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 June 30, 2001
( ) TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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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, NJ 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) filed all reports required to
be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during
the past 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
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date: As of August 9, 2001, the
registrant had 17,047,080 outstanding shares of Common Stock, par value $.01 per
share.
INDEX PAGE
- ----- ----
Part I - Financial Information
Item 1. Unaudited Financial Statements
Consolidated Balance Sheets
June 30, 2001 and December 31, 2000 3
Consolidated Statements of Operations -
Three months ended June 30, 2001 and 2000
(restated), and inception to June 30, 2001 4
Consolidated Statements of Operations -
Six months ended June 30, 2001 and 2000
(restated), and inception to June 30, 2001 5
Consolidated Statements of Cash Flows -
Six months ended June 30, 2001 and 2000
(restated), and inception to June 30, 2001 6
Notes to Consolidated Financial Statements 7-13
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13-16
Item 3. Quantitative & Qualitative Disclosures
About Market Risk 16
Part II - Other Information
Item 4. Submission of Matters to a Vote of Security Holders 16-17
Item 6. Exhibits and Reports on Form 8-K. 17
PART I. - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARY
(a development-stage company)
CONSOLIDATED BALANCE SHEETS
(unaudited)
June 30, 2001 December 31, 2000
------------- -----------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (See Note 2) $ 3,165,470 $ 7,701,040
Short-term investments (See Note 2) 4,198,581 2,704,220
Contract research receivables 321,685 312,076
Prepaid development expense 1,002,886 --
Other current assets 435,622 204,810
------------ ------------
Total current assets 9,124,244 10,922,146
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $1,233,221 and $713,884 4,759,035 4,630,257
ACQUIRED TECHNOLOGY, net of accumulated
amortization of $1,308,335 and $460,799 15,642,383 16,489,919
DEPOSITS 20,125 37,472
------------ ------------
Total assets $ 29,545,787 $ 32,079,794
============ ============
LIABILITIES, REDEEMABLE COMMON STOCK AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 277,018 $ 816,131
Accrued expenses 530,692 850,126
Advanced license fees 200,000 --
Short term portion of capital leases 3,968 3,759
------------ ------------
Total current liabilities 1,011,678 1,670,016
LONG TERM PORTION OF CAPITAL LEASES 10,806 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 designated Series A Nonconvertible
Preferred Stock, 200,000 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 $0.01 per share, 50,000,000
shares authorized, 17,008,320 and 16,440,286
issued and outstanding 170,083 164,403
Additional paid-in capital 65,124,170 57,885,790
Deficit accumulated during development-stage (36,775,950) (28,228,389)
------------ ------------
Total shareholders' equity 28,523,303 29,826,804
------------ ------------
Total liabilities and shareholders' equity $ 29,545,787 $ 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)
Period from Inception
Three Months Ended (June 17, 1994) to
June 30, June 30, 2001
------------------------------------- ----------------------
2001 2000
(restated)
------------ ------------
REVENUE:
Contract research revenue $ 254,671 $ 126,746 $ 1,929,604
Development chemicals 2,488 -- 12,492
------------ ------------ -------------
Total revenue 257,159 126,746 1,942,096
------------ ------------ -------------
OPERATING EXPENSES:
Research and development
(See Note 3) 4,063,480 2,265,504 26,260,204
General and administrative 1,067,141 907,670 13,783,980
------------ ------------ -------------
Total operating expenses 5,130,621 3,173,174 40,044,184
------------ ------------ -------------
Operating loss (4,873,462) (3,046,428) (38,102,088)
------------ ------------ -------------
INTEREST INCOME 104,880 81,506 1,326,138
------------ ------------ -------------
NET LOSS $ (4,768,582) $ (2,964,922) $ (36,775,950)
============ ============ =============
BASIC AND DILUTED NET LOSS
PER COMMON SHARE $ (.28) $ (.20)
------------ ------------
WEIGHTED AVERAGE SHARES
USED IN COMPUTING BASIC
AND DILUTED NET LOSS PER
COMMON SHARE 16,903,060 15,043,310
------------ ------------
The accompanying notes are an integral part of these statements.
4
UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARY
(a development-stage company)
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Period from Inception
Six Months Ended (June 17, 1994) to
June 30, June 30, 2001
------------------------------------- ----------------------
2001 2000
(restated)
------------ ------------
REVENUE:
Contract research revenue $ 454,913 $ 132,656 $ 1,929,604
Development chemicals 8,298 -- 12,492
------------ ------------ -------------
Total revenue 463,211 132,656 1,942,096
------------ ------------ -------------
OPERATING EXPENSES:
Research and development
(See Note 3) 7,325,709 3,664,926 26,260,204
General and administrative 1,925,623 1,591,349 13,783,980
------------ ------------ -------------
Total operating expenses 9,251,332 5,256,275 40,044,184
------------ ------------ -------------
Operating loss (8,788,121) (5,123,619) (38,102,088)
------------ ------------ -------------
INTEREST INCOME 240,560 141,282 1,326,138
------------ ------------ -------------
NET LOSS $ (8,547,561) $ (4,982,337) $ (36,775,950)
============ ============ =============
BASIC AND DILUTED NET LOSS
PER COMMON SHARE $ (.51) $ (.34)
------------ ------------
WEIGHTED AVERAGE SHARES
USED IN COMPUTING BASIC
AND DILUTED NET LOSS PER
COMMON SHARE 16,809,118 14,810,829
------------ ------------
The accompanying notes are an integral part of these statements.
5
UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARY
(a development-stage company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Period from Inception
Six Months Ended (June 17, 1994) to
June 30, June 30, 2001
----------------------------------- ----------------------
2001 2000
(restated)
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (8,547,561) $(4,982,337) $ (36,775,950)
Adjustments to reconcile net loss to net cash used
in operating activities
Depreciation 520,592 279,851 1,234,476
Amortization 847,536 -- 1,308,335
Issuance of Common Stock options and warrants for
services 58,080 10,000 737,751
Issuance of Common Stock and warrants in connection
with amended research and license agreements -- -- 3,120,329
Issuance of Common Stock in connection with
executives' compensation -- -- 423,220
Issuance of redeemable Common Stock, Common Stock
options and warrants in connection with
development agreement 1,453,810 -- 2,116,921
Issuance of Common Stock options and warrants
for Scientific Advisory Board 1,712,736 1,021,729 2,315,419
Acquired in-process technology -- -- 350,000
(Increase) decrease in assets:
Contract research receivables (9,609) 214,767 (321,685)
Other current assets (230,812) 237,446 (6,637)
Deposits 17,347 18,864 (20,125)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses (846,184) (77,159) 508,460
Payable to related parties -- -- 250,000
Advanced license fees 200,000 -- 200,000
------------- ------------- -------------
Net cash provided by (used in) operating activities (4,824,065) (3,276,839) (24,559,486)
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment (605,593) (457,384) (5,111,489)
Purchase of intangibles -- -- (25,750)
Purchases of short-term investments (4,170,361) (1,745,475) (23,036,364)
Proceeds from sale of short-term investments 2,676,000 2,596,460 18,837,783
------------- ------------- -------------
Net cash provided by (used in) investing activities (2,099,954) 393,601 (9,335,820)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Common Stock 1,348,984 -- 22,976,751
Proceeds from warrant and option exercise 1,041,310 5,415,230 14,089,272
Principal payments on capital lease (1,845) (1,655) (5,247)
------------- ------------- -------------
Net cash provided by financing activities 2,388,449 5,413,575 37,060,776
------------- ------------- -------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (4,535,570) 2,530,337 3,165,470
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD 7,701,040 1,558,473 --
------------ ------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,165,470 $ 4,088,810 $ 3,165,470
============= ============= =============
The accompanying notes are an integral part of these statements.
6
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 five 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 leased facility, which is located in Ewing,
NJ. The Company moved its operations to this facility in the fourth quarter of
1999. In the second quarter of 2001, the Company signed a lease for an
additional 10,000 square feet, which it intends to occupy by the fourth quarter
of 2001.
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
7
the OLED technology research, the scope of and technical aspects of the research
and the resources and efforts directed to such research are 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.
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
June 30, 2001, the results of operations for the three months and six months
ended June 30, 2001 and 2000 (restated), and the cash flows for the six months
ended June 30, 2001 and 2000 (restated). While 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 thereto 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, have 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.
8
Revenues from the sale of development chemicals are recognized at the time the
customer takes title to the product, generally at the time of shipment.
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 June 30, 2001 and December 31, 2000, are
classified as short-term investments. At June 30, 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 June 30, 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 three to seven 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.
NET LOSS PER COMMON SHARE
Basic EPS is computed by dividing net loss by the weighted-average number of
shares of Common Stock outstanding for the period. Diluted EPS reflects the
potential dilution from the exercise of conversion rights, under securities of
the Company, convertible in accordance with their terms, into Common Stock. For
the three months and six months ended June 30, 2001 and 2000, the effects of the
exercise of outstanding stock options and warrants were excluded from the
calculation of diluted EPS because the effect of their inclusion would have been
antidilutive.
RESEARCH AND DEVELOPMENT
Expenditures for research and development expense are charged to operations as
incurred.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board finalized Statements of
Financial Accounting Standards No. 141, Business Combinations (SFAS 141), and
No. 142, Goodwill and Other Inangible Assets (SFAS 142), which are effective for
fiscal years beginning after December 15, 2001. SFAS 141 requires all business
combinations initiated after June 30, 2001, to be accounted for using the
purchase method. SFAS 142 no longer requires the amortization of goodwill;
rather, goodwill will be subject to at least an annual assessment for impairment
by applying a fair-value-based test. In addition, an acquired intangible asset
should be separately recognized if the benefit of the intangible asset is
obtained through contractual or other legal rights, or if the intangible asset
can be sold, transferred, licensed, rented, or exchanged, regardless of the
acquirer's intent to do so. Such acquired intangible asset will be amortized
over the estimated useful lives. All of the Company's intangible assets were
obtained through contractual rights and have been separately identified and
recognized in the consolidated balance sheet. These intangibles are being
amortized over the estimated useful lives or contractual lives as appropriate.
Therefore, management does not expect the adoption of SFAS 142 to have an effect
on the future financial statements.
9
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
June 30, 2001 consisted of the following:
PD-LD, Inc. ......................................... $ 1,481,250
Motorola, Inc. ...................................... 15,469,468
-----------
$16,950,718
Less: Accumulated Amortization ...................... (1,308,335)
-----------
Acquired Technology, net ............................ $15,642,383
===========
Acquired technology is amortized on a straight-line basis over the estimated
useful life of ten years.
STATEMENT OF CASH FLOW INFORMATION
In the first quarter of 2001, 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 addition, in connection with a development agreement with a third
party, the Company issued 118,824 shares of Common Stock, 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 of $811,622 during
the six months ended June 30, 2001 for the amortization of the prepaid expense.
The charge was determined based on the fair value of the Common Stock earned by
the third party as of June 30, 2001. The Company also recorded a charge to
research and development expense of $497,485 during the six months ended June
30, 2001. This charge was recorded based on the fair value of warrants that were
earned by the third party during 2001. The fair value was determined based on
the Black-Scholes option-pricing model. The Company also recorded as a charge to
research and development expense of $144,703 for the vesting of stock options
granted to employees of the third party in 2000. These options vest on December
31, 2001 and are being accounted for as a variable award.
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 which amended the 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
during the period commencing on July 31, 1998 through July 31, 2002, which
period is subject to extension. Through June 30, 2001, the Company paid
$3,922,714 under this agreement. The amounts due to Princeton University are
charged to 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 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
10
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 the
Company issued, in October 1997, 140,000 shares of Common Stock and warrants to
purchase 175,000 shares of Common Stock to Princeton University as well as
60,000 shares of Common Stock and warrants to purchase 75,000 shares of 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 in and 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).
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 its estimated 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
estimated 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 also 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 the Common Stock over
the ten trading days ending two business days prior to the date the Common Stock
is issued.
11
NOTE 5. - REDEEMABLE COMMON STOCK AND SHAREHOLDERS' EQUITY
On October 1, 2000, the Company entered into a five year Development and License
Agreement with a third party to leverage the Company's OLED flat panel display
technology with the third party's expertise in the development and manufacturing
of organic materials. A team of scientists and engineers from the third party is
assisting the Company in developing and commercializing the Company's
proprietary OLED material system. In consideration for the services under the
agreement, the Company will issue shares of its Common Stock and warrants to
acquire its Common Stock to the third party 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 the third party's services through
December 31, 2000, the Company issued 26,448 shares of Redeemable Common Stock
and an 11.5% promissory note for $535,300. The note was only payable if the
Redeemable Common Stock issued were not registered under the Securities Act of
1933 by May 31, 2001. The amount of the note was based on the fair market value
of the services rendered by the third party through December 31, 2000. The
Company recorded a charge to research and development expense of $535,300 in
2000. If the note was paid then the third party would have returned the
Redeemable Common Shares previously issued.
In accordance with the 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 the third party. 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 was settled and the
Redeemable Common Stock was reclassified as Common Stock and Additional
Paid-In-Capital.
In accordance with the agreement, the Company issued warrants to the third party
to acquire 28,168 shares of Common Stock as part of the consideration for
services performed during 2000. The estimated 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 seven years.
Accordingly, the Company recorded a charge of $85,918 to research and
development expense during 2000 based on the estimated 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 the third party.
In 2001, the Company issued 118,824 shares of its Common Stock to the third
party 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 of $811,622 during the six months ended June 30, 2001 for the
amortization of the prepaid expense. The charge was determined based on the fair
value of the Common Stock earned by the third party as of June 30, 2001.
The Company also recorded a charge to research and development expense of
$497,485 during the six months ended June 30, 2001. This charge was recorded
based on the estimated value of warrants that were earned by the third party
during 2001. The estimated value was determined based on the Black-Scholes
option-pricing model.
The Company also recorded as a charge to research and development expense of
$144,703 for the vesting of stock options granted to employees of the third
party in 2000. These options vest on December 31, 2001 and are being accounted
for as a variable award.
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.
12
During January 2001, the private placement was completed and the Company 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 of $1,712,736 to research and development
expense for the six months ended June 30, 2001 for the vesting of warrants
earned during this period. The warrants issued in 2000 are for future services
and are being accounted for as a variable award.
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 exclusively engaged, and for the
foreseeable future expects to continue to be exclusively engaged, 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
$36,775,950 at June 30, 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 June 30, 2001 Compared to Three Months Ended June 30, 2000
The Company had a net loss of $4,768,582 (or $.28 per share) for the quarter
ended June 30, 2001 compared to a loss of $2,964,922 or ($.20 per share) for the
same period in 2000. The increase in the net loss was mainly attributed to
increased research and development costs.
Research and development costs were $4,063,480 for the quarter ended June 30,
2001 compared to $2,265,504 for the same period in 2000. For the quarter ended
June 30, 2001, research and development expenses consisted of: (i) payments of
13
$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 of $199,960 for patent applications, prosecutions and other
intellectual property rights, (iii) costs incurred of $1,349,102 for the
development and operations in the Company's facility, (iv) non-cash charges of
$929,343 incurred in connection with the development agreement with a third
party, (v) non-cash charges of $946,718 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 $406,683 for patent applications, prosecutions and other
intellectual property rights, (iii) costs incurred of $906,453 for the
development and operations in the Company's facility, and (iv) non-cash charges
of $812,842 recorded for warrants issued to the Scientific Advisory Board
members.
The Company earned $254,671 from contract research revenue in the quarter ended
June 30, 2001 compared to $126,746 for the same period in 2000. In the quarter
ended June 30, 2001, contract research revenue consisted of: (i) $205,309
recognized under an 18-month, $2,977,471 Phase I contract received from the
Defense Advanced Research Project Agency (DARPA), (ii) $21,542 recognized under
a two-year, $400,000 Phase II contract from the National Science Foundation
(NSF) under the Small Business Technology Transfer Program, and (iii) $27,820
recognized under a two-year Department of Defense Phase II SBIR contract. The
Company also earned $2,488 from the sale of evaluation chemicals to potential
OLED display manufacturers. The chemicals are used to evaluate the Company's
proprietary OLED material system. The Company commenced chemical sales in the
third quarter of 2000 therefore, there were none in the same period in 2000. In
the same period in 2000, contract research revenue was derived from the
following: (i) $8,112 was derived from a subcontract under a three year, $3
million contract Princeton University received from the Defense Advanced
Research Projects Agency (DARPA), which is substantially complete at this time,
(ii) an $80,000 milestone payment received from a National Science Foundation
(NSF)-Phase II contract, (iii) and $38,634 from a Small Business Innovation
Research (SBIR) Army contract.
Six Months Ended June 30, 2001 Compared to Six Months Ended June 30, 2000
The Company had a net loss of $8,547,561 (or $.51 per share) for the six months
ended June 30, 2001, compared to $4,982,337 (or $.34 per share) restated, for
the same period in 2000. The increase is primarily attributed to increased
research and development.
Research and development costs were $7,325,709 for the six months ended June 30,
2001 compared to $3,664,926 for the same period in 2000. For the quarter ended
June 30, 2001, research and development expenses consisted of: (i) payments of
$429,178 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 $427,252 for patent applications, prosecutions and other
intellectual property rights, (iii) costs incurred of $2,455,197 for the
development and operations in the Company's facility, (iv) non-cash charges of
$1,453,810 incurred in connection with the development agreement with a third
party, (v) non-cash charges of $1,712,736 recorded for warrants and options
previously issued to the Scientific Advisory Board members, and (vi) non-cash
charges of $847,536 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
$279,052 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 $737,343 for patent applications, prosecutions and other
intellectual property rights, (iii) costs incurred of $1,626,802 for the
development and operations in the Company's facility, and (iv) non-cash charges
of $1,021,729 recorded for warrants issued to the Scientific Advisory Board
members.
The Company earned $454,913 from contract research revenue for the six months
ended June 30, 2001 compared to $132,656 for the same period in 2000. In the six
14
months ended June 30, 2001, contract research revenue consisted of: (i)
$338,486 recognized under an 18-month, $2,977,471 Phase I contract received from
the Defense Advanced Research Project Agency (DARPA), (ii) $67,078 recognized
under a two-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)
$44,426 recognized under a two-year Department of Defense Phase II SBIR
contract, and (v) a $2,955 charge against revenue for an overpayment on the
final costs of a subcontract under a three-year, $3 million contract Princeton
University received from DARPA. The Company also earned $8,298 from the sale of
evaluation chemicals to potential OLED display manufacturers. The chemicals are
used to evaluate the Company's proprietary OLED material system. The Company
commenced chemical sales in the third quarter of 2000, therefore, there were
none in the same period in 2000. In the same period in 2000, contract research
revenue was derived from the following: (1) $9,987 was derived from a
subcontract under a three year, $3 million contract Princeton University
received from the Defense Advanced Research Projects Agency (DARPA), which is
completed at this time, (2) an $80,000 milestone payment received from a
National Science Foundation (NSF)-Phase II contract, (3) and $42,669 from a
Small Business Innovation Research (SBIR) Army contract.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2001, the Company had cash and cash equivalents of $3,165,470 and
short-term investments of $4,198,581 compared to cash and cash equivalents of
$7,701,040 and short-term investments of $2,704,220 at December 31, 2000. During
the six months ended June 30, 2001, warrants and options to purchase 251,431
shares of the Company's Common Stock were exercised, resulting in cash proceeds
of $1,041,310. Also in the first quarter, the Company 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, sales of debt and equity securities in both public and private
transactions and receipt of cash upon the exercise of warrants. The 1997
Sponsored Research Agreement requires the Company to pay up to $4.4 million to
Princeton University during the period from July 1998 through July 2002, which
period is subject to extension. Pursuant to its development and license
agreement with a third party, the Company is to issue shares of Common Stock, on
an annual basis, in consideration of the services provided by the third party.
In certain circumstances, the Company may also be required to pay cash to the
third party 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.
15
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board finalized Statements of
Financial Accounting Standards No. 141, Business Combinations (SFAS 141), and
No. 142, Goodwill and Other Intangible Assets (SFAS 142), which are effective
for fiscal years beginning after December 15, 2001. SFAS 141 requires all
business combinations initiated after June 30, 2001, to be accounted for using
the purchase method. SFAS 142 no longer requires the amortization of goodwill;
rather, goodwill will be subject to at least an annual assessment for impairment
by applying a fair-value-based test. In addition, an acquired intangible asset
should be separately recognized if the benefit of the intangible asset is
obtained through contractual or other legal rights, or if the intangible asset
can be sold, transferred, licensed, rented, or exchanged, regardless of the
acquirer's intent to do so. Such acquired intangible asset will be amortized
over the estimated useful lives. All of the Company's intangible assets were
obtained through contractual rights and have been separately identified and
recognized in the consolidated balance sheet. These intangibles are being
amortized over the estimated useful lives or contractual lives as appropriate.
Therefore, the management does not expect the adoption of SFAS 142 to have an
effect on the future financial statements.
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 1. NONE
ITEM 2. Changes in Securities/Use of Proceeds
(a) None
(b) None
(c) None
(d) None
ITEM 3. NONE
ITEM 4. Submission of Matters to a Vote of Security Holders (a) The Company held
its 2001 Annual Meeting of Shareholders on June 28, 2001. (b) Per Instruction 3
to Item 4 of Form 10-Q, no response is required.
(c) The matters voted upon at the annual meeting, and the results of the vote on
each such matter, are set forth below:
1. Election of seven directors. The result of the vote tabulated at the meeting
for the following seven director nominees is set forth as follows, opposite
their respective names:
Name Number of Votes For Number of Votes Against
- ---- ------------------- -----------------------
Steven V. Abramson 15,223,524 370,796
Lawrence Lacerte 15,224,230 370,090
Elizabeth H. Gemmill 15,224,230 370,090
Leonard Becker 15,224,230 370,090
C. Keith Hartley 15,224,230 370,090
Sidney D. Rosenblatt 15,223,524 370,796
Sherwin I. Seligsohn 15,223,524 370,796
16
2. Proposal to increase the number of shares of the Company's Common Stock
subject to the Company's Stock Option Plan to 2,800,000 from 2,000,000. The
result of the vote tabulated at the meeting for the ratification and approval of
the aforementioned proposal was as follows:
Number of Votes FOR 14,543,539
Number of Votes AGAINST 959,746
Number of Abstentions 91,035
3. Proposal to approve the appointment of Arthur Andersen LLP as the Company's
independent public accountants for the year ending December 31, 2001. The result
of the vote tabulated at the meeting for the ratification and approval of the
aforementioned proposal was as follows:
Number of Votes FOR 15,545,729
Number of Votes AGAINST 20,988
Number of Abstentions 27,603
ITEM 5. NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS:
None.
(B) REPORTS ON FORM 8-K:
None.
SIGNATURES
In accordance with the requirements of the Exchange Act, 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: August 14, 2001 -------------------------
Sidney D. Rosenblatt
(Executive Vice President,
Chief Financial Officer,
Treasurer and Secretary)
17