SECURITIES AND EXCHANGE COMMISSION
Washington, DC 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 September 30, 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, NJ 08618
- ---------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
(609) 671-0980
------------------------------------------------
(Issuer'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
----- -----
As of November 12, 2001, the registrant had outstanding 17,047,080 shares of
common stock, par value $0.01 per share.
INDEX PAGE
- ----- ----
Part I - Financial Information
Item 1. Unaudited Financial Statements
Consolidated Balance Sheets
September 30, 2001 and December 31, 2000 3
Consolidated Statements of Operations -
Three months Ended September 30, 2001 and 2000,
(restated) and inception to September 30, 2001 4
Consolidated Statements of Operations -
Nine months Ended September 30, 2001 and 2000,
(restated) and inception to September 30, 2001 5
Consolidated Statements of Cash Flows -
Nine months ended September 30, 2001 and 2000,
(restated) and inception to September 30, 2001 6
Notes to Unaudited Consolidated Financial Statements 7-15
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 16-19
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 19
Part II - Other Information 19
Item 2. Changes in Securities/Use of Proceeds 19
Item 6. Exhibits and Reports on Form 8-K 20
PART I - FINANCIAL INFORMATION
ITEM 1. UNAUDITED FINANCIAL STATEMENTS
UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARY
(a development-stage company)
CONSOLIDATED BALANCE SHEETS
(unaudited)
ASSETS
September 30, 2001 December 31, 2000
------------------ -----------------
CURRENT ASSETS:
Cash and cash equivalents (See Note 2) $ 6,267,549 $ 7,701,040
Restricted cash (See Note 6) 15,116,871 --
Short-term investments (See Note 2) 3,831,427 2,704,220
Contract research receivables 423,284 312,076
Prepaid development expense 204,267 --
Other current assets 535,145 204,810
------------ ------------
Total current assets 26,378,543 10,922,146
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $1,457,224 and $713,884 4,515,930 4,630,257
ACQUIRED TECHNOLOGY, net of accumulated
amortization of $1,732,103 and $460,799 15,218,615 16,489,919
DEPOSITS 20,125 37,472
------------ ------------
Total assets $ 46,133,213 $ 32,079,794
============ ============
LIABILITIES, REDEEMABLE COMMON STOCK AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Convertible promissory notes (See Note 6) $ 7,107,775 --
Accounts payable 207,756 $ 816,131
Accrued expenses 594,236 850,126
Advanced license fees 350,000 --
Short-term portion of capital leases 4,077 3,759
------------ ------------
Total current liabilities 8,263,844 1,670,016
------------ ------------
LONG-TERM PORTION OF CAPITAL LEASES 9,737 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 $1,500,000), 300,000
shares designated Series B convertible Preferred Stock
300,000 issued and outstanding, Series C Convertible
Preferred Stock, 5,000 issued and outstanding 5,050 5,000
Common Stock, par value $0.01 per share,
50,000,000 shares authorized, 17,028,320 and
16,440,286 issued and outstanding 170,283 164,403
Additional paid-in capital 77,055,564 57,885,790
Unrealized gain on investments 5,292 --
Deficit accumulated during development-stage (39,376,557) (28,228,389)
------------ ------------
Total shareholders' equity 37,859,632 29,826,804
------------ ------------
Total liabilities and shareholders' equity $ 46,133,213 $ 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
September 30, September 30, 2001
---------------------------------- ----------------------
2000
2001 (restated)
----------- -------------
REVENUE:
Contract research revenue $ 436,801 $ 124,812 $ 2,366,405
Development chemicals 132,432 -- 144,924
------------ ------------ ------------
Total Revenue 569,233 124,812 2,511,329
------------ ------------ ------------
OPERATING EXPENSES:
Research and development
(See Note 3) 1,203,473 1,574,258 27,462,874
General and administrative 900,803 738,531 14,685,584
------------ ------------ ------------
Total operating expenses 2,104,276 2,312,789 42,148,458
------------ ------------ ------------
Operating loss (1,535,043) (2,187,977) (39,637,129)
INTEREST INCOME 133,087 113,581 1,459,224
INTEREST EXPENSE (509,236) -- (509,236)
------------ ------------ ------------
NET LOSS (1,911,192) (2,074,396) (38,687,141)
BENEFICIAL CONVERSION FEATURE
TREATED AS A DIVIDEND
(See Note 6) (689,416) -- (689,416)
------------ ------------ ------------
NET LOSS APPLICABLE TO
COMMON SHARE HOLDERS $ (2,600,608) $ (2,074,396) $(39,376,557)
============ ============ ============
BASIC AND DILUTED NET LOSS
PER COMMON SHARE $ (.15) $ (.14)
------------ ------------
WEIGHTED AVERAGE SHARES
USED IN COMPUTING BASIC AND DILUTED
NET LOSS PER COMMON SHARE 17,024,804 15,357,309
------------ ------------
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
Nine Months Ended (June 17, 1994) to
September 30, September 30, 2001
---------------------------------- ----------------------
2000
2001 (restated)
----------- -------------
REVENUE:
Contract research revenue $ 891,714 $ 257,467 $ 2,366,405
Development chemicals 140,730 -- 144,924
------------ ------------ ------------
Total revenue 1,032,444 257,467 2,511,329
------------ ------------ ------------
OPERATING EXPENSES:
Research and development
(See Note 3) 8,528,379 5,251,535 27,462,874
General and administrative 2,827,227 2,312,223 14,685,584
------------ ------------ ------------
Total operating expenses 11,355,606 7,563,758 42,148,458
------------ ------------ ------------
Operating loss (10,323,162) (7,306,291) (39,637,129)
INTEREST INCOME 373,646 254,837 1,459,224
INTEREST EXPENSE (509,236) -- (509,236)
------------ ------------ ------------
NET LOSS (10,458,752) (7,051,454) (38,687,141)
BENEFICIAL CONVERSION FEATURE
TREATED AS A DIVIDEND
(See Note 6) (689,416) -- (689,416)
------------ ------------ ------------
NET LOSS APPLICABLE TO
COMMON SHARE HOLDERS $(11,148,168) $ (7,051,454) $(39,376,557)
============ ============ ============
BASIC AND DILUTED NET LOSS
PER COMMON SHARE $ (.66) $ (.46)
------------ ------------
WEIGHTED AVERAGE SHARES
USED IN COMPUTING BASIC AND
DILUTED NET LOSS PER COMMON SHARE 16,881,743 15,357,309
------------ ------------
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
Nine Months Ended (June 17, 1994) to
September 30, September 30, 2001
-------------------------------- ---------------------
2000
2001 (restated)
------------ -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(10,458,752) $(7,051,454) $(38,687,141)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation 815,848 433,200 1,529,732
Amortization 1,271,304 37,031 1,732,103
Amortization of original issuance discount and beneficial
conversion feature on convertible promissory notes 509,236 -- 509,236
Issuance of Common Stock options and warrants for services 46,754 10,000 726,425
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 1,694,824 -- 2,357,935
Issuance of Common Stock options and warrants for
Scientific Advisory Board 539,757 1,271,862 1,142,440
Acquired in-process technology -- -- 350,000
(Increase) decrease in assets
Contract research receivables (111,208) 99,943 (423,284)
Other current assets (330,335) 198,452 (106,160)
Deposits 17,347 18,864 (20,125)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses (851,902) 199 502,742
Payable to related parties -- -- 250,000
Advanced license fees 350,000 -- 350,000
------------ ----------- ------------
Net cash used in operating activities (6,507,127) (4,981,903) (26,242,548)
------------ ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment (657,744) (1,046,063) (5,163,640)
Purchases of intangibles -- (25,750) (25,750)
Purchases of short-term investments (4,661,915) (2,217,628) (23,527,918)
Proceeds from sale of short-term investments 3,540,000 4,616,461 19,701,783
------------- ------------ -------------
Net cash (used in) provided by investing activities (1,779,659) 1,327,020 (9,015,525)
------------ ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Common Stock 1,348,984 -- 22,976,751
Proceeds from issuance of Preferred Stock,net 4,496,477 -- 4,496,477
Proceeds from issuance of convertible promissory notes 15,000,000 -- 15,000,000
Proceeds from warrant & option exercise 1,127,510 6,339,842 14,175,472
Principal payments on Capital Lease (2,805) (2,517) (6,207)
------------ ----------- ------------
Net cash provided by financing activities 21,970,166 6,337,325 56,642,493
------------ ----------- ------------
INCREASE IN CASH, CASH EQUIVALENTS
AND RESTRICTED CASH 13,683,380 2,682,442 21,384,420
CASH, CASH EQUIVALENTS AND RESTRICTED CASH
BEGINNING OF PERIOD 7,701,040 1,558,473 --
------------ ----------- ------------
CASH, CASH EQUIVALENTS AND RESTRICTED CASH
END OF PERIOD $ 21,384,420 $ 4,240,915 $ 21,384,420
============ =========== ============
The accompanying notes are an integral part of these statements.
6
UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARY
(a development-stage company)
NOTES TO UNAUDITED 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 end of 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, 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, cash
equivalents and short term investments 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
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.
7
NOTE 2. - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INTERIM FINANCIAL INFORMATION
In the opinion of 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 September
30, 2001, the results of operations for the three months and nine months ended
September 30, 2001 and 2000 (restated), and the cash flows for the nine months
ended September 30, 2001 and 2000 (restated). While the Company believes that
the disclosures presented are adequate to make the information not misleading,
these unaudited consolidated financial statements should be read in conjunction
with the audited 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 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 generally accepted
accounting principles 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.
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.
8
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 September 30, 2001 and December 31, 2000 are
classified as short-term investments. At September 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 are presented as a separate component of
shareholders' equity. At September 30, 2001, unrealized holding gains on
investments were $5,292. The unrealized gains or losses were not material at
December 31, 2000.
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 earnings per share is computed by dividing net loss applicable to common
share holders by the weighted-average number of shares of Common Stock
outstanding for the period. Diluted earnings per share 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 and nine months ended September 30, 2001 and 2000, the effects of the
conversion of convertible securities and the exercise of outstanding stock
options and warrants were excluded from the calculation of diluted earnings per
share because the effect of their inclusion would have been antidilutive.
RESEARCH AND DEVELOPMENT
Expenditures for research and development costs 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 sheets. 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.
In October 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" (SFAS 144). SFAS 144 changes the accounting for
long-lived assets by requiring that all long-lived assets be measured at the
lower of carrying amount or fair value less cost to sell, whether included in
reporting continuing operations or in discontinued operations. SFAS 144, which
replaces SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for
assets to be disposed of" is effective for fiscal years beginning after December
15, 2001. The Company has not fully assessed the potential impact of the
adoption of SFAS 144, which is effective for the Company as of January 1, 2002.
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
September 30, 2001 consisted of the following:
PD-LD, Inc. $ 1,481,250
Motorola 15,469,468
------------
16,950,718
Less: Accumulated Amortization (1,732,103)
------------
Acquired technology, net $ 15,218,615
============
Acquired technology is amortized on a straight-line basis over the estimated
useful life of ten years.
LONG-LIVED ASSETS
The Company follows SFAS No. 121, "Accounting for Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of". The Company continually
evaluates the recoverability of its long-lived assets, including property and
equipment and acquired technology. As of September 30, 2001 and December 31,
2000, management has determined that no impairment of the company value of these
long-lived assets existed.
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 was 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 $211,881 during
the nine months ended September 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 September 30, 2001. The Company also recorded a
charge to research and development expense of $99,936 during the nine months
ended September 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 credit to research and development expense of $70,804 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. The Company recorded an unrealized gain on short-term investments of
$5,292 during 2001.
As discussed in Note 6, on August 22, 2001 the Company issued convertible
promissory notes for $15,000,000. The cash proceeds received from the issuance
of these notes is restricted and classified as a current asset on the
accompanying consolidated balance sheet. In connection with the accounting for
the convertible promissory notes the Company recorded a beneficial conversion
feature charge of $689,416 during the three months ended September 30, 2001,
which has been recorded as a deemed dividend.
10
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 September 30, 2001, the Company paid
$4,062,485 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
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
resale of the shares of 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, a registration statement under the Securities Act of 1933
covering the resale of the shares of Redeemable Common Stock was declared
effective by 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 option-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 $211,881 during the nine months ended September 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 September 30, 2001.
12
The Company also recorded a charge to research and development expense of
$99,936 during the nine months ended September 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 a credit to research and development expense of
$70,804 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.
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 $539,757 to research and development
expense for the nine months ended September 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.
NOTE 6. - RESTRICTED CASH, CONVERTIBLE PROMISSORY NOTES, CONVERTIBLE PREFERRED
STOCK, WARRANTS TO PURCHASE COMMON STOCK AND SUBSEQUENT EVENT
On August 22, 2001 the Company closed on a private placement financing
transaction with two investors whereby the Company sold Convertible Promissory
Notes ("Notes"), Series C Convertible Preferred Stock ("Series C"), and Warrants
to purchase Common Stock ("Warrants") for $20,000,000. The Company accounted for
the financing transaction as a package sale and allocated the cash proceeds
received to the Notes, Series C and Warrants to acquire common stock based on
the relative fair value of each instrument.
In addition, the Company will subsequently designate a new series of Preferred
Stock called Series D Convertible Preferred Stock ("Series D"). The investors
are, subject to the satisfaction of certain conditions that are outside of their
control, obligated to purchase $5,000,000 of the Series D following the
effective date of a Registration Statement on Form S-3 registering the resale of
the shares of the Company's Common Stock issuable upon the conversion of the
Series C and the Series D.
Notes
On August 22, 2001 the Company issued two $7,500,000 Notes with a maturity date
of August 22, 2004. Interest accrues daily on the outstanding principal amount
of the Notes but compounds annually, at a rate per annum equal to the rate of
interest paid from time to time on money market accounts held at First Union
National Bank, and is payable quarterly in cash. The Notes are convertible into
shares of the Company's Common Stock at a price per share equal to the
conversion price then in effect. The initial conversion price of the Notes is
$13.97, and may change in the future based on certain anti-dilution and other
adjustments. The Notes are automatically converted into Common Stock if certain
conditions, which are outside the control of the holders and the Company, are
met. The notes are convertible at the election of the holders or the Company if
certain conditions, which are outside the control of the holders and the
Company, are met.
The holders of the Notes have the right to require the Company prepay all or a
portion of the Notes, plus all accrued but unpaid interest thereon, at any on
time on or after:
1. the 120th day following the date on which the SEC declares a Registration
Statement effective, if more than $3,750,000 of the principal amount of such
Note is then outstanding; and
2. the 240th day following the date on which the SEC declares a Registration
Statement effective, if more than $1,875,000 million of the principal amount of
such Note is then outstanding.
13
The Company has the right to prepay each of the Notes in full at any time by
paying the holder thereof 105% of the outstanding principal amount of such Note
and all accrued but unpaid interest thereon.
In the event that either (i) a Registration Statement has not been declared
effective by the SEC on or prior to January 9, 2002 or (ii) the Company sells
shares of its Common Stock or other securities convertible into or exercisable
for shares of its Common Stock at a price less than $13.97 per share, then the
Note holders may elect to demand repayment of the principal amount of the Notes
then outstanding, plus accrued but unpaid interest thereon.
In addition, upon the occurrence of events of default under the Notes, the
holders thereof may demand repayment of the principal amount of the Notes then
outstanding, plus accrued but unpaid interest thereon, and may also be entitled
to liquidated damages, as defined.
The Company's obligations under the Notes are secured by an irrevocable letter
of credit issued with a face amount equal to the outstanding principal of the
related Notes. The $15,000,000 in proceeds from the sale of the Notes has been
pledged as collateral to the bank issuing the letters of credit. Under the terms
of the applicable agreements, the face amount of each letter of credit is
reduced as the outstanding principal amount of the related Note is reduced.
Thus, as each Note is converted or repaid, the face amount of the related letter
of credit will be reduced and, likewise, the amount pledged to the bank as
collateral relating to that letter of credit will be reduced. Accordingly, as
the Notes are converted or repaid, the Company will be able to access the funds
raised from the sale of the Notes in amounts corresponding to the portion of the
Notes that are converted or repaid. The $15,116,871 in cash proceeds plus
accrued but unpaid interest has been classified as a restricted cash asset on
the accompanying consolidated balance sheet as of September 30, 2001.
The Company allocated the proceeds from the private placement financing
transaction to the Series C, Notes and Warrants based on their relative fair
values as of the commitment date. The fair value of the Notes was determined
based on a three-year discounted cash flow analysis using a risk-adjusted
interest rate of 11%. The Company determined the relative fair value of the
Notes to be $9,857,006. The resulting original issuance discount of $5,142,994
is being amortized as interest expense, using the effective interest method over
the maturity period of three years. During the quarter ended September 30, 2001,
the Company recognized interest expense of $305,814 for the amortization of the
original issuance discount. After considering the allocation of the proceeds to
the Notes, the Company determined that the Notes contained a beneficial
conversion feature ("BCF"). The Company recorded $3,258,468 of BCF as a debt
discount on the commitment date. The BCF debt discount is being amortized as
interest expense, using the effective interest method, over the maturity period
of three years. During the quarter ended September 30, 2001, the Company
recognized interest expense of $203,422.
Series C
Holders of Series C are not entitled to voting rights except as otherwise
required by law. Each share of Series C has a stated value of $1,000, which
increases by $4.16 for each month during which such share of Series C is
outstanding. The Company issued 5,000 shares of Series C Stock as of August 22,
2001. There are no dividends on the Series C.
The number of shares of Common Stock issuable upon conversion of a share of
Series C equals the quotient obtained by dividing the stated value of one share
of Preferred Stock by the conversion price then in effect. The initial
conversion price of the Series C Stock is $12.70, and may change in the future
based on certain anti-dilution and other adjustments. Series C is convertible as
follows:
(a) Holders of Series C may elect to convert such shares at any time at the
then-applicable conversion price until August 21, 2004. A holder may not convert
shares of Series C, however, to the extent that it would then own, together with
its affiliates, more than 9.99% of the Company's Common Stock then outstanding.
(b) If, at any time after the shares of Common Stock underlying the Series C
have been registered for resale with the SEC, the Volume Weighted Average Price
of the Company's Common Stock exceeds 135% of the then-applicable conversion
price for 20 consecutive trading days, the Company may require the conversion of
all of the Preferred Stock at the then-applicable conversion price. Such
conversion, however, shall not be effected to the extent that it would result in
a holder of Preferred Stock owning, together with its affiliates, more than
9.99% of the Company's Common Stock then outstanding.
14
(c) All shares of Series C automatically convert into shares of Common Stock on
the third anniversary of the date of issuance thereof at the then-applicable
conversion price, unless the Company is in default, as defined. Such conversion,
however, shall not be effected to the extent that it would result in a holder of
Preferred Stock owning, together with its affiliates, more than 9.99% of the
Company's Common Stock then outstanding.
On August 22, 2001 the Company sold 5,000 Series C shares for $1,000 per share
for a selling price of $4,496,477 net of $503,523 in cash offering costs.
The Company allocated the proceeds from the Notes, Series C, and Warrants based
on their relative fair values. The fair value of the Series C was based on the
fair value of the common stock that would be issuable on a converted basis. As a
result, the Company allocated $4,146,678 to the Series C.
After considering the allocation of the proceeds to the Series C, the Company
determined that the Series C contained a BCF. The Company recorded the BCF
immediately, as the Series C is convertible at the commitment date, in the
amount of $616,793, in a manner similar to a dividend in the quarter ended
September 30, 2001.
As a result of the monthly increase in the stated price, a contingent beneficial
conversion feature ("BCF") existed at the August 22, 2001 commitment date. The
contingent BCF was recorded upon the increase in the stated price, which results
in additional shares of Common Stock issuable upon conversion, on September 30,
2001. At this date the Company recorded a $72,622 beneficial conversion feature
treated as dividend.
Warrants
In connection with private placement financing transaction the Company issued
the following warrants:
Series Number Exercise Price Expiration date Relative Fair Value
- ------ ------ -------------- --------------- -------------------
A-1 78,740 $15.24 August 22, 2006 $ 593,006
A-2 78,740 15.24 August 22, 2006 593,006
B-1 78,740 15.24 August 22, 2006 --
B-2 78,740 15.24 August 22, 2006 --
C-1 214,746 15.24 August 22, 2006 1,617,295
C-2 214,746 15.24 August 22, 2006 1,617,295
D-1 186,114 15.24 August 22, 2011 1,575,714
The A-1,2, C-1,2 and D-1 warrants are exercisable immediately by the holders.
The B-1,2 are exercisable at the earlier of the sale of Series D or August 22,
2004 and can be repurchased by the Company for $100 anytime after August 22,
2002, if the Series D is not issued. As a result the B-1,2 warrants are
contingent and will be measured and recorded by the Company upon the closing of
Series D. The remaining warrants listed above have been recorded based on their
relative fair values. Using the Black-Scholes option-pricing model, the Company
allocated $5,996,316 of the cash proceeds received in the private placement
transaction to the warrants. The warrants have been recorded as
additional-paid-in- capital in the accompanying consolidated balance sheet as of
September 30, 2001. The D-1 warrants were issued as a placement agent's fee.
Subsequent Event
Effective November 5, 2001, the Company and the investors agreed to amend the
terms of the private placement transaction. As a result of the amendment, the
conversion price of the Series C and D was set at $9.45 per share. All of
the outstanding Series C and D shares must be converted by the holders on the
fifth trading day after the SEC declares the Form S-3, filed to register the
common shares underlying the conversion of Series C and D, effective.
Additionally, the exercise prices on the Series A-1,2, B-1, 2 were reduced to
$9.93 per share and the expiration date on all of the warrants was extended to
August 22, 2011. The Company established a new class of Convertible Preferred
Stock, Series C-1 ("Series C-1"). All of the outstanding shares of Series C were
exchanged for Series C-1 shares.
15
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 (stacked OLED), TOLED (transparent OLED) and FOLED
(flexible OLED) 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 and
performing 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 OLED technology. The Company has incurred
significant losses since its inception, resulting in an accumulated deficit of
$39,376,557 at September 30, 2001. The accumulated deficit includes non-cash
interest charges of $509,236 as a result of the amortizaiton of original
issuance discount and beneficial conversion feature discount on the convertible
promissory notes and $689,416 of beneficial conversion features treated as a
preferred stock dividend (see Note 6 in Notes to Unaudited Consolidated
Financial Statements). 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 September 30, 2001 Compared to Three Months Ended
September 30, 2000
The Company had a net loss of $1,911,191 (or $.11 per share) for the quarter
ended September 30, 2001 compared to a loss of $2,074,396 or ($.14 per share)
for the same period in 2000. The decrease in net loss was attributed mainly to
the increase in revenues and decrease in research and development expenses.
The Company earned $436,801 from contract research revenue in the quarter ended
September 30, 2001 compared to $124,812 for the same period in 2000. The revenue
was derived from the following: (i) $281,117 recognized under an 18-month,
$2,977,471 Phase I contract received from Defense Advanced Research Project
Agency (DARPA), (ii) $38,459 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) $117,225 recognized under a two-year
Department of Defense (DoD) Phase II Small Business Innovation Research (SBIR)
Army Contract. The Company also earned $132,432 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 fourth quarter of 2000. In the same period in 2000, the
revenue was derived from the following: (i) $10,695 was recognized from a
subcontract under a 3 year, $3 million contract Princeton University received
from DARPA, which was completed on September 30, 2000, (ii) $43,838 was
recognized from a NSF Phase II contract, (iii) $27,331 was recognized from a
SBIR Army Phase I contract which was completed as of September 30, 2000, (iv)
$1,333 was recognized from SBIR Army Phase I Option contract, and (v) $41,615
was recognized from DARPA Phase I contract.
16
Research and development expenses were $1,203,473 for the quarter ended
September 30, 2001 compared to $1,574,258 for the same period in 2000. For the
quarter ended September 30, 2001, research and development expenses consisted
of: (i) payments of $139,777 to the Company's research partners (see Note 3 in
Notes to Unaudited Consolidated Financial Statements) under the 1997 Sponsored
Research Agreement, (ii) costs incurred of $256,813 for patent applications,
prosecutions, and other intellectual property rights, (iii) costs incurred of
$1,315,080 for the development and operations in the Company's facility, (iv)
non-cash charges of $241,014 incurred in connection with the development
agreement with a third party, (v) non-cash credit of $1,172,979 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 Unaudited Consolidated
Financial Statements). Research and development costs in the same period in 2000
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 of $279,795 for patent applications,
prosecutions, and other intellectual property rights, (iii) costs incurred of
$792,710 for the development and operations in the Company's facility, (iv)
non-cash charge of $250,133 recorded for warrants and options previously issued
to the Scientific Advisory Board members, and (v) non-cash charges of $37,031
for the amortization of the Company's acquired technology (see Note 2 and Note 4
in Notes to Unaudited Consolidated Financial Statements). General and
administrative expenses were $900,803 for the quarter ended September 30, 2001
compared to $738,531. The increase is attributed to the expansion of the
Company's facility and corporate team.
Interest expense was $509,236 for the quarter ended September 30, 2001, compared
to zero for the same period in 2000. The increase is due to the amortization of
original issuance discount and beneficial conversion feature on the convertible
promissory notes issued on August 22, 2001 (see Note 6 in Notes to Unaudited
Consolidated Financial Statements).
Beneficial conversion feature treated as a dividend was $689,416 for the three
months ended September 30, 2001, compared to zero for the same period in 2000.
The increase is due to the conversion features of the Series C Convertible
Preferred Stock issued on August 22, 2001. As a result of the dividend, net
loss applicable to common stockholders was $2,600,607 (or $.15 per share) for
the three months ended September 30, 2001.
Nine Months Ended September 30, 2001 Compared to Nine Months Ended
September 30, 2000
The Company had a net loss of $10,458,752 (or $.62 per share) for the nine
months ended September 30, 2001, compared to a loss of $7,051,454 (or $.46 per
share) for the same period in 2000. The increase in net loss is primarily
attributed to the non-cash interest expense on convertible promissory notes (see
Note 6 in Notes to Unaudited Consolidated Financial Statements) as well as
increased research and development expenses.
The Company earned $891,714 from contract research revenue for the nine months
ended September 30, 2001, compared to $257,467 for the same period in 2000. The
revenue was derived from the following: (i) $619,603 recognized under an
18-month, $2,977,471 Phase I contract received from Defense Advanced Research
Project Agency (DARPA), (ii) $105,537 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 DoD Phase
I, SBIR contract which is completed at this time, (iv) $161,651 recognized under
a two-year DoD Phase II SBIR Army Contract, and (v) a $2,955 charge against
revenue for an overpayment on the final costs of a subcontract under a 3-year,
$3 million contract Princeton University received from DARPA. The Company also
earned $140,730 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 fourth quarter of
2000, therefore, there were none in the same period in 2000. In the same period
in 2000, the revenue was derived from the following: (i) $20,681 was recognized
from a subcontract under a 3 year, $3 million contract Princeton University
received from DARPA, which was completed on September 30, 2000, (ii) $123,838
was recognized from a NSF Phase II contract, (iii) $70,000 was recognized from a
SBIR Army Phase I contract which was completed as of September 30, 2000, (iv)
$1,333 was recognized from SBIR Army Phase I Option contract, and (v) $41,615
was recognized from DARPA Phase I contract.
17
Research and development expenses were $8,528,379 for the nine months ended
September 30, 2001 compared to $5,251,535 for the same period in 2000. For the
nine months ended September 30, 2001, research and development expenses
consisted of: (i) payments of $568,955 to the Company's research partners (see
Note 3 in Notes to Unaudited Consolidated Financial Statements) under the 1997
Sponsored Research Agreement, (ii) costs incurred of $684,065 for patent
applications, prosecutions, and other intellectual property rights, (iii) costs
incurred of $3,769,474 for the development and operations in the Company's
facility, (iv) non-cash charges of $1,694,824 incurred in connection with the
development agreement with a third party, (v) non-cash charge of $539,757
recorded for warrants and options previously issued to the Scientific Advisory
Board members, and (vi) non-cash charges of $1,271,304 for the amortization of
the Company's acquired technology (see Note 2 and Note 4 in Notes to Unaudited
Consolidated Financial Statements). Research and development costs in the same
period in 2000 consisted of: (i) payments of $493,641 to the Company's research
partners (see Note 3 in Notes to Unaudited Consolidated Financial Statements)
under the 1997 Sponsored Research Agreement, (ii) costs incurred of $1,017,138
for patent applications, prosecutions, and other intellectual property rights,
(iii) costs incurred of $2,431,863 for the development and operations in the
Company's facility, (iv) non-cash credit of $1,271,862 recorded for warrants and
options previously issued to the Scientific Advisory Board members, and (v)
non-cash charges of $37,031 for the amortization of the Company's acquired
technology (see Note 2 and Note 4 in Notes to Unaudited Consolidated Financial
Statements). General and administrative expenses were $2,827,227 for the nine
months ended September 30, 2001 compared to $2,312,223 for the same period in
2000. The increase is attributed to the expansion of the Company's facility and
corporate team. Also, the increase is attributed to increased legal fees in
connection with joint development and licensing activities the Company has
entered into throughout the nine months ended September 30, 2001.
Interest expense was $509,236 for the nine months ended September 30, 2001,
compared to zero for the same period in 2000. The increase is due to the
amortization of original issuance discount and beneficial conversion feature on
the convertible promissory note issued on August 22, 2001 (see Note 6 in Notes
to Unaudited Consolidated Financial Statements).
Beneficial conversion feature treated as a dividend was $689,416 for the nine
months ended September 30, 2001, compared to zero for the same period in 2000.
The increase is due to the conversion features of the Series C Convertible
Preferred Stock issued on August 22, 2001. As a result of the dividend, net
loss applicable to common stockholders was $11,148,168 (or $.66 per share) for
the three months ended September 30, 2001.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2001, the Company had cash and cash equivalents of
$6,267,549, restricted cash of $15,116,871 and short-term investments of
$3,831,427 compared to cash and cash equivalents of $7,701,040 and short-term
investments of $2,704,220 at December 31, 2000. During the nine months ended
September 30, 2001, warrants and options to purchase 271,431 shares of the
Company's Common Stock were exercised, resulting in net cash proceeds of
$1,127,510 to the Company. In August 2001, the Company sold in a private
placement 5,000 shares of Series C convertible preferred stock, warrants to
purchase shares of the Company's Common Stock and issued secured convertible
debentures (see Note 6 in Notes to Unaudited Consolidated Financial Statements),
resulting in net cash proceeds of $4,496,477 and restricted cash proceeds of
$15,000,000.
In the first quarter, the Company received additional net cash proceeds of
$1,348,984 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
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 current fiscal year. Management believes that additional
financing sources for the Company include long-term and short-term borrowings,
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 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.
18
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.
In October 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" (SFAS 144). SFAS 144 changes the accounting for
long-lived assets by requiring that all long-lived assets be measured at the
lower of carrying amount or fair value less cost to sell, whether included in
reporting continuing operations or in discontinued operations. SFAS 144, which
replaces SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for
assets to be disposed of" is effective for fiscal years beginning after December
15, 2001. The Company has not fully assessed the potential impact of the
adoption of SFAS 144, which is effective for the Company as of January 1, 2002.
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 investments.
PART II - OTHER INFORMATION
ITEM 1. NONE
ITEM 2. Changes in Securities/Use of Proceeds
(a) None
(b) None
(c) On August 22, 2001, the Company consummated the sale of an aggregate
of 5,000 shares of its Series C Convertible Preferred Stock (the "Series C
Preferred"), for an aggregate purchase price of $5,000,000, to Pine Ridge
Financial Inc. and Strong River Investments, Inc. The transaction was made in
reliance upon the exemption from registration under Section 4(2) of the
Securities Act of 1933, as amended. In general, each share of Series C Preferred
is convertible into that number of shares of the Company's Common Stock as
equals the quotient obtained by dividing the stated value of one share of Series
C Preferred by the conversion price then in effect in accordance with the terms
of the Series C Preferred. See Note 6 to the Financial Statements contained in
this Quarterly Report on Form 10-Q for further explanation of the terms of
conversion of the Series C Preferred.
(d) None
ITEM 3. NONE
ITEM 4. NONE
ITEM 5. NONE
19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS:
4.1 Statement of Designations, Preferences and Rights of Series C Convertible
Preferred Stock.(1)
4.2 Form of Terms of Series D Convertible Preferred Stock.(1)
4.3 Convertible Promissory Note dated as of August 22, 2001 payable to the
order of Pine Ridge Financial Inc.(1)
4.4 Convertible Promissory Note dated as of August 22, 2001 payable to the
order of Strong River Investments, Inc.(1)
4.5 Warrant of Pine Ridge Financial Inc. to Purchase 78,740 Shares of Common
Stock dated as of August 22, 2001.(1)
4.6 Warrant of Pine Ridge Financial Inc. to Purchase 78,740 Shares of Common
Stock dated as of August 22, 2001.(1)
4.7 Warrant of Pine Ridge Financial Inc. to Purchase 214,746 Shares of Common
Stock dated as of August 22, 2001.(1)
4.8 Warrant of Strong River Investments, Inc. to Purchase 78,740 Shares of
Common Stock dated as of August 22, 2001.(1)
4.9 Warrant of Strong River Investments, Inc. to Purchase 78,740 Shares of
Common Stock dated as of August 22, 2001.(1)
4.10 Warrant of Strong River Investments, Inc. to Purchase 214,746 Shares of
Common Stock dated as of August 22, 2001.(1)
4.11 Warrant of Gerard Klauer Mattison & Co., Inc. to Purchase 186,114 Shares of
Common Stock dated as of August 22, 2001.(1)
10.1 Securities Purchase Agreement dated as of August 22, 2001 among the
Company, Pine Ridge Financial Inc. and Strong River Investors.(1)
10.2 Registration Rights Agreement dated as of August 21, 2001 among the
Company, Pine Ridge Financial Inc. and Strong River Investments, Inc.(1)
10.3 Voting Agreement dated as of August 21, 2001 among the Company, Pine Ridge
Financial Inc. and Strong River Investments, Inc.(1)
10.4 Pledge Agreement dated as of August 21, 2001 by UDC, Inc. in favor of First
Union National Bank.(1)
10.5 Control Agreement dated as of August 21, 2001 among First Union National
Bank, in its capacity as the issuer of two standby letters of credit, UDC,
Inc. and First Union National Bank, in its capacity as custodian.(1)
10.6 Guaranty and Suretyship Agreement dated as of August 22, 2001 made by the
Company in facor of First Union National Bank.(1)
10.7 Irrevocable Standby Letter of Credit issued by First Union National Bank in
favor of Pine Ridge Financial Inc.(1)
10.8 Irrevocable Standby Letter of Credit issued by First Union National Bank in
favor of Strong River Investments, Inc.(1)
10.9 First Amendment, dated as of September 20, 2001, to the Securities Purchase
Agreement dated as of August 22, 2001 among the Company, Pine Ridge
Financial Inc. and Strong River Investors.(2)
- ----------
(1) Incorporated by reference to the exhibit of the same number filed with the
Company's Current Report on Form 8-K, filed with the Commission on
September 6, 2001.
(2) Incorporated by reference to the exhibit of the same number filed with the
Company's Registration Statement on Form S-3 (Commission File No.
333-69854).
(B) REPORTS ON FORM 8-K:
The following reports on Form 8-K were filed during the three months
ended September 30, 2001:
1. Current Report on Form 8-K, filed with the Commission on September
6, 2001, reporting Items 2, 5 and 7.
2. Current Report on Form 8-K, filed with the Commission on September
26, 2001, reporting Items 5 and 7.
20
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: November 14, 2001 --------------------------
Sidney D. Rosenblatt
(Executive Vice President,
Chief Financial Officer,
Treasurer and Secretary)
21