UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR l5(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended April 3, 1999 Commission file number 0-19882 KOPIN CORPORATION ----------------- (Exact name of registrant as specified in its charter) Delaware 04-2833935 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 695 Myles Standish Blvd.,Taunton, MA 02780-1042 ------------------------------------ ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (508) 824-6696 -------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or l5(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Applicable only to corporate issuers: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding as of April 30, 1999 ----- -------------------------------- Common Stock, par value $ .01 12,414,374
KOPIN CORPORATION INDEX ----- Page No. ------- PART I - FINANCIAL INFORMATION Item 1. Consolidated Financial Statements: Consolidated Balance Sheets at April 3, 1999 and December 31, 1998 3 Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three months ended April 3, 1999 and March 28, 1998 4 Consolidated Statements of Stockholders' Equity for the Three months ended April 3, 1999 and March 28, 1998 5 Consolidated Statements of Cash Flows for the Three months ended April 3, 1999 and March 28, 1998 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Item 3. Quantitative and Qualitative Disclosures About Market Risk 10 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> April 3, 1999 December 31, 1998 ---------------------- ---------------------- <S> <C> <C> Assets Current assets: Cash and equivalents $ 25,227,455 $ 30,807,335 Marketable securities, at fair value 7,606,249 6,000,883 Accounts receivable, net of allowance of $150,000 Billed 4,555,780 2,743,211 Unbilled 1,606,354 910,787 Inventory 3,855,643 3,337,178 Prepaid expenses and other current assets 1,028,005 743,069 ------------ ------------ Total current assets 43,879,486 44,542,463 Equipment and improvements: Equipment 25,108,716 24,953,456 Leasehold improvements 808,884 808,884 Furniture and fixtures 426,084 426,084 Equipment under construction 3,116,888 25,131 ------------ ------------ 29,460,572 26,213,555 Accumulated depreciation and amortization 17,705,983 16,867,698 ------------ ------------ 11,754,589 9,345,857 Other assets 5,956,940 6,173,153 Intangible assets 1,803,227 1,844,148 ------------ ------------ Total assets $ 63,394,242 $ 61,905,621 ============ ============ Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 3,761,954 $ 1,728,596 Accrued payroll and expenses 300,116 541,732 Other accrued liabilities 657,310 913,908 Current portion of long-term obligations 2,036,031 1,999,494 ------------ ------------ Total current liabilities 6,755,411 5,183,730 Long-term obligations, less current portion 3,574,992 4,209,474 Minority interest 635,395 665,994 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, 12,408,297 shares in 1999 and 12,268,561 shares in 1998 124,083 122,686 Additional paid-in capital 109,379,609 108,954,779 Deferred compensation (151,300) (165,055) Accumulated other comprehensive income 356,984 420,812 Deficit (57,280,932) (57,486,799) ------------ ------------ Total stockholders' equity 52,428,444 51,846,423 ------------ ------------ Total liabilities and stockholders' equity $ 63,394,242 $ 61,905,621 ============ ============ </TABLE> See notes to consolidated financial statements. 3
KOPIN CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) <TABLE> <CAPTION> Three Months Ended ------------------- April 3, 1999 March 28, 1998 --------------- --------------- <S> <C> <C> Revenues: Product revenues $ 5,984,932 $ 4,660,684 Research and development revenues 744,664 805,863 ----------- ----------- 6,729,596 5,466,547 Expenses: Cost of product revenues 3,930,174 2,723,238 Research and development 1,999,144 2,550,005 Selling, general and administrative 922,930 991,695 Other 87,900 91,899 ----------- ----------- 6,940,148 6,356,837 ----------- ----------- Loss from operations (210,552) (890,290) Other income and expense: Interest and other income 534,516 379,235 Interest expense (118,264) (99,970) ----------- ----------- Income (loss) before minority interest 205,700 (611,025) Minority interest in loss of subsidiary 167 - ----------- ----------- Net income (loss) $ 205,867 ($ 611,025) =========== =========== Net income (loss) per share - Basic $.02 ($ .05) =========== =========== Net income (loss) per share - Diluted $.02 ($ .05) =========== =========== Weighted average number of common shares outstanding - Basic 12,388,153 11,660,684 =========== =========== Weighted average number of common shares outstanding - Diluted 13,139,379 11,660,684 =========== =========== </TABLE> CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited) <TABLE> <CAPTION> Three Months Ended ------------------- April 3, 1999 March 28, 1998 --------------- --------------- <S> <C> <C> Net income (loss) $205,867 $ (611,025) Foreign currency translation adjustments (56,516) - Unrealized gain (loss) on marketable securities, (7,312) 2,811 net -------- ---------- Comprehensive income (loss) $142,039 $ (608,214) ======== ========== </TABLE> See notes to consolidated financial statements. 4
KOPIN CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Three months ended April 3, 1999 and March 28, 1998 (unaudited) <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, 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 -- -- -- 16,725 -- -- 16,725 options 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 ========== ========= ============ ============ ================= ============= =========== Balance, December 31, 1998 12,268,561 $122,686 $108,954,779 $(165,055) $420,812 $(57,486,799) $51,846,423 Exercise of stock options 139,736 1,397 424,830 -- -- -- 426,227 Amortization of compensation relating to grant of stock -- -- -- 13,755 -- -- 13,755 options Net unrealized loss on marketable securities -- -- -- -- (7,312) -- (7,312) Foreign currency translation adjustments -- -- -- -- (56,516) -- (56,516) Net income for the three month period ended April 3, 1999 -- -- -- -- -- 205,867 205,867 ---------- --------- ------------ ------------ ----------------- ------------- ----------- Balance, April 3, 1999 12,408,297 $124,083 $109,379,609 $(151,300) $356,984 $(57,280,932) $52,428,444 ========== ========= ============ ============ ================= ============= =========== </TABLE> See notes to consolidated financial statements. 5
KOPIN CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) <TABLE> <CAPTION> Three Months Ended ----------------- April 3, March 28, 1999 1998 -------- --------- <S> <C> <C> Cash flows from operating activities: Net income (loss) $ 205,867 $ (611,025) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 937,631 997,668 Amortization of compensation relating to grant of stock options 13,755 16,725 Decrease in deferred rent - (165,166) Minority interest in loss of subsidiary (167) - Changes in assets and liabilities: Accounts receivable (2,525,556) (716,424) Inventory (527,364) (63,642) Prepaid expenses and other current assets (287,433) 189,084 Intangible assets (46,979) (100,003) Accounts payable and accrued expenses 1,539,976 487,687 ----------- ----------- Net cash provided by (used in) operating activities (690,270) 34,904 ----------- ----------- Cash flows from investing activities: Marketable securities (1,612,678) 2,613,757 Other assets 215,963 (2,516,809) Capital expenditures (3,302,792) (579,176) ----------- ----------- Net cash used in investing activities (4,699,507) (482,228) ----------- ----------- 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 (597,945) (382,475) Proceeds from exercise of stock options 426,227 240,146 ----------- ----------- Net cash provided by (used in) financing activities (171,718) 21,579,089 ----------- ----------- Effect of exchange rate changes on cash (18,385) - ----------- ----------- Net increase (decrease) in cash and equivalents (5,579,880) 21,131,765 Cash and equivalents, beginning of period 30,807,335 14,425,400 ----------- ----------- Cash and equivalents, end of period $25,227,455 $35,557,165 =========== =========== Supplementary information -Interest paid in cash $ 122,596 $ 68,277 </TABLE> See notes to consolidated financial statements. 6
KOPIN CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION --------------------- The consolidated financial statements for the three month periods ended April 3, 1999 and March 28, 1998 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. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission (File No. 0-19882) for the year ended December 31, 1998. The results of the Company's operations for any interim period are not necessarily indicative of the results of the Company's operations for any other interim period or for a full fiscal year. The consolidated financial statements include the accounts of the Company, its wholly owned subsidiary and Kowon Technology Co., Ltd., a majority owned (65%) subsidiary located in Korea. All intercompany transactions and balances have been eliminated. 2. FOREIGN CURRENCY TRANSLATION ---------------------------- Assets and liabilities of non-U.S. operations are translated into U.S. dollars at period end exchange rates, and revenues and expenses at rates prevailing during the quarter. Resulting translation adjustments are accumulated as part of other comprehensive income and aggregate $357,976 of unrealized gain at April 3, 1999. Transaction gains or losses are recognized in income or loss currently. 3. NET INCOME (LOSS) PER SHARE --------------------------- Basic net income (loss) per share is computed using the weighted average number of shares of common stock outstanding during the period. Diluted net income (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. 4. LONG-TERM OBLIGATIONS --------------------- 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. This term note is secured by the Company's accounts receivable. 5. 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. 6. RECENT 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. 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. 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 annually since inception and, at April 3, 1999, the Company had an accumulated deficit of $57,280,932. Results of Operations Revenues. The Company's total revenues increased $1,263,049 or 23% to $6,729,596 for the three months ended April 3, 1999 compared to $5,466,547 for the three months ended March 28, 1998. The Company's product revenues were $5,984,932 for the three months ended April 3, 1999 compared to $4,660,684 for the same period in 1998, an increase of $1,324,248, or 28%. Product revenue growth was attributable to gallium arsenide products which increased 34% to $5,898,424 in 1999 compared to $4,386,000 in 1998. The increase in sales of the Company's gallium arsenide products principally resulted from an increase in sales of device wafers. Research and development revenues decreased $61,199 to $744,664 for the three months ended April 3, 1999 compared to $805,863 for the same period in 1998 primarily as a result of a decrease in revenues from contracts with agencies of the federal government. 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 $3,930,174 for the three months ended April 3, 1999 compared to $2,723,238 for the three months ended March 28, 1998. The increase in cost of product revenues as a percentage of product revenues in 1999 was primarily due to manufacturing inefficiencies caused by reduced production volumes of Cyberdisplay products and increased production staffing. Cost of product revenues as a percentage of sales is dependent upon the product sales mix of gallium arsenide products versus Cyberdisplay products. (See "Liquidity and Capital Resources") Research and Development. Research and development expenses (R&D) are incurred under development programs for display devices and products and device wafers either in support of internal development programs or programs funded by agencies of the federal government. R&D includes costs for staffing, purchases of materials and laboratory supplies, and overhead. Funded R&D was $899,759 for the three months ended April 3, 1999 compared to $1,056,134 for the three months ended March 28, 1998, a decrease of $156,375, associated with reduced subcontractor expenses caused by the expiration of multi-year contracts with agencies of the federal government. Internal R&D was $1,099,385 for the three months ended April 3, 1999 compared to $1,493,871 during the corresponding period in 1998, a decrease of $394,486. The decrease in internal R&D was primarily the result of a reduction in internal development programs as the Company transitions into production. Selling, General and Administrative. Selling, general and administrative expenses (S,G&A) consist of the expenses incurred by the Company's sales and marketing personnel and related expenses, and administrative and general corporate expenses. S,G&A was $922,930 for the three months ended April 3, 1999 compared to $991,695 during the corresponding period in 1998, a decrease of $68,765. The decrease in S,G&A in 1999 was primarily due to cost containment strategies partially offset by an increase in headcount in the sales and marketing staff. Other. Other expenses related to the amortization of patents and licenses were $87,900 for the three months ended April 3, 1999 compared to $91,899 during the corresponding period in 1998. Other Income, Net. Other income, net was $416,252 for the three months ended April 3, 1999 compared to $279,265 during the corresponding period in 1998. The increase was due to increased interest income, $439,242 during the three months ended April 3, 1999 compared to $379,235 for the corresponding period in 1998, earned on higher average cash balances in 1999 due to an equity placement and secured term note financing which together totaled $22,171,000 in the first quarter of 1998. Other income increased to $95,274 as a result of gains on sale of equipment during the quarter. Interest expense increased to $118,264 in 1999 compared to $99,970 in 1998 due to this additional debt financing obtained by the Company. 8
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 April 3, 1999, the Company had cash and equivalents and marketable securities of $32,833,704 and working capital of $37,124,075 compared to $36,808,218 and $39,358,733, respectively, as of December 31, 1998. The decrease in cash and equivalents and marketable securities was primarily due to cash used in operations of $690,270, capital expenditures of $3,302,792, and principal payments on long-term obligations of $597,945, offset by proceeds from the exercise of stock options of $426,227. The increase in capital expenditures is primarily for the Company's expansion program to increase manufacturing capacity for the Company's gallium arsenide products. The Company periodically enters into various long-term debt arrangements to finance equipment purchases and other activities. As of April 3, 1999, debt obligations totaled $5,611,023, of which $2,036,031 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. 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 9
$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 40 percent of the total project cost has been spent through April 3, 1999, with the remaining amount to be spent in 1999. The plan costs will be paid from cash flow generated from operations. The Year 2000 project will not result in the delay in implementation of any previously planned information technology projects. 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 no assurance, however, 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. 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, changes in foreign currency exchange rates, and the risk factors and cautionary statements listed from time to time in the Company's periodic reports and registration statements filed with the Securities and Exchange Commission, including but not limited to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT 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. 10
PART II. OTHER INFORMATION Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 27 Financial Data Schedule (b) Reports on Form 8-K None 11
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. KOPIN CORPORATION (Registrant) Date: May 17, 1999 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 17, 1999 By: /s/ Richard A. Sneider __________________________ Richard A. Sneider Treasurer and Chief Financial Officer (Principal Financial and Accounting Officer) 12