KOPIN CORP, 10-Q filed on 8/4/2011
Quarterly Report
Document and Entity Information
6 Months Ended
Jun. 25, 2011
Jul. 29, 2011
Document Information [Line Items]
 
 
Document Type
10-Q 
 
Amendment Flag
FALSE 
 
Document Period End Date
Jun. 25, 2011 
 
Document Fiscal Year Focus
2011 
 
Document Fiscal Period Focus
Q2 
 
Trading Symbol
KOPN 
 
Entity Registrant Name
KOPIN CORP 
 
Entity Central Index Key
0000771266 
 
Current Fiscal Year End Date
--12-31 
 
Entity Filer Category
Accelerated Filer 
 
Entity Common Stock, Shares Outstanding
 
67,246,072 
CONDENSED CONSOLIDATED BALANCE SHEETS (USD $)
Jun. 25, 2011
Dec. 25, 2010
Current assets:
 
 
Cash and equivalents
$ 33,170,411 
$ 49,834,547 
Marketable debt securities, at fair value
66,156,933 
61,112,843 
Accounts receivable, net of allowance of $373,000 and $737,000 in 2011 and 2010, respectively
15,034,313 
14,539,664 
Accounts receivable from unconsolidated affiliates
4,213,227 
2,558,513 
Unbilled receivables
977,185 
391,171 
Inventory
19,114,320 
21,462,871 
Prepaid taxes
515,980 
664,320 
Prepaid expenses and other current assets
2,265,253 
2,060,833 
Total current assets
141,447,622 
152,624,762 
Property, plant and equipment, net
35,810,203 
32,613,961 
Goodwill
4,741,510 
 
Intangible assets
4,439,808 
 
Other assets
5,575,816 
6,857,675 
Total assets
192,014,959 
192,096,398 
Current liabilities:
 
 
Accounts payable
8,092,099 
11,317,865 
Accrued payroll and expenses
2,583,068 
2,741,004 
Accrued warranty
1,368,413 
1,300,000 
Billings in excess of revenue earned
2,604,774 
3,210,895 
Other accrued liabilities
2,861,931 
1,956,642 
Total current liabilities
17,510,285 
20,526,406 
Asset retirement obligations
1,284,354 
944,617 
Commitments and contingencies
 
 
Stockholders' equity:
 
 
Preferred stock, par value $.01 per share: authorized, 3,000 shares; none issued
 
 
Common stock, par value $.01 per share: authorized, 120,000,000 shares; issued 75,574,189 shares in 2011 and 74,604,442 shares in 2010; outstanding 64,419,720 shares in 2011 and 64,775,234 shares in 2010
726,328 
725,708 
Additional paid-in capital
314,791,169 
313,311,889 
Treasury stock (8,213,104 and 7,795,605 shares in 2011 and 2010, respectively, at cost)
(28,488,147)
(26,580,823)
Accumulated other comprehensive income
6,062,264 
5,985,345 
Accumulated deficit
(124,738,669)
(127,606,200)
Total Kopin Corporation stockholders' equity
168,352,945 
165,835,919 
Noncontrolling interest
4,867,375 
4,789,456 
Total stockholders' equity
173,220,320 
170,625,375 
Total liabilities and stockholders' equity
$ 192,014,959 
$ 192,096,398 
CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $)
Jun. 25, 2011
Dec. 25, 2010
Accounts receivable, allowance
$ 373,000 
$ 737,000 
Preferred stock, par value
$ 0.01 
$ 0.01 
Preferred stock, authorized
3,000 
3,000 
Preferred stock, issued
Common stock, par value
$ 0.01 
$ 0.01 
Common stock, authorized
120,000,000 
120,000,000 
Common stock, issued
75,574,189 
74,604,442 
Common stock, outstanding
64,419,720 
64,775,234 
Treasury stock, shares
8,213,104 
7,795,605 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (USD $)
3 Months Ended
Jun. 25, 2011
3 Months Ended
Jun. 26, 2010
6 Months Ended
Jun. 25, 2011
6 Months Ended
Jun. 26, 2010
Revenues:
 
 
 
 
Net product revenues
$ 29,597,668 
$ 29,129,931 
$ 62,518,659 
$ 53,006,291 
Research and development revenues
1,833,289 
1,059,226 
3,846,790 
2,636,851 
Revenues, Total
31,430,957 
30,189,157 
66,365,449 
55,643,142 
Expenses:
 
 
 
 
Cost of product revenues
19,115,190 
21,854,777 
41,061,802 
39,392,724 
Research and development
7,139,559 
4,858,868 
13,524,308 
9,154,775 
Selling, general and administration
4,697,648 
4,215,001 
9,142,794 
7,857,535 
Costs and Expenses, Total
30,952,397 
30,928,646 
63,728,904 
56,405,034 
Income (loss) from operations
478,560 
(739,489)
2,636,545 
(761,892)
Other income and expense:
 
 
 
 
Interest income
365,611 
426,701 
629,303 
856,310 
Other income and (expense), net
33,316 
38,346 
(241)
118,278 
Foreign currency (losses) gains
(347,077)
720,458 
(638,036)
366,374 
Gain on sale of investments
368,641 
1,911,255 
368,641 
2,597,505 
Gain on sale of patents
 
 
155,658 
159,797 
Nonoperating Income (Expense), Total
420,491 
3,096,760 
515,325 
4,098,264 
Income before provision for income taxes, equity loss in unconsolidated affiliate and net loss (income) of noncontrolling interest
899,051 
2,357,271 
3,151,870 
3,336,372 
Tax provision
(97,500)
(180,000)
(195,500)
(93,000)
Income before equity loss in unconsolidated affiliate and net loss (income) of noncontrolling interest
801,551 
2,177,271 
2,956,370 
3,243,372 
Equity loss in unconsolidated affiliate
(43,599)
(89,858)
(154,238)
(182,586)
Net income
757,952 
2,087,413 
2,802,132 
3,060,786 
Net loss (income) attributable to the noncontrolling interest
43,872 
(226,636)
65,399 
(163,018)
Net income attributable to the controlling interest
$ 801,824 
$ 1,860,777 
$ 2,867,531 
$ 2,897,768 
Net income per share
 
 
 
 
Basic
$ 0.01 
$ 0.03 
$ 0.04 
$ 0.04 
Diluted
$ 0.01 
$ 0.03 
$ 0.04 
$ 0.04 
Weighted average number of common shares
 
 
 
 
Basic
64,528,623 
66,625,637 
64,632,732 
66,606,789 
Diluted
65,774,967 
67,357,297 
65,715,021 
67,333,967 
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (USD $)
3 Months Ended
Jun. 25, 2011
3 Months Ended
Jun. 26, 2010
6 Months Ended
Jun. 25, 2011
6 Months Ended
Jun. 26, 2010
Net income
$ 757,952 
$ 2,087,413 
$ 2,802,132 
$ 3,060,786 
Foreign currency translation gain (loss)
739,806 
(1,460,794)
1,084,671 
(782,797)
Unrealized holding (losses) gains on marketable securities
(716,282)
(1,243,145)
(393,095)
503,765 
Reclassifications of gains in net income
(411,510)
(1,565,170)
(428,469)
(1,635,118)
Comprehensive income (loss)
369,966 
(2,181,696)
3,065,239 
1,146,636 
Comprehensive (income) loss attributable to the noncontrolling interest
(96,573)
(538,511)
(77,919)
11,391 
Comprehensive income (loss) attributable to Kopin Corporation
$ 273,393 
$ (2,720,207)
$ 2,987,320 
$ 1,158,027 
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (USD $)
Total
Common Stock
Additional Paid-in Capital
Treasury Stock
Accumulated Other Comprehensive Income
Accumulated Deficit
Total Kopin Corporation Stockholders' Equity
Noncontrolling interest
Beginning Balance at Dec. 25, 2010
$ 170,625,375 
$ 725,708 
$ 313,311,889 
$ (26,580,823)
$ 5,985,345 
$ (127,606,200)
$ 165,835,919 
$ 4,789,456 
Beginning Balance (in shares) at Dec. 25, 2010
 
72,570,835 
 
 
 
 
 
 
Exercise of stock options (in shares)
 
19,700 
 
 
 
 
 
 
Exercise of stock options
72,445 
197 
72,248 
 
 
 
72,445 
 
Vesting of restricted stock (in shares)
 
63,125 
 
 
 
 
 
 
Vesting of restricted stock
 
631 
(631)
 
 
 
 
 
Stock based compensation expense
1,470,524 
 
1,470,524 
 
 
 
1,470,524 
 
Net unrealized holding loss on marketable securities
(1,064,157)
 
 
 
(1,064,157)
 
(1,064,157)
 
Foreign currency translation adjustments
1,084,671 
 
 
 
941,353 
 
941,353 
143,318 
Change in other-than-temporary impairment loss recorded in other comprehensive income
199,723 
 
 
 
199,723 
 
199,723 
 
Restricted stock for tax withholding obligations (in shares)
 
(20,840)
 
 
 
 
 
 
Restricted stock for tax withholding obligations
(63,069)
(208)
(62,861)
 
 
 
(63,069)
 
Treasury stock purchase
(1,907,324)
 
 
(1,907,324)
 
 
(1,907,324)
 
Net income
2,802,132 
 
 
 
 
2,867,531 
2,867,531 
(65,399)
Ending Balance at Jun. 25, 2011
$ 173,220,320 
$ 726,328 
$ 314,791,169 
$ (28,488,147)
$ 6,062,264 
$ (124,738,669)
$ 168,352,945 
$ 4,867,375 
Ending Balance (in shares) at Jun. 25, 2011
 
72,632,820 
 
 
 
 
 
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $)
6 Months Ended
Jun. 25, 2011
6 Months Ended
Jun. 26, 2010
Cash flows from operating activities:
 
 
Net income
$ 2,802,132 
$ 3,060,786 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
Depreciation and amortization
3,812,998 
3,697,463 
Accretion of discount on marketable debt securities
(82,219)
(84,112)
Stock-based compensation
1,470,524 
1,174,094 
Equity loss in unconsolidated affiliate
154,238 
182,586 
Foreign currency losses
575,580 
366,374 
Gain on sale of investments
(368,641)
(2,597,505)
Change in allowance for bad debt
(360,375)
 
Change in inventory reserves
271,636 
268,750 
Changes in assets and liabilities:
 
 
Accounts receivable
(2,065,893)
(1,594,190)
Inventory
2,786,195 
(1,388,326)
Prepaid expenses and other current assets
210,907 
(1,352,014)
Accounts payable, accrued expenses and other accrued liabilities
(5,069,743)
(109,215)
Billings in excess of revenue earned
(606,121)
(487,030)
Net cash provided by operating activities
3,531,218 
1,137,661 
Cash flows from investing activities:
 
 
Proceeds from sale and maturity of marketable debt securities
14,997,567 
24,168,590 
Purchase of marketable debt securities
(19,854,118)
(36,837,378)
Proceeds from sale of investments
392,196 
4,223,536 
Investment in Forth Dimension Displays, net of cash acquired
(10,084,307)
 
Other assets
(19,655)
28,533 
Capital expenditures
(3,865,205)
(4,316,868)
Net cash used in investing activities
(18,433,522)
(12,733,587)
Cash flows from financing activities:
 
 
Treasury stock purchases
(1,907,324)
 
Proceeds from exercise of stock options
72,445 
30,619 
Settlements of restricted stock for tax withholding obligations
(63,069)
(103,433)
Net cash used in financing activities
(1,897,948)
(72,814)
Effect of exchange rate changes on cash
136,116 
7,210 
Net decrease in cash and equivalents
(16,664,136)
(11,661,530)
Cash and equivalents:
 
 
Beginning of period
49,834,547 
54,832,744 
End of period
33,170,411 
43,171,214 
Supplemental disclosure of cash flow information:
 
 
Income taxes paid
139,000 
200,000 
Supplemental schedule of noncash investing activities:
 
 
Construction in progress included in accrued expenses
$ 995,000 
$ 464,000 
BASIS OF PRESENTATION
BASIS OF PRESENTATION

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.

CASH AND EQUIVALENTS AND MARKETABLE SECURITIES
CASH AND EQUIVALENTS AND MARKETABLE SECURITIES

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   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total

   $ 65,738,628       $ 60,848,764       $ 571,690       $ 295,412       $ (153,385   $ (31,333   $ 66,156,933       $ 61,112,843   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

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   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 26,592,356       $ 38,633,327       $ 931,250       $ 66,156,933   
  

 

 

    

 

 

    

 

 

    

 

 

 

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.

FAIR VALUE MEASUREMENTS
FAIR VALUE MEASUREMENTS

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         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 102,116,162       $ 48,668,489       $ 53,447,673       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 
            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         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 114,949,327       $ 63,642,864       $ 51,306,463       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 
INVENTORY
INVENTORY

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
 

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   
  

 

 

    

 

 

 
   $ 19,114,320       $ 21,462,871   
  

 

 

    

 

 

 

Inventory on consignment at customer locations was $3.4 million and $4.4 million at June 25, 2011 and December 25, 2010, respectively.

NET INCOME PER SHARE
NET INCOME PER SHARE

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
 

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   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average common shares outstanding -diluted

     65,774,967         67,357,297         65,715,021         67,333,967   
  

 

 

    

 

 

    

 

 

    

 

 

 

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
 

Nonvested restricted common stock

     554,012         948,189   

Stock options

     935,441         3,368,473   
  

 

 

    

 

 

 

Total

     1,489,453         4,316,662   
  

 

 

    

 

 

 
STOCK-BASED COMPENSATION
STOCK-BASED COMPENSATION

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
 
     Shares     Weighted
Average
Exercise
Price
 

Balance, December 25, 2010

     2,899,261      $ 6.45   

Options granted

     —          —     

Options forfeited/cancelled

     (735,565     8.43   

Options exercised

     (19,700     3.68   
  

 

 

   

 

 

 

Balance, June 25, 2011

     2,143,996      $ 5.79   
  

 

 

   

Exercisable, June 25, 2011

     2,143,996     
  

 

 

   

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
 

$ 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   
  

 

 

       
     2,143,996         2.83       $ 5.79   
  

 

 

       

Aggregate intrinsic value on June 25, 2011

   $ 605,988         
  

 

 

       

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
 

Balance, December 25, 2010

     2,033,607      $ 3.79   

Granted

     972,012        4.23   

Forfeited

     (1,125     2.75   

Vested

     (63,125     3.24   
  

 

 

   

Balance, June 25, 2011

     2,941,369      $ 3.95   
  

 

 

   

 

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
 

Cost of product revenues

   $ 296,866       $ 292,082   

Research and development

     288,969         183,570   

Selling, general and administrative

     884,689         698,442   
  

 

 

    

 

 

 

Total

   $ 1,470,524       $ 1,174,094   
  

 

 

    

 

 

 

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.

OTHER ASSETS AND AMOUNTS DUE TO / FROM AFFILIATES
OTHER ASSETS AND AMOUNTS DUE TO / FROM AFFILIATES

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
 

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.

ACQUISITION OF FORTH DIMENSION DISPLAYS
ACQUISITION OF FORTH DIMENSION DISPLAYS

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)
 

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   
  

 

 

   

 

 

   

 

 

 

Total

   $ 12,254,000      $ (1,254,000   $ 11,000,000   
  

 

 

   

 

 

   

 

 

 

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   
  

 

 

 

Goodwill, June 25, 2011

   $ 4,741,510   
  

 

 

 

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
 

Revenue

   $ 31,711,000       $ 58,445,000   

Net Income

   $ 1,923,000       $ 2,967,000
ACCRUED WARRANTY
ACCRUED WARRANTY

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
 

Beginning Balance

   $ 1,300,000   

Additions

     1,019,000   

Claim and reversals

     (951,000
  

 

 

 

Ending Balance

   $ 1,368,000   
  

 

 

 
INCOME TAXES
INCOME TAXES

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.

SEGMENTS AND GEOGRAPHICAL INFORMATION
SEGMENTS AND GEOGRAPHICAL INFORMATION

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

             

June 25, 2011

             

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

             

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

             

June 25, 2011

             

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

             

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   
                                   
LITIGATION
LITIGATION

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.