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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-19882
KOPIN CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 04-2833935
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State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
695 Myles Standish Blvd., Taunton, MA 02780-1042
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (508) 824-6696
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act: Common Stock, par
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value $.01 per share
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(Title of Class)
Name on each exchange on which registered: NASDAQ National Market
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to filing requirements
for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 23, 1999 the aggregate market value of outstanding shares of voting
stock held by non-affiliates of the registrant was $155,201,153
As of March 23, 1999, 12,325,042 shares of the registrant's Common Stock, par
value $.01 per share, were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement relating to the Annual Meeting of Shareholders
to be held on May 20, 1999 are incorporated by reference into Part III of this
Report. Other documents incorporated by reference are listed in the Exhibit
Index.
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Part I
ITEM 1. Business
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General
Kopin Corporation (the "Company"), founded in 1984 to commercialize
semiconductor expertise developed at the Massachusetts Institute of Technology
("MIT"), is a leading developer and manufacturer of advanced semiconductor
materials and small form factor displays. The Company's technology expertise
centers on its Wafer-Engineering technology, a process of splicing or layering
selected semiconductor materials to provide optimal performance for specific
applications. The Company uses Wafer-Engineering technology for the
manufacturing of advanced gallium arsenide device wafers that enable the
production of differentiated, higher performance integrated circuits. With this
expertise, the Company has also developed a process to produce single crystal
silicon integrated circuits and transfer those circuits to glass and other
media. This proprietary technology enabled the development of the CyberDisplay
product. The Company's customers use Kopin's products to develop and market an
improved generation of highly demanding commercial wireless communications and
high resolution portable products.
Kopin produces gallium arsenide ("GaAs") products. The Company's principal
GaAs product is a heterojunction bipolar transistor ("HBT") GaAs device wafer
used by manufacturers of GaAs power amplifiers and other integrated circuits for
digital wireless handsets and other high frequency communications devices. The
Company currently sells its device wafers primarily to manufacturers of
microwave integrated circuits for high performance wireless communications
devices. The Company believes that integrated circuits manufactured using its
HBT device wafers are well suited for applications that require lower power
consumption and high frequency performance. Kopin's principal customer for its
HBT device wafers is Conexant Systems, Inc. ("Conexant"), formerly part of
Rockwell International Corporation. Conexant, as well as other customers,
primarily use these HBT device wafers in the fabrication of integrated circuits
used in digital wireless handsets. The Company is actively marketing its device
wafers by working with customers who are developing integrated circuits for use
in these and other applications.
In April 1997, the Company introduced the CyberDisplay product, a miniature
active matrix liquid crystal display ("AMLCD"). The Company believes that the
CyberDisplay product is the world's smallest, high performance, high resolution,
low cost AMLCD, based upon the Company's review of industry developments, trade
shows and specialized periodicals. The CyberDisplay product is a miniature
display (0.24 inch diagonal) which uses a lens and backlight to deliver high
resolution data and video images equivalent to viewing a 20 inch monitor from a
distance of five feet. The Company believes CyberDisplay products are well-
suited for high resolution, high information content applications, including
viewing images in digital cameras, camcorders, reading e-mail and facsimile
messages using digital wireless handsets and pagers, and viewing information
stored in smart cards and for other personal communications and consumer
electronics devices.
The Company currently manufactures all of its HBT device wafers at its
facility in Taunton, Massachusetts. The Company's facility in Westborough,
Massachusetts is used in the development and packaging of CyberDisplay products.
The integrated circuit portion of CyberDisplay products is produced by United
Microelectronics Corporation ("UMC"). The Company has also established
packaging capability for CyberDisplay products with Unipac Optoelectronics Corp.
("Unipac"), an affiliate of UMC. The Company anticipates that it will continue
to use third-party contractors in the manufacture of CyberDisplay products.
Industry Overview
Gallium Arsenide Products
The Company believes there is a growing need for advanced semiconductor
materials used in the manufacture of microwave integrated circuits and other
integrated circuits used in high frequency, low power applications. The demand
for these microwave integrated circuits is being driven by the rapid growth in
the wireless communications equipment industry, resulting from new transmission
technologies, such as personal communications systems ("PCS"), wireless local
loop, satellite communications, wireless local area networks (WLANs) and local
multipoint distribution system (LMDS). The increasingly shorter product cycles
of systems products in these markets is another factor driving the growth of
demand for integrated circuits used in these applications. In addition to the
cellular and PCS markets, telecommunications and data communications equipment
markets represent other significant applications opportunities for integrated
circuits with these
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features. The Company believes that emerging markets for integrated circuits
made from GaAs device wafers include power devices for base station applications
in broadband wireless services, high data rate fiber optic receivers used in
telecommunications, and other specialized integrated circuits used in data
communications and other applications.
Until recently, integrated circuits used in high frequency, low power
applications were generally constructed with hybrid solutions such as silicon
bipolar transistors or silicon metal oxide semiconductor field effect
transistors ("MOSFET"). GaAs semiconductor technology has emerged as an
effective alternative or complement to silicon in many of these high performance
applications, in particular, high frequency microwave telecommunications
systems. GaAs has inherent physical properties which allow electrons to move up
to five times faster than in silicon. This higher electron mobility permits GaAs
integrated circuits to operate at much higher frequencies than silicon devices,
or operate at the same frequency with lower power consumption. The reduction in
system power requirements is particularly important in portable applications.
The high performance characteristics of GaAs have led to the increased use of
GaAs field effect transistors ("FETs") in a wide range of commercial systems.
Hybrid solutions are relatively inexpensive to manufacture but have lower power
efficiency, while the Company believes GaAs FET wafers have better performance
characteristics than hybrid solutions but are more costly and create greater
system complexity.
Even as device manufacturers are increasingly adopting GaAs FET technology in
the manufacture of high frequency integrated circuits such as those used in
microwave applications, industry demands are calling for even greater
performance. To address the increasingly demanding requirements of the
telecommunications and data communications markets, microwave and other high
frequency integrated circuits must incorporate certain key features. These
features include simpler system design, support for higher frequencies, lower
power consumption, improved signal linearity, and effective operation at a wider
range of temperatures. HBT device wafers enable manufacturers of integrated
circuits to provide these features.
Display Products
The Company believes there is an emerging and potentially large market for
small form factor displays that are capable of displaying significant amounts of
information. Driven by consumers' desire for smaller, more compact electronics
products capable of displaying ever increasing amounts of information, these
displays are expected to be used in portable information, imaging and
communications products. To date, the growth of some of these markets has been
inhibited by the limitations of available display technologies. To meet consumer
demands for a highly portable, small form factor, high information content
display, the display must have high resolution, low power consumption,
durability, low cost and be available in both monochrome and full color.
The markets for high resolution, small form factor displays include digital
cameras, camcorders, digital wireless handsets, pagers, and smart card viewers.
The growth of these markets is being driven, in part, by rapid advances in
technology that are making possible new applications. For example, advances in
wireless communications systems such as higher bandwidths and increases in
intelligence embedded in digital wireless handsets, pagers and other portable
communications devices ("PCDs") have created the potential for mobile data
users to obtain real-time, wireless access to data.
There are several display technologies currently available. The most commonly
used technology in portable applications is based on the traditional liquid
crystal display ("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 passive matrix LCD is primarily used in displays for calculators,
watches and pagers because of its relatively low cost and power consumption. Its
relatively low image quality, slow response time and limited viewing angle,
however, make it inadequate for many demanding applications. In contrast, AMLCDs
incorporate a transistor at every pixel location. This 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. AMLCDs
are used primarily in laptop computers, instrumentation and projection systems.
The speed, size and leakage of the transistors in AMLCDs are the key factors
governing their suitability for use as high performance digital displays.
Currently, transistors in the active matrix are primarily formed in one of two
ways. The first method involves the use of a thin film of amorphous silicon
grown on glass. It is termed "amorphous" because a silicon film
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grown directly on glass has very high crystal disorder and low electronic
quality (the speed of electrons in amorphous silicon is approximately 500 times
slower than in integrated-circuit-quality, single crystal silicon).
Consequently, amorphous silicon thin-film transistors have difficulty achieving
the speed and the gray scale dynamic range required for digital high definition
imaging systems. The other method of transistor formation utilizes
polycrystalline silicon thin films that are grown on glass at high temperatures.
This process requires special high temperature glass or expensive quartz panels.
Although better than amorphous films, polycrystalline silicon films are not well
suited for high definition, high performance applications because the speed of
electrons in these films is still approximately 30 times slower than in
integrated circuit-quality, single crystal silicon. Both approaches currently
require the development and manufacture of large scale, active matrix integrated
circuits in material that is already formed on glass or quartz substrates, which
limits the pixel density of the resulting displays, making this approach more
suitable for larger AMLCDs. The commercial manufacture of circuits on these
substrates is currently performed in purpose-built facilities rather than in
conventional silicon integrated circuit foundries, resulting in an inability to
take advantage of low-cost manufacturing available in the silicon integrated
circuit industry.
High information content displays require a large number of pixels, and an
equal number of transistors. For example, a conventional monochrome LCD with a
resolution of 320 x 240 pixels is comprised of 76,800 pixels (and 76,800
transistors). For most color LCDs, three times that number of pixels are
required to provide a color display. The generation of color images is usually
accomplished by three color filters (red, green and blue) lithographically
located over each pixel. Thus, a 320 x 240 color AMLCD requires 230,400
transistors. Due to this requirement, current conventional AMLCD technologies
have difficulty in achieving the levels of pixel density required in a small
form factor appropriate for use in portable devices.
The Company believes that the potential for high growth PCD markets can be
realized effectively, however, only if these devices are able to present clearly
to the end user the information they wish to access, without compromising the
form factor of the device. These devices, as well as the next generation of
digital cameras and other consumer electronics devices, require a small display
with low power consumption and rich, full color high resolution images. To date,
display technologies have been limited in addressing these needs due to
constraints with respect to size, power consumption, resolution, cost or full
color capability.
The Kopin Solution
Gallium Arsenide Products
The Company's primary GaAs product is an HBT device wafer which is based on
its proprietary Wafer-Engineering technology. HBT device wafers, unlike
competing GaAs FET wafers, consist of a series of material layers of atomic-
level thickness, which form a vertical transistor on the wafer. This wafer
structure enables the design of integrated circuits in which individual
transistors are vertically arranged. The three-dimensional nature of an HBT
device wafer, as opposed to the two-dimensional nature of a competing GaAs FET
wafer, offers several advantages to an integrated circuit manufacturer. The
principal advantage of this vertical structure is a higher transistor density
for a given surface area, resulting in better yields and greater processing
speed. Furthermore, current limitations on optical lithography result in
transistor gate length limits (the distance an electron must travel within a
transistor) on GaAs FET wafers of approximately 0.2 microns (for commercial
volumes). In the case of HBT device wafers, the transistor gate length is
determined by the thickness of the vertical base layer, which is a function of
the device manufacturer's process expertise rather than a limitation of current
optical lithography techniques. Kopin is currently manufacturing device wafers
in commercial volumes with a vertical base layer thickness of approximately 0.05
microns, therefore enabling the design of faster circuits.
HBT device wafers also offer other advantages over GaAs FET wafers for certain
applications. For example, power amplifier circuits based on the Company's
device wafers run on a single power supply voltage and have excellent signal
linearity and power efficiency that enable digital wireless handset designers to
eliminate certain costly components and contribute to longer battery life.
Kopin's HBT device wafers also enable the design of integrated circuits that
operate at a wider range of temperatures, especially as temperatures increase,
due to their greater resistance to noise. This resistance is due to the higher
voltages that vertical base layers support compared to conventional gates used
in GaAs FET devices. Kopin's HBT technology, expertise and processes also offer
a number of advantages when compared to those of other manufacturers of HBT
wafers, such as the uniform, repeatable growth of atomic layers, higher
frequency performance, greater manufacturing throughput, the ability to make
larger diameter HBT device wafers, and the development of device wafers from new
compounds, such as indium gallium phosphide ("InGaP").
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CyberDisplay Products
The Company's principal CyberDisplay product is a miniature display (0.24 inch
diagonal) which uses a lens and backlight to deliver high resolution data and
video images. In contrast to current passive matrix LCD and AMLCD approaches,
the CyberDisplay product utilizes high quality, single crystal silicon--the same
high quality silicon that is 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 the Company's Wafer-
Engineering technology. Before it is transferred to glass, the thin film is
patterned into an integrated circuit (including the active matrix, driver
circuitry and other logic circuits) in an integrated circuit foundry, so that
the transferred layer is a fully-functional active matrix integrated circuit.
The Company's Wafer-Engineering technology enables the production of transparent
circuits, in contrast to conventional silicon circuits, which are opaque. As
with conventional AMLCDs, the display's imaging properties are a result of the
formation of a liquid crystal layer over the transparent active matrix
integrated circuit. The Company believes that this manufacturing process offers
several advantages over other manufacturing approaches with regard to small form
factor displays, including greater miniaturization, reduced cost, improved
reliability, full color capability and higher definition.
The Company's use of high quality single crystal silicon in the manufacture of
CyberDisplay products offers several advantages. High quality silicon enables
high speed displays which operate at 180 frames per second, compared to 60
frames per second for most AMLCDs. At this higher cycle speed, the Company is
able to produce full color displays without using color filters. Colors are
generated by using a backlight comprised of three LEDs that generate 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, in turn decreasing the size, weight, and power
requirements of the color display. Furthermore, the color pixels are not
spatially separated as in conventional AMLCDs, resulting in sharper color
images.
The Company's display products have the additional advantage of being
fabricated using conventional integrated circuit lithography processes. These
processes enable the manufacture of smaller active matrix circuits, resulting in
comparable or higher resolution AMLCDs relative to conventional displays. The
Company expects that its display products will benefit from further general
technology advances in the design and production of integrated circuits and
AMLCDs, resulting in further improvements in resolution and miniaturization.
The Company believes that the CyberDisplay product's lower power consumption,
high resolution, cost-effectiveness and color capability makes it well-suited
for portable, high information content applications.
Strategy
The Company's objective is to become a leading supplier of advanced
semiconductor device wafers and miniature displays that enable its customers to
develop and manufacture high volume, differentiated communications and consumer
electronics devices. The critical elements of the Company's strategy include:
. Target Communications and Consumer Electronics Industries. The Company's
products are targeted at high growth applications, including digital and
video cameras, camcorders, digital wireless handsets, pagers, smart card
viewers, and other electronic devices in the communications and consumer
electronics industries. The Company believes that its device wafer and
display products are well-suited for these applications and will allow its
customers to develop and market an improved generation of products for these
target industries.
. Develop Strong Relationships with Strategic Customers. The Company seeks
to develop relationships with key customers in targeted industries to
promote the use of Kopin's device wafers and CyberDisplay products. In
addition to its established device wafer customer, Conexant, the Company has
entered into agreements with respect to CyberDisplay products with Siemens,
Motorola, Gemplus and FujiFilm. The Company works closely with its customers
to help them design and develop cost-effective products based on its device
wafer and display solutions. With respect to its display products, the
Company believes that these relationships will allow the Company to increase
its marketing reach and more rapidly increase its sales volume. Furthermore,
the Company believes that if the sales volume grows quickly enough, the
Company's display products may become accepted as an industry standard
reference platform, which in turn will serve as a greater incentive for
manufacturers of portable products and related components to integrate the
Company's display products into their products. Accordingly, the Company
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anticipates pricing competitively against existing display products to
reduce the adoption cycle time of its CyberDisplay products.
. Maintain Technological Leadership. The Company believes that its ability
to develop innovative products based on its extensive Wafer-Engineering
technology capabilities enhances the opportunity for growth within its
targeted markets. By continuing to invest in research and development, Kopin
is able to add to its expertise in the design of innovative, high
resolution, small form factor displays and GaAs device wafers. The Company
intends to continue to focus its development efforts on advanced
semiconductor device wafers and proprietary miniature displays, both of
which the Company believes have a broad range of applications.
. Maximize Production Efficiencies. The Company believes that its success
will depend in part on its ability to be a low cost manufacturer. The
Company continually strives to reduce the cost of its device wafers by
refining its advanced processes to increase manufacturing efficiencies while
maintaining the quality of its products. Since late 1996, the Company has
added two production lines at its device wafer facility, and anticipates
adding more production lines in 1999 which are expected to become
operational in the second half of 1999.
. Leverage Integrated Circuit and Display Industries' Infrastructure. The
Company believes that an important advantage of its approach to
manufacturing CyberDisplay products is the use of standard integrated
circuit fabrication and LCD packaging technologies. This capability leads to
greater production capacity and allows the Company to reduce greatly the
substantial capital investment and significant process development costs
typically needed for the manufacture of advanced LCDs. Additionally, the
Company believes it will continue to be aided by general technological
advances in the design and fabrication of integrated circuits, as well as
advances in LCD technology and manufacturing processes, that can be applied
to the manufacture of its display products. This capability enables the
Company to engage third-party manufacturers for certain fabrication and
packaging of CyberDisplay products, and allows the Company to rapidly take
advantage of new technologies, cost-efficiencies and increased production
capabilities of these third-party manufacturers.
Products, Markets and Customers
Gallium Arsenide Products
The Company develops and manufactures application specific gallium arsenide
products, primarily HBT device wafers for advanced integrated circuit
applications and optoelectronic products. The Company's device wafers are
manufactured using metal organic chemical vapor deposition ("MOCVD")
semiconductor growth techniques. The Company believes it is one of the world's
leading suppliers of HBT device wafers and is currently supporting volume
production of three-inch and four-inch device wafers, with production of six-
inch device wafers. Kopin's primary HBT device wafer product is the aluminum
gallium arsenide ("AlGaAs") emitter. Using Wafer-Engineering technology, the
Company deposits films of atomic-level thickness on substrate materials,
creating vertically oriented devices. The Company can vary the manufacturing
process to create products with different characteristics to suit the
requirements of particular customers.
Using Kopin's HBT device wafers, the Company's customers have developed power
amplifiers for wireless handsets, which the Company believes have performance
advantages over GaAs FET solutions. These components, in addition to operating
at very high frequencies, have low distortion and are power efficient. At
present, the Company's HBT device wafer products have been used predominantly in
Code Division Multiple Access (CDMA) power amplifiers, but the Company believes
that these wafer products are applicable in and can provide the same benefits to
the Global System Mobile (GSM), Time Division Multiple Access (TDMA) and third
generation ("3G") wireless handset standards. In particular, 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, which equipment
is likely to require higher performance semiconductor technology such as the
Company's HBT device wafers.
The Company's device wafers are typically manufactured for customer-specific
integrated circuits. Once an integrated circuit manufacturer has designed in a
particular device wafer, the Company believes that it is difficult for the
supplier of that device wafer to be replaced with respect to that particular
integrated circuit. The Company's largest customer for its device wafers is
Conexant, with whom the Company has collaborated on the manufacturing and
development of HBT device wafers and related integrated circuits for several
years. For the year ended December 31, 1998, 87% of Kopin's product revenues
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were derived from the sale of gallium arsenide products. Other customers of the
Company's device wafers include Raytheon Company, Northrop Grumman Corporation,
Siemens, Mitsubishi Electric Corporation, Hewlett Packard Company and Northern
Telecom.
CyberDisplay Products
The CyberDisplay product is a miniature (0.24 inch diagonal) high density 320
x 240 color or monochrome AMLCD. When illuminated by a backlight and viewed
through a lens, the CyberDisplay product displays high resolution data and video
images equivalent to viewing a 20 inch diagonal screen from a distance of five
feet. Kopin sells CyberDisplay products to customers either as a single
component or together with a lens and backlight as a unit. The Company believes
that the extremely small size and high image quality of the CyberDisplay product
makes it suitable for digital cameras, camcorders, PCDs such as digital wireless
handsets, pagers and other applications, where there is a demand for enhanced
functionality, particularly to display more information while retaining the
portability of these products.
There are several potential applications for the CyberDisplay product. The
CyberDisplay product is expected to be used in digital cameras and camcorders to
allow the user to view previously stored images as well as for replacement of
traditional viewfinders. CyberDisplay products are expected to be incorporated
in PCDs to allow the user to interactively view data such as e-mail, facsimiles,
Internet web pages and other information. The Company believes that there may be
numerous other applications for CyberDisplay products, including use in video
cameras and other consumer electronics devices.
The Company's customers for CyberDisplay products are currently developing
applications for digital cameras, camcorders, digital wireless handsets and
accessories, pagers and other portable communications devices. The Company's
strategy is to enter into relationships with these and other customers to expand
the market for its display devices and to become an industry standard platform.
Products using CyberDisplay products are expected to be introduced in the second
half of 1999.
Sales and Marketing
The Company principally sells its device wafer products directly to integrated
circuit manufacturers in the United States, Europe and Asia. Sales of the
Company's device wafers to customers in Japan are made primarily through a
foreign distributor. The Company sells CyberDisplay products to OEM customers on
a direct basis. Under the terms of an agreement with the Company, Motorola has
commenced the marketing of CyberDisplay products on a worldwide basis.
The Company believes that the technical nature of its products and markets
demands a commitment to close relationships with its customers. The sales and
marketing staff, assisted by the technical staff and senior management, visit
prospective and existing customers worldwide on a regular basis and stay in
close contact with customers. The Company believes that these contacts are vital
to the development of a close, long-term working relationship with its
customers, and in obtaining regular forecasts, market updates, and information
regarding technical and market trends. The Company also participates in
industry-specific trade shows and conferences.
Kopin's design and engineering staff is actively involved with a customer
during all phases of prototype design and production by providing the customer
with engineering data, up-to-date product application notes, following up with
the customer's engineers on a regular basis, and assisting in resolving
technical problems by working with the customer's engineers both on and off
site. In most cases the Company's technical staff work 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. The Company has
established a prototype product design facility in Los Gatos, California to
assist the Company's customers in incorporating the Company's products into
their own and to reduce the time required to bring such end-products to the
marketplace. This strategy helps customers accelerate their design process,
achieve cost-effective and manufacturable designs, and ensure a smooth
transition into high volume production.
Product Development
The Company believes that continued introduction of new products in its target
markets is essential to its growth. The Company has assembled a group of highly
skilled engineers to work internally and with its customers to continue the
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Company's product development efforts. For the years ended December 31, 1998,
1997 and 1996 , the Company incurred total research and development expenses of
$9,613,237, $10,424,285 and $16,467,098, respectively, including research and
development expenses related to the Company's internal development programs for
its display products and device wafers of $5,659,362, $7,622,614 and $9,876,082,
respectively.
Gallium Arsenide Products
Kopin intends to continue developing gallium arsenide products for advanced
integrated circuit applications from other compound materials. The Company is
working closely with several of its major customers in the development of the
next generation of device wafers, particularly with respect to increasing the
application of its InGaP technology. The Company believes that InGaP device
wafers are simpler to process and result in greater yields for certain products
made by the Company's customers. Kopin is currently manufacturing device wafers
with a layer thickness of approximately 0.05 microns, and is developing
manufacturing processes to further reduce this thickness. The decrease in base
layer thickness will provide faster transistor performance, thus producing
faster circuits. The Company has equipment and facilities in place to
manufacture, and is developing manufacturing processes for production of six-
inch device wafers, in anticipation of six-inch GaAs substrates becoming more
commercially available in 1999.
CyberDisplay
The Company's product development efforts are focused towards continually
enhancing the features and functions of the CyberDisplay product. A principal
focus of this effort is the Company's development of, and ability to manufacture
very small active matrix pixels, which it will use in succeeding generations of
the CyberDisplay product. The pixel size of the current CyberDisplay product is
15 microns and the Company believes it can achieve a pixel size of less than 10
microns in commercial production. This 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. The
Company expects future CyberDisplay products to have resolutions of 640 x 480
and higher. While Kopin is working on the commercialization of even higher
resolutions for the CyberDisplay product, the Company has already demonstrated
640 x 480, 800 x 600 and 1,280 x 1,024 resolution displays in a 0.75 inch format
as well as 2,560 x 2,048 resolution displays in a 1.5 inch format. The Company
is also working on further decreasing the already low power consumption of the
CyberDisplay product by continuing to evolve its display designs to improve the
power efficiency of products which incorporate CyberDisplay products. Additional
display development efforts include further automation of final display assembly
processes, and increasing the quantity of CyberDisplay active matrix pixel
arrays processed on each wafer by further reducing the display size and using
increasingly precise manufacturing techniques.
Other Wafer-Engineering Technology Applications
The Company is exploring the potential for using its innovative integrated
circuit lift-off technology for other advanced electronics applications. The
Company has developed techniques to transfer thin film displays and integrated
circuits to alternative materials, such as plastic and other flexible surfaces,
which the Company believes could enable a new class of applications, including
three-dimensional stacked integrated circuits, flexible displays, conformal
electronics and next generation flexible smart cards.
Funded Research and Development
The Company has entered into various development contracts with agencies of
the federal government. These contracts help support the continued development
of the Company's core technologies. The Company intends to continue to pursue
other federal government development contracts for applications that relate to
the Company's commercial product applications. The Company's contracts with
government agencies contain certain milestones relating to technology
development and may be terminated by the government agencies prior to completion
of funding. The Company's policy is to retain its proprietary rights with
respect to the principal commercial applications of its technology. To the
extent technology development has been funded by a federal agency, under
applicable federal laws, such agency has the right to obtain a non-exclusive,
non-transferable, irrevocable, fully-paid license to practice or have practiced
such technology for governmental use. Revenues attributable to research and
development contracts and for the years ended December 31, 1998, 1997 and 1996 ,
totaled $3,679,582, $3,282,974 and $6,291,172, respectively.
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Competition
Gallium Arsenide Products
With respect to its device wafer products, the Company presently competes
with several companies, including The Furakawa Electric Co., Ltd., Epitronics,
Emcore Corporation, Epitaxial Products International and Hitachi Cable, as well
as integrated circuit manufacturers with in-house wafer growth capabilities,
such as TRW Inc., RF Micro Devices, and Fujitsu Limited. In the gallium arsenide
business, competition could become increasingly intense as new entrants emerge
to address the high growth markets that Kopin's products address. The production
of GaAs integrated circuits has been and continues to be more costly than the
production of silicon integrated circuits. Although the Company has reduced
production costs of its HBT device wafers by achieving higher volumes, there can
be no assurance that the Company will be able to continue to decrease production
costs. In addition, the Company believes the costs of producing GaAs integrated
circuits by its customers will continue to exceed the costs associated with the
production of competing silicon integrated circuits. As a result, the Company
must target markets where the higher cost associated with GaAs integrated
circuits is justified by their superior performance. There can be no assurance
that the Company can continue to identify markets which require performance
superior to that offered by silicon solutions or that the Company will continue
to offer products which provide superior performance to offset the cost
differentials. The GaAs materials industry has been characterized by rapid and
significant technological advances. There can be no assurance that the Company
will be able to enhance its products to include these advances on a timely
basis, if at all, or that the Company will have sufficient funds to invest in
new technologies or products or processes.
Displays
The display market is highly competitive and is currently dominated by large
Asian electronics companies including Sharp Corporation, Hitachi, Ltd., Seiko
Corporation, Toshiba Corporation ("Toshiba"), Sony Corporation, NEC
Corporation, Sanyo Electric Co., Ltd. and Display Technologies, Inc., a joint
venture of IBM Corporation and Toshiba. The display market consists of multiple
segments, each focusing on different end-user applications applying different
technologies. Flat panel AMLCDs have experienced rapid growth as the market for
laptop computers has grown with the improvements in performance and cost. Most
of the companies that manufacture AMLCDs have substantially greater financial,
technical, marketing, manufacturing, and personnel resources than the Company.
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 the Company's display product offerings will also depend
upon its ability to compete against other types of more well-established
products such as traditional AMLCD-based products as well as the adoption of the
CyberDisplay product in the industry as an alternative to traditional AMLCD-
based products. There can be no assurance that the Company will be able to
compete against these companies and technologies.
There are also a number of alternative display technologies in production and
under development including passive matrix LCD and light emitting diode
("LED"), reflective, field emission display, plasma, organic LED and virtual
retinal displays, some of which target the high performance small form factor
display markets in which the Company's display products are sold. There are many
large and small companies that manufacture or have in development products based
on these technologies. The CyberDisplay product will compete with other displays
utilizing these and other competing display technologies. There can be no
assurance that the Company will be able to compete successfully against these
companies.
9
<PAGE>
Patents, Proprietary Rights and Licenses
An important part of the Company's product development strategy is to seek,
when appropriate, protection for its products and proprietary technology through
the use of various United States and foreign patents and contractual
arrangements. The Company intends to prosecute and defend its proprietary
technology aggressively. The Company owns more than 50 issued United States
patents and more than 50 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, the Company is licensed by MIT under 29 issued
United States patents, 4 pending United States patent applications, and some
foreign counterparts to these United States patents and applications. The
Company's United States patents expire at various dates through September 2014.
The United States patents licensed to the Company by MIT expire during the
period running at various dates through November 2011.
In 1985, the Company obtained a license from MIT to certain patents and patent
applications directed to device wafers and related technology. The license
grants to the Company a worldwide license to make, have made, use, and sell
products covered by the licensed patents for the life of these patents. The
license is exclusive with respect to commercial applications until April 22,
1999, and becomes non-exclusive thereafter. In 1995, the Company obtained an
additional license from MIT to certain optical technology. The license grants to
the Company 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 there can be no assurance that patents will issue from currently pending or
future applications or that the Company's existing patents or any new patents
that may be issued will be sufficient in scope or strength to provide meaningful
protection or any commercial advantage to the Company. The Company 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, the Company cannot be certain
that it was the first to conceive of inventions covered by pending patent
applications or the first to file patent applications on such inventions. There
can be no assurance that the Company's pending patent applications or those of
its licensors will result in issued patents or that any issued patents will
afford protection against a competitor. In addition, there can be no assurance
that others will not obtain patents that the Company would need to license,
circumvent or cease manufacturing and sales of products covered by such patents,
or that such licenses, if needed, would be available to the Company on favorable
terms, if at all.
There can be no assurance that foreign intellectual property laws will protect
the Company's intellectual property rights. Furthermore, there can be no
assurance that others will not independently develop similar products, duplicate
the Company's products or design around any patents issued to the Company. The
Company's 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 the patent rights of the Company. Although the Company is not aware of
any pending or threatened patent litigation against the Company, the Company may
be notified, from time to time, that it could be or is infringing certain
patents and other intellectual property rights of others. Litigation, which
could result in substantial cost to, and diversion of resources of, the Company
even if the outcome is favorable to the Company, may be necessary to enforce
patents or other intellectual property rights of the Company or to defend the
Company 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 the Company for patent infringement, the Company 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. No assurance can be given 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 have a material adverse effect on the Company's business, results of
operations and financial condition.
The Company also attempts to protect its proprietary information with
contractual arrangements and under trade secret laws. The Company believes that
its future success will depend primarily upon the technical expertise, creative
skills and management abilities of its officers and key employees rather than on
patent ownership. Company 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 the employ of the
Company. Agreements with consultants generally provide that rights to inventions
made by them while consulting for the Company will be assigned to the Company
unless such assignment is
10
<PAGE>
prohibited by the terms of any agreements with their regular employers.
Agreements with employees, consultants and collaborators contain provisions
intended to protect further the confidentiality of the Company's proprietary
information. To date, the Company has had no experience in enforcing such
agreements. There can be no assurance that these agreements will not be
breached, that the Company would have adequate remedies for any breaches, or
that the Company's trade secrets will not otherwise become known or be
independently developed by competitors.
Government Regulations
The Company is 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 its manufacturing process.
Although the Company believes that its activities conform to presently
applicable environmental regulations, the failure to comply with present or
future regulations could result in fines being imposed on the Company,
suspension of production or a cessation of operations. Any failure of the
Company to control the use of, or adequately restrict the discharge of,
hazardous substances, or otherwise comply with environmental regulations, could
subject it to significant future liabilities. In addition, although the Company
believes that its past operations conformed with then applicable environmental
laws and regulations, there can be no assurance that the Company has not in the
past violated applicable laws or regulations, which violations could result in
remediation or other liabilities, or that past use or disposal of
environmentally sensitive materials in conformity with then existing
environmental laws and regulations will not result in remediation or other
liabilities under current or future environmental laws or regulations.
Investments in Related Businesses
The Company has made certain equity investments in Kowon Technology Co., Ltd.
("Kowon"), a manufacturer of gallium arsenide optoelectronic products located in
Korea, GMT Microelectronics, Inc. ("GMT"), a merchant integrated circuit foundry
and Kendin Semiconductor, Inc. ("Kendin"), a developer and manufacturer of
integrated circuits for data communications and smart card applications. In 1998
the Company made a $2,000,000 investment in Kowon for which the Company received
a 65% equity interest. The 1998 financial statements of Kowon are consolidated
with those of Kopin beginning in the second quarter of 1998. Kowon's results of
operations are principally denominated in won and are subject to exchange rate
fluctuations. At December 31, 1998, the Company's investments in GMT and Kendin
totaled approximately $1,100,000 and $2,535,000, respectively, representing
approximately 7% and 19.7% of the outstanding equity of each company,
respectively. Kowon, GMT and Kendin are privately held companies. In addition,
the Company has made investments in other companies which represent less than 5%
of the outstanding equity of these companies. The Company has no obligations
associated with these investments. The Company may from time to time make
further equity investments in these and other companies engaged in certain
aspects of the flat panel display and electronics industries as part of its
business strategy. These investments may not provide the Company with any
financial return or other benefit and there can be no assurance that any losses
by these companies or associated losses in the Company's investments will not
have a material adverse effect on the Company's business, results of operations
and financial condition.
The Company also made an investment in Forte Technologies, Inc. ("Forte") over
a period of two years, commencing in October of 1994. As a result of declining
sales and results of operations of Forte, the Company recorded in the fourth
quarter of 1996 a writedown in connection with Forte totaling $3,900,000. In
March 1997, Forte filed a voluntary petition seeking protection from its
creditors under Chapter 11 of the United States Bankruptcy Code. In November
1997, Interactive Imaging Systems, Inc. ("IIS") (previously named Kaotech
Corporation), a newly organized entity (of which the Company owned approximately
19.5%) purchased substantially all of the assets of Forte, subject to certain
liens, for approximately $60,000. This purchase price was determined by arms-
length negotiations among the Company, the debtor-in-possession and the
creditor's committee, and approved by the bankruptcy court with notice to all
creditors. In December, 1998, IIS undertook a plan of recapitalization. Under
the plan, Kopin obtained a nominal interest in the equity of the new IIS and a
minority interest in the equity of Interactive Pictures Corporation ("IPIX"), a
developer of interactive photo technology for use on the Internet, in exchange
of its previous interest in IIS and a net payment of $125,000.
11
<PAGE>
Employees
As of December 31, 1998, the Company and its subsidiaries employed 169 full-
time and 7 part-time individuals. Of these, 13 hold Ph.D. degrees in Material
Science, Electrical Engineering or Physics. The Company's management and
professional employees have significant prior experience in semiconductor
materials, device wafer and display processing, manufacturing and other related
technologies. None of the Company's employees is covered by a collective
bargaining agreement. The Company considers relations with its employees to be
good.
Item 2. Properties
- ------------------
Kopin leases separate gallium arsenide product manufacturing and CyberDisplay
product fabrication facilities. The Company's device wafer manufacturing
facility is located, together with the Company's 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 on
October 31, 2002.
Kopin's 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. The Westborough facility is occupied under a lease that expires in
October 2000, with renewable options for up to four additional years at the
Company's election.
Kopin has entered into agreements with UMC and its affiliate, Unipac, under
which Unipac will assemble and package CyberDisplay products at its facility in
Taiwan. The Company believes that the capabilities and capacity of UMC and
Unipac, together with its existing facility in Westborough, provide Kopin with
sufficient production capacity through at least 1999.
In addition to its Massachusetts facilities, Kopin leases a 5,280 square foot
design facility in Los Gatos, California for developing prototypes of products
incorporating the CyberDisplay product. This facility is occupied under a lease
that expires in November 2002.
Kowon owns the two facilities in Kyunggi-Do, Korea in which it manufactures
its gallium arsenide optoelectronic products and in which its corporate
headquarters is located. The Korean facilities occupy 18,000 and 10,000 square
feet.
Item 3. Legal Proceedings
- -------------------------
The Company is not a party to any material litigation and is not aware of any
pending or threatened litigation that could have a material adverse effect upon
the Company's business, operating results or financial condition.
Item 4. Submission of Matter to a Vote of Security Holders
- ----------------------------------------------------------
Not Applicable.
12
<PAGE>
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company, who are elected on an annual basis to
serve at the discretion of the Board of Directors, are as follows:
Name Age Position with the Company
---- --- -------------------------
John C. C. Fan........... 55 President and Chief Executive Officer;
Chairman of the Board of Directors
Richard A. Sneider....... 38 Treasurer and Chief Financial Officer
Bor Yeu Tsaur............ 43 Executive Vice President, Display Operations
Ronald P. Gale........... 48 Chief Technology Officer and Vice President
Daily S. Hill............ 42 Vice President, Gallium Arsenide Operations
Glen G. Kephart.......... 55 Vice President of Marketing, Display Products
Matthew J. Micci......... 42 Vice President of Sales, Gallium Arsenide
Products
Matthew M. Zavracky...... 43 Vice President, Engineering
John C. C. Fan, President, Chief Executive Officer, Chairman of the
Board of Directors. Dr. Fan, a founder of the Company, has served as Chief
Executive Officer and Chairman of the Board of Directors of the Company since
its organization in 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 Treasurer and Chief Financial Officer of the Company since
September 1998. Mr. Sneider is a Certified Public Accountant and formerly a
partner of the international public accounting firm, Deloitte & Touche LLP.
Bor Yeu Tsaur, Executive Vice President, Display Operations. Dr.
Tsaur joined the Company 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 Vice
President of the Company 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 Director of Gallium Arsenide
Operations for the Company. From November 1987 to January 1995, Mr. Hill served
as a manager of the Company's device wafer product group.
Glen G. Kephart, Vice President, Marketing Display Products. Mr. Kephart
joined the Company as Vice President, Marketing Display Products in December
1995. Prior to joining the Company, 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.
13
<PAGE>
Matthew J. Micci, Vice President, Sales, Gallium Arsenide Products. Mr.
Micci joined the Company in January 1988 as Regional Director of Sales and
became Vice President, Sales in July 1990. Prior to joining the Company, 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.
14
<PAGE>
Part II
-------
Item 5. Market for Company's Common Stock and Related Stockholder Matters
- -------------------------------------------------------------------------
The Company's Common Stock trades on the Nasdaq Stock Market. The following
table sets forth the high and low sale prices per share of Common Stock as
reported on the Nasdaq Stock Market for the periods indicated.
1998 High Low
--------------------------------------------------------------------------
First Quarter 22 3/8 14
Second Quarter 22 3/8 16
Third Quarter 21 11 7/16
Fourth Quarter 21 1/4 11 1/2
1997
--------------------------------------------------------------------------
First Quarter 15 3/4 9 7/8
Second Quarter 16 3/4 10 1/2
Third Quarter 24 5/8 14 3/4
Fourth Quarter 29 16 5/8
The Company has never paid dividends on its common stock and has no present
plans to do so.
As of December 31, 1998, there were 237 stockholders of record of the
Company's Common Stock. These numbers do not reflect persons or entities who
hold their stock through nominee or "street" name.
15
<PAGE>
Item 6. Selected Financial Data
- -------------------------------
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
Product revenues $ 23,225 $ 13,110 $ 11,727 $ 7,161 $ 2,830
Research and development revenues 3,680 3,283 6,291 8,628 10,453
-------- -------- -------- -------- --------
26,905 16,393 18,018 15,789 13,283
-------- -------- -------- -------- --------
Expenses:
Cost of product revenues 15,509 8,636 9,489 6,059 1,981
Research and development-funded programs 3,954 2,802 6,591 8,757 10,531
Research and development-internal 5,660 7,623 9,876 6,856 4,070
General, administrative and selling 4,015 4,292 7,070 4,013 4,575
Other 384 327 598 403 255
Write-down of subsidiary assets - - 3,900 - -
Impairment charge 1,800 - 4,990 - -
-------- -------- -------- -------- --------
31,322 23,680 42,514 26,088 21,412
-------- -------- -------- -------- --------
Loss from operations (4,417) (7,287) (24,496) (10,299) (8,129)
Other income and expense:
Interest and other income 2,044 1,264 2,014 1,671 1,543
Interest expense (536) (235) (338) (363) (108)
-------- -------- -------- -------- --------
Loss before minority interest (2,909) (6,258) (22,820) (8,991) (6,694)
Minority interest in (income) loss of subsidiary (59) - 1,224 - -
-------- -------- -------- -------- --------
Net loss $ (2,968) $ (6,258) $(21,596) $ (8,991) $ (6,694)
======== ======== ======== ======== ========
Net loss per share - basic and diluted $(.25) $(.57) $(1.98) $(.95) $(.72)
======== ======== ======== ======== ========
Weighted average number of common shares outstanding 12,068 11,010 10,921 9,462 9,267
======== ======== ======== ======== ========
December 31,
--------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Balance Sheet Data:
Cash and equivalents and marketable securities $ 36,808 $ 19,046 $ 27,072 $ 41,997 $ 28,728
Working capital 39,359 21,466 27,687 44,727 30,566
Total assets 61,906 43,394 53,746 76,160 52,836
Long-term obligations (excluding current maturities) 4,209 1,959 2,793 1,605 2,235
Deficit (57,487) (54,519) (48,261) (26,665) (17,674)
Stockholders' equity 51,846 35,869 40,271 61,842 43,451
</TABLE>
16
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations
- -------------
Kopin is a leading developer and manufacturer of advanced semiconductor
materials and small form factor displays. The Company was incorporated in 1984
to further develop and commercialize certain semiconductor expertise developed
at MIT. The Company's primary revenue source since 1995 has been from sales of
its gallium arsenide products. In 1998, the Company commenced sales of
CyberDisplay products. The Company has been unprofitable since inception and,
at December 31, 1998, the Company had an accumulated deficit of $57,486,799.
For the year ended December 31, 1996, the Company's consolidated financial
statements include the results of operations of Forte, a majority-owned
subsidiary of the Company. In March 1997, Forte filed a voluntary petition
seeking protection from its creditors under Chapter 11 of the United States
Bankruptcy Code. As a result of such filing, the financial statements of Forte
are not consolidated with those of the Company subsequent to December 31, 1996.
Results of Operations
Year Ended December 31, 1998 ("1998") Compared to Year Ended December 31, 1997
("1997")
Revenues. The Company's total revenues were $26,904,997 for 1998 compared to
$16,393,018 during the corresponding period in 1997, an increase of $10,511,979,
or 64%. The Company's product revenues were $23,225,415 for 1998 compared to
$13,110,044 in 1997, an increase of $10,115,371, or 77%. The increase in
product revenues was primarily due to an increase in sales of gallium arsenide
products to $20,290,433 in 1998 compared to $11,950,428 in 1997, an increase of
$8,340,005, or 70%. The increase in sales of the Company's gallium arsenide
products was primarily due to the increased use of device wafers in various
wireless telecommunications products, particularly by the Company's major
customer, Conexant. Research and development revenues were $3,679,582 for 1998
compared to $3,282,974 in 1997, an increase of $396,608. The increase in
research and development revenues was primarily attributable to a increase in
contract revenues from agencies of the federal government. As a result of the
expirations of multi-year contracts with the federal government and the
Company's increased emphasis on product revenues, the Company believes that
research and development revenues will continue to decline as a percentage of
total revenues for the near future.
Cost of Product Revenues. Cost of product revenues, which is comprised of
materials, labor and manufacturing overhead related to the Company's products,
was $15,509,316 for 1998 compared to $8,636,199 in 1997. Included in 1998's cost
of product revenues is a charge totaling approximately $1,708,000 associated
with the write-down of inventory resulting from modification of certain
processes in the production of 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. Research and development expenses include expenses
incurred in support of internal development programs and programs funded by
agencies of the federal government, including development programs for display
devices and products, device wafers, circuit design costs, staffing, purchases
of materials and laboratory supplies, and fabrication and packaging of the
Company's display products. Funded research and development expenses were
$3,953,875 for 1998 compared to $2,801,671 in 1997, an increase of $1,152,204.
The increase in funded research and development expenses in 1998 was primarily
due to an increase in programs funded by agencies of the federal government.
Internal research and development expenses were $5,659,362 in 1998 compared to
$7,622,614 in 1997, a decrease of $1,963,252. The decrease in internal research
and development expenses was primarily a result of reduced development costs
incurred for fabrication and packaging of the Company's display products.
General, Administrative and Selling. General, administrative and selling
expenses consist of the expenses incurred by the Company's business development
and sales personnel, marketing expenses, and administrative and general
corporate expenses. General, administrative and selling expenses were $4,014,862
for 1998 compared to $4,292,383 in 1997, a decrease of $277,521. In addition,
general, administrative and selling 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.
17
<PAGE>
Impairment Charge. In 1998, the Company recorded a non-cash, impairment
charge totaling approximately $1,800,000 associated with the write-down of
equipment and intangible assets resulting from modification of certain processes
in the production of 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 $1,508,103 in 1998 compared to
$1,029,182 in 1997, an increase of $478,921. The increase was primarily due to
an increase in interest income of $779,834 to $2,043,886 in 1998 from $1,264,052
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 obtained by the Company.
Results of Operations
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996 ("1996")
Revenues. The Company's total revenues were $16,393,018 for 1997 compared to
$18,018,253 ($15,476,221 excluding Forte) during the corresponding period in
1996, a decrease of $1,625,235. The Company's product revenues were $13,110,044
for 1997 compared to $11,727,081 ($9,185,049 excluding Forte) in 1996, an
increase of $1,382,963. Product revenues from sales of the Company's gallium
arsenide products were $11,950,428 in 1997 compared to $8,346,377 in 1996, an
increase of $3,604,051, or 43%. The increase in product revenues was due to a
$3,924,995 increase in sales of gallium arsenide products 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 the Company's
gallium arsenide products was primarily due to the increased use of device
wafers in various wireless telecommunications products, particularly by the
Company's major customer, Conexant. Research and development revenues were
$3,282,974 for 1997 compared to $6,291,172 in 1996, a decrease of $3,008,198.
The decrease in research and development revenues was primarily attributable to
a decrease in contract revenues from agencies of the federal government. In
1994, the Company received a $10,658,000 multi-year contract award from Defense
Advanced Research Projects Agency. The Company recorded revenues under this
contract of $492,000 in 1997 compared to $3,441,000 in 1996, a decrease of
$2,949,000.
Cost of Product Revenues. Cost of product revenues, which is comprised of
materials, labor and manufacturing overhead related to the Company's products,
was $8,636,199 for 1997 compared to $9,488,702 ($6,733,054 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 gallium arsenide
products, resulting in lower unit costs, and the inclusion in the 1996 financial
results of shipments of head-mounted display systems by Forte.
Research and Development. Research and development expenses include expenses
incurred in support of internal development programs and programs funded by
agencies of the federal government, including development programs for display
devices and products, device wafers and head-mounted display systems, circuit
design costs, staffing, purchases of materials and laboratory supplies, and
fabrication and packaging of the Company's display products. Funded research and
development expenses were $2,801,671 for 1997 compared to $6,591,016 in 1996, a
decrease of $3,789,345. The decrease in funded research and development expenses
in 1997 was primarily due to a reduction in programs funded by agencies of the
federal government. Internal research and development expenses were $7,622,614
in 1997 compared to $9,876,082 ($9,278,537 excluding Forte) in 1996, a decrease
of $2,253,468. The decrease in internal research and development expenses was
primarily a result of reduced development costs incurred for fabrication and
packaging of the Company's display products, as well as the inclusion of
$597,545 of such expenses incurred by Forte during the corresponding period in
1996.
General, Administrative and Selling. General, administrative and selling
expenses consist of the expenses incurred by the Company's business development
and sales personnel, marketing expenses, and administrative and general
corporate expenses. General, administrative and selling expenses were $4,292,383
for 1997 compared to $7,070,275 ($4,188,658 excluding Forte) in 1996, a decrease
of $2,777,892. The decrease in general, administrative and selling expenses in
1997 was primarily due to the inclusion of expenses of $2,881,617 incurred by
Forte in 1996. In addition, general, administrative and selling 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 the Company's investment in Forte.
18
<PAGE>
Other Income, Net. Other income, net was $1,029,182 in 1997 compared to
$1,676,224 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.
Liquidity and Capital Resources
The Company has financed its operations primarily through public and
private placements of its equity securities, research and development contract
revenues, and sales of its gallium arsenide and display products. The Company
believes its available cash resources will support its operations and capital
needs for at least the next twelve months.
As of December 31, 1998, the Company had cash and equivalents and marketable
securities of $36,808,218 and working capital of $39,358,733 compared to
$19,046,284 and $21,465,606, respectively, as of December 31, 1997. The increase
in cash and equivalents and marketable securities was primarily provided by cash
from operations of $2,338,000, proceeds totaling $17,171,000 from a public
offering of the Company's common stock and the receipt of a term loan facility
of $5,000,000. This increase was offset by other asset expenditures of
$2,800,000, capital expenditures of $2,946,000, and principal payments on notes
payable and long-term obligations of $2,743,000. In February 1998, the Company
completed a public offering of 2,000,000 shares of common stock at a price of
$19.00 per share. Of the total shares sold, 1,000,000 shares were sold by Kopin
and the other 1,000,000 shares were sold by a shareholder. Net proceeds to the
Company totaled approximately $17,171,000. In March 1998, the Company entered
into a $5,000,000 term loan which requires the Company to make quarterly
principal payments of $250,000 plus interest at a floating rate based upon
LIBOR. This term loan is secured by the Company's accounts receivable.
The Company periodically enters into various long-term debt arrangements to
finance equipment purchases and other activities. As of December 31, 1998, debt
obligations totaled $6,208,968, of which $1,999,494 is payable in the next
twelve months.
The markets the CyberDisplay product is targeted at are large sales volume
consumer electronic and wireless communication applications. The Company
believed that in order to obtain customers in these markets, it was necessary to
make significant investments in equipment and infrastructure prior to obtaining
sales orders for the CyberDisplay product. In addition, the Company has spent
approximately $5,000,000 and $7,000,000 annually in 1998 and 1997, respectively,
to develop and improve CyberDisplay products. The Company believes that it will
be necessary to continue to make significant investments in equipment and
development in order to produce the current CyberDisplay product and higher
resolution displays. As a result of the current cost structure of the
CyberDisplay product line, the ability of the CyberDisplay product line to
achieve profitability is dependent upon achieving significant sales volumes and
reasonable gross profit margins. The Company has not yet produced the
CyberDisplay product at volumes necessary to achieve profitability. Accordingly,
there can be no assurances that the Company will obtain sufficient sales
volumes, or if sufficient sales volumes are achieved, produce the CyberDisplay
at a gross margin which will allow the product line to generate a profit.
The Company leases a 74,000 square foot manufacturing facility. This facility,
which includes 10,000 square feet of environmentally controlled clean rooms, is
used primarily for the Company's production of display products. This facility
is occupied under a lease that expires in October 2000, with renewable options
for up to four additional years at the Company's election. The Company will make
lease payments of approximately $1.0 million per year over the remaining term of
the lease.
The Company expects to expend approximately $10,000,000 on capital
expenditures over the next twelve months, primarily for the acquisition of
equipment relating to the production of the Company's gallium arsenide products
and the manufacturing, packaging and testing of CyberDisplay products.
As of December 31, 1998, the Company had tax loss carryforwards of
approximately $45,000,000 which may be used to offset future taxable income.
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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, 1999. 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.
Year 2000
The Company has developed plans to address issues related to the impact on its
systems from the "Year 2000 Problem". Financial and operational systems are
being assessed and plans have been implemented to address systems modification
requirements.
The Company, utilizing both internal and external resources to address the
Year 2000 issue, expects to substantially complete this project by the third
quarter of calendar 1999. The current estimate of total project cost is
approximately $700,000, which includes the cost of purchasing certain equipment
and software, including financial accounting 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) are 30 percent of the cost and
external resources are the remaining 40 percent. Approximately 20 percent of the
total project cost has been spent through December, 1998, with the majority of
the remaining amount to be spent within the next year. 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.
The Company's products, which are Year 2000 compliant, require high quality
raw materials in order to achieve historical manufacturing yields and
performance. The Company requires suppliers to meet stringent quality standards
before the Company will accept their product. The Company is continually
performing an assessment of its key suppliers' Year 2000 readiness and their
plans for becoming Year 2000 compliant. Although the Company has multiple
suppliers for each raw material, failure by one or more key suppliers to achieve
Year 2000 readiness could impact the Company's ability to produce product at
historical levels. In addition, certain critical raw material suppliers allocate
capacity to the Company. Accordingly, there can be no assurance that if one or
more suppliers are unable to meet their commitments to the Company, the
remaining suppliers will be able to make-up the shortfall. Development of
contingency plans is in progress and will be developed in detail in 1999. There
can be, however, no assurance that the Company will adequately address the Year
2000 problem, that any contingency plans implemented by the Company would be
adequate to meet the Company's needs without materially impacting its
operations, that any such plan would be successful or that the Company's 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.
Seasonality
The Company's business is not seasonal in nature.
Inflation
The Company does not believe that its operations have been materially affected
by inflationary forces.
Item 7a. Quantitative and Qualitative Market Risk
The Company invests its excess cash in high quality government and corporate
financial instruments which bear minimal risk. The Company believes that the
effect, if any, of reasonably possible near-term changes in interest rates on
the Company's financial position, results of operations, and cash flows should
not be material. The Company sells its products to customers worldwide. The
Company maintains a reserve for potential credit losses and such losses have
been minimal. The Company is exposed to changes in foreign currency exchange
primarily through its translation of its foreign subsidiary's financial
position, results of operations, and cash flows.
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RISK FACTORS
Certain of the statements contained in this Annual Report on Form 10-K are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, that involve risks and uncertainties. The Company's
actual results could differ materially from those discussed here. Factors that
could cause or contribute to such differences include, but are not limited to,
those discussed below.
Potential Lack of Market Acceptance. The Company's product sales have been
derived primarily from its custom Wafer-Engineered device wafers. To date, the
Company has had limited sales of its display products. The CyberDisplay product
is a miniature display which uses a lens and backlight to deliver high
resolution data and video images. The Company's success will in large part
depend on the widespread adoption of this viewing format in the marketplace as
compared to a direct view display. The Company's success will also be dependent
upon the widespread acceptance of its customers' products. The Company's
competitors are investing substantial resources in the development and
manufacture of displays using a number of different technologies. In the event
these efforts result in the development of products that offer advantages over
the Company's products, and the Company is unable to improve its technology or
develop or acquire alternative technology that is competitive, the Company's
business, results of operations and financial condition will be materially and
adversely affected. Kopin's prospective customers for its display products are
principally manufacturers in the wireless handset, pager, digital camera,
camcorder, smart card and other consumer electronics industries that would use
CyberDisplay products in their products. These companies may be reluctant to
adopt Kopin's products because of perceived risks relating to the introduction
of the Company's display technology generally, concerns about end-user
acceptance of CyberDisplay products and the complexity, reliability, usefulness
and cost-effectiveness of the Company's display products compared to traditional
AMLCDs. In addition, these companies may be reluctant to rely upon a relatively
small company such as Kopin for a critical component. There can be no assurance
that the Company's prospective customers will adopt CyberDisplay products or
that the end-users of these prospective customers will accept CyberDisplay
products. There can be no assurance that the Company will be able to manufacture
the Cyberdisplay in the quantities ordered by prospective customers. The failure
of Kopin to achieve such market acceptance of CyberDisplay products or achieve
efficient manufacturing capability will have a material adverse effect on the
Company's business, results of operations and financial condition.
Kopin's customers for its gallium arsenide products are principally
manufacturers of integrated circuits for the telecommunications and data
communications markets. Current and prospective customers may be reluctant to
adopt Kopin's products to an extent greater than at present because of perceived
risks relating to GaAs technology generally or HBT GaAs technology in
particular. In addition, these customers may be reluctant to rely upon a
relatively small company such as Kopin for a critical component. There can be no
assurance that additional companies in Kopin's target markets will adopt its HBT
technology or that the companies that currently use the Company's HBT device
wafer products will continue to do so in the future.
History of Operating Losses; Accumulated Deficit. The Company has never
achieved profitability. As of December 31, 1998, the Company had an accumulated
deficit of $57,486,799. For 1998, 1997, and 1996, the Company incurred net
losses of $2,967,887, $6,257,769 and $21,596,364, respectively. There can be no
assurance that the Company will achieve or maintain profitability in the future.
If the Company continues to incur losses, the Company is likely to require
additional financing and there can be no assurance that the Company would be
able to secure additional financing or that such financing will be available on
favorable terms.
Potential Fluctuations in Results of Operations. The Company's quarterly and
annual results of operations are affected by a wide variety of factors that
could have a material adverse effect on total revenues and profitability from
period to period, including competitive pressures on selling prices; the timing
and cancellation of customer orders; availability of integrated circuit foundry
capacity and raw materials; fluctuations in yields; changes in product mix; the
Company's ability to introduce new products and technologies on a timely basis;
introduction of products and technologies by the Company's competitors; market
acceptance of the Company's and its customers' products; the level of orders
received which can be shipped in a quarter; the Company's ability to
successfully reduce costs; and the cyclical nature of the semiconductor
industry. Sales of end-user products incorporating the Company's products may
exhibit cyclical fluctuations based on factors such as capital expenditure
cycles of customers and new product introductions. Historically, average selling
prices in the semiconductor industry have decreased over the life of a product,
and as a result, the average selling prices of the Company's products are likely
to be subject to pricing pressures in the future. The Company's business is
characterized by short-term orders and shipment schedules, and the Company
generally permits orders to be canceled or rescheduled without significant
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penalty to the customer. Due to the absence of substantial noncancellable
backlog, the Company typically plans its production and inventory levels based
on internal forecasts of customer demand, which are highly unpredictable and can
fluctuate substantially. Because the Company is continuing to invest in capital
equipment and to increase its operating expenses for personnel and new product
development, the Company's business, results of operations and financial
condition would be materially and adversely affected if increased sales are not
achieved. As a result of the foregoing or other factors, the Company may
experience fluctuations in future results of operations on a quarterly or annual
basis which could have a material adverse effect on its business, results of
operations and financial condition.
Substantial Reliance on Certain Customers. Relatively few customers account
for a substantial portion of the Company's revenues. For the years ended
December 31, 1998, 1997 and 1996, revenues from multiple contracts with various
United States governmental agencies accounted for approximately 14%, 20% and
35%, respectively, of the Company's total revenues. Sales to Conexant accounted
for approximately 59%, 68%, and 39% of the Company's total revenues for 1998,
1997 and 1996, respectively. The Company expects that device wafer sales to
Conexant will continue to represent a significant portion of the Company's
revenues for the near future. A reduction in research and development contracts
from the United States government or a reduction or delay in orders from
Conexant or the Company's other customers, including reductions or delays due to
market, economic or competitive conditions in the semiconductor or display
industries, could have a material adverse effect on the Company's business,
results of operations and financial condition. Although some of the Company's
customers have entered into agreements obligating them to purchase a certain
amount of the Company's products, the Company's customers generally do not enter
into such agreements. In addition, customer orders generally can be canceled and
volume levels changed or delayed. The timely replacement of canceled, delayed or
reduced orders cannot be assured. The Company's results of operations have been
adversely affected in the past by the failure of anticipated orders to be
realized and by deferrals or cancellations of orders as a result of changes in
customer requirements. Canceled, delayed, or reduced commitments from any of the
Company's major customers, particularly Conexant, would have a material adverse
effect on the Company's business, results of operations and financial condition.
Uncertain Demand for High Information Content in Portable Products. The
Company's success in the display business will depend on the availability of
cost-effective wireless applications that support customer demand for high
resolution portable displays. Deployment of higher bandwidth infrastructure will
be needed to drive the development of value added wireless services (such as
wireless e-mail, facsimile and Internet access) to increase the demand for the
Company's display products. The Company's success will depend in large part on
the widespread implementation of this infrastructure and the cost-effectiveness
to the end-user of these services. Either a delay in such deployment or an
unacceptably high cost to the consumer would delay the rate of market adoption
of products based on Kopin's display technology.
Dependence on Marketing and Distribution Relationships. The Company has
entered into agreements with Motorola, Siemens, FujiFilm and Gemplus for the
marketing and distribution of certain of its current and anticipated display
products, and intends to continue to pursue these arrangements with other
potential customers. There can be no assurance that the Company will be
successful in maintaining current alliances or forming additional relationships
or that the Company's strategic customers will devote adequate resources to
accomplish such marketing and distribution or be successful in such efforts. The
failure of the Company to enter into these key relationships or the failure of
these customers to devote adequate resources to market or distribute the
Company's products could have a have a material adverse effect on the Company's
business, results of operations and financial condition.
Manufacturing Risks; Manufacturing Capacity Limitations. The Company is
subject to significant manufacturing risks. The manufacturing processes utilized
by the Company are highly complex and are periodically modified in an effort to
improve yields and product performance. Process changes or other problems that
occur in the complex manufacturing process can result in interruptions in
production or significantly reduced yields. From time to time, the Company has
experienced these problems, many of which are difficult to diagnose and time-
consuming or expensive to remedy. In particular, new process technologies or new
products can be subject to especially wide variations in manufacturing yields
and efficiency. There can be no assurance that the Company will not experience
manufacturing problems that result in delays in product introduction, delivery
delays or yield fluctuations, including problems associated with increases in
production volumes and increases in the complexity of the Company's products.
The Company is also subject to the risks associated with the shortage of raw
materials such as unprocessed wafers and packaging used in the manufacture or
assembly of the Company's products. The Company's business, results of
operations and financial condition would be materially and adversely affected if
it were to experience any significant disruption in the operation of its
facilities.
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The Company currently manufactures all of its device wafers at its
manufacturing facility located in Taunton, Massachusetts. The Company intends to
increase its production capacity in its Taunton facility to produce device
wafers up to six inches in diameter. Along with adding production equipment, the
Company will be required to successfully hire, train and manage additional
production personnel in order to successfully increase its production capacity
in accordance with its time schedule. The Company has no prior experience in
producing finished six-inch device wafers. In the event the Company's expansion
plans are not implemented on a timely basis for any reason, the Company could
become subject to production capacity constraints. Such constraints could have a
material adverse effect on the Company's business, results of operations and
financial condition.
The Company has limited experience manufacturing display products. The Company
is subject to the risk that the manufacture of such a small display may not ever
be commercially viable, as Kopin believes that no other company currently
manufactures a display of a size equivalent to the CyberDisplay product at
commercial quantities and prices. The Company's fabrication facility in
Westborough, Massachusetts is used in the development and packaging of
CyberDisplay products. The integrated circuit portion of the CyberDisplay
product is commercially produced by UMC. The Company has also established
packaging capability of CyberDisplay products at UMC's affiliate, Unipac. There
are certain significant risks associated with the Company's reliance on outside
foundries, including the lack of control over production capacity and delivery
schedules and limited control over quality assurance, manufacturing yields and
production costs. In addition, the operations of UMC and Unipac, both located in
Taiwan, are subject to risks associated with international commerce, including
unexpected changes in legal and regulatory requirements, changes in tariffs and
trade policies, and political and economic instability. There can be no
assurance that UMC and Unipac will be able to provide the required capacity and
quality on a timely basis to meet the Company's requirements. The Company is
dependent on these third-party manufacturers for the fabrication of integrated
circuits and the packaging of its display products. The termination or
cancellation of the Company's agreements with these companies, or the inability
of these companies to produce required components, would materially and
adversely affect the Company's ability to manufacture its products and would
require the Company to establish alternative manufacturing relationships. There
can be no assurance that the Company would be able to establish such
relationships on acceptable terms; in any event, the time required to establish
such substitute relationships could substantially delay the commercialization of
the Company's display products, which in turn, could have a material adverse
effect on the Company's business, results of operations and financial condition.
Competition. The display market is highly competitive and is currently
dominated by large Asian electronics companies including Sharp Corporation,
Hitachi, Ltd., Seiko Corporation, Toshiba Corporation ("Toshiba"), Sony
Corporation, NEC Corporation, Sanyo Electric Co., Ltd. and Display Technologies,
Inc., a joint venture of IBM Corporation and Toshiba. Most of these companies
have substantially greater financial, technical, marketing, manufacturing, and
personnel resources than the Company. 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 the Company's display
product offerings will also depend upon its ability to compete against other
types of more well-established products such as traditional AMLCD-based products
as well as the adoption of the CyberDisplay product in the industry as an
alternative to traditional AMLCD-based products. There can be no assurance that
the Company will be able to compete successfully against these companies.
There are also a number of alternative display technologies in production and
under development including passive matrix liquid crystal display ("LCD"),
light emitting diode ("LED"), reflective, field emission display, plasma,
organic LED and virtual retinal displays, some of which target the high
performance small form factor display markets in which the Company's display
products are sold. There are many large and small companies that manufacture or
have in development products based on these technologies. The CyberDisplay
product will compete with other displays utilizing these and other competing
display technologies. There can be no assurance that the Company will be able to
compete successfully against these companies.
With respect to its gallium arsenide products, particularly device wafer
products, the Company presently competes with several companies, including The
Furakawa Electric Co., Ltd., Epitronics, Emcore Corporation, Epitaxial Products
International and Hitachi Cable, as well as integrated circuit manufacturers
with in-house wafer growth capabilities, such as TRW Inc., RF Micro Devices, and
Fujitsu Limited. In the gallium arsenide business, competition could become
increasingly intense as new entrants emerge to address the high growth markets
that Kopin's products address. The production of GaAs integrated circuits has
been and continues to be more costly than the production of silicon integrated
circuits. Although the Company has reduced production costs of its HBT device
wafers by achieving higher volumes, there can be no assurance that the Company
will be able to continue to decrease production costs. In addition, the Company
believes the costs of
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producing GaAs integrated circuits by its customers will continue to exceed the
costs associated with the production of competing silicon integrated circuits.
As a result, the Company must target markets where the higher cost associated
with GaAs integrated circuits is justified by their superior performance. There
can be no assurance that the Company can continue to identify markets which
require performance superior to that offered by silicon solutions or that the
Company will continue to offer products which provide superior performance to
offset the cost differentials. The GaAs materials industry has been
characterized by rapid and significant technological advances. There can be no
assurance that the Company will be able to enhance its products to include these
advances on a timely basis, if at all, or that the Company will have sufficient
funds to invest in new technologies, products or processes.
New Products and Rapid Technological Change. The advanced semiconductor
wafer and display industries have been characterized by rapid technological
change and evolving industry requirements and standards. The Company believes
that these trends will continue. The Company's ability to compete will depend
upon its ability to enhance its existing products and to develop and market new
products to meet customer requirements. Successful product commercialization
depends on a number of factors, including new product definition, timely
completion, introduction and market acceptance of the Company's products and its
customers' products. There can be no assurance that the Company will adjust to
changing market conditions or be successful in introducing products or product
enhancements on a timely basis, if at all, or that the Company will be able to
market successfully these products and product enhancements once developed.
Further, there can be no assurance that the Company's products will not be
rendered obsolete by new industry standards or changing technology.
Dependence on Wireless Communications Markets. Substantially all of the
Company's product revenues are presently derived from, and are expected to
continue to be derived from, sales of products for wireless communications
applications. These markets are characterized by intense competition, rapid
technological change and short product life cycles. In addition, the wireless
communications equipment markets have undergone a period of rapid growth and
consolidation in the last few years. The Company's business, results of
operations, and financial condition would be materially and adversely affected
in the event of a significant slowdown in these markets. Products for wireless
communications applications are based on industry standards, which are
continually evolving. The emergence of new industry standards could render the
Company's products unmarketable or obsolete. There can be no assurance that the
Company will be able to successfully develop and introduce new products based on
emerging industry standards and the failure of the Company to introduce such
products on a timely basis, or at all, would have a material adverse effect on
the Company's business, results of operations and financial condition.
Uncertainty Relating to Patents and Proprietary Rights. The Company's
success depends in part on its ability to obtain patents and licenses and to
preserve other intellectual property rights covering its products and
manufacturing processes. To that end, the Company has obtained certain domestic
and foreign patents and intends to continue to seek patents on its inventions
when appropriate. With respect to CyberDisplay products, the Company relies upon
a combination of patent applications, patents and trade secrets to protect its
related technology and many of the applications for these products. With respect
to Wafer-Engineered materials, the Company primarily relies on trade secrets to
protect its processing technology.
The process of seeking patent protection can be time consuming and expensive
and there can be no assurance that patents will issue from currently pending or
future applications or that the Company's existing patents or any new patents
that may be issued will be sufficient in scope or strength to provide meaningful
protection or any commercial advantage to the Company. The Company 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, the Company cannot be certain
that it was the first to conceive of inventions covered by pending patent
applications or the first to file patent applications on such inventions. There
can be no assurance that the Company's pending patent applications or those of
its licensors will result in issued patents or that any issued patents will
afford protection against a competitor. In addition, there can be no assurance
that others will not obtain patents that would require the Company to license,
circumvent or cease manufacturing and sales of products covered by such patents,
or that such licenses, if needed, would be available to the Company on favorable
terms, if at all.
There can be no assurance that foreign intellectual property laws will protect
the Company's intellectual property rights. Furthermore, there can be no
assurance that others will not independently develop similar products, duplicate
the Company's products or design around any patents issued to the Company. The
Company's 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 the patent rights of
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the Company. Although the Company is not aware of any pending or threatened
patent litigation against the Company, the Company may be notified, from time to
time, that it could be or is infringing certain patents and other intellectual
property rights of others. Litigation, which could result in substantial cost
to, and diversion of resources of, the Company even if the outcome is favorable
to the Company, may be necessary to enforce patents or other intellectual
property rights of the Company or to defend the Company 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
the Company for patent infringement, the Company 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. No assurance can be given 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 have a material adverse effect on the Company's business, results of
operations and financial condition.
The Company also attempts to protect its proprietary information with
contractual arrangements and under trade secret laws. Company 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 the employ of the Company. Agreements with consultants generally provide that
rights to inventions made by them while consulting for the Company will be
assigned to the Company unless such assignment is prohibited by the terms of any
agreements with their regular employers. Agreements with employees, consultants
and collaborators contain provisions intended to protect further the
confidentiality of the Company's proprietary information. To date, the Company
has had no experience in enforcing such agreements. There can be no assurance
that these agreements will not be breached, that the Company would have adequate
remedies for any breaches, or that the Company's trade secrets will not
otherwise become known or be independently developed by competitors.
Dependence on Key Personnel. The Company's 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, the Company's
President and Chief Executive Officer, could have a material adverse effect on
the Company. The Company does not maintain any "key-man" insurance policies on
Dr. Fan or any other employees. In addition, the Company's success will depend
in significant part upon its ability to attract and retain highly-skilled
management, technical, and sales and marketing personnel. Competition for such
personnel is intense and there can be no assurance that the Company will be
successful in attracting and retaining such personnel.
Risks Associated with Managing an Expanding Business. Due to the level of
technical and marketing expertise necessary to support its existing and new
customers, the Company must attract highly qualified and well-trained personnel.
There may be only a limited number of persons with the requisite skills to serve
in these positions and it may become increasingly difficult for the Company to
hire such personnel. The Company has historically derived its revenues primarily
from research and development contracts with various agencies of the federal
government and sales of its device wafers. In order to achieve its business
objectives, the Company must continue to undergo substantial changes in its
operations to transition to a company which develops and manufactures advanced
semiconductor device wafer products and small form factor displays and markets
them to a broader commercial marketplace. This transition has placed, and is
expected to continue to place, significant strain on the Company's limited
administrative, operational and financial resources. Future expansion by the
Company may also significantly strain the Company's management, manufacturing,
financial and other resources, including required spending on capital
expenditures. There can be no assurance that the Company's systems, procedures,
controls and existing space will be adequate to support the Company's
operations. There can also be no assurance that the Company will be able to
finance such improvements. Failure to manage the Company's growth properly could
have a material adverse effect on the Company's business, results of operations
and financial condition.
Risks Associated with Possible Acquisitions and Investments. The Company may
pursue potential acquisitions of businesses, products and technologies that
could complement or expand the Company's business. The Company currently has no
commitments or agreements with respect to any acquisitions and there can be no
assurance that the Company will be able to identify any appropriate acquisition
candidates. If the Company identifies an acquisition candidate, there can be no
assurance that the Company will be able to successfully negotiate the terms of
any such acquisition, finance such acquisition or integrate such acquired
businesses, products or technologies into the Company's existing business and
products. The negotiation of potential acquisitions as well as the integration
of an acquired business could cause diversion of management's time and
resources, and require the Company to use its capital to consummate a potential
acquisition. Future acquisitions by the Company could result in potentially
dilutive issuances of equity securities, the incurrence of debt and contingent
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liabilities, amortization expenses and write-downs of acquired assets. For
example, the Company recorded a write-down of $3,900,000 in 1996 associated with
its investment in Forte Technologies, Inc., a developer of virtual reality head-
mounted systems and peripherals for the computer and entertainment markets. In
addition, the Company has made, and may from time to time in the future make,
investments in companies engaged in certain aspects of the flat panel display
and electronics industries as part of its business strategy. If the Company were
to complete any acquisitions or investments in the future, there can be no
assurance that, whether or not consummated, any such acquisition or investment
would not have a material adverse effect on the Company's business, results of
operations and financial condition.
Environmental Regulation. The Company is 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 its
manufacturing process. Although the Company believes that its activities conform
to presently applicable environmental regulations, the failure to comply with
present or future regulations could result in fines being imposed on the
Company, suspension of production or a cessation of operations. Any failure of
the Company to control the use of, or adequately restrict the discharge of,
hazardous substances, or otherwise comply with environmental regulations, could
subject it to significant future liabilities. In addition, although the Company
believes that its past operations conformed with then applicable environmental
laws and regulations, there can be no assurance that the Company has not in the
past violated applicable laws or regulations, which violations could result in
remediation or other liabilities, or that past use or disposal of
environmentally sensitive materials in conformity with then existing
environmental laws and regulations will not result in remediation or other
liabilities under current or future environmental laws or regulations.
Stock Price Volatility. The trading price of the Company's 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 the Company or its competitors, general conditions in the
wireless communications, semiconductor and display markets, changes in earnings
estimates by analysts, or other events or factors. In addition, the public stock
markets have experienced extreme price and trading volume volatility in recent
months. This volatility has significantly affected the market prices of
securities of many technology companies for reasons frequently unrelated to the
operating performance of the specific companies. These broad market fluctuations
may adversely affect the market price of the Company's Common Stock.
Item 8. Financial Statements and Supplementary Data
- ---------------------------------------------------
The financial statements of the Company required by this item are incorporated
in this report on pages F-1 through F-14. For other financial statements and
schedules along with independent auditors' reports thereon required under this
item, reference is made to Item 14 of this Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
- -----------------------------------------------------------------------
Financial Disclosure
- --------------------
Not Applicable.
26
<PAGE>
Part III
Item 10. Directors and Executive Officers of the Registrant
- -----------------------------------------------------------
(a) Directors. The information with respect to directors required by this item
is incorporated herein by reference from the Company's Proxy Statement relating
to the Company's Annual Meeting of Shareholders to be held on May 20, 1999 (the
"Proxy Statement").
(b) Executive Officers. The information with respect to executive officers
required by this item is set forth in Part I of this Report.
(c) Reports of Beneficial Ownership. The information with respect to reports
of beneficial ownership required by this item is incorporated herein by
reference from the Company's Proxy Statement.
Item 11. Executive Compensation
- -------------------------------
The information required under this item is incorporated herein by reference
from the Company's Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- -----------------------------------------------------------------------
The information required by this item is incorporated herein by reference from
the Company's Proxy Statement.
Item 13. Certain Relationships and Related Transactions
- -------------------------------------------------------
The information required by this item is incorporated herein by reference from
the Company's Proxy Statement.
27
<PAGE>
Part IV
<TABLE>
<CAPTION>
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
- -------------------------------------------------------------------------
<S> <C>
(a) Documents filed as part of the Report: Page
----
(1) Consolidated Financial Statements:
Index to Consolidated Financial Statements F-1
Independent Auditors' Report. F-2
Consolidated Balance Sheets at December 31, 1998 and 1997 F-3
Consolidated Statements of Operations and Comprehensive Loss for the years F-4
ended December 31, 1998, 1997 and 1996.
Consolidated Statements of Stockholders' Equity for the years ended December 31, F-5
1998, 1997 and 1996.
Consolidated Statements of Cash Flows for the years ended December 31, 1998, F-6
1997 and 1996.
Notes to Consolidated Financial Statements. F-7 to F-14
</TABLE>
(2) Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts
Schedules other than the one listed above have been omitted because of the
absence of conditions under which they are required or because the required
information is included in the financial statements or the notes thereto.
<TABLE>
<CAPTION>
(3) Exhibits
<S> <C>
3.1 Amended and Restated Certificate of Incorporation (2)
3.2 Amendment to Certificate of Incorporation (13)
3.3 Amended and Restated By-laws (2)
4 Specimen Certificate of Common Stock (1)
10.1 Form of Employee Agreement with Respect to Inventions
and Proprietary Information (1)
10.2 1985 Incentive Stock Option Plan, as amended (1)
10.3 1992 Stock Option Plan Amendment (14)
10.4 Form of Key Employee Stock Purchase Agreement (1)
10.5 License Agreement by and between the Company and
Massachusetts Institute of
Technology dated April 22, 1985, as amended (1)
10.6 Technology and Business Development Agreement, dated as of November 6, 1992
by and between the Company and Rockwell International Corporation
(confidential portions on file with the Commission) (2)
10.7 Facility Lease, by and between the Company and Massachusetts
Technology Park Corporation dated October 15, 1993 (3)
10.8 Master Sublease - Purchase Agreement, by and between the Company and
Massachusetts Industrial Finance Agency dated June 23, 1994 (4)
10.9 Contract by and between the Company and the Advanced Research Projects
Agency dated May 25, 1994(confidential portions on file with the
Commission) (4)
10.10 Joint Agreement by and between the Company and Philips Consumer Electronics
Company, Division of Philips Electronics North America Corporation dated
</TABLE>
28
<PAGE>
<TABLE>
<S> <C>
July 25, 1994 (confidential portions on file with the Commission) (5)
10.11 Cross License and Supply Agreement, by and between the Company and
Philips Electronics North America Corporation dated June 18, 1994(confidential
portions on file with the Commission) (5)
10.12 Securities Purchase Agreement, by and between the Company
and GMT Microelectronics Corporation, dated January 6, 1995
(confidential portions on file with the Commission) (7)
10.13 Contract by and between the Company and the United States Department
of Commerce dated April 25,1995 (9)
10.14 Securities Purchase Agreement, by and between the Company and Forte
Technologies, Inc. dated September 15, 1995 (9)
10.15 Cooperative Research and Development Agreement, by and between the
Company and Massachusetts Institute of Technology Lincoln Laboratory dated
June 21, 1995 (confidential portions on file with the Commission) (9)
10.16 Stock Purchase Agreement, by and between the Company and Telecom
Holding dated November 24, 1995 (10)
10.17 Letter Agreement, by and between the Company and Telecom Holding
Co., Ltd. Co., Ltd. dated November 24, 1995 (10)
10.18 Stock Purchase Agreement, by and between the Company and United
Microelectronics Corporation dated November 29, 1995 (9)
10.19 Stock Purchase Agreement, by and between the Company and Unipac
Optoelectronics Corporation dated November 29, 1995 (9)
10.20 Letter Agreement, by and between the Company and United
Microelectronics Corporation dated November 29, 1995(confidential
portions on file with the Commission) (9)
10.21 Amendment Agreement, by and between the Company and Rockwell
International Corporation dated September 29, 1995 (9)
10.22 Securities Purchase Agreement, by and between the Company and
Unitek Semiconductor, Inc. dated January 26, 1996 (11)
10.23 Chattel Leasing Promissory Note, by and between the Company
and BancBoston Leasing dated January 29, 1996 (11)
10.24 Securities Purchase Agreement, by and between the Company
and Forte Technologies, Inc. dated February 8, 1996. (11)
10.25 Securities Purchase Agreement, by and between Forte Technologies, Inc.
and Investors, dated June 27, 1996. (12)
10.26 Master lease agreement, by and between the Company and BancBoston Leasing
dated December 23, 1996 (13)
10.27 Joint Venture Agreement, by and among the Company, Kowon Technology
Co., Ltd., and Korean Investors, dated as of March 3, 1998 (14)
10.28 Amended and Restated Employment Agreement between the Company and Dr.
John C.C. Fan, dated as of February 20, 1998 (14)
21.1 Subsidiaries of Kopin Corporation
23.1 Consent of Deloitte & Touche LLP, Independent Auditors of the Company
27 Financial Data Schedule
</TABLE>
(1) Filed as an exhibit to Registration Statement on Form S-1, File No.
33-45853, and incorporated herein by reference.
(2) Filed as an exhibit to Registration Statement on Form S-1, File No.
33-57450, and incorporated herein by reference.
(3) Filed as an exhibit to Annual Report on Form 10-K for the fiscal year
ended December 31, 1993 and incorporated herein by reference.
29
<PAGE>
(4) Filed as an exhibit to Quarterly Report on Form 10-Q for the quarterly
period ended July 2, 1994 and incorporated herein by reference.
(5) Filed as an exhibit to Quarterly Report on Form 10-Q for the quarterly
period ended October 1, 1994 and incorporated herein by reference.
(6) Filed as an exhibit to Annual Report on Form 10-K for the fiscal year ended
December 31, 1994 and incorporated herein by reference
(7) Filed as an exhibit to Quarterly Report on Form 10-Q for the quarterly
period ended April 1, 1995 and incorporated herein by reference.
(8) Filed as an exhibit to Quarterly Report on Form 10-Q for the quarterly
period ended July 1, 1995 and incorporated herein by reference.
(9) Filed as an exhibit to Annual Report on Form 10-K for the fiscal year
ended December 31, 1995 and incorporated herein by reference.
(10) Filed as an exhibit to Schedule 13D for Telecom Holding, Co., Ltd. filed on
October 10, 1995 and incorporated herein by reference.
(11) Filed as an exhibit to Quarterly Report on Form 10-Q for the incorporated
herein by reference. quarterly period ended March 30, 1996 and
(12) Filed as an exhibit to Quarterly Report on Form 10-Q for the herein by
reference. quarterly period ended June 29, 1996 and incorporated
(13) Filed as an exhibit to Annual Report on Form 10-K for the fiscal year ended
December 31, 1996 and incorporated herein by reference.
(14) Filed as an exhibit to Annual Report on Form 10-Q for the quarterly period
ended June 27, 1998 and incorporated herein by reference.
(b) Reports on Form 8-K:
None
30
<PAGE>
KOPIN CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report F-2
Consolidated Balance Sheets at December 31, 1998 and 1997 F-3
Consolidated Statements of Operations and Comprehensive Loss for the years ended
December 31, 1998, 1997 and 1996 F-4
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1998,
1997 and 1996 F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996 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, 1998 and 1997, 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. Our audits also included the financial statement schedule listed in the
index at Item 14(a)(2). These financial statements and financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and financial statement
schedule 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, 1998 and 1997, 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.
Also, in our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Boston, Massachusetts
February 16, 1999
F-2
<PAGE>
KOPIN CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
----------------------------
1998 1997
------------- -------------
Assets
Current assets:
<S> <C> <C>
Cash and equivalents $ 30,807,335 $ 14,425,400
Marketable securities, at fair value 6,000,883 4,620,884
Accounts receivable, net of allowance of $150,800 and $152,700
Billed 2,743,211 3,209,482
Unbilled 910,787 1,091,806
Inventory 3,337,178 2,720,843
Prepaid expenses and other current assets 743,069 798,867
------------ ------------
Total current assets 44,542,463 26,867,282
Equipment and improvements:
Equipment 24,953,456 22,954,885
Leasehold improvements 808,884 772,717
Furniture and fixtures 426,084 331,955
Equipment under construction 25,131 1,904,198
------------ ------------
26,213,555 25,963,755
Accumulated depreciation and amortization 16,867,698 14,869,251
------------ ------------
9,345,857 11,094,504
Other assets 6,173,153 3,372,692
Intangible assets 1,844,148 2,059,918
------------ ------------
Total assets $ 61,905,621 $ 43,394,396
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Note payable $ - $ 450,000
Accounts payable 1,728,596 2,683,671
Accrued payroll and expenses 541,732 245,273
Other accrued liabilities 913,908 479,914
Current portion of long-term obligations 1,999,494 1,542,818
------------ ------------
Total current liabilities 5,183,730 5,401,676
Deferred rent - 165,166
Long-term obligations, less current portion 4,209,474 1,958,968
Minority interest 665,994 -
Commitments and contingencies
Stockholders' equity:
Preferred stock, par value $.01 per share: Authorized, 3,000 shares;
none issued and outstanding - -
Common stock, par value $.01 per share: Authorized, 20,000,000 shares;
issued, 12,268,561 shares in 1998 and 11,122,143 shares in 1997 122,686 111,221
Additional paid-in capital 108,954,779 90,514,233
Deferred compensation (165,055) (231,955)
Accumulated other comprehensive income (loss) 420,812 (6,001)
Deficit (57,486,799) (54,518,912)
------------ ------------
Total stockholders' equity 51,846,423 35,868,586
------------ ------------
Total liabilities and stockholders' equity $ 61,905,621 $ 43,394,396
============ ============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
KOPIN CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------------
1998 1997 1996
------------ ------------ -------------
<S> <C> <C> <C>
Revenues:
Product revenues $23,225,415 $13,110,044 $ 11,727,081
Research and development revenues 3,679,582 3,282,974 6,291,172
----------- ----------- ------------
26,904,997 16,393,018 18,018,253
Expenses:
Cost of product revenues 15,509,316 8,636,199 9,488,702
Research and development-funded programs 3,953,875 2,801,671 6,591,016
Research and development-internal 5,659,362 7,622,614 9,876,082
General, administrative and selling 4,014,862 4,292,383 7,070,275
Other 384,349 327,102 597,943
Write-down of subsidiary assets - - 3,900,000
Impairment charge 1,800,000 - 4,990,412
----------- ----------- ------------
31,321,764 23,679,969 42,514,430
----------- ----------- ------------
Loss from operations (4,416,767) (7,286,951) (24,496,177)
Other income and expense:
Interest and other income 2,043,886 1,264,052 2,013,642
Interest expense (535,783) (234,870) (337,418)
----------- ----------- ------------
Loss before minority interest (2,908,664) (6,257,769) (22,819,953)
Minority interest in (income) loss of subsidiary (59,223) - 1,223,589
----------- ----------- ------------
Net loss $(2,967,887) $(6,257,769) $(21,596,364)
=========== =========== ============
Net loss per share - basic and diluted $ (0.25) $ (0.57) $ (1.98)
=========== =========== ============
Weighted average number of common shares outstanding 12,068,478 11,010,160 10,921,138
=========== =========== ============
</TABLE>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------------
1998 1997 1996
------------ ------------ -------------
<S> <C> <C> <C>
Net loss $(2,967,887) $(6,257,769) $(21,596,364)
Foreign currency translation adjustments 414,492 - -
Unrealized gain (loss) on marketable securities, net 12,321 (50,934) (92,250)
----------- ----------- ------------
Comprehensive loss $(2,541,074) $(6,308,703) $(21,688,614)
=========== =========== ============
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
KOPIN CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Additional Accumulated Other
------------ Paid-in Deferred Comprehensive
Shares Amount Capital Compensation Income (Loss) Deficit Total
--------------------------------------------------------------------------------------------------
<S> <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 - - - 66,900 - - 66,900
options
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
========== ======== ============ ========= ======== ============ ============
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
KOPIN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------------------
1998 1997 1996
------------- ------------- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ($2,967,887) ($6,257,769) ($21,596,364)
Adjustments to reconcile net loss to
net cash provided by (used in) operating activities:
Depreciation and amortization 4,275,202 3,512,272 3,499,881
Write-down of subsidiary assets - - 3,900,000
Amortization of compensation relating to grant of stock
options 66,900 75,857 66,776
Impairment charge 1,800,000 - 4,990,412
Decrease in unearned revenue - (80,484) (92,004)
Decrease in deferred rent (165,166) (216,000) (7,667)
Minority interest in income (loss) of subsidiary 59,223 - (1,223,589)
Changes in assets and liabilities:
Accounts receivable 682,103 1,754,988 (558,326)
Inventory (594,151) (7,875) 1,480,547
Prepaid expenses and other current assets 63,114 458,914 (126,536)
Intangible assets (509,175) (501,677) (1,679,221)
Accounts payable and accrued expenses (372,105) (4,233,891) (1,439,270)
------------ ------------ -------------
Net cash provided by (used in) operating activities 2,338,058 (5,495,665) (12,785,361)
------------ ------------ -------------
Cash flows from investing activities:
Marketable securities (1,367,678) 5,888,997 6,625,889
Other assets (2,799,751) (410,543) 476,185
Capital expenditures (2,945,784) (3,555,266) (3,779,919)
------------ ------------ -------------
Net cash provided by (used in) investing activities (7,113,213) 1,923,188 3,322,155
------------ ------------ -------------
Cash flows from financing activities:
Net proceeds from issuance of common stock 17,171,418 - -
Net proceeds from issuance of subsidiary stock 383,583 - 1,800,000
Proceeds from note payable - 450,000 500,000
Principal payment on note payable (450,000) (500,000) (3,000,000)
Proceeds from long-term obligations 5,000,000 1,259,832 2,830,425
Principal payments on long-term obligations (2,292,818) (1,553,829) (924,421)
Proceeds from exercise of stock options 1,280,593 1,830,583 50,470
------------ ------------ -------------
Net cash provided by financing activities 21,092,776 1,486,586 1,256,474
------------ ------------ -------------
Effect of exchange rate changes on cash 64,314 - -
------------ ------------ -------------
Net increase (decrease) in cash and equivalents 16,381,935 (2,085,891) (8,206,732)
Cash and equivalents, beginning of year 14,425,400 16,511,291 24,718,023
------------ ------------ -------------
Cash and equivalents, end of year $ 30,807,335 $ 14,425,400 $ 16,511,291
============ ============ =============
Supplementary cash flow information-Interest paid in cash $ 501,691 $ 229,328 $ 328,824
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
KOPIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
- ----------------------------------------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Significant estimates
included within the financial statements include net realizable value of
subsidiary assets, sales return reserves, warranty reserves, inventory reserves,
allowances for doubtful accounts and the economic life of intangible assets.
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 device 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.
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 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
F-7
<PAGE>
KOPIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
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 Unrealized Unrealized Fair
Cost Gains Losses Value
---------------- ------------------ --------------- ---------------
<S> <C> <C> <C> <C>
1998
Available for sale securities:
U.S. government and agency securities $5,001,073 $5,710 $ - $5,006,783
Corporate debt securities 993,490 610 - 994,100
---------- ------ ------ ----------
Total available for sale securities $5,994,563 $6,320 $ - $6,000,883
========== ====== ====== ==========
1997
Available for sale securities:
U.S. government and agency securities $2,585,254 $ - $ 751 $2,584,503
Corporate debt securities 2,041,631 983 6,233 2,036,381
---------- ------ ------ ----------
Total available for sale securities $4,626,885 $ 983 $6,984 $4,620,884
========== ====== ====== ==========
</TABLE>
Inventory
Inventory is stated at the lower of cost (first-in, first-out method) or market
and consists of the following:
<TABLE>
<CAPTION>
1998 1997
------------- ----------------
<S> <C> <C>
Raw materials $2,672,230 $1,172,913
Work in process 333,996 1,529,463
Finished goods 330,952 18,467
---------- ----------
$3,337,178 $2,720,843
========== ==========
</TABLE>
Equipment and Improvements
Equipment and improvements are recorded at cost. Depreciation and amortization
are provided using the straight-line method over the estimated useful 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.
F-8
<PAGE>
KOPIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Net Loss Per Share
Basic 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 common share
equivalents outstanding during the period using the treasury method. Common
share equivalents have not been included in any periods in which the effect
would be anti-dilutive.
Concentration of Credit Risk
The Company invests its excess cash in high quality government and corporate
financial instruments which bear minimal risk. The Company sells its products to
customers worldwide. The Company maintains a reserve for potential credit losses
and such losses have been minimal.
Fair Market Value of Financial Instruments
Financial instruments consist of current assets (except inventories), current
liabilities and long-term obligations. Current assets and current liabilities
are carried at cost which approximates fair market value. Long-term obligations
are stated at cost which approximates fair market value.
Impairment Charge
The Company periodically assesses the recoverability of its long-lived assets by
comparing the undiscounted cash flows expected to be generated by those assets
to their carrying value. If the sum of the undiscounted cash flows is less than
the carrying value of the assets, an impairment charge is recognized.
In January 1996, the Company recorded an impairment charge of approximately
$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 to certain manufacturing processes, the Company recorded an
impairment charge of approximately $1,800,000 which consisted of the write-down
of certain patents and equipment. The $4,990,000 and $1,800,000 represented the
amount that the carrying value of the assets exceeded their fair market value.
The fair market value of the assets was determined based on valuation techniques
utilizing the present value of estimated expected future cash flows.
Stock-Based Compensation
Compensation cost associated with the grant of options and other stock awards to
employees is determined using the intrinsic value method. Compensation cost
associated with the grant of options and other stock awards to non-employees is
determined using the fair value method.
Reclassifications
Certain reclassifications have been made to the December 31, 1997 amounts to
conform to the 1998 presentation.
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 $4,695,000 and $2,693,000 at December 31, 1998 and 1997,
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-9
<PAGE>
KOPIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
3. Intangible Assets
- --------------------
Intangible assets consist of the following:
<TABLE>
<CAPTION>
Estimated Useful
Life (years) 1998 1997
------------ ------------------- -----------------
<S> <C> <C> <C>
Patents and application fees 10 $ 2,096,406 $ 2,316,376
Licenses 5-12 987,714 935,207
----------- -----------
3,084,120 3,251,583
Less accumulated amortization (1,239,972) (1,191,665)
----------- -----------
$ 1,844,148 $ 2,059,918
=========== ===========
</TABLE>
4. Investment in Forte Technologies, Inc.
- ------------------------------------------
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 in connection with 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.
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>
1998 1997
---- ----
Deferred tax assets:
<S> <C> <C>
Net operating loss carryforward $ 18,450,000 $ 20,910,000
Research and development expenses 2,200,000 -
Amortization of intangible assets 315,000 342,500
Deferred rent - 67,700
Other 300,000 317,000
------------ ------------
21,265,000 21,637,200
------------ ------------
Deferred tax liabilities:
Patent costs 850,000 950,000
Depreciation 1,200,000 1,146,000
------------ ------------
2,050,000 2,096,000
------------ ------------
Net deferred tax assets 19,215,000 19,541,200
Valuation allowance (19,215,000) (19,541,200)
------------ ------------
$ - $ -
============ ============
</TABLE>
F-10
<PAGE>
KOPIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
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 .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>
1998 1997
----------------- -------------------
<S> <C> <C>
Secured term note $ 4,250,000 $ -
5.625% equipment promissory note 339,272 989,915
Capital lease obligations-equipment 1,593,200 2,181,086
8.19% equipment promissory note 26,496 330,785
----------- -----------
6,208,968 3,501,786
Less current portion (1,999,494) (1,542,818)
----------- -----------
$ 4,209,474 $ 1,958,968
=========== ===========
</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 requires monthly payments of principal and
interest totaling $57,477 through June 1999. The loan obligation is
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.
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 obligation is
collateralized by the equipment financed under the agreement.
The aggregate maturities of long-term obligations, including capital lease
obligations, as of December 31, 1998 are as follows:
Year ending December 31, Amount
- ------------------------------------------------------------------------------
1999 $ 2,133,968
2000 1,692,445
2001 1,317,100
2002 1,250,000
2003 -
-----------
6,393,513
Less:
Amounts representing interest (184,545)
Current portion of long-term obligations (1,999,494)
-----------
$ 4,209,474
===========
F-11
<PAGE>
KOPIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
7. 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.
8. Stock Options
- -----------------
The Company's 1992 Stock Option Plan permits the granting of both nonqualified
stock options and incentive stock options. The plan covers 3,100,000 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.
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 December 31, 1998, the Company has available 369,895 shares of
common stock for future grant under its stock option plans.
A summary of option activity is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Shares Exercise Shares Exercise
Price Price Price
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance,beginning of year 2,211,647 $11.66 1,807,966 $10.47 1,560,326 $12.38
Options granted 323,725 13.16 683,650 14.31 1,126,750 9.09
Options cancelled (144,616) 13.03 (89,234) 11.07 (862,721) 12.47
Options exercised (146,418) 10.05 (190,735) 9.60 (16,389) 3.09
-------------------------------------------------------------------------------------
Balance, end of year 2,244,338 $11.95 2,211,647 $11.66 1,807,966 $10.47
========= ========= =========
Exercisable, end of year 1,502,933 967,000 587,000
========= ========= =========
</TABLE>
F-12
<PAGE>
KOPIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
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 1998, 1997 and 1996, the Company's net loss and
loss per share would have been $4,857,414 or $.40 per share in 1998, $7,763,328
or $.71 per share in 1997, and $22,828,070 or $2.09 per share in 1996.
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 1998, 1997, and 1996: no expected dividend yield; expected volatility
of 61.9% in 1998, 61.3% in 1997, and 57.6% in 1996; risk-free interest rate of
4.69% in 1998, 5.72% in 1997 and 6.55% in 1996; and expected lives of four
years. The weighted-average fair value of options on grant date was $6.76 in
1998, $7.44 in 1997, and $4.64 in 1996.
9. Employee Benefit Plan
- -------------------------
The Company has an employee benefit plan pursuant to Section 401(k) of the
Internal Revenue Code. The plan allows employees to defer up to 15% of their
annual compensation to a current maximum of $10,000. The Company will match 50%
of all deferred compensation up to a maximum of 3% of each employee's annual
compensation. The amount charged to operations in connection with this plan was
approximately $108,000 in 1998, $91,000 in 1997, and $92,000 in 1996.
10. Major Customers
- --------------------
Approximately 59%, 63% and 39% of the Company's revenue resulted from sales to a
single customer during the years ended December 31, 1998, 1997 and 1996,
respectively. In addition, during the years ended December 31, 1998, 1997, and
1996, approximately 14%, 20%, and 35%, 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.
11. Commitments
- ---------------
Leases
The Company leases certain machinery and equipment, and its facilities located
in Taunton and Westborough, Massachusetts, and Los Gatos, California, under
noncancellable operating leases. The Taunton lease expires in 2002. The
Westborough lease, entered into in 1993, is a five-year lease and has been
extended two additional years. 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.
F-13
<PAGE>
KOPIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The following is a schedule of minimum rental commitments under noncancellable
operating leases subsequent to December 31, 1998:
Year ending December 31, Amount
- --------------------------------------------------------------------------------
1999 $1,263,667
2000 1,142,219
2001 270,904
2002 245,567
2003 8,339
----------
Total minimum lease payments $2,930,696
==========
Costs incurred under operating leases are recorded as rent expense and
aggregated approximately $1,090,000 in 1998, $979,000 in 1997, and $1,214,000 in
1996.
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
$25,000 in 1998, $24,000 in 1997, and $25,500 in 1996.
12. 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, 1999. SFAS No. 133
requires fair value accounting for all stand-alone derivatives and many
derivatives embedded in other financial instruments and contracts. The impact of
SFAS No. 133 on the Company has not yet been determined.
F-14
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
March 26, 1999 KOPIN CORPORATION
By: /s/ John C. C. Fan
--------------------------
John C. C. Fan
Chairman of the Board, Chief Executive
Officer, President and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant in
the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ John C. C. Fan Chairman of the Board, March 26, 1999
- ------------------- Chief Executive Officer,
John C. C. Fan President and Director
(principal executive officer)
/s/ David E. Brook Director March 26, 1999
- ----------------------
David E. Brook
/s/ Morton Collins Director March 26, 1999
- ------------------
Morton Collins
/s/ Andrew H. Chapman Director March 26, 1999
- ---------------------
Andrew H. Chapman
/s/ Chi Chia Hsieh Director March 26, 1999
- ---------------------
Chi Chia Hsieh
/s/ Michael A. Wall Director March 26, 1999
- ---------------------
Michael A. Wall
/s/ Richard A. Sneider Treasurer and Chief March 26, 1999
- ---------------------- Financial Officer
Richard A. Sneider (principal financial and
accounting officer)
<PAGE>
KOPIN CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Years Ended December 31, 1998, 1997, 1996
Balance at Additions Deductions Balance at
Beginning Charged to from End
Description of Year Income Reserve of Year
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Reserve deducted from assets--
allowance for doubtful accounts:
1996 $ 85,600 $72,000 $(20,200) $137,400
1997 137,400 72,000 (56,700) 152,700
1998 152,700 - (1,900) 150,800
</TABLE>
<PAGE>
Index to Exhibits
Sequential
page
Exhibits number
- -------- ------------------------------------------------- ------
3.1 Amended and Restated Certificate of Incorporation (2)
3.2 Amendment to Certificate of Incorporation (13)
3.3 Amended and Restated By-laws (2)
4 Specimen Certificate of Common Stock (1)
10.1 Form of Employee Agreement with Respect to
Inventions and Proprietary Information (1)
10.2 1985 Incentive Stock Option Plan, as amended (1)
10.3 1992 Stock Option Plan Amendment (14)
10.4 Form of Key Employee Stock Purchase Agreement (1)
10.5 License Agreement by and between the Company and
Massachusetts Institute of Technology dated
April 22, 1985, as amended (1)
10.6 Technology and Business Development Agreement,
dated as of November 6, 1992 by and between the
Company and Rockwell International Corporation
(confidential portions on file with the Commission) (2)
10.7 Facility Lease, by and between the Company and
Massachusetts Technology Park Corporation dated
October 15, 1993 (3)
10.8 Master Sublease - Purchase Agreement, by and between
the Company and Massachusetts Industrial Finance Agency
dated June 23, 1994 (4)
10.9 Contract by and between the Company and the Advanced
Research Projects Agency dated May 25, 1994(confidential
portions on file with the Commission) (4)
10.10 Joint Agreement by and between the Company and Philips
Consumer Electronics Company, Division of Philips
Electronics North America Corporation dated July 25, 1994
(confidential portions on file with the Commission) (5)
10.11 Cross License and Supply Agreement, by and between the
Company and Philips Electronics North America Corporation
dated June 18, 1994(confidential portions on file with the
Commission) (5)
10.12 Securities Purchase Agreement, by and between the Company
and GMT Microelectronics Corporation, dated January 6, 1995
(confidential portions on file with the Commission) (7)
10.13 Contract by and between the Company and the United States
Department of Commerce dated April 25,1995 (9)
10.14 Securities Purchase Agreement, by and between the Company
and Forte Technologies, Inc. dated September 15, 1995 (9)
10.15 Cooperative Research and Development Agreement, by and
between the Company and Massachusetts Institute of
Technology Lincoln Laboratory dated June 21, 1995
(confidential portions on file with the Commission) (9)
10.16 Stock Purchase Agreement, by and between the Company
and Telecom Holding dated November 24, 1995 (10)
10.17 Letter Agreement, by and between the Company and Telecom
Holding Co., Ltd. Co., Ltd. dated November 24, 1995 (10)
10.18 Stock Purchase Agreement, by and between the Company and
United Microelectronics Corporation dated November 29, 1995 (9)
10.19 Stock Purchase Agreement, by and between the Company and Unipac
Optoelectronics Corporation dated November 29, 1995 (9)
10.20 Letter Agreement, by and between the Company and United
Microelectronics Corporation dated November 29,
1995(confidential portions on file with the Commission) (9)
10.21 Amendment Agreement, by and between the Company and Rockwell
International Corporation dated September 29, 1995 (9)
10.22 Securities Purchase Agreement, by and between the Company and
Unitek Semiconductor, Inc. dated January 26, 1996 (11)
10.23 Chattel Leasing Promissory Note, by and between the Company
and BancBoston Leasing dated January 29, 1996 (11)
10.24 Securities Purchase Agreement, by and between the Company
and Forte Technologies, Inc. dated February 8, 1996. (11)
10.25 Securities Purchase Agreement, by and between Forte (12)
Technologies, Inc. and Investors, dated June 27, 1996. (13)
10.26 Master lease agreement, by and between the Company and
BancBoston Leasing dated December 23, 1996
10.27 Joint Venture Agreement, by and among the Company, Kowon
Technology co., Ltd., and Korean Investors, dated as of
March 3, 1998 (14)
10.28 Amended and Restated Employment Agreement between the Company
and Dr. John C.C. Fan, dated as of February 20, 1998 (14)
21.1 Subsidiaries of Kopin Corporation
23.1 Consent of Deloitte & Touche LLP, Independent Auditors of the
Company
27 Financial Data Schedule
(1) Filed as an exhibit to Registration Statement on Form S-1, File No.
33-45853, and incorporated herein by reference.
(2) Filed as an exhibit to Registration Statement on Form S-1, File No.
33-57450, and incorporated herein by reference.
(3) Filed as an exhibit to Annual Report on Form 10-K for the fiscal year
ended December 31, 1993 and incorporated herein by reference.
(4) Filed as an exhibit to Quarterly Report on Form 10-Q for the quarterly
period ended July 2, 1994 and incorporated herein by reference.
(5) Filed as an exhibit to Quarterly Report on Form 10-Q for the quarterly
period ended October 1, 1994 and incorporated herein by reference.
(6) Filed as an exhibit to Annual Report on Form 10-K for the fiscal year ended
December 31, 1994 and incorporated herein by reference
(7) Filed as an exhibit to Quarterly Report on Form 10-Q for the quarterly
period ended April 1, 1995 and incorporated herein by reference.
(8) Filed as an exhibit to Quarterly Report on Form 10-Q for the quarterly
period ended July 1, 1995 and incorporated herein by reference.
(9) Filed as an exhibit to Annual Report on Form 10-K for the fiscal year
ended December 31, 1995 and incorporated herein by reference.
(10) Filed as an exhibit to Schedule 13D for Telecom Holding, Co., Ltd. filed on
October 10, 1995 and incorporated herein by reference.
(11) Filed as an exhibit to Quarterly Report on Form 10-Q for the incorporated
herein by reference. quarterly period ended March 30, 1996 and
(12) Filed as an exhibit to Quarterly Report on Form 10-Q for the herein by
reference. quarterly period ended June 29, 1996 and incorporated
(13) Filed as an exhibit to Annual Report on Form 10-K for the fiscal year ended
December 31, 1996 and incorporated herein by reference.
(14) Filed as an exhibit to Annual Report on Form 10-Q for the quarterly period
ended June 27, 1998 and incorporated herein by reference
<PAGE>
EXHIBIT 21.1
KOPIN CORPORATION
SUBSIDIARIES OF KOPIN CORPORATION
The Registrant has the following wholly owned ("W") and majority owned
subsidiaries ("M"):
<TABLE>
<CAPTION>
Subsidiary Type State of Incorporation Fiscal Year End
---------- ---- ---------------------- ---------------
<S> <C> <C> <C>
VS Corporation W Delaware December 31
Kowon Technology Co., Ltd. M Korea December 31
</TABLE>
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements Nos.
33-71744, 33-88812, 33-87308, and 333-46613 of Kopin Corporation and
subsidiaries on Forms S-8 of our reports dated February 16, 1999, appearing in
this Annual Report on Form 10-K of Kopin Corporation for the year ended
December 31, 1998.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Boston, Massachusetts
March 29, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 30,807,335
<SECURITIES> 6,000,883
<RECEIVABLES> 3,653,998
<ALLOWANCES> 0
<INVENTORY> 3,337,178
<CURRENT-ASSETS> 44,542,463
<PP&E> 26,213,555
<DEPRECIATION> 16,867,698
<TOTAL-ASSETS> 61,905,621
<CURRENT-LIABILITIES> 5,183,730
<BONDS> 4,209,474
0
0
<COMMON> 122,686
<OTHER-SE> 51,723,737
<TOTAL-LIABILITY-AND-EQUITY> 61,905,621
<SALES> 23,225,415
<TOTAL-REVENUES> 26,904,997
<CGS> 15,509,316
<TOTAL-COSTS> 25,122,553
<OTHER-EXPENSES> 1,800,000 <F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 535,783
<INCOME-PRETAX> (2,967,887)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,967,887)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,967,887)
<EPS-PRIMARY> (.25)
<EPS-DILUTED> (.25)
<FN>
<F1>Non-cash impairment charge associated with the write-down of equipment and
intangible assets resulting from modification of certain processes in the
production of Cyberdisplay products to improve manufacturing flexibility.
</TABLE>
