UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARY
(a development-stage company)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Financial Statements:
Report of Independent Public Accountants F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Shareholders'
Equity (Deficit) F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Universal Display Corporation:
We have audited the accompanying consolidated balance sheets of Universal
Display Corporation (a Pennsylvania corporation in the development-stage) and
subsidiary as of December 31, 2000 and 1999, and the related consolidated
statements of operations, and shareholders' equity (deficit) and cash flows for
each of the three years in the period ended December 31, 2000 and for the period
from inception (June 17, 1994) to December 31, 2000. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Universal Display Corporation and subsidiary as of December 31, 2000 and 1999,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 2000 and for the period from inception
(June 17, 1994) to December 31, 2000, in conformity with generally accepted
accounting principles in the United States.
Philadelphia, Pennsylvania ARTHUR ANDERSEN LLP
March 1, 2001
F-2
UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARY
(a development-stage company)
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31, December 31,
2000 1999
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents (see Note 4) $ 7,701,040 $ 1,558,473
Short-term investments (see Note 4) 2,704,220 4,300,060
Contract research receivables 312,076 267,423
Prepaid and other current assets 204,810 452,718
------------ ------------
Total current assets 10,922,146 6,578,674
------------ ------------
PROPERTY AND EQUIPMENT, net of accumulated depreciation
of $713,884 and $123,600 4,630,257 3,679,965
ACQUIRED TECHNOLOGY, net of accumulated amortization of
$460,799 and $0 16,489,919 -
DEPOSITS 37,472 58,211
------------ ------------
$ 32,079,794 $ 10,316,850
============ ============
LIABILITIES, REDEEMABLE COMMON STOCK AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 816,131 $ 651,837
Accrued expenses 850,126 218,522
Short term portion of capital lease obligation 3,759 3,402
------------ ------------
Total current liabilities 1,670,016 873,761
------------ ------------
LONG TERM PORTION CAPITAL LEASE OBLIGATIONS 12,860 16,619
------------ ------------
REDEEMABLE COMMON STOCK (See Note 8) 570,114 -
------------ ------------
SHAREHOLDERS' EQUITY:
Preferred Stock, par value $0.01 per share, 5,000,000 shares
authorized, 200,000 shares Series A Nonconvertible Preferred
Stock, 200,000 issued and outstanding (liquidation value of $7.50
per share or $1,500,000), 300,000 shares Series B Convertible
Preferred Stock, issued and outstanding (liquidation value of
$21.48 per shares or $6,444,000) 5,000 2,000
Common Stock, par value $.01 per share, 50,000,000 shares
authorized, 16,440,286 and 13,714,563 shares issued and
outstanding, respectively 164,403 137,146
Additional paid-in capital 57,885,790 27,986,667
Deficit accumulated during development-stage (28,228,389) (18,699,343)
------------ ------------
Total shareholders' equity 29,826,804 9,426,470
------------ ------------
$ 32,079,794 $ 10,316,850
============ ============
The accompanying notes are an integral part of these statements.
F-3
UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARY
(a development-stage company)
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
-----------------------------------------------------------------------------------
Period from Inception
(June 17, 1994) to
2000 1999 1998 December 31, 2000
------------ ------------ ------------ ---------------------
REVENUE:
Contract research revenue $ 492,756 $ 519,536 $ 368,794 $ 1,474,691
------------ ------------ ------------ --------------
OPERATING EXPENSES:
Research and development (See Note 4) 7,109,205 3,171,497 1,419,394 18,930,301
General and administrative 3,261,113 2,727,856 1,933,976 11,858,357
------------ ------------ ------------ --------------
Total operating expenses 10,370,318 5,899,353 3,353,370 30,788,658
------------ ------------ ------------ --------------
Operating loss (9,877,562) (5,379,817) (2,984,576) (29,313,967)
INTEREST INCOME 348,516 254,811 190,734 1,085,578
------------ ------------ ------------ --------------
NET LOSS $ (9,529,046) $ (5,125,006) $ (2,793,842) $ (28,228,389)
============ ============ ============ ==============
BASIC AND DILUTED NET LOSS PER
COMMON SHARE $ (0.62) $ (0.42) $ (0.27)
============ ============ ============
WEIGHTED AVERAGE SHARES USED IN
COMPUTING BASIC AND DILUTED NET
LOSS PER COMMON SHARE 15,260,837 12,269,943 10,310,353
============ ============ ============
The accompanying notes are an integral part of these statements.
F-4
UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARY
(a development-stage company)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
Series A Nonconvertible
Preferred Stock
---------------------------------
Shares Amount
--------------- ---------------
BALANCE, INCEPTION - (JUNE 17, 1994) -- $ --
Net Loss -- --
------------- -------------
BALANCE, DECEMBER 31, 1994 -- --
Recapitalization by issuance of Common Stock to Enzymatics, Inc. (see Note 3) -- --
Issuance of Common Stock options to former sole director of Enzymatics, Inc. to satisfy an
Enzymatics, Inc. liability -- --
Issuance of Series A Nonconvertible Preferred Stock in connection with assignment of research
and license agreements (see Note 3) 200,000 2,000
Issuance of Common Stock through private Placements, net of issuance expenses of $50,000
(see Note 3) -- --
Issuance of Common Stock options (see Note 3) -- --
Net loss -- --
------------- -------------
BALANCE, DECEMBER 31, 1995 200,000 2,000
Issuance of Common Stock in Initial Public Offering on April 11, 1996 (see Note 3) -- --
Issuance of Common Stock warrants (see Note 9) -- --
Net loss -- --
------------- -------------
BALANCE, DECEMBER 31, 1996 200,000 2,000
Exercise of private placement warrants -- --
Issuance of Common Stock warrants -- --
Issuance of Common Stock options -- --
Issuance of Common Stock and warrants in connection with 1997 Sponsored Research Agreement
(see Note 5) -- --
Exercise of Common Stock options and warrants -- --
Net loss -- --
------------- -------------
BALANCE, DECEMBER 31, 1997 200,000 2,000
Exercise of private placement warrants -- --
Exercise of Common Stock options and warrants --
Issuance of Common Stock warrants (see Note 9) -- --
Net loss -- --
------------- -------------
Balance, December 31, 1998 2,000 --
Exercise of Common Stock options and warrants -- --
Issuance of Common Stock and warrants through private placement, net of expenses of $488,220 -- --
Issuance of Common Stock for purchase of equipment -- --
Issuance of Common Stock in connection with the executive employee bonus -- --
Issuance of Common Stock options to non employees -- --
Net loss -- --
------------- -------------
BALANCE, DECEMBER 31, 1999 200,000 2,000
Exercise of Common Stock options and warrants -- --
Issuance of Common Stock and warrants through private placement, net of expenses of $311,313 -- --
Issuance of Common Stock for purchase of equipment -- --
Issuance of Common Stock options to non employees -- --
Issuance of Redeemable Common Stock, options and warrants in connection with the Development
Agreements -- --
Issuance of Common Stock, Preferred Stock Series B, and warrants in connection with the
purchase of intangibles -- --
Issuance of Common Stock options and warrants to Scientific Advisory Board -- --
Net loss -- --
------------- -------------
BALANCE, DECEMBER 31, 2000 200,000 $ 2,000
============= =============
Series B Convertible
Preferred Stock
---------------------------------
Shares Amount
--------------- ---------------
BALANCE, INCEPTION - (JUNE 17, 1994) -- $ --
Net Loss -- --
------------- -------------
BALANCE, DECEMBER 31, 1994 -- --
Recapitalization by issuance of Common Stock to Enzymatics, Inc. (see Note 3) -- --
Issuance of Common Stock options to former sole director of Enzymatics, Inc. to satisfy an
Enzymatics, Inc. liability -- --
Issuance of Series A Nonconvertible Preferred Stock in connection with assignment of research
and license agreements (see Note 3) -- --
Issuance of Common Stock through private Placements, net of issuance expenses of $50,000
(see Note 3) -- --
Issuance of Common Stock options (see Note 3) -- --
Net loss -- --
------------- -------------
BALANCE, DECEMBER 31, 1995 -- --
Issuance of Common Stock in Initial Public Offering on April 11, 1996
(see Note 3) -- --
Issuance of Common Stock warrants (see Note 9) -- --
Net loss -- --
------------- -------------
BALANCE, DECEMBER 31, 1996 -- --
Exercise of private placement warrants -- --
Issuance of Common Stock warrants -- --
Issuance of Common Stock options -- --
Issuance of Common Stock and warrants in connection with 1997 Sponsored Research Agreement
(see Note 5) -- --
Exercise of Common Stock options and warrants -- --
Net loss -- --
------------- -------------
BALANCE, DECEMBER 31, 1997 -- --
Exercise of private placement warrants -- --
Exercise of Common Stock options and warrants
Issuance of Common Stock warrants (see Note 9) -- --
Net loss -- --
------------- -------------
Balance, December 31, 1998 -- $ --
Exercise of Common Stock options and warrants -- --
Issuance of Common Stock and warrants through private placement, net of expenses of $488,220 -- --
Issuance of Common Stock for purchase of equipment -- --
Issuance of Common Stock in connection with the executive employee bonus -- --
Issuance of Common Stock options to non employees -- --
Net loss -- --
------------- -------------
BALANCE, DECEMBER 31, 1999 -- --
Exercise of Common Stock options and warrants -- --
Issuance of Common Stock and warrants through private placement, net of expenses of $311,313 -- --
Issuance of Common Stock for purchase of equipment -- --
Issuance of Common Stock options to non employees -- --
Issuance of Redeemable Common Stock, options and warrants in connection with the Development
Agreements -- --
Issuance of Common Stock, Preferred Stock Series B, and warrants in connection with the
purchase of intangibles 300,000 3,000
Issuance of Common Stock options and warrants to Scientific Advisory Board -- --
Net loss -- --
------------- -------------
BALANCE, DECEMBER 31, 2000 300,000 $ 3,000
============= =============
Common Stock
--------------------------------
Shares Amount
--------------- ---------------
BALANCE, INCEPTION - (JUNE 17, 1994) 6,000,000 $ 6,000
Net Loss -- --
------------- -------------
BALANCE, DECEMBER 31, 1994 6,000,000 6,000
Recapitalization by issuance of Common Stock to Enzymatics, Inc. (see Note 3) 523,268 59,233
Issuance of Common Stock options to former sole director of Enzymatics, Inc. to satisfy an
Enzymatics, Inc. liability -- --
Issuance of Series A Nonconvertible Preferred Stock in connection with assignment of research
and license agreements (see Note 3) -- --
Issuance of Common Stock through private Placements, net of issuance expenses of $50,000
(see Note 3) 1,114,000 11,140
Issuance of Common Stock options (see Note 3) -- --
Net loss -- --
------------- -------------
BALANCE, DECEMBER 31, 1995 7,637,268 76,373
Issuance of Common Stock in Initial Public Offering on April 11, 1996
(see Note 3) 1,300,000 13,000
Issuance of Common Stock warrants (see Note 9) -- --
Net loss -- --
------------- -------------
BALANCE, DECEMBER 31, 1996 8,937,268 89,373
Exercise of private placement warrants 1,124,000 11,240
Issuance of Common Stock warrants -- --
Issuance of Common Stock options -- --
Issuance of Common Stock and warrants in connection with 1997 Sponsored Research Agreement
(see Note 5) 200,000 2,000
Exercise of Common Stock options and warrants 41,000 410
Net loss -- --
------------- -------------
BALANCE, DECEMBER 31, 1997 10,302,268 103,023
Exercise of private placement warrants 675 7
Exercise of Common Stock options and warrants 10,000 100
Issuance of Common Stock warrants (see Note 9) -- --
Net loss -- --
------------- -------------
Balance, December 31, 1998 10,312,943 103,130
Exercise of Common Stock options and warrants 1,687,586 16,876
Issuance of Common Stock and warrants through private placement, net of expenses of $488,220 1,414,034 14,140
Issuance of Common Stock for purchase of equipment 100,000 1,000
Issuance of Common Stock in connection with the executive employee bonus 200,000 2,000
Issuance of Common Stock options to non employees -- --
Net loss -- --
------------- -------------
BALANCE, DECEMBER 31, 1999 13,714,563 137,146
Exercise of Common Stock options and warrants 1,754,353 17,544
Issuance of Common Stock and warrants through private placement, net of expenses of $311,313 631,527 6,315
Issuance of Common Stock for purchase of equipment 89,843 898
Issuance of Common Stock options to non employees -- --
Issuance of Redeemable Common Stock, options and warrants in connection with the Development
Agreements -- --
Issuance of Common Stock, Preferred Stock Series B, and warrants in connection with the
purchase of intangibles 250,000 2,500
Issuance of Common Stock options and warrants to Scientific Advisory Board -- --
Net loss -- --
------------- -------------
BALANCE, DECEMBER 31, 2000 16,440,286 $ 164,403
============= =========
Deficit
Additional Accumulated
Paid-in During
-------------- Development
Capital Stage
-------------- ---------------
BALANCE, INCEPTION - (JUNE 17, 1994) $ -- $ --
Net Loss -- (11,121)
------------ -------------
BALANCE, DECEMBER 31, 1994 -- (11,121)
Recapitalization by issuance of Common Stock to Enzymatics, Inc. (see Note 3) (243,393) --
Issuance of Common Stock options to former sole director of Enzymatics, Inc. to satisfy an
Enzymatics, Inc. liability 140,000 --
Issuance of Series A Nonconvertible Preferred Stock in connection with assignment of research
and license agreements (see Note 3) 348,000 --
Issuance of Common Stock through private Placements, net of issuance expenses of $50,000
(see Note 3) 2,166,860 --
Issuance of Common Stock options (see Note 3) 9,950 --
Net loss -- (3,072,661)
------------ -------------
BALANCE, DECEMBER 31, 1995 2,421,417 (3,083,782)
Issuance of Common Stock in Initial Public Offering on April 11, 1996
(see Note 3) 5,492,928 --
Issuance of Common Stock warrants (see Note 9) 25,000 --
Net loss -- (1,768,995)
------------ -------------
BALANCE, DECEMBER 31, 1996 7,939,345 (4,852,777)
Exercise of private placement warrants 3,929,560 --
Issuance of Common Stock warrants 528,985 --
Issuance of Common Stock options 216,000 --
Issuance of Common Stock and warrants in connection with 1997 Sponsored Research Agreement
(see Note 5) 3,118,329 --
Exercise of Common Stock options and warrants 80,590 --
Net loss -- (5,927,718)
------------ -------------
BALANCE, DECEMBER 31, 1997 15,812,809 (10,780,495)
Exercise of private placement warrants 2,356 --
Exercise of Common Stock options and warrants 2,800 --
Issuance of Common Stock warrants (see Note 9) 234,916 --
Net loss -- (2,793,842)
------------ -------------
Balance, December 31, 1998 $ 16,052,881 $ (13,574,337)
Exercise of Common Stock options and warrants 6,220,104 --
Issuance of Common Stock and warrants through private placement, net of expenses of $488,220 4,778,657 --
Issuance of Common Stock for purchase of equipment 430,000
Issuance of Common Stock in connection with the executive employee bonus 421,220
Issuance of Common Stock options to non employees 83,805 --
Net loss -- (5,125,006)
------------ -------------
BALANCE, DECEMBER 31, 1999 27,986,667 (18,699,343)
Exercise of Common Stock options and warrants 6,837,299 --
Issuance of Common Stock and warrants through private placement, net of expenses of $311,313 5,050,351 --
Issuance of Common Stock for purchase of equipment 386,325
Issuance of Common Stock options to non employees 10,000 --
Issuance of Redeemable Common Stock, options and warrants in connection with the Development
Agreements 92,997 --
Issuance of Common Stock, Preferred Stock Series B, and warrants in connection with the
purchase of intangibles 16,919,468 --
Issuance of Common Stock options and warrants to Scientific Advisory Board 602,683 --
Net loss -- (9,529,046)
------------ --------------
BALANCE, DECEMBER 31, 2000 $ 57,885,790 $ (28,228,389)
============ =============
Total
Equity/(Deficit)
----------------
BALANCE, INCEPTION - (JUNE 17, 1994) $ 6,000
Net Loss (11,121)
------------
BALANCE, DECEMBER 31, 1994 (5,121)
Recapitalization by issuance of Common Stock to Enzymatics, Inc. (see Note 3) (184,160)
Issuance of Common Stock options to former sole director of Enzymatics, Inc. to satisfy an
Enzymatics, Inc. liability 140,000
Issuance of Series A Nonconvertible Preferred Stock in connection with assignment of research
and license agreements (see Note 3) 350,000
Issuance of Common Stock through private Placements, net of issuance expenses of $50,000
(see Note 3) 2,178,000
Issuance of Common Stock options (see Note 3) 9,950
Net loss (3,072,661)
------------
BALANCE, DECEMBER 31, 1995 (583,992)
Issuance of Common Stock in Initial Public Offering on April 11, 1996 (see Note 3) 5,505,928
Issuance of Common Stock warrants (see Note 9) 25,000
Net loss (1,768,995)
------------
BALANCE, DECEMBER 31, 1996 3,177,941
Exercise of private placement warrants 3,940,800
Issuance of Common Stock warrants 528,985
Issuance of Common Stock options 216,000
Issuance of Common Stock and warrants in connection with 1997 Sponsored Research Agreement
(see Note 5) 3,120,329
Exercise of Common Stock options and warrants 81,000
Net loss (5,927,718)
------------
BALANCE, DECEMBER 31, 1997 5,137,337
Exercise of private placement warrants 2,363
Exercise of Common Stock options and warrants 2,900
Issuance of Common Stock warrants (see Note 9) 234,916
Net loss (2,793,842)
------------
Balance, December 31, 1998 2,583,674
Exercise of Common Stock options and warrants 6,236,980
Issuance of Common Stock and warrants through private placement, net of expenses of $488,220 4,792,797
Issuance of Common Stock for purchase of equipment 431,000
Issuance of Common Stock in connection with the executive employee bonus 423,220
Issuance of Common Stock options to non employees 83,805
Net loss (5,125,006)
------------
BALANCE, DECEMBER 31, 1999 9,426,470
Exercise of Common Stock options and warrants 6,854,843
Issuance of Common Stock and warrants through private placement, net of expenses of $311,313 5,056,666
Issuance of Common Stock for purchase of equipment 387,223
Issuance of Common Stock options to non employees 10,000
Issuance of Redeemable Common Stock, options and warrants in connection with the Development
Agreements 92,997
Issuance of Common Stock, Preferred Stock Series B, and warrants in connection with the
purchase of intangibles 16,924,968
Issuance of Common Stock options and warrants to Scientific Advisory Board 602,683
Net loss (9,529,046)
------------
BALANCE, DECEMBER 31, 2000 $ 29,826,804
============
F-5
UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARY
(a development-stage company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Period from
Year Ended December 31, Inception
---------------------------------------------------- (June 17, 1994) to
2000 1999 1998 December 31, 2000
------------ ------------ ------------ -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (9,529,046) $ (5,125,006) $ (2,793,842) $ (28,228,389)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 590,284 56,368 27,879 713,884
Amortization of intangibles 460,799 -- -- 460,799
Issuance of Common Stock options and warrants
for services 10,000 83,805 234,916 679,671
Issuance of Common Stock and warrants in
connection with Amended research and license -- -- -- 3,120,329
agreements
Issuance of Common Stock in connection with
executive compensation -- 423,220 -- 423,220
Issuance of Redeemable Common Stock, options and
warrants in connection with Development Agreement 663,111 -- -- 663,111
Issuance of Common Stock options and warrants for
Scientific Advisory Board 602,683 -- -- 602,683
Acquired in-process technology -- -- -- 350,000
(Increase) decrease in assets:
Contract research receivables (44,653) (145,482) (33,575) (312,076)
Receivable from related party -- -- 51,906 --
Prepaids and other current assets 247,908 (5,832) 71,905 224,175
Deposits 20,739 39,862 (22,000) (37,472)
Increase in liabilities:
Accounts payable and accrued expenses 484,585 375,039 215,080 1,354,644
Payable to related parties -- -- -- 250,000
------------ ------------ ------------ -------------
Net cash used in operating activities (6,493,590) (4,298,026) (2,247,731) (19,735,421)
------------ ------------ ------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment (1,153,353) (3,229,101) (26,689) (4,505,897)
Purchases of intangibles (25,750) -- -- (25,750)
Purchases of short-term investments (3,368,621) (7,776,880) (270,932) (18,866,003)
Proceeds from sale of short-term investments 4,964,461 4,004,322 4,283,000 16,161,783
------------ ------------ ------------ -------------
Net cash provided by (used) in
investing activities 416,737 (7,001,659) 3,985,379 (7,235,867)
------------ ------------ ------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of Common Stock 5,367,979 4,792,797 -- 21,627,767
Proceeds from the exercise of Common Stock
options and warrants 6,854,843 6,236,980 5,263 13,047,963
Principal payment on capital lease (3,402) -- -- (3,402)
------------ ------------ ------------ -------------
Net cash provided by financing activities 12,219,420 11,029,777 5,263 34,672,328
------------ ------------ ------------ -------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 6,142,567 (269,908) 1,742,911 7,701,040
CASH AND CASH EQUIVALENT, BEGINNING OF PERIOD 1,558,473 1,828,381 85,470 --
------------ ------------ ------------ -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 7,701,040 $ 1,558,473 $ 1,828,381 $ 7,701,040
============ ============ ============ =============
The accompanying notes are an integral part of these statements.
F-6
UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARY
(a development-stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
1. BACKGROUND:
Universal Display Corporation (the "Company"), a development-stage company, is
engaged in the research and development and commercialization of organic light
emitting diode ("OLED") technology for potential flat panel display
applications.
The Company, formerly known as Enzymatics, Inc. ("Enzymatics"), was incorporated
under the laws of the Commonwealth of Pennsylvania on April 24, 1985 and
commenced its current business activities on August 1, 1994. The New Jersey
corporation formerly known as Universal Display Corporation ("UDC") was
incorporated under the laws of the State of New Jersey on June 17, 1994 (see
Note 3).
Research and development of the OLED technology is being conducted at the
Advanced Technology Center for Photonics and Optoelectronic Materials at
Princeton University and at the University of Southern California ("USC") (on a
subcontract basis with Princeton University), pursuant to a Sponsored Research
Agreement dated August 1, 1994, as amended (the "1994 Sponsored Research
Agreement"), originally between the Trustees of Princeton University ("Princeton
University") and American Biomimetics Corporation ("ABC"), a privately held
Pennsylvania corporation and affiliate of the Company. In October 1997, the
Company entered into a new 5-year Sponsored Research Agreement with Princeton
University and USC (the "1997 Sponsored Research Agreement") for research and
development of the OLED technology (see Note 5). Pursuant to a license agreement
dated August 1, 1994 (the "1994 License Agreement") between Princeton University
and ABC, assigned to the Company by ABC in June 1995, the Company has a
worldwide exclusive license to manufacture and market products based on
Princeton University's pending patent application relating to the OLED
technology and the right to obtain a similar license to inventions conceived or
discovered under the 1994 Sponsored Research Agreement and to sublicense such
rights. In October 1997, the Company amended the 1994 License Agreement (the
"1997 Amended License Agreement") to modify certain terms of the license (see
Note 5).
The Company is also engaged in research, development and commercialization
activities at its 11,000 square foot facility, which is leased in Ewing, New
Jersey. The Company moved its operations to this facility in the fourth quarter
of 1999.
The Company is a development-stage entity with no significant operating activity
to date. Expenses incurred have primarily been in connection with research and
development funding, obtaining financing and administrative activities. The
developmental nature of the activities is such that significant inherent risks
exist in the Company's operations. To the extent that Princeton University's
research efforts do not result in the development of commercially viable
applications for the OLED technology, the Company will not have any meaningful
operations. Even if a product incorporating the OLED technology is developed and
introduced into the marketplace, additional time and funding may be necessary
before significant revenues are realized. Completion of the commercialization of
the Company's technology will require funds substantially greater than the
Company currently has available. There is no assurance that such financing will
be available to the Company, on commercially reasonable terms or at all. Also,
F-7
while the Company funds the OLED technology research, the scope of and technical
aspects of the research and the resources and efforts directed to such research
is subject to the control of Princeton University and the principal
investigators. Accordingly, the Company's success is dependent on the efforts of
Princeton University and the principal investigators. The 1997 Sponsored
Research Agreement provides that if certain of the principal investigators are
unavailable to continue to serve as principal investigators, because such
persons are no longer associated with Princeton University or otherwise, and
successors acceptable to both the Company and Princeton University are not
available, the 1997 Sponsored Research Agreement will terminate.
2. LIQUIDITY:
As of December 31, 2000, the Company has an accumulated deficit of $28,228,389.
In addition, the Company has incurred losses since its inception and is subject
to those risks associated with companies in the early stages of development. The
completion of the commercialization of the Company's technology may require
funds substantially greater than the Company currently has available. Management
believes that its cash and cash equivalents and short-term investments as of
December 31, 2000 are sufficient to fund its operations during 2001.
3. STOCK TRANSACTIONS, MERGER, RECAPITALIZATION AND PUBLIC OFFERING:
On June 22, 1995, a wholly-owned subsidiary of the Company consummated an
Agreement and Plan of Reorganization ("Merger Agreement") with a New Jersey
corporation formerly known as UDC. At the time of the merger, UDC was engaged in
the business which is currently being conducted by the Company. Prior to the
merger, the Company was known as Enzymatics, an inactive Pennsylvania
corporation, and was engaged in a business separate from and unrelated to that
of UDC. Enzymatics had incurred significant losses since its inception in 1985
and, notwithstanding a public offering, failed to find significant alternative
sources of financing to enable it to continue its operations on any scale. In
June 1994, the shareholders of Enzymatics approved the sale of substantially all
of its assets to a third party. Management of UDC concluded that merging with a
former publicly traded company, and acquiring access to its shareholder base,
would facilitate its ability to raise additional capital in the private or
public markets. Management of UDC determined that such additional capital would
be necessary to fulfill its financial obligations under the Transfer Agreement
(as herein defined) pursuant to which it obtained certain rights and obligations
related to the OLED technology, obtained funds to commercialize the OLED
technology, fund the acquisition of additional intellectual property rights
useful to the OLED technology and to fund working capital. As of June 22, 1995,
Enzymatics had 523,268 shares issued and outstanding (after giving effect to a
reverse stock split of 10.9672) which were not actively traded. Pursuant to the
Merger Agreement, the former Enzymatics shareholders received 523,268 shares of
the merged entity's Common Stock. Additionally, Nachman, Hays & Associates
(NHA), a consulting firm, received options to purchase 84,234 shares of the
merged entity's Common Stock at an exercise price of $.29 per share (see Note 8)
as payment of NHA's consulting services in connection with the wind-down of
Enzymatics. These options were issued to satisfy a liability which was reflected
on the balance sheet of Enzymatics on the date of the merger. The sole director
of Enzymatics, is also a principal of NHA.
The merger was treated, for accounting purposes, as a recapitalization of UDC
whereby UDC issued 523,268 shares of Common Stock to the Enzymatics shareholders
and assumed Enzymatics shareholders' deficit of $184,160. The assets and
liabilities of both companies have been recorded at their historical book values
in these financial statements. The assets of Enzymatics consisted of cash and
its liabilities consisted of payables related to the merger and other
professional fees.
Upon consummation of the merger, UDC's shareholders collectively owned
approximately 92% of the outstanding shares of the merged entity, with the
former Enzymatics shareholders retaining the balance of approximately 8%. UDC
was the surviving corporation in the merger, changed its name to UDC, Inc., and,
as a result of the merger, became a wholly-owned subsidiary of Enzymatics. At
the effective time of the merger, Enzymatics changed its name to Universal
F-8
Display Corporation. Universal Display Corporation and its wholly owned
subsidiary, UDC, Inc., are herein referred to collectively as the "Company."
Contemporaneous with the merger, the Company and ABC entered into a Technology
Transfer Agreement dated June 22, 1995 (the "Transfer Agreement") pursuant to
which, among other things, ABC assigned the 1994 License Agreement to the
Company, and granted to the Company an exclusive worldwide sublicense to patents
and other intellectual property rights to display technology developed under a
Sponsored Research Agreement dated October 22, 1993 between ABC and Princeton
University (the "1993 Sponsored Research Agreement") in exchange of (i)
reimbursement of ABC's scheduled payments and expenses previously made to
Princeton University under the 1994 Sponsored Research Agreement in the amount
of $674,000 and a payment of $500,000 for the sublicense under the 1993
Sponsored Research Agreement which were charged to research and development
expense; (ii) the Company's assumption of ABC's obligation to pay all future
scheduled payments under the 1994 Sponsored Research Agreement, which were
approximately $1,610,000, plus expenses related thereto estimated to be $500,000
for a total of $2,110,000; and (iii) 200,000 shares of the Company's Series A
Nonconvertible Preferred Stock (see Note 9) with a fair value of $350,000.
Also, contemporaneous with the merger, the Company sold 781,500 units ("Units")
at a price of $2.00 per Unit, in a private placement, which generated proceeds
of $1,513,000, net of offering expenses in the amount of $50,000. Each Unit
consisted of one share of Common Stock and one warrant to purchase one share of
Common Stock at an exercise price of $3.50 per share. Additionally, 125,000
Units with a fair value of $250,000, based upon the price of the Units, were
transferred to a non-affiliate debt holder of ABC to satisfy $250,000 of ABC's
outstanding debt. Therefore, the Company had a receivable of this amount from
ABC. Accordingly, ABC netted this $250,000 receivable against the Company's
payable to related parties. In addition, on July 17, 1995, the Company sold an
additional 207,500 Units which generated gross proceeds of $415,000. On April
11, 1996, the Company consummated a public offering of 1,300,000 shares of
Common Stock at a price of $5.00 per share and redeemable warrants to purchase
1,495,000 shares of Common Stock at an exercise price of $3.50 per share, at a
price of $.10 per warrant. The Company received net cash proceeds of $5,282,665
from the public offering (excluding $223,263 representing a portion of the
offering expenses previously charged to general and administration expenses).
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The consolidated financial statements include the accounts of Universal Display
Corporation and its wholly-owned subsidiary, UDC, Inc. (see Note 3). All
significant intercompany transactions and accounts have been eliminated.
Management's Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash, Cash Equivalents and Short-term Investments
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents. At December
31, 2000, unrealized holding gains or losses were not material. The gross
proceeds from sales and maturities of investments were $4,964,461 and $4,004,322
F-9
for the years ended December 31, 2000 and 1999, respectively. Gross realized
gains and losses for the years ended December 31, 2000 and 1999 were not
material. For the purpose of determining gross realized gains and losses, the
cost of securities sold is based upon specific identification.
Fair Value of Financial Instruments
Cash and cash equivalent, short-term investments, contract research receivables,
prepaids and other current assets, accounts payable, accrued expenses and
redeemable common stock are reflected in the accompanying financial statements
at fair value due to the short-term nature of those instruments. The carrying
amount of capital lease obligations approximate fair value at the balance sheet
dates.
Property and Equipment
Property and equipment are stated at cost and depreciated on a straight-line
basis over 3 to 7 years for office and lab equipment, furniture and fixtures,
and the lease term for leasehold improvements. Repair and maintenance costs are
charged to expense as incurred. Additions and betterments are capitalized.
Property, plant and equipment consists of the following:
December 31
--------------------------
2000 1999
----------- -----------
Office and lab equipment $ 1,742,667 $ 628,281
Furniture and fixtures 102,014 90,804
Leasehold improvements 1,034,533 996,652
Construction-in-progress 2,464,927 2,087,828
----------- ------------
5,344,141 3,803,565
Less- Accumulated depreciation (713,884) (123,600)
----------- ------------
$ 4,630,257 $ 3,679,965
=========== ============
Depreciation expense was $590,284, $56,368 and $27,879 for the years ended
December 31, 2000, 1999 and 1998, respectively.
Construction-in-progress costs consist of costs incurred for the acquisition of
lab equipment for the Company's new facility. Upon commencement of operation of
the lab equipment, the costs associated with such assets will be depreciated
over the estimated useful life of the lab equipment.
F-10
Acquired Technology
Acquired technology consists of acquired license rights for patents and know-how
obtained from PD-LD, Inc. and Motorola (see Note 6). The intangible asset at
December 31, 2000 consisted of the following:
PD-LD, Inc. $ 1,481,250
Motorola 15,469,468
------------
16,950,718
Less: Accumulated Amortization (460,799)
------------
Acquired Technology, net $ 16,489,919
============
Acquired technology is amortized on a straight-line basis over its estimated
useful life of ten years.
Long-Lived Assets
The Company continually evaluates whether events and circumstances have occurred
that indicate that the remaining estimated useful life of long-lived assets may
warrant revision or that the remaining balance may not be recoverable. When
factors indicate that long-lived assets should be evaluated for possible
impairment, the Company uses an estimate of the related undiscounted cash flows
in measuring whether the long-lived asset should be written down to fair value.
Measurement of the amount of the impairment will be based on generally accepted
valuation methodologies, as deemed appropriate. As of December 31, 2000,
management believes that no revision to the remaining useful lives or write-down
of long-lived assets is required.
Net Loss Per Common Share
Basic EPS is computed by dividing net income by the weighted-average number of
common shares outstanding for the period. Diluted EPS reflects the potential
dilution from the exercise, or conversion of securities into Common Stock. For
the years ended December 31, 2000, 1999 and 1998 the effects of the exercise of
outstanding stock options and warrants were excluded from the calculation of
diluted EPS because their effect was antidilutive.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133, as
amended in 1999 by SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133 -
an amendment of comprehensive and consistent standard for the recognition and
measurement of derivatives and hedging activities. As the Company does not
currently hold derivative instrument or engage in hedging activities, the
adoption of this pronouncement is expected to have no impact on the Company's
financial position or results of operations.
In December 1999, the Securities and Exchange Commission staff issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB101"). The Bulletin draws on existing accounting rules and provides
specific guidance on how those accounting rules should be applied. SAB 101 is
effective for fiscal years beginning after December 15, 1999. The Company
adopted SAB 101 and it did not have a material impact on its method of revenue
recognition.
Contract Research Revenue
Contract research revenues are recognized as the related expenses are incurred.
F-11
Research and Development
Expenditures for research and development are charged to operations as incurred.
Research and development expenses consist of the following:
Year Ended December 31,
-----------------------------------------------
2000 1999 1998
----------- ----------- -------------
Payments made to Princeton University
and Southern California under the 1997 Sponsored
Research Agreements (see Note 5) $ 733,230 $ 544,450 $ 125,842
Patent application expenses 1,227,184 854,463 630,929
PPG development agreement (see Notes 8 and 9) 663,111 -- --
Scientific Advisory Board Compensation
(see Notes 9 and 14) 602,683 -- --
Development and operations in the new facility 2,057,202 807,191 --
Expansion of the Company's research and development team 1,364,996 965,393 --
Amortization of intangibles 460,799 -- --
Other expenses -- -- 662,623
----------- ----------- -------------
$ 7,109,205 $ 3,171,497 $ 1,419,394
=========== =========== =============
Statement of Cash Flow Information
Capital lease obligations of $27,120 were incurred on equipment leases entered
into in 1999. In 2000 and 1999, the Company issued 89,843 and 100,000 shares of
its Common Stock to a vendor in consideration for lab equipment. The shares were
valued at $4.31 per share, which was the approximate fair market value at the
transaction date. In 2000, in connection with PD-LD agreement (see Note 6), the
Company issued 50,000 shares of its Common Stock valued at $1,481,250, which was
the fair market value at the transaction date. In 2000, in connection with the
Motorola agreement (see Note 6) the Company issued 200,000 shares of its Common
Stock valued at $4,412,500, and 300,000 shares of its Series B Convertible
Preferred Stock valued at $6,618,750, and a warrant to purchase 150,000 shares
of Common Stock at $21.60 per share, which was the approximate fair market value
at the transaction date. In connection with the PPG agreement (see Note 8), the
Company issued 26,448 of Redeemable Common Shares shares and a warrant to
purchase 26,448 shares of Common Stock at $24.29 per share. In 2000, the Company
accrued for $311,313 in private placement fees which was a component of
additional paid in capital (see Note 9).
Income Taxes
Deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax bases of assets and liabilities.
Deferred tax assets or liabilities at the end of each period are determined
using the tax rate expected to be in effect when taxes are actually paid or
recovered.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year
presentation.
5. SPONSORED RESEARCH AGREEMENT WITH PRINCETON UNIVERSITY:
On October 9, 1997, the Company entered into the 1997 Sponsored Research
Agreement with Princeton University and entered into a 1997 Amended License
Agreement with Princeton University and USC amending its 1994 License Agreement
with Princeton University. The 1997 Sponsored Research Agreement continues and
expands the sponsored research which commenced in 1994 under which the Company
funds additional research and development work at Princeton University (and at
F-12
USC under a subcontract with Princeton University) in OLED technology. The 1997
Sponsored Research Agreement requires the Company to pay up to $4.4 million
commencing on July 31, 1998 through July 31, 2002, which period is subject to
extension. The amounts due to Princeton University will be expensed when paid by
the Company. Under the 1997 License Agreement, the Company has the worldwide
exclusive and perpetual license to manufacture and market products, and to
sublicense those rights, based on Princeton University's and USC's pending
patent applications relating to the OLED technology and conceived under the 1994
and 1997 Sponsored Research Agreements. The Company is required to pay Princeton
University a royalty in the amount of 3% of the Company's net sales of products
utilizing the OLED technology. In circumstances where the Company sublicenses
the OLED technology (except to affiliates), the royalty required to be paid by
the Company was reduced in the 1997 License Agreement from 50% to 3%. These
royalty rates are subject to upward adjustments under certain conditions. In
October 1997, in connection with the 1997 License Agreement and Sponsored
Research Agreement, the Company issued 140,000 Common Shares and 175,000
warrants to purchase Common Stock to Princeton University as well as 60,000
Common Shares and 75,000 warrants to purchase Common Stock to the University of
Southern California. The Company recorded a charge of $3,120,329 related to the
issuance of the Common Stock and warrants to purchase Common Stock to research
and development expenses. The value of the warrants was determined in accordance
with Statement of Financial Accounting Standards No. 123 ("SFAS 123"),
"Accounting for Stock-Based Compensation."
6. ACQUIRED TECHNOLOGY:
On July 19, 2000, the Company, PD-LD, Inc. ("PD-LD") and Princeton University
entered into a Termination, Amendment and License Agreement whereby the Company
acquired all PD-LD's rights to certain issued and pending patents and technology
known as organic vapor phase deposition ("OVPD") in exchange for 50,000 shares
of the Company's Common Stock. Pursuant to this transaction, the Company has
included in its License Agreement with Princeton the exclusive license to all
Princeton patents and technology related to OVPD, whether developed pursuant to
its research agreements with Princeton or otherwise. The acquisition of these
patents had a fair value of $1,481,250 (see Note 4).
On September 29, 2000, the Company entered into a license agreement with
Motorola, Inc. ("Motorola"). Pursuant to the license agreement, the Company
licensed from Motorola 67 US patents, 7 US patent applications, and additional
foreign patents. These patents expire between 2012 and 2018. The Company has the
sole right to sublicense these Motorola patents to manufacturers. As
consideration for the licenses, the Company issued to Motorola 200,000 shares of
its Common Stock (valued at $4,412,500), 300,000 shares of its Series B
Convertible Preferred Stock (valued at $6,618,750), and a warrant to purchase
150,000 shares of its Common Stock at $21.60 per share. The warrant becomes
exercisable on September 29, 2001 and will remain exercisable until September
29, 2008. The warrant was recorded at fair market value ($2,206,234) based on
the Black-Scholes option-pricing model and has been recorded as a component of
the costs of the acquired technology. The Company also issued a warrant to
acquire 150,000 shares of Common Stock as a finder's fee in connection with this
transaction. The warrant was granted with an exercise price of $21.60 per share.
The warrant is exercisable immediately and will remain exercisable until
September 29, 2007. This warrant was accounted for at its fair value
($2,206,234) based on the Black-Scholes option pricing model and has been
recorded as a component of the cost of the acquired technology. In addition, the
Company incurred $25,750 of direct cash transaction costs that have been
included in the cost of the acquired technology. In total, the Company recorded
an intangible asset of $15,469,468 for the technology acquired from Motorola
(see Note 4). In addition, the Company will pay to Motorola a royalty based on
future sales of products incorporating OLED technology (see Note 11). Such
royalty payments may be made, at the Company's discretion, in either all cash or
(50%) cash and (50%) in shares of Common Stock. The number of shares of common
stock used to pay the royalty portion shall be equal to 50% of the royalty due
divided by the average daily closing price per share of stock over the ten
trading days ending two business days prior to the date the common stock is
issued.
F-13
7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
Accrued expenses consist of the following:
December 31
----------------------
2000 1999
--------- ---------
Accrued professional fees $ 239,293 $ 142,575
Payroll 102,914 -
Utilities 83,557 -
Vacation 100,154 63,922
Private placement fees 311,313 -
Other 12,895 12,025
--------- ---------
$ 850,126 $ 218,522
========= =========
Professional fees of $398,000 and $369,519 were included in accounts payable at
December 31, 2000 and 1999, respectively.
8. REDEEMABLE COMMON STOCK
On October 1, 2000, the Company entered into a 5 year Development and License
Agreement with PPG Industries, Inc. (PPG) to leverage the Company's OLED flat
panel display technology with PPG's expertise in the development and
manufacturing of organic materials. A team of PPG scientists and engineers are
assisting the Company in developing and commercializing its proprietary OLED
material system. In consideration for PPG's services under the agreement, UDC
will issue shares of its Common Stock and warrants to acquire its Common Stock
to PPG on an annual basis over the period from January 1, 2001 through December
31, 2005. The amount of securities issued is subject to adjustment under certain
circumstances, as defined in the agreement.
On November 11, 2000, in consideration for PPG's services through December 31,
2000, UDC issued 26,448 shares of Redeemable Common Shares and an 11.5%
promissory note in the amount of $535,300. The note is only payable if the
Redeemable Common Shares issued are not registered with the SEC by May 31, 2001.
The amount of the note is based on the fair market value of the services
rendered by PPG through December 31, 2000. The company recorded a charge to
research and development expense of $535,500. If the note is paid then PPG will
return the Common Shares previously issued.
In accordance with the PPG agreement, UDC issued 1,720 shares of Common Stock on
January 31, 2001. The additional shares were issued as a result of the final
accounting for actual costs incurred by PPG. The promissory note was also
increased to reflect actual costs incurred through December 31, 2000.
Accordingly, the Company accrued $34,814 of additional research and development
expense as of December 31, 2000, for these additional shares.
F-14
9. SERIES A NONCONVERTIBLE PREFERRED STOCK, SERIES B CONVERTIBLE PREFERRED
STOCK, SHAREHOLDERS' EQUITY (DEFICIT), STOCK OPTIONS AND WARRANTS:
Series A Nonconvertible Preferred Stock
In 1995, the Company issued 200,000 shares of Series A Nonconvertible Preferred
Stock ("Series A") to ABC (see Note 3), which has a liquidation value of $7.50
per share. Series A holders, as a single class, have the right to elect two of
the Company's Board of Directors. The holders of Series A shares are entitled to
one vote per share on matters which shareholders are generally entitled to vote.
The Series A holders are not entitled to any dividends.
The Series A were valued at $1.75 per share which was based upon an independent
appraisal.
Series B Convertible Preferred Stock
In 2000, the Company issued 300,000, shares of Series B Convertible Preferred
Stock ("Series B") to Motorola (see Note 6), upon liquidation, the Series B
shares will rank senior to the Common Stock and any other capital stock of the
Company. The Series B has a liquidation value of $21.48 per share, plus accrued
and unpaid dividends. Each share of the Series B Preferred Stock is convertible,
at the option of the holder, into such number of fully paid and nonassessable
shares of Common Stock as determined by dividing the original purchase price by
the conversion price applicable to such share determined as provided, in effect
on the date the certificate is surrendered for conversion. The conversion price
shall initially be the original issuance price per share of Common Stock. The
Series B is convertible at a rate of 75,000 per year for four years. The
conversion price may be subject to change if the Company's average stock price
falls below $12.00 for the thirty-day period preceding the conversion dates. The
Company has the option to pay the Series B holders an amount of cash equal to
the difference between $12.00 and the Average Price (as defined) multiplied by
the number of shares of Common Stock into which the shares of Series B would be
convertible. As of December 31, 2000, the conversion feature has not been
triggered. All outstanding shares of Series B shall be converted automatically
into shares of Common Stock after 4 years. The holders of Series B shares are
entitled to that number of votes equal to the largest of whole shares of Common
Stock into which the Series B could be converted on matters which shareholders
are generally entitled to vote. The Series B holders are entitled to dividends
that are declared or paid to the Common Stock holders.
Shareholders' Equity
In May 1999, the Company completed a private placement, and issued 1,414,034
units, each consisting of one share of Common Stock and one warrant, resulting
in net proceeds of $4,792,797. The units were issued at $3.75 per unit. The
shares of Common Stock and the warrants were valued at $2.27 and $1.48,
respectively, based on their relative fair values. The warrants were issued with
an exercise price ranging from $4.28 to $4.31, which was 120% of the approximate
fair value at the grant date.
On July 19, 2000, the Company issued 50,000 shares of unregistered Common Stock
to PD-LD, in accordance with the Termination, Amendment and License Agreement
(see Note 6). These shares were recorded on the fair market value of the Common
Stock. Accordingly, the Company recorded an intangible asset of $1,481,250.
On September 29, 2000, the Company issued to Motorola 200,000 shares of its
Common Stock, 300,000 shares of its Series B and a warrant to purchase 150,000
shares of Common Stock in accordance with the termination, amendment and license
agreement (see Note 6). The Company also issued a warrant to purchase 150,000
shares of Common Stock as a finder's fee in connection with this transaction.
The warrants were valued using the Black Scholes option pricing model.
Accordingly, the Company recorded an intangible asset of $15,469,468.
F-15
In December of 2000, the Company sold 631,527 units in a private placement, each
consisting of one share of Common Stock and one warrant, resulting in gross
proceeds of $5,367,979. The units were issued at $8.50 per unit. The shares of
Common Stock and the warrants were valued at $4.66 and $3.84 based on their
relative fair values, respectively. The warrants vest immediately, have an
exercise price of $10.00 and expire in 10 years. In connection with the private
placement, the Company issued an additional 161,000 warrants as finders' fees,
which vest immediately, have an exercise price of $10.00 and expire in 10 years.
The warrants were valued using the Black Scholes option pricing model at
$890,722 which was recorded as a component of additional paid in capital. During
January 2001, the private placement was completed and the Company then issued an
additional 158,704 units, each consisting of one share of Common Stock and one
warrant, resulting in additional net proceeds of $1,037,671.
Enzymatics 1992 Stock Option Plan
The stock options granted prior to the merger by Enzymatics under the 1992 Stock
Option Plan which have been assumed by the Company were converted into options
to purchase 20,538 shares of Common Stock of the Company at exercise prices
ranging from $11.74 to $29.61 per share. In 1999, 11,992 of such options
expired. The remaining 8,546 of such options expire 2001.
1995 Stock Option Plan
In 1995, the directors of the Company adopted the 1995 Stock Option Plan (the
"1995 Plan"), under which a maximum of 500,000 options may be granted at prices
not less than 100% of the fair market value of the Common Stock on the date of
grant as determined by the Board of Directors. Through 2000, the Shareholders
have approved the Plan to increase the number of Common Shares reserved for the
1995 Plan to 2,000,000. The 1995 Plan provides for the granting of both
incentive and nonqualified stock options to employees, officers, directors and
consultants of the Company. The stock options are exercisable over a period
determined by the Board of Directors, but no longer than ten years after the
grant date.
In June 1995, the Company granted options to purchase 70,000 shares of Common
Stock to an officer of the Company at an exercise price of $2.00 per share,
which approximated the fair market value of the Common Stock at the grant date.
These options vested over a period of three years. As of December 31, 2000,
70,000 options were exercisable. These options expire in 2005. In addition, in
June 1995, the Company granted options to purchase 5,000 shares of Common Stock
to the same officer of the Company at an exercise price of $.01 per share, all
of which were exercised in October 1998. These options vested on the grant date.
The Company recorded a charge of $9,950, to general and administrative expenses,
which represented the difference between the deemed value of the Common Stock
for accounting purposes and the exercise price of the options at the grant date.
In 1995, the Company granted nonqualified stock options to three principal
investigators who are conducting research under the 1994 Sponsored Research
Agreement and the 1993 Sponsored Research Agreement. The Company granted options
to purchase an aggregate of 240,000 shares of Common Stock to the three
principal investigators at an exercise price of $4.00 per share, which
approximated the fair market value of the Common Stock at the grant date. These
options vest as follows: 33% at the grant date with the remaining 67% vesting
over two years. As of December 31, 2000, options to purchase 220,000 shares of
Common Stock were exercisable. These options expire in 2005.
In 1996, the Company granted nonqualified and incentive stock options to two
employees and one consultant. The Company granted options to purchase an
aggregate of 30,000 shares of Common Stock at an exercise price of $4.12 per
share, which was the fair market value of the Common Stock at the date of grant.
These options vest as follows: 10,000 shares at the grant date with the
remaining 20,000 shares vesting over 5 years. During 1997, 6,000 of these
options were forfeited when an employee left the Company and an additional 2,000
options were forfeited in 2000. As of December 31, 2000, options to purchase
12,000 shares of Common Stock were exercisable. These options expire in 2006.
In 1997, the Company granted incentive and nonqualified stock options to several
employees, officers, and principal investigators. The Company granted options to
purchase an aggregate of 274,500 shares of Common Stock at exercise prices
ranging from $4.06 to $5.25 per share, which was the fair market value of the
Common Stock at the date of grant. These options vest either immediately upon
grant or over a five year period. As 55,000 of these options were granted to
non-employee principal investigators, the Company recorded a charge of $216,000,
to general and administrative expense, which represents the value of the options
as determined in accordance with SFAS 123. As of December 31, 2000, options to
purchase 236,353 shares of Common Stock were exercisable. These options expire
in 2007.
F-16
In 2000, 1999 and 1998, the Company granted nonqualified and incentive stock
options to several employees. The Company granted options to purchase an
aggregate of 432,000, 431,750 and 303,000 shares of Common Stock at exercise
prices ranging from $9.44 to $24.38, $3.375 to $4.19 and $3.75 to $6.22 per
share, respectively, which was the fair market value of the Common Stock at the
date of grant. These options vest either immediately upon grant or over a five
year period. In 2000 and 1999, 12,000 and 60,992 options were forfeited,
respectively. As of December 31, 2000, options to purchase 695,608 shares of
Common Stock were exercisable. The options granted in 2000, 1999 and 1998 expire
in 2010, 2009 and 2008 respectively.
In 2000 and 1999, the Company granted options to consultants to purchase 2,000
and 27,500 shares of Common Stock at exercise prices of $24.38 and $3.13 to
$4.19 per share, respectively. The options vest immediately and expire in 2010
and 2009, respectively. These options were valued using the Black Scholes
pricing model. Accordingly, the Company recorded a charge of $10,000 and
$83,805, which was included in general and administrative expenses.
Other Options
In connection with NHA's services relative to consummation of the merger
discussed in Note 3, in June 1995, the Company granted options to purchase
84,234 shares of Common Stock at an exercise price of $.29 per share to NHA.
These options were used to satisfy a liability reflected on the balance sheet of
Enzymatics on the date of the merger. These options vested 100% upon grant and
15,000 were exercised in 1997. Accordingly, as of December 31, 2000, 42,117
options were exercisable. These options expire in 2005.
In accordance with the terms of the PPG agreement, on December 14, 2000, UDC
granted options to PPG employees to acquire 20,000 shares of Common Stock. These
options vest over a one year period, have an exercise price of $9.44 per share
and expire in 10 years. On December 31, 2000, the Company recorded a charge of
$7,072 to research and development expense for the fair market value, determined
in accordance with the Black-Scholes option pricing model, of the stock option
awards that were earned. These awards are considered variable and will be
measured each reporting period.
The following table summarizes all stock option activity:
2000 1999 1998
----------------------- ----------------------- ----------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------- --------- ---------- ---------- ---------- --------
Outstanding at beginning
of year 1,359,530 $ 4.19 986,272 $ 4.38 707,810 $ 4.54
Granted 434,000 13.19 459,250 3.95 303,000 4.66
Exercised (132,181) 3.94 (25,000) 3.52 (10,000) .29
Forfeited (12,000) 4.19 (60,992) 5.79 (14,538) 20.67
---------- ---------- ----------
Outstanding at end of year 1,649,349 6.58 1,359,530 4.19 986,272 4.38
Exercisable at end of year 1,260,371 5.55 973,503 3.97 792,951 4.00
Available for future grant 158,470 180,470 377,991
Weighted average fair value of
options granted $ 8.28 $ 2.99 $ 3.60
======= ====== ======
The weighted average remaining contractual life for options outstanding at
December 31, 2000, 1999 and 1998 was 8 years.
Common Stock Warrants
In connection with the June 22, 1995 private placement and the July 17, 1995
private placement (see Note 3), the Company issued 906,500 warrants and 207,500
warrants, respectively each warrant entitled the holder to purchase one share of
Common Stock at an exercise price of $3.50 per share. In 1997, all of these
outstanding warrants were exercised.
On April 11, 1996, in connection with the Company's public offering, the Company
sold redeemable warrants to purchase 1,495,000 shares of Common Stock at an
exercise price of $3.50 per share at a price of $.10 per share. These warrants
expired April 12, 1999 (see Note 3). In connection with the public offering, the
Company issued warrants to its underwriter to purchase up to 130,000 shares of
Common Stock at an exercise price of $8.25 per share and warrants to purchase an
additional 130,000 shares of Common Stock at an exercise price of $3.675 per
share. In April 1996, the Company issued warrants to third parties to purchase
up to 578,000 shares of Common Stock at an exercise price of $4.125 per share.
F-17
In August 1996, the Company granted warrants to purchase 20,000 shares of Common
Stock to an individual in exchange for consulting services. These warrants have
an exercise price of $6.00 per share, vest immediately, and expire in August
2006. The Company recorded a charge of $25,000 to general and administrative
expenses, which represents the value of the warrant as determined in accordance
with SFAS 123.
In April 1996, the Company granted warrants to four employees and one consultant
to purchase 925,000 shares of the Company's Common Stock at an exercise price of
$4.125 per share, which approximated the fair market value of the Common Stock
at the date of grant. These warrants vest 25% at the date of grant and the
remaining 75% over 5 years, provided these employees are employed by the Company
on the vesting date. These warrants expire in 2006.
In 1997, the Company granted warrants to Princeton University and the University
of Southern California under the 1997 Sponsored Research Agreement (see Note 5)
to purchase an aggregate of 250,000 shares of Common Stock at an exercise price
of $7.25 per share, which approximated the fair market value of the Common Stock
at the date of grant. These warrants vest immediately upon grant and expire in
2007. Also in 1997, the Company granted warrants to consultants to purchase
200,000 shares of Common Stock at an exercise price of $4.80 per share. These
warrants vest immediately upon grant and expire in 2002. The Company valued the
warrants in accordance with SFAS 123. The warrants will be expensed over the
three year consulting period. In 2000, 1999 and 1998, the Company recorded a
charge of $76,329, $176,328 and $176,328, respectively which is included in
general and administrative expenses in the accompanying consolidated statement
of operations.
In 1998, the Company granted warrants to two employees and two directors to
purchase 400,000 shares of Common Stock at an exercise price of $6.38 per share,
which was the fair market value of the Common Stock at the date of grant. These
warrants vest immediately and expire in 2008.
In 1998, the Company granted warrants to consultants to purchase 125,000 shares
of Common Stock at exercise prices ranging from $3.375 to $7.25 per share. Of
the 125,000 warrants granted in 1998, 25,000 warrants were granted to one
consultant which vested immediately. These warrants were valued using the Black-
Scholes option pricing model. Accordingly, the Company recorded a charge in 1998
to record expense in the amount of $154,247, which is included in general and
administrative expenses. The remaining 100,000 warrants were granted to another
consultant of which 25,000 vested immediately and 75,000 will vest based upon
the Company's successful entrance into the Taiwanese market. Only the 25,000
which vested were valued using the Black-Scholes option pricing model. The
remaining 75,000 will be valued upon ultimate determination of performance. The
unamortized portion ($80,669) of this charge is recorded as prepaid consulting
fee on the accompanying Consolidated Balance Sheets.
In February 2000, the Company granted warrants to one employee and two
Scientific Advisory board members to purchase 290,000 shares of the Company's
Common Stock at exercise prices ranging from $14.12 to $16.75, which was the
fair market value of the Common Stock at the date of grant. These warrants vest
over the three years and expire in 2010 (see Note 14).
In accordance with the PPG agreement, UDC issued warrants to PPG to acquire
28,168 shares of Common Stock as part of the consideration for services
performed during 2000. The fair market value of the warrants was determined
using Black Scholes pricing model. The warrants vest immediately, have an
exercise price of $24.29 and a contractual life of 7 years. Accordingly, the
Company recorded a charge of $85,918 to research and development expense during
2000 based on the fair market value of the warrants. The Company recorded this
charge based on a measurement date of December 31, 2000, which is the date upon
which the warrants were earned by PPG.
F-18
As of December 31, 2000 3,485,749 warrants to acquire Common Stock were
exercisable.
Pro Forma Disclosure for Stock-Based Compensation
The Company accounts for its employee stock-based compensation plans under APB
Opinion No. 25, "Accounting for Stock Issued to Employees." Had the Company
recognized compensation cost for its stock based compensation plans consistent
with the provisions of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"), the Company's net loss
and net loss per share would have been increased to the following pro forma
amounts:
Year Ended December 31,
------------------------------------------------
2000 1999 1998
-------------- -------------- --------------
Net loss:
As reported $ (9,529,046) $ (5,125,006) $ (2,793,842)
Pro forma (11,937,622) (6,000,155) (5,803,012)
Net loss per share:
As reported $ (0.62) $ (0.42) $ (.27)
Pro forma (0.78) (0.49) (.56)
The fair value of each option or warrant granted is estimated on the date of
grant using the Black-Scholes option pricing model with the following
assumptions used for grants in 2000, 1999 and 1998. Risk-free interest rates of
4.7% to 6.8%, expected dividend yields of zero for each year, expected
volatility ranging from 60% to 81% and expected lives ranging from 7 years to 10
years for each.
Because the SFAS 123 method of accounting has not been applied to options and
warrants granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
10. RESEARCH CONTRACTS:
Contract research revenue consists of the following:
December 31
---------------------------------------
2000 1999 1998
--------- --------- ---------
Department of Defense Advanced Research
Projects Agency (DARPA) $ 186,179 $ 419,536 $ 190,008
Small Business Innovative Research (SBIR) Army
1 & Army 1 OPT 112,113 -- --
New Jersey Commission on Science and Technology
(NJCST) -- -- 94,521
National Science Foundation (NSF) 194,464 100,000 84,265
--------- --------- ---------
$ 492,756 $ 519,536 $ 368,794
========= ========= =========
11. COMMITMENTS:
Lease Commitments
The Company has several operating lease arrangements for office space and office
equipment. During 1999, the Company entered into one capital lease. Total rent
expense was $207,104, $311,996 and $91,467, for the years ended December 31,
2000, 1999 and 1998, respectively. Minimum future rental payments for operating
and capital leases as of December 31, 2000 are as follows:
Operating Capital
Year Leases Lease
---- --------- ---------
2001 $ 369,502 $ 5,424
2002 337,385 5,424
2003 260,885 5,424
2004 670 4,520
--------- --------
$ 968,442 20,792
=========
Less amount representing interest (4,173)
--------
Present value of capital lease $ 16,619
========
F-19
At December 31, 2000, the Company has commitments outstanding in connection with
capital expenditures of equipment acquired during 1999. According to the
purchase agreement, the Company has agreed to pay the vendor in both stock and
cash. At December 31, 2000, the Company owed $126,634 in cash and stock valued
at $43,778. All payments are expected to be paid in year 2001.
Under the terms of the Motorola license agreement (see Note 6), the Company has
agreed to make minimum royalty payments. To the extent that the royalties
payable based on sales are not sufficient to meet the minimums, the Company
shall pay, at its discretion, the shortfall in all cash or in cash (50%) and
Common Stock (50%) within 90 days after the end of each two-year period
specified below in which the shortfall occurs. The minimum royalty payments are
as follows:
September 29, 2000 - December 31, 2002 $ 150,000
January 1, 2003 - December 31, 2004 $ 500,000
January 1, 2005 - December 31, 2006 $1,000,000
In the normal course of business, the Company is party to various claims and
legal proceedings. Although the ultimate outcome of these matters is presently
not determinable, management of the Company, after consultation with legal
counsel, does not believe that the resolution of these matters will have a
material effect upon the Company's financial position or results of operations.
12. INCOME TAXES:
The components of income taxes are as follows:
December 31
---------------------------------------------
2000 1999 1998
------------ ------------ ------------
Current $ -- $ -- $ --
Deferred (3,019,639) (2,063,624) (484,848)
------------ ------------ ------------
(3,019,639) (2,063,624) (484,848)
Increase in valuation allowance provision 3,019,639 2,063,624 484,848
------------ ------------ ------------
$ -- $ -- $ --
============ ============ ============
The difference between the Company's federal statutory income tax rate and its
effective income tax rate is primarily due to non-deductible expenses and the
valuation allowance.
As of December 31, 2000, the Company had net operating loss carryforwards of
approximately $16,900,000, which will begin to expire in 2010. The net operating
loss carryforwards differ from the accumulated deficit principally due to the
timing of the recognition of certain expenses. In accordance with the Tax Reform
Act of 1986, the net operating loss carryforwards could be subject to certain
limitations.
Significant components of the Company's deferred tax assets and liabilities are
as follows:
December 31
------------------------------
2000 1999
------------ ------------
Gross deferred tax assets:
Net operating loss carryforwards $ 5,738,172 $ 3,650,365
Capitalized start-up costs 2,710,141 1,844,133
Capitalized technology license 170,000 170,000
Other 532,718 466,894
------------ ------------
9,151,031 6,135,392
Valuation allowance (9,151,031) (6,131,392)
------------ ------------
Net deferred tax assets $ -- $ --
============ ============
A valuation allowance was established for 100% of the net deferred tax asset,
since the Company has incurred substantial operating losses and expects
additional losses in 2001. The Company's management has concluded that the
realizability of the deferred tax assets is uncertain.
13. DEFINED CONTRIBUTION PLAN:
During 2000, the Company adopted the Universal Display Corporation 401(k) Plan
(the Plan) in accordance with the provisions of Section 401(k) of the Internal
Revenue Code (Code). The Plan covers substantially all full-time employees of
the Company. Participants may contribute up to 15% of their total compensation
to the Plan, not to exceed the limit as defined in the Code, with the Company
F-20
matching 50% of the participant's contribution, limited to 6% of the
participant's total compensation. For the year ending December 31, 2000, the
Company contributed $52,125 to the Plan.
14. QUARTERLY SUPPLEMENTAL FINANCIAL DATA (UNAUDITED):
Year ended December 31, 1999: Three Months Ended
----------------------------------------------------------------------
March 31 June 30 September 30 December 31
------------- ------------- ------------- -------------
Revenues $ 117,233 $ 69,732 $ 145,532 $ 187,039
Net loss (593,866) (1,677,994) (987,225) (1,865,912)
Basic and diluted loss per share (.06) (0.14) (0.07) (0.15)
Year ended December 31, 2000: Three Months Ended
---------------------------------------------------------------------------------------------
(1) (2) (3) (1) (2) (3)
---------------------------------------------------------------------------------------------
March 31 March 31 June 30 June 30
------------ ------------ ------------ ------------
Revenues $ 5,909 $ - $ 5,909 $ 126,746 $ - $ 126,746
Net loss (1,803,249) (208,887) (2,012,136) (2,152,080) (812,842) (2,964,922)
Basic and diluted loss per share (0.12) (0.01) (0.13) (0.14) (0.05) (0.19)
[RESTUBBED TABLE]
Year ended December 31, 2000: Three Months Ended
------------------------------------------------------------
(1) (2) (3) (4)
------------------------------------------------------------
September 30 September 30 December 31
------------- ------------ -------------
Revenues $ 124,812 $ - $ 124,812 $ 235,289
Net loss (1,824,263) (250,133) (2,074,396) (2,477,592)
Basic and diluted loss per share (0.12) (0.02) (0.14) (.16)
(1) Interim results as reported in the Company's Form 10Q.
(2) In February 2000, the Company granted warrants to purchase 200,000 shares of
Common Stock to two Scientific Advisory Board members. The warrants were
granted with an exercise price of $14.12 per share, a ten year life and vest
ratably over three years. The Company did not account for these warrants
during the first three interim periods. In accordance with the FASB
Interpretation No. (FIN) 44, "Accounting for Certain Transactions involving
Stock Compensation; An Interpretation of APB 25", which became effective
during 2000, awards granted to Advisory Board members are treated as awards
granted to non-employees. The Company has restated the interim periods above
to show the impact of the accounting for these warrants. As the warrants
were granted to non-employees and vest over a three year period, the
warrants are accounted for as a variable plan award and research and
development expense has been recorded based on the fair market value of the
warrants. The fair market value of the warrants has been determined by using
the Black-Scholes option pricing model.
(3) Restated interim results
(4) The results for the three months ended December 31, 2000 include a reduction
to research and development expense of $809,213 as a result of the decrease
in fair market value of the Company's common stock.
F-21