SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR l5(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 28, 1998 Commission file number 0-19882 KOPIN CORPORATION ----------------- (Exact name of registrant as specified in its charter) Delaware 04-2833935 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 695 Myles Standish Blvd., Taunton, MA 02780-1042 ------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (508) 824-6696 -------------- Not Applicable -------------- Former name, former address, and former fiscal year, if changed since last report Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or l5(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Applicable only to corporate issuers: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding as of April 30, 1998 ----- -------------------------------- Common Stock, par value $.01 12,147,863
KOPIN CORPORATION INDEX ----- Page No. ------- PART I - FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets at March 28, 1998 and December 31, 1997 3 Consolidated Statements of Operations for the Three months ended March 28, 1998 and March 29, 1997 4 Consolidated Statements of Stockholders' Equity for the Three months ended March 28, 1998 and March 29, 1997 5 Consolidated Statements of Cash Flows for the Three months ended March 28, 1998 and March 29, 1997 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition 8 and Results of Operations PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 11 SIGNATURES 12 2
KOPIN CORPORATION CONSOLIDATED BALANCE SHEETS (UNAUDITED) <TABLE> <CAPTION> March 28, 1998 December 31, 1997 -------------- ----------------- <S> <C> <C> ASSETS - ------ Current assets: Cash and equivalents $35,557,165 $ 14,425,400 Marketable securities 2,009,938 4,620,884 Accounts receivable, net of allowance of $152,700 and $152,700: Billed 3,909,900 3,209,482 Unbilled 1,107,812 1,091,806 Inventory 2,784,485 2,720,843 Prepaid expenses and other current assets 609,783 798,867 ------------- ------------- Total current assets 45,979,083 26,867,282 Equipment and improvements: Equipment 25,167,639 22,954,885 Leasehold improvements 815,095 772,717 Furniture and fixtures 335,326 331,955 Equipment under construction 224,871 1,904,198 ------------- ------------- 26,542,931 25,963,755 Accumulated depreciation and amortization 15,775,020 14,869,251 ------------- ------------- 10,767,911 11,094,504 Other assets 5,889,501 3,372,692 Intangible assets 2,068,022 2,059,918 ------------- ------------- Total assets $64,704,517 $ 43,394,396 ============= ============= LIABILITIES AND STOCKHOLDERS' - ---------------------------- EQUITY - ------ Current liabilities: Note payable $ - $ 450,000 Accounts payable 2,559,325 2,683,671 Accrued payroll and expenses 1,337,220 725,187 Current portion of long-term obligations 2,508,288 1,542,818 ------------- ------------- Total current liabilities 6,404,833 5,401,676 Deferred rent - 165,166 Long-term obligations, less current portion 5,611,023 1,958,968 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 12,146,660 shares in 1998 and 11,122,143 shares in 1997 121,467 111,221 Additional paid-in capital 107,915,551 90,514,233 Deferred compensation (215,230) (231,955) Accumulated other comprehensive loss (3,190) (6,001) Accumulated deficit (55,129,937) (54,518,912) ------------- ------------ Total stockholders' equity 52,688,661 35,868,586 ------------- ------------- Total liabilities and stockholders' equity $64,704,517 $ 43,394,396 ============= ============= </TABLE> See notes to consolidated financial statements. 3
KOPIN CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) <TABLE> <CAPTION> Three Months Ended ----------------------------- March 28, March 29, 1998 1997 ----------- ----------- <S> <C> <C> Revenues: Product revenues $ 4,660,684 $ 2,882,077 Research and development revenues 805,863 831,936 ----------- ----------- 5,466,547 3,714,013 Expenses: Cost of product revenues 2,723,238 2,111,365 Research and development 2,550,005 2,803,978 General, administrative and selling 991,695 1,086,044 Other 91,899 75,612 ----------- ----------- 6,356,837 6,076,999 ----------- ----------- Loss from operations (890,290) (2,362,986) Other income and expense: Interest and other income 379,235 314,897 Interest expense (99,970) (53,529) ----------- ----------- Net loss ($ 611,025) ($2,101,618) =========== =========== Net loss per share - basic and diluted ($ .05) ($ .19) =========== =========== Weighted average number of common shares outstanding 11,660,684 10,940,988 =========== =========== </TABLE> See notes to consolidated financial statements. 4
KOPIN CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY THREE MONTHS ENDED MARCH 28, 1998 AND MARCH 29, 1997 (UNAUDITED) <TABLE> <CAPTION> Additional Accumulated Common Stock Other --------------- Paid-in Deferred Comprehensive Shares Amount Capital Compensation Loss Deficit Total --------- ------ ------- ------------ ------------ ------- ----- <S> <C> <C> <C> <C> <C> <C> <C> Balance, December 31, 1996 10,931,408 $109,314 $ 88,605,451 ($227,706) $ 44,933 ($48,261,143) $40,270,849 Exercise of stock options 9,580 96 93,534 -- -- -- 93,630 Amortization of compensation relating to grant of stock options -- -- -- 18,180 -- -- 18,180 Net unrealized gain on marketable securities -- -- -- -- 1,100 -- 1,100 Net loss for the three month period ended March 29, 1997 -- -- -- -- -- (2,101,618) (2,101,618) ---------- -------- ------------ ---------- -------- ------------ ----------- Balance, March 29, 1997 10,940,988 $109,410 $ 88,698,985 ($ 209,526) $ 46,033 ($50,362,761) $38,282,141 ========== ======== ============ ========== ======== ============ =========== 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 24,517 246 239,900 -- -- -- 240,146 Amortization of compensation relating to grant of stock options -- -- -- 16,725 -- -- 16,725 Net unrealized gain on marketable securities -- -- -- -- 2,811 -- 2,811 Net loss for the three month period ended March 28, 1998 -- -- -- -- -- (611,025) (611,025) ---------- -------- ------------ ---------- -------- ------------ ----------- Balance, March 28, 1998 12,146,660 $121,467 $107,915,551 ($ 215,230) ($ 3,190) ($55,129,937) $52,688,661 ========== ======== ============ ========== ======== ============ =========== </TABLE> See notes to consolidated financial statements. 5
KOPIN CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) <TABLE> <CAPTION> Three Months Ended ------------------------------ March 28, March 29, 1998 1997 ----------- ------------ <S> <C> <C> Cash flows from operating activities: Net loss ($ 611,025) ($ 2,101,618) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 997,668 863,298 Amortization of compensation relating to grant of stock options 16,725 18,180 Decrease in unearned revenue - (23,001) Decrease in deferred rent (165,166) (54,000) Changes in assets and liabilities: Accounts receivable (716,424) 1,002,215 Inventory (63,642) 135,272 Prepaid expenses and other current assets 189,084 352,326 Intangible assets (100,003) (58,951) Accounts payable and accrued expenses 487,687 (2,311,353) ----------- ------------- Net cash provided by (used in) operating activities 34,904 (2,177,632) ----------- ------------- Cash flows from investing activities: Marketable securities 2,613,757 3,175,601 Other assets (2,516,809) (120,539) Capital expenditures (579,176) (1,247,246) ----------- ------------- Net cash provided by (used in) investing activities (482,228) 1,807,816 ----------- ------------- Cash flows from financing activities: Net proceeds from issuance of common stock 17,171,418 - Principal payment on notes payable (450,000) - Proceeds from long-term obligations 5,000,000 - Principal payment on long-term obligations (382,475) (334,950) Proceeds from exercise of stock options 240,146 93,630 ----------- ------------- Net cash provided by (used in) financing activities 21,579,089 (241,320) ----------- ------------- Net increase (decrease) in cash and equivalents 21,131,765 (611,136) Cash and equivalents, beginning of period 14,425,400 16,511,291 ----------- ------------- Cash and equivalents, end of period $35,557,165 $ 15,900,155 =========== ============= Non-cash investing and financing transactions: Marketable securities valuation $ 2,811 $ 1,100 Supplementary information -Interest paid in cash $ 68,277 $ 53,529 </TABLE> See notes to consolidated financial statements. 6
KOPIN CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION --------------------- The financial statements for the three month periods ended March 28, 1998 and March 29, 1997 are unaudited and include all adjustments which, in the opinion of management, are necessary to present fairly the results of operations for the periods then ended. All such adjustments are of a normal recurring nature. Certain reclassifications have been made to the March 29, 1997 amounts to conform to the 1998 presentation including the presentation of interest income, other income and interest expense shown as Other Income and Expense. These financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission (File No. 0-19882) for the year ended December 31, 1997. The results of the Company's operations for any interim period are not necessarily indicative of the results of the Company's operations for any other interim period or for a full fiscal year. The consolidated financial statements include the accounts of the Company and its wholly-owned and majority-owned subsidiaries. All intercompany transactions and balances have been eliminated. 2. NET LOSS PER SHARE ------------------ Net loss per share is computed using the weighted average number of common shares outstanding during the period. Common share equivalents have not been included because the effect would be anti-dilutive. The Company has adopted Statement of Financial Accounting Standards (SFAS) No.128, "Earnings Per Share," which became effective during the fourth quarter of 1997. The new pronouncement's requirements had no impact on the Company's previously reported loss per share. 3. LONG-TERM OBLIGATIONS --------------------- In March 1998, the Company entered into a $5,000,000 term loan which requires the Company to make quarterly principal payments of $250,000 plus interest at a floating rate based upon LIBOR. This term loan is secured by the Company's accounts receivable. 4. STOCKHOLDERS' EQUITY -------------------- In February 1998, the Company completed a 2,000,000 share public offering of its common stock at a price of $19.00 per share. Of the total shares sold, 1,000,000 shares were sold by Kopin and the other 1,000,000 shares were sold by Telecom Holding Co., Ltd. of Thailand. Net proceeds to the Company totaled approximately $17,171,000. 5. RECENT PRONOUNCEMENTS --------------------- In January 1998, the Company adopted SFAS No.130, "Reporting Comprehensive Income," which became effective during the quarter. SFAS No. 130 requires reporting of comprehensive income, which in the case of the Company, is a combination of reported net loss and the change in the marketable securities valuation which is a component of stockholders' equity. SFAS No. 130 has no impact on the Company's net loss. Comprehensive loss for the quarters ended March 28, 1998 and March 29, 1997 was $608,214 and $2,100,518. In January 1998, the Company adopted SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information," which will become reportable during the fourth quarter. The impact of SFAS No. 131 on the Company has not yet been determined. 7
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS ----------------------------------------------------------------------- OF OPERATIONS ------------- Kopin is a leading developer and manufacturer of advanced semiconductor materials and small form factor displays. The Company was incorporated in 1984 to further develop and commercialize certain semiconductor expertise developed at MIT. Historically, the Company has derived most of its revenues from research and development contracts with agencies of the United States government. Beginning in 1995, the Company experienced a significant increase in revenues from sales of its device wafers, and in 1996, revenues from such sales for the first time exceeded revenues from research and development contracts. More recently, the Company has commenced sales of CyberDisplay products. The Company has been unprofitable since inception and, at March 28, 1998, the Company had an accumulated deficit of $55,129,937. RESULTS OF OPERATIONS REVENUES. The Company's total revenues were $5,466,547 for the three months ended March 28, 1998 compared to $3,714,013 during the corresponding period in 1997, an increase of $1,752,534. The Company's product revenues were $4,660,684 for the three months ended March 28, 1998 compared to $2,882,077 in 1997, an increase of $1,778,607. Product revenues from sales of the Company's device wafers were $4,386,000 in 1998 compared to $2,822,774 in 1997, an increase of $1,563,226 or 55.4%. The increase in product revenues was due to an increase in sales of HBT device wafers and display products over the corresponding period in the prior year. The increase in sales of the Company's device wafers was primarily due to the increased use of these wafers in various wireless telecommunications products, particularly by the Company's major customer, Rockwell International. Research and development revenues were $805,863 for the three months ended March 28, 1998 compared to $831,936 during the corresponding period in 1997, a decrease of $26,073 primarily attributable to a decrease 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 $2,723,238, or 58.4% of product revenues, for the three months ended March 28, 1998 compared to $2,111,365, or 73.3% of product revenues, for the three months ended March 29, 1997. The improvement in cost of product revenues as a percentage of product revenues in 1998 was primarily due to increased sales of device wafers resulting in lower unit costs. RESEARCH AND DEVELOPMENT. Research and development expenses include expenses incurred in support of internal development programs and programs funded by agencies of the federal government, including development programs for display devices and products, device wafers, circuit design costs, staffing, purchases of materials and laboratory supplies, and fabrication and packaging of the Company's display products. Funded research and development expenses were $1,056,134 for the three months ended March 28, 1998 compared to $923,860 for the three months ended March 29, 1997, an increase of $132,274. Internal research and development expenses were $1,493,871 for the three months ended March 28, 1998 compared to $1,880,118 during the corresponding period in 1997, a decrease of $396,247. 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 $991,695 for the three months ended March 28, 1998 compared to $1,086,044 during the corresponding period in 1997, a decrease of $94,349. The decrease in general, administrative and selling expenses in 1998 was primarily due to changes in personnel and related expenses. In addition, general, administrative and selling expenses include non-cash charges for compensation expense of $16,725 for the three months ended March 28, 1998 compared to $18,180 in the for the three months ended March 29, 1997 relating to the issuance of certain stock options. OTHER. Other expenses were $91,899 for the three months ended March 28, 1998 compared to $75,612 during the corresponding period in 1997. 8
OTHER INCOME, NET. Other income, net was $279,265 for the three months ended March 28, 1998 compared to $261,368 during the corresponding period in 1997. The increase was primarily due to increased interest income of $379,235 during the three months ended March 28, 1998 compared to $314,897 for the corresponding period in 1997, resulting from higher cash balances in 1998, partially offset by increased interest expense of $99,970 in 1998 compared to $53,529 in 1997 due to additional debt funding obtained by the Company. LIQUIDITY AND CAPITAL RESOURCES The Company has financed its operations primarily through public and private placements of its equity securities, research and development contract revenues, and sales of its device wafers and display devices and products. In February 1998, the Company completed a 2,000,000 share public offering of its common stock at a price of $19.00 per share. Of the total shares sold, 1,000,000 shares were sold by Kopin and the other 1,000,000 shares were sold by Telecom Holding Co., Ltd. of Thailand. Net proceeds to the Company totaled approximately $17,171,000. As of March 28, 1998, the Company had cash and equivalents and marketable securities of $37,567,103 and working capital of $39,574,250 compared to $19,046,284 and $21,465,606 as of December 31, 1997. The increase in cash and equivalents and marketable securities is primarily due to the public offering of common stock resulting in net proceeds to the Company of $17,171,000 and the receipt of a term loan facility of $5,000,000, offset by an increase in other assets of $2,516,809, capital expenditures of $579,176, and principal payments on notes payable and long-term obligations of $832,475. The Company also has approximately $1,096,000 of marketable securities held in escrow as equipment financing collateral which is shown in other assets. The Company periodically enters into various long-term debt arrangements to finance equipment purchases and other activities. As of March 28, 1998, long-term debt obligations totaled $8,119,311, of which $2,508,288 is payable in 1998. In March 1998, the Company entered into a $5,000,000 term loan which requires the Company to make quarterly principal payments of $250,000 plus interest at a floating rate based upon LIBOR. This term loan is secured by the Company's accounts receivable. In October 1993, the Company entered into a lease for a 74,000 square foot manufacturing facility. This facility, which includes 10,000 square feet of environmentally controlled clean rooms, is used primarily for the Company's production of display devices. This facility is occupied under a lease that expires in October 2000, with renewable options for up to four additional years at the Company's election. The Company will make lease payments of approximately $1.0 million per year over the remaining term of the lease. The Company expects to expend approximately $5,000,000 on capital expenditures over the next twelve months, primarily for the acquisition of equipment relating to the manufacturing, packaging and testing of CyberDisplay products and production of the Company's device wafers. RECENT ACCOUNTING PRONOUNCEMENTS In January 1998, the Company adopted SFAS No.130, "Reporting Comprehensive Income," which became effective during the quarter. SFAS No. 130 requires reporting of comprehensive income, which in the case of the Company, is a combination of reported net loss and the change in the marketable securities valuation which is a component of stockholders' equity. SFAS No. 130 has no impact on the Company's net loss. Comprehensive loss for the quarters ended March 28, 1998 and March 29, 1997 was $608,214 and $2,100,518. In January 1998, the Company adopted SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information," which will become reportable during the fourth quarter. The impact of SFAS No. 131 on the Company has not yet been determined. 9
FUTURE OPERATING RESULTS The Company is conducting a review of its computer systems to identify those areas that could be affected by the "Year 2000" issue and is developing an implementation plan to resolve the issue. The Company presently believes, with modification to existing software and converting to new software, the Year 2000 problem will not pose significant operational problems and is not anticipated to be material to its financial position or results of operations in any given year. Certain of the statements contained in this Form 10-Q, including Management's Discussion and Analysis of Financial Condition and Results of Operations, are forward-looking statements that involve risks and uncertainties. In addition to the risks and uncertainties set forth in this Form 10-Q, other factors that could cause actual results to differ materially include the following: general economic and business conditions and growth in the flat panel display industry and the gallium arsenide integrated circuit and materials industries, the impact of competitive products and pricing, availability of third party components, availability of integrated circuit fabrication facilities, cost and yields associated with production of the Company's CyberDisplay imaging devices and device wafers, loss of significant customers, acceptance of the Company's products, continuation of strategic relationships, and the risk factors and cautionary statements listed from time to time in the Company's periodic reports and registration statements filed with the Securities and Exchange Commission, including but not limited to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997. 10
PART II. OTHER INFORMATION Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.41 Loan Agreement, by and between the Company and The Sumitomo Bank, Limited, dated February 27, 1998 10.42 Note Agreement, by and between the Company and The Sumitomo Bank, Limited, dated February 27, 1998 10.43 Restricted Account and Security Agreement, by and between the Company and The Sumitomo Bank, Limited, dated February 27, 1998 27 Financial Data Schedule (b) Reports on Form 8-K None 11
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. KOPIN CORPORATION (Registrant) Date: May 8, 1998 By: /s/ John C.C. Fan --------------------------------- John C.C. Fan President, Chief Executive Officer and Chairman of the Board of Directors (Principal Executive Officer) Date: May 8, 1998 By: /s/ Paul J. Mitchell --------------------------------- Paul J. Mitchell Treasurer and Chief Financial Officer (Principal Financial and Accounting Officer) 12