U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
/ / TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to _________
Commission File No. 1-12031
UNIVERSAL DISPLAY CORPORATION
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
PENNSYLVANIA 23-2372688
------------------------------------- ---------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
375 Phillips Boulevard
Ewing, New Jersey 08618
---------------------------------------- -------------
(Address of Principal Executive Offices) (Zip Code)
(609) 671-0980
--------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes _X_ No ____
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date: As of May 10, 2002, the
registrant had outstanding 18,467,867 shares of Common Stock, par value $.01 per
share.
INDEX PAGE
- ----- -----
Part I - Financial Information
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets -
March 31, 2002 and December 31, 2001 3
Consolidated Statements of Operations -
Three months ended March 31, 2002 and 2001
and inception to March 31, 2002 4
Consolidated Statements of Cash Flows -
Three months ended March 31, 2002 and 2001
and inception to March 31, 2002 5
Notes to Consolidated Financial Statements 6-12
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13-14
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 15
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K. 15
Signatures 16
PART I- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (unaudited)
UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARY
(a development-stage company)
CONSOLIDATED BALANCE SHEETS
ASSETS
March 31, 2002 December 31, 2001
-------------- -----------------
CURRENT ASSETS:
Cash and cash equivalents $ 5,523,761 $ 7,883,132
Short-term investments 4,609,450 4,516,199
Restricted cash (Note 6) 15,142,324 15,162,414
Accounts receivable 492,457 540,855
Prepaid development expense (Note 5) 2,485,670 --
Other current assets 366,613 355,820
----------- -----------
Total current assets 28,620,275 28,458,420
PROPERTY AND EQUIPMENT, net 5,717,685 5,296,177
ACQUIRED TECHNOLOGY, net 14,371,079 14,794,847
DEPOSITS 33,125 20,125
----------- -----------
$48,742,164 $48,569,569
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Convertible promissory notes (face value of $15,000,000,
net of discounts) (Note 6) $ 9,380,021 $ 8,288,239
Capital lease obligations 4,344 4,228
Accounts payable 706,491 649,100
Accrued expenses 672,638 1,072,621
Deferred license fees 1,116,667 450,000
----------- -----------
11,880,161 10,464,188
----------- -----------
CAPITAL LEASE OBLIGATIONS 7,468 8,599
----------- -----------
SHAREHOLDERS' EQUITY
Preferred Stock, par value $0.01 per share, 5,000,000 shares authorized,
200,000 shares Series A Nonconvertible Preferred Stock issued and
outstanding (liquidation value of $7.50 per share or $1,500,000), 300,000
shares of Series B Convertible Preferred Stock issued and outstanding
(liquidation value of $21.48 per share or $6,444,000), 5,000 shares of
Series C-1 Convertible Preferred Stock authorized and none outstanding,
5,000 shares of Series D Convertible Preferred Stock authorized and none
outstanding 5,000 5,000
Common Stock, par value $.01 per share, 50,000,000 shares authorized,
18,440,522 and 18,093,124 shares issued and outstanding, respectively 184,405 180,931
Additional paid-in capital 89,070,930 85,016,601
Accumulated other comprehensive loss (5,166) (3,925)
Deficit accumulated during development-stage (52,400,634) (47,101,825)
----------- -----------
Total shareholders' equity 36,854,535 38,096,782
----------- -----------
$48,742,164 $48,569,569
=========== ===========
The accompanying notes are an integral part of these statements.
3
UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARY
(a development-stage company)
CONSOLIDATED STATEMENTS OF OPERATIONS
Period from Inception
(June 17, 1994) to
Three Months Ended March 31, March 31, 2002
-------------------------------------------------- -----------------------
2002 2001
---------------------- ----------------------
REVENUE:
Contract research revenue $ 447,083 $ 200,242 $ 2,980,345
Development chemicals 87,843 -- 282,173
----------- ----------- ------------
Total revenue 534,926 200,242 3,262,518
----------- ----------- ------------
OPERATING EXPENSES:
Research and development 3,849,548 3,252,977 35,164,885
General and administrative 957,856 861,923 16,732,067
----------- ----------- ------------
Total operating expenses 4,807,404 4,114,900 51,896,952
----------- ----------- ------------
Operating loss (4,272,478) (3,914,658) (48,634,434)
INTEREST INCOME 128,362 135,679 1,753,971
INTEREST EXPENSE (1,154,693) -- (3,002,835)
----------- ----------- ------------
NET LOSS (5,298,809) (3,778,979) (49,883,298)
DEEMED DIVIDEND TO PREFERRED
SHAREHOLDERS -- -- (2,517,336)
----------- ----------- ------------
NET LOSS APPLICABLE TO COMMON
SHAREHOLDERS $(5,298,809) $(3,778,979) $(52,400,634)
=========== =========== ============
BASIC AND DILUTED NET LOSS PER
COMMON SHARE $ (0.29) $ (0.23)
=========== ===========
WEIGHTED AVERAGE SHARES USED
IN COMPUTING BASIC AND DILUTED
NET LOSS PER COMMON SHARE 18,435,253 16,715,452
=========== ===========
The accompanying notes are an integral part of these statements.
4
UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARY
(a development-stage company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Period from
Inception
Three Months (June 17, 1994) to
Ended March 31, March 31, 2002
--------------------------------------- ---------------------
2002 2001
----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (5,298,809) $ (3,778,979) $ (49,883,298)
Non-cash charges to statement of operations:
Depreciation 358,952 233,828 2,197,480
Amortization of intangibles 423,768 423,768 2,579,639
Amortization of discounts on Convertible
Promissory Notes 1,091,782 -- 2,781,483
Issuance of Common Stock options and warrants
for services 1,709 2,066 1,069,701
Issuance of Common Stock and warrants in
connection with amended research and license
agreements -- -- 3,120,329
Issuance of Common Stock in connection with
executive compensation -- -- 423,220
Issuance of redeemable Common Stock, Common
Stock options and warrants in connection with
development agreement 1,542,951 529,468 4,489,244
Issuance of Common Stock options and warrants
for Scientific Advisory Board -- 766,018 1,947,369
Acquired in-process technology -- -- 350,000
(Increase) decrease in assets:
Accounts receivable 48,398 31,886 (492,457)
Other current assets (10,793) (10,136) 62,372
Deposits (13,000) -- (33,125)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses (315,119) (202,213) 1,079,878
Payable to related parties -- -- 250,000
Deferred license fees 666,667 200,000 1,116,667
------------ ------------ ------------
Net cash used in operating activities (1,503,494) (1,804,294) (28,941,498)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment (780,460) (309,495) (7,033,144)
Purchase of intangibles -- -- (25,750)
Purchases of short-term investments (1,446,492) (1,730,480) (27,412,399)
Proceeds from sale of short-term investments 1,352,000 479,000 22,797,783
Restricted cash 20,090 -- (15,142,324)
------------ ------------ ------------
Net cash used in investing activities (854,862) (1,560,975) (26,815,834)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Common Stock -- 1,348,984 22,976,751
Proceeds from issuance of Preferred Stock -- -- 9,137,079
Proceeds from issuance of Convertible Promissory
Notes and equity instruments -- -- 15,000,000
Proceeds from the exercise of Common Stock options
and warrants -- 50,689 14,175,472
Principal payments on capital lease (1,015) (910) (8,209)
------------ ------------ ------------
Net cash (used in) provided by financing activities (1,015) 1,398,763 61,281,093
------------ ------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,359,371) (1,966,506) 5,523,761
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 7,883,132 7,701,040 --
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 5,523,761 $ 5,734,534 $ 5,523,761
============ ============ ============
The accompanying notes are an integral part of these statements.
5
UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARY
(a development-stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 potential flat panel display
applications.
The Company, formerly known as Enzymatics, Inc. ("Enzymatics"), was incorporated
under the laws of the Commonwealth of Pennsylvania on April 24, 1985 and
commenced its current business activities on August 1, 1994. The New Jersey
corporation formerly known as Universal Display Corporation ("UDC") was
incorporated under the laws of the State of New Jersey on June 17, 1994.
Research and development of the OLED technology is being conducted at the
Advanced Technology Center for Photonics and Optoelectronic Materials at
Princeton University and at the University of Southern California ("USC") (on a
subcontract basis with Princeton University), pursuant to a Sponsored Research
Agreement dated August 1, 1994, as amended (the "1994 Sponsored Research
Agreement"), originally between the Trustees of Princeton University ("Princeton
University") and American Biomimetics Corporation ("ABC"), a privately held
Pennsylvania corporation and affiliate of the Company. In October 1997, the
Company entered into a new 5-year Sponsored Research Agreement with Princeton
University and USC (the "1997 Sponsored Research Agreement") for research and
development of the OLED technology (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 Amended License Agreement") to modify certain terms of the license and
again in 2002 (the "2002 Amended License Agreement") (Note 3).
The Company is also engaged in research, development and commercialization
activities at its 21,000 square foot facility leased in Ewing, New Jersey. In
1999 the Company entered into a lease for 11,000 square feet. 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.
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 and activities, 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 is no assurance that
such financing will be available to the Company, 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 its current fiscal year, which will end December 31,
2002. To the extent that Princeton University's research efforts do not result
in the development of commercially viable applications for the OLED technology,
the Company will not have any meaningful operations. Even if a product
incorporating the OLED technology is developed and introduced into the
marketplace, additional time and funding may be necessary before significant
revenues are realized. While the Company funds the OLED technology research, the
scope of and technical aspects of the research and the resources and efforts
directed to such research is subject to the control of Princeton University and
the principal investigators. Accordingly, the Company's success is dependent on
the efforts of Princeton University and the principal investigators. The 1997
Sponsored Research Agreement provides that if certain of the principal
investigators are unavailable to continue to serve as principal investigators,
because such persons are no longer associated with Princeton University or
otherwise, and successors acceptable to both the Company and Princeton
University are not available, the 1997 Sponsored Research Agreement will
terminate.
6
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 March 31,
2002, and the results of operations and cash flows for the three months ended
March 31, 2002 and 2001. While management 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, 2001.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Universal Display
Corporation and its wholly owned subsidiary, UDC, Inc. All significant
intercompany transactions and accounts have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents. The Company
classifies its existing marketable securities as available-for-sale in
accordance with the provisions of Statement of Financial Accounting Standards
No. 115, "Accounting for Certain Investments in Debt and Equity Securities."
These securities are carried at fair market value, with unrealized gains and
losses reported in shareholders' equity as a component of other comprehensive
income (loss). Gains or losses on securities sold are based on the specific
identification method. The Company reported unrealized holding losses of $5,166
and $3,925 at March 31, 2002 and December 31, 2001, respectively. Comprehensive
loss, which includes the net loss and change in unrealized holding losses, was
$5,300,050 and $3,778,979 for the three months ended March 31, 2002 and 2001,
respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash and cash equivalents, short-term investments, restricted cash, accounts
receivable, prepaids and other current assets, accounts payable and accrued
expenses are reflected in the accompanying financial statements at fair value
due to the short-term nature of those instruments. The carrying amount of
capital lease obligations approximate fair value at the balance sheet dates. The
carrying amount of the convertible promissory notes approximates fair value at
March 31, 2002 (Note 6).
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciated on a straight-line
basis over 3 to 7 years for office and lab equipment, furniture and fixtures,
and the lesser of the lease term or useful life for leasehold improvements.
Repair and maintenance costs are charged to expense as incurred. Additions and
betterments are capitalized.
Construction-in-progress costs consist of costs incurred for the expansion of
the Company's current leased space and for the acquisition of lab equipment.
Upon completion of construction or commencement of operation of the lab
equipment, the costs associated with such assets will be depreciated over the
estimated useful life.
7
ACQUIRED TECHNOLOGY
Acquired technology consists of acquired license rights for patents and know-how
obtained from PD-LD, Inc. and Motorola (Note 4). The intangible asset consists
of the following:
March 31, 2002 December 31, 2001
-------------- -----------------
PD-LD, Inc. $ 1,481,250 $ 1,481,250
Motorola 15,469,468 15,469,468
----------- -----------
16,950,718 16,950,718
Less: Accumulated amortization (2,579,639) (2,155,871)
----------- -----------
Acquired Technology, net $14,371,079 $14,794,847
=========== ===========
Acquired technology is amortized on a straight-line basis over its estimated
useful life of ten years.
LONG-LIVED ASSETS
Management continually evaluates whether events and circumstances have occurred
that indicate that the remaining estimated useful life of long-lived assets may
warrant revision or that the remaining balance may not be recoverable. When
factors indicate that long-lived assets should be evaluated for possible
impairment, the Company uses an estimate of the related undiscounted cash flows
in measuring whether the long-lived asset should be written down to fair value.
Measurement of the amount of the impairment will be based on generally accepted
valuation methodologies, as deemed appropriate. As of March 31, 2002 and
December 31, 2001, management believed that no revision to the remaining useful
lives or write-down of long-lived assets was required.
NET LOSS PER COMMON SHARE
Basic earnings per share (EPS) is computed by dividing net loss applicable to
Common shareholders by the weighted-average number of Common shares outstanding
for the period. Diluted EPS reflects the potential dilution from the exercise or
conversion of securities into Common Stock. For the three months ended March 31,
2002 and 2001 the effects of the exercise of 7,278,203 outstanding stock options
and warrants were excluded from the calculation of diluted EPS as the impact
would be antidilutive.
REVENUE RECOGNITION AND DEFERRED LICENSE FEES
Contract revenues represent reimbursements by government entities for all or a
portion of the research and development costs the Company incurs related to the
contracts. Revenues are recognized proportionally as the research and
development costs are incurred.
Development chemical revenues represent the sale of evaluation chemicals to
potential OLED display manufacturers. The chemicals are used to evaluate the
Company's proprietary OLED material system. Revenues are recognized at the time
of shipment and passage of title.
The Company also receives non-refundable advanced license payments in connection
with certain joint development and technology evaluation agreements it enters
into. These payments are deferred until a license agreement is executed or
negotiations have ceased and there is no likelihood of executing a license
agreement. Revenues will be recorded over the expected life of the licensed
technology, if there is an effective license agreement, or at the time the
negotiations show no likelihood of an executable license agreement.
RESEARCH AND DEVELOPMENT
Expenditures for research and development are charged to operations as incurred.
8
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards ("SFAS") No. 141, Business Combinations (SFAS No.
141), and SFAS No. 142, "Goodwill and Other Intangible Assets" (SFAS No. 142),
which are effective for fiscal years beginning after December 15, 2001. SFAS No.
141 requires all business combinations initiated after June 30, 2001, to be
accounted for using the purchase method. SFAS No. 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. The adoption of SFAS 142 had
no effect on the consolidated financial statements.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations" ("SFAS No. 143"), which is effective for fiscal years beginning
after June 15, 2002. SFAS No. 143 addresses accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and
retirement of assets. The adoption of SFAS No. 143 did not have an impact on the
consolidated financial statements.
In October 2001, the Financial Accounting Standards Board issued SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No.
144"). SFAS No. 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 No. 144, which replaces SFAS 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of" is effective for fiscal years beginning after December 15, 2001. The
adoption of SFAS No. 144 had no impact on the consolidated financial statements.
STATEMENT OF CASH FLOW INFORMATION
The following non-cash investing and financing activities occurred:
Three months ended March 31,
----------------------------
2002 2001
---- ----
Common Stock, options and warrants to acquire Common Stock
in development agreement (Note 5) $ 1,542,951 $ 529,468
Common Stock issued for the purchase of equipment -- 43,776
----------- ---------
$ 1,542,951 $ 573,244
=========== =========
STOCK OPTIONS
The Company accounts for its stock option plans under Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees," under which no
compensation cost has been recognized for options issued to employees at fair
market value on the date of grant. In 1995, the Financial Accounting Standards
Board issued SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No.
123 established a fair value based method of accounting for stock-based
compensation plans. SFAS No. 123 requires that a company's financial statements
include certain disclosures about stock-based employee compensation arrangement
regardless of the method used to account for the plan. The Company accounts for
its stock option and warrant grants to non-employees in exchange for goods or
services in accordance with SFAS No. 123 and Emerging Issues Task Force No.
96-18 ("EITF 96-18"). SFAS 123 and EITF 96-18 require that the Company account
for its option and warrant grants to non-employees based on the fair value of
the options and warrants granted.
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 a 1997 Amended License
Agreement with Princeton University and USC amending its 1994 License Agreement
with Princeton University. The 1997 Sponsored Research Agreement continues and
expands the sponsored research, which commenced in 1994 under which the Company
funds additional research and development work at Princeton University (and at
USC under a subcontract with Princeton University) in OLED technology. The 1997
Sponsored Research Agreement requires the Company to pay up to $4.4 million
commencing on July 31, 1998 through July 31, 2002, which period has been
9
extended until July 31, 2007. The Company is obligated to pay Princeton up to
$7.5 million commencing on July 31, 2002 through July 31, 2007. The amounts due
to Princeton University are charged to expense when paid by the Company. Under
the 1997 License Agreement, the Company has the worldwide exclusive and
perpetual license to manufacture and market products, and to sublicense those
rights, based on Princeton University's and USC's pending patent applications
relating to the OLED technology and conceived under the 1994 and 1997 Sponsored
Research Agreements. The Company is required to pay Princeton University a
royalty of 3% of the Company's net sales of products utilizing the OLED
technology. In circumstances where the Company sublicenses the OLED technology
(except to affiliates), the royalty required to be paid by the Company was
reduced in the 1997 License Agreement from 50% to 3%. These royalty rates are
subject to upward adjustments under certain conditions.
In 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 175,000
warrants to purchase Common Stock to Princeton University as well as 60,000
shares of Common stock and 75,000 warrants to purchase Common Stock to the
University of Southern California. The Company recorded a charge of $3,120,329
related to the issuance of the Common Stock and warrants to purchase Common
Stock to research and development expenses. The value of the warrants were
determined in accordance with SFAS No. 123, "Accounting for Stock-Based
Compensation." ("SFAS No. 123").
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 PD-LD's rights to certain issued and pending patents and technology
known as organic vapor phase deposition ("OVPD") in exchange for 50,000 shares
of the Company's Common Stock. Pursuant to this transaction, the Company has
included in its License Agreement with Princeton the exclusive license to all
Princeton patents and technology related to OVPD, whether developed pursuant to
its research agreements with Princeton or otherwise. The acquisition of these
patents had a fair value of $1,481,250 (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 72 US patents, 6 US patent applications, and additional
foreign patents. These patents expire between 2012 and 2018. The Company has the
sole right to sublicense these Motorola patents to manufacturers. As
consideration for the licenses, the Company issued to Motorola 200,000 shares of
Common Stock (valued at $4,412,500), 300,000 shares of Series B Convertible
Preferred Stock (valued at $6,618,750), and a warrant to purchase 150,000 shares
of Common Stock at $21.60 per share. The warrant becomes exercisable on
September 29, 2001 and will remain exercisable until September 29, 2008. The
warrant was recorded at fair market value of $2,206,234 based on the
Black-Scholes option-pricing model and was recorded as a component of the costs
of the acquired technology. The Company also issued a warrant to acquire 150,000
shares of Common Stock as a finder's fee in connection with this transaction.
The warrant was granted with an exercise price of $21.60 per share. The warrant
is exercisable immediately and will remain exercisable until September 29, 2007.
This warrant was accounted for at its fair value based on the Black-Scholes
option pricing model and $2,206,234 was recorded as a component of the cost of
the acquired technology. The Company used the following assumptions in the
Black-Scholes option pricing model for the 300,000 warrants issued in connection
10
with this transaction: (1) 6.3% risk-free interest rate, (2) expected life of 7
years, (3) 60% volatility, and (4) zero expected dividend yield. In addition,
the Company incurred $25,750 of direct cash transaction costs that have been
included in the cost of the acquired technology. In total, the Company recorded
an intangible asset of $15,469,468 for the technology acquired from Motorola
(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 (50%) cash and
(50%) in shares of Common Stock. The number of shares of Common Stock used to
pay the royalty portion shall be equal to 50% of the royalty due divided by the
average daily closing price per share of stock over the ten trading days ending
two business days prior to the date the Common Stock is issued.
NOTE 5. COMMON STOCK AND WARRANTS ISSUED IN DEVELOPMENT AND LICENSE AGREEMENT
On October 1, 2000, the Company entered into a 5 year Development and License
Agreement with PPG Industries, Inc. ("PPG") to leverage the Company's OLED flat
panel display technology with PPG's expertise in the development and
manufacturing of organic materials. A team of PPG scientists and engineers are
assisting the Company in developing and commercializing its proprietary OLED
material system. In consideration for PPG's services under the agreement, the
Company will issue shares of Common Stock and warrants to acquire Common Stock
to PPG on an annual basis over the period from January 1, 2001 through December
31, 2005. The amount of securities issued is subject to adjustment under certain
circumstances, as defined in the agreement.
In accordance with the PPG agreement, the Company issued 3,019 shares of Common
Stock in February 2002. The additional shares were issued as a result of the
final accounting for actual costs incurred by PPG in 2001. Accordingly, the
Company accrued $27,473 of research and development expense as of December 31,
2001 based on the fair value of the additional shares.
In accordance with the agreement, the Company also issued warrants to PPG to
acquire 121,843 shares of Common Stock as part of the consideration for services
performed during 2001. The warrants were earned during 2001, but were not issued
until February 2002. The number of warrants earned and issued is based on the
number of shares of Common Stock earned by, and issued, to PPG by the Company
during the calendar year.
During the first quarter of 2002 and 2001, the Company issued 344,379 and
118,824 shares of Common Stock, respectively, to PPG as consideration for
services required under the agreement for 2002 and 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 $820,368 and $315,532 during the three months ended March 31, 2002 and 2001,
respectively, for the amortization of the prepaid expense. The charge was
determined based on the fair value of the Common Stock earned by PPG as of March
31, 2002 and 2001.
During the three months ended March 31, 2002 and 2001, the Company also recorded
a charge to research and development expense of $672,220 and $174,232,
respectively. This charge was recorded based on the estimated fair value of
warrants that were earned by PPG during these periods. The Company determined
the fair value of the warrants earned during 2002 and 2001 using the
Black-Scholes option-pricing model with the following assumptions: (1) risk free
interest rate of 5.443% and 5.028%, (2) no expected dividend yield, (3) expected
life of 10 and 7 years, and (4) expected volatility of 94%, respectively.
In accordance with the terms of the PPG agreement, on December 14, 2000, UDC
granted options to PPG employees to acquire 26,000 shares of Common Stock. These
options vested over a one-year period, have an exercise price of $9.44 per share
and expire in 10 years. During the three months ended March 31, 2001, the
Company recorded a charge of $39,704, to research and development expense for
the fair market value, determined in accordance with the Black-Scholes
option-pricing model, of the stock option awards that were earned. On December
17, 2001, the Company granted an additional 26,333 options to PPG employees.
These options vest over a one-year period and are exercisable based on the PPG
employee's work status on the UDC project at the end of the one-year period. The
options have an exercise price of $8.56 per share and expire in 10 years. During
the three months ended March 31, 2002, the Company recorded $50,363 in research
and development costs related to these options. The Company determined the fair
value of the options earned during the three months ended March 31, 2002 and
2001 using the Black-Scholes option-pricing model with the following
assumptions: (1) risk free interest rate of 5.443% and 5.028%, (2) no expected
dividend yield, (3) expected life of 10 and 7 years, and (4) expected volatility
of 94%, respectively.
11
NOTE 6. RESTRICTED CASH AND CONVERTIBLE PROMISSORY NOTES
In August 2001, the Company issued two $7,500,000 Notes with a maturity date of
August 22, 2004, in connection with a private placement. Interest accrues daily
on the outstanding principal amount of the Notes but compounds annually at a
rate per year 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. Upon the occurrence and during the continuance of an event of default
under the Notes, the interest rate increases to 18% per year. As of March 31,
2002, the Company was not in default. 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 automatically convert 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 Company's obligations under the Notes are secured by irrevocable letters 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, 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, 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 $15,000,000 in cash proceeds plus accrued but unpaid
interest has been classified as restricted cash on the accompanying consolidated
balance sheet as of March 31, 2002 and December 31, 2001.
In accordance with APB No. 14, "Accounting for Convertible Debt and Debt Issued
with Stock Purchase Warrants" ("APB No. 14"), the Company determined the
relative fair value of the Notes to be $9,857,006. The resulting original
issuance discount ("OID") of $5,142,994 is being amortized as interest expense,
using the effective interest method, over the maturity period of three years.
During the three months ended March 31, 2002, the Company recognized a non-cash
charge to interest expense of $660,121 for the amortization of the OID.
In accordance with Emerging Issues Task Force ("EITF") No. 00-27, "Application
of Issue No. 98-5 to Certain Convertible Instruments" ("EITF No. 00-27") and
EITF No. 98-5, "Accounting for Convertible Securities with Beneficial Conversion
Features or Contingently Adjustable Conversion Ratios" ("EITF No. 98-5") and
after considering the allocation of the proceeds to the Notes, the Company
determined that the Notes contained a beneficial conversion feature ("BCF"). The
BCF existed at the commitment date due to the fact that the carrying value of
the Notes, after the initial allocation of the proceeds, was less than the fair
market value of the Common Stock that was issuable upon conversion. Accordingly,
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
three months ended March 31, 2002, the Company recognized a non-cash charge to
interest expense of $431,661 for the amortization of the BCF.
A reconciliation of the face amount of the Notes and the carrying value at March
31, 2002 is as follows:
Notes carrying value at December 31, 2001 $ 8,288,239
2002 Amortization of:
OID, treated as interest expense 660,121
BCF, treated as interest expense 431,661
-----------
Notes carrying value at March 31, 2002 $ 9,380,021
===========
The OID and BCF will be fully amortized by 2004, at which time the carrying
value of the Notes will equal the face value of $15,000,000.
12
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, TOLED, FOLED, SOLED and PHOLED technology; the expansion of
applications for OLED technology; the success of Universal Display Corporation
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
$52,400,634 at March 31, 2002. The rate of loss is expected to increase as the
Company's activities increase and losses are expected to continue for the
foreseeable future and until such time, if ever, as the Company is able to
achieve sufficient levels of revenue from the commercial exploitation of the
OLED technology to support its operations.
RESULTS OF OPERATIONS
Three Months Ended March 31, 2002 Compared to Three Months Ended March 31, 2001
The Company had a net loss of $5,298,809 (or $0.29 per share) for the quarter
ended March 31, 2002 compared to a net loss of $3,778,979 (or $0.23 per share)
for the same period in 2001. The increase in net loss was primarily attributed
to the following: (i) the increase in cash and non-cash research and development
expenses (ii) non-cash interest expense on convertible promissory notes issued
in August 2001 (Note 6).
The Company earned $447,083 from contract research revenue in the quarter ended
March 31, 2002 compared to $200,242 for the same period in 2001. In the quarter
ended March 31, 2002, contract research revenue consisted of: (i) $283,488
recognized under a 24-month, $2,977,471 Phase I contract received from the
Defense Advanced Research Project Agency (DARPA), (ii) $91,657 recognized under
a subcontract received from Princeton University, pursuant to an 18-month,
$700,000 contract Princeton received from DARPA, (iii) $66,186 recognized under
a two-year DoD Phase II SBIR Army Contract, and (iv) $5,752 under an 11-month,
$69,951 Phase I contract received from the US Department of Army. In the same
period in 2001, contract research revenue consisted of : (i) $133,176 recognized
under an 18-month, $1,500,000 Phase I contract received from the Defense
Advanced Research Project Agency (DARPA), (ii) $45,536 recognized under a
2-year, $400,000 Phase II contract from the National Science Foundation (NSF)
under the Small Business Technology Transfer Program, (iii) $7,878 recognized
under a Department of Defense Phase I, Small Business Innovative Research (SBIR)
contract which is completed at this time, (iv) $16,606 recognized under a 2-year
Department of Defense Phase II SBIR contract and (v) a $2,954 charge against
revenue for overpayment on the final costs of a subcontract under a 3-year, $3
million contract Princeton University received from the Defense Advanced
Research Project Agency (DARPA).
13
The Company also earned $87,843 from the sale of evaluation chemicals to
potential OLED display manufacturers. The chemicals are used to evaluate the
Company's proprietary OLED material system. In the same period in 2001, there
were no evaluation chemical sales.
The Company has entered into certain joint development and technology evaluation
agreements, for which it has received advanced license fees. These fees are
classified as current liabilities and the Company will record revenue as it is
earned.
Research and development costs were $3,849,548 for the quarter ended March 31,
2002 compared to $3,252,977 for the same period in 2001. For the quarter ended
March 31, 2002, research and development expenses consisted of: (i) costs
incurred of $1,352,781 for the development and operations in the Company's
facility, (ii) costs incurred of $315,271 for patent applications, prosecutions
and other intellectual property rights, (iii) payments of $214,777 to the
Company's Research Partners (Note 3) under the 1997 Sponsored Research
Agreement, (iv) non-cash charges of $1,542,951 incurred in connection with the
PPG development agreement, and (v) non-cash charges of $423,768 for the
amortization of the Company's acquired technology (Note 2 and Note 4). Research
and development for the same period in 2001, research and development expenses
consisted of : (i) costs incurred of $1,091,842 for the development and
operations in the Company's facility, (ii) costs incurred of $227,292 for patent
applications, prosecutions and other intellectual property rights, (iii)
payments of $214,589 to the Company's Research Partners (Note 3) under the 1997
Sponsored Research Agreement, (iv) non-cash charges of $766,018 recorded for
warrants and options previously issued to the Scientific Advisory Board members,
(v) non-cash charges of $529,468 incurred in connection with the PPG development
agreement, and (vi) non-cash charges of $423,768 for the amortization of the
Company's acquired technology (Note 2 and Note 4).
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2002, the Company had cash and cash equivalents of $5,523,761,
short-term investments of $4,609,450 and restricted cash of $15,142,324,
compared to cash and cash equivalents of $7,883,132, short-term investments of
$4,516,199 and restricted cash of $15,162,414 at December 31, 2001. During the
three months ended March 31, 2002, the Company received non-refundable cash
payments of $716,667 in connection with joint development and technology
evaluation agreements, which the Company recorded as deferred license fees.
In the fourth quarter of 2001, the Company commenced construction on the
expansion of its current location in Ewing, New Jersey. The expansion was
completed in the first quarter of 2002. As of March 31, 2002, the Company had
incurred costs of $1,619,044 relating to the construction and the purchase of
equipment for the expansion. Remaining construction commitments at March 31,
2002 are approximately $226,000.
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 has been extended until July 31, 2007. Through March 31, 2002, $4,342,045
of this commitment has been funded. The Company is obligated to pay Princeton up
to $7.5 million commencing on July 31, 2002 through July 31, 2007. 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.
14
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) None.
(d) None
ITEM 3. NONE
ITEM 4. NONE
ITEM 5. NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS:
None.
(B) REPORTS ON FORM 8-K:
None.
15
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
UNIVERSAL DISPLAY CORPORATION
Date: May 15, 2002 /s/ Sidney D. Rosenblatt
--------------------------
Sidney D. Rosenblatt
(Executive Vice President,
Chief Financial Officer,
Treasurer and Secretary)