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Business Combinations
 12 Months Ended
Dec. 31, 2011
Business Combinations

4.    Business Combinations

Kopin Taiwan Corp

From Kopin Taiwan Corp’s (KTC) inception in 2002 through July 2009 the Company owned approximately 35% of KTC. In July 2009, the Company purchased 19,572,468 and 128,226 shares of KTC common stock for approximately $5,975,000 and $300,000, respectively, which increased the Company’s ownership to approximately 87%. In 2010, the Company purchased 14,349,809 shares of KTC common stock for approximately $6,150,000 to increase the Company’s ownership to approximately 90%.

The consolidated statements of operations for the periods includes the following amounts which were recorded as a result of the transaction in 2009:

 

     2009  

Gain on remeasurement of Kopin’s previous investment in KTC

    $ 599,000   

Repayment of loan by KTC which was previously written-off

      2,012,000   

Reduction in bad debt allowance

      507,000   

In fiscal 2008, the Company recorded allowances for possible bad debts for the excess of what KTC owed the Company over what the Company owed KTC. During the nine months ended September 26, 2009 the Company reduced the allowance to $0, resulting in a reduction of selling, general and administrative expenses of approximately $0.5 million.

Prior to July 2009 the Company recorded its investment in KTC under the equity method and had written down the investment to $0. The Company remeasured and wrote-up its investment in KTC by approximately $0.6 million which represented the fair market value of the investment immediately prior to the purchase of the shares in July 2009.

One of the Company’s Directors is chairman of KTC and owns approximately 1% of the outstanding common stock of KTC. This director is also an employee and stockholder of MTI and is a member of the Board of Directors of KoBrite.

 

Included in the Company’s consolidated statement of operations for 2009 is $0.6 million of net income from KTC which represents KTC’s results of operations from July 30, 2009, the date the Company took a controlling interest in KTC, through December 26, 2009. The following supplemental pro forma disclosures are provided for the year ended December 26, 2009 assuming the acquisition of the controlling interest in KTC had occurred as December 28, 2008 (the first day of the Company’s 2009 fiscal year). All intercompany transactions have been eliminated.

 

     December 26,
2009		  

Revenues

    $ 115,114,000   

Net income

      16,629,000   

Forth Dimension Displays

On January 11, 2011, the Company purchased 100% of the outstanding common stock of Forth Dimension Displays Ltd. (FDD) for approximately $11.0 million plus contingent consideration. In addition to the approximate $11.0 million cash paid there were provisions for contingent consideration if certain revenue milestones were met. The revenue milestones were not met and no additional consideration was owed. Commencing in the first quarter of 2011, the Company consolidated the financial results 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 of the acquired company with limited exceptions.

The 2011 purchase of FDD shares was accounted for as follows:

 

Cash consideration

    $  11,000,000  

Contingent consideration

      —     
  

 

 

  

Total purchase price

    $ 11,000,000   
  

 

 

  

The allocation of the purchase price is as follows:

 

     Jan 11, 2011
(As adjusted (A))		  

Cash and marketable securities

    $ 1,000,605   

Accounts receivable

      341,156   

Inventory

      638,331   

Plant and equipment

      1,500,202   

Other identifiable assets

      247,711   

Customer relationships

      3,300,000   

Developed technology

      1,100,000   

Trademark portfolio

      220,000   

Identifiable liabilities

      (1,952,464 ) 

Goodwill

      4,604,459   
  

 

 

  

Total

    $ 11,000,000   

 

(A) At the acquisition date the Company estimated that the contingent consideration would be $1.3 million and during 2011 it revised its estimate to $0.

 

The Company’s goodwill balance is as follows:

 

Goodwill, December 26, 2010

    $ —    

Goodwill from the acquisition of FDD at Jan. 11, 2011

      5,538,491   

Reduction in goodwill as a result of change in contingent consideration

      (934,032 ) 

Goodwill from the acquisition of FDD at Jan. 11, 2011, as adjusted

      4,604,459   

Impairment of goodwill

      (2,964,114 ) 

Foreign currency translation

      24,112   
  

 

 

  

Goodwill, December 31, 2011

    $ 1,664,457   
  

 

 

  

The Company performs impairment tests of goodwill at its reporting unit level. The Company conducts its annual goodwill impairment test on the last day of each fiscal year.

On December 31, 2011, the Company performed an impairment analysis of its finite-lived intangible assets based on a comparison of the undiscounted cash flows to the recorded carrying value of the intangible assets. This analysis resulted in the determination that a potential impairment was present. As a result of this analysis, the Company was required to determine the fair value of its finite-lived intangible assets and compare their respective fair values to their carrying values. The fair value of the acquired customer relationships is based on the benefit derived from the incremental revenue and related cash flows as a direct result of the customer relationships. The fair values of the acquired developed technology and trademark portfolio were determined by estimating the royalty expense that would be expected to be paid for the technology and trade name portfolio had they not been owned by the Company using market participant royalty rates and discounting the expected expense that is avoided given the Company’s ownership of these intangible assets. These forecasted cash flows are discounted to present value using an appropriate discount rate. As a result, the carrying values of the finite-lived intangible assets exceeded their fair values and the Company recorded impairments of $1.5 million related to customer relationships, $0.4 million related to developed technology, and $57,000 related to trademark portfolio.

After completing its finite-lived intangible asset impairment test, the Company completed its impairment analysis of the goodwill derived from the FDD acquisition and determined the goodwill was impaired. The Company’s impairment analysis for goodwill consisted of comparing the implied fair value of goodwill to its carrying value as of December 31, 2011. Determining the fair value of goodwill required determining the fair value of the FDD reporting unit using certain assumptions, including the consideration of two generally accepted valuation methodologies: (i) the income approach and (ii) the market approach. The income approach is based upon the present value of the expected income that can be generated through the ownership of the property. The market approach is a process by which the market value estimate is derived analyzing similar assets that have been recently sold or licensed and then comparing them to the subject. The Company concluded that, given the size of FDD and its relatively niche business, the income approach provided the most accurate method of valuation.

Based on this analysis, the Company recorded a $3.0 million goodwill impairment charge as of and for the year ended December 31, 2011.

The discount rate used was the value-weighted average of the Company’s estimated cost of equity and debt (“cost of capital”) derived using both known and estimated customary market metrics.

 

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 $170,000 and $665,000 in amortization for the three and twelve months ended December 31, 2011 related to its intangible assets.

Customer relationships represent the fair value of the underlying relationships and agreements with FDD customers. Developed technology represents the fair value of FDD’s technology as it exists in current products and has value through its continued use or reuse. The trademark represents the brand and name recognition associated with the marketing of FDD products and was determined to have a finite life.

The results of operations of the FDD acquisition have been included in the consolidated statements of operations from its acquisition date of January 11, 2011. FDD contributed approximately $4.9 million of net revenue to the consolidated results of operations for the fiscal year ended December 31, 2011. FDD’s net loss from operations included in the consolidated results of operation for the year ended December 31, 2011 was $6.9 million. The transaction related costs associated to the FDD acquisition were considered immaterial and included within selling, general and administrative expense for the fiscal year ended December 31, 2011.

The unaudited pro forma financial results for the fiscal year ended December 25, 2010 combine the unaudited historical results of the Company along with the unaudited historical results of FDD. The results include the effects of unaudited pro forma adjustments as if FDD was acquired on December 27, 2009 (the first day of the Company’s fiscal year 2010). There were no material nonrecurring pro forma adjustments in the calculation of revenue or earnings. The pro forma financial results presented below do not include any anticipated synergies or other expected benefits of the acquisition. The results of operations of FDD for the period January 1, 2011 through January 10, 2011 were immaterial. These results are presented for informational purposes only and are not necessarily indicative of future operations (in thousands, except per share amounts):

 

     Three Months Ended
December 25, 2010		      Twelve Months Ended
December 25, 2010		  

Revenue

    $ 34,590,000       $ 126,049,000   

Net Income

    $ 4,637,000       $ 8,497,000