U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
( ) TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to _________
Commission File No. 1-12031
UNIVERSAL DISPLAY CORPORATION
------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
PENNSYLVANIA 23-2372688
- ------------------------------------ ---------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
375 Phillips Boulevard Ewing, New Jersey 08618
- ---------------------------------------------------- -------------
(Address of Principal Executive Offices) (Zip Code)
(609) 671-0980
--------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes __X__ No ____
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date: As of May 7, 2001, the
registrant had outstanding 16,856,516 shares of Common Stock, par value $.01 per
share.
INDEX PAGE
- ----- ----
Part I - Financial Information
Item 1. Unaudited Financial Statements
Consolidated Balance Sheets -
March 31, 2001 and December 31, 2000 3
Consolidated Statements of Operations -
Three months ended March 31, 2001 and 2000
(restated), and inception to March 31, 2000 4
Consolidated Statements of Cash Flows -
Three months ended March 31, 2001 and 2000
(restated), and inception to March 31, 2000 5
Notes to Consolidated Financial Statements 6-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-12
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 13
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K. 13
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARY
(a development-stage company)
CONSOLIDATED BALANCE SHEETS
(unaudited)
ASSETS March 31, 2001 December 31, 2000
-------------- -----------------
CURRENT ASSETS:
Cash and cash equivalents (See Note 2) $ 5,734,534 $ 7,701,040
Short-term investments (See Note 2) 3,955,700 2,704,220
Contract research receivables 280,190 312,076
Prepaid development expense 909,841 --
Prepaid and other current assets 214,946 204,810
------------ ------------
Total current assets 11,095,211 10,922,146
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $947,712 and $713,884 4,749,701 4,630,257
ACQUIRED TECHNOLOGY, net of accumulated
amortization of $884,567 and $460,799 16,066,151 16,489,919
DEPOSITS 37,472 37,472
------------ ------------
Total assets $31,948,535 $32,079,794
============ ============
LIABILITIES, REDEEMABLE COMMON STOCK AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,035,254 $ 816,131
Accrued expenses 416,428 850,126
Advanced license fees 200,000 --
Short term portion of capital leases 3,826 3,759
----------- ------------
1,655,508 1,670,016
----------- ------------
LONG TERM PORTION OF CAPITAL LEASES 11,883 12,860
----------- ------------
REDEEMABLE COMMON STOCK -- 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,
par value $.01 per share, issued and outstanding
(liquidation value of $7.50 per share, $1,500,000
in the aggregate) and 300,000 shares Series B
Convertible Preferred Stock (liquidation value
of $21.48 per share, $6,444,000 in the aggregate)
issued and outstanding 5,000 5,000
Common Stock, par value $.01 per share, 50,000,000 shares
authorized, 16,784,256 and 16,440,286 issued and
outstanding, respectively 167,843 164,403
Additional paid-in capital 62,115,669 57,885,790
Deficit accumulated during development-stage (32,007,368) (28,228,389)
------------ ------------
Total shareholders' equity 30,281,144 29,826,804
------------ ------------
Total liabilities and shareholders' equity $ 31,948,535 $ 32,079,794
============ ============
The accompanying notes are an integral part of these statements.
3
UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARY
(a development-stage company)
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended
March 31,
------------------------
Period from Inception
(June 17, 1994) to
2001 2000 March 31, 2001
---- -------------- ---------------------
(restated)
REVENUE:
Contract research revenue $ 200,242 $ 5,909 $ 1,674,933
----------- ---------- ------------
OPERATING EXPENSES:
Research and development 3,252,977 1,149,493 22,183,278
General and administrative 861,923 928,302 12,720,280
----------- ---------- ------------
Total operating expenses 4,114,900 2,077,795 34,903,558
----------- ---------- ------------
Operating loss (3,914,658) (2,071,886) (33,228,625)
INTEREST INCOME 135,679 59,750 1,221,257
----------- ---------- ------------
NET LOSS $(3,778,979) $(2,012,136) $(32,007,368)
=========== =========== ============
BASIC AND DILUTED NET LOSS PER
COMMON SHARE $ (.23) $ (.14)
=========== ==========
WEIGHTED AVERAGE SHARES USED
IN COMPUTING BASIC AND DILUTED
NET LOSS PER COMMON SHARE 16,715,452 14,579,193
========== ==========
The accompanying notes are an integral part of these statements.
4
UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARY
(a development-stage company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three Months Period from Inception
Ended March 31, (June 17, 1994) to
2001 2000 March 31, 2001
---- ---- ---------------------
(restated)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(3,778,979) $(2,012,136) $(32,007,368)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation 233,828 132,039 947,712
Amortization 423,768 -- 884,567
Issuance of Common Stock options and warrants
for services 2,066 -- 681,737
Issuance of Common Stock and warrants in connection
with amended research and license agreements -- -- 3,120,329
Issuance of Common Stock in connection with executive
compensation -- -- 423,220
Issuance of redeemable Common Stock, Common Stock
options and warrants in connection with
development agreement 529,468 -- 1,192,579
Isuuance of Common Stock options and warrants for
Scientific Advisory Board 766,018 208,887 1,368,701
Acquired in-process technology -- -- 350,000
(Increase) decrease in assets:
Contract research receivables 31,886 226,662 (280,190)
Other current assets (10,136) 141,544 214,039
Deposits -- -- (37,472)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses (202,213) 51,591 1,152,431
Payable to related parties -- -- 250,000
Advanced license fees 200,000 -- 200,000
--------- --------- -----------
Net cash used in operating activities (1,804,294) (1,251,413) (21,539,715)
--------- --------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment (309,495) (331,987) (4,815,391)
Purchase of intangibles -- -- (25,750)
Purchases of short-term investments (1,730,480) (1,455,419) (20,596,483)
Proceeds from sale of short-term investments 479,000 1,636,102 16,640,783
--------- --------- -----------
Net cash used in investing activities (1,560,975) (151,304) (8,796,841)
--------- --------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Common Stock 1,348,984 -- 22,976,751
Proceeds from the exercise of Common Stock
options and warrants 50,689 4,423,438 13,098,651
Principal payments on capital lease (910) (816) (4,312)
--------- --------- -----------
Net cash provided by financing activities 1,398,763 4,422,622 36,071,090
--------- --------- ----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,966,506) 3,019,905 5,734,534
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 7,701,040 1,558,473 --
--------- --------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 5,734,534 $ 4,578,378 $ 5,734,534
=========== =========== ===========
The accompanying notes are an integral part of these statements.
5
UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARY
(a development-stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 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 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. UDC Inc., a wholly
owned subsidiary of the Company and a 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.
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 (the "1997
Sponsored Research Agreement") for OLED technology (see Note 3). 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 License Agreement") in which certain terms were modified (see Note 3).
The Company is also engaged in research, development and commercialization
activities at its 11,000 square foot facility, which is leased in Ewing, NJ. 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, patent expense, obtaining financing and administrative
activities. The developmental nature of the activities is such that significant
inherent risks exist in the Company's operations. Completion of the
commercialization of the Company's technology will require funds substantially
greater than the Company currently has available. There can be no assurance that
such financing will be available to the Company when needed, on commercially
reasonable terms or at all. The Company anticipates, based on management's
internal forecasts and assumptions relating to its operations, that it has
sufficient cash to meet its obligations through at least the end of the current
fiscal year, which will end December 31, 2001. 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. 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 a principal investigator, because such person is no longer associated with
Princeton University or otherwise, and a successor acceptable to both the
Company and Princeton University is not available, the 1997 Sponsored Research
Agreement will terminate.
6
NOTE 2. - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INTERIM FINANCIAL INFORMATION
In the opinion of the management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of only normal
recurring adjustments) necessary to present fairly the financial position as of
March 31, 2001, the results of operations for the three months ended March 31,
2001 and 2000 (restated), and the cash flows for the three months ended March
31, 2001 and 2000 (restated). While the management believes that the disclosures
presented are adequate to make the information not misleading, these
consolidated financial statements should be read in conjunction with the
consolidated financial statements and the notes in the Company's latest year-end
financial statements, which were included in the Company's Annual Report on Form
10-K for the year ended December 31, 2000.
RESTATEMENT
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 of 2000. 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 in 2000 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.
PRINCIPLES OF CONSOLIDATION
The Consolidated Financial Statements include the accounts of the Company and
its wholly owned subsidiary, UDC, Inc. 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.
REVENUE RECOGNITION AND ADVANCED LICENSE FEES
Contract research revenues are recognized as the related expenses are incurred.
Non-refundable cash payments received in connection with technology license
agreements are deferred and recorded as revenue over the expected life of the
licensed technology.
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. Investments
are carried at market value and at March 31, 2001 and December 31, 2000, are
classified as short-term investments. At March 31, 2001 and December 31, 2000,
all of the Company's investments are classified as available for sale pursuant
to Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," (SFAS 115). Therefore, any
unrealized holding gains or losses should be presented as a separate component
of shareholders' equity. At March 31, 2001 and December 31, 2000, unrealized
holding gains or losses were not material.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and depreciated on a straight-line
basis over 3 to 7 years for office and lab equipment and 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.
7
NET LOSS PER COMMON SHARE
Basic EPS is computed by dividing net loss by the weighted-average number of
common shares outstanding for the period. Diluted EPS reflects the potential
dilution from the exercise of conversion of securities into Common Stock. For
the three months ended March 31, 2001 and 2000 the effects of the exercise of
outstanding stock options and warrants were excluded from the calculation of
diluted EPS because their effect was antidilutive.
RESEARCH AND DEVELOPMENT
Expenditures for research and development expense are charged to operations as
incurred.
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 had 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" ("SAB
101"). 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 the financial position or results of
operations.
ACQUIRED TECHNOLOGY
Acquired technology consists of acquired license rights for patents and know-how
obtained from PD-LD, Inc. and Motorola (see Note 4). The intangible asset at
March 31, 2001 consisted of the following:
PD- LD, Inc................................. $ 1,481,250
Motorola, Inc............................... 15,469,468
-------------
$ 16,950,718
Less: Accumulated Amortization.............. (884,567)
-------------
Acquired Technology, net.................... $ 16,066,151
=============
Acquired technology is amortized on a straight-line basis over the estimated
useful life of 10 years.
STATEMENT OF CASH FLOW INFORMATION
In the first quarter, the Company issued 10,157 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
connection with a development agreement with a third party, the Company issued
118,824 Common shares which were recorded as a prepaid development expense based
on the fair value of the Common Stock. The Company recorded a charge to research
and development expense in the amount of $315,532 during the three months ended
March 31, 2001 for the amortization of the prepaid expense. The charge was
determined based on the fair value of the Common Stock earned by PPG as of March
31, 2001. The Company recorded a charge to research and development expense in
the amount of $174,232 during the three months ended March 31, 2001. This
charge was recorded based in the fair value of warrants that were earned by PPG
during 2001. The fair value was determined based in the Black-Scholes
option-pricing model. The Company recorded as a charge to research and
development expense of $39,704 for the vesting of stock options granted to PPG
employees in 2000. These options vest on December 31, 2001 and are being
accounted for as a variable award.
8
NOTE 3. - 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 the 1997 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
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 charged expense when
paid by the Company. Under the 1997 License Agreement, the Company has the
exclusive worldwide 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
Sponsored Research Agreement, and to inventions conceived or discovered under
the 1997 Sponsored Research Agreement. 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 from 50% to 3%. These royalty rates are subject to
upward adjustments under certain conditions. In order to protect Princeton
University's tax exempt status, the 1997 License Agreement provides that
Princeton University may, in its sole discretion, determine whether, pursuant to
the provisions of the Tax Reform Act of 1986, it is required to negotiate the
royalties and other considerations payable to Princeton University on products
not reasonably conceivable by the parties at the time of execution of the 1994
License Agreement. If Princeton University reasonably concludes that the
consideration payable by the Company for any such product is not fair and
competitive, Princeton University may exercise its right to renegotiate the
royalties and other consideration payable by the Company for any such product
prior to the expiration of 180 days after the first patent is filed or other
intellectual property protection is sought. The Company has the right to
commence arbitration proceedings to challenge Princeton University's exercise of
such renegotiation rights. If the parties are unable to agree to royalties and
other consideration for such products within a specified period of time, then
Princeton University is free to license to third parties without repayment of
any funds provided under the 1997 Sponsored Research Agreement. In connection
with the 1997 License Agreement and 1997 Sponsored Research Agreement, in
October 1997, 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 USC. The value of the warrants
was determined in accordance with the Statement of Financial Accounting
Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation."
NOTE 4. - 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 of 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 2).
9
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 U.S. patents, 7 U.S. 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 2). In addition, the Company will pay to Motorola a royalty based on
future sales of products incorporating OLED technology. Such royalty payments
may be made, at the Company's discretion, in either all cash or cash (50%) and
in shares (50%) 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.
NOTE 5. - REDEEMABLE COMMON STOCK AND SHAREHOLDERS' EQUITY
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, the
Company 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. The agreement was
amended, effective March 7, 2001.
On November 11, 2000, in consideration for PPG's services through December 31,
2000, the Company issued 26,448 shares of Redeemable Common Shares and an 11.5%
promissory note for $535,300. The note is only payable if the Redeemable Common
Shares issued are not registered under the Securities Act of 1933 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 $535,300 in 2000. If the note is paid then
PPG will return the Common Shares previously issued.
In accordance with the PPG agreement, the Company 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.
On May 11, 2001, the shares of redeemable Common Stock were effectively
registered with the SEC. Accordingly, the promissory note has been settled and
the redeemable Common Stock has been reclassified as Common Stock and additional
paid-in-capital.
In accordance with the PPG agreement, the Company issued warrants to PPG to
acquire 28,168 shares of its 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.
In 2001, the Company issued 118,824 shares of its Common Stock to PPG as
consideration for services to be rendered during 2001. The Company recorded the
shares as a prepaid development expense based on the fair value of the Common
Stock. The Company recorded a charge to research and development expense in the
amount of $315,532 during the three months ended March 31, 2001 for the
amortization of the prepaid expense. The charge was determined based on the fair
value of the Common Stock earned by PPG as of March 31, 2001.
The Company recorded a charge to research and development expense in the amount
of $174,232 during the three months ended March 31, 2001. This charge was
recorded based in the fair value of warrants that were earned by PPG during
2001. The fair value was determined based in the Black-Scholes option-pricing
model.
The Company recorded as a charge to research and development expense of $39,704
for the vesting of stock options granted to PPG employees in 2000. These options
vest on December 31, 2001 and are being accounted for as a variable award.
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 $1,348,984.
In connection with the warrants granted to the Scientific Advisory Board members
in 2000, the Company recorded a charge in the amount of $766,018 to research and
development expense for the vesting of warrants earned during 2001. The warrants
issued in 2000 are for future services and are being accounted for as a variable
award.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
All statements in this document that are not historical are forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995, subject to risks and uncertainties that could cause actual results to
differ materially for Universal Display Corporation from those projected,
including, but not limited to, statements regarding Universal Display
Corporation's beliefs, expectations, hopes or intentions regarding the future.
Forward-looking statements in this document also include statements regarding
any financial forecasts or market growth predictions. Universal Display
Corporation expressly disclaims any obligation or undertaking to release
publicly any updates or revisions to any forward-looking statements contained
herein to reflect any change in Universal Display Corporation's expectations
with regard thereto or any change in events, conditions, or circumstances on
which any such statements are based. It is important to note that actual
outcomes and Universal Display Corporation's actual results could differ
materially from those in such forward-looking statements. Factors that could
cause actual results to differ materially include risks and uncertainties such
as: uncertainties relating to developments and advances in display technologies,
including OLED, SOLED, TOLED and FOLED technology; the expansion of applications
for OLED technology; the success of UDC and its development partners in
accomplishing technological advances; the ability of Universal Display
Corporation to enter into alliances with product manufacturers; product
development, manufacturing, and marketing acceptance; uncertainties related to
cost and pricing of Universal Display Corporation products; dependence on
collaborative partners; and other competition, risks relating to intellectual
property of others and the uncertainties of patent protection.
GENERAL
Since inception, the Company has been engaged, and for the foreseeable future
expects to continue to be engaged, exclusively in funding research and
development activities related to the OLED technology and attempting to
commercialize such technology. To date, the Company has not generated any
significant revenues and does not expect to generate any meaningful revenues for
the foreseeable future and until such time, if ever, as it successfully
demonstrates that the OLED technology is commercially viable for one or more
flat panel display applications and enters into license agreements with third
parties with respect to the technology. The Company has incurred significant
losses since its inception, resulting in an accumulated deficit of $32,007,368
at March 31, 2001. The rate of loss is expected to increase as the Company's
activities increase and losses are expected to continue for the foreseeable
future and until such time, if ever, as the Company is able to achieve
sufficient levels of revenue from the commercial exploitation of the OLED
technology to support its operations.
RESULTS OF OPERATIONS
Three Months Ended March 31, 2001 Compared to Three Months Ended March 31, 2000
(restated)
The Company had a net loss of $3,778,979 (or $.23 per share) for the quarter
ended March 31, 2001 compared to a loss of $2,012,136 or ($.14 per share) for
the same period in 2000. The increase in the net loss was attributed to the
increase in research and development costs, as described below.
Research and development costs were $3,252,977 for the quarter ended March 31,
2001 compared to $1,149,493 for the same period in 2000. For the quarter ended
March 31, 2001, research and development expenses consisted of: (i) payments of
$214,589 to the Company's Research Partners (see Note 3 in Notes to consolidated
financial statements) under the 1997 Sponsored Research Agreement, (ii) costs
incurred in the amount of $227,292 for patent applications, prosecutions and
other intellectual property rights, (iii) costs incurred of $1,091,842 for the
development and operations in the Company's facility, (iv) non-cash charges of
$529,468 incurred in connection with the PPG development agreement, (v) non-cash
charges of $766,018 recorded for warrants and options previously issued to the
Scientific Advisory Board members, and (vi) non-cash charges of $423,768 for the
amortization of the Company's acquired technology (see Note 2 and Note 4 in
Notes to consolidated financial statements). Research and development costs in
the same period in 2000 consisted of: (i) payments of $139,526 to the Company's
Research Partners (see Note 3 in Notes to consolidated financial statements)
under the 1997 Sponsored Research Agreement, (ii) costs incurred of $330,660 for
patent applications, prosecutions and other intellectual property rights, (iii)
costs incurred of $470,420 for the development and operations in the Company's
facility, and (iv) non-cash charges of $208,887 recorded for warrants issued to
the Scientific Advisory Board members.
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The Company earned $200,242 from contract research revenue in the quarter ended
March 31, 2001 compared to $5,909 for the same period in 2000. In the quarter
ending March 31, 2001, contract research revenue consisted of : (i) $133,176
recognized under an 18-month, $1,500,000 Phase I contract received from the
Defense Advanced Research Project Agency (DARPA), (ii) $45,536 recognized under
a 2-year, $400,000 Phase II contract from the National Science Foundation (NSF)
under the Small Business Technology Transfer Program, (iii) $7,878 recognized
under a Department of Defense Phase I, Small Business Innovative Research (SBIR)
contract which is completed at this time, (iv) $16,606 recognized under a 2-year
Department of Defense Phase II SBIR contract and (v) a $2,955 charge against
revenue for overpayment on the final costs of a subcontract under a 3-year, $3
million contract Princeton University received from the Defense Advanced
Research Project Agency (DARPA). In the same period in 2000, the revenue was
derived from the continuation of a subcontract under a 3-year, $3 million
contract Princeton University received from the Defense Advanced Research
Project Agency (DARPA), which is complete at this time.
The Company has entered into certain joint development and technology evaluation
agreements, for which it has received advanced license fees. These fees are
classified as current liabilities and the Company will record revenue as it is
earned.
Liquidity and Capital Resources
As of March 31, 2001, the Company had cash and cash equivalents of $5,734,534
and short-term investments of $3,955,700 compared to cash and cash equivalents
of $7,701,040 and short-term investments of $2,704,220 at December 31, 2000.
During the first quarter, warrants and options to purchase 28,117 shares of the
Company's Common Stock were exercised, resulting in cash proceeds of $50,689.
Also in the first quarter, the Company had received additional cash proceeds of
$1,348,984, net of $311,313 for expenses, from the completion of its private
placement, initiated in December 2000, issuing an additional 158,704 units, as
defined below.
In December 2000, the Company sold in a private placement 631,527 units, each
unit consisting of one share of the Company's Common Stock and one warrant with
an exercise price of $10.00, resulting in proceeds of $5,367,979. The units were
issued at $8.50 per unit. Also, during 2000, warrants and options to purchase
1,754,353 shares of the Company's Common Stock were exercised, resulting in cash
proceeds of $6,854,843.
The Company anticipates, based on management's internal forecasts and
assumptions relating to its operations (including assumptions regarding working
capital requirements of the Company, the progress of research and development,
the availability and amount of other sources of funding available to Princeton
University for research relating to the OLED technology and the timing and costs
associated with the preparation, filing and prosecution of patent applications
and the enforcement of intellectual property rights) that it has sufficient
cash, cash equivalents and short term investments to meet its obligations
through at least the end of the current fiscal year. Management believes that
additional financing sources for the Company include long-term and short-term
borrowings, public and private equity and the exercise of warrants. The 1997
Sponsored Research Agreement requires the Company to pay up to $4.4 million to
Princeton University from July 1998 through July 2002, which period is subject
to extension. Pursuant to its development and license agreement with PPG, the
Company is to issue shares of Common Stock, on an annual basis, in consideration
of the services provided by PPG. In certain circumstances, the Company may also
be required to pay cash to PPG for such services. Substantial additional funds
will be required thereafter for the research, development and commercialization
of OLED technology, obtaining and maintaining intellectual property rights,
working capital and other purposes, the timing and amount of which is difficult
to ascertain. There can be no assurance that additional funds will be available
when needed, or if available, on commercially reasonable terms.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company does not utilize financial instruments for trading purposes and
holds no derivative financial instruments which could expose the Company to
significant market risk. The Company's primary market risk exposure with regard
to financial instruments is to changes in interest rates which would impact
interest income earned on instruments.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS:
None.
(B) REPORTS ON FORM 8-K:
Current Report on Form 8-K, filed March 19, 2001 and amended on March 21, 2001.
This Current Report contains disclosure regarding Items 5 and 7 of Form 8-K.
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
UNIVERSAL DISPLAY CORPORATION
/s/ Sidney D. Rosenblatt
Date: May 15, 2001 -------------------------------
Sidney D. Rosenblatt
(Executive Vice President, Chief
Financial Officer, Treasurer and
Secretary)
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