KOPN

KOPIN CORP 10-Q Summary: Period Ended June 26, 2004

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 26, 2004, for Kopin Corporation, a developer and manufacturer of miniature flat panel displays (CyberDisplay) and advanced semiconductor materials (III-V products including HBT transistor wafers and CyberLite LEDs). The company operates primarily in the wireless communications and portable consumer electronics sectors. As of July 24, 2004, there were 70,108,535 shares of common stock outstanding.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased by approximately 18% ($3.7 million) for the three months and 21% ($8.0 million) for the six months compared to the prior year periods. This was driven by increased demand for HBT wafers in wireless applications and CyberDisplay sales for digital still cameras.
• Widening Losses: Despite revenue growth, the net loss for the six months ended June 26, 2004, increased to $5.7 million from $3.2 million in the prior year period. This was primarily due to higher costs of product revenues and increased R&D expenses.
• Gross Margin Compression: Cost of product revenues as a percentage of sales rose to 87% for the six months ended June 26, 2004, compared to 80% in the prior year. This decline was attributed to lower manufacturing yields on new color filter CyberDisplay products and declining sales prices for LED products.
• CyberLite Performance: CyberLite LED sales declined to $2.7 million for the six months ended June 26, 2004, from $4.0 million in the prior year. The product line continues to generate negative gross margins.

Guidance, Outlook, and Risks

• Revenue Outlook: Management expects total revenues to decrease sequentially by approximately 3% in the third quarter of 2004. However, they anticipate a 30% year-over-year increase for the third quarter compared to the same period in 2003.
• Capital Expenditures: The company expects to spend between $3.0 million and $5.0 million on capital expenditures in 2004, with a broader expectation of $5.0 million to $7.0 million over the next twelve months.
• CyberLite Strategy: Management is evaluating different business models for the CyberLite LED product line, including transferring manufacturing to lower-cost countries, due to low yields and negative margins. An evaluation is expected to be completed by year-end. There is a risk of an impairment charge on approximately $16.0 million of CyberLite equipment if profitability is not achieved.
• Customer Concentration: Revenue is heavily concentrated among a few customers. In 2003, Skyworks Solutions (20%), Samsung (33%), and JVC (12%) accounted for a significant portion of total revenues. Loss of any major customer would materially impact the company.
• Supply Agreement Liability: Under a supply agreement with a significant HBT customer, the company could be liable for monetary damages up to $45 million if it fails to meet supply obligations.

Investor Verification Checklist

• Verify the progress of the CyberLite business model evaluation and the potential for an impairment charge on $16 million of assets.
• Monitor the manufacturing yields of color filter CyberDisplay products, as low yields are currently compressing gross margins.
• Assess the stability of relationships with top customers (Samsung, Skyworks, JVC), given the high concentration of revenue.
• Review the company's ability to meet the $45 million liability threshold under the HBT supply agreement.
• Track the sequential revenue decline projected for Q3 2004 and the success of penetrating the digital still camera market.