States patents licensed to us by
MIT expire during the period running at various dates through March 2016.
In 1985, we obtained a license from MIT to certain patents and patent
applications directed to device wafers and related technology. The license
grants to Kopin a worldwide license to make, have made, use, and sell products
covered by the licensed patents for the life of these patents. The license was
exclusive with respect to commercial applications until April 22, 1999, and
became non-exclusive at that time. In 1995, we obtained an additional license
from MIT to certain optical technology. The license grants to Kopin a worldwide
license to make, have made, use, lease and sell products covered by the
licensed patents until 2007.
The process of seeking patent protection can be time consuming and expensive
and we cannot assure you that patents will issue from currently pending or
future applications or that our existing patents or any new patents that may be
issued will be sufficient in scope or strength to provide meaningful protection
or any
29
<PAGE>
commercial advantage to us. We may be subject to or may initiate interference
proceedings in the United States Patent and Trademark Office, which can demand
significant financial and management resources. Patent applications in the
United States are maintained in secrecy until patents issue and since
publication of discoveries in the scientific and patent literature lags behind
actual discoveries, we cannot be certain that we were the first to conceive of
inventions covered by pending patent applications or the first to file patent
applications on such inventions. We cannot assure you that our pending patent
applications or those of our licensors will result in issued patents or that
any issued patents will afford protection against a competitor. In addition, we
can not assure you that others will not obtain patents that we would need to
license, circumvent or cease manufacturing and sales of products covered by
these patents, nor can we be sure that licenses, if needed, would be available
to the us on favorable terms, if at all.
We cannot assure you that foreign intellectual property laws will protect
our intellectual property rights or that others will not independently develop
similar products, duplicate our products or design around any patents issued to
Kopin. Our products might infringe the patent rights of others, whether
existing now or in the future. For the same reasons, the products of others
could infringe our patent rights. Although we are not aware of any pending or
threatened patent litigation against us, we may be notified, from time to time,
that we could be or we are infringing certain patents and other intellectual
property rights of others. Litigation, which could be very costly or lead to
substantial diversion of our resources even if the outcome is favorable, may be
necessary to enforce our patents or other intellectual property rights or to
defend us against claimed infringement of the rights of others. These problems
can be particularly severe in foreign countries. In the event of an adverse
ruling in litigation against Kopin for patent infringement, we might be
required to discontinue the use of certain processes, cease the manufacture,
use and sale of infringing products, expend significant resources to develop
non-infringing technology or obtain licenses to patents of third parties
covering the infringing technology. We cannot assure you that licenses will be
obtainable on acceptable terms, or at all, or that damages for infringement
will not be assessed or that litigation will not occur. The failure to obtain
necessary licenses or other rights or litigation arising out of any such claims
could adversely affect our ability to conduct our business as we propose to
conduct it.
We also attempt to protect our proprietary information with contractual
arrangements and under trade secret laws. We believe that our future success
will depend primarily upon the technical expertise, creative skills and
management abilities of our officers and key employees rather than on patent
ownership. Kopin 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. Agreements with
consultants generally provide that rights to inventions made by them while
consulting for Kopin will be assigned to us unless the assignment of rights is
prohibited by the terms of any agreements with their regular employers.
Agreements with employees, consultants and collaborators contain provisions
intended to further protect the confidentiality of our proprietary information.
To date, we have had no experience in enforcing these agreements. We cannot
assure you that these agreements will not be breached or that we would have
adequate remedies for any breaches. Our trade secrets may not be secure from
discovery or independent development by competitors.
Facilities
We lease separate HBT transistor wafer manufacturing and CyberDisplay
product fabrication facilities. Our HBT transistor wafer manufacturing facility
is located at our corporate headquarters in Taunton, Massachusetts. The Taunton
facility occupies 25,100 square feet, including 6,000 square feet of contiguous
environmentally controlled production clean rooms. The Taunton facility is
occupied under a lease that expires in October 2002.
Our CyberDisplay production facility occupies 74,000 square feet in
Westborough, Massachusetts, of which 10,000 square feet consist of contiguous
environmentally controlled production clean rooms, of which 7,000 square feet
are Class 10. We occupy our Westborough facility under a lease that expires in
October 2001, with renewable options for up to three additional years at our
election.
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<PAGE>
In addition to our Massachusetts facilities, we lease a 5,280 square foot
design facility in Los Gatos, California for developing prototypes of products
incorporating our CyberDisplay product. This facility is occupied under a lease
that expires in November 2002.
Our subsidiary, Kowon Technology, owns two facilities in Kyungii-Do, South
Korea, in which it manufactures its optoelectronic products and in which its
corporate headquarters is located. These facilities occupy an aggregate of
28,000 square feet.
Government Regulations
We are subject to a variety of federal, state and local governmental
regulations related to the use, storage, discharge and disposal of toxic,
volatile or otherwise hazardous chemicals used in our manufacturing process.
Although we believe that our activities conform to presently applicable
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. Any failure on our part to control the use of, or
adequately restrict the discharge of, hazardous substances, or otherwise comply
with environmental regulations, could subject us to significant future
liabilities. In addition, although we believe that our past operations
conformed with then applicable environmental laws and regulations, we cannot
assure you that we have not in the past violated applicable laws or
regulations, which violations could result in remediation or other liabilities.
We also cannot assure you that past use or disposal of environmentally
sensitive materials in conformity with then existing environmental laws and
regulations will protect us from required remediation or other liabilities
under current or future environmental laws or regulations.
Investments in Related Businesses
We have made equity investments in other companies including Kowon, a
manufacturer of optoelectronic products located in South Korea, GMT
Microelectronics, an integrated circuit manufacturer and foundry, and Kendin
Semiconductor, a developer and manufacturer of silicon integrated circuits for
high speed data and network communications.
In 1998 we made a $2.0 million investment in Kowon for which we received a
65% equity interest. We consolidated the 1998 financial statements of Kowon
with our financial statements beginning in the second quarter of 1998. Kowon's
results of operations are principally denominated in the South Korean won and
are subject to exchange rate fluctuations. On July 3, 1999, our investments in
GMT and Kendin totaled approximately $1.1 million and $2.5 million,
respectively, representing approximately 3.5% and 19.7% of the outstanding
equity of each company, respectively. GMT and Kendin are privately held
companies. Our investments in GMT and Kendin are carried on our balance sheet
at cost. We may from time to time make further equity investments in these and
other companies engaged in certain aspects of the display and electronics
industries as part of our business strategy. These investments may not provide
us with any financial return or other benefit and any losses by these companies
or associated losses in our investments may negatively impact our operating
results.
Employees
As of July 3, 1999, we and our subsidiaries employed 183 full-time and 8
part-time individuals. Of these, 15 hold Ph.D. degrees in Material Science,
Electrical Engineering or Physics. Our management and professional employees
have significant prior experience in semiconductor materials, device transistor
and display processing, manufacturing and other related technologies. None of
our employees is covered by a collective bargaining agreement. We consider
relations with our employees to be good.
Legal Proceedings
We may become engaged in legal proceedings arising in the ordinary course of
business from time to time. We currently are not a party to any material legal
proceedings.
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<PAGE>
MANAGEMENT
Set forth below is information regarding our directors and executive
officers:
<TABLE>
<CAPTION>
Name Age Position with the Company
---- --- --------------------------------------------------
<C> <C> <S>
John C.C. Fan......... 55 President and Chief Executive Officer; Chairman of
the Board of Directors
Richard A. Sneider.... 39 Treasurer and Chief Financial Officer
Bor-Yeu Tsaur......... 44 Executive Vice President--Display Operations
Ronald P. Gale........ 49 Chief Technology Officer and Vice President
Daily S. Hill......... 42 Vice President--Gallium Arsenide Operations
Glen G. Kephart....... 56 Vice President--Marketing, Display Products
Matthew J. Micci...... 43 Vice President--Sales, Gallium Arsenide Products
Matthew M. Zavracky... 44 Vice President--Engineering
David E. Brook(2)..... 59 Director and Secretary
Andrew H. Chapman(1).. 44 Director
Morton Collins(1)..... 63 Director
Chi-Chia Hsieh........ 55 Director
Michael A. Wall(2).... 71 Director
</TABLE>
- --------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
John C.C. Fan, President, Chief Executive Officer, Chairman of the Board of
Directors. Dr. Fan, one of our founders, has served as our Chief Executive
Officer and Chairman of the Board of Directors since April 1984. He has also
served as President of the Company since July 1990. Prior to July 1985, Dr. Fan
was Associate Leader of the Electronic Materials Group at MIT Lincoln
Laboratory. Dr. Fan is the author of numerous patents and scientific
publications. Dr. Fan received a Ph.D. in Applied Physics from Harvard
University.
Richard A. Sneider, Treasurer and Chief Financial Officer. Mr. Sneider has
served as our Treasurer and Chief Financial Officer since September 1998. Mr.
Sneider is a Certified Public Accountant and was formerly a partner of the
international public accounting firm, Deloitte & Touche LLP, where he worked
for sixteen years.
Bor-Yeu Tsaur, Executive Vice President--Display Operations. Dr. Tsaur
joined us as Executive Vice President--Display Operations in July 1997. From
1993 to 1997, Dr. Tsaur served as Group Leader, Electronic Material Group, at
MIT Lincoln Laboratory. Dr. Tsaur received a Ph.D. in Electrical Engineering
from the California Institute of Technology.
Ronald P. Gale, Chief Technology Officer and Vice President. Dr. Gale became
Chief Technology Officer in 1997. Previously, Dr. Gale served as our Vice
President in several capacities since July 1985. Dr. Gale received a Ph.D. in
Materials Science and Engineering from the Massachusetts Institute of
Technology in 1978.
Daily S. Hill, Vice President--Gallium Arsenide Operations. Mr. Hill has
served as Vice President--Gallium Arsenide Operations since July 1997. From
December 1995 to June 1997, Mr. Hill served as our Director of Gallium Arsenide
Operations. From November 1987 to January 1995, Mr. Hill served as a manager of
our HBT transistor wafer product group.
Glen G. Kephart, Vice President--Marketing Display Products. Mr. Kephart
joined us as Vice President, Marketing Display Products in December 1995. Prior
to joining us, Mr. Kephart served as General Manager, Conference Products, for
Coherent Communications Systems for four years and previously served as a
Director of National Distribution for Motorola.
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<PAGE>
Matthew J. Micci, Vice President--Sales, Gallium Arsenide Products. Mr.
Micci joined us in January 1988 as Regional Director of Sales and became Vice
President, Sales in July 1990. Prior to joining us, Mr. Micci worked for ten
years for Texas Instruments Semiconductor Group.
Matthew M. Zavracky, Vice President--Engineering. Mr. Zavracky has served as
Vice President--Engineering since July 1997. From 1985 to 1997, Mr. Zavracky
served as Director of Engineering.
David E. Brook, Director and Secretary. Mr. Brook is one of our founders and
has served as a Director since 1984. Mr. Brook is the founder and Chairman of
the Board of the intellectual property law firm of Hamilton, Brook, Smith &
Reynolds, P.C. in Lexington, Massachusetts.
Andrew H. Chapman, Director. Mr. Chapman has served as one of our Directors
since 1985. Mr. Chapman is a founder of MaxComm Technologies, a
telecommunications company, and was a director and Executive Vice President of
MaxComm from 1998 to 1999, when it was sold to Cisco Systems. From 1994 to
1996, Mr. Chapman was an Executive Vice President of Integrated Network
Corporation of which he has also served as a director. During that time, Mr.
Chapman was also a founder and co-General Manager of Dagaz Technologies,
Integrated Network's Multimedia Business Unit which was sold to Cisco Systems,
in 1997. From our formation to 1998, Mr. Chapman was also Managing Director of
The Vertical Group, a private investment management company.
Morton Collins, Director. Mr. Collins has served as one of our Directors
since 1985. Mr. Collins has been a General Partner of DSV Partners III, a
venture capital limited partnership, since 1981, and a General Partner of DSV
Management Ltd. since 1982. Since 1985, DSV Management Ltd. has been the
General Partner of DSV Partners IV, a venture capital limited partnership. Mr.
Collins is also a director of The Liposome Company, Inc., ThermoTrex
Corporation, Thermedics Detection, Inc. and a number of privately held
companies.
Chi-Chia Hsieh, Director. Dr. Hsieh has served as one of our Directors since
December 1995. Dr. Hsieh is currently the Vice Chairman and was previously the
President of Microelectronics Technology, Inc., a Taiwan corporation publicly
traded on the Taiwan Stock Exchange.
Michael A. Wall, Director. Mr. Wall is one of our founders and has served as
a Director since 1984. Mr. Wall is a director and Chairman of Alkermes, Inc.
Mr. Wall has founded, been a director of and/or managed numerous high
technology firms in the last three decades, including Centocor, Inc. and Flow
Laboratories, Inc.
33
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions contained in the underwriting
agreement dated , 1999, we have agreed to sell to the underwriters named
below, for whom Credit Suisse First Boston Corporation, CIBC World Markets
Corp., Pacific Growth Equities, Inc. and C.E. Unterberg, Towbin are acting as
representatives, the following respective numbers of shares of common stock:
<TABLE>
<CAPTION>
Number
Underwriter of Shares
- ----------- ---------
<S> <C>
Credit Suisse First Boston Corporation................................
CIBC World Markets Corp...............................................
Pacific Growth Equities, Inc..........................................
C.E. Unterberg, Towbin................................................
---------
Total............................................................. 1,800,000
=========
</TABLE>
The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of common stock in the offering if any are purchased,
other than those shares covered by the over-allotment option described below.
The underwriting agreement also provides that if an underwriter defaults, the
purchase commitments of non-defaulting underwriters may be increased or this
offering of common stock may be terminated.
We have granted to the underwriters a 30-day option to purchase up to
270,000 additional shares at the offering price less the underwriting discounts
and commissions. The option may be exercised only to cover any over-allotments
of common stock.
The underwriters propose to offer the shares of common stock initially at
the public offering price on the cover page of this prospectus and to selling
group members at that price less a concession of $ per share. The
underwriters and selling group members may allow a discount of $ per share
on sales to other broker/dealers. After the offering, the public offering price
and concession and discount to broker/dealers may be changed by the
representatives.
The following table summarizes the compensation and estimated expenses we
will pay.
<TABLE>
<CAPTION>
Per Share Total
----------------------------- -----------------------------
Without With Without With
Over-allotment Over-allotment Over-allotment Over-allotment
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Underwriting discounts
and commissions paid
by us.................. $ $ $ $
Expenses payable by us.. $ $ $ $
</TABLE>
We have agreed that we will not offer, sell, contract to sell, announce our
intention to sell, pledge or otherwise dispose of, directly or indirectly, or
file with the Securities and Exchange Commission a registration statement under
the Securities Act relating to, any additional shares of our common stock or
securities
34
<PAGE>
convertible into or exchangeable or exercisable for any of our common stock
without the prior written consent of Credit Suisse First Boston Corporation for
a period of 90 days after the date of this prospectus, except for:
. Issuances pursuant to the exercise of employee stock options on this
date; and
. Grants of stock options pursuant to a plan in effect on this date.
We have agreed to indemnify the underwriters against liabilities under the
Securities Act, or contribute to payments which the underwriters may be
required to make in that respect.
The representatives may engage in over-allotment, stabilizing transactions,
syndicate covering transactions, penalty bids and "passive" market making in
accordance with Regulation M under the Securities Exchange Act of 1934.
. Over-allotment involves syndicate sales in excess of the offering size,
which creates a syndicate short position. Stabilizing transactions permit
bids to purchase the underlying security so long as the stabilizing bids
do not exceed a specified maximum.
. Syndicate covering transactions involve purchases of the common stock in
the open market after the distribution has been completed in order to
cover syndicate short positions.
. Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the common stock originally sold by the
syndicate member is purchased in a syndicate covering transaction to
cover syndicate short positions.
. In "passive" market making, market makers in the common stock who are
underwriters or prospective underwriters may, subject to certain
limitations, make bids for or purchases of the common stock until the
time, if any, at which a stabilizing bid is made.
These stabilizing transactions, syndicate covering transactions and penalty
bids may cause the price of the common stock to be higher than it would
otherwise be in the absence of these transactions. These transactions may be
effected on The Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
35
<PAGE>
NOTICE TO CANADIAN RESIDENTS
Resale Restrictions
The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of common stock are effected. Accordingly, any resale of the common
stock in Canada must be made in accordance with applicable securities laws
which will vary depending on the relevant jurisdiction, and which may require
resales to be made in accordance with available statutory exemptions or
pursuant to a discretionary exemption granted by the applicable Canadian
securities regulatory authority. Purchasers are advised to seek legal advice
prior to any resale of the common stock.
Representations of Purchasers
Each purchaser of common stock in Canada who receives a purchase
confirmation will be deemed to represent to us and the dealer from whom such
purchase confirmation is received that (i) such purchaser is entitled under
applicable provincial securities laws to purchase such common stock without the
benefit of a prospectus qualified under such securities laws, (ii) where
required by law, that such purchaser is purchasing as principal and not as
agent, and (iii) such purchaser has reviewed the text above under "Resale
Restrictions".
Rights of Action (Ontario Purchasers)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by the
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U.S. federal securities laws.
Enforcement of Legal Rights
All of the company's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be
possible for Canadian purchasers to effect service of process within Canada
upon the issuer or such persons. All or a substantial portion of the assets of
the issuer and such persons may be located outside of Canada and, as a result,
it may not be possible to satisfy a judgment against the issuer or such persons
in Canada or to enforce a judgment obtained in Canadian courts against such
issuer or persons outside of Canada.
Notice to British Columbia Residents
A purchaser of common stock to whom the Securities Act (British Columbia)
applies is advised that such purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
common stock acquired by such purchaser pursuant to this offering. Such report
must be in the form attached to British Columbia Securities Commission Blanket
Order BOR #95/17, a copy of which may be obtained from us. Only one such report
must be filed in respect of common stock acquired on the same date and under
the same prospectus exemption.
Taxation and Eligibility for Investment
Canadian purchasers of common stock should consult their own legal and tax
advisers with respect to the tax consequences of an investment in the common
stock in their particular circumstances and with respect to the eligibility of
the common stock for investment by the purchaser under relevant Canadian
legislation.
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<PAGE>
LEGAL MATTERS
The validity of the shares of common stock offered hereby and certain legal
matters will be passed on for us by Bingham Dana LLP, Boston, Massachusetts.
Certain legal matters will be passed on for the Underwriters by Testa, Hurwitz
& Thibeault, LLP, Boston, Massachusetts.
EXPERTS
The consolidated financial statements and related financial statement
schedule as of December 31, 1997 and 1998 and for each of the three years in
the period ended December 31, 1998 included and incorporated by reference in
this Prospectus have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their reports appearing herein and incorporated by
reference and have been so included and incorporated by reference in reliance
upon the reports of such firm given upon their authority as experts in
accounting and auditing.
The statements in this Prospectus under the captions "Risk Factors-We may
not be successful in protecting our intellectual property and proprietary
rights" and "Business-Patents, Proprietary Rights and Licenses" have been
reviewed and approved by Hamilton, Brook, Smith & Reynolds, P.C., patent
counsel to Kopin, as experts on such matters, and are included herein in
reliance upon that review and approval. David E. Brook, a principal at that
firm, is the Secretary and a Director of the Company.
37
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
This prospectus constitutes a part of a registration statement on Form S-3
filed by us with the SEC under the Securities Act of 1933. This prospectus does
not contain all of the information set forth in the Registration Statement,
since we have omitted some parts in accordance with the SEC's rules and
regulations. For further information about us and the shares being sold in this
offering, please refer to the registration statement. Statements contained in
this prospectus concerning the contents of any contract or any other document
referred to are not necessarily a complete description of the provisions of the
contract. Copies of the registration statement may be inspected, without
charge, at the offices of the Commission, or obtained at prescribed rates from
the Public Reference Section of the Commission at the address set forth below.
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. You may read and copy any document we file at the
public reference facilities of the SEC located at 450 Fifth Street N.W.,
Washington D.C. 20549. You may obtain information on the operation of the SEC's
public reference facilities by calling the SEC at 1-800-SEC-0330. You can also
access copies of such material electronically on the SEC's home page on the
World Wide Web at http://www.sec.gov. Information concerning us is also
available for inspection at the offices of the Nasdaq National Market, Reports
Section, 1735 K Street, N.W., Washington, D.C. 20006.
This prospectus is part of a registration statement we filed with the SEC.
The SEC permits us to "incorporate by reference" the information we file with
them, which means that we can disclose important information to you by
referring you to those documents. The information incorporated by reference is
considered to be part of this prospectus, and information we file with the SEC
after the date of this prospectus will automatically update and supersede this
information. We incorporate by reference the following documents filed by us
with the SEC. We also incorporate by reference any future filings made with the
SEC under Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of
1934, as amended, after the date of this prospectus until the termination of
this offering.
1. Our Annual Report on Form 10-K for the fiscal year ended December 31,
1998.
2. Our Proxy Statement for our 1999 Annual Meeting.
3. Our Quarterly Report on Form 10-Q for the fiscal quarter ended April
3, 1999.
4. Our Quarterly Report on Form 10-Q for the fiscal quarter ended July
3, 1999.
5. Our Form 8-K filed on September 20, 1999.
If you request a copy of any or all of the documents incorporated by
reference, then we will send to you the copies you requested at no charge.
However, we will not send exhibits to such documents, unless such exhibits are
specifically incorporated by reference in such documents. You should direct a
request for such copies to Investor Relations, 695 Myles Standish Boulevard,
Taunton, Massachusetts 02780 or contact us at (508) 824-6696.
38
<PAGE>
KOPIN CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report.............................................. F-2
Consolidated Balance Sheets at December 31, 1997 and 1998 and July 3,
1999..................................................................... F-3
Consolidated Statements of Operations and Comprehensive Income (Loss) for
the years ended
December 31, 1996, 1997 and 1998 and the six months ended June 27, 1998
and July 3, 1999......................................................... F-4
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1996, 1997 and 1998 and the six months ended July 3, 1999... F-5
Consolidated Statements of Cash Flows for the years ended December 31,
1996, 1997 and 1998 and the six months ended June 27, 1998 and July 3,
1999..................................................................... F-6
Notes to Consolidated Financial Statements................................ F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Kopin Corporation
Taunton, Massachusetts
We have audited the accompanying consolidated balance sheets of Kopin
Corporation and subsidiaries as of December 31, 1997 and 1998, and the related
consolidated statements of operations, comprehensive loss, stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Kopin Corporation and
subsidiaries as of December 31, 1997 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Boston, Massachusetts
February 16, 1999
F-2
<PAGE>
KOPIN CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-------------------------- July 3,
1997 1998 1999
------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and equivalents............... $ 14,425,400 $ 30,807,335 $ 20,218,858
Marketable securities.............. 4,620,884 6,000,883 7,719,405
Accounts receivable, net of
allowance of $152,700, $150,800,
and $150,000
Billed........................... 3,209,482 2,743,211 7,254,603
Unbilled......................... 1,091,806 910,787 662,325
Inventory.......................... 2,720,843 3,337,178 5,138,972
Prepaid expenses and other current
assets............................ 798,867 743,069 1,223,218
------------ ------------ ------------
Total current assets........... 26,867,282 44,542,463 42,217,381
------------ ------------ ------------
Equipment and improvements:
Equipment.......................... 22,954,885 24,953,456 26,118,659
Leasehold improvements............. 772,717 808,884 808,884
Furniture and fixtures............. 331,955 426,084 433,113
Equipment under construction....... 1,904,198 25,131 4,825,157
------------ ------------ ------------
25,963,755 26,213,555 32,185,813
Accumulated depreciation and
amortization...................... 14,869,251 16,867,698 18,619,918
------------ ------------ ------------
11,094,504 9,345,857 13,565,895
------------ ------------ ------------
Other assets......................... 3,372,692 6,173,153 6,272,441
Intangible assets.................... 2,059,918 1,844,148 1,837,957
------------ ------------ ------------
TOTAL ASSETS......................... $ 43,394,396 $ 61,905,621 $ 63,893,674
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable....................... $ 450,000 $ -- $ --
Accounts payable................... 2,683,671 1,728,596 3,213,865
Accrued payroll and expenses....... 725,187 1,455,640 1,489,544
Current portion of long-term
obligations....................... 1,542,818 1,999,494 1,792,631
------------ ------------ ------------
Total current liabilities...... 5,401,676 5,183,730 6,496,040
------------ ------------ ------------
Deferred rent........................ 165,166 -- --
Long-term obligations, less current
portion............................. 1,958,968 4,209,474 3,241,000
Minority interest.................... -- 665,994 718,947
Commitments
Stockholders' equity:
Preferred stock, par value $.01 per
share; authorized, 3,000 shares;
none issued and outstanding....... -- -- --
Common stock, par value $.01 per
share; authorized, 20,000,000
shares; issued, 11,122,193 shares
in 1997, 12,268,561 shares in 1998
and 12,482,694 in 1999............ 111,221 122,686 124,827
Additional paid-in capital......... 90,514,233 108,954,779 110,123,445
Deferred compensation.............. (231,955) (165,055) (137,545)
Accumulated other comprehensive
income ........................... (6,001) 420,812 461,369
Deficit............................ (54,518,912) (57,486,799) (57,134,409)
------------ ------------ ------------
Total stockholders' equity..... 35,868,586 51,846,423 53,437,687
------------ ------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY.............................. $ 43,394,396 $ 61,905,621 $ 63,893,674
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
KOPIN CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31, Six Months Ended
-------------------------------------- ------------------------
June 27, July 3,
1996 1997 1998 1998 1999
------------ ----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
Product revenues...... $ 11,727,081 $13,110,044 $23,225,415 $10,327,579 $13,911,064
Research and
development
revenues............. 6,291,172 3,282,974 3,679,582 1,822,905 1,432,933
------------ ----------- ----------- ----------- -----------
18,018,253 16,393,018 26,904,997 12,150,484 15,343,997
------------ ----------- ----------- ----------- -----------
Costs and expenses:
Cost of product
revenues............. 9,488,702 8,636,199 15,509,316 6,234,865 9,821,482
Research and
development-funded
programs............. 6,591,016 2,801,671 3,953,875 2,316,150 1,748,765
Research and
development-
internal............. 9,876,082 7,622,614 5,659,362 2,743,071 1,598,049
Selling, general and
administrative....... 7,070,275 4,292,383 4,014,862 2,126,127 2,343,997
Other................. 597,943 327,102 384,349 187,630 179,275
Write-down of
subsidiary assets.... 3,900,000 -- -- -- --
Impairment charge..... 4,990,412 -- 1,800,000 -- --
------------ ----------- ----------- ----------- -----------
42,514,430 23,679,969 31,321,764 13,607,843 15,691,568
------------ ----------- ----------- ----------- -----------
Loss from operations.... (24,496,177) (7,286,951) (4,416,767) (1,457,359) (347,571)
Other income and
expense:
Interest and other
income............... 2,013,642 1,264,052 2,043,886 927,584 941,636
Interest expense...... (337,418) (234,870) (535,783) (256,159) (216,160)
------------ ----------- ----------- ----------- -----------
Income (loss) before
minority interest...... (22,819,953) (6,257,769) (2,908,664) (785,934) 377,905
Minority interest in
(income) loss of
subsidiary............. 1,223,589 -- (59,223) -- (25,515)
------------ ----------- ----------- ----------- -----------
Net income (loss)....... $(21,596,364) $(6,257,769) $(2,967,887) $ (785,934) $ 352,390
============ =========== =========== =========== ===========
Net income (loss) per
share--
basic and diluted...... $ (1.98) $ (0.57) $ (0.25) $ (0.07) $ 0.03
============ =========== =========== =========== ===========
Weighted average number
of common shares
outstanding:
Basic................. 10,921,138 11,010,160 12,068,478 11,915,323 12,411,882
Diluted............... 10,921,138 11,010,160 12,068,478 11,915,323 13,144,102
<CAPTION>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Years Ended December 31, Six Months Ended
-------------------------------------- ------------------------
June 27, July 3,
1996 1997 1998 1998 1999
------------ ----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Net income (loss)....... $(21,596,364) $(6,257,769) $(2,967,887) $ (785,934) $ 352,390
Foreign currency
translation
adjustments............ -- -- 414,492 185,547 50,955
Unrealized gain (loss)
on marketable
securities, net........ (92,250) (50,934) 12,321 6,001 (10,398)
------------ ----------- ----------- ----------- -----------
Comprehensive income
(loss)................. $(21,688,614) $(6,308,703) $(2,541,074) $ (594,386) $ 392,947
============ =========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
KOPIN CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<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> <C>
Balance, January 1,
1996................... 10,915,019 $109,150 $ 88,355,145 $ (94,482) $137,183 $(26,664,779) $ 61,842,217
Exercise of stock
options............... 16,389 164 50,306 -- -- -- 50,470
Compensation relating
to grant of stock
options............... -- -- 200,000 (200,000) -- -- --
Amortization of
compensation relating
to grant of stock
options............... -- -- -- 66,776 -- -- 66,776
Net unrealized loss on
marketable
securities............ -- -- -- -- (92,250) -- (92,250)
Net loss............... -- -- -- -- -- (21,596,364) (21,596,364)
---------- -------- ------------ --------- -------- ------------ ------------
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............... 190,735 1,907 1,828,676 -- -- -- 1,830,583
Compensation relating
to grant of stock
options............... -- -- 80,106 (80,106) -- -- --
Amortization of
compensation relating
to grant of stock
options............... -- -- -- 75,857 -- -- 75,857
Net unrealized loss on
marketable
securities............ -- -- -- -- (50,934) -- (50,934)
Net loss............... -- -- -- -- -- (6,257,769) (6,257,769)
---------- -------- ------------ --------- -------- ------------ ------------ ---
Balance, December 31,
1997................... 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............... 146,418 1,465 1,279,128 -- -- -- 1,280,593
Amortization of
compensation relating
to grant of stock
options............... -- -- -- 66,900 -- -- 66,900
Net unrealized gain on
marketable
securities............ -- -- -- -- 12,321 -- 12,321
Foreign currency
translation
adjustments........... -- -- -- -- 414,492 -- 414,492
Net loss............... -- -- -- -- -- (2,967,887) (2,967,887)
---------- -------- ------------ --------- -------- ------------ ------------
Balance, December 31,
1998................... 12,268,561 122,686 108,954,779 (165,055) 420,812 (57,486,799) 51,846,423
Exercise of stock
options (unaudited)... 214,133 2,141 1,168,666 -- -- -- 1,170,807
Amortization of
compensation relating
to grant of stock
options (unaudited)... -- -- -- 27,510 -- -- 27,510
Net unrealized loss on
marketable securities
(unaudited)........... -- -- -- -- (10,398) -- (10,398)
Foreign currency
translation
adjustments
(unaudited)........... -- -- -- -- 50,955 -- 50,955
Net income
(unaudited)........... -- -- -- -- -- 352,390 352,390
---------- -------- ------------ --------- -------- ------------ ------------
Balance, July 3, 1999
(unaudited)............ 12,482,694 $124,827 $110,123,445 $(137,545) $461,369 $(57,134,409) $ 53,437,687
========== ======== ============ ========= ======== ============ ============
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
KOPIN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31, Six Months Ended
-------------------------------------- -------------------------
June 27, July 3,
1996 1997 1998 1998 1999
------------ ----------- ----------- ----------- ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net income (loss)...... $(21,596,364) $(6,257,769) $(2,967,887) $ (785,934) $ 352,390
Adjustments to
reconcile net income
(loss) to net cash
provided by (used in)
operating activities:
Depreciation and
amortization.......... 3,499,881 3,512,272 4,275,202 2,047,303 1,916,113
Write-down of
subsidiary assets..... 3,900,000 -- -- -- --
Amortization of
compensation relating
to grant of stock
options............... 66,776 75,857 66,900 33,450 27,510
Impairment charge...... 4,990,412 -- 1,800,000 -- --
Decrease in unearned
revenue............... (92,004) (80,484) -- -- --
Decrease in deferred
rent.................. (7,667) (216,000) (165,166) (165,166) --
Minority interest in
income (loss) of
subsidiary............ (1,223,589) -- 59,223 -- 25,515
Changes in assets and
liabilities:
Accounts receivable... (558,326) 1,754,988 682,103 649,970 (4,251,666)
Inventory............. 1,480,547 (7,875) (594,151) (595,020) (1,792,579)
Prepaid expenses and
other current
assets............... (126,536) 458,914 63,114 (79,287) (477,584)
Intangible assets..... (1,679,221) (501,677) (509,175) (235,399) (169,609)
Accounts payable and
accrued expenses..... (1,439,270) (4,233,891) (372,105) 119,639 1,514,468
------------ ----------- ----------- ----------- ------------
Net cash provided by
(used in) operating
activities.......... (12,785,361) (5,495,665) 2,338,058 989,556 (2,855,442)
------------ ----------- ----------- ----------- ------------
Cash flows from
investing activities:
Marketable securities.. 6,625,889 5,888,997 (1,367,678) 3,126,885 (1,728,920)
Other assets........... 476,185 (410,543) (2,799,751) (982,170) (99,077)
Capital expenditures... (3,779,919) (3,555,266) (2,945,784) (2,761,651) (5,922,168)
------------ ----------- ----------- ----------- ------------
Net cash provided by
(used in) investing
activities.......... 3,322,155 1,923,188 (7,113,213) (616,936) (7,750,165)
------------ ----------- ----------- ----------- ------------
Cash flows from
financing activities:
Net proceeds from
issuance of common
stock................. -- -- 17,171,418 17,171,418 --
Net proceeds from
issuance of subsidiary
stock................. 1,800,000 -- 383,583 582,981 --
Principal payments on
long-term
obligations........... (924,421) (1,553,829) (2,292,818) (1,012,049) (1,175,337)
Proceeds from long-term
obligations........... 2,830,425 1,259,832 5,000,000 5,000,000 --
Proceeds from note
payable............... 500,000 450,000 -- -- --
Principal payment on
note payable.......... (3,000,000) (500,000) (450,000) (450,000) --
Proceeds from exercise
of stock options...... 50,470 1,830,583 1,280,593 498,731 1,170,807
------------ ----------- ----------- ----------- ------------
Net cash provided by
(used in) financing
activities.......... 1,256,474 1,486,586 21,092,776 21,791,081 (4,530)
------------ ----------- ----------- ----------- ------------
Effect of exchange rate
changes on cash........ -- -- 64,314 (2,662) 21,660
------------ ----------- ----------- ----------- ------------
Net increase (decrease)
in cash and
equivalents............ (8,206,732) (2,085,891) 16,381,935 22,161,039 (10,588,477)
Cash and equivalents:
Beginning of period.... 24,718,023 16,511,291 14,425,400 14,425,400 30,807,335
------------ ----------- ----------- ----------- ------------
End of period.......... $ 16,511,291 $14,425,400 $30,807,335 $36,586,439 $ 20,218,858
============ =========== =========== =========== ============
Supplementary cash flow
information--Interest
paid in cash........... $ 328,824 $ 229,328 $ 501,691 $ 191,651 $ 235,547
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
KOPIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of July 3, 1999 and for the six months ended June 27, 1998 and
July 3, 1999 is unaudited)
1. Summary of Significant Accounting Policies
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Significant
estimates included within the financial statements include net realizable value
of subsidiary assets, sales return reserves, warranty reserves, inventory
reserves, allowances for doubtful accounts and the economic life of intangible
assets.
References herein to "1996", "1997", "1998" and "1999" are for and as of the
fiscal years ended December 31, 1996, 1997 and 1998 and the six months ended
July 3, 1999, respectively.
Industry Segment
Kopin Corporation and its subsidiaries (the "Company") operate in one
industry segment which includes the development, manufacture and sale of flat
panel display devices and products and gallium arsenide transistor wafers and
products for commercial and consumer markets, and the performance of related
research and development under contracts.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company,
its wholly owned subsidiary and Kowon Technology Co., Ltd., a majority owned
(65%) subsidiary located in Korea. All intercompany transactions and balances
have been eliminated. From 1994 through 1996, the Company made equity
investments in Forte Technologies, Inc. ("Forte"). In May 1995, the Company
obtained a controlling interest in Forte and consolidated the financial
statements of Forte with those of the Company through December 31, 1996.
Revenue Recognition
Product revenue is recognized when a product is shipped or when a service is
performed. For certain of its products, the Company provides customers with a
twelve-month warranty from the date of sale. Estimated sales return and
warranty reserves are provided at the time of sale based upon historical and
anticipated warranty costs.
Revenue from long-term research and development contracts is recognized on
the percentage-of-completion method of accounting as work is performed, based
upon the ratio that incurred costs or hours bear to estimated total completion
cost or hours. At the time a loss on a contract becomes known, the entire
amount of the estimated ultimate loss is recognized in the financial
statements. Amounts earned on contracts in progress in excess of the billings
of such contracts are classified as unbilled receivables and amounts received
in excess of amounts earned are classified as unearned revenue. Unbilled
receivables primarily result from the time necessary to accumulate costs,
including costs incurred by subcontractors, for invoice preparation after the
work has been performed by the Company. Unbilled receivables are billed based
on dates stipulated in the related agreement or in periodic installments based
upon the Company's monthly invoicing cycle.
Research and Development Costs
Research and development expenses include expenses incurred in support of
internal development programs and programs funded by agencies of the federal
government, including development programs for
F-7
<PAGE>
KOPIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of July 3, 1999 and for the
six months ended June 27, 1998 and July 3, 1999 is unaudited)
display devices and products, device wafers, circuit design costs, staffing,
purchases of materials and laboratory supplies, and fabrication and packaging
of the Company's display products.
Cash and Equivalents and Marketable Securities
The Company considers all highly liquid, short-term debt instruments with a
maturity of three months or less at the date of purchase to be cash
equivalents.
Marketable securities consist primarily of commercial paper, medium-term
notes, and United States government and agency securities. Under Statement of
Financial Accounting Standards ("SFAS") No. 115, the Company classifies
marketable securities included in Current Assets as "available for sale" and
accordingly carries them at market value. Marketable securities included in
Other Assets are classified as "held to maturity" and carried at cost as the
Company has the ability and intent to hold them until maturity. From time to
time, the Company sells marketable securities for working capital, capital
expenditure and investment purposes. Substantially all the marketable
securities mature within one year. Gross unrealized holding gains or losses are
recorded in other comprehensive income.
Investments in marketable securities are as follows:
<TABLE>
<CAPTION>
Amortized Cost Unrealized Gains
--------------------------------- ---------------------------------
December 31, December 31,
--------------------- July 3, --------------------- July 3,
1997 1998 1999 1997 1998 1999
---------- ---------- ----------- ---------- ---------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Available for sale
securities:
U.S. government and
agency securities.... $2,585,254 $5,001,073 $7,723,483 $ -- $ 5,710 $ --
Corporate debt
securities........... 2,041,631 993,490 -- 983 610 --
---------- ---------- ---------- ---------- ---------- ----------
Total available for
sale securities.... $4,626,885 $5,994,563 $7,723,483 $ 983 $ 6,320 $ --
========== ========== ========== ========== ========== ==========
<CAPTION>
Unrealized Losses Fair Value
--------------------------------- ---------------------------------
December 31, December 31,
--------------------- July 3, --------------------- July 3,
1997 1998 1999 1997 1998 1999
---------- ---------- ----------- ---------- ---------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Available for sale
securities:
U.S. government and
agency securities.... $ 751 $ -- $ 4,078 $2,584,503 $5,006,783 $7,719,405
Corporate debt
securities........... 6,233 -- -- 2,036,381 994,100 --
---------- ---------- ---------- ---------- ---------- ----------
Total available for
sale securities.... $ 6,984 $ -- $ 4,078 $4,620,884 $6,000,883 $7,719,405
========== ========== ========== ========== ========== ==========
</TABLE>
The gross gains and losses realized related to sales of marketable
securities were not material. Kopin uses the specific identification method as
a basis for determining cost and calculating realized gains or losses.
F-8
<PAGE>
KOPIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of July 3, 1999 and for the
six months ended June 27, 1998 and July 3, 1999 is unaudited)
Inventory
Inventory is stated at the lower of cost (first-in, first-out method) or
market, and consists of the following:
<TABLE>
<CAPTION>
1997 1998 1999
---------- ---------- -----------
(Unaudited)
<S> <C> <C> <C>
Raw materials................................. $1,172,913 $2,672,230 $4,091,136
Work in process............................... 1,529,463 333,996 634,765
Finished goods................................ 18,467 330,952 413,071
---------- ---------- ----------
$2,720,843 $3,337,178 $5,138,972
========== ========== ==========
</TABLE>
Equipment and Improvements
Equipment and improvements are recorded at cost. Depreciation and
amortization are provided using the straight-line method over the estimated
lives of the assets, generally 3 to 10 years, or, in the case of leasehold
improvements and leased equipment, over the term of the lease.
Intangible Assets
Amortization of intangible assets is on a straight-line basis over the
estimated useful lives.
Foreign Currency Translation
Assets and liabilities of non-U.S. operations are translated into U.S.
dollars at year end exchange rates, and revenues and expenses at rates
prevailing during the year. Resulting translation adjustments are accumulated
as part of other comprehensive income and aggregate $414,492 of unrealized
gain at December 31, 1998. Transaction gains or losses are recognized in
income or loss currently.
Net Income (Loss) Per Share
Basic income (loss) per share is computed using the weighted average number
of shares of common stock outstanding during the period. Diluted net income
(loss) per share is computed using the weighted average number of common
shares and potential common shares outstanding during the period using the
treasury method. Potential common shares have not been included in any periods
in which the effect would be anti-dilutive. Had the impact of stock options,
using the treasury stock method, been included in the computation, weighted
average shares would have increased by approximately 214,000, 678,000 and
967,000, for the years ended December 31, 1996, 1997 and 1998, respectively.
Concentration of Credit Risk
The Company invests its excess cash in high quality government and
corporate financial instruments which bear minimal risk. The Company sells its
products to customers worldwide. The Company maintains a reserve for potential
credit losses and such losses have been minimal.
Fair Market Value of Financial Instruments
Financial instruments consist of current assets (except inventories),
current liabilities and long-term obligations. Current assets and current
liabilities are carried at cost which approximates fair market value. Long-
term obligations are stated at cost which approximates fair market value.
F-9
<PAGE>
KOPIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of July 3, 1999 and for the
six months ended June 27, 1998 and July 3, 1999 is unaudited)
Impairment Charge
The Company periodically assesses the recoverability of its long-lived
assets by comparing the undiscounted cash flows expected to be generated by
those assets to their carrying value. If the sum of the undiscounted cash flows
is less than the carrying value of the assets, an impairment charge is
recognized.
In January 1996, the Company recorded an impairment charge of $4,990,000
which consisted primarily of the expensing of previously capitalized patent
infringement legal costs and the write-down of purchased technology, prepaid
license fees, certain patents and equipment. In December 1998, due to the
modification of certain manufacturing processes, the Company recorded an
impairment charge of $1,800,000 which consisted of the write-down of certain
patents and equipment. The $4,990,000 and $1,800,000 represented the amounts
that the carrying value of the assets exceeded their fair market value. The
fair market value of the assets was determined based on valuation techniques
utilizing the present value of estimated expected future cash flows.
Stock-Based Compensation
Compensation cost associated with the grant of options and other stock
awards to employees is determined using the intrinsic value method.
Compensation cost associated with the grant of options and other stock awards
to non-employees is determined using the fair value method.
Unaudited Interim Information
The results of operations and cash flows for the six-month periods ended
June 27, 1998 and July 3, 1999 are unaudited and are not necessarily indicative
of results which would be expected for a full year. In the opinion of
management, the financial statements for the unaudited periods presented
include all adjustments necessary for a fair presentation in accordance with
generally accepted accounting principles, consisting solely of normal recurring
accruals and adjustments.
Reclassifications
Certain reclassifications have been made to the December 31, 1996 amounts to
conform to the 1998 presentation. The reclassifications consisted of presenting
interest income, other income and interest expense as Other Income and Expense.
In addition, previously reported research and development expense has been
separated into research and development-funded programs and research and
development-internal.
2. Other Assets
Other assets consist primarily of equity investments in various companies
and notes receivable. Equity investments are non-marketable and are carried at
cost and aggregate $2,693,000 and $4,695,000 at December 31, 1997 and 1998,
respectively. The Company periodically assesses possible impairment of these
investments. Notes receivable bear interest at rates ranging from 6% to 10% and
are due in varying installments through August, 2003.
F-10
<PAGE>
KOPIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of July 3, 1999 and for the
six months ended June 27, 1998 and July 3, 1999 is unaudited)
3. Intangible Assets
Intangible assets consist of the following:
<TABLE>
<CAPTION>
Estimated Useful
Life (years) 1997 1998 1999
---------------- ----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C>
Patents and application
fees................... 10 $ 2,316,376 $ 2,096,406 $ 2,261,015
Licenses................ 5-12 935,207 987,714 992,714
----------- ----------- -----------
3,251,583 3,084,120 3,253,729
Less accumulated amorti-
zation................. (1,191,665) (1,239,972) (1,415,772)
----------- ----------- -----------
$ 2,059,918 $ 1,844,148 $ 1,837,957
=========== =========== ===========
</TABLE>
4. Investment in Forte Technologies, Inc.
Forte was founded in July 1994. From October 1994 through December 31, 1996,
Kopin made a series of equity investments in Forte resulting in an equity
ownership of 59% at December 31, 1996. As a result of declining sales and
results of operations at Forte, the Company recorded, in the fourth quarter of
1996, write-downs of Forte's accounts receivable of $561,000, inventory of
$1,848,000, equipment, improvements and other of $823,000 and its remaining
investment of $668,000 in Forte, totaling $3,900,000.
On March 7, 1997, Forte filed a voluntary petition seeking protection from
its creditors under Chapter 11 of the United States Bankruptcy Code. In
conjunction with the filing, the Company's representatives resigned from
Forte's board of directors. As a result of the Chapter 11 filing, subsequent to
March 7, 1997, the Company no longer consolidates the results of operations or
assets and liabilities of Forte.
5. Income Taxes
As of December 31, 1998, the Company has available for tax reporting
purposes, federal net operating loss and general business tax credit
carryforwards of approximately $45,000,000 and $595,000, respectively, expiring
through 2013. To date, no financial statement benefit has been recognized for
these losses and credits as realization does not appear more likely than not.
F-11
<PAGE>
KOPIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of July 3, 1999 and for the
six months ended June 27, 1998 and July 3, 1999 is unaudited)
Deferred taxes are provided to recognize the effect of temporary differences
between tax and financial reporting. Deferred income tax assets and liabilities
consist of the following:
<TABLE>
<CAPTION>
1997 1998
------------ ------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward................ $ 20,910,000 $ 18,450,000
Research and development expenses.............. -- 2,200,000
Amortization of intangible assets.............. 342,500 315,000
Deferred rent.................................. 67,700 --
Other.......................................... 317,000 300,000
------------ ------------
21,637,200 21,265,000
------------ ------------
Deferred tax liabilities:
Patent costs................................... 950,000 850,000
Depreciation................................... 1,146,000 1,200,000
------------ ------------
2,096,000 2,050,000
------------ ------------
Net deferred tax assets........................ 19,541,200 19,215,000
Valuation allowance............................ (19,541,200) (19,215,000)
------------ ------------
$ -- $ --
============ ============
</TABLE>
6. Note Payable and Long-Term Obligations
In 1997, the Company entered into a $450,000 demand note payable with a bank
bearing interest at 0.75% above prime, or 9.25% at December 31, 1997. The note
was repaid in 1998.
Long-term obligations consist of the following:
<TABLE>
<CAPTION>
1997 1998 1999
----------- ----------- -----------
(unaudited)
<S> <C> <C> <C>
Secured term note................... $ -- $ 4,250,000 $ 3,750,000
5.625% equipment promissory note.... 989,915 339,272 --
Capital lease obligations--
equipment.......................... 2,181,086 1,593,200 1,283,631
8.19% equipment promissory note..... 330,785 26,496 --
----------- ----------- -----------
3,501,786 6,208,968 5,033,631
Less current portion................ (1,542,818) (1,999,494) (1,792,631)
----------- ----------- -----------
$ 1,958,968 $ 4,209,474 $ 3,241,000
=========== =========== ===========
</TABLE>
In March 1998, the Company entered into a $5,000,000 secured term note which
requires the Company to make quarterly principal payments of $250,000 plus
interest at a floating rate based upon LIBOR, 7.56% at December 31, 1998. This
term note is secured by the Company's accounts receivable.
The 5.625% equipment promissory note required monthly payments of principal
and interest totaling $57,477 through June 1999. The loan obligation was
specifically collateralized by the equipment financed under the agreement and
certain marketable securities. These securities are shown as other assets on
the Company's balance sheet, since they are not available for working capital
purposes.
F-12
<PAGE>
KOPIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of July 3, 1999 and for the
six months ended June 27, 1998 and July 3, 1999 is unaudited)
The equipment capital lease obligations require monthly payments of
approximately $63,500 through June 2000, decreasing to approximately $32,500
thereafter until June 2001. Early termination and equipment purchase options
may be exercised in December 1999 and December 2000, respectively, for the
outstanding capital lease obligations. The capital lease obligations are
collateralized by equipment with a carrying value of $1,941,274 at December 31,
1998.
The 8.19% equipment promissory note requires monthly payments of principal
and interest totaling $26,680 through January 1999. The loan obligations are
collateralized by the equipment financed under the agreements.
The aggregate maturities of long-term obligations, including capital lease
obligations, as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Year ending December 31, Amount
------------------------ -----------
<S> <C>
1999......................................................... $ 2,133,968
2000......................................................... 1,692,445
2001......................................................... 1,317,100
2002......................................................... 1,250,000
2003......................................................... --
-----------
Less: 6,393,513
Amounts representing interest................................. (184,545)
Current portion of long-term obligations...................... (1,999,494)
-----------
$ 4,209,474
===========
</TABLE>
8. 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 the Company and the other 1,000,000 shares
were sold by a shareholder. Net proceeds to the Company totaled approximately
$17,171,000.
9. Stock Options
The Company's 1992 Stock Option Plan permits the granting of both
nonqualified stock options and incentive stock options. The plan covers
3,250,000 shares of common stock (including shares issued upon exercise of
options granted pursuant the 1985 Plan). The option price of incentive stock
options shall not be less than 100% of the fair market value of the stock at
the date of grant, or in the case of certain incentive stock options, at 110%
of the fair market value at the time of the grant. Options must be exercised
within a ten-year period or sooner if so specified within the option agreement.
Options granted generally vest over four years.
In 1994, the Company adopted the Director Stock Option Plan, which provides
for the automatic granting, pursuant to a formula, of nonqualified stock
options to the Company's non-employee directors. A maximum of 175,000 shares
are issuable under the plan.
During 1996, a total of 573,500 outstanding options were cancelled in
exchange for the grant of 516,150 options with an exercise price equal to the
fair market value of the common stock on the date of grant of $8.25 per share.
These options vest over four years.
F-13
<PAGE>
KOPIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of July 3, 1999 and for the
six months ended June 27, 1998 and July 3, 1999 is unaudited)
For certain options granted, the Company recognizes as compensation expense
the excess of the fair market value of the common shares issuable upon exercise
of such options over the aggregate exercise price of such options. This
compensation expense is amortized ratably over the vesting period of each
option. For the year ended December 31, 1998, such compensation expense of
$66,900 was recorded and will aggregate to $165,055 over the remaining terms of
the options. At July 3, 1999 the Company has available 455,995 shares of common
stock for future grant under its stock option plans. A summary of option
activity is as follows:
<TABLE>
<CAPTION>
1996 1997 1998 1999
------------------- ------------------- ------------------- -------------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Exercise Exercise Exercise Exercise
Shares Price Shares Price Shares Price Shares Price
--------- -------- --------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, beginning of
period................. 1,560,326 $12.38 1,807,966 $10.47 2,211,647 $11.66 2,244,338 $11.95
Options granted....... 1,126,750 9.09 683,650 14.31 323,725 13.16 63,900 17.96
Options cancelled..... (862,721) 12.47 (89,234) 11.07 (144,616) 13.03 -- --
Options exercised..... (16,389) 3.09 (190,735) 9.60 (146,418) 10.05 (321,739) 7.96
--------- --------- --------- ---------
Balance, end of period.. 1,807,966 $10.47 2,211,647 $11.66 2,244,338 $11.95 1,986,499 $12.32
========= ========= ========= =========
Exercisable, end of
period................. 587,000 967,000 1,502,933 1,171,594
========= ========= ========= =========
</TABLE>
Of the 2,244,338 options outstanding at December 31, 1998, 446,516 have
exercise prices between $1.00 and $9.00, with a weighted average exercise price
of $7.89 and a weighted average remaining contractual life of 7.4 years. Of
these options, 381,174 are exercisable at a weighted average price of $8.11. An
additional 673,009 options outstanding at December 31, 1998 have exercise
prices between $9.25 and $11.75, with a weighted average exercise price of
$10.53 and a weighted average remaining contractual life of 6.7 years. Of these
options, 508,859 are exercisable at a weighted average price of $10.48. The
remaining 1,124,813 options have exercise prices between $11.88 and $22.00,
with a weighted average exercise price of $14.43 and a weighted average
remaining contractual life of 8.3 years. Of these options, 614,776 are
exercisable at a weighted average exercise price of $14.71. The weighted
average exercise price of all options exercisable at December 31, 1998 is
$11.61.
The Company has two fixed option plans which reserve shares of common stock
for issuance to executives, key employees and directors. Had compensation cost
for the Company's two stock option plans been determined based on the fair
value at the grant date for awards in 1996, 1997 and 1998 the Company's net
loss and loss per share would have been $22,828,070 or $2.09 per share in 1996,
$7,763,328 or $0.71 per share in 1997 and $4,857,414 or $0.40 per share in
1998.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following assumptions used for
grants in 1996, 1997 and 1998: no expected dividend yield; expected volatility
of 57.6% in 1996, 61.3% in 1997 and 61.9% in 1998; risk-free interest rate of
6.55% in 1996, 5.72% in 1997 and 4.69% in 1998; and expected lives of four
years. The weighted-average fair value of options on grant date was $4.64 in
1996, $7.44 in 1997 and $6.76 in 1998.
10. Employee Benefit Plan
The Company has an employee benefit plan pursuant to Section 401(k) of the
Internal Revenue Code. The plan allows employees to defer up to 15% of their
annual compensation to a current maximum of $10,000. The
F-14
<PAGE>
KOPIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of July 3, 1999 and for the
six months then ended June 27, 1998 and July 3, 1999 is unaudited)
Company will match 50% of all deferred compensation up to a maximum of 3% of
each employee's annual compensation. The amount charged to operations in
connection with this plan was approximately $92,000 in 1996, $91,000 in 1997,
and $108,000 in 1998.
11. Major Customers and Geographic Information
Approximately 39%, 63%, 59% and 49% of the Company's revenue resulted from
sales to a single customer during the years ended December 31, 1996, 1997, and
1998, and the six months ended July 3, 1999, respectively. In addition, during
the years ended December 31, 1996, 1997, and 1998 and the six months ended July
3, 1999, approximately 35%, 20%, 14% and 9%, respectively, of the Company's
revenues resulted from multiple contracts with various agencies of the United
States government. These contracts are subject to termination at the election
of the relevant agency.
Sales to foreign customers during the years ended December 31, 1996, 1997,
and 1998 and the six months ended July 3, 1999 were approximately 1%, 2%, 29%
and 27%, respectively, of the Company's revenues. Sales to customers in Japan
for 1998 and the six months ended July 3, 1999 were 4% and 13%, respectively.
12. Commitments
Leases
The Company leases certain machinery and equipment, and its facilities
located in Taunton and Westborough, Massachusetts, and Los Gatos, California,
under noncancelable operating leases. The Taunton lease expires in 2002. The
Westborough lease expires in October 2001, with renewal options for up to three
additional years at the Company's election. The Los Gatos lease covers a five-
year period terminating in 2002. Substantially all real estate taxes, insurance
and maintenance expenses under these leases are obligations of the Company. The
following is a schedule of minimum rental commitments under noncancelable
operating leases:
<TABLE>
<CAPTION>
Amount
----------
<S> <C>
July 4, 1999 to December 31, 1999 ............................... $ 631,834
Years ended December 31:
2000............................................................. 1,142,219
2001............................................................. 270,904
2002............................................................. 245,567
2003............................................................. 8,339
----------
Total minimum lease payments..................................... $2,298,863
==========
</TABLE>
Costs incurred under operating leases are recorded as rent expense and
aggregated approximately $1,214,000 in 1996, $979,000 in 1997, $1,090,000 in
1998 and $613,000 for the six months ended July 3, 1999.
Other Agreements
The Company has entered into various license agreements which require the
Company to pay royalties based upon a set percentage of product sales, subject,
in some cases, to certain minimum amounts. Total royalty expense approximated
$25,500 in 1996, $24,000 in 1997, $25,000 in 1998 and $13,000 for the six
months ended July 3, 1999.
F-15
<PAGE>
KOPIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of July 3, 1999 and for the
six months then ended June 27, 1998 and July 3, 1999 is unaudited)
Litigation
The Company is engaged in legal proceedings arising in the ordinary course
of business. The Company believes that the ultimate outcome of these
proceedings will not have a material adverse impact on the Company's
consolidated financial position, results of operations or cash flows.
13. Recent Accounting Pronouncements
The Financial Accounting Standards Board ("FASB") has issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities", which is
effective for fiscal years commencing after June 15, 2000. SFAS No. 133
requires fair value accounting for all stand-alone derivatives and many
derivatives embedded in other financial instruments and contracts. The impact
of SFAS No. 133 on the Company has not yet been determined.
F-16
<PAGE>
[Text description of inside back cover]
The Kopin logo appears in the upper left corner with "CyberDisplay"
appearing underneath. Text in the upper right hand corner reads, "A leading
developer and manufacturer of miniature flat panel displays for high resolution
portable consumer electronics and mobile communications devices." The center of
the page is a reproduction of a CyberDisplay product underneath a U.S. dime to
show scale, surrounded by pictures of four applications which incorporate the
CyberDisplay product including a digital camcorder, a digital camera, a wireless
handset and an enhanced pager.
[End of text description of inside back cover]
<PAGE>
[KOPIN LOGO]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution
Expenses of the Registrant in connection with the issuance and distribution
of the securities being registered, other than the underwriting discount and
commissions, are estimated as follows:
<TABLE>
<S> <C>
SEC Registration Fee.............................................. $ 17,569
NASD Filing Fees.................................................. 6,820
Nasdaq National Market Listing Fees............................... 17,500
Printing and Engraving Expenses................................... 120,000
Legal Fees and Expenses........................................... 250,000
Accountants' Fees and Expenses.................................... 75,000
Expenses of Qualification Under State Securities Laws, Including
Attorneys' Fees.................................................. 30,000
Transfer Agent and Registrar's Fees............................... 2,500
Miscellaneous Costs............................................... 30,611
--------
Total........................................................... 550,000
========
</TABLE>
Item 15. Indemnification of Directors and Officers
The Registrant's Amended and Restated Certificate of Incorporation and
Amended and Restated Bylaws include provisions to (i) eliminate the personal
liability of our directors for monetary damages resulting from breaches of
their fiduciary duty to the extent permitted by Section 102(b)(7) of the
General Corporation Law of Delaware (the "Delaware Law") and (ii) authorize the
Registrant to indemnify our directors and officers to the fullest extent
permitted by Section 145 of the Delaware Law, including circumstances in which
indemnification is otherwise discretionary. Pursuant to Section 145 of the
Delaware Law, a corporation generally has the power to indemnify its present
and former directors, officers, employees and agents against expenses incurred
by them in connection with any suit to which they are, or are threatened to be
made, a party by reason of their serving in such positions so long as they
acted in good faith and in a manner they reasonably believed to be in, or not
opposed to, the best interests of a corporation, and with respect to any
criminal action, they had no reasonable cause to believe their conduct was
unlawful. The Registrant believes that these provisions do not eliminate
liability for breach of the director's duty of loyalty to the Registrant or our
stockholders, for acts or omissions not in good faith or involving intentional
misconduct or knowing violations of law, for any transaction from which the
director derived an improper personal benefit or for any willful or negligent
payment of any unlawful dividend or any unlawful stock purchase agreement or
redemption.
The Registrant has purchased an insurance policy covering the officers and
directors of the Registrant with respect to certain liabilities arising under
the Securities Act or otherwise.
II-1
<PAGE>
Item 16. Exhibits
<TABLE>
<C> <S>
1.1 Proposed Form of Underwriting Agreement+
3.1 Amended and Restated Certificate of Incorporation*
3.2 Amended and Restated By-laws*
4.1 Reference is made to exhibits 3.1 and 3.2
4.2 Specimen Certificate of Common Stock**
5.1 Opinion of Bingham Dana LLP, with respect to the legality of the
shares being registered
23.1 Independent Auditors' Consent--Deloitte & Touche LLP
23.2 Consent of Bingham Dana LLP (included in exhibit 5.1)
23.3 Consent of Hamilton, Brook, Smith & Reynolds, P.C.
21.1 Power of Attorney (included in signature page)
27 Financial Data Schedule
</TABLE>
- --------
* Filed as an exhibit to Registration Statement on Form S-1, File No. 33-
57450, and incorporated herein by reference.
** Filed as an exhibit to Registration Statement on Form S-1, File No. 33-
45853, and incorporated herein by reference.
+ To be filed by amendment.
Item 17. Undertakings
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act
of 1934) that is incorporated by reference in the registration statement shall
be deemed to be a new registration statement relating to the securities offered
therein, and this offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers, and controlling persons of the
Registrant pursuant to the foregoing provisions, the Registrant has been
informed that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer, or controlling person of the Registrant in the
successful defense of any action, suit, or proceeding) is asserted by such
director, officer, or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of our counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant undertakes that: (1) for purposes of determining
any liability under the Securities Act of 1933, the information omitted from
the form of prospectus as filed as part of the Registration Statement in
reliance upon Rule 430A and contained in the form of prospectus filed by the
Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act
shall be deemed to be part of the Registration Statement as of the time it was
declared effective, and (2) for the purpose of determining any liability under
the Securities Act of 1933, each post-effective amendment that contains a form
of prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and this offering of such securities at that
time shall be deemed to be in the initial bona fide offering thereof.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that is has reasonable grounds to believe that it meets all of the
requirements for filing on form S-3 and has duly caused this registration
statement to be signed on our behalf by the undersigned, thereunto duly
authorized, in the city of Taunton, Commonwealth of Massachusetts, on this 20th
day of September, 1999.
Kopin Corporation
/s/ John C.C. Fan
By: ____________________________________
John C.C. Fan
Chairman of the Board of Directors,
President and Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below hereby appoints each of John C.C.
Fan, Richard A. Sneider, John H. Chu, and John J. Concannon III, severally,
acting alone and without the other, his true and lawful attorney-in-fact with
the authority to execute in the name of each such person, any and all
amendments (including without limitation, post-effective amendments) to this
Registration Statement on Form S-3, to sign any and all additional registration
statements relating to the same offering of securities as this Registration
Statement that are filed pursuant to Rule 462(b) of the Securities Act, and to
file such registration statements with the Securities and Exchange Commission,
together with any exhibits thereto and other exhibits therewith, necessary or
advisable to enable the registrant to comply with the Securities Act, and any
rules, regulations and requirements of the Securities and Exchange Commission
in respect thereof, which amendments may make such other changes in the
Registration Statement as the aforesaid attorney-in-fact executing the same
deems appropriate.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ John C.C. Fan Chairman of the Board of September 20,
____________________________________ Directors, President and Chief 1999
John C.C. Fan Executive Officer (Principal
Executive Officer)
/s/ Richard A. Sneider Chief Financial Officer and September 20,
____________________________________ Treasurer (Principal Financial 1999
Richard A. Sneider and Accounting Officer)
/s/ David E. Brook Director and Secretary September 20,
____________________________________ 1999
David E. Brook
/s/ Andrew H. Chapman Director September 20,
____________________________________ 1999
Andrew H. Chapman
/s/ Morton Collins Director September 20,
____________________________________ 1999
Morton Collins
/s/ Chi-Chia Hsieh Director September 20,
____________________________________ 1999
Chi-Chia Hsieh
/s/ Michael A. Wall Director September 20,
____________________________________ 1999
Michael A. Wall
</TABLE>
II-3
<PAGE>
EXHIBITS
<TABLE>
<C> <S>
1.1 Proposed Form of Underwriting Agreement+
3.1 Amended and Restated Certificate of Incorporation*
3.2 Amended and Restated By-laws*
4.1 Reference is made to exhibits 3.1 and 3.2
4.2 Specimen Certificate of Common Stock**
5.1 Opinion of Bingham Dana LLP, with respect to the legality of the shares
being registered.
23.1 Independent Auditors' Consent--Deloitte & Touche LLP
23.2 Consent of Bingham Dana LLP (included in exhibit 5.1)
23.3 Consent of Hamilton, Brook, Smith & Reynolds, P.C.
21.1 Power of Attorney (included in signature page)
27 Financial Data Schedule
</TABLE>
- --------
* Filed as an exhibit to Registration Statement on Form S-1, File No. 33-
57450, and incorporated herein by reference.
** Filed as an exhibit to Registration Statement on Form S-1, File No. 33-
45853, and incorporated herein by reference.
+ To be filed by amendment.
<PAGE>
EXHIBIT 5.1
BINGHAM DANA LLP
150 Federal Street
Boston, MA 02110
September 20, 1999
Kopin Corporation
695 Myles Standish Blvd.
Taunton, MA 02412
Dear Ladies and Gentlemen:
We have acted as counsel for Kopin Corporation, a Delaware corporation (the
"Company"), in connection with the registration under the Securities Act of
1933, as amended (the "Act"), of up to 1,800,000 shares of the Company's Common
Stock, $0.01 par value per share (the "Common Stock"), to be sold by the Company
(the "Firm Shares") and up to an additional 270,000 shares which may be offered
by the Company in order to cover over-allotments, if any, (the "Over-allotment
Shares" and referred to hereinafter together with the Firm Shares as the
"Shares"), pursuant to a Registration Statement on Form S-3 (as amended, the
"Registration Statement"), initially filed with the Securities Exchange
Commission on September 20, 1999.
We have reviewed the corporate proceedings of the Company with respect to
the authorization of the issuance of the Shares. We have also examined and
relied upon originals or copies of such corporate records, instruments,
agreements or other documents of the Company, and certificates of officers of
the Company as to certain factual matters, and have made such investigation of
law and have discussed with officers and representatives of the Company such
questions of fact, as we have deemed necessary or appropriate as a basis for the
opinions hereinafter expressed. In connection with the issuance of the Firm
Shares, we have examined and relied upon a certificate of the Treasurer of the
Company. In our examinations, we have assumed the genuineness of all
signatures, the conformity to the originals of all documents reviewed by us as
copies, the authenticity and completeness of all original documents reviewed by
us in original or copy form and the legal competence of each individual
executing any document.
We have also assumed that an Underwriting Agreement substantially in the
form of Exhibit 1.1 to the Registration Statement, by and among the Company and
the underwriters named therein (the "Underwriting Agreement"), will have been
duly executed and delivered pursuant to the authorizing resolutions of the Board
of Directors of the Company and that the Firm Shares and Over-allotment Shares
will be sold and transferred only upon the payment therefor as provided in the
Underwriting Agreement. We have further assumed that the registration
requirements of the Act and all applicable requirements of state laws regulating
the sale of securities will have been duly satisfied.
This opinion is limited solely to the Delaware General Corporation Law as
applied by courts located in Delaware. Based upon and subject to the foregoing,
we are of the opinion that the Shares have been duly authorized, the Firm Shares
are validly issued and are fully-paid and non-assessable, and the Over-allotment
Shares, when delivered and paid for in accordance with the provisions of the
Underwriting Agreement will be validly issued, fully-paid and non-assessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to this firm under the heading
"Legal Matters" in the Registration Statement.
Very truly yours,
/s/ Bingham Dana LLP
BINGHAM DANA LLP
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors and Stockholders of
Kopin Corporation:
We consent to the use in this Registration Statement of Kopin Corporation on
Form S-3 of our reports dated February 16, 1999 appearing in and incorporated
by reference from Kopin Corporation's 1998 Annual Report on Form 10-K in the
prospectus, which is a part of this Registration Statement, and to the
reference to us under the heading "Experts" in such prospectus.
Deloitte & Touche LLP
Boston, Massachusetts
September 20, 1999
<PAGE>
EXHIBIT 23.3
CONSENT OF SPECIAL COUNSEL FOR KOPIN CORPORATION
We consent to the reference to our firm under the caption "Experts"
contained in the Registration Statement on Form S-3 of Kopin Corporation and the
Prospectus forming a part thereof.
Hamilton Brook, Smith & Reynolds, P.C.
By: /s/ David E. Brook
-------------------
David E. Brook
Dated: September 20, 1999
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<PAGE>
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUL-03-1999
<CASH> 20,218,858
<SECURITIES> 7,719,405
<RECEIVABLES> 7,916,928
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<INVENTORY> 5,138,972
<CURRENT-ASSETS> 42,217,381
<PP&E> 32,185,813
<DEPRECIATION> 18,619,918
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<CURRENT-LIABILITIES> 6,496,040
<BONDS> 3,241,000
0
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<TOTAL-REVENUES> 15,343,997
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<OTHER-EXPENSES> 0
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<INTEREST-EXPENSE> 216,160
<INCOME-PRETAX> 352,390
<INCOME-TAX> 0
<INCOME-CONTINUING> 352,390
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