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1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements include the accounts of Kopin Corporation, its wholly owned subsidiaries, Kowon Technology Co., Ltd. (Kowon), a majority owned (78%) subsidiary located in Korea and Kopin Taiwan Corporation (KTC), a majority owned (90%) subsidiary located in Taiwan (collectively the “Company”). Amounts of Kowon and KTC not attributable to the Company are referred to as noncontrolling interests. All intercompany transactions and balances have been eliminated. The condensed consolidated financial statements for the three and six months ended June 25, 2011 and June 26, 2010 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. These condensed consolidated financial statements should be read in conjunction with the Company’s financial statements and notes thereto, included in the Company’s Annual Report on Form 10-K for the year ended December 25, 2010.
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.
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2. CASH AND EQUIVALENTS AND MARKETABLE SECURITIES
The Company considers all highly liquid, short-term debt instruments with original maturities of three months or less to be cash equivalents.
Marketable debt securities consist primarily of commercial paper, medium-term corporate notes, and United States government and agency backed securities. The Company classifies these marketable debt securities as available-for-sale in “Marketable Debt Securities”. The investment in Advanced Wireless Semiconductor Company (AWSC) is included in “Other Assets” as available-for-sale and recorded at fair value. The Company records the amortization of premium and accretion of discount on marketable debt securities in the results of operations.
The Company uses the specific identification method as a basis for determining cost and calculating realized gains and losses. The gross gains and losses realized related to sales and maturities of marketable debt securities were not material during the six months ended June 25, 2011 and the year ended December 25, 2010.
Investments in available-for-sale marketable debt securities are as follows at June 25, 2011 and December 25, 2010:
Amortized Cost | Unrealized Gains | Unrealized Losses | Fair Value | |||||||||||||||||||||||||||||
2011 | 2010 | 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | |||||||||||||||||||||||||
U.S. government and agency backed securities |
$ | 31,090,406 | $ | 23,899,218 | $ | 571,690 | $ | 295,412 | $ | — | $ | — | $ | 31,662,096 | $ | 24,194,630 | ||||||||||||||||
Corporate debt and certificates of deposit |
34,648,222 | 36,949,546 | — | — | (153,385 | ) | (31,333 | ) | 34,494,837 | 36,918,213 | ||||||||||||||||||||||
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Total |
$ | 65,738,628 | $ | 60,848,764 | $ | 571,690 | $ | 295,412 | $ | (153,385 | ) | $ | (31,333 | ) | $ | 66,156,933 | $ | 61,112,843 | ||||||||||||||
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The contractual maturity of the Company’s marketable debt securities is as follows at June 25, 2011:
Less than One year |
One to Five years |
Greater than Five years |
Total | |||||||||||||
U.S. government and agency backed securities |
$ | 3,801,606 | $ | 27,860,490 | $ | — | $ | 31,662,096 | ||||||||
Corporate debt and certificates of deposit |
22,790,750 | 10,772,837 | 931,250 | 34,494,837 | ||||||||||||
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Total |
$ | 26,592,356 | $ | 38,633,327 | $ | 931,250 | $ | 66,156,933 | ||||||||
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The Company conducts a review of its marketable debt securities on a quarterly basis for the presence of other-than-temporary impairment (OTTI). The Company assesses whether OTTI is present when the fair value of a debt security is less than its amortized cost basis at the balance sheet date. Under these circumstances OTTI is considered to have occurred (1) if the Company intends to sell the security before recovery of its amortized cost basis; (2) if it is “more likely than not” the Company will be required to sell the security before recovery of its amortized cost basis; or (3) the present value of expected cash flows is not sufficient to recover the entire amortized cost basis.
The Company further estimates the amount of OTTI resulting from a decline in the credit worthiness of the issuer (credit-related OTTI) and the amount of non credit-related OTTI. Noncredit-related OTTI can be caused by such factors as market illiquidity. Credit-related OTTI is recognized in earnings while noncredit-related OTTI on securities not expected to be sold is recognized in other comprehensive income (OCI). The Company did not record an OTTI for the three and six month periods ended June 25, 2011 and June 26, 2010.
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3. FAIR VALUE MEASUREMENTS
Financial instruments are categorized as Level 1, Level 2 or Level 3 based upon the method by which their fair value is computed. An investment is categorized as Level 1 when its fair value is based on unadjusted quoted prices in active markets for identical assets that the Company has the ability to access at the measurement date. An investment is categorized as Level 2 if its fair market value is based on quoted market prices for similar assets in active markets, quoted prices for identical or similar assets in markets that are not active, based on observable inputs such as interest rates, yield curves, or derived from or corroborated by observable market data by correlation or other means. An investment is categorized as Level 3 if its fair value is based on assumptions developed by the Company about what a market participant would use in pricing the assets.
Fair Value Measurement at June 25, 2011 Using: | ||||||||||||||||
Level 1 | Level 2 | Level 3 | ||||||||||||||
Money Markets and Cash Equivalents |
$ | 33,170,411 | $ | 33,170,411 | $ | — | $ | — | ||||||||
U.S. Government Securities |
31,662,096 | 12,709,260 | 18,952,836 | — | ||||||||||||
Corporate Debt |
20,807,604 | — | 20,807,604 | — | ||||||||||||
Certificates of Deposit |
13,687,233 | — | 13,687,233 | — | ||||||||||||
Advanced Wireless Semiconductor Company |
2,788,818 | 2,788,818 | — | — | ||||||||||||
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$ | 102,116,162 | $ | 48,668,489 | $ | 53,447,673 | $ | — | |||||||||
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Fair Value Measurement at December 25, 2010 Using: | ||||||||||||||||
Level 1 | Level 2 | Level 3 | ||||||||||||||
Money Markets and Cash Equivalents |
$ | 49,834,547 | $ | 49,834,547 | $ | — | $ | — | ||||||||
U.S. Government Securities |
24,194,630 | 9,806,380 | 14,388,250 | — | ||||||||||||
Corporate Debt |
23,212,833 | — | 23,212,833 | — | ||||||||||||
Certificates of Deposit |
13,705,380 | — | 13,705,380 | — | ||||||||||||
Advanced Wireless Semiconductor Company |
4,001,937 | 4,001,937 | — | — | ||||||||||||
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$ | 114,949,327 | $ | 63,642,864 | $ | 51,306,463 | $ | — | |||||||||
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4. INVENTORY
Inventory is stated at the lower of cost (determined on the first-in, first-out or specific identification method) or market and consists of the following at June 25, 2011 and December 25, 2010:
June 25, 2011 |
December 25, 2010 |
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Raw materials |
$ | 9,047,714 | $ | 10,775,935 | ||||
Work-in-process |
3,565,073 | 4,159,064 | ||||||
Finished goods |
6,501,533 | 6,527,872 | ||||||
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$ | 19,114,320 | $ | 21,462,871 | |||||
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Inventory on consignment at customer locations was $3.4 million and $4.4 million at June 25, 2011 and December 25, 2010, respectively.
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5. NET INCOME PER SHARE
Basic net income per share is computed using the weighted average number of shares of common stock outstanding during the period less any nonvested restricted shares. Diluted earnings per common share is calculated using weighted average shares outstanding and contingently issuable shares, less weighted average shares reacquired during the period. The net outstanding shares are adjusted for the dilutive effect of shares issuable upon the assumed conversion of the Company’s common stock equivalents, which consist of outstanding stock options and unvested restricted stock awards.
Weighted average common shares outstanding used to calculate earnings per share are as follows:
Three Months Ended | Six Months Ended | |||||||||||||||
June 25, 2011 |
June 26, 2010 |
June 25, 2011 |
June 26, 2010 |
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Weighted average common shares outstanding-basic |
64,528,623 | 66,625,637 | 64,632,732 | 66,606,789 | ||||||||||||
Stock options and nonvested restricted common stock |
1,246,344 | 731,660 | 1,082,289 | 727,178 | ||||||||||||
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Weighted average common shares outstanding -diluted |
65,774,967 | 67,357,297 | 65,715,021 | 67,333,967 | ||||||||||||
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The following were not included in weighted average common shares outstanding-diluted because they are anti-dilutive or performance conditions have not been met at the end of the period.
June 25, 2011 |
June 26, 2010 |
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Nonvested restricted common stock |
554,012 | 948,189 | ||||||
Stock options |
935,441 | 3,368,473 | ||||||
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Total |
1,489,453 | 4,316,662 | ||||||
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6. STOCK-BASED COMPENSATION
The fair value of stock option awards is estimated on the date of grant using the Black-Scholes-Merton option-pricing model. There were no stock options granted in fiscal years 2011 and 2010. The fair value of nonvested restricted common stock awards is generally the market value of the Company’s equity shares on the date of grant. The nonvested common stock awards require the employee to fulfill certain obligations, including remaining employed by the Company for one, two or four years (the vesting period) and in certain cases meeting performance criteria. The performance criteria primarily consist of the achievement of the Company’s annual incentive plan goals. For nonvested restricted common stock awards which solely require the recipient to remain employed with the Company, the stock compensation expense is amortized over the anticipated service period. For nonvested restricted common stock awards which require the achievement of performance criteria, the Company reviews the probability of achieving the performance goals on a periodic basis. If the Company determines that it is probable that the performance criteria will be achieved, the amount of compensation cost derived for the performance goal is amortized over the service period. If the performance criteria are not met, no compensation cost is recognized and any previously recognized compensation cost is reversed. The Company recognizes compensation costs on a straight-line basis over the requisite service period for time vested awards. For awards that vest based on performance conditions, the Company uses the accelerated model for graded vesting awards.
A summary of award activity under the stock option plans as of June 25, 2011 and changes during the six month period is as follows. All options were vested as of June 25, 2011.
Six months ended June 25, 2011 |
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Shares | Weighted Average Exercise Price |
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Balance, December 25, 2010 |
2,899,261 | $ | 6.45 | |||||
Options granted |
— | — | ||||||
Options forfeited/cancelled |
(735,565 | ) | 8.43 | |||||
Options exercised |
(19,700 | ) | 3.68 | |||||
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Balance, June 25, 2011 |
2,143,996 | $ | 5.79 | |||||
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Exercisable, June 25, 2011 |
2,143,996 | |||||||
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The following table summarizes information about stock options outstanding and exercisable at June 25, 2011:
Options Outstanding and Exercisable | ||||||||||||
Range of Exercise Prices |
Number Outstanding and Exercisable |
Weighted Average Remaining Contractual Life (Years) |
Weighted Average Exercise Price |
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$ 0.01—$ 3.50 |
130,000 | 5.00 | $ | 3.49 | ||||||||
$ 3.75—$ 4.82 |
1,080,555 | 2.60 | 4.45 | |||||||||
$ 5.00—$ 9.39 |
732,997 | 2.74 | 6.36 | |||||||||
$10.00—$13.00 |
100,100 | 5.00 | 10.00 | |||||||||
$14.31—$16.16 |
100,344 | 1.00 | 14.87 | |||||||||
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2,143,996 | 2.83 | $ | 5.79 | |||||||||
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Aggregate intrinsic value on June 25, 2011 |
$ | 605,988 | ||||||||||
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In June 2010 the Company issued a warrant to purchase 200,000 shares of the Company’s stock at $3.49. The warrant vests ratably over a two year period and, as of June 25, 2011, 100,000 shares had vested. The intrinsic value of the warrant at June 25, 2011 was approximately $272,000.
NonVested Restricted Common Stock
A summary of the activity for nonvested restricted common stock awards as of June 25, 2011 and changes during the six months then ended is presented below:
Shares | Weighted Average Grant Fair Value |
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Balance, December 25, 2010 |
2,033,607 | $ | 3.79 | |||||
Granted |
972,012 | 4.23 | ||||||
Forfeited |
(1,125 | ) | 2.75 | |||||
Vested |
(63,125 | ) | 3.24 | |||||
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Balance, June 25, 2011 |
2,941,369 | $ | 3.95 | |||||
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Stock-Based Compensation
The following table summarizes stock-based compensation expense within each of the categories below as it relates to employee stock options and nonvested restricted common stock awards for the six months ended June 25, 2011 and June 26, 2010 (no net tax benefits were recognized):
Six Months Ended | ||||||||
June 25, 2011 |
June 26, 2010 |
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Cost of product revenues |
$ | 296,866 | $ | 292,082 | ||||
Research and development |
288,969 | 183,570 | ||||||
Selling, general and administrative |
884,689 | 698,442 | ||||||
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Total |
$ | 1,470,524 | $ | 1,174,094 | ||||
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The total unrecognized compensation cost related to nonvested restricted common stock awards is expected to be recognized over a weighted average period of 3 years. The total unrecognized compensation cost at June 25, 2011 is $6.1 million.
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7. OTHER ASSETS AND AMOUNTS DUE TO / FROM AFFILIATES
Marketable Equity Securities
At June 25, 2011 the Company had an investment in AWSC, with a fair market value of $2.8 million and an adjusted cost basis of $0.7 million, as compared to a fair market value of $4.0 million and an adjusted cost basis of $0.7 million at December 25, 2010. During the second quarter of 2011 the Company sold 300,000 shares of AWSC and recorded a gain of $0.4 million. One of the Company’s Directors is a director of AWSC and several directors and officers own amounts ranging from 0.1% to 0.5% of the outstanding stock of AWSC.
During the first quarter of 2010 the Company sold its investment in Micrel, Inc. and recorded a gain of $0.7 million.
Non-Marketable Securities—Equity Method Investment
In January 2011, KoBrite issued additional equity and the Company’s ownership percentage was reduced from approximately 19% to approximately 12%. At June 25, 2011 the carrying value of the investment was $2.5 million. The Company accounts for its interest in KoBrite using the equity method and for each of the three and six months ended June 25, 2011 and June 26, 2010 recorded equity losses in unconsolidated affiliates of $0.1 million and $0.2 million, respectively. One of the Company’s Directors is also a member of the Board of Directors of Bright LED, one of the principle investors of KoBrite.
Summarized financial information for KoBrite for the three and six month periods ended March 26, 2011 and March 27, 2010 is as follows (KoBrite’s results are recorded one quarter in arrears):
Three Months Ended | Six Months Ended | |||||||||||||||
June 25, 2011 |
June 26, 2010 |
June 25, 2011 |
June 26, 2010 |
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Revenue |
$ | 1,298,000 | $ | 3,582,000 | $ | 2,289,000 | $ | 6,814,000 | ||||||||
Gross margin |
122,000 | (161,000 | ) | (399,000 | ) | (147,000 | ) | |||||||||
Loss from operations |
(276,000 | ) | (577,000 | ) | (1,255,000 | ) | (1,075,000 | ) | ||||||||
Net loss |
$ | (371,000 | ) | $ | (463,000 | ) | $ | (1,314,000 | ) | $ | (940,000 | ) |
Amounts Due from and Due to Affiliates
Related party receivables from AWSC approximated $4.2 million and $2.6 million at June 25, 2011 and December 25, 2010, respectively.
In fiscal year 2008 the Company entered into an agreement wherein it agreed to sell certain of its patents that it was no longer using to a party who would attempt to sub-license the patents. Under the terms of the agreement the amount the Company would receive for the sale of the patents was a percentage of any license fees, after expenses, from the sublicense. In each of the six months ended June 25, 2011 and June 26, 2010 the Company recorded $0.2 million of license fees from the sale of these patents.
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8. ACQUISITION OF FORTH DIMENSION DISPLAYS
On January 11, 2011, the Company purchased all of the outstanding common stock of Forth Dimension Displays Ltd. (FDD) for approximately $11.0 million plus contingent consideration. In addition to the $11.0 million cash paid there is up to an additional $7.0 million the Company may have to pay the former shareholders of FDD depending upon the revenue FDD achieves in 2011. The actual amount of contingent consideration could range from $0 to $7.0 million. Management currently estimates that the fair market value of the contingent consideration is zero.
As a result of this transaction the Company owns 100% of the outstanding stock of FDD. Accounting standards for business combinations require that an acquiring entity measures and recognizes identifiable assets acquired and liabilities assumed at the acquisition date fair value with limited exceptions. The Company has not yet completed its evaluation of the fair market value of the identifiable assets acquired and liabilities assumed. Final determination of the fair values may result in further adjustments to the values below. In addition, the purchase agreement required that FDD have a net working capital of $1.3 million at the acquisition date and any shortages or overages resulted in a dollar for dollar decrease or increase, respectively, in the purchase price. The final net working capital amount has not yet been agreed upon by the parties. The transaction costs of approximately $0.2 million for the acquisition of FDD were expensed as incurred and recorded as selling, general and administrative expenses. Additional information, which existed as of the acquisition date but was at that time unknown to the Company, may become known to the Company during the remainder of the measurement period, a period not to exceed 12 months from the acquisition date. Changes to amounts recorded as assets or liabilities may result in a corresponding adjustment to goodwill. The goodwill will not be deductible for tax purposes.
Jan 10, 2011 (As initially reported) |
Measurement period adjustments |
Jan 10, 2011 (As adjusted) |
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Cash and marketable securities |
$ | 1,000,605 | $ | — | $ | 1,000,605 | ||||||
Accounts receivable |
338,917 | 2,239 | 341,156 | |||||||||
Inventory |
1,009,738 | (371,407 | ) | 638,331 | ||||||||
Plant and equipment |
1,500,202 | — | 1,500,202 | |||||||||
Other identifiable assets |
247,711 | — | 247,711 | |||||||||
Customer relationships |
3,100,000 | 200,000 | 3,300,000 | |||||||||
Developed technology |
1,000,000 | 100,000 | 1,100,000 | |||||||||
Trademark portfolio |
160,000 | 60,000 | 220,000 | |||||||||
Identifiable liabilities |
(1,641,664 | ) | (310,800 | ) | (1,952,464 | ) | ||||||
Goodwill |
5,538,491 | (934,032 | ) | 4,604,459 | ||||||||
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Total |
$ | 12,254,000 | $ | (1,254,000 | ) | $ | 11,000,000 | |||||
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The gross contractual receivables are approximately $845,000.
The Company’s goodwill balance is as follows:
Goodwill, December 26, 2010 |
$ | — | ||
Goodwill from the acquisition of FDD at Jan. 10, 2011 |
5,538,491 | |||
Change in goodwill |
(934,032 | ) | ||
Foreign currency translation |
137,051 | |||
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Goodwill, June 25, 2011 |
$ | 4,741,510 | ||
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The identified intangible assets will be amortized on a straight-line basis over the following lives:
Years | ||||
Customer relationships |
7 | |||
Developed technology |
7 | |||
Trademark portfolio |
7 |
The Company recognized $317,000 in amortization for the six months ended June 25, 2011 related to its intangible assets.
The following unaudited supplemental pro forma disclosures are provided for the three and six months ended June 26, 2010, assuming the acquisition of the controlling interest in FDD had occurred as December 27, 2009 (the first day of the Company’s 2010 fiscal year). All intercompany transactions have been eliminated.
Three Months Ended June 26, 2010 |
Six Months Ended June 26, 2010 |
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Revenue |
$ | 31,711,000 | $ | 58,445,000 | ||||
Net Income |
$ | 1,923,000 | $ | 2,967,000 |
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9. ACCRUED WARRANTY
The Company warrants its products against defect for 12 months. A provision for estimated future costs and estimated returns for credit relating to warranty is recorded in the period when product is shipped and revenue recognized, and is updated as additional information becomes available. The Company’s estimate of future costs to satisfy warranty obligations is based primarily on historical warranty expense experienced and a provision for potential future product failures. The Company’s accrued warranty was $1.4 million as of June 25, 2011 and $1.3 million as of December 25, 2010. Changes in the accrued warranty for the six month period ended June 25, 2011 is as follows:
June 25, 2011 |
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Beginning Balance |
$ | 1,300,000 | ||
Additions |
1,019,000 | |||
Claim and reversals |
(951,000 | ) | ||
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Ending Balance |
$ | 1,368,000 | ||
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10. INCOME TAXES
The Company’s tax provision of approximately $98,000 and $196,000 for the three and six months ended June 25, 2011, respectively and $180,000 and $93,000 for the corresponding periods in 2010, respectively, represents alternative minimum, state income tax and foreign tax expenses which are partially offset by the Company’s net operating loss carryforwards (NOL) and tax credits.
As of June 25, 2011, the Company has available for tax purposes U.S. federal NOLs of $11.8 million expiring through 2027. The Company has recognized a full valuation allowance on its net deferred tax assets due to the uncertainty of realization of such assets. The Company has not historically recorded, nor does it intend to record the tax benefits from stock awards until realized. Unrecorded benefits from stock awards approximate $13.0 million.
The Company’s income tax returns have not been examined by the Internal Revenue Service and are subject to examination for all years since 1994. State income tax returns are generally subject to examination for a period of 3 to 5 years after filing of the respective return. The state impact of any federal changes remains subject to examination by various states for a period of up to one year after formal notification to the states.
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11. SEGMENTS AND GEOGRAPHICAL INFORMATION
The Company’s chief operating decision maker is its Chief Executive Officer. The Company’s chief operating decision maker evaluates the operating results of the Company’s reportable segments based on revenues and net income.
The Company has four operating and reportable segments: (i) Kopin U.S., which includes the operations in the United States and the Company’s equity method investment, (ii) Kowon, (iii) KTC and (iv) FDD (commencing in the first quarter of 2011). The following table presents the Company’s reportable segment results for the three and six month periods ended June 25, 2011 and June 26, 2010 (in thousands):
Kopin U.S. | Kowon | KTC | FDD | Adjustments | Total | |||||||||||||||||||
Three Months Ended |
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June 25, 2011 |
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Revenues |
$ | 29,867 | $ | 2,456 | $ | 2,713 | $ | 1,564 | $ | (5,169 | ) | $ | 31,431 | |||||||||||
Net income (loss) attributable to the controlling interest |
1,268 | (147 | ) | (89 | ) | (274 | ) | 44 | 802 | |||||||||||||||
June 26, 2010 |
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Revenues |
$ | 29,337 | $ | 2,856 | $ | 2,367 | $ | — | $ | (4,371 | ) | $ | 30,189 | |||||||||||
Net income (loss) attributable to the controlling interest |
914 | 881 | 293 | — | (227 | ) | 1,861 | |||||||||||||||||
Six Months Ended |
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June 25, 2011 |
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Revenues |
$ | 63,800 | $ | 5,193 | $ | 6,339 | $ | 2,522 | $ | (11,489 | ) | $ | 66,365 | |||||||||||
Net income (loss) attributable to the controlling interest |
3,705 | (492 | ) | 489 | (899 | ) | 65 | 2,868 | ||||||||||||||||
June 26, 2010 |
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Revenues |
$ | 54,303 | $ | 5,239 | $ | 3,926 | $ | — | $ | (7,825 | ) | $ | 55,643 | |||||||||||
Net income (loss) attributable to the controlling interest |
2,112 | 590 | 359 | — | (163 | ) | 2,898 |
The adjustments to reconcile the consolidated financial statement total revenue and net income include the elimination of intercompany sales and noncontrolling interest in income of subsidiaries.
During the three and six month periods ended June 25, 2011 and June 26, 2010, the Company derived its sales from the following geographies (as a percentage of net revenues):
Three Months Ended | Six Months Ended | |||||||||||||||
June 25, 2011 | June 26, 2010 | June 25, 2011 | June 26, 2010 | |||||||||||||
Asia-Pacific |
21 | % | 22 | % | 23 | % | 24 | % | ||||||||
Americas |
79 | % | 78 | % | 77 | % | 76 | % | ||||||||
Total Revenues |
100 | % | 100 | % | 100 | % | 100 | % | ||||||||
During the three and six month periods ended June 25, 2011 and June 26, 2010, revenues by product group consisted of approximately the following:
Three Months Ended | Six Months Ended | |||||||||||||||
June 25, 2011 | June 26, 2010 | June 25, 2011 | June 26, 2010 | |||||||||||||
Display |
$ | 15,425,000 | $ | 14,257,000 | $ | 32,798,000 | $ | 25,197,000 | ||||||||
III-V |
16,006,000 | 15,932,000 | 33,567,000 | 30,446,000 | ||||||||||||
Total Revenues |
$ | 31,431,000 | $ | 30,189,000 | $ | 66,365,000 | $ | 55,643,000 | ||||||||
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12. LITIGATION
The Company may engage in legal proceedings arising in the ordinary course of business. Claims, suits, investigations and proceedings are inherently uncertain and it is not possible to predict the ultimate outcome of such matters and our business, financial condition, results of operations or cash flows could be affected in any particular period.