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FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 for the fiscal year ended December 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition period from ____________ to ___________
Commission File Number 1-12031
UNIVERSAL DISPLAY CORPORATION
---------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2372688
- ------------------------------------------------------------- ----------------------------------
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
375 Phillips Boulevard
Ewing, New Jersey 08618
- -------------------------------------------- ----------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (609) 671-0980
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock (par value $0.01 per share)
---------------------------------------
(Title of Class)
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 and 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 ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment of this
Form 10-K [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based upon the closing sale price of Common Stock reported by the
Nasdaq Stock Market on March 18, 2002, was approximately $128,204,807. For the
purposes of calculation, all executive officers and directors of the Company and
all beneficial owners of more than 10% of the Company's stock (and their
affiliates) were considered affiliates.
As of March 18, 2002, the Registrant had outstanding 18,459,291 shares of Common
Stock.
Documents Incorporated by Reference
Portions of the Company's Proxy Statement to be filed with the Securities and
Exchange Commission for the Annual Meeting of Shareholders to be held on June
27, 2002 are incorporated by reference into Part III of this report.
TABLE OF CONTENTS
PART I
ITEM 1. BUSINESS........................................................ 3
ITEM 2. PROPERTIES......................................................11
ITEM 3. LEGAL PROCEEDINGS...............................................11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............11
EXECUTIVE OFFICERS OF THE REGISTRANT............................12
PART II
ITEM 5. MARKET FOR THE REGISTRANTS COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.............................................13
ITEM 6. SELECTED FINANCIAL DATA.........................................13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.............................14
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.......17
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.....................17
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE........................................17
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..............17
ITEM 11. EXECUTIVE COMPENSATION..........................................17
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT......................................................17
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................17
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K.....................................................18
2
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 research and 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.
PART I
ITEM 1. BUSINESS
General
Universal Display Corporation (the "Company") is engaged in the research,
development and commercialization of Organic Light Emitting Diode ("OLED")
technology for use in flat panel displays and other applications. Research is
being performed by the Company, Princeton University and the University of
Southern California ("USC") (together, the "Research Partners") pursuant to a
certain Sponsored Research Agreement funded by the Company (See "Business -
Research and Development"). The Company has the exclusive right to commercialize
the technology being developed by the Research Partners pursuant to a certain
License Agreement (See "Business - Intellectual Property"). The Company is also
engaged in research, development and commercialization activities at its
headquarters in Ewing, New Jersey. The Company moved its operations to this
facility in the fourth quarter of 1999.
The Company's present commercialization strategy is to enter into licensing
arrangements, joint ventures, joint development agreements, proprietary material
evaluation licenses and other strategic alliances for the volume manufacturing
of products utilizing the Company's OLED technology. The Company does not
presently intend to become a volume manufacturer. The Company anticipates that
its OLED technology, if successfully developed, may have a variety of
applications, including full color, large area, high resolution, high
information content displays, such as laptop and notebook computer screens,
computer monitors and televisions. Other applications also include full color
small area displays, such as consumer electronic equipment, vehicular dashboard
displays, cellular phones and other telecommunication displays, computer games
and personal digital assistants, as well as transparent applications such as
head-up displays for automobile windshields.
The Company was incorporated under the laws of the Commonwealth of Pennsylvania
in April 1985 under the name Enzymatics, Inc. ("Enzymatics"). Another
corporation named "Universal Display Corporation" ("UDC") was incorporated under
the laws of the State of New Jersey in June 1994. On June 22, 1995, a wholly
owned subsidiary of Enzymatics merged with and into UDC (the "Merger"). UDC, the
surviving corporation in the Merger, became a wholly owned subsidiary of
Enzymatics and changed its name to "UDC, Inc." Simultaneously with the
consummation of the Merger, Enzymatics changed its name to "Universal Display
Corporation."
Flat Panel Display Industry
The market for flat panel displays has been driven by a number of market forces,
including, but not limited to, the increasing popularity of portable computers
and other consumer electronic devices, the increasing availability of
information and visual content of electronic formats, the proliferation of
graphical interfaces and emerging multimedia applications and the conversion of
traditional analog displays to digital or graphical displays. Existing products
that use flat panel displays include notebook and laptop computers, portable
televisions, video cameras, cellular phones, pagers, electronic organizers,
internet access devices, portable electronic devices, digital watches,
calculators, electronic games and audiovisual equipment, copiers, fax machines,
telephones and answering machines. In addition, flat panel displays have been
utilized in military applications, including missile controls, ground support
and communications equipment and avionics.
3
The Company believes that competition in this market, particularly for full
color, large area, high resolution, high information content displays, is based
upon image and color quality, range of viewing angle, power requirements, cost
and manufacturability. The dominant technology for all displays today is the
cathode ray tube ("CRT"), the type of technology in most televisions and
computer monitors. The dominant technology today for flat panel displays is
liquid crystal display ("LCD") technology, the type of technology in most laptop
computers. The Company believes LCD technology has certain limitations, such as
a limited viewing angle, limited scalability, narrow acceptable temperature
ranges, low contrast and inferior image and color quality when compared to CRT
displays. The Company believes that flat panel displays utilizing its OLED
technology, if successfully developed, will provide for flat panel displays
image and color quality, brightness, contrast, scalability and viewing angles
comparable or superior to CRT displays and superior to LCD, be manufacturable
from light weight, low cost materials and require a relatively low power source.
The Company's OLED Technology
OLED technology is an emerging technology. There are numerous companies engaged
in research, development and commercialization efforts relating to OLED
technology. Pioneer Electric Corporation of Japan is currently marketing and
selling multi-color OLED devices for applications including automotive displays,
consumer electronics equipment and cellular phones. The Company believes that
its OLED technology, if fully developed, will have the capability to address
many of the limitations of LCD and other developing technologies.
Light emitting diodes ("LEDs") are solid-state semiconductor devices that emit
light when electrical current passes through them. The color of light emitted by
LEDs depends on the band gap of the semiconductor material; narrow band gap
materials emit light in the red/orange range and wide band gap materials emit
green or blue light. Traditional LEDs are created from inorganic semiconductors.
The OLED technology currently under development by the Company and its research
partners at Princeton University and USC utilizes a new type of LED created from
organic materials.
The Company believes that flat panel displays utilizing its OLED technology, if
successfully developed, will provide for flat panel displays image and color
quality, brightness, contrast and viewing angles comparable or superior to CRT
displays and superior to LCD; will be manufacturable from lightweight, low cost
materials; will demonstrate efficiency in converting electrical power into light
and require very low voltage for operation, which will make the OLED technology
compatible for a variety of flat panel display applications which require
lightness and portability; and will be scaleable for use in large area, high
resolution, high information, full color, flat panel displays.
The Company is currently focusing its research, development and
commercialization efforts on a number of innovative technology applications for
OLEDs. One technology application is based on the fabrication of transparent
cathodes. Traditional OLEDs use a reflective metal cathode and a transparent
anode. The Company's transparent cathode technology, called TOLED(TM), for
transparent OLED, provides the ability to develop transparent and high contrast
displays using organic materials. It also provides the ability to build OLEDs on
opaque surfaces or active matrix thin film transistors (TFTs) with a greater
fill factor and aperture ratio.
A second technology application is based upon a novel, vertically stacked pixel
structure. This SOLED(TM) (Stacked OLED) application vertically stacks the red,
green and blue pixels on top of each other, rather than side by side as in CRTs
and LCD's, theoretically providing for very high image resolution, since one
pixel can occupy the same space as three or more pixels would in a side-by-side
architecture. The SOLED, which was made possible by the creation of the TOLED,
permits the independent tuning of color, grayscale and intensity and is expected
to allow an individual pixel to emit red, blue and green, either at the same
time or separately. Combinations of such colors create additional colors so that
each individual pixel will be capable of producing a full range of colors.
A third technology application is the fabrication of small molecule organic
displays on flexible substrates. Flat panel displays are commonly built on
glass. The Company believes that its research partners were the first group to
announce the deposition of small molecule OLEDs on a flexible substrate,
flexibility being a property that was previously believed to be unique to
polymer materials. The FOLED(TM) (Flexible OLED) may allow the potential for
conformable, lighter weight and thinner electronic displays. It also provides
the possibility of fabricating FOLEDs using potentially low cost "roll to roll"
processing methods.
4
A fourth technology application being researched by the Company and its Research
Partners is based upon the ability to fabricate an optically pumped organic
laser. In the September 25, 1997 issue of the scientific journal, Nature, the
researchers at Princeton University and USC announced what they believed to be
the first evidence of lasing from vacuum deposited thin films of organic
molecules. The Company believes this is a significant first step towards the
realization of an electrically pumped, solid-state laser based on organic thin
films.
A fifth technology application involves the use of novel materials and device
structures that emit light in OLEDs through the use of Electrophosphorescent
materials (PHOLED(TM)) for high efficiency OLEDs. In conventional OLEDs, the
light emission is based on the process of fluorescence. The use of
electrophosphorescent materials as dopants enables significantly higher
efficiencies for OLED displays. It is believed that the use of the Company's
PHOLED technology can be up to four times more efficient than the conventional
OLED technology. The Company has entered into a Development and License
Agreement with PPG Industries, Inc. to assist it in the development and
commercialization of OLED materials.
A sixth technology application is called Organic Vapor Phase Deposition (OVPD).
OVPD involves the use of a carrier gas stream in a hot walled reactor at low
pressure to precisely deposit the thin layers of organic materials used in OLED
displays. Conventional OLED fabrication equipment evaporates the organic
molecules at high vacuum. The Company has entered into a Development and License
Agreement with Aixtron AG, a German company that manufactures precision
semiconductor production equipment for inorganic LEDs, to further develop,
commercialize and produce manufacturing equipment for OLEDs based on this
technology.
The Company and its Research Partners are also working on technologies related
to processing, patterning, encapsulation, novel device concepts and other areas
of development for OLED technologies.
While significant advances have been made in the research and development
efforts on OLEDs being conducted by the Company and its Research Partners,
substantial additional research and development work needs to be performed
before products utilizing this technology are manufactured and sold, including
issues of operating life, reliability, the development of additional and more
fully saturated colors, integration with drive electronics and issues related to
scalability into a production environment and cost effective fabrication
technologies for transparent, flexible and full color, large area and small area
applications. The development of an electrically pumped laser is also necessary
before products based on the organic laser are manufactured and sold.
There can be no assurance that the necessary research and development work will
be successfully completed and that the Company or its licensees will
successfully commercialize any products based upon its proprietary technology.
Commercialization Strategy and Markets
The Company's approach to developing technology and penetrating the electronic
display market has three major components: (i) continuing to fund the research
and development of OLED technology with its Research Partners and at other
academic institutions; (ii) the development of reliable product and process
technologies; and (iii) licensing the technology and entering into joint
ventures or other strategic relationships with experienced manufacturers (who
may have much of the needed infrastructure already in place), suppliers and
users of display products, materials and equipment for the manufacture,
distribution and sale of OLED display products, materials or equipment using the
Company's technology. The Company does not presently intend to become a volume
manufacturer of OLED products.
The Company believes that the OLED technology under development, could have
significant applicability for displays, such as cellular phones, instrumentation
displays, consumer electronics, personal digital assistants, projection
displays, viewfinders in camcorders, video phones, hand held computers and
numerous industrial, medical and military uses. The Company also believes that
the OLED technology has potential application in large area, full color displays
such as laptop computers, desktop computers and televisions and in numerous
defense-related markets. There are also potential markets for transparent
devices, for example, as head-up displays on vehicle windshields. The Company
believes that an electrically pumped organic semiconductor laser could have
applications in a number of markets, including fiber-optic communications, audio
compact discs (CDs), CD-ROM drives, DVD Discs, DVD-ROM's, laser printers,
rewritable optical storage drives, bar code scanners and digital printing
presses.
5
There can be no assurance that the Company will be able to enter into
appropriate licensing, joint ventures or other strategic relationships, or that
the terms of such relationships, if entered into, would be favorable to the
Company.
During 2000, the Company entered into three commercial agreements.
In July 2000 the Company entered into a Development and License Agreement with
Aixtron AG, of Aachen Germany, to further develop and commercialize
manufacturing equipment for OLEDs based on a proprietary UDC technology called
Organic Vapor Phase Deposition ("OVPD"). Aixtron AG is a world leader in the
production of manufacturing equipment for LEDs using MOCVD (Metal-organic
chemical vapor deposition) technology. Under the Agreement, UDC and Aixtron are
engaging in a joint development program to commercialize OVPD equipment. Aixtron
has the exclusive license to produce and sell equipment based on this technology
and UDC will receive a royalty from the sale of the equipment. Delivery of the
Preproduction OVPD Manufacturing Equipment to UDC's pilot line facility
commenced in January 2002.
In September 2000 the Company entered into a License Agreement with Motorola,
Inc., whereby the Company obtained an exclusive license, with the sole right to
sublicense, to 72 US patents, 6 US patents pending, and certain foreign patents
of Motorola, Inc. related to OLEDs. The agreement with Motorola also includes
the opportunity to meet with their product development group, although there are
no assurances that Motorola, Inc. will purchase any products from the Company or
its licensees, or use any of the Company's technology in its products. In
connection with the rights granted to the Company under the agreement with
Motorola, the Company issued to Motorola 200,000 shares of the Company's Common
Stock, 300,000 shares of the Company's Convertible Preferred Stock, and warrants
to purchase an additional 150,000 shares of the Company's Common Stock. See Note
6 in Notes to Consolidated Financial Statements.
In October 2000, the Company entered into a five year Development and License
Agreement and a seven year Supply Agreement with PPG Industries, Inc. ("PPG"). A
team of PPG scientists and engineers are assisting the Company in developing and
commercializing the proprietary OLED materials for which the Company has
licensing rights. Based upon initial projected staffing requirements, which
provide the full time services of seven PPG employees, plus managerial services,
PPG's services were estimated at a value of approximately $11 million over the
five-year initial period of the Development and License Agreement. PPG is being
compensated in the Company's equity for services under the Development and
License Agreement. The Company issued to PPG 150,011 shares of Common Stock for
its services from the period of October 1, 2000 through December 31, 2001. The
Company also issued PPG seven year warrants to purchase 150,011 shares of the
Company's Common Stock at a per share exercise price of $24.28. In February
2002, the Company issued 344,379 shares of Common Stock to PPG for services to
be rendered in 2002. The increased number of shares was due to an additional
scientist being added to the PPG team, and a reduction in the average Common
Stock price of UDC during the year (because the average price of Common Stock
for the 90 days preceding December 31, 2001 was less than 65% of the average
Common Stock price of the Company as defined in the agreement, the price per
share for 2002 was based upon a 90-day average ending on December 31, 2001). The
Company anticipates issuing to PPG warrants to purchase approximately 344,379
shares of Common Stock in consideration of PPG's 2002 services. See Note 8 in
Notes to the Consolidated Financial Statements. PPG also has the right to
request that the Company grant royalty-bearing licenses to PPG for use of the
Company's OLED technology in certain applications. Under the Supply Agreement,
PPG will be the exclusive supplier of the Company's proprietary materials
through December 31, 2007. PPG will sell the materials to the Company, which
will resell them to OLED manufacturers.
In 2001 the Company entered into three commercial agreements.
In April 2001, the Company and Sony Corporation entered into a non-exclusive
Joint Development Agreement focusing on OLED flat panel monitors. Under this
Agreement, the parties are developing active matrix OLED displays utilizing
UDC's proprietary high efficiency electrophosphorescent material technology and
Sony's proprietary low temperature poly silicon active matrix TAC (Top emission
Adaptive Current drive) technology.
In April 2001, the Company and Luxell Technologies, Inc. entered into a
Technology Development and Cross Licensing Agreement. Under this agreement, the
parties will work together to combine UDC's Transparent Organic Light Emitting
Device (TOLED) technology with Luxell's high contrast Black Layer (TM)
technology. Luxell also obtained a royalty bearing license to UDC's TOLED
technology and high efficiency materials for their manufacturing, marketing and
sales of the combined Black Layer/TOLED displays. UDC will be the licensor of
the combined Black Layer/TOLED technology and the parties will share in the
revenues from such licensing activities.
6
In October 2001, the Company and Samsung SDI entered into a non-exclusive Joint
Development Agreement focusing on portable OLED displays. Under the agreement,
the parties are developing active matrix OLED displays utilizing UDC's high
efficiency phosphorescent materials and top-emitting device structures with
Samsung SDI's low temperature poly silicon active matrix architecture.
The Company had the following contracts for programs with agencies of the United
States Government during 2001.
In June 2001, the contract value of the Company's Prime Contract from the U.S.
Department of Defense Advanced Research Projects Agency (DARPA) for the
development of ruggedized full-color flexible OLED displays, was increased to
approximately $3.0 million from $1.5 million. The program, which commenced on
July 1, 2000, was also extended through June 2002. Pursuant to this contract,
the government will pay the Company and its subcontractors approximately $1.6
million and the team members need to supply approximately $1.4 million in goods
and services towards the objective of the contract, which is known as a cost
share. The subcontractors on the Company's team are: Princeton University; USC;
Vitex Systems, a Battelle Company; L-3 Communications Corporation; and Penn
State University. As of December 31, 2001 the Company has recognized $888,533 in
revenue related to this contract.
In June 2001, the Company was awarded a $132,009 subcontract by Princeton
University, pursuant to an 18-month, $700,000 contract Princeton received from
DARPA to develop an understanding of the long-term failure mechanisms of OLEDs
and OLED displays.
In 2001, the Company completed a two-year, $400,000 Phase II contract from the
National Science Foundation (NSF) under the Small Business Technology Transfer
Program for further development of its SOLED technology. This award followed the
successful completion by the Company of the Phase I contract. Princeton
University is a subcontractor under this contract. As of December 31, 2001, the
Company has recognized $400,000 in revenue related to this contract.
In February 2001, the Company was awarded a $729,158 Phase II contract under the
Department of Defense (DoD) Small Business Innovative Research Program (SBIR)
for the development of high efficiency phosphorescent backlights, as a result of
the success in the Phase I program. The term of the new program is from February
1, 2001 through March 31, 2003. The Company has subcontracts with Princeton
University and USC relating to this Phase II contract.
In February 2002, the Company was awarded a $69,951 Phase I contract by the
U.S. Department of the Army to demonstrate the feasibility of using three of its
proprietary OLED technologies: high-efficiency phosphorescent (PHOLED),
transparent (TOLED) and flexible OLED (FOLED) technologies for a conformable,
transparent, high resolution, low power display for the U.S. Army. The term of
the program is February 6, 2002 through December 7, 2002.
The Company is a member of the United States Display Consortium ("USDC"), a
cooperative industry/government effort aimed at developing an infrastructure to
support a North American flat panel display infrastructure. The USDC's role is
to provide a common platform for flat panel display manufacturers, developers,
users and the manufacturing equipment and supplier base. It has more than 130
members, as well as support from DARPA. The Company is one of 18 members on the
Governing Board of the USDC.
Research and Development
Research relating to the OLED technology is being conducted at Princeton
University's Advanced Technology Center for Photonics and Optoelectronic
Materials and at the USC Synthetic Materials Laboratories (on a subcontract
basis with Princeton University). In October 1997, the Company entered into a
new five year Sponsored Research Agreement (the "1997 Sponsored Research
Agreement") for research activities related to Organic Light Emitters, which
continues and expands the scope of the Sponsored Research Agreement dated August
1, 1994 (the "1994 Sponsored Research Agreement"). The Company is in process of
negotiating an extension to the 1997 Sponsored Research Agreement with Princeton
University. In October 1997, the Company, Princeton University and USC also
entered into an Amended License Agreement (the "1997 License Agreement"). See
"Business--Intellectual Property". The Company is also engaged in research,
development and commercialization activities at a 21,000 square foot facility,
which it leases in Ewing, New Jersey. The Company moved its operations to an
11,000 square foot facility in the fourth quarter of 1999 and expanded it by an
additional 10,000 square feet during 2001.
The development of commercially viable applications for the OLED technology is
principally dependent on the success of the research efforts of Dr. Stephen
Forrest and Dr. Mark Thompson (the "Principal Investigators") conducted pursuant
to such agreements. The scope 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.
7
The Company paid Princeton University $758,732 in 2001 pursuant to the 1997
Sponsored Research Agreement. 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. From inception to December 31,
2001, the Company has paid an aggregate of $4,202,268 under all agreements with
Princeton University. The 1997 Sponsored Research Agreement provides that if Dr.
Forrest is unavailable to continue to serve as a Principal Investigator, either
because he is no longer associated with Princeton University or otherwise, and a
successor acceptable to both the Company and Princeton University is not
available, Princeton University has the right to terminate the 1997 Sponsored
Research Agreement. The Company believes that additional research and
development efforts are required for the development of products based upon the
OLED technology. See "Business--The Company's OLED Technology". Loss to the
Company of the Principal Investigators' services or termination of the 1997
Sponsored Research Agreement would have a material adverse effect on the
Company.
In December 1999, the Company and the University of California, Berkeley,
entered into a Collaboration Agreement under which the parties are engaged in
co-development activities and UDC is funding research at that University
respecting very low temperature poly silicon TFT fabrication technology
compatible with the Company's FOLED technology. That Agreement concluded in
2001.
In September 2000, the Company entered into a Collaboration Agreement with Penn
State University under which the parties are engaged in co-development
activities and UDC is funding research at that University respecting amorphous
silicon TFT technology compatible with UDC's phosphorescent materials system.
In April 2001, the Company entered into a one year Research Agreement with
Massachusetts Institute of Technology ("MIT"), under which the parties are
engaged in co-development activities and the Company is funding research at MIT
respecting High Efficiency Hybrid Organic/Inorganic Vacuum Deposited Light
Emitting Devices.
In May 2001, the Company entered into a two year Contract Research Agreement
with the Chitose Institute of Science and Technology ("CIST") of Japan relating
to High Efficiency OLED devices and materials.
Intellectual Property
The Company currently owns or has licensing rights to approximately 127 issued
US patents, 81 US patents pending and numerous foreign patents and applications.
The Company's OLED technology rights are derived principally from two sources.
One set of rights is governed by the 1997 Sponsored Research Agreement, and the
1997 License Agreement with Princeton University and USC. Pursuant to such
agreements, all patents and other intellectual property rights relating to the
OLED technology are the property of Princeton University, or USC, as applicable,
and the Company is the worldwide exclusive licensee. The other set of rights are
governed by the License Agreement with Motorola, Inc., whereby the Company
obtained the license, with the sole right to sublicense, to 78 issued and
pending US patents (and additional foreign patents) relating to OLED technology
and owned by Motorola, Inc.
Fifty-five patents have been issued to Princeton University and the University
of Southern California by the U.S. Patent and Trademark Office in connection
with the Sponsored Research. Princeton University and USC have filed
approximately 56 additional patent applications relating to the OLED technology
in the United States, and have filed for intellectual property protection
internationally. In addition, the Company has obtained an exclusive worldwide
royalty-free license from USC (the "USC License") to manufacture and market
products based on inventions claimed in a patent issued to USC in May 1994,
relating to, among other things, a method of depositing ultra-thin, very smooth,
ordered organic layers using vacuum deposition.
Under an Interinstitutional Agreement between Princeton University and USC,
Princeton University manages the intellectual property rights being developed
pursuant to the 1994 Sponsored Research Agreement and 1997 Sponsored Research
Agreement and licensed to the Company pursuant to the 1997 License Agreement,
and the Company is required to reimburse Princeton University for all costs
incurred in filing, prosecuting and maintaining patent applications and patents.
The Company has the worldwide exclusive license to manufacture and market
products based on such patents, pending patent applications and any future
patent applications and inventions conceived or discovered under the 1997
Sponsored Research Agreement, and to sublicense those rights. In circumstances
where the Company sublicenses the OLED technology (except to affiliates), or
sells products utilizing the OLED technology, the Company is required to pay to
Princeton University a royalty in the amount of 3% of the Company's net
sublicense fees or net sales of products utilizing the OLED technology. This
royalty rate is subject to upward adjustments under certain conditions.
8
Under the Motorola License Agreement, the Company obtained a license, with the
sole right to sublicense, to 78 issued and pending US patents, and certain
foreign patent rights, related to OLED technology and owned by Motorola Inc.
These patents cover many aspects of OLED technology, including mixed layer and
single layer device architectures, packaging and encapsulation, and proprietary
materials and drive circuit architectures. Motorola, Inc. received equity in the
Company in consideration for the license. The Company is also obligated to make
certain minimum royalty payments to Motorola, Inc. and pay Motorola, Inc. a
royalty on the Company's licensing revenues. See Notes 6 and 13 to Notes to
Consolidated Financial Statements.
There can be no assurance that patents applied for will be obtained or that any
such patents will afford the Company and Princeton University commercially
significant protection of its OLED technology. In addition, the patent laws of
other countries may differ from those of the United States as to the
patentability of the OLED technology and the degree of protection afforded.
Other companies and institutions may independently develop equivalent or
superior technologies and may obtain patent or similar rights with respect
thereto. There are a number of other companies and organizations that have been
issued patents and are filing additional patent applications relating to OLED
technology including Eastman Kodak Company and the companies described in
"Competition" below. There can be no assurance that the exercise of the
Company's licensing rights respecting its OLED technology being developed by
Princeton University and USC will not infringe on the patents of others. In the
event of infringement, the Company and Princeton University could, under certain
circumstances, be required to obtain a license or modify its methods or other
aspects of the OLED technology. Under the 1997 License Agreement, the Company
has the right to prosecute at its own expense any infringement of the patent
rights. Princeton is entitled to 23% of the net proceeds, if any, received from
final judgments in infringement actions respecting the patent rights.
In connection with the 1997 License Agreement and the 1997 Sponsored Research
Agreement, the Company issued to Princeton University 140,000 shares of Common
Stock and 10 year warrants to purchase 175,000 shares of Common Stock at an
exercise price of $7.25 per share. The Company also issued to USC 60,000 shares
of Common Stock and 10 year warrants to purchase 75,000 shares of Common Stock
at an exercise price of $7.25 per share. Under the 1997 License Agreement, the
Company is required to use commercially reasonable efforts to bring the OLED
technology to market. This requirement is deemed satisfied provided the Company
performs its obligations under the 1997 Sponsored Research Agreement and, upon
expiration or termination thereof, the Company invests a minimum of $800,000 per
year in research, development, commercialization or patenting efforts respecting
the OLED technology. Princeton University has the right to terminate the 1997
License Agreement in certain specified circumstances, and prior to any
termination, all disputes under the 1997 License Agreement and the 1997
Sponsored Research Agreement are subject to mediation and arbitration, except
those relating to the validity, construction or effect of patents.
The United States government, through DARPA, has provided funding to Princeton
University and the Company for research activities related to certain aspects of
its OLED technology. In the event that all or certain aspects of its OLED
technology developed (if any) from the Company's funding to Princeton University
is deemed to fall within the planned and committed activities of DARPA's
funding, the federal government, pursuant to federal law, could have certain
rights relating to the OLED technology, including a license to practice or have
practiced on its behalf any such technology and, if the federal government
determines that the Company has not taken effective steps to achieve practical
application of such technology in a field of use in a reasonable time, require
the Company to grant licenses to other parties in any such field of use. In
addition, the federal government's rights could restrict the Company's ability
to market the OLED technology to the federal government for military and other
applications which could have a material adverse effect on the Company. There
can be no assurance as to which aspects of the OLED technology the federal
government has any rights and the extent of such rights. Continued funding of
Princeton University's research activities by the federal government, which is
anticipated, may give the federal government rights to aspects of the OLED
technology developed in the future.
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 third parties without
repayment of any funds provided under the 1997 Sponsored Research Agreement.
9
The Company and Princeton University may also rely on proprietary know-how and
trade secrets and employ various methods to protect concepts, ideas and
documentation of their technology. However, such methods may not afford complete
protection, and there can be no assurance that others will not independently
develop similar know-how or obtain access to the Company's or Princeton
University's know-how, trade secrets, concepts, ideas and documentation.
Competition
The display industry is characterized by intense competition. CRTs currently
dominate the television and desktop computer monitor market and improvements in
CRTs have further increased display quality. Flat panel displays have been
developed and are in commercial use in certain applications where the weight,
power requirements, and bulky size of the CRT inhibit its use. Flat panel
displays have been available for a significant period of time and a variety of
advancements in flat panel displays have been made over the last several years.
However, flat panel displays with the capabilities necessary to replace CRTs in
all applications have not been developed.
The flat panel display market is currently dominated by products utilizing LCD
technology and is expected to be dominated by LCD technology for the foreseeable
future. The Company believes that LCDs have certain limitations, such as a
limited viewing angle, limited scalability, low response rate, low contrast and
inferior image and color quality when compared to CRT displays (the current
standard for display quality). LCDs are also more expensive to produce than
CRTs. However, compared to CRTs, LCD displays are smaller, have lower power
requirements (leading to longer battery life), emit no measurable radiation, are
not affected by magnetic fields generated by speakers or VCRs and have uniform
brightness throughout the screen. Numerous companies, however, are making
substantial investments in, and conducting research to improve these
characteristics of LCD technology.
Several other flat panel display technologies have recently been developed or
are being developed, such as field emissive, inorganic electroluminescent,
inorganic LED, plasma, and vacuum fluorescent displays. Field emissive displays,
which essentially employ an array of miniature CRTs, may be efficient in
converting electrical power into light at a relatively low cost, but high
voltage power sources and high temperature fabrication equipment may be
required. Inorganic electroluminescent displays offer better contrast and
broader viewing angles than LCDs and gas plasma displays, but also use more
power than LCDs and are difficult to view in bright ambient light. As plasma
displays, used in outdoor signs, some laptop computers and recently introduced
for large screen televisions are durable and reliable, have long lives and
superior video speed (useful in video applications) but have high power
requirements; dot matrix display panels on copiers, microwave ovens and video
cassette recorders, have superior brightness, are inexpensive and are capable of
providing full color, but are difficult to manufacture and have high power
requirements, making them unsuitable for portable products.
The Company believes that each of these developing technologies may have one or
more of the limitations associated with LCD technology or other limitations,
such as lack of reliability, high power requirements (restricting portability),
high production cost and/or difficulty of manufacture. The Company believes that
flat panel displays utilizing its OLED technology, if successfully developed,
will provide image and color quality, brightness, contrast, scalability and
viewing angles comparable to CRT displays, be manufacturable from light weight,
low cost materials and require a relatively low power source.
Numerous domestic and foreign companies have developed or are developing CRT,
LCD, gas plasma and other display technologies. Substantially all of these
competitors, including Sony Corporation, NEC Corporation, Matsushita
Corporation, Fujitsu Corporation, Hitachi Corporation, Toshiba Corporation and
Samsung Corporation, have greater name recognition and financial, technical,
marketing, personnel and research capabilities than the Company. There can be no
assurance that the Company's competitors will not succeed in developing
technologies and applications that are more cost effective, have fewer display
limitations than or have other advantages as compared to its OLED technology.
In addition, a number of companies, including those mentioned above, and Eastman
Kodak Company, Pioneer Electric Corporation, Sharp Corporation, Sanyo
Corporation, TDK Corporation, Mitsubishi Chemical Corporation, Ritek
Corporation, Lite Array Corporation, Nippon Seiki Corporation, Seiko-Epson
Corporation, Dupont Displays, Cambridge Display Corporation and Idemitsu
Corporation are engaged in research, development and commercialization
activities with respect to technology using OLEDs. Pioneer Electric Corporation
is presently manufacturing products using OLED technology, and other companies
have announced plans to manufacture products based on OLEDs. Eastman Kodak and
Sanyo Corporation have formed a joint venture, SK Corporation, to manufacture
OLED displays and Eastman Kodak Company has licensed its OLED technology to
third parties. There can be no assurance that the Company will be able to
compete successfully, license its technology, or develop commercial applications
for its OLED technologies.
10
Employees
As of December 31, 2001, the Company has 37 employees, 36 of whom are full-time
employees. The Company believes that its relations with its employees are good.
Facilities
The Company's corporate offices and research facility are located at 375
Phillips Boulevard, Ewing, New Jersey.
ITEM 2. PROPERTIES
The Company currently leases approximately 21,000 square feet of space for its
operations in Ewing, New Jersey. In 1999, the Company signed a lease for 11,000
square feet. The Company entered into a new lease for an additional 10,000
square feet in the Ewing location, which commenced in April 2001. The Company
also leases approximately 900 square feet of office space in Coeur D'Alene,
Idaho.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders in the fourth quarter of
2001.
11
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information with respect to the Company's
executive officers:
Name Age Position
---- --- --------
Sherwin I. Seligsohn 66 Chairman, Chief Executive Officer and Director
Steven V. Abramson 50 President, Chief Operating Officer and Director
Sidney D. Rosenblatt 54 Executive Vice President, Chief Financial Officer,
Treasurer, Secretary and Director
Julia J. Brown 41 Vice President of Technology Development
Executive Officers are elected annually and hold office until their successors
are elected and qualified.
Sherwin I. Seligsohn has been Chairman and Chief Executive Officer of the
Company since the Company's inception. He was President of the Company until May
1996. Mr. Seligsohn founded, and since August 1991 has served as sole Director,
Chairman, President and Secretary of, American Biomimetics Corporation ("ABC"),
International Multi-Media Corporation ("IMMC"), and Wireless Unified Network
Systems Corporation ("WUNSC"). He is also Chairman and Chief Executive Officer
of Global Photonic Energy Corporation ("Global"). From June 1990 to October
1991, Mr. Seligsohn was Chairman Emeritus of InterDigital Communications, Inc.
("InterDigital"), formerly International Mobile Machines Corporation. Mr.
Seligsohn was the founder of InterDigital and from August 1972 to June 1990
served as its Chairman. Mr. Seligsohn is a member of the Advisory Board of the
Advanced Technology Center for Photonics and Optoelectronic Materials (POEM) at
Princeton University.
Steven V. Abramson joined Universal Display Corporation as President and Chief
Operating Officer in May 1996. He is also a member of the Board of Directors.
Mr. Abramson is also a member of the Board of Directors of Global. From March
1992 to May 1996 he was Vice President, General Counsel, Secretary and Treasurer
of Roy F. Weston, Inc., a worldwide environmental consulting and engineering
firm. From 1982 to 1991 he was with InterDigital, where he held various
positions, including General Counsel, Executive Vice President and General
Manager of the Technology Licensing Division. Mr. Abramson is a member of the
Advisory Board of the Advanced Technology Center for Photonics and
Optoelectronic Materials (POEM) at Princeton University and a member of the
Board of Governors of the USDC.
Sidney D. Rosenblatt has been Executive Vice President, Chief Financial Officer,
Treasurer and Secretary of the Company since June 1995. He has been a member of
the Board of Directors since May 1996. Mr. Rosenblatt is also Executive Vice
President, Chief Financial Officer, Secretary and Treasurer of Global, and a
member of its Board of Directors. Mr. Rosenblatt is the owner of and served as
the President of S.Zitner Company from August 1990 through December 1998. From
May 1982 to August 1990, Mr. Rosenblatt served as the Senior Vice President,
Chief Financial Officer and Treasurer of InterDigital. Mr. Rosenblatt sits on
the Board of Directors of various non-profit organizations.
Dr. Julia J. Brown has been Vice President, Technology Development since June
1998. From November 1991 to June 1998 she was a Research Department Manager at
Hughes Research Laboratories where she directed the pilot line production of
high-speed Indium Phosphide-based integrated circuits for insertion into
advanced airborne radar and satellite communication systems. She received her
B.S. in Electrical Engineering from Cornell University in 1983 and then worked
at Raytheon Company (1983-1984) and AT&T Bell Laboratories (1984-1986) before
returning to graduate school. Dr. Brown received an M.S. (1988) and Ph.D. (1991)
in Electrical Engineering/Electrophysics at the University of Southern
California under the advisement of Professor Stephen R. Forrest. Dr. Brown has
served as an Associate Editor of Journal of Electronic Materials and as an
elected member of the Electron Device Society Technical Board. She co-founded an
IEEE-sponsored international engineering mentoring program. She is a Senior
Member of the IEEE and has served on numerous technical conference committees
and is presently a member of the Society of Information Display.
12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The following table sets forth the high and low sales prices of the Company's
Common Stock as reported by The NASDAQ National Market for the period indicated.
High Low
Close Close
2000
First Quarter $34.25 $12.63
Second Quarter 29.69 11.88
Third Quarter 31.88 19.19
Fourth Quarter 20.75 6.00
2001
First Quarter 14.13 7.03
Second Quarter 20.00 7.88
Third Quarter 16.32 6.61
Fourth Quarter 9.88 6.55
As of March 18, 2002, there were more than 300 holders of record of the
Company's Common Stock. The Company's Common Stock is listed on the Nasdaq
National Market under the symbol PANL.
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data has been derived from and
should be read in conjunction with the audited consolidated financial statements
of the Company, and the notes thereto, and with "Management's Discussion and
Analysis of Results of Operations and Financial Condition", included elsewhere
herein and incorporated herein by this reference.
Fiscal Year Ended December 31,
-----------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Operating Results:
Total revenue $ 1,252,901 $ 492,756 $ 519,536 $ 368,794 $ 93,605
Research and development expense 12,385,036 7,109,205 3,171,497 1,419,394 4,207,898
General and administrative expense 3,915,854 3,261,113 2,727,856 1,933,976 1,986,628
Net loss (16,356,100) (9,529,046) (5,125,006) (2,793,842) (5,927,718)
Net loss applicable to
Common shareholders (18,873,436) (9,529,046) (5,125,006) (2,793,842) (5,927,718)
Net loss per share, basic and
diluted (1.11) (0.62) (0.42) (0.27) (0.64)
Balance Sheet Data:
Total assets $48,569,569 $ 32,079,794 $ 10,316,850 $3,078,994 $5,417,577
Current liabilities 10,464,037 1,670,016 873,761 495,320 280,240
Capital lease obligations 12,827 16,619 20,021 - -
Shareholders' equity 38,096,782 29,826,804 9,426,470 2,583,674 5,137,337
Other Financial Data:
Working capital $17,994,383 $9,252,130 $ 5,704,913 $2,429,390 $5,003,863
Capital expenditures 1,790,564 1,540,577 3,680,122 26,689 23,287
Acquired technology -- 16,924,968 -- -- --
Weighted average Common
Shares, basic and diluted 16,994,537 15,260,837 12,269,943 10,310,353 9,327,521
Shares of Common Stock
outstanding 18,093,124 16,440,286 13,714,563 10,312,943 10,302,268
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
Since inception, the Company has been engaged, and for the foreseeable future
expects to continue to be engaged, exclusively in the research and development
and commercialization of its OLED technology for use in flat panel displays and
other applications. To date, the Company has generated minimal revenues and does
not expect to generate any meaningful revenues for the foreseeable future and
until such time, if ever, that it successfully demonstrates that its OLED
technology is commercially viable for one or more flat panel display and other
applications and receives revenue from license agreements, joint ventures or
strategic alliances with third parties with respect to the technology. The
Company has incurred significant losses since its inception, resulting in an
accumulated deficit of $47,101,825 at December 31, 2001.
Results of Operations
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000
The Company had a net loss applicable to Common shareholders of $18,873,436 (or
$1.11 per share) for the year ended December 31, 2001 compared to a net loss
applicable to Common shareholders of $9,529,046 (or $.62 per share) for the year
ended December 31, 2000. The increase in net loss applicable to Common
shareholders was primarily attributed to the following: (i) the increase in cash
and non-cash research and development expenses (ii) the increase in non-cash
interest expense on convertible promissory notes and (iii) non-cash deemed
dividends associated with the private placement in 2001 (see Note 10 in Notes to
Consolidated Financial Statements).
The Company earned $1,058,571 from contract research revenue in 2001 compared to
$492,756 in 2000. The revenue was derived principally from the following: (i)
$723,034 recognized under an 24-month, $2,977,471 Phase I contract received from
the Defense Advanced Research Project Agency (DARPA), (ii) $225,079 recognized
under a two-year DoD Phase II SBIR Army Contract, and (iii) $105,536 of final
revenue were recognized under a two-year, $400,000 Phase II contract from the
National Science Foundation (NSF) under the Small Business Technology Transfer
Program, which was completed on December 31, 2001. The Company also earned
$194,330 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 evaluation chemical sales in the fourth
quarter of 2000. During 2001 the Company received non-refundable cash payments
of $450,000 in the aggregate in connection with joint development and technology
evaluation agreements, which it recorded as unearned revenue. In 2000, contract
revenue consisted of: (i) $20,680 recognized from the final payments under a
subcontract with Princeton University, pursuant to a three year, $3 million
contract Princeton University received from DARPA, (ii) $70,000 recognized from
the completion of a DoD SBIR Phase I program, (iii) $42,113 recognized from a
DoD SBIR Phase I Option, (iv) $194,464 recognized from an NSF Phase II program
and (v) $165,499 recognized from the DARPA Phase I program.
Research and development expenses were $12,385,036 for the year ended December
31, 2001 compared to $7,109,205 for the year ended December 31, 2000. For the
year ended December 31, 2001, research and development expenses consisted of:
(i) costs incurred in the amount of $5,287,884 for the development of and
operations in the Company's facility, (ii) costs incurred in the amount of
$940,480 for patent applications, prosecution and other intellectual property
rights, (iii) costs incurred in the amount of $833,732 to the Company's Research
Partners (see Note 5 in Notes to Consolidated Financial Statements) under the
1997 Sponsored Research Agreement, (iv) non-cash charges in the amount of
$2,283,182 incurred in connection with the PPG development agreement (see Notes
8 and 11 in Notes to Consolidated Financial Statements), (v) a non-cash charge
of $1,695,072 for the amortization of the Company's acquired technology (see
Note 6 in Notes to Consolidated Financial Statements) and (vi) non-cash charges
in the amount of $1,344,686 recorded for the warrants and options issued to
Scientific Advisory Board members (see Note 11 in Notes to Consolidated
Financial Statements). For the year ended December 31, 2000, research and
development expenses consisted of: (i) costs incurred in the amount of
$3,422,198 for the development of and operations in the Company's new facility,
(ii) costs incurred in the amount of $1,227,184 for patent applications,
prosecution and other intellectual property rights, (iii) payments in the amount
of $733,230 to the Company's Research Partners (see Note 5 in Notes to
Consolidated Financial Statements) under the 1997 Sponsored Research Agreement,
(iv) a non-cash charge in the amount of $663,111 incurred in connection with the
PPG development agreement (see Notes 8 and 11 in Notes to Consolidated Financial
Statements), (v) a non-cash charge in the amount of $602,683 recorded for the
warrants and options issued to Scientific Advisory Board members (see Notes 11
and 14 in Notes to Consolidated Financial Statements) and (vi) a non-cash charge
of $460,799 for the amortization of the Company's acquired technology (see Note
6 in Notes to Consolidated Financial Statements).
14
General and administrative expenses were $3,915,854 for the year ended December
31, 2001 compared to $3,261,113 for the year ended December 31, 2000. The
increase in general and administrative expenses is mainly due to increased costs
associated with the expansion of the Company's facility and additional
employees.
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999
The Company had a net loss of $9,529,046 (or $.62 per share) for the year ended
December 31, 2000 compared to a net loss of $5,125,006 (or $.42 per share) for
the year ended December 31, 1999. The increase in net loss was primarily
attributable to the increase in research and development expenses.
The Company earned $492,756 from contract revenue in 2000 compared to $519,536
in 1999. In 2000, contract revenue consisted of: (i) $194,464 recognized from an
NSF Phase II program and (ii) $165,499 recognized from a DARPA Phase I program,
(iii) $70,000 recognized from the completion of a DoD SBIR Phase I program, (iv)
$42,113 recognized from a DoD SBIR Phase I Option, (v) $20,680 recognized from
the final payments under a subcontract with Princeton University, pursuant to a
three year, $3 million dollar contract Princeton University received from DARPA.
In 1999, contract revenue was derived primarily from the continuation of a
subcontract with Princeton University, pursuant to a three year, $3 million
dollar contract Princeton University received from DARPA and the initial payment
from the NSF Phase II program.
Research and development expenses were $7,109,205 for the year ended December
31, 2000 compared to $3,171,497 for the year ended December 31, 1999. For the
year ended December 31, 2000, research and development expenses consisted of:
(i) costs incurred in the amount of $3,422,198 for the development of and
operations in the Company's new facility, (ii) costs incurred in the amount of
$1,227,184 for patent applications, prosecution and other intellectual property
rights, (iii) payments in the amount of $733,230 to the Company's Research
Partners (see Note 5 in Notes to Consolidated Financial Statements) under the
1997 Sponsored Research Agreement, (iv) a non-cash charge in the amount of
$663,111 incurred in connection with the PPG development agreement (see Notes 8
and 11 in Notes to Consolidated Financial Statements), (v) a non-cash charge in
the amount of $602,683 recorded for the warrants and options issued to
Scientific Advisory Board members (see Notes 9 and 14 in Notes to Consolidated
Financial Statements) and (vi) a non-cash charge of $460,799 for the
amortization of the Company's acquired technology (see Note 6 in Notes to
Consolidated Financial Statements). Research and development expenses in 1999
consisted of (i) costs incurred in the amount of $1,772,584 for the development
and construction of and operations in the Company's new facility, (ii) payments
in the amount of $854,463 for patent applications, prosecution and other
intellectual property rights, (iii) payments in the amount of $544,450 to the
Company's Research Partners (see Note 5 in Notes to Consolidated Financial
Statements) under the 1997 Sponsored Research Agreement.
General and administrative expenses were $3,261,113 for the year ended December
31, 2000 compared to $2,727,856 for the year ended December 31, 1999. The
increase in general and administrative expenses is mainly due to the
commencement of operations in the Company's new facility.
Liquidity and Capital Resources
As of December 31, 2001, the Company had cash and cash equivalents of
$7,883,132, restricted cash of $15,162,414 and short-term investments of
$4,516,199 compared to cash and cash equivalents of $7,701,040 and short-term
investments of $2,704,220 at December 31, 2000.
During 2001, warrants and options to purchase 271,431 shares of Common stock
were exercised, resulting in net cash proceeds of $1,127,510 to the Company.
Also during 2001, the Company received non-refundable cash payments of $450,000
in the aggregate in connection with joint development and technology evaluation
agreements, which the Company recorded as unearned income.
In the fourth quarter of 2001, the Company commenced construction on the
expansion of its current location in Ewing, New Jersey. During the year, the
Company incurred costs of $1,376,737 relating to the construction and the
purchase of equipment for the expansion. Remaining construction commitments at
December 31, 2001 are approximately $844,000.
15
In August 2001, the Company sold in a private placement 5,000 shares of Series C
convertible preferred stock ("Series C") and warrants to purchase shares of the
Company's Common Stock and issued secured convertible debentures (see Note 10 in
Notes to Consolidated Financial Statements), resulting in net cash proceeds of
$4,496,477 and restricted cash proceeds of $15,000,000. The Company's obligation
under the convertible debentures ("Notes") is secured by irrevocable letters of
credit issued with a face amount equal to the outstanding principal of the
related Notes. The $15,000,000 proceeds from the sale of the Notes has been
pledged as collateral to the bank issuing the letters of credit. As the Notes
are converted or repaid, the Company has access to the funds raised from the
sale of the Notes in amounts corresponding to the portion of the Notes that are
converted or repaid.
In December 2001, the Company completed the second tranche of its August 2001
private placement by selling 5,000 shares of Series D convertible preferred
stock ("Series D") and warrants from the completion of its private placement
resulting in additional net cash proceeds of $4,640,602. In December 2001, all
shares of Series C and Series D were converted to Common Stock.
In the first quarter of 2001, the Company received additional net cash proceeds
of $1,348,984 from the completion of its December 2000 private placement issuing
an additional 158,704 units. In December 2000, the Company sold in a private
placement 631,527 units, each unit consisting of one share of the Company's
Common Stock and one warrant with an exercise price of $10.00, resulting in
proceeds of $5,367,979. The units were issued at $8.50 per unit. Also, during
2000, warrants and options to purchase 1,754,353 shares of the Company's Common
Stock were exercised, resulting in cash proceeds of $6,854,843.
Net working capital increased to $17,994,383 at December 31, 2001 from working
capital of $9,252,130 at December 31, 2000, due primarily to the proceeds
received in connection with the private placements and exercise of warrants and
options during 2001. However, the working capital would be $11,120,208 if the
restricted cash and debentures were not included. The Company's net cash used in
operating activities was $7,702,583, $6,493,590, and $4,298,026 in 2001, 2000
and 1999, respectively. Non-cash expenses related to the issuance of Common
Stock, warrants and options and the amortization of discounts relating to the
issuance of convertible debt (see Note 10 in Notes to Consolidated Financial
Statements) were $5,705,890, $1,275,794 and $507,025 in 2001, 2000 and 1999,
respectively.
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
to meet its obligations for 2002. 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. The remaining
obligation of the Company under that agreement is $2,357,659. The Company
expects funding under this agreement in 2002 to be less than the $1.1 million
maximum per the agreement. Substantial additional funds will be required 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.
Critical Accounting Policies
The Company believes the following represent its critical accounting policies:
Revenue recognition
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.
16
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.
Valuation of acquired technology
The Company continually reviews its acquired technology for events or changes in
circumstances that may indicate that the carrying value may not be recoverable.
Factors considered important which could cause impairment include significant
changes in the manner of the Company's use of its acquired patents or the
strategy of the Company's overall business and patents owned by competitors or
others in the same field of use.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE 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 changes in interest rates.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and notes thereto of the Company are attached hereto
beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to this item is set forth in the Company's definitive
Proxy Statement (the "Proxy Statement") to be filed with the Securities and
Exchange Commission for the Annual Meeting of Shareholders to be held on June
27, 2002 under the headings "Nominees for Election as Directors" and "Compliance
with Section 16(a) of the Exchange Act" and is incorporated herein by reference.
Information regarding the Company's executive officers is included in Part I on
page 11 herein.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to this item is set forth in the Proxy Statement under
the heading "Executive Management Compensation" and is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to the ownership of securities of the Company by
certain persons is set forth in the Proxy Statement under the heading "Principal
Shareholders" and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to transactions with management and others is set forth
in the Proxy Statement under the heading "Certain Transactions," and is
incorporated herein by reference.
17
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this 10-K:
1. Financial Statements:
Report of Independent Public Accountants.................................F-2
Consolidated Balance Sheets..............................................F-3
Consolidated Statements of Operations....................................F-4
Consolidated Statements of Shareholders' Equity (Deficit)................F-5
Consolidated Statements of Cash Flows....................................F-6
Notes to Consolidated Financial Statements...............................F-7
2. Financial Statement Schedules:
None.
3. Exhibits:
The following is a list of exhibits filed as part of this
Annual Report on Form 10-K. Where so indicated by footnote,
exhibits which were previously filed are incorporated by
reference. For exhibits incorporated by reference, the
location of the exhibit in the previous filing is indicated
parenthetically, together with a reference to the filing
indicated by footnote.
Exhibit
Number Description
- ------ -----------
3.1 Articles of Incorporation of the Company. (1)
3.2 Articles of Amendment to the Company's Articles of Incorporation
filed with the Department of State of the Commonwealth of
Pennsylvania on July 31, 2000. (2)
3.3 Articles of Amendment to the Company's Articles of Incorporation
filed with the Department of State of the Commonwealth of
Pennsylvania on July 31, 2000. (2)
3.4 Bylaws of the Company. (1)
4.1 Specimen stock certificate representing the Common Stock. (3)
4.2 Specimen warrant certificate representing the Warrants. (3)
4.3 Form of Public Warrant Agreement. (1)
4.4 Form of Underwriter's Warrant Agreement. (1)
4.5 Statement of Designations and Preferences of Series A
Non-Convertible Preferred Stock. (3)
4.6 Statement of Designations, Preferences and Rights of Series C-1
Convertible Preferred Stock (9)
4.7 Statement of Designations, Preferences and Rights of Series D
Convertible Preferred Stock (9)
4.8 Convertible Promissory Note dated as of August 22, 2001 payable to
the order of Pine Ridge Financial Inc. (8)
4.9 Convertible Promissory Note dated as of August 22, 2001 payable to
the order of Strong River Investments, Inc. (8)
4.10 Amended and Restated Warrant of Strong River Investments, Inc.
to Purchase 78,740 Shares of Common Stock dated as of August
22, 2001 (9)
4.11 Amended and Restated Warrant of Pine Ridge Financial Inc. to
Purchase 78,740 Shares of Common Stock dated as of August 22,
2001 (9)
4.12 Amended and Restated Warrant of Strong River Investments, Inc.
to Purchase 78,740 Shares of Common Stock dated as of August
22, 2001 (9)
4.13 Amended and Restated Warrant of Pine Ridge Financial Inc. to
Purchase 78,740 Shares of Common Stock dated as of August 22,
2001 (9)
4.14 Amended and Restated Warrant of Strong River Investments, Inc.
to Purchase 214,746 Shares of Common Stock dated as of August
22, 2001 (9)
4.15 Amended and Restated Warrant of Pine Ridge Financial Inc. to
Purchase 214,746 Shares of Common Stock dated as of August 22,
2001 (9)
4.16 Warrant of Gerard Klauer Mattison & Co., Inc. to Purchase 186,114
Shares of Common Stock dated as of August 22, 2001 (8)
10.1 License Agreement dated August 1, 1994 between The Trustees of
Princeton University and American Biomimetics Corporation. (3)
10.2 Amendment to License Agreement (August 1, 1994) dated April 11, 1995
between the Trustees of Princeton University and American
Biomimetics Corporation. (3)
18
10.3 Sponsored Research Agreement dated August 1, 1994 between the
Trustees of Princeton University and American Biomimetics
Corporation. (3)
10.4 Letter Amendment dated May 5, 1995, between the Trustees of
Princeton University and American Biomimetics Corporation. (3)
10.5 Amendment to Sponsored Research Agreement (August 1, 1994) dated
April 18, 1995 between the Trustees of Princeton University and
American Biomimetics Corporation. (3)
10.6 Technology Transfer Agreement dated June 22, 1995 between American
Biomimetics Corporation and the Company. (3)
10.7 Assignment and Assumption of License dated June 22, 1995 between
American Biomimetics Corporation and the Company. (3)
10.8 Sublicense Agreement and Option dated June 22, 1995 between American
Biomimetics Corporation and the Company. (3)
10.9 Assignment and Assumption of Agreement dated August 1, 1995 between
the Trustees of Princeton University and the University of Southern
California. (3)
10.10 Subcontract No. 341-4014-1 dated August 16, 1995 between the
Trustees of Princeton University and the University of Southern
California. (3)
10.11 Assignment of 1994 Sponsored Research Agreement dated November 1,
1995 between American Biomimetics Corporation and the Company. (3)
10.12 # Stock Option Agreement dated as of June 23, 1995 between the Company
and Thomas D. Hays, III. (3)
10.13 # Stock Option Agreement dated as of June 23, 1995 between the Company
and Harvey Nachman. (3)
10.14 Registration Rights Agreement dated as of June 23, 1995 between the
Company and Thomas D. Hays, III. (3)
10.15 Registration Rights Agreement dated as of June 23, 1995 between the
Company and Harvey Nachman. (3)
10.16 Form of Registration Rights Agreement between the Company and
Certain Subscribers to Purchase Common Stock of the Company. (3)
10.17 # Form of Stock Option Agreement dated as of June 23, 1995 between the
Company and Sidney D. Rosenblatt. (3)
10.18 # 1992 Stock Option Plan. (3)
10.19 # 1995 Stock Option Plan. (3)
10.20 # Employment Agreement dated as of November 1, 1995 between the
Company and Sherwin I. Seligsohn. (3)
10.21 # Form of Services Agreement dated as of December 1, 1995 between the
Company and Dean L. Ledger. (3)
10.22 # Form of Stock Option Agreement dated as of June 23, 1995 between the
Company and Sidney D. Rosenblatt. (3)
19
10.23 # Form of Stock Option Agreement dated as of September 1, 1995 between
the Company and Stephen R. Forrest. (3)
10.24 # Form of Stock Option Agreement dated as of September 1, 1995 between
the Company and Mark E. Thompson. (3)
10.25 # Form of Stock Option Agreement dated as of September 1, 1995 between
the Company and Paul E. Burrows. (3)
10.26 License Agreement dated January 26, 1996 between the Company and
University of Southern California. (3)
10.27 Letter Agreement dated September 20, 1995 Agreeing to a Royalty Rate
between the Trustees of Princeton University and the Company. (3)
10.28 Agreement and Plan of Reorganization dated as of April 6, 1995
between Enzymatics, Inc., Enzymatics Merger Subsidiary, Inc. and the
Company. (3)
10.29 Form of Consulting Agreement between the Company and Whale
Securities Co., L.P. (3)
10.30 # Warrant Agreement dated April 25, 1996 between the Company and
Steven V. Abramson. (4)
10.31 # Warrant Agreement dated April 25, 1996 between the Company and
Sherwin Seligsohn. (4)
10.32 # Warrant Agreement dated April 25, 1996 between the Company and Dean
L. Ledger. (4)
10.33 # Warrant Agreement dated April 25, 1996 between the Company and
Sidney D. Rosenblatt. (4)
10.34 1997 Sponsored Research Agreement between the Company and Princeton
University. (5)
10.35 1997 Amended License Agreement between the Company, Princeton
University and the University of Southern California. (5)
10.36 License Agreement between the Company and Motorola, Inc. dated as of
September 29, 2000. (2)
10.37 Development and License Agreement dated as of October 1, 2000 by and
between PPG Industries, Inc. and the Company. (6)
10.38 Form of Warrant Agreement issuable by the Company to PPG Industries,
Inc. pursuant to the Development and License Agreement. (6)
10.39 Amendment Number 1 to the Development and License Agreement dated as
of March 7, 2001 by and between PPG Industries, Inc. and the
Company. (6)
10.40 # Form of Warrant Agreement dated as of April 18, 2000 between the
Company and Julia Brown. (7)
10.41 Termination, Amendment and License Agreement by and among the
Company, PD-LD, Inc., Dr. Vladimir S. Ban, and The Trustees of
Princeton University dated as of July 19, 2000. (2)
10.42 Securities Purchase Agreement dated as of August 22, 2001 among the
Company, Pine Ridge Financial Inc. and Strong River Investments,
Inc. (8)
10.43 Registration Rights Agreement dated as of August 22, 2001 among the
Company, Pine Ridge Financial Inc. and Strong River Investments,
Inc. (8)
10.44 Voting Agreement dated as of August 22, 2001 among the Company, Pine
Ridge Financial Inc. and Strong River Investments, Inc. (8)
10.45 Pledge Agreement dated as of August 22, 2001 by UDC, Inc. in favor
of First Union National Bank (8)
10.46 Control Agreement dated as of August 22, 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 (8)
10.47 Guaranty and Suretyship Agreement dated as of August 22, 2001 made
by the Company in favor of First Union National Bank (8)
10.48 Irrevocable Standby Letter of Credit issued by First Union National
Bank in favor of Pine Ridge Financial Inc. (8)
10.49 Irrevocable Standby Letter of Credit issued by First Union National
Bank in favor of Strong River Investments, Inc. (8)
10.50 First Amendment to Securities Purchase Agreement dated as of
September 20, 2001 among the Company, Pine Ridge Financial Inc. and
Strong River Investments, Inc. (9)
10.51 Second Amendment to Securities Purchase Agreement dated as of
November 1, 2001 among the Company, Pine Ridge Financial Inc. and
Strong River Investments, Inc. (9)
10.52 First Amendment to Registration Rights Agreement dated as of
November 1, 2001 among the Company, Pine Ridge Financial Inc. and
Strong River Investments, Inc. (9)
10.53 Exchange Agreement dated as of November 2, 2001 among the Company,
Pine Ridge Financial Inc. and Strong River Investments, Inc. (9)
20
21 * Subsidiaries of the Registrant.
23 * Consent of Arthur Andersen LLP
99.1* Letter regarding independent public accountants
Explanation of Footnotes to Listing of Exhibits
* Filed herewith
# Management contract or compensatory plan or arrangement
(1) Filed as an Exhibit to Registration Statement (No. 33-80703) on Form
SB-2 filed with the Securities and Exchange Commission.
(2) Filed as an Exhibit to the Quarterly Report on Form 10-Q for the
quarter ended September 30, 2001 filed with the Securities and
Exchange Commission.
(3) Filed as an Exhibit to Amendment No. 1 to Registration Statement (No.
33-80703) on Form SB-2 filed with the Securities and Exchange
Commission.
(4) Filed as an Exhibit to the Annual Report on Form 10K-SB for the year
ended December 31, 1996 filed with the Securities and Exchange
Commission.
(5) Filed as Exhibit to the Annual Report on Form 10K-SB for the year
ended December 31, 1997, filed with the Securities and Exchange
Commission.
(6) Filed as an Exhibit to Amendment No. 1 to Registration Statement (No.
333-50990) on Form S-3 filed with the Securities and Exchange
Commission.
(7) Filed as an Exhibit to the Annual Report on Form 10-K for the year
ended December 31, 2000 filed with the Securities and Exchange
Commission.
(8) Filed as an Exhibit to the Current Report on Form 8-K filed with the
Securities and Exchange Commission September 6, 2001 and incorporated
herein by reference.
(9) Filed as an Exhibit to Registration Statement (No. 333-72846) on Form
S-3 filed with the Securities and Exchange Commission.
Note: Any of the exhibits listed in the foregoing index not included with this
Annual Report on Form 10-K may be obtained without charge by writing to Mr.
Sidney D. Rosenblatt, Corporate Secretary, Universal Display Corporation, 375
Phillips Boulevard, Ewing, New Jersey 08618.
(b) No reports were filed on Form 8-K during the fiscal quarter ended
December 31, 2001.
(c) Exhibits required to be filed by the Company pursuant to Item 601
of Regulation S-K are contained in Exhibits listed in response to Item 14(a)(3)
and are incorporated herein by reference.
(d) Financial statement schedules required to be filed by the Company
pursuant to Regulation S-X are listed in response to Item 14(a)(2) and are
incorporated herein by reference.
21
UNIVERSAL DISPLAY CORPORATION
SIGNATURES
Pursuant to the requirements of Section 13 and 15(d) of the Securities Exchange
Act of 1934, Universal Display Corporation has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized:
UNIVERSAL DISPLAY CORPORATION
By: /s/ Sherwin I. Seligsohn
-------------------------------------------------
Sherwin I. Seligsohn
Chairman of the Board and Chief Executive Officer
Date: March 29, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities indicated on the dates indicated.
Name Title Date
---- ----- ----
/s/ Sherwin I. Seligsohn Chairman of Board and Chief Executive Officer March 29, 2002
- -----------------------------
Sherwin I. Seligsohn
/s/ Steven V. Abramson President, Chief Operating Officer and Director March 29, 2002
- ----------------------------
Steven V. Abramson
/s/ Sidney D. Rosenblatt Executive Vice President, Chief Financial Officer, March 29, 2002
- ----------------------------- Treasurer, Secretary and Director
Sidney D. Rosenblatt
/s/ Leonard Becker Director March 29, 2002
- -----------------------------
Leonard Becker
/s/ Elizabeth Gemmil Director March 29, 2002
- -----------------------------
Elizabeth Gemmil
/s/ C. Keith Hartley Director March 29, 2002
- -----------------------------
C. Keith Hartley
/s/ Lawrence Lacerte Director March 29, 2002
- -----------------------------
Lawrence Lacerte
22
UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARY
(a development-stage company)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Financial Statements:
Report of Independent Public Accountants.............................. F-2
Consolidated Balance Sheets........................................... F-3
Consolidated Statements of Operations................................. F-4
Consolidated Statements of Shareholders' Equity (Deficit)............. F-5
Consolidated Statements of Cash Flows................................. F-6
Notes to Consolidated Financial Statements............................ F-7
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Universal Display Corporation:
We have audited the accompanying consolidated balance sheets of Universal
Display Corporation (a Pennsylvania corporation in the development-stage) and
subsidiary as of December 31, 2001 and 2000, and the related consolidated
statements of operations, shareholders' equity (deficit) and cash flows for each
of the three years in the period ended December 31, 2001 and for the period from
inception (June 17, 1994) to December 31, 2001. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Universal Display
Corporation and subsidiary as of December 31, 2001 and 2000, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2001 and for the period from inception (June 17, 1994) to
December 31, 2001, in conformity with accounting principles generally accepted
in the United States.
/s/ ARTHUR ANDERSEN LLP
Philadelphia, Pennsylvania
March 5, 2002
F-2
UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARY
(a development-stage company)
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31, December 31,
2001 2000
----------- -----------
CURRENT ASSETS:
Cash and cash equivalents $ 7,883,132 $ 7,701,040
Short-term investments 4,516,199 2,704,220
Restricted cash (Note 10) 15,162,414 --
Accounts receivable 540,855 312,076
Prepaid and other current assets 355,820 204,810
----------- -----------
Total current assets 28,458,420 10,922,146
PROPERTY AND EQUIPMENT, net 5,296,177 4,630,257
ACQUIRED TECHNOLOGY, net 14,794,847 16,489,919
DEPOSITS 20,125 37,472
----------- -----------
$48,569,569 $32,079,794
=========== ===========
LIABILITIES, REDEMABLE COMMON STOCK AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Convertible promissory notes (face value of $15,000,000,
net of discounts) (Note 10) $ 8,288,239 $ --
Capital lease obligations 4,228 3,759
Accounts payable 649,100 816,131
Accrued expenses 1,072,621 850,126
Deferred license fees 450,000 --
----------- -----------
Total current liabilities 10,464,188 1,670,016
----------- -----------
CAPITAL LEASE OBLIGATIONS 8,599 12,860
----------- -----------
REDEEMABLE COMMON STOCK (Note 8) -- 570,114
----------- -----------
COMMITMENTS (Note 13)
SHAREHOLDERS' EQUITY:
Preferred Stock, par value $0.01 per share, 5,000,000 shares authorized,
200,000 shares of 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 shares 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,
18,093,124 and 16,440,286 shares issued and outstanding 180,931 164,403
Additional paid-in capital 85,016,601 57,885,790
Accumulated other comprehensive loss (3,925) --
Deficit accumulated during development-stage (47,101,825) (28,228,389)
----------- -----------
Total shareholders' equity $38,096,782 $29,826,804
=========== ===========
$48,569,569 $32,079,794
=========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARY
(a development-stage company)
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31
----------------------------------------------
Period from
Inception
(June 17, 1994) to
2001 2000 1999 December 31, 2001
------------ ------------ ------------ -----------------
REVENUE:
Contract research revenue $ 1,058,571 $ 492,756 $ 519,536 $ 2,533,262
Development chemicals 194,330 -- -- 194,330
------------ ------------ ------------ ------------
Total revenue 1,252,901 492,756 519,536 2,727,592
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Research and development 12,385,036 7,109,205 3,171,497 31,315,337
General and administrative 3,915,854 3,261,113 2,727,856 15,774,211
------------ ------------ ------------ ------------
Total operating expenses 16,300,890 10,370,318 5,899,353 47,089,548
------------ ------------ ------------ ------------
Operating loss (15,047,989) (9,877,562) (5,379,817) (44,361,956)
------------ ------------ ------------ ------------
INTEREST INCOME 540,031 348,516 254,811 1,625,609
INTEREST EXPENSE (1,848,142) -- -- (1,848,142)
------------ ------------ ------------ ------------
NET LOSS $(16,356,100) $ (9,529,046) $ (5,125,006) $(44,584,489)
------------ ------------ ------------ ------------
DEEMED DIVIDENDS TO PREFERRED
SHAREHOLDERS (Notes 9 and 10) (2,517,336) -- -- (2,517,336)
------------ ------------ ------------ ------------
NET LOSS APPLIABLE TO COMMON
SHAREHOLDERS $(18,873,436) $ (9,529,046) $ (5,125,006) $(47,101,825)
============ ============ ============ ============
BASIC AND DILUTED NET LOSS PER
COMMON SHARE $ (1.11) $ (0.62) $ (0.42)
============ ============ ============
WEIGHTED AVERAGE SHARES USED IN
COMPUTING BASIC AND DILUTED NET
LOSS PER COMMON SHARE 16,994,537 15,260,837 12,269,943
============ ============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARY
(a development-stage company)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
Series A Nonconvertible
Preferred Stock
-------------------------------
Shares Amount
------------- -------------
BALANCE, INCEPTION (JUNE 17, 1994) -- $ --
Net Loss -- --
------------- -------------
BALANCE, DECEMBER 31, 1994 -- --
Recapitalization by issuance of Common Stock to Enzymatics, Inc. -- --
Issuance of Common Stock options to former sole director of Enzymatics, Inc. to satisfy an
Enzymatics, Inc. liability -- --
Issuance of Series A Nonconvertible Preferred Stock in connection with assignment of research
and license agreements 200,000 2,000
Issuance of Common Stock through private Placements, net of issuance expenses of $50,000 -- --
Issuance of Common Stock options -- --
Net loss -- --
------------- -------------
BALANCE, DECEMBER 31, 1995 200,000 2,000
Issuance of Common Stock in Initial Public Offering on April 11, 1996 -- --
Issuance of Common Stock warrants -- --
Net loss -- --
------------- -------------
BALANCE, DECEMBER 31, 1996 200,000 2,000
Exercise of private placement warrants -- --
Issuance of Common Stock warrants -- --
Issuance of Common Stock options -- --
Issuance of Common Stock and warrants in connection with 1997 Sponsored Research Agreement -- --
Exercise of Common Stock options and warrants -- --
Net loss -- --
------------- -------------
BALANCE, DECEMBER 31, 1997 200,000 2,000
Exercise of private placement warrants -- --
Exercise of Common Stock options and warrants -- --
Issuance of Common Stock warrants -- --
Net loss -- --
------------- -------------
BALANCE, DECEMBER 31, 1998 200,000 2,000
Exercise of Common Stock options and warrants -- --
Issuance of Common Stock and warrants through private placement, net of expenses of $488,220 -- --
Issuance of Common Stock for purchase of equipment -- --
Issuance of Common Stock in connection with the executive employee bonus -- --
Issuance of Common Stock options to non-employees -- --
Net loss -- --
------------- -------------
BALANCE, DECEMBER 31, 1999 200,000 2,000
Exercise of Common Stock options and warrants -- --
Issuance of Common Stock and warrants through private placement, net of expenses of $311,313 -- --
Issuance of Common Stock for purchase of equipment -- --
Issuance of Common Stock options to non-employees -- --
Issuance of Redeemable Common Stock, options and warrants in connection with the Development
Agreements -- --
Issuance of Common Stock, Preferred Stock Series B, and warrants in connection with the
purchase of intangibles -- --
Issuance of Common Stock options and warrants to Scientific Advisory Board -- --
Net loss -- --
------------- -------------
BALANCE, DECEMBER 31, 2000 200,000 2,000
Exercise of Common Stock options and warrants -- --
Issuance of Convertible Preferred stock and warrants through private placement, net of
expenses of $863,021 -- --
Exchange of Series C to Series C-1 (Note 10) -- --
Issuance of Common Stock upon conversion of Convertible Preferred Stock -- --
Deemed dividends to Preferred Shareholders -- --
Issuance of Common Stock and warrants through private placement -- --
Issuance of Common Stock for purchase of equipment -- --
Issuance of Common Stock options to non-employees -- --
Issuance of Common Stock, options and warrants in connection with the Development
Agreements -- --
Issuance of Common Stock options and warrants to Scientific Advisory Board -- --
Unrealized loss on available-for-sale securities -- --
Net loss -- --
------------- -------------
Comprehensive loss -- --
------------- -------------
BALANCE, DECEMBER 31, 2001 200,000 $ 2,000
============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARY
(a development-stage company)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(continued)
Series B Nonconvertible
Preferred Stock
-------------------------------
Shares Amount
------------- -------------
BALANCE, INCEPTION (JUNE 17, 1994) -- $ --
Net Loss -- --
------------- -------------
BALANCE, DECEMBER 31, 1994 -- --
Recapitalization by issuance of Common Stock to Enzymatics, Inc. -- --
Issuance of Common Stock options to former sole director of Enzymatics, Inc. to satisfy an
Enzymatics, Inc. liability -- --
Issuance of Series A Nonconvertible Preferred Stock in connection with assignment of research
and license agreements -- --
Issuance of Common Stock through private Placements, net of issuance expenses of $50,000 -- --
Issuance of Common Stock options -- --
Net loss -- --
------------- -------------
BALANCE, DECEMBER 31, 1995 -- --
Issuance of Common Stock in Initial Public Offering on April 11, 1996 -- --
Issuance of Common Stock warrants -- --
Net loss -- --
------------- -------------
BALANCE, DECEMBER 31, 1996 -- --
Exercise of private placement warrants -- --
Issuance of Common Stock warrants -- --
Issuance of Common Stock options -- --
Issuance of Common Stock and warrants in connection with 1997 Sponsored Research Agreement -- --
Exercise of Common Stock options and warrants -- --
Net loss -- --
------------- -------------
BALANCE, DECEMBER 31, 1997 -- --
Exercise of private placement warrants -- --
Exercise of Common Stock options and warrants -- --
Issuance of Common Stock warrants -- --
Net loss -- --
------------- -------------
BALANCE, DECEMBER 31, 1998 -- --
Exercise of Common Stock options and warrants -- --
Issuance of Common Stock and warrants through private placement, net of expenses of $488,220 -- --
Issuance of Common Stock for purchase of equipment -- --
Issuance of Common Stock in connection with the executive employee bonus -- --
Issuance of Common Stock options to non-employees -- --
Net loss -- --
------------- -------------
BALANCE, DECEMBER 31, 1999 -- --
Exercise of Common Stock options and warrants -- --
Issuance of Common Stock and warrants through private placement, net of expenses of $311,313 -- --
Issuance of Common Stock for purchase of equipment -- --
Issuance of Common Stock options to non-employees -- --
Issuance of Redeemable Common Stock, options and warrants in connection with the Development
Agreements -- --
Issuance of Common Stock, Preferred Stock Series B, and warrants in connection with the
purchase of intangibles 300,000 3,000
Issuance of Common Stock options and warrants to Scientific Advisory Board -- --
Net loss -- --
------------- -------------
BALANCE, DECEMBER 31, 2000 300,000 3,000
Exercise of Common Stock options and warrants -- --
Issuance of Convertible Preferred stock and warrants through private placement, net of
expenses of $863,021 -- --
Exchange of Series C to Series C-1 (Note 10) -- --
Issuance of Common Stock upon conversion of Convertible Preferred Stock -- --
Deemed dividends to Preferred Shareholders -- --
Issuance of Common Stock and warrants through private placement -- --
Issuance of Common Stock for purchase of equipment -- --
Issuance of Common Stock options to non-employees -- --
Issuance of Common Stock, options and warrants in connection with the Development
Agreements -- --
Issuance of Common Stock options and warrants to Scientific Advisory Board -- --
Unrealized loss on available-for-sale securities -- --
Net loss -- --
------------- -------------
Comprehensive loss -- --
------------- -------------
BALANCE, DECEMBER 31, 2001 300,000 $ 3,000
============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
F-5 (cont'd)
UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARY
(a development-stage company)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(continued)
Series C Convertible Series C-1 Convertible
Preferred Stock Preferred Stock
------------------------ -----------------------
Shares Amount Shares Amount
-------- -------- -------- -------
BALANCE, INCEPTION (JUNE 17, 1994) -- $ -- -- $ --
Net Loss -- -- -- --
------- ------- ------- -------
BALANCE, DECEMBER 31, 1994 -- -- -- --
Recapitalization by issuance of Common Stock to
Enzymatics, Inc. -- -- -- --
Issuance of Common Stock options to former sole director
of Enzymatics, Inc. to satisfy an Enzymatics, Inc.
liability -- -- -- --
Issuance of Series A Nonconvertible Preferred Stock in
connection with assignment of research and license agreements -- -- -- --
Issuance of Common Stock through private Placements, net of
issuance expenses of $50,000 -- -- -- --
Issuance of Common Stock options -- -- -- --
Net loss -- -- -- --
------- ------- ------- -------
BALANCE, DECEMBER 31, 1995 -- -- -- --
Issuance of Common Stock in Initial Public Offering on
April 11, 1996 -- -- -- --
Issuance of Common Stock warrants -- -- -- --
Net loss -- -- -- --
------- ------- ------- -------
BALANCE, DECEMBER 31, 1996 -- -- -- --
Exercise of private placement warrants -- -- -- --
Issuance of Common Stock warrants -- -- -- --
Issuance of Common Stock options -- -- -- --
Issuance of Common Stock and warrants in connection with 1997
Sponsored Research Agreement -- -- -- --
Exercise of Common Stock options and warrants -- -- -- --
Net loss -- -- -- --
------- ------- ------- -------
BALANCE, DECEMBER 31, 1997 -- -- -- --
Exercise of private placement warrants -- -- -- --
Exercise of Common Stock options and warrants
Issuance of Common Stock warrants -- -- -- --
Net loss -- -- -- --
------- ------- ------- -------
BALANCE, DECEMBER 31, 1998 -- -- -- --
Exercise of Common Stock options and warrants -- -- -- --
Issuance of Common Stock and warrants through private
placement, net of expenses of $488,220 -- -- -- --
Issuance of Common Stock for purchase of equipment -- -- -- --
Issuance of Common Stock in connection with the executive
employee bonus -- -- -- --
Issuance of Common Stock options to non-employees -- -- -- --
Net loss -- -- -- --
------- ------- ------- -------
BALANCE, DECEMBER 31, 1999 -- -- -- --
Exercise of Common Stock options and warrants -- -- -- --
Issuance of Common Stock and warrants through private
placement, net of expenses of $311,313 -- -- -- --
Issuance of Common Stock for purchase of equipment -- -- -- --
Issuance of Common Stock options to non employees -- -- -- --
Issuance of Redeemable Common Stock, options and warrants
in connection with the Development Agreements -- -- -- --
Issuance of Common Stock, Preferred Stock Series B, and
warrants in connection with the purchase of intangibles -- -- -- --
Issuance of Common Stock options and warrants to Scientific
Advisory Board -- -- -- --
Net loss -- -- -- --
------- ------- ------- -------
BALANCE, DECEMBER 31, 2000 -- -- -- --
Exercise of Common Stock options and warrants -- -- -- --
Issuance of Convertible Preferred Stock through private
placement, net of expenses of $863,021 5,000 50 -- --
Exchange of Series C to Series C-1 (Note 10) (5,000) (50) 5,000 50
Issuance of Common Stock upon conversion of Convertible
Preferred Stock -- -- (5,000) (50)
Deemed dividends to Preferred Shareholders -- -- -- --
Issuance of Common Stock and warrants through private
placement -- -- -- --
Issuance of Common Stock for purchase of equipment -- -- -- --
Issuance of Common Stock options to non-employees -- -- -- --
Issuance of Common Stock, options and warrants in connection
with the Development Agreements -- -- -- --
Issuance of Common Stock options and warrants to Scientific
Advisory Board -- -- -- --
Unrealized loss on available-for-sale securities -- -- -- --
Net loss -- -- -- --
------- ------- ------- -------
Comprehensive loss -- -- -- --
------- ------- ------- -------
BALANCE, DECEMBER 31, 2001 -- $ -- -- $ --
======= ======= ======= =======
The accompanying notes are an integral part of these
consolidated financial statements.
F-5 (cont'd)
UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARY
(a development-stage company)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(continued)
Series D Convertible
Preferred Stock
--------------------------------
Shares Amount
--------------- --------------
BALANCE, INCEPTION (JUNE 17, 1994) -- $ --
Net Loss -- --
------------- -------------
BALANCE, DECEMBER 31, 1994 -- --
Recapitalization by issuance of Common Stock to Enzymatics, Inc. -- --
Issuance of Common Stock options to former sole director of Enzymatics, Inc. to satisfy an
Enzymatics, Inc. liability -- --
Issuance of Series A Nonconvertible Preferred Stock in connection with assignment of research
and license agreements -- --
Issuance of Common Stock through private Placements, net of issuance expenses of $50,000 -- --
Issuance of Common Stock options -- --
Net loss -- --
------------- -------------
BALANCE, DECEMBER 31, 1995 -- --
Issuance of Common Stock in Initial Public Offering on April 11, 1996 -- --
Issuance of Common Stock warrants -- --
Net loss -- --
------------- -------------
BALANCE, DECEMBER 31, 1996 -- --
Exercise of private placement warrants -- --
Issuance of Common Stock warrants -- --
Issuance of Common Stock options -- --
Issuance of Common Stock and warrants in connection with 1997 Sponsored Research Agreement
(Note 5) -- --
Exercise of Common Stock options and warrants -- --
Net loss -- --
------------- -------------
BALANCE, DECEMBER 31, 1997 -- --
Exercise of private placement warrants -- --
Exercise of Common Stock options and warrants -- --
Issuance of Common Stock warrants -- --
Net loss -- --
------------- -------------
BALANCE, DECEMBER 31, 1998 -- --
Exercise of Common Stock options and warrants -- --
Issuance of Common Stock and warrants through private placement, net of expenses of $488,220 -- --
Issuance of Common Stock for purchase of equipment -- --
Issuance of Common Stock in connection with the executive employee bonus -- --
Issuance of Common Stock options to non-employees -- --
Net loss -- --
------------- -------------
BALANCE, DECEMBER 31, 1999 -- --
Exercise of Common Stock options and warrants -- --
Issuance of Common Stock and warrants through private placement, net of expenses of $311,313 -- --
Issuance of Common Stock for purchase of equipment -- --
Issuance of Common Stock options to non-employees -- --
Issuance of Redeemable Common Stock, options and warrants in connection with the Development
Agreements -- --
Issuance of Common Stock, Preferred Stock Series B, and warrants in connection with the
purchase of intangibles -- --
Issuance of Common Stock options and warrants to Scientific Advisory Board -- --
Net loss -- --
------------- -------------
BALANCE, DECEMBER 31, 2000 -- --
Exercise of Common Stock options and warrants -- --
Issuance of Convertible Preferred Stock and warrants through private placement, net of
expenses of $863,021 5,000 50
Exchange of Series C to Series C-1 (Note 10) -- --
Issuance of Common Stock upon conversion of Convertible Preferred Stock (5,000) (50)
Deemed dividends to Preferred Shareholders -- --
Issuance of Common Stock and warrants through private placement -- --
Issuance of Common Stock for purchase of equipment -- --
Issuance of Common Stock options to non-employees -- --
Issuance of Common Stock, options and warrants in connection with the Development
Agreements -- --
Issuance of Common Stock options and warrants to Scientific Advisory Board -- --
Unrealized loss on available-for-sale securities -- --
Net loss -- --
------------- -------------
Comprehensive loss -- --
------------- -------------
BALANCE, DECEMBER 31, 2001 -- $ --
============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
F-5 (cont'd)
UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARY
(a development-stage company)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(continued)
Common Stock
--------------------------------
Shares Amount
--------------- --------------
BALANCE, INCEPTION - (JUNE 17, 1994) 6,000,000 $ 6,000
Net Loss -- --
------------- -------------
BALANCE, DECEMBER 31, 1994 6,000,000 6,000
Recapitalization by issuance of Common Stock to Enzymatics, Inc. 523,268 59,233
Issuance of Common Stock options to former sole director of Enzymatics, Inc. to satisfy an
Enzymatics, Inc. liability -- --
Issuance of Series A Nonconvertible Preferred Stock in connection with assignment of research
and license agreements -- --
Issuance of Common Stock through private Placements, net of issuance expenses of $50,000 1,114,000 11,140
Issuance of Common Stock options -- --
Net loss -- --
------------- -------------
BALANCE, DECEMBER 31, 1995 7,637,268 76,373
Issuance of Common Stock in Initial Public Offering on April 11, 1996 1,300,000 13,000
Issuance of Common Stock warrants -- --
Net loss -- --
------------- -------------
BALANCE, DECEMBER 31, 1996 8,937,268 89,373
Exercise of private placement warrants 1,124,000 11,240
Issuance of Common Stock warrants -- --
Issuance of Common Stock options -- --
Issuance of Common Stock and warrants in connection with 1997 Sponsored Research Agreement 200,000 2,000
Exercise of Common Stock options and warrants 41,000 410
Net loss -- --
------------- -------------
BALANCE, DECEMBER 31, 1997 10,302,268 103,023
Exercise of private placement warrants 675 7
Exercise of Common Stock options and warrants 10,000 100
Issuance of Common Stock warrants -- --
Net loss -- --
------------- -------------
BALANCE, DECEMBER 31, 1998 10,312,943 103,130
Exercise of Common Stock options and warrants 1,687,586 16,876
Issuance of Common Stock and warrants through private placement, net of expenses of $488,220 1,414,034 14,140
Issuance of Common Stock for purchase of equipment 100,000 1,000
Issuance of Common Stock in connection with the executive employee bonus 200,000 2,000
Issuance of Common Stock options to non-employees -- --
Net loss -- --
------------- -------------
BALANCE, DECEMBER 31, 1999 13,714,563 137,146
Exercise of Common Stock options and warrants 1,754,353 17,544
Issuance of Common Stock and warrants through private placement, net of expenses of $311,313 631,527 6,315
Issuance of Common Stock for purchase of equipment 89,843 898
Issuance of Common Stock options to non-employees -- --
Issuance of Redeemable Common Stock, options and warrants in connection with the Development
Agreements -- --
Issuance of Common Stock, Preferred Stock Series B, and warrants in connection with the
purchase of intangibles 250,000 2,500
Issuance of Common Stock options and warrants to Scientific Advisory Board -- --
Net loss -- --
------------- -------------
BALANCE, DECEMBER 31, 2000 16,440,286 164,403
Exercise of Common Stock options and warrants 271,431 2,714
Issuance of Convertible Preferred Stock and warrants through private placement, net of
expenses of $863,021 -- --
Exchange of Series C to Series C-1 (Note 10) -- --
Issuance of Common Stock upon conversion of Convertible Preferred Stock 1,064,804 10,648
Deemed dividends to Preferred Shareholders -- --
Issuance of Common Stock and warrants through private placement 158,704 1,587
Issuance of Common Stock for purchase of equipment 10,157 101
Issuance of Common Stock options to non-employees 750 8
Issuance of Common Stock, options and warrants in connection with the Development
Agreements 146,992 1,470
Issuance of Common Stock options and warrants to Scientific Advisory Board -- --
Unrealized loss on available-for-sale securities -- --
Net loss -- --
------------- -------------
Comprehensive loss -- --
------------- -------------
BALANCE, DECEMBER 31, 2001 18,093,124 $ 180,931
============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
F-5 (cont'd)
UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARY
(a development-stage company)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(continued)
Deficit
Accumulated
Additional During
Paid-in Development
Capital Stage
------------ -------------
BALANCE, INCEPTION (JUNE 17, 1994) $ -- $ --
Net Loss -- (11,121)
------------ -------------
BALANCE, DECEMBER 31, 1994 -- (11,121)
Recapitalization by issuance of Common Stock to Enzymatics, Inc. (243,393) --
Issuance of Common Stock options to former sole director of Enzymatics, Inc. to satisfy an
Enzymatics, Inc. liability 140,000 --
Issuance of Series A Nonconvertible Preferred Stock in connection with assignment of research
and license agreements 348,000 --
Issuance of Common Stock through private Placements, net of issuance expenses of $50,000 2,166,860 --
Issuance of Common Stock options 9,950 --
Net loss -- (3,072,661)
------------ -------------
BALANCE, DECEMBER 31, 1995 2,421,417 (3,083,782)
Issuance of Common Stock in Initial Public Offering on April 11, 1996 5,492,928 --
Issuance of Common Stock warrants 25,000 --
Net loss -- (1,768,995)
------------ -------------
BALANCE, DECEMBER 31, 1996 7,939,345 (4,852,777)
Exercise of private placement warrants 3,929,560 --
Issuance of Common Stock warrants 528,985 --
Issuance of Common Stock options 216,000 --
Issuance of Common Stock and warrants in connection with 1997 Sponsored Research Agreement 3,118,329 --
Exercise of Common Stock options and warrants 80,590 --
Net loss -- (5,927,718)
------------ -------------
BALANCE, DECEMBER 31, 1997 15,812,809 (10,780,495)
Exercise of private placement warrants 2,356 --
Exercise of Common Stock options and warrants 2,800 --
Issuance of Common Stock warrants 234,916 --
Net loss -- (2,793,842)
------------ -------------
BALANCE, DECEMBER 31, 1998 16,052,881 (13,574,337)
Exercise of Common Stock options and warrants 6,220,104 --
Issuance of Common Stock and warrants through private placement, net of expenses of $488,220 4,778,657 --
Issuance of Common Stock for purchase of equipment 430,000
Issuance of Common Stock in connection with the executive employee bonus 421,220
Issuance of Common Stock options to non-employees 83,805 --
Net loss -- (5,125,006)
------------ -------------
BALANCE, DECEMBER 31, 1999 27,986,667 (18,699,343)
Exercise of Common Stock options and warrants 6,837,299 --
Issuance of Common Stock and warrants through private placement, net of expenses of $311,313 5,050,351 --
Issuance of Common Stock for purchase of equipment 386,325
Issuance of Common Stock options to non-employees 10,000 --
Issuance of Redeemable Common Stock, options and warrants in connection with the Development
Agreements 92,997 --
Issuance of Common Stock, Preferred Stock Series B, and warrants in connection with the
purchase of intangibles 16,919,468 --
Issuance of Common Stock options and warrants to Scientific Advisory Board 602,683 --
Net loss -- (9,529,046)
------------ --------------
BALANCE, DECEMBER 31, 2000 57,885,790 (28,228,389)
Exercise of Common Stock options and warrants 1,124,796 --
Issuance of Convertible Preferred Stock and warrants through private placement, net of
expenses of $863,021 9,136,979 --
Exchange of Series C to Series C-1 (Note 10) -- --
Issuance of Common Stock upon conversion of Convertible Preferred Stock (10,548) --
Deemed dividends to Preferred Shareholders 10,918,798 (2,517,336)
Issuance of Common Stock and warrants through private placement 1,347,397 --
Issuance of Common Stock for purchase of equipment 43,675 --
Issuance of Common Stock options to non-employees 388,313 --
Issuance of Common Stock, options and warrants in connection with the Development
Agreements 2,836,715 --
Issuance of Common Stock options and warrants to Scientific Advisory Board 1,344,686 --
Unrealized loss on available-for-sale securities -- --
Net loss -- (16,356,100)
------------- --------------
Comprehensive loss -- --
------------- -------------
BALANCE, DECEMBER 31, 2001 $85,016,601 $ (47,101,825)
============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
F-5 (cont'd)
UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARY
(a development-stage company)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(continued)
Accumulated Other
Comprehensive Total
Loss Equity/(Deficit)
--------------- ---------------
BALANCE, INCEPTION (JUNE 17, 1994) $ -- $ 6,000
Net Loss -- (11,121)
--------------- ---------------
BALANCE, DECEMBER 31, 1994 -- (5,121)
Recapitalization by issuance of Common Stock to Enzymatics, Inc. -- (184,160)
Issuance of Common Stock options to former sole director of Enzymatics, Inc. to satisfy an
Enzymatics, Inc. liability -- 140,000
Issuance of Series A Nonconvertible Preferred Stock in connection with assignment of research
and license agreements -- 350,000
Issuance of Common Stock through private Placements, net of issuance expenses of $50,000 -- 2,178,000
Issuance of Common Stock options -- 9,950
Net loss -- (3,072,661)
--------------- --------------
BALANCE, DECEMBER 31, 1995 -- (583,992)
Issuance of Common Stock in Initial Public Offering on April 11, 1996 -- 5,505,928
Issuance of Common Stock warrants -- 25,000
Net loss -- (1,768,995)
--------------- --------------
BALANCE, DECEMBER 31, 1996 -- 3,177,941
Exercise of private placement warrants -- 3,940,800
Issuance of Common Stock warrants -- 528,985
Issuance of Common Stock options -- 216,000
Issuance of Common Stock and warrants in connection with 1997 Sponsored Research Agreement -- 3,120,329
Exercise of Common Stock options and warrants -- 81,000
Net loss -- (5,927,718)
--------------- --------------
BALANCE, DECEMBER 31, 1997 -- 5,137,337
Exercise of private placement warrants -- 2,363
Exercise of Common Stock options and warrants -- 2,900
Issuance of Common Stock warrants -- 234,916
Net loss -- (2,793,842)
--------------- --------------
BALANCE, DECEMBER 31, 1998 -- 2,583,674
Exercise of Common Stock options and warrants -- 6,236,980
Issuance of Common Stock and warrants through private placement, net of expenses of $488,220 -- 4,792,797
Issuance of Common Stock for purchase of equipment -- 431,000
Issuance of Common Stock in connection with the executive employee bonus -- 423,220
Issuance of Common Stock options to non-employees -- 83,805
Net loss -- (5,125,006)
--------------- --------------
BALANCE, DECEMBER 31, 1999 -- 9,426,470
Exercise of Common Stock options and warrants -- 6,854,843
Issuance of Common Stock and warrants through private placement, net of expenses of $311,313 -- 5,056,666
Issuance of Common Stock for purchase of equipment -- 387,223
Issuance of Common Stock options to non-employees -- 10,000
Issuance of Redeemable Common Stock, options and warrants in connection with the Development
Agreements -- 92,997
Issuance of Common Stock, Preferred Stock Series B, and warrants in connection with the
purchase of intangibles -- 16,924,968
Issuance of Common Stock options and warrants to Scientific Advisory Board -- 602,683
Net loss -- (9,529,046)
--------------- --------------
BALANCE, DECEMBER 31, 2000 -- 29,826,804
Exercise of Common Stock options and warrants -- 1,127,510
Issuance of Convertible Preferred Stock and warrants through private placement, net of
expenses of $863,021 -- 9,137,079
Issuance of Common Stock upon conversion of Convertible Preferred Stock -- --
Deemed dividends to Preferred Shareholders -- 8,401,462
Issuance of Common Stock and warrants through private placement -- 1,348,984
Issuance of Common Stock for purchase of equipment -- 43,776
Issuance of Common Stock options to non employees -- 388,321
Issuance of Common Stock, options and warrants in connection with the Development
Agreements -- 2,838,185
Issuance of Common Stock options and warrants to Scientific Advisory Board -- 1,344,686
Unrealized loss on available-for-sale securities (3,925) (3,925)
Net loss -- (16,356,100)
--------------- --------------
Comprehensive loss -- (16,360,025)
--------------- --------------
BALANCE, DECEMBER 31, 2001 $ (3,925) $ 38,096,782
=============== ==============
The accompanying notes are an integral part of these
consolidated financial statements.
F-5 (cont'd)
UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARY
(a development-stage company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, Period from Inception
(June 17,1994) to
December 31,
2001 2000 1999 2001
------------ ------------ ------------ -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(16,356,100) $ (9,529,046) $ (5,125,006) $(44,584,489)
Non-cash charges to statement of operations:
Depreciation 1,124,644 590,284 56,368 1,838,528
Amortization of intangibles 1,695,072 460,799 -- 2,155,871
Amortization of discounts on Convertible Promissory Notes 1,689,701 -- -- 1,689,701
Issuance of Common Stock options and warrants
for services 388,321 10,000 83,805 1,067,992
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 -- -- 423,220 423,220
Issuance of Redeemable Common Stock, options and
warrants in connection with Development Agreement 2,283,182 663,111 -- 2,946,293
Issuance of Common Stock options and warrants for
Scientific Advisory Board 1,344,686 602,683 -- 1,947,369
Acquired in-process technology -- -- -- 350,000
(Increase) decrease in assets:
Accounts receivables (228,779) (44,653) (145,482) (540,855)
Prepaids and other current assets (151,010) 247,908 (5,832) 73,165
Deposits 17,347 20,739 39,862 (20,125)
Increase in liabilities:
Accounts payable and accrued expenses 40,353 484,585 375,039 1,394,997
Payable to related parties -- -- -- 250,000
Deferred license fees 450,000 -- -- 450,000
------------ ------------ ------------ ------------
Net cash used in operating activities (7,702,583) (6,493,590) (4,298,026) (27,438,004)
------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment and leasehold improvements (1,746,788) (1,153,353) (3,229,101) (6,252,684)
Purchases of intangibles -- (25,750) -- (25,750)
Purchases of short-term investments (7,099,904) (3,368,621) (7,776,880) (25,965,907)
Proceeds from sale of short-term investments 5,284,000 4,964,461 4,004,322 21,445,783
Restricted Cash (15,162,414) -- -- (15,162,414)
------------ ------------ ------------ ------------
Net cash (used in) provided by investing activities (18,725,106) 416,737 (7,001,659) (25,960,972)
------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of Common Stock 1,348,984 5,367,979 4,792,797 22,976,751
Proceeds from issuance of Preferred Stock 9,137,079 -- -- 9,137,079
Proceeds from issuance of Convertible Promissory
Notes and equity instruments (Note 10) 15,000,000 -- -- 15,000,000
Proceeds from the exercise of Common Stock
options and warrants 1,127,510 6,854,843 6,236,980 14,175,472
Principal payment on capital lease (3,792) (3,402) -- (7,194)
------------ ------------ ------------ ------------
Net cash provided by financing activities 26,609,781 12,219,420 11,029,777 61,282,108
------------ ------------ ------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 182,092 6,142,567 (269,908) 7,883,132
CASH AND CASH EQUIVALENT, BEGINNING OF PERIOD 7,701,040 1,558,473 1,828,381 --
------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 7,883,132 $ 7,701,040 $ 1,558,473 $ 7,883,132
============ ============ ============ ============
Cash paid for interest $ 51,944 $ -- $ -- $ 51,944
============ ============ ============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARY
(a development-stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 (Note
3).
Research and development of the OLED technology is being conducted at the
Advanced Technology Center for Photonics and Optoelectronic Materials at
Princeton University and at the University of Southern California ("USC") (on a
subcontract basis with Princeton University), pursuant to a Sponsored Research
Agreement dated August 1, 1994, as amended (the "1994 Sponsored Research
Agreement"), originally between the Trustees of Princeton University ("Princeton
University") and American Biomimetics Corporation ("ABC"), a privately held
Pennsylvania corporation and affiliate of the Company. In October 1997, the
Company entered into a new 5-year Sponsored Research Agreement with Princeton
University and USC (the "1997 Sponsored Research Agreement") for research and
development of the OLED technology (Note 5). Pursuant to a license agreement
dated August 1, 1994 (the "1994 License Agreement") between Princeton University
and ABC, assigned to the Company by ABC in June 1995, the Company has a
worldwide exclusive license to manufacture and market products based on
Princeton University's pending patent application relating to the OLED
technology and the right to obtain a similar license to inventions conceived or
discovered under the 1994 Sponsored Research Agreement and to sublicense such
rights. In October 1997, the Company amended the 1994 License Agreement (the
"1997 Amended License Agreement") to modify certain terms of the license (Note
5).
The Company is also engaged in research, development and commercialization
activities at its 21,000 square foot facility, which is 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 next fiscal year, which will end December 31,
2002. To the extent that Princeton University's research efforts are not
extended past the scheduled agreement termination date of July 31, 2002 or 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.
F-7
2. LIQUIDITY:
As of December 31, 2001, the Company has an accumulated deficit of $47,101,825.
In addition, the Company has incurred losses since its inception and is subject
to those risks associated with companies in the early stages of development. The
completion of the commercialization of the Company's technology may require
funds substantially greater than the Company currently has available. Management
believes that its cash and cash equivalents and short-term investments as of
December 31, 2001 are sufficient to fund its operations through December 31,
2002.
3. MERGER, RECAPITALIZATION AND PUBLIC OFFERING:
On June 22, 1995, a wholly owned subsidiary of the Company consummated an
Agreement and Plan of Reorganization ("Merger Agreement") with a New Jersey
corporation formerly known as UDC. At the time of the merger, UDC was engaged in
the business which is currently being conducted by the Company. Prior to the
merger, the Company was known as Enzymatics, an inactive Pennsylvania
corporation, and was engaged in a business separate from and unrelated to that
of UDC. Enzymatics had incurred significant losses since its inception in 1985
and, notwithstanding a public offering, failed to find significant alternative
sources of financing to enable it to continue its operations on any scale. In
June 1994, the shareholders of Enzymatics approved the sale of substantially all
of its assets to a third party. Management of UDC concluded that merging with a
former publicly traded company, and acquiring access to its shareholder base,
would facilitate its ability to raise additional capital in the private or
public markets. Management of UDC determined that such additional capital would
be necessary to fulfill its financial obligations under the Transfer Agreement
(as herein defined) pursuant to which it obtained certain rights and obligations
related to the OLED technology, obtained funds to commercialize the OLED
technology, fund the acquisition of additional intellectual property rights
useful to the OLED technology and to fund working capital. As of June 22, 1995,
Enzymatics had 523,268 shares issued and outstanding (after giving effect to a
reverse stock split of 10.9672) which were not actively traded. Pursuant to the
Merger Agreement, the former Enzymatics shareholders received 523,268 shares of
the merged entity's Common Stock. Additionally, Nachman, Hays & Associates
(NHA), a consulting firm, received options to purchase 84,234 shares of the
merged entity's Common Stock at an exercise price of $.29 per share (Note 11) as
payment of NHA's consulting services in connection with the wind-down of
Enzymatics. These options were issued to satisfy a liability, which was
reflected on the balance sheet of Enzymatics on the date of the merger. The sole
director of Enzymatics is also a principal of NHA.
The merger was treated, for accounting purposes, as a recapitalization of UDC
whereby UDC issued 523,268 shares of Common Stock to the Enzymatics shareholders
and assumed Enzymatics shareholders' deficit of $184,160. The assets and
liabilities of both companies have been recorded at their historical book values
in these financial statements. The assets of Enzymatics consisted of cash and
its liabilities consisted of payables related to the merger and other
professional fees.
Upon consummation of the merger, UDC's shareholders collectively owned
approximately 92% of the outstanding shares of the merged entity, with the
former Enzymatics shareholders retaining the balance of approximately 8%. UDC
was the surviving corporation in the merger, changed its name to UDC, Inc., and,
as a result of the merger, became a wholly owned subsidiary of Enzymatics. At
the effective time of the merger, Enzymatics changed its name to Universal
Display Corporation. Universal Display Corporation and its wholly owned
subsidiary, UDC, Inc., are herein referred to collectively as the "Company."
Contemporaneous with the merger, the Company and ABC entered into a Technology
Transfer Agreement dated June 22, 1995 (the "Transfer Agreement") pursuant to
which, among other things, ABC assigned the 1994 License Agreement to the
Company, and granted to the Company an exclusive worldwide sublicense to patents
and other intellectual property rights to display technology developed under a
Sponsored Research Agreement dated October 22, 1993 between ABC and Princeton
University (the "1993 Sponsored Research Agreement") in exchange for (i)
reimbursement of ABC's scheduled payments and expenses previously made to
Princeton University under the 1994 Sponsored Research Agreement in the amount
of $674,000 and a payment of $500,000 for the sublicense under the 1993
Sponsored Research Agreement which were charged to research and development
expense; (ii) the Company's assumption of ABC's obligation to pay all future
scheduled payments under the 1994 Sponsored Research Agreement, which were
approximately $1,610,000, plus expenses related thereto estimated to be $500,000
for a total of $2,110,000; and (iii) 200,000 shares of the Company's Series A
Nonconvertible Preferred Stock (Note 9) with a fair value of $350,000.
F-8
Also, contemporaneous with the merger, the Company sold 781,500 units ("Units")
at a price of $2.00 per Unit, in a private placement, which generated proceeds
of $1,513,000, net of offering expenses in the amount of $50,000. Each Unit
consisted of one share of Common Stock and one warrant to purchase one share of
Common Stock at an exercise price of $3.50 per share. Additionally, 125,000
Units with a fair value of $250,000, based upon the price of the Units, were
transferred to a non-affiliate debt holder of ABC to satisfy $250,000 of ABC's
outstanding debt. Therefore, the Company had a receivable of this amount from
ABC. Accordingly, ABC netted this $250,000 receivable against the Company's
payable to related parties. In addition, on July 17, 1995, the Company sold an
additional 207,500 Units, which generated gross proceeds of $415,000. On April
11, 1996, the Company consummated a public offering of 1,300,000 shares of
Common Stock at a price of $5.00 per share and redeemable warrants to purchase
1,495,000 shares of Common Stock at an exercise price of $3.50 per share, at a
price of $.10 per warrant. The Company received net cash proceeds of $5,282,665
from the public offering (excluding $223,263 representing a portion of the
offering expenses previously charged to general and administration expenses).
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The consolidated financial statements include the accounts of Universal Display
Corporation and its wholly owned subsidiary, UDC, Inc. (Note 3). All significant
intercompany transactions and accounts have been eliminated.
Management's Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash, Cash Equivalents and Short-term Investments
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents. 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 $3,925
at December 31, 2001. The gross proceeds from sales and maturities of
investments were $5,284,000 and $4,964,461 for the years ended December 31, 2001
and 2000, respectively. Gross realized gains and losses for the years ended
December 31, 2001 and 2000 were not material.
Fair Value of Financial Instruments
Cash and cash equivalents, short-term investments, restricted cash, contract
research receivables, prepaids and other current assets, accounts payable,
accrued expenses and redeemable Common Stock are reflected in the accompanying
financial statements at fair value due to the short-term nature of those
instruments. The carrying amount of capital lease obligations approximate fair
value at the balance sheet dates. The carrying amount of the convertible
promissory notes approximates fair value at December 31, 2001 (Note 10).
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.
F-9
Property, plant and equipment consists of the following:
December 31,
-----------------------------------
2001 2000
----------- ------------
Office and lab equipment $ 4,652,925 $ 1,742,667
Furniture and fixtures 146,496 102,014
Leasehold improvements 1,055,298 1,034,533
Construction-in-progress 1,226,370 2,464,927
----------- ------------
7,081,089 5,344,141
Less: Accumulated depreciation (1,784,912) (713,884)
----------- ------------
$ 5,296,177 $ 4,630,257
=========== ============
Depreciation expense was $1,124,644, $590,284 and $56,368 for the years ended
December 31, 2001, 2000 and 1999, respectively.
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 for
the Company's facility. Upon completion of construction or commencement of
operation of the lab equipment, the costs associated with such assets will be
depreciated over its estimated useful life.
Acquired Technology
Acquired technology consists of acquired license rights for patents and know-how
obtained from PD-LD, Inc. and Motorola (Note 6). The intangible asset consists
of the following:
December 31,
2001 2000
------------- -----------
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 (2,155,871) (460,799)
------------- -----------
Acquired Technology, net $ 14,794,847 $16,498,919
============= ===========
Acquired technology is amortized on a straight-line basis over its estimated
useful life of ten years. Amortization expense was $1,695,072 and $460,799 for
the years ended December 31, 2001 and 2000, respectively. There was no
amortization expense during 1999.
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 December 31, 2001,
management believed that no revision to the remaining useful lives or write-down
of long-lived assets was required and no such revisions were required in 2001,
2000 and 1999.
Net Loss Per Common Share
Basic 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 years ended December 31, 2001, 2000 and
1999 the effects of the exercise of outstanding stock options and warrants were
excluded from the calculation of diluted EPS as the impact would be
antidilutive.
F-10
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.
Research and development expenses consist of the following:
Year Ended December 31,
----------------------------------------------------------
2001 2000 1999
---------------- ---------------- ----------------
Development and operations in the Company's facility $5,287,884 $3,422,198 $ 1,772,584
Patent application expenses 940,480 1,227,184 854,463
Costs incurred to Princeton University
and Southern California under the 1997 Sponsored
Research Agreements (Note 5) 833,732 733,230 544,450
PPG development agreement (Notes 8 and 11) 2,283,182 663,111 --
Amortization of intangibles 1,695,072 460,799 --
Scientific Advisory Board Compensation (Note 11) 1,344,686 602,683 --
----------- ----------- -----------
$12,385,036 $ 7,109,205 $ 3,171,497
=========== =========== ===========
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. 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 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. Management does not expect that the adoption of SFAS No.
143 will have a significant 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 Company
does not expect the adoption of SFAS No. 144 to have a significant impact on the
consolidated financial statements.
F-11
Statement of Cash Flow Information
The following non-cash investing and financing activities occurred:
Year Ended December 31,
-------------------------------------------------
2001 2000 1999
------------ ------------ ------------
Common Stock issued for the purchase of equipment $ 43,776 $ 387,223 $ 431,000
Unrealized loss on available for sale securities 3,925 -- --
Redeemable Common Stock issued in development
agreement (Note 8) -- 570,114 --
Reclassification of Redeemable Common Stock (Note 8) 570,114 -- --
Common Stock, options and warrants to acquire Common Stock
in development agreement (Note 8) 2,283,182 663,111 --
Conversion of Series C and D Preferred Stock into Common
Stock 10,648 -- --
Deemed dividends to Preferred shareholders
(Note 10) 2,517,336 -- --
Capital lease obligations incurred on equipment -- -- 27,120
Common Stock issued to PD-LD for intangibles -- 1,481,250 --
Common Stock, Series B Preferred Stock, and
warrants issued for Motorola intangibles -- 15,443,718 --
Accrued offering expenses on private placement
transaction -- 311,313 --
Reclassification of accrued expenses to
additional paid-in capital for warrants earned
in 2000 and issued in 2001 (15,111) -- --
------------ ------------ ------------
$ 5,413,870 $ 18,856,729 $ 458,120
============ ============ ============
Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." Deferred tax assets and liabilities are
determined based on the difference between the financial statement and tax bases
of assets and liabilities. Deferred tax assets or liabilities at the end of each
period are determined using the tax rate expected to be in effect when taxes are
actually paid or recovered.
Stock options
The Company accounts for its stock option plans (Note 11) 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 requires
that the Company account for its option and warrant grants to non-employees
based on the fair value of the options and warrants granted.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year
presentation.
F-12
5. SPONSORED RESEARCH AGREEMENT WITH PRINCETON UNIVERSITY:
On October 9, 1997, the Company entered into the 1997 Sponsored Research
Agreement with Princeton University and entered into a 1997 Amended License
Agreement with Princeton University and USC amending its 1994 License Agreement
with Princeton University. The 1997 Sponsored Research Agreement continues and
expands the sponsored research, which commenced in 1994 under which the Company
funds additional research and development work at Princeton University (and at
USC under a subcontract with Princeton University) in OLED technology. The 1997
Sponsored Research Agreement requires the Company to pay up to $4.4 million
commencing on July 31, 1998 through July 31, 2002, which period is subject to
extension. The Company is in the process of negotiating an extension to the 1997
Sponsored Research Agreement with Princeton University and Management believes
that the negotiations will be successful. 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, the Company issued 140,000 Common Shares
and 175,000 warrants to purchase Common Stock to Princeton University as well as
60,000 Common Shares and 75,000 warrants to purchase Common Stock to the
University of Southern California. The Company recorded a charge of $3,120,329
related to the issuance of the Common Stock and warrants to purchase Common
Stock to research and development expenses. The value of the warrants were
determined in accordance with SFAS No. 123, "Accounting for Stock-Based
Compensation." ("SFAS No. 123")
6. ACQUIRED TECHNOLOGY:
On July 19, 2000, the Company, PD-LD, Inc. ("PD-LD") and Princeton University
entered into a Termination, Amendment and License Agreement whereby the Company
acquired all PD-LD's rights to certain issued and pending patents and technology
known as organic vapor phase deposition ("OVPD") in exchange for 50,000 shares
of the Company's Common Stock. Pursuant to this transaction, the Company has
included in its License Agreement with Princeton the exclusive license to all
Princeton patents and technology related to OVPD, whether developed pursuant to
its research agreements with Princeton or otherwise. The acquisition of these
patents had a fair value of $1,481,250 (Note 4).
F-13
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
its Common Stock (valued at $4,412,500), 300,000 shares of its Series B
Convertible Preferred Stock (valued at $6,618,750), and a warrant to purchase
150,000 shares of its Common Stock at $21.60 per share. The warrant becomes
exercisable on September 29, 2001 and will remain exercisable until September
29, 2008. The warrant was recorded at fair market value 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 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 4). In addition, the Company will pay to Motorola a
royalty based on future sales of products incorporating OLED technology (Note
13). 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.
7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
Accrued expenses consist of the following:
December 31,
------------------------------------
2001 2000
---------------- ----------------
Accrued professional fees $ 118,076 $ 239,293
Payroll 145,025 102,914
Utilities 24,511 83,557
Vacation and sick 176,812 100,154
Subcontractor 137,889 --
Research and development agreements 102,473 --
Private placement fees -- 311,313
Interest expense 84,997 --
Construction costs 261,906 --
Other 20,932 12,895
---------------- ----------------
$1,072,621 $ 850,126
8. REDEEMABLE COMMON STOCK, 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 its 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.
On November 11, 2000, in consideration for PPG's services through December 31,
2000, the Company issued 26,448 shares of Redeemable Common Shares and an 11.5%
promissory note in the amount of $535,300. The note was payable if the
Redeemable Common Shares issued were not registered with the SEC by May 31,
2001. The amount of the note was based on the fair market value of the services
rendered by PPG through December 31, 2000. The Company recorded a charge to
research and development expense of $535,500 in 2000. If the note was paid, then
PPG would return the Common Shares previously issued.
F-14
In accordance with the PPG agreement, the Company issued 1,720 shares of Common
Stock on January 31, 2001. The additional shares were issued as a result of the
final accounting for actual costs incurred by PPG. The promissory note was also
increased to reflect actual costs incurred through December 31, 2000.
Accordingly, the Company accrued $34,814 of additional research and development
expense as of December 31, 2000, for these additional shares.
On May 11, 2001, 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 agreed to issue warrants to PPG to
acquire 28,168 shares of Common Stock as part of the consideration for services
performed during 2000. The warrants were earned during 2000, but not issued
until February 2001. 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. The estimated value of the warrants was determined
using the Black-Scholes option-pricing model. The warrants vest immediately,
have an exercise price of $24.28 and a contractual life of seven years.
Accordingly, the Company recorded a charge of $98,286 to research and
development expense during 2000 based on the estimated fair value of the
warrants. The Company recorded this charge based on a measurement date of
December 31, 2000, which is the date upon which the warrants were earned by PPG.
The Company determined the fair value using the Black-Scholes option-pricing
model with the following assumptions: (1) risk free interest rate of 5.3%, (2)
no expected dividend yield, (3) expected life of 7 years, and (4) expected
volatility of 70%.
During the first quarter of 2001, the Company issued 118,824 shares of its
Common Stock to PPG as consideration for services to be rendered during 2001.
During 2001, the Company recorded the issuance of the shares as a charge of
$1,314,640 to research and development expense based on the fair value of the
Common Stock as it was earned.
In accordance with the PPG agreement, the Company issued 3,019 shares of its
Common Stock in February 2002. The additional shares were issued as a result of
the final accounting for actual costs incurred by PPG. 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.
The Company also recorded a charge to research and development expense of
$804,988 during the year ended December 31, 2001. This charge was recorded based
on the estimated fair value of warrants that were earned by PPG during 2001. The
estimated fair value was determined based on the Black-Scholes option-pricing
model. PPG earned warrants to acquire 121,843 shares of Common Stock at an
exercise price of $24.28. The warrants vest immediately and have a contractual
term of seven years. The warrants were issued on February 15, 2002. The Company
determined the fair value of the warrants earned during 2001 using the
Black-Scholes option-pricing model with the following assumptions: (1) risk free
interest rate of 4.5%-5.6%, (2) no expected dividend yield, (3) expected life of
7 years, and (4) expected volatility of 70%-94%.
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 2001 and 2000, the Company recorded a charge of
$155,578 and $7,072, respectively, 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. In
2001 the Company recorded $7,977 in research and development costs related to
these options. The Company determined the fair value of the options earned
during 2001 and 2000 using the Black-Scholes option-pricing model with the
following assumptions: (1) risk free interest rate of 4.8%-5.3%, (2) no expected
dividend yield, (3) expected life of 10 years, and (4) expected volatility of
70%-94%.
F-15
9. SERIES A NONCONVERTIBLE PREFERRED STOCK AND SERIES B CONVERTIBLE PREFERRED
STOCK:
Series A Nonconvertible Preferred Stock
In 1995, the Company issued 200,000 shares of Series A Nonconvertible Preferred
Stock ("Series A") to ABC (Note 3). The Series A has a liquidation value of
$7.50 per share. Series A holders, as a single class, have the right to elect
two of the Company's Board of Directors. The holders of Series A shares are
entitled to one vote per share on matters which shareholders are generally
entitled to vote. The Series A holders are not entitled to any dividends. The
Series A were valued at $1.75 per share, which was based upon an independent
appraisal.
Series B Convertible Preferred Stock
In 2000, the Company issued 300,000 shares of Series B Convertible Preferred
Stock ("Series B") to Motorola (Note 6). The Series B shares rank senior to the
Common Stock and any other capital stock of the Company ranking junior to the
Series B as to dividends and upon liquidation, dissolution or winding up. There
are no restrictions upon the Company to create any other class of stock ranking
equivalent or senior to the Series B. The Series B has a liquidation value of
$21.48 per share, plus accrued and unpaid dividends. Each share of the Series B
Preferred Stock is convertible, at the option of the holder, into such number of
fully paid and nonassessable shares of Common Stock as determined by dividing
the original purchase price by the conversion price applicable to such share
determined on the date the certificate is surrendered for conversion. The
conversion price shall initially be the original issuance price per share of
Common Stock. The Series B is convertible at a rate of 75,000 shares per year
for four years. The conversion price may be subject to change if the Company's
average stock price falls below $12.00 for the thirty- day period preceding two
business days prior to the conversion dates. The Company has the option to pay
the Series B holders an amount of cash equal to the difference between $12.00
and the Average Price (as defined) multiplied by the number of shares of Common
Stock into which the shares of Series B would be convertible. Two business days
prior to the first anniversary date the Company's average stock price for the
preceding thirty business days was $10.81. As such, the original conversion
price was adjusted in accordance with the conversion terms of the Series B, the
conversion price was reduced to $19.25 resulting in an additional 8,256 shares
of Common Stock issuable upon conversion. The incremental shares issuable upon
conversion were accounted for as a contingent beneficial conversion feature
("CBCF") in accordance with EITF No. 00-27. The CBCF was measured by multiplying
the incremental shares by the fair value of the Company's Common Stock on the
commitment date of September 29, 2000. The fair value of the Company's Common
Stock on the commitment date was $22.06 per share. Accordingly, the Company
recorded a CBCF in the amount of $182,127. The CBCF was treated as a deemed
dividend to the Series B holder.
All outstanding shares of Series B shall be converted automatically into shares
of Common Stock after 4 years. The holders of Series B shares are entitled to
that number of votes equal to the largest of whole shares of Common Stock into
which the Series B could be converted on matters which shareholders are
generally entitled to vote. The Series B holders are entitled to dividends that
are declared or paid to the Common Stock holders.
10. RESTRICTED CASH, CONVERTIBLE PROMISSORY NOTES, CONVERTIBLE PREFERRED
STOCK AND WARRANTS TO PURCHASE COMMON STOCK
On August 22, 2001, the Company closed on a private placement financing
transaction with two investors whereby the Company sold two Convertible
Promissory Notes ("Notes"), Series C Convertible Preferred Stock ("Series C"),
and warrants to purchase Common Stock 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.
Notes
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 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 December 31, 2001, the Company is 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.
F-16
A holder of a Note has the right to require the Company to prepay all or a
portion of a Note, plus all accrued but unpaid interest thereon, at any time on
or after:
1. March 28, 2002, if more than $3,750,000 of the principal amount of such Note
is then outstanding; and
2. July 28, 2002, if more than $1,875,000 of the principal amount of such Note
is then outstanding.
The Company has the right to prepay each of the Notes in full at any time by
paying the holder thereof all of the outstanding principal amount of such Notes
and all accrued but unpaid interest thereon.
As the payment on the Notes is outside the Company's control, the Notes have
been classified as a current obligation on the accompanying consolidated balance
sheet as of December 31, 2001.
In the event that the Company sells shares of Common Stock or other securities
convertible into, or exercisable for, shares of Common Stock at a price less
than $13.97 per share, then the 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 in the Notes.
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 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 allocated the proceeds
from the private placement financing transaction to the Series C, Notes and
warrants based on the 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 ("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 year ended December 31, 2001, the Company recognized a non-cash
charge to interest expense of $1,015,418 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
year ended December 31, 2001, the Company recognized a non-cash charge to
interest expense of $674,283 for the amortization of the BCF.
F-17
A reconciliation of the face amount of the Notes and the carrying value at
December 31, 2001 is as follows:
Original value of Convertible Notes $15,000,000
Less:
OID 5,142,994
BCF 3,258,468
-------------
Carrying value on date of issuance 6,598,538
Add:
2001 amortization of OID treated as interest expense 1,015,418
2001 amortization of BCF treated as interest expense 674,283
-------------
Notes carrying value at December 31, 2001 $8,288,239
=============
The OID and BCF will be fully amortized by 2004, at which time the carrying
value of the Notes will equal their face value of $15,000,000.
Series C
The Company issued 5,000 shares of Series C Stock as of August 22, 2001 and
received proceeds of $4,496,477, net of $503,523 in cash offering costs. 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. There
are no dividends on the Series C.
The number of shares of Common Stock issuable upon conversion of a share of
Series C is obtained by dividing the stated value of one share of Series C by
the conversion price then in effect. The initial conversion price of the Series
C was $12.70, subject to certain anti-dilution and other adjustments.
In accordance with APB No. 14, the Company allocated the proceeds from the
Notes, Series C, and warrants based on the 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.
In accordance with EITF No. 00-27 and EITF No. 98-5 and after considering the
allocation of the proceeds to the Series C, the Company determined that a BCF
existed on the Series C. The BCF existed at the commitment date due to the fact
that the carrying value of the Series C, 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 the BCF of $616,793
immediately as the Series C is convertible at the commitment date. The BCF was
recorded in a manner similar to a dividend for the year ended December 31, 2001.
In accordance with EITF No. 00-27 and EITF No. 98-5, as a result of the monthly
increase in the stated price of the Series C, a CBCF existed on the commitment
date of August 22, 2001. The monthly increase in stated price reduces the
conversion price of the Series C so long as the Series C is outstanding. The
CBCF was recorded based upon the increase in the stated price, which results in
additional shares of Common Stock issuable upon conversion, on December 31,
2001. The Company recorded a $163,749 CBCF treated as a deemed dividend to
preferred shareholders in the Consolidated Statement of Operations for the year
ended December 31, 2001.
In November 2001, the Company reduced the conversion price of the Series C from
$12.70 to $9.45. Under the terms of the original conversion privileges the
holders were entitled to receive 393,701 shares of Common Stock upon conversion.
As a result of the reduced conversion price, the Series C holders are entitled
to an additional 135,400 shares of Common Stock upon conversion. The incremental
shares issuable upon conversion were measured using the $8.30 fair value of the
Common Stock on the date of the reduction in the conversion price. As a result
of this, the Company recorded a deemed dividend in the amount of $1,123,808 for
the reduced conversion price of December 5, 2001 (the conversion date).
F-18
On December 5, 2001, the holders converted all 5,000 shares of the Series C into
Common Stock. This was done at the new $9.45 conversion price per share. Upon
conversion the Company issued 535,704 shares of Common Stock.
Series D
On December 3, 2001, the Company issued 5,000 shares of Series D Preferred Stock
("Series D") with a conversion price of $9.45 and warrants to acquire common
stock for an aggregate price of $5,000,000. The terms of the Series D, regarding
voting rights, stated value, increase in stated vale and dividends, were the
same as those of the Series C.
In accordance with APB No. 14, the Company allocated the proceeds from the
Series D and warrants based on their relative fair values. The fair value of the
Series D was based on the fair value of the Common Stock that would be issuable
on a converted basis. As a result, the Company allocated $3,874,931 to the
Series D and $1,125,070 to the warrants.
In accordance with EITF No. 00-27 and EITF No. 98-5 and after considering the
allocation of the proceeds to the Series D, the Company determined that as a
result of the monthly increase in the stated price, a CBCF existed on the Series
D. The monthly increase in stated price reduces the conversion price of the
Series D, so long as the Series D is outstanding. The Company recorded the CBCF
of $98,614 immediately as the Series D is convertible at the commitment date, as
a deemed dividend to preferred shareholders in the Consolidated Statement of
Operations for the year ended December 31, 2001.
On December 5, 2001, the holders converted all 5,000 shares of the Series D into
Common Stock. This was done at the $9.45 conversion price per share. Upon
conversion the Company issued 529,100 shares of Common Stock.
Warrants
In connection with the private placement financing transaction the Company
issued the following warrants to purchase shares of the Company's Common Stock:
Original Original Original
Series Number Exercise Price Expiration date Relative Fair Value
- -------- ---------- ----------------- ------------------ ------------------
I 157,480 $ 15.24 August 22, 2006 $1,186,012
II 157,480 15.24 August 22, 2006 1,125,070
III 429,492 15.24 August 22, 2006 3,234,590
IV 186,114 15.24 August 22, 2008 1,575,714
The Series I, III and IV warrants were exercisable immediately by the holders.
The Series II warrants were exercisable at December 3, 2001. Series I, II and
III warrants cannot be exercised to the extent a holder would then own, together
with its affiliates more than 9.99% of the Company's Common Stock then
outstanding. The warrants listed above have been recorded based on the relative
fair values. Using the Black-Scholes option-pricing model, the Company allocated
$7,121,386 of the cash proceeds received in the private placement transaction to
the warrants. The Company used the Black-Scholes option-pricing model to
determine the fair value of the warrants issued in connection with the financing
transaction. The Company used the following assumptions:
Series
-------------------------------------------------
I II III IV
----------- ----------- --------- ---------
Risk free interest rate 4.6% 5.1% 4.6% 4.9%
Volatility 94% 94% 94% 94%
Expected dividend yield 0% 0% 0% 0%
Expected option life 5 Years 10 Years 5 Years 7 Years
The warrants have been recorded as additional paid-in capital in the
accompanying consolidated balance sheet as of December 31, 2001. The Series IV
warrants were issued as a placement agent's fee.
F-19
Effective November 5, 2001, the Company and the investors agreed to amend the
terms of the private placement transaction and reduced the exercise prices on
the Series I and II warrants to $9.93 per share and the expiration date on the
Series I, II and III warrants were extended to August 22, 2011. This represented
a new measurement date and the Company revalued the warrants on this date. The
difference between the original fair value and the new fair value of the
warrants was recorded as a one-time dividend of $332,245. The new fair value of
the Series I warrants was determined using the Black-Scholes option-pricing
model with the following assumptions: (1) risk free interest rate of 4.5%, (2)
no expected dividend yield, (3) expected life of 10 years, and (4) expected
volatility of 94%.
In December 2001, the Company also 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. As the term, rights and
preferences of the Series C-1 were substantially similar to those of the Series
C, the Company recorded the exchange based upon the carrying value of the Series
C.
A summary of the deemed dividends recorded as a result of this financing
transaction are as follows:
BCF recorded for Series C $ 616,793
Reduced conversion price of Series C 1,123,808
CBCF recorded for Series C 163,749
CBCF recorded for Series D 98,614
Change in the fair value of the Warrants due to the
change in exercise price and extension of life 332,245
----------
$2,335,209
==========
11. SHAREHOLDERS' EQUITY (DEFICIT), STOCK OPTIONS AND WARRANTS:
Shareholders' Equity
In May 1999, the Company completed a private placement and issued 1,414,034
units, each consisting of one share of Common Stock and one warrant, resulting
in net proceeds of $4,792,797. The units were issued at $3.75 per unit. The
shares of Common Stock and the warrants were valued at $2.27 and $1.48,
respectively, based on their relative fair values. The warrants were issued with
an exercise price ranging from $4.28 to $4.31, which was 120% of the approximate
fair value at the grant date.
On July 19, 2000, the Company issued 50,000 shares of unregistered Common Stock
to PD-LD, in accordance with the Termination, Amendment and License Agreement
(Note 6). These shares were recorded at the fair market value of the Common
Stock. Accordingly, the Company recorded an intangible asset of $1,481,250.
On September 29, 2000, the Company issued to Motorola 200,000 shares of Common
Stock, 300,000 shares of Series B and a warrant to purchase 150,000 shares of
Common Stock in accordance with the Termination, Amendment and License Agreement
(Note 6). The Company also issued a warrant to purchase 150,000 shares of Common
Stock as a finder's fee in connection with this transaction. The warrants were
valued using the Black Scholes option-pricing model. Accordingly, the Company
recorded an intangible asset of $15,469,468 (Note 6).
In December 2000, the Company sold 631,527 units in a private placement, each
consisting of one share of Common Stock and one warrant, resulting in gross
proceeds of $5,367,979. Costs of raising the capital were $311,313. The units
were issued at $8.50 per unit. The shares of Common Stock and the warrants were
valued at $4.66 and $3.84 based on their relative fair values, respectively. The
warrants vest immediately, have an exercise price of $10.00 and expire in five
years. In connection with the private placement, the Company issued an
additional 161,000 warrants as finders' fees, which vest immediately, have an
exercise price of $10.00 and expire in five years. The warrants were valued at
$890,722, using the Black-Scholes option-pricing model, which was recorded as a
component of additional paid-in capital. The Company used the following
assumptions in determining the value of the warrants under the Black-Scholes
option-pricing model: (1) 5.2% risk-free interest rate, (2) expected life of 5
years(contractual term), (3) 70% expected volatility, and (4) zero expected
dividend yield.
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 completion of the private placement, the Company issued additional
warrants to purchase 22,500 shares of Common Stock as finders' fees. The
warrants vested immediately, have an exercise price of $10.00 and expire in five
years. The warrants were valued at $551,645, using the Black-Scholes
option-pricing model, which was recorded as a component of additional paid-in
capital. The Company used the following assumptions in determining the value of
the warrants under the Black-Scholes option-pricing model: (1) 4.9% risk-free
interest rate, (2) expected life of 5 years (contractual term), (3) 70% expected
volatility, and (4) zero expected dividend yield.
F-20
In connection with the warrants granted to the Scientific Advisory Board members
in 2000, the Company recorded a charge of $556,612 to research and development
expense for the year ended December 31, 2001 for the vesting of warrants earned
during this period. The warrants issued in 2000 became fully vested in December
2001.
Enzymatics 1992 Stock Option Plan
The stock options granted prior to the merger (Note 1) by Enzymatics under the
1992 Stock Option Plan which have been assumed by the Company were converted
into options to purchase 20,538 shares of Common Stock of the Company at
exercise prices ranging from $11.74 to $29.61 per share. In 1999, 11,992 of such
options expired. The remaining 8,546 options expired during 2001.
1995 Stock Option Plan
In 1995, the directors of the Company adopted the 1995 Stock Option Plan (the
"1995 Plan"), under which a maximum of 500,000 options may be granted at prices
not less than the fair market value of the Common Stock on the date of grant as
determined by the Board of Directors. Through 2001, the shareholders approved an
increase in the number of Common Shares reserved for the 1995 Plan to 2,800,000.
The 1995 Plan provides for the granting of both incentive and nonqualified stock
options to employees, officers, directors and consultants of the Company. The
stock options are exercisable over a period determined by the Board of
Directors, but no longer than ten years after the grant date.
Option Activity
The following table summarizes the stock option activity from inception thorough
December 31, 2001 for all grants under the 1995 Plan:
Year of
Year Granted Exercise Price Expiration Exercised Forfeited Exercisable Outstanding
- ------------------------------------------------------------------------------------------------------------
2001 824,833 8.56-13.900 2011 - - 704,500 824,833
2000 430,250 9.4375-24.375 2010 9,500 2,500 318,587 418,250
1999 479,250 3.375- 9.625 2009 67,817 17,000 354,433 394,433
1998 303,000 3.75- 6.220 2008 21,000 42,000 228,000 240,000
1997 274,500 4.06- 5.250 2007 34,747 - 239,753 239,753
1996 30,000 4.120 2006 14,000 8,000 8,000 8,000
1995 315,000 $ 0.01- 4.000 2005 42,500 - 272,500 272,500
--------- ----------- --------- ----------- ----------
Totals 2,656,833 189,564 69,500 2,125,773 2,397,769
========= ========== ========= =========== ==========
The following tables summarize the stock options grant activity for each year
from inception through December 31, 2001 for grants under the 1995 Plan:
2001 grants and activity through December 31, 2001:
Exercise Year of
Grantee Granted Price Expiration Exercisable Outstanding
- ---------------------------------------------------------------------------------------------
Employees 28,750 $ 10.375 2011 8,750 28,750
Employees and Officers 116,622 10.313 2011 76,622 116,622
Employees 2,000 13.900 2011 2,000 2,000
Employees 12,500 12.000 2011 2,500 12,500
Employees and Officers 111,932 8.560 2011 107,932 111,932
Employees and Officers 10,000 10.375 2011 10,000 10,000
Employees and Officers 63,378 10.313 2011 63,378 63,378
Employees and Officers 500 13.900 2011 500 500
Employees and Officers 301,818 8.560 2011 301,818 301,818
Scientific advisory board 40,000 10.313 2011 40,000 40,000 (A)
Scientific advisory board 60,000 8.560 2011 60,000 60,000 (A)
Consultant 25,000 10.313 2011 5,000 25,000 (B)
Consultant 10,000 9.438 2011 10,000 10,000 (B)
Consultant 10,000 12.000 2011 10,000 10,000 (B)
Consultant 250 10.375 2011 250 250 (B)
Consultant 250 13.900 2011 250 250 (B)
Consultant 5,500 8.560 2011 5,500 5,500 (B)
PPG 26,333 8.560 2011 -- 26,333 (C)
---------- -------- --------
Totals 824,833 704,500 824,833
========== ======== ========
F-21
(A) The Company recorded a charge of $788,074 to research and development
expense in 2001 for options granted to members of the Scientific Advisory
Board. The charge represents the fair value of the options as determined
in accordance with SFAS No. 123. The Company determined the fair value
using the Black-Scholes option-pricing model with the following
assumptions: (1) risk free interest rate of 5.0%-5.4%, (2) no expected
dividend yield, (3) expected life of 10 years, and (4) expected volatility
of 70%-94%.
(B) The Company recorded charges of $175,944 to research and development
expense and $212,377 to general and administrative expense in 2001 for
options granted to consultants. The charge represents the fair value of
the options as determined in accordance with SFAS No. 123. The Company
determined the fair value using the Black-Scholes option-pricing model
with the following assumptions: (1) risk free interest rate of 4.8%-5.6%,
(2) no expected dividend yield, (3) expected life of 10 years, and (4)
expected volatility of 70%-94%.
(C) See Note 8.
2000 grants and activity through December 31, 2001:
Exercise Year of
Grantee Granted Price Expiration Exercised Forfeited Exercisable Outstanding
- ----------------------------------------------------------------------------------------------------------------
Employees 20,000 $ 14.120 2010 -- 2,500 11,500 17,500
Employees 60,000 18.125 2010 2,000 -- 22,000 58,000
Employees 18,397 24.375 2010 -- -- 10,025 18,397
Employees 46,103 24.375 2010 -- -- 19,642 46,103
Employees 5,000 21.688 2010 -- -- 2,000 5,000
Employees 5,000 16.375 2010 -- -- 5,000 5,000
Employees and Officers 163,303 9.4375 2010 7,000 -- 138,636 156,303
Employees and Officers 66,447 9.4375 2010 500 -- 63,784 65,947
Scientific advisory board 20,000 9.4375 2010 -- -- 20,000 20,000(A)
PPG 26,000 9.4375 2010 -- -- 26,000 26,000(B)
-------- ----- ----- --------- ---------
Total 430,250 9,500 2,500 318,587 418,250
======== ====== ===== ========= =========
(A) The Company recorded a charge of $140,036 to research and development
expense in 2000 for options granted to members of the Scientific Advisory
Board. The charge represents the fair value of the options as determined
in accordance with SFAS No. 123. The Company determined the fair value
using the Black-Scholes option-pricing model with the following
assumptions: (1) risk free interest rate of 5.3%, (2) no expected dividend
yield, (3) expected life of 10 years, and (4) expected volatility of 60%.
(B) See Note 8.
1999 grants and activity through December 31, 2001:
Exercise Year of
Grantee Granted Price Expiration Exercised Forfeited Exercisable Outstanding
- -----------------------------------------------------------------------------------------------------------------
Employees 50,000 $ 4.1875 2009 5,000 12,000 16,000 33,000
Employees 1,000 4.1875 2009 -- -- 1,000 1,000
Employees 20,000 3.7500 2009 -- -- 12,000 20,000
Employees 5,000 9.6250 2009 2,000 -- 1,000 3,000
Employees and Officers 227,550 3.8750 2009 23,817 5,000 185,733 198,733
Employees and Officers 53,200 3.8750 2009 10,000 -- 43,200 43,200
Scientific advisory board 40,000 4.1875 2009 -- -- 40,000 40,000
Scientific advisory board 55,000 3.8750 2009 -- -- 55,000 55,000
Consultant 25,000 3.3750 2009 25,000 -- -- -- (A)
Consultant 1,000 4.1875 2009 1,000 -- -- -- (A)
Consultant 1,500 3.8750 2009 1,000 -- 500 500 (A)
--------- ------ ------ ------- --------
Totals 479,250 67,817 17,000 354,433 394,433
========== ======= ======= ======== =========
(A) The Company recorded a charge of $2,956 to general and administrative
expense and $50,849 to research and development expense in 1999 for
options issued to consultants. These charges represented the fair value of
the options as determined in accordance with SFAS No. 123. The Company
determined the fair value using Black-Scholes option-pricing model with
the following assumptions: (1) risk free interest rate of 4.7%, (2) no
expected dividend yield, (3) expected life of 5-7 years, and (4) expected
volatility of 81.48%.
F-22
1998 grants and activity through December 31, 2001:
Exercise Year of
Grantee Granted Price Expiration Exercised Forfeited Exercisable Outstanding
- ------------------------------------------------------------------------------------------------------------------
Employees 5,000 $ 6.22 2008 -- -- 4,000 5,000
Employees 50,000 5.88 2008 -- -- 40,000 50,000
Employees 40,000 3.75 2008 -- 40,000 -- --
Employees and Officers 143,912 4.50 2008 21,000 2,000 119,912 120,912
Employee 9,088 4.50 2008 -- -- 9,088 9,088
Scientific advisory board 55,000 4.50 2008 -- -- 55,000 55,000
------- -------- ------ ------- ---------
Totals 303,000 21,000 42,000 228,000 240,000
======== ======== ====== ======= =========
1997 grants and activity through December 31, 2001:
Exercise Year of
Grantee Granted Price Expiration Exercised Forfeited Exercisable Outstanding
- --------------------------------------------------------------------------------------------------------------
Employees and Officers 42,000 $ 4.06 2007 12,200 - 29,800 29,800
Employees and Officers 137,235 5.25 2007 17,047 - 120,188 120,188
Employees and Officers 10,500 4.06 2007 5,500 - 5,000 5,000
Employees and Officers 29,765 5.25 2007 - - 29,765 29,765
Principal Investigators 10,000 4.06 2007 - - 10,000 10,000(A)
Principal Investigators 45,000 5.25 2007 - - 45,000 45,000(A)
------- ------------ ---- ------------ -------
Totals 274,500 34,747 - 239,753 239,753
======= ============ ==== ============ =======
(A) The Company recorded a charge of $216,000 to general and administrative
expense in 1997 for options issued to Principal investigators. The charge
represents the fair value of the options as determined in accordance with
SFAS No. 123. The Company determined the fair value using the
Black-Scholes option-pricing model with the following assumptions: (1)
risk free interest rate of 4.3%, (2) no expected dividend yield, (3)
expected life of 10 years, and (4) expected volatility of 70%.
1996 grants and activity through December 31, 2001:
Exercise Year of
Grantee Granted Price Expiration Exercised Forfeited Exercisable Outstanding
- --------------------------------------------------------------------------------------------------------------
Employees 20,000 $ 4.12 2006 4,000 8,000 70,000 8,000
Consultant 10,000 4.12 2006 10,000 - - -
-------- ------- ------ ------- ------
Totals 30,000 14,000 8,000 70,000 8,000
======== ======= ====== ======= ======
1995 grants and activity through December 31, 2001:
Exercised Forfeited Exercisable Outstanding
Exercise Year of as of as of as of as of
Grantee Granted Price Expiration 12/31/01 12/31/01 12/31/01 12/31/01
- -------------------------------------------------------------------------------------------------------------
Officer of the Company 70,000 $ 2.00 2005 - - 70,000 70,000
Officer of the Company 5,000 0.01 2005 5,000 - - - (A)
SAB 240,000 4.00 2005 37,500 - 202,500 202,500
-------- ------ ---- ------- ---- -------- -------
-
Totals 315,000 42,500 272,500 272,500
======= ====== ======= =======
(A) The Company recorded a charge of $9,950 to general and administrative
expense in 1995 related for options issued to an officer of the Company.
This charge represents the difference between the deemed value of the
Common Stock, for accounting purposes, and the exercise price of the
options on the date of the grant.
F-23
Other Options
In connection with NHA's services relative to consummation of the merger
discussed in Note 3, in June 1995, the Company granted options to purchase
84,234 shares of Common Stock at an exercise price of $.29 per share to NHA.
These options were used to satisfy a liability reflected on the balance sheet of
Enzymatics on the date of the merger. These options vested immediately on the
date of grant and 59,234 options have been exercised through December 31, 2001.
Accordingly, as of December 31, 2001, 25,000 options remain exercisable. These
options expire in 2005.
The following table summarizes all stock option activity:
2001 2000 1999
------------------------- --------------------------- --------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
----------- -------- ---------- -------- -------- --------
Outstanding at beginning
of year 1,665,599 $ 4.19 1,379,530 $ 4.19 986,272 $ 4.38
Granted 824,833 9.29 430,250 13.19 479,250 3.96
Exercised (56,617) 3.83 (132,181) 3.94 (25,000) 3.52
Forfeited (11,046) 19.70 (12,000) 4.19 (60,992) 5.79
----------- --------- ---------
Outstanding at end of year 2,422,769 7.58 1,665,599 6.57 1,379,530 4.19
=========== ====== ========= ====== ========= =======
Exercisable at end of year 2,177,106 6.94 1,260,371 5.55 973,503 3.97
=========== ====== ========= ====== ========= =======
Available for future grant 128,433 142,210 160,470
======= ======= =======
Weighted average fair value
of options granted $ 6.94 $ 8.28 $ 2.99
====== ====== ======
The weighted average remaining contractual life for options outstanding at
December 31, 2001, 2000 and 1999 was 8 years.
Common Stock Warrants
The following table summarizes all of the warrant activity from inception
through December 31, 2001:
Year of
Year Granted Exercise Price Expiration Exercised Forfeited Exercisable Outstanding
- ------------------------------------------------------------------------------------------------------------
2001 1,156,938 9.93-24.28 2006-2011 -- 8,000 1,148,938 1,148,938
2000 1,589,346 10.00-21.60 2005-2010 49,850 -- 1,509,496 1,539,496
1999 1,602,701 4.28-4.53 2004 1,378,553 8,055 216,093 216,093
1998 525,000 6.38-7.25 2008 -- -- 450,000 525,000
1997 450,000 4.80-7.25 2002-2007 245,357 829 203,814 203,814
1996 3,278,000 3.5-8.25 1999-2006 2,089,156 89,344 1,099,500 1,099,500
1995 1,114,000 $ 3.50 1997 1,114,000 -- -- --
---------- --------- -------- ---------- ---------
Totals 9,715,985 4,876,916 106,228 4,627,841 4,732,841
========== ========= ======== ========== =========
F-24
Warrant Activity
The following tables summarize the warrant activity for each year from inception
through December 31, 2001:
2001 grants and activity through December 31, 2001:
Exercise Year of
Grantee Granted Price Expiration Exercised Forfeited Exercisable Outstanding
- -----------------------------------------------------------------------------------------------------------------
Private Placement 163,704 $ 10.000 2006 -- 8,000 155,704 155,704 (A)
Private Placement finder's
fees 34,500 10.000 2006 -- -- 34,500 34,500
PPG 28,168 24.280 2008 -- -- 28,168 28,168 (B)
Private Placement 744,452 9.930-15.240 2011 -- -- 744,452 744,452
Private Placement
finder's fees 186,114 15.240 2011 -- -- 186,114 186,114
-------- --- ----- --------- ---------
Totals 1,156,938 -- 8,000 1,148,938 1,148,938
========= === ===== ========= =========
(A) Forfeited due to cancellation of warrants
(B) See Note 8
2000 grants and activity through December 31, 2001:
Exercise Year of
Grantee Granted Price Expiration Exercised Forfeited Exercisable Outstanding
- --------------------------------------------------------------------------------------------------------------------
Scientific advisory board 200,000 $ 14.120 2010 -- -- 200,000 200,000(A)
Employee 90,000 16.750 2010 -- -- 60,000 90,000
Acquired Technology 300,000 21.600 2007 -- -- 300,000 300,000(B)
Agents' fees from 99 Private
Placement 215,819 10.000 2005 49,850 165,969 165,969
Private Placement 634,527 10.000 2005 -- -- 634,527 634,527
Private Placement
finder's fees 149,000 10.000 2005 -- -- 149,000 149,000
--------- ------ ----- --------- ---------
Total 1,589,346 49,850 -- 1,509,496 1,539,496
========= ====== ===== ========= =========
(A) See Note 8
(B) See Note 6
F-25
1999 grants and activity through December 31, 2001:
Exercised Forfeited Exercisable Outstanding
Year of as of as of as of as of
Grantee Granted Exercise Price Expiration 12/31/01 12/31/01 12/31/01 12/31/01
- --------------------------------------------------------------------------------------------------------------------------
Private Placement 1,414,034 $ 4.28-4.31 2004 1,218,581 7,953 187,500 187,500
Agents' and finders' fees 188,667 4.28-4.53 2004 159,972 102 28,593 28,593
--------- --------- ----- ------- -------
Totals 1,602,701 1,378,553 8,055 216,093 216,093
========= ========= ===== ======= ========
1998 grants and activity through December 31, 2001:
Exercised Forfeited Exercisable Outstanding
Exercise Year of as of as of as of as of
Grantee Granted Price Expiration 12/31/01 12/31/01 12/31/01 12/31/01
- ----------------------------------------------------------------------------------------------------------------
Employees and Officers 400,000 $ 6.38 2008 -- -- 400,000 400,000
Consultant 100,000 7.00 2008 -- -- 25,000 100,000(A)
Consultant 25,000 7.25 2008 -- -- 25,000 25,000(B)
------- ---- ---- ------- -------
Totals 525,000 -- -- 450,000 525,000
======= ==== ==== ======= =======
(A) Of the 100,000 warrants granted 25,000 vested immediately and the
remaining 75,000 vest based upon the Company's successful entrance into
the Taiwanese market. The Company determined the fair value of these
options on the date of the granted to be $107,559 of which the Company
recorded a charge of $26,890 to general and administrative expenses, which
represented the fair value of the 25,000 vested warrants and the remaining
unamortized portion of the $80,669 is recorded as a prepaid consulting fee
on the accompanying Consolidated Balance Sheets. The Company determined
the fair value using the Black-Scholes option-pricing model with the
following assumptions: (1) risk free interest rate of 5.6%, (2) no
expected dividend yield, (3) expected life of 7 years, and (4) expected
volatility of 81.48%.
(B) In connection with the granting of these warrants the Company recorded a
charge of $127,357 to general and administrative expenses, which
represented the fair value of the warrants as determined in accordance
with SFAS No. 123. The Company determined the fair value using the
Black-Scholes option-pricing model with the following assumptions: (1)
risk free interest rate of 5.5%, (2) no expected dividend yield, (3)
expected life of 7 years, and (4) expected volatility of 81.48%.
1997 grants and activity through December 31, 2001:
Exercised Forfeited Exercisable Outstanding
Exercise Year of as of as of as of as of
Grantee Granted Price Expiration 12/31/01 12/31/01 12/31/01 12/31/01
- ---------------------------------------------------------------------------------------------------------
Princeton Univ and USC
under 1997 --
Sponsored Research
Agreement 250,000 $ 7.25 2007 45,357 829 203,814 203,814(A)
Consultants 200,000 4.80 2002 200,000 -- -- --(B)
-------- -------- --- ------ -------
Totals 450,000 245,357 829 203,814 203,814
======== ======== === ======= =======
(A) The grantees forfeited warrants as a result of a cashless exercise.
(B) In connection with the granting of these warrants the Company charged to
expense, over the three year consulting period, $528,985 to general and
administrative expense. The Company recorded charges in 2000, 1999 and
1998 in the amount of $76,329, $176,328 and $176,328, respectively. The
Company determined the fair value using the Black-Scholes option-pricing
model with the following assumptions: (1) risk free interest rate of 6.2%,
(2) no expected dividend yield, (3) expected life of 10 years, and (4)
expected volatility of 81.48%.
F-26
1996 grants and activity through December 31, 2001:
Exercise Year of
Grantee Granted Price Expiration Exercised Forfeited Exercisable Outstanding
- ---------------------------------------------------------------------------------------------------------
Public Offering 1,495,000 $ 3.500 1999 1,495,000 -- -- --
Underwriter of
Public Offering 130,000 8.250 2001 74,753 55,247 -- --(A)
Underwriter of
Public Offering 130,000 3.675 2001 97,650 32,350 -- --(A)
Third Parties 578,000 4.125 2006 374,613 1,387 202,000 202,000(A)
Employees 925,000 4.125 2006 27,140 360 897,500 897,500(A)
Consultant 20,000 6.000 2006 20,000 -- -- --(B)
---------- --------- ------- ---------- ---------
Totals 3,278,000 2,089,156 89,344 1,099,500 1,099,500
========== ========= ======= ========== =========
(A) The grantees forfeited warrants as a result of a cashless exercise.
(B) In connection with the granting of these warrants the Company recorded a
charge of $25,000 to general and administrative expense, which represents
the fair value of the warrants as determined in accordance with SFAS No.
123. The Company determined the fair value using the Black-Scholes
option-pricing model with the following assumptions: (1) risk free
interest rate of 6.6%, (2) no expected dividend yield, (3) expected life
of 10 years, and (4) expected volatility of 70%.
1995 grants and activity through December 31, 2001:
Exercise Year of
Grantee Granted Price Expiration Exercised Forfeited Exercisable Outstanding
- ------------------------------------------------------------------------------------------------------------------------
Private Placement 1,114,000 $ 3.50 1997 1,114,000 - - -
Pro Forma Disclosure for Stock-Based Compensation
The Company accounts for its employee stock-based compensation plans under APB
Opinion No. 25, "Accounting for Stock Issued to Employees." Had the Company
recognized compensation cost for its stock based compensation plans consistent
with the provisions of SFAS 123, the Company's net loss and net loss per share
would have been increased to the following pro forma amounts:
Year Ended December 31,
------------------------------------------------------
2001 2000 1999
----------- ------------ -----------
Net loss applicable to Common shareholders:
As reported $(18,873,436) $(9,529,046) $(5,125,006)
Pro forma (25,515,682) (11,937,622) (6,000,155)
Net loss per share:
As reported $(1.11) $(0.62) $(0.42)
Pro forma (1.50) (0.78) (0.49)
F-27
The fair value of the options granted is estimated using the Black-Scholes
option-pricing model with the following assumptions:
2001 2000 1999
---- ---- ----
Risk-free interest rate 4.6% 4.7% 6.89%
Volatility 94% 60% 81%
Expected dividend yield 0% 0% 0%
Expected option life 7 years 7 years 7-10 years
Because the SFAS 123 method of accounting has not been applied to options and
warrants granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of cost to be expected in future years.
12. RESEARCH CONTRACTS:
Contract research revenue consists of the following:
December 31,
-----------------------------------------------
2001 2000 1999
---------- --------- ---------
Department of Defense Advanced Research
Projects Agency (DARPA) $ 720,079 $ 186,179 $ 419,536
Small Business Innovative Research (SBIR)
Army 232,957 112,113 --
National Science Foundation (NSF) 105,535 194,464 100,000
---------- --------- ---------
$1,058,571 $ 492,756 $ 519,536
========== ========= =========
13. COMMITMENTS:
Lease Commitments
The Company has several operating lease arrangements for office space and
equipment. Total rent expense was $415,952, $330,320 and $311,998, for the years
ended December 31, 2001, 2000 and 1999, respectively. During 1999, the Company
entered into one capital lease. Minimum future rental payments for operating and
capital leases as of December 31, 2001 are as follows:
Operating Capital
Year Lease Lease
---- ------------- -------------
2002 $327,460 $ 5,421
2003 267,062 4,968
2004 3,147 4,517
2005 2,477 --
2006 and thereafter 1,445 --
-------- -------
$601,591 14,906
========
Less amount representing interest (2,079)
-------
Present value of capital lease $12,827
=======
F-28
Other Commitments
Under the terms of the Motorola license agreement (Note 6), the Company agreed
to make minimum royalty payments. To the extent that the royalties payable based
on sales are not sufficient to meet the minimums, the Company shall pay, at its
discretion, the shortfall in all cash or in cash (50%) and Common Stock (50%)
within 90 days after the end of each two-year period specified below in which
the shortfall occurs. The minimum royalty payments are as follows:
September 29, 2000 - December 31, 2002 $ 150,000
January 1, 2003 - December 31, 2004 $ 500,000
January 1, 2005 - December 31, 2006 $1,000,000
14. INCOME TAXES:
The components of income taxes are as follows:
December 31,
---------------------------------------------------------
2001 2000 1999
---------------- --------------- -----------------
Current $ -- $ -- $ --
Deferred (6,354,493) (3,019,639) (2,063,624)
--------------- -------------- ----------------
(6,354,493) (3,019,639) (2,063,624)
Increase in valuation allowance 6,354,493 3,019,639 2,063,624
--------------- -------------- ----------------
$ -- $ -- $ --
=============== ============== ================
The difference between the Company's federal statutory income tax rate and its
effective income tax rate is primarily due to non-deductible expenses and the
valuation allowance.
As of December 31, 2001, the Company had net operating loss carryforwards of
approximately $18,715,485, which will begin to expire in 2010. The net operating
loss carryforwards differ from the accumulated deficit principally due to the
timing of the recognition of certain expenses. In accordance with the Tax Reform
Act of 1986, the net operating loss carryforwards could be subject to certain
limitations.
F-29
Significant components of the Company's deferred tax assets and liabilities are
as follows:
December 31,
----------------------------------------
2001 2000
------------------ ------------------
Gross deferred tax assets:
Net operating loss carryforwards $ 7,660,868 $ 5,738,172
Capitalized start-up costs 5,781,789 2,710,141
Capitalized technology license 170,000 170,000
Stock options and warrants 1,563,593 181,327
Accruals and reserves 225,945 102,738
Other 103,329 248,653
------------ -----------
15,505,524 9,151,031
Valuation allowance (15,505,524) (9,151,031)
------------ -----------
Net deferred tax assets $ -- $ --
============ ===========
A valuation allowance was established for all of the net deferred tax asset
since the Company has incurred substantial operating losses since inception and
expects additional losses in 2002. The Company's management has concluded that
the realizability of the deferred tax assets is uncertain.
15. DEFINED CONTRIBUTION PLAN:
During 2000, the Company adopted the Universal Display Corporation 401(k) Plan
(the Plan) in accordance with the provisions of Section 401(k) of the Internal
Revenue Code (the Code). The Plan covers substantially all full-time employees
of the Company. Participants may contribute up to 15% of their total
compensation to the Plan, not to exceed the limit as defined in the Code, with
the Company matching 50% of the participant's contribution, limited to 6% of the
participant's total compensation. For the years ending December 31, 2001 and
2000, the Company contributed $83,611 and $52,125 to the Plan, respectively.
16. QUARTERLY SUPPLEMENTAL FINANCIAL DATA (UNAUDITED):
The following tables present certain unaudited consolidated quarterly financial
information for each of the eight quarters in the period ended December 31,
2001. In the opinion of management, this quarterly information has been prepared
on the same basis as the consolidated financial statements and includes all
adjustments (consisting of only normal recurring adjustments) necessary to
present fairly the information for the periods presented. The results of
operations for any quarter are not necessarily indicative of the results for the
full year or for any future period.
Year ended December 31, 2001:
Three Months Ended
---------------------------------------------------------------------------------
March 31 June 30 September 30 December 31
----------------- ----------------- ----------------- ----------------
Revenue.................. $ 200,242 $ 257,159 $ 569,233 $ 226,267
Net loss................. (3,778,979) (4,768,582) (1,911,192) (5,897,347)
Basic and Diluted loss
per share................ (0.23) (0.28) (0.15) (0.45)
Year ended December 31, 2000:
Three Months Ended (restated)
----------------------------------------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
Revenues.................. $ 5,909 $ 126,746 $ 124,812 $ 235,289
Net loss.................. (2,012,136) (2,964,922) (2,074,396) (2,477,592)
Basic and diluted loss per
share.................. (0.13) (0.19) (0.14) (0.16)
F-30