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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
for the fiscal year ended December 31, 2002
OR
[X] 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
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(Exact name of registrant as specified in its charter)
Pennsylvania 23-2372688
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
375 Phillips Boulevard
Ewing, New Jersey 08618
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(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)
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(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 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 to this
Form 10-K [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act) Yes _X_ No ___
The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant, based upon the closing sale price of the
registrant's Common Stock on the Nasdaq National Market on June 28, 2002, was
approximately $118,878,659. For purposes of this calculation, all executive
officers and directors of the registrant and all beneficial owners of more than
10% of the registrant's Common Stock (and their affiliates) were considered
affiliates.
As of March 26, 2003, the registrant had outstanding 21,864,003 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
26, 2003 are incorporated by reference into Part III of this report.
TABLE OF CONTENTS
PART I
ITEM 1. BUSINESS................................................... 3
ITEM 2. PROPERTIES................................................. 12
ITEM 3. LEGAL PROCEEDINGS.......................................... 12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........ 12
PART II
ITEM 5. MARKET FOR REGISTRANT'S 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 DISCLOSURES ABOUT
MARKET RISK................................................ 24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................ 24
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE........................ 24
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT......... 24
ITEM 11. EXECUTIVE COMPENSATION..................................... 24
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS................. 24
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............. 24
ITEM 14. CONTROLS AND PROCEDURES.................................... 24
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K................................................ 25
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CAUTIONARY STATEMENT
CONCERNING FORWARD-LOOKING STATEMENTS
This report and the documents incorporated by reference herein contain some
"forward-looking statements" (as defined in the Private Securities Litigation
Reform Act of 1995) that involve risks and uncertainties. Among other things,
these include, but are not limited to, statements regarding the following:
o the outcomes of the Company's ongoing and future Organic Light Emitting
Device ("OLED") technology research and development activities;
o the Company's ability to access future OLED technology developments of its
academic and commercial research partners;
o the Company's ability to form and continue strategic relationships with
manufacturers of OLEDs and OLED-containing products;
o the protections afforded to the Company by the patents that it owns or
licenses;
o the anticipated success of the Company's OLED technology, materials and
manufacturing equipment commercialization strategies;
o the potential commercial applications of the Company's OLED technologies and
OLED materials, and of OLED-containing products in general;
o future demand for the Company's OLED technologies and OLED materials;
o the comparative advantages and disadvantages of the Company's OLED
technologies and OLED materials versus competing technologies and materials
currently being developed;
o the nature and potential advantages of any competing technologies that may
be developed in the future;
o the payments that the Company expects to receive in the future under its
existing contracts;
o the Company's future capital requirements;
o the amount and type of securities that the Company will issue in the future
to its business partners and others; and
o the Company's future OLED technology licensing and OLED material sales
revenues and results of operations.
In addition, when used in this report and the documents incorporated by
reference, the words "estimate," "project," "believe," "anticipate," "intend,"
"expect" and similar expressions are intended to identify forward-looking
statements. These statements reflect the Company's current views with respect to
future events and are subject to risks and uncertainties that could cause actual
results to differ materially from those contemplated. These risks are discussed
in greater detail in the subsection entitled "Factors That May Affect Future
Results and Financial Condition" under Part II, Item 7 of this report.
You are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date of this report or the documents
incorporated by reference, as the case may be. The Company undertakes no
obligation to update any of these forward-looking statements to reflect events
or circumstances after the date of this report, or to reflect the occurrence of
unanticipated events.
PART I
ITEM 1. BUSINESS
BACKGROUND AND COMPANY HISTORY
Universal Display Corporation (the "Company") is engaged in the research,
development and commercialization of OLED technologies and materials for use in
flat panel displays and other applications.
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. UDC, the
surviving corporation in this merger, became a wholly-owned subsidiary of
Enzymatics and changed its name to "UDC, Inc." Simultaneously with the
consummation of this merger, Enzymatics changed its name to "Universal Display
Corporation." UDC, Inc. functions as an operating subsidiary of the Company
having the same officers and directors.
OVERVIEW OF THE OLED INDUSTRY
The primary market for the Company's OLED technologies and materials is flat
panel displays. The market for flat panel displays has been driven by a number
of market forces, including:
o the increasing popularity of cell phones, personal digital assistants,
portable computers, flat panel monitors and other consumer electronic
devices;
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o the increasing availability of information and visual content in electronic
formats;
o the proliferation of graphical interfaces and emerging multimedia
applications; and
o a growing consumer preference for light weight, thin, low power and high
resolution 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, 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, communications equipment and avionics.
Competition in the flat panel display market, particularly for full color, large
area, high resolution, high information content displays, is based upon various
factors, including image and color quality, range of viewing angle, power
requirements, cost and manufacturability. The dominant technology today for flat
panel displays is liquid crystal display ("LCD") technology, the type of
technology used in most laptop computers. Though it has certain limitations, LCD
technology compares favorably to the more traditional cathode ray tube ("CRT")
technology, which is the technology used in conventional televisions.
Light emitting diodes ("LEDs") are discrete, solid-state semiconductor devices
that emit light when electrical current passes through them. The color of light
emitted by LEDs depends on the particular semiconductor material utilized in the
device. Traditional LEDs are created from inorganic semiconductors. In contrast,
OLEDs utilize an organic semiconductor material.
While LCDs currently dominate the market for flat panel displays, the Company
believes that OLEDs are a promising alternative technology for the future.
Compared to LCD displays, OLED displays are expected to have better image and
color quality, brightness, contrast, response rates and viewing angles, which in
many cases will be comparable or superior to those of CRT displays. OLED
displays also are believed to exhibit a thinner profile and be manufacturable
from lower cost materials; efficient in converting electrical power into light
(thereby requiring low power for operation as compared to backlit LCDs), and
scaleable for use in large area flat panel displays. These features would make
OLED displays useful for a variety of flat panel display applications,
particularly those requiring light weight and portability.
OLED technology is just emerging and there are many companies and institutions
engaged in research, development and commercialization efforts relating to
OLEDs. If successfully developed, OLED displays could have a variety of
applications, particularly in full color, small area displays such as consumer
electronic equipment, vehicular dashboards, cellular phones and other
telecommunication devices, computer games and personal digital assistants.
Potential applications of OLED displays also include use in full color, large
area displays such as laptop and notebook computer screens, computer monitors
and televisions, as well as in transparent and flexible items such as head-up
displays for automobile windshields and bendable electronic displays. OLEDs are
also being investigated for use in applications other than flat panel displays,
such as lasers and lighting sources.
BUSINESS STRATEGY AND MARKETS
The Company's present approach to developing technology and penetrating the OLED
market has three major components:
o the funding of additional OLED technology research by the Company's
research partners at Princeton University, the University of
Southern California and other academic institutions;
o the research, development and validation of reliable OLED
technologies and OLED materials for use in the commercial
manufacture of OLEDs; and
o the licensing of these technologies and the sale of these materials
to experienced manufacturers (who may already have much of the
needed infrastructure in place), suppliers and users of OLEDs and
OLED-containing products, as well as the equipment needed to
manufacture them.
The Company hopes to achieve these goals through internal development efforts
and by entering into various sponsored research agreements, joint development
agreements, licensing arrangements, sales arrangements, evaluation licenses and
other strategic alliances with others. The Company does not presently intend to
become a volume manufacturer of OLEDs, OLED materials or OLED manufacturing
equipment or devices.
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OLED Technologies
The Company is currently focusing its research, development and
commercialization efforts on a number of innovative OLED structure and device
technologies, including those discussed below.
Phosphorescent OLEDs (PHOLEDs(TM))
One of the Company's key technology applications involves the use of novel
materials and device structures that emit light in OLEDs through the process of
phosphorescence, referred to by the Company as PHOLEDs. In conventional OLEDs,
the light emission is based on the process of fluorescence. The use of
phosphorescent materials as dopants in OLEDs enables significantly higher device
efficiencies, thereby substantially reducing power requirements. This is
particularly relevant in hand-held devices where battery power is often a
limiting factor.
Printable Phosphorescent OLEDs (P(2)OLEDs(TM))
There are a number of different processing technologies that can be used for the
manufacture of OLEDs. Among other things, the Company is pursuing the
development of proprietary phosphorescent materials for the manufacture of OLEDs
using solution or liquid processing technologies. Solution processing
technologies, such as spin coating and ink jet printing, involve the use of
spraying or printing apparatus to deposit the organic material in an OLED. The
Company recently entered into a joint development relationship with DuPont
Displays, Inc. to conduct research and development in this area. This
relationship is discussed further below in subsection below entitled
"Relationships with OLED Manufacturers."
Flexible OLEDs (FOLEDs(TM))
Another important technology application for the Company is its technology for
the fabrication of small molecule OLEDs on flexible substrates. Flat panel
displays are commonly built on rigid substrates such as glass. The Company's
flexible OLED or FOLED technology permits the fabrication of small molecule
OLEDs on a flexible substrates. Flexible OLEDs have the potential for being used
in conformable, lighter weight and thinner electronic displays, and ultimately
in future roll-up display products. Flexible OLEDs also may possibly be
fabricated using potentially low cost "roll to roll" processing methods.
Transparent OLEDs (TOLEDs(TM))
Yet another significant technology application for the Company is based on the
fabrication of OLEDs with transparent cathodes. Traditional OLEDs use a
reflective metal cathode and a transparent anode. The Company's transparent
cathode technology, referred to by the Company as its TOLED technology, may
permit the fabrication of transparent OLED displays, such as "heads-up" displays
in windshields. This technology also enables "top emission" OLEDs to be built on
opaque surfaces, including active matrix thin-film transistors, thereby
resulting in devices with potentially better image quality and lifetime than
conventional OLEDs.
Organic Vapor Phase Deposition (OVPD)
The standard process for the manufacture of OLEDs using small molecules,
including PHOLEDs, involves the use of vacuum thermal evaporation ("VTE"). VTE
utilizes evaporation in a high vacuum to deposit the thin layers of organic
materials in an OLED. An alternate process for the manufacture of OLEDs is based
on organic vapor phase deposition ("OVPD") technology. In contrast to VTE, the
OVPD process utilizes a carrier gas stream in a hot walled reactor at low
pressure to precisely deposit the organic material in an OLED. The OVPD process
offers the potential advantage of being more readily scalable to larger area
OLED displays. The Company and its exclusive licensee, Aixtron AG, are actively
developing and qualifying a tool for the fabrication of OLED displays utilizing
OVPD processes. The Company's relationship with Aixtron AG is discussed further
below.
OLED Materials
The Company is developing novel phosphorescent and other materials for use in
OLEDs. Through its commercial relationship with PPG Industries, Inc. and
research being sponsored at Princeton University and the University of Southern
California (all of which are discussed further below in the section entitled
"Research and Development Activities"), the Company has developed, and continues
to develop, proprietary materials for use as phosphorescent emitters in OLEDs.
The evaluation and qualification of these materials is ongoing with OLED
manufacturers.
RESEARCH AND DEVELOPMENT ACTIVITIES
The Company's core activities involve the research and development of OLED
technologies. The Company conducts this research and development both internally
and through various relationships with for-profit entities and academic
institutions. The Company's costs and expenses for research and development
totaled $15,804,267 in 2002, $12,310,036 in 2001 and $7,109,205 in 2000.
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Company Internal Development
The Company conducts a substantial portion of its OLED technology development
activities at its technology development and transfer facility in Ewing, New
Jersey. The Company moved its operations to this facility in the fourth quarter
of 1999 and expanded the facility from 11,000 square feet to 21,000 square feet
in 2001. The facility includes a state-of-the-art OLED display pilot production
line designed to produce up to several hundred 6" x 6" OLED plates per month.
The facility also contains substrate patterning, organic deposition, display
packaging, module assembly and extensive test and characterization equipment in
Class 100 and 100,000 clean rooms, as well as opto-electronics laboratories.
Development and operations expenses for work conducted at this facility totaled
$6,189,638 in 2002, $5,287,884 in 2001 and $3,422,198 in 2000.
The Company currently employs a team of research scientists, engineers and
laboratory assistants at its Ewing facility. This team includes chemists,
physicists, engineers with electrical, chemical and mechanical backgrounds, and
highly-trained experimentalists.
University Sponsored Research
The Company has a long-standing relationship with Princeton University and the
University of Southern California ("USC") for the conduct of research related to
OLED technologies for applications such as displays and lighting. This research
is performed at Princeton University's Advanced Technology Center for Photonics
and Optoelectronic Materials (POEM) under the direction of Dr. Stephen R.
Forrest and at USC's Synthetic Materials Laboratories under the direction of Dr.
Mark E. Thompson. The scope and technical aspects of this research is controlled
by these investigators with advisory input from the Company.
The Company funds the research conducted at Princeton University and USC under a
Research Agreement executed by the Company and the Trustees of Princeton
University in October 1997. This OLED technology research was preceded by
similar research conducted at Princeton University and USC under a Sponsored
Research Agreement entered into by the Company and the Trustees of Princeton
University in 1994. USC conducts its portion of this research under subcontract
between Princeton University and USC. In April 2002, the Company and Princeton
University extended the term of their 1997 Research Agreement through July 2007.
Under the Research Agreement, the Company paid Princeton University $859,339 in
2002, $758,732 in 2001 and $733,230 in 2000. The Company's maximum funding
commitment under the Research Agreement for the period from August 2002 through
July 2007 is $1,495,599 per year. As discussed further below, the Company has an
exclusive license to all patent rights arising out of the research conducted by
Princeton University or USC under the Research Agreement.
In May 2001, the Company entered into a Contract Research Agreement with the
Chitose Institute of Science and Technology ("CIST") of Japan, under which the
Company is funding research at CIST relating to high efficiency OLED materials
and device structures. This collaborative relationship runs through April 2003.
In January 2002, the Company entered into a 13-month Research Agreement with the
Massachusetts Institute of Technology ("MIT"), under which the Company funded
research at MIT relating to high efficiency white OLEDs. This agreement followed
a one-year Research Agreement entered into by the Company and MIT in April 2001,
under which the Company funded research at MIT relating to high efficiency
hybrid organic/inorganic vacuum deposited LEDs.
PPG Industries
In October 2000, the Company and PPG Industries, Inc. ("PPG") entered into a
five-year Development and License Agreement. Under this agreement, a team of
approximately eight PPG scientists and engineers are assisting the Company in
developing and commercializing various OLED materials in which the Company has a
proprietary interest. The Company simultaneously entered into a commercial
Supply Agreement with PPG, which is discussed further below.
PPG is being compensated in the form of the Company's Common Stock for the
services provided under the Development and License Agreement, though under
limited circumstances PPG has the right to demand payment in cash in lieu of
stock. For services rendered by PPG under the Development and License Agreement
during 2002, the Company issued to PPG 344,379 shares of the Company's Common
Stock and seven-year warrants to purchase 344,379 shares of the Common Stock at
a per share exercise price of $10.14, which vested upon issuance. For services
rendered by PPG under this agreement from its inception through the end of 2001,
the Company issued to PPG 150,011 shares of the Common Stock and seven-year
warrants to purchase 150,011 shares of the Common Stock at a per share exercise
price of $24.28, which vested upon issuance.
In January 2003, the Company and PPG amended the Development and License
Agreement to cover the supply of OLED materials for purposes of development and
qualification in the facilities of the Company and its customers. There was no
cash consideration exchanged for this amendment.
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Aixtron AG
In July 2000, the Company entered into a Development and License Agreement with
Aixtron AG of Aachen, Germany ("Aixtron") to jointly develop and commercialize
equipment for the manufacture of OLEDs using the OVPD process. Aixtron is
considered a world leader in the production of manufacturing equipment for LEDs
using metal-organic chemical vapor deposition technology. A pre-production OVPD
manufacturing tool was delivered to the Company's Ewing facility in January
2002. The Company and Aixtron are in the process of upgrading and qualifying
this tool.
Under the Development and License Agreement, the Company granted Aixtron an
exclusive license to produce and sell equipment for use in the manufacture of
OLEDs and other devices using the OVPD process. Aixtron is required to pay the
Company royalties on its sales of this equipment. Purchasers of this equipment
also may obtain rights to use the Company's proprietary OVPD process to
manufacture OLEDs for additional fees.
Government-Funded Programs
The Company has entered into a number of government contracts and subcontracts
for the development of OLED technologies and OLED-containing products. These
include, among others, Phase I Small Business Innovation Research ("SBIR")
program contracts for the demonstration of technical merit and feasibility and
Phase II SBIR program contracts for the development of well-defined prototypes.
On those contracts where the Company is the prime contractor, the Company
subcontracts portions of its work to various entities and institutions,
including Princeton University, USC, Penn State University, L-3 Communications
Corporation and Vitex Systems, a Batelle Memorial Institute Company. All of the
Company's government contracts and subcontracts are subject to termination at
the election of the contracting agency.
The Company derived a substantial portion of its revenues from its government
contract and subcontract work. These revenues totaled $1,468,958 in 2002,
$1,058,571 in 2001 and $492,756 in 2000. The Company's government contracts
include, but are not limited to, those discussed below. For further discussion
of these contracts and their associated revenues see Part II, Item 7 of this
report, including the subsection entitled "Factors That May Affect Future
Results and Financial Condition".
OLED Displays in Head-Mounted Devices
In January 2003, the Company was awarded a two-year, $729,996 SBIR Phase II
program contract by the U.S. Department of the Army to further its development
of conformable and transparent display technologies for use in helmets and other
head-mounted devices. The Company will receive $444,017 for the first year of
the contract, and the remainder is expected to be funded in year two of the
contract. In February 2002, the Company completed its Phase I work on this same
program.
OLED Displays on Metal Foil
In January 2003, the Company was awarded a $69,850 SBIR Phase I program contract
by the U.S. Department of the Army to demonstrate the feasibility of building
rugged, light weight active-matrix OLED displays on durable metal foil.
Roll-Up OLED Displays in Pen-Like Devices
In October 2002, the Company was awarded a two-year $2,013,725 cooperative
agreement by the U.S. Army Research Laboratories ("ARL") to develop technology
for flexible, low-power consumption OLED displays and communication components
for use in advanced, next-generation mobile communication devices, such as a
pen-like device that functions as a portable computer with a roll-up OLED
display. ARL is expected to fund $1,200,000 and the remaining $813,725 would be
funded as a "cost-share" by the Company and its subcontractors. In addition, ARL
has an option to extend the agreement with a third-year, $2,850,000 program in
which ARL would provide additional funds of $2,000,000, with the Company and its
subcontractors contributing $850,000 through cost sharing.
White OLEDs for Lighting
In August 2002, the Company was awarded two $100,000 SBIR Phase I program
contracts by the U.S. Department of Energy to demonstrate the feasibility of
using its proprietary, high-efficiency phosphorescent OLED and flexible OLED
technologies for general lighting applications. One of these programs is to
demonstrate a broadband white light source that consists of a series of
highly-efficient red, green and blue PHOLED stripes which combine to emit white
light. The other program is to demonstrate an innovative PHOLED structure that
emits simultaneously from monomer and aggregate states, leading to a broad
spectrum and high quality white emission.
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Phosphorescent OLED Backlights
In December 2000, the Company was awarded a two-year $729,158 SBIR Phase II
program contract by the Department of Defense for the development of high
efficiency phosphorescent backlights as a result of the success of the Company's
Phase I program for similar work. The term of the Phase II program extends from
February 2001 through March 2003.
Ruggedized OLED Displays
In December 2002, the Company completed its work under a 30-month prime contract
from the U.S. Department of Defense Advanced Research Projects Agency ("DARPA")
for the development of ruggedized full-color flexible OLED displays. Pursuant to
this contract, the Company received $1,600,000 and contributed $2,024,636 in
goods and services through cost sharing. The work under this contract resulted
in the Company delivering to DARPA prototypes of a flexible OLED display.
United States Display Consortium
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 90
members, as well as support from ARL. The Company is one of 16 members on the
Governing Board of the USDC and actively participates on its Technical Council.
OLED MATERIALS MANUFACTURING AND SUPPLY
In October 2000, the Company and PPG entered into a seven-year Supply Agreement.
Under this agreement, the Company has appointed PPG as the Company's exclusive
supplier of its proprietary materials for commercial use in OLEDs. PPG will sell
these OLED materials to the Company, which in turn will resell them to OLED
manufacturers. The current term of the Supply Agreement extends through 2007.
The Company also relies on PPG to supply OLED materials that are resold to the
Company's customers for evaluation purposes. The Company's payment terms for its
OLED material sales are typically net 30 days from the date of invoice. The
revenues received by the Company from its sales of OLED materials totaled
$793,518 in 2002, $194,330 in 2001 and $0 in 2000.
RELATIONSHIPS WITH OLED MANUFACTURERS
The Company has established relationships with several manufacturers of OLEDs
and OLED-containing products to further develop, qualify and license the
Company's OLED technologies and materials for use by these manufacturers in the
commercial production of OLEDs. Payments received by the Company on account of
these relationships (not including sales of OLED materials) totaled $4,266,667
in 2002 and $400,000 in 2001; there were no such payments received in 2000.
Portions of these payments are creditable against license fees paid by these
manufacturers to the Company for commercial license rights granted to them in
the future. The Company's relationships with manufacturers of OLEDs and
OLED-containing products include, but are not limited to, those discussed below.
DuPont Displays
In December 2002, the Company entered into a non-exclusive Joint Development
Agreement with DuPont Displays, Inc. and its parent E.I. DuPont de Nemours and
Company ("DuPont") for the development of liquid-processible phosphorescent
materials and OLEDs. The term of this joint development program runs for three
years. Under the Joint Development Agreement, the Company will have the
exclusive right to sublicense any intellectual property developed by either
party under the program for use with liquid processed OLED displays on rigid
glass substrates. Each of the Company and DuPont is responsible for its own
development costs and expenses in connection with the program.
The Company and DuPont also entered into a Cross-License Agreement in December
2002. Under this agreement, the Company granted DuPont a non-exclusive license
under the Company's background phosphorescent emitter, transparent cathode and
ink jet printing patents to make and sell liquid processed OLED displays on
rigid glass substrates. DuPont paid the Company an up-front license fee and
agreed to pay the Company running royalties on its sales of these displays.
DuPont has the option to reduce the royalty rates on these sales if it elects to
make cash payments to the Company in one or both of January 2004 and January
2005.
In addition, the Company and DuPont entered into a Developed Device Additional
Payment Agreement in December 2002. Under this agreement, the Company granted
DuPont a non-exclusive license to utilize any intellectual property developed by
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the Company under their joint development program for use with liquid processed
OLED displays on rigid glass substrates. For sales of these displays on which
DuPont is not already required to pay the Company a royalty under the
Cross-License Agreement, DuPont agreed to pay the Company running royalties at
rates reduced from those under the Cross-License Agreement.
Samsung SDI
In July 2001, the Company and Samsung SDI Co. Ltd. ("Samsung") entered into a
non-exclusive Joint Development Agreement focusing on portable, low-power OLED
displays for cell phones and other product applications. Under the agreement,
the parties are developing active matrix OLED displays utilizing the Company's
high efficiency phosphorescent materials and top-emitting device structures,
together with Samsung's low temperature poly silicon active matrix architecture.
Samsung and the Company presented the world's first full color active matrix
OLED display utilizing red and green phosphorescent emitting materials at the
40th Annual Society for Information Display Symposium in May 2002. The power
consumption of this display is believed to be approximately 50% less than a
comparable fluorescent OLED display and, under standard usage conditions, 20%
less than a similar backlight LCD.
Sony Corporation
In February 2001, the Company and Sony Corporation ("Sony") entered into a
non-exclusive Joint Development Agreement focusing on high efficiency OLED
displays for use in large area monitors, such as televisions, as well as for
other product applications. Under this Agreement, the parties are developing
active matrix OLED displays utilizing the Company's proprietary high efficiency
phosphorescent material technology and Sony's proprietary low temperature poly
silicon active matrix TAC (Top emission Adaptive Current drive) technology. Each
party is responsible for its own costs and expenses in connection with these
development efforts.
Toyota Industries Corporation
In October 2002, the Company and Toyota Industries Corporation ("TICO") entered
into an OLED Technology Development and Evaluation Agreement under which the
Company agreed to conduct specified development activities with TICO relating to
the use of certain OLED technologies of the Company as sources of white light.
INTELLECTUAL PROPERTY
Along with its scientific and technical personnel, the Company's primary assets
are its intellectual property. This includes numerous U.S. and foreign patents
and patent applications that the Company owns or has the exclusive right to
license. It also includes a substantial body of Company trade secrets and
technical know-how.
Company Patents
The Company's expanded research and development activities, both internally and
through its collaboration with PPG, have led to the Company's recent filing of a
substantial number of patent applications relating to its OLED technologies. As
of December 31, 2002, the Company had 24 issued and pending patents in the
United States, together with numerous foreign counterparts filed in key
countries such as Japan, Taiwan, Korea, China and the countries of the European
Union. The Company's issued U.S. patents are listed on its Internet website at
www.universaldisplay.com, under the heading "Intellectual Property."
Patents of Princeton University and USC
The bulk of the Company's patent rights are exclusively licensed to the Company
on a perpetual basis under an Amended License Agreement executed by and among
the Company, the Trustees of Princeton University and USC in October 1997. As of
December 31, 2002, these licensed patent rights included 70 issued U.S. patents
and 47 U.S. patents pending, together with numerous foreign counterparts in
various foreign countries. The U.S. patents that the Company exclusively
licenses from Princeton University and USC are listed on the Company's Internet
website at www.universaldisplay.com, under the heading "Intellectual Property."
Under the Amended License Agreement, Princeton and USC granted the Company a
worldwide, exclusive license to specified patents and patent applications
relating to OLEDs and OLED technologies. By the terms of the Amended License
Agreement and the 1997 Research Agreement between the Company and the Trustees
of Princeton University, this license grant extends to any patent rights arising
out of the OLED technology research conducted by Princeton University or USC
under the Research Agreement. The Company is free to sublicense these patent
rights to third parties.
Princeton University is responsible for the filing, prosecution and maintenance
of all patent rights licensed to the Company under the Amended License Agreement
pursuant to an Interinstitutional Agreement between Princeton University and
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USC. However, the Company participates closely in this process and has the right
to instruct patent counsel on additional matters to be covered in any patent
applications. The Company is required to bear all costs associated with the
filing, prosecution and maintenance of these patent rights.
The Company is required under the Amended License Agreement to pay Princeton
University royalties for licensed products sold by the Company or its
sublicensees. For licensed products sold by the Company, the Company is required
to pay Princeton University 3% of the net sales price of these products. For
licensed products sold by the Company's sublicensees, the Company is required to
pay Princeton University 3% of the revenues received by the Company from the
sublicense. These royalty rates are subject to renegotiation for products not
reasonably conceivable in 1997 (the inception of the agreement) and developed
under the Research Agreement and Princeton University reasonably determines that
the royalty rates payable with respect to these products are not fair and
competitive. Princeton University shares a portion of these royalties with USC
under their Interinstitutional Agreement.
The Company paid Princeton University minimum royalties under the Amended
License Agreement in the amounts of $50,000 for 2000, $75,000 for 2001 and
$100,000 for 2002. For 2002 and thereafter, this minimum royalty obligation is
$100,000 per year. The Company also is required to use commercially reasonable
efforts to bring the licensed OLED technology to market. However, this
requirement is deemed satisfied provided the Company performs its obligations
under the Research Agreement and, when that agreement ends, the Company invests
a minimum of $800,000 per year in research, development, commercialization or
patenting efforts respecting the patent rights licensed to the Company.
In connection with executing the Research Agreement and the Amended License
Agreement, in 1997 the Company issued to Princeton University 140,000 shares of
the Company's Common Stock and 10 year warrants to purchase an additional
175,000 shares of the Common Stock at an exercise price of $7.25 per share
vesting immediately. The Company also issued to USC 60,000 shares of the Common
Stock and 10 year warrants to purchase an additional 75,000 shares of the Common
Stock at an exercise price of $7.25 per share vesting immediately.
Motorola Patents
In September 2000, the Company entered into a License Agreement with Motorola,
Inc. ("Motorola"), whereby Motorola granted the Company perpetual license rights
to what are now 74 issued U.S. patents relating to Motorola's OLED technology,
together with foreign counterparts in various countries. With limited
exceptions, this license is exclusive in the OLED field even as to Motorola.
This includes the exclusive right to grant sublicenses to third parties. The
issued U.S. patents that the Company has licensed from Motorola are listed on
the Company's Internet website at www.universaldisplay.com, under the heading
"Intellectual Property."
Motorola remains responsible for the filing, prosecution and maintenance of all
patent rights licensed to the Company under the License Agreement, including all
associated costs. Motorola is obligated to keep the Company informed as to the
status of these activities.
The Company is required under the License Agreement to pay Motorola royalties on
gross revenues received by the Company on account of its sales of OLED products
or components, or from its sublicensees on account of their sales of OLED
products or components, whether or not these products or components are based on
inventions claimed in the patent rights licensed from Motorola. The Company has
the option to pay these royalties in either all cash or 50% cash and 50% in
shares of the Company's Common Stock. The Company met its minimum royalty
obligation of $150,000 to Motorola for the 2001-2002 period by issuing to
Motorola 8,000 shares of the Company's Common Stock, valued at $71,816, and
paying Motorola $78,184 in cash. The Company also has minimum royalty
obligations to Motorola of $500,000 in cash or cash and stock for the 2003-2004
period and $1,000,000 in cash or cash and stock for the 2005-2006 period.
In connection with the rights granted to the Company by Motorola, in 2000 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 Common Stock at an exercise price of $21.60 per
share which vested immediately.
DuPont Patents
Under the Joint Development Agreement entered into between the Company and
DuPont in December 2002, DuPont granted the Company a royalty-free, worldwide,
non-exclusive license under certain of DuPont's background OLED patents relating
to phosphorescent emitters to make and sell specific types of liquid processed
OLED displays on rigid glass substrates. However, these license rights are
triggered with respect to each type of OLED display only upon the parties'
achievement of specified milestones under their joint development program. The
Company has the right to sublicense these patent rights to third parties.
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Luxell Technologies Patents
Under a Development and License Agreement between the Company and Luxell
Technologies, Inc. ("Luxell") entered into in April 2001, Luxell granted the
Company a royalty-bearing, exclusive license under Luxell's Black Layer patents
to grant sublicenses to high-volume OLED manufacturers for these manufacturers
to make and sell Black Layer transparent OLED displays.
Intellectual Property under Government Contracts
The Company anticipates that it and its subcontractors may develop patentable
OLED technologies under their various government contracts and subcontracts.
Under these arrangements, the Company or its subcontractor generally can elect
to take title to any patents on these OLED technologies, and to control the
manner in which these patents are licensed to third parties. However, the U.S.
Government has reserved the rights to utilize, and to permit others to utilize,
these technologies and any associated technical data for government purposes,
and, in some cases, for unlimited purposes. In addition, if the government
determines that the Company or its subcontractors have not taken appropriate
steps to achieve practical application of these OLED technologies, the
government may require that they be licensed to third parties.
Trade Secrets and Technical Know-How
The Company has accumulated, and continues to accumulate, a substantial amount
of valuable trade secret information and technical know-how relating to OLEDs
and OLED technologies. Where practicable, the Company shares portions of this
information and know-how with its business partners and OLED manufacturers on a
confidential basis. The Company also employs various methods to protect this
information and know-how from unauthorized use or disclosure, although no such
methods can afford complete protection. Moreover, because the Company derives
some of this information and know-how from academic institutions such as
Princeton University and USC, there is an increased potential for public
disclosure.
COMPETITION
The display industry is characterized by intense competition. Numerous domestic
and foreign companies have developed or are developing LCD and other flat panel
display technologies that will compete with the Company's OLED technology. These
technologies include the plasma, field emissive and vacuum fluorescent display
technologies as well as various others. Substantially all of the companies
pursuing these technologies, including Sony Corporation, NEC Corporation,
Toshiba Matsushita Display Technology Co., Fujitsu Ltd., Hitachi, Ltd., Samsung
Electronics Co., LG Electronics Institute of Technology, AU Optronics Corp., Chi
Mei Optoelectronics Corp., Chunghwa Picture Tubes, Ltd., HannStar Display Corp.,
Quanta Display Inc., Toppoly Optoelectronics Corp. and Innolux Display Corp.
have greater name recognition and financial, technical, marketing, personnel and
research capabilities than the Company.
The Company believes that its OLED technology overcomes various limitations of
these other technologies, such as high power consumption, high temperature
manufacturing conditions, poor display contrasts and limited viewing angles.
However, these companies may ultimately succeed in developing competing
technologies and applications that are superior to the Company's OLED
technology.
In addition, a number of companies, including those mentioned above and Eastman
Kodak Company, Pioneer Corporation, Sharp Electronics Corporation, Sanyo
Electric Co., Samsung SDI Co., Samsung NEC Mobile Display Co., TDK Corporation,
RiTdisplay Corporation, Mitsubishi Chemical Corporation, Lite Array, Inc.,
Nippon Seiki Co., Seiko Epson Corporation, Dupont Displays, Inc., Cambridge
Display Technology, Opsys, Ltd., TECO Optronics Corp. and Idemitsu Kosan Co.,
are engaged in research, development and commercialization activities with
respect to technology using OLEDs. In particular, Pioneer Corporation,
RiTdisplay Corporation, Philips Electronics N.V. and other companies are
presently manufacturing OLED products using OLED technologies other than those
of the Company. Moreover, Eastman Kodak Company ("Kodak") has licensed its
competing OLED technology to OLED display manufacturers, and Kodak and Sanyo
Electric Co. are working through a joint venture, SK Display Corporation, to
manufacture OLED displays utilizing this technology. The Company cannot be sure
that its OLED technology will ultimately be adopted for commercial usage, or
that the Company will be able to compete successfully with Kodak or other
companies due to their established name recognition and greater resources.
ENVIRONMENTAL PROTECTION COMPLIANCE
The Company is not aware of any current federal, state or local environmental
compliance regulations that have a material effect on its business activities.
The Company has not expended any capital to comply with any environmental
protection statutes and does not anticipate incurring any such expenditures in
the future.
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EMPLOYEES
As of December 31, 2002, the Company had 40 full-time employees and one
part-time employee, none of whom are unionized. The Company believes that its
relations with its employees are good.
INTERNET SITE
The Company's Internet website can be found at www.universaldisplay.com. The
Company makes available free of charge, on or through its website, access to its
annual report on Form 10-K, its quarterly reports on Form 10-Q, its current
reports on Form 8-K and any amendments to those reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably
practicable after such materials are filed with, or furnished to, the SEC.
ITEM 2. PROPERTIES
The Company's corporate offices and research and development facility is located
at 375 Phillips Boulevard in Ewing, New Jersey. The Company currently leases
approximately 21,000 square feet of space at this facility. The current term of
this lease runs through December 31, 2003, and management expects to renew the
term of the lease when the current term ends. The Company also leases
approximately 900 square feet of office space in Coeur D'Alene, Idaho.
ITEM 3. LEGAL PROCEEDINGS
The Company is not currently a party to any legal proceedings of a material
nature.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
No matters were submitted by the Company to a vote of its security holders in
the fourth quarter of 2002.
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 67 Chairman of the Board, Chief Executive Officer and
Director
Steven V. Abramson 51 President, Chief Operating Officer and Director
Sidney D. Rosenblatt 55 Executive Vice President, Chief Financial Officer
Treasurer, Secretary and Director
Julia J. Brown 42 Vice President and Chief Technology Officer
The Company's Board of Directors has elected these executive officers to hold
office until their successors are duly elected and qualified.
Sherwin I. Seligsohn has been Chairman of the Board and Chief Executive Officer
of the Company since the Company's inception. He funded and was President of the
Company until May 1996. In addition, 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 ("WUNS"). 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 and has been a member of the Company's Board of
Directors since May 1996. He is also a member of the Board of Directors of
Global and a consultant to 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 is a member of the Board of Governors of the United
States Display Consortium.
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Sidney D. Rosenblatt has been Executive Vice President, Chief Financial Officer,
Treasurer and Secretary of the Company since June 1995, and has been a member of
the Company's 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 the Company's Vice President and Chief Technology
Officer since June 2002. She joined the Company in June 1998 as its Vice
President of Technology Development. From November 1991 to June 1998, Dr. Brown
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 and is a Senior Member of the IEEE.
Dr. Brown has served on numerous technical conference committees and is
presently a member of the Society of Information Display.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is listed on the Nasdaq National Market under the
symbol PANL. The following table sets forth the high and low bid quotation of
the Company's Common Stock as reported by the Nasdaq National Market for the
periods indicated.
High Close Low Close
------------- ------------
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
2002
First Quarter $ 11.78 $ 8.17
Second Quarter 11.80 8.30
Third Quarter 8.30 4.95
Fourth Quarter 11.60 5.76
As of March 26, 2003, there were more than 300 holders of record of the
Company's Common Stock. The Company did not declare any cash dividends on its
Common Stock during 2001 or 2002, and does not expect to pay any cash dividends
to holders of its Common Stock in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
The following selected condensed 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 Financial Condition and Results of Operations,"
included elsewhere in this filing and incorporated herein by reference.
Fiscal Year Ended December 31,
------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
------------- ------------- ------------- ------------- --------------
Operating Results:
Total revenue........................... $ 2,445,272 $ 1,252,901 $ 492,756 $ 519,536 $ 368,794
Research and development expense........ 15,804,267 12,310,036 7,109,205 3,171,497 1,419,394
General and administrative expense...... 4,754,850 3,915,854 3,261,113 2,727,856 1,933,976
Net loss................................ (31,019,201) (16,356,100) (9,529,046) (5,125,006) (2,793,842)
Net loss attributable to Common
shareholders................. (32,972,680) (18,873,436) (9,529,046) (5,125,006) (2,793,842)
Net loss per share, basic and diluted... (1.71) (1.11) (0.62) (0.42) (0.27)
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Balance Sheet Data:
Total assets............................... $39,639,216 $48,569,569 $32,079,794 $10,316,850 $3,078,994
Current liabilities........................ 2,866,759 10,464,188 1,670,016 873,761 495,320
Capital lease obligations.................. 8,599 12,827 16,619 20,021 --
Shareholders' equity....................... 33,668,571 38,096,782 29,826,804 9,426,470 2,583,674
Other Financial Data:
Working capital............................ $18,541,596 $17,994,232 $9,252,130 $5,704,913 $2,429,390
Capital expenditures....................... 1,169,945 1,790,564 1,540,577 3,680,122 26,689
Acquired technology........................ -- -- 16,924,968 -- --
Weighted average Common Shares, basic and
diluted.................................. 19,227,697 16,994,537 15,260,837 12,269,943 10,310,353
Shares of Common Stock outstanding......... 21,525,412 18,093,124 16,440,286 13,714,563 10,312,943
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Since inception, the Company has been exclusively engaged, and for the
foreseeable future expects to continue to be exclusively engaged, in funding and
performing research and development activities related to OLED technologies and
associated materials, and in attempting to commercialize these technologies and
materials. The Company has incurred significant losses since its inception,
resulting in an accumulated deficit of $80,074,505 as of December 31, 2002. The
rate of loss is expected to increase as the Company's activities increase, and
losses are expected to continue for the foreseeable future and until such time,
if ever, as the Company is able to achieve, from the commercial licensing of its
OLED technologies and sale of its OLED materials, revenues that are sufficient
to support its operations.
RESULTS OF OPERATIONS
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001
The Company had a net loss attributable to holders of Common Stock of
$32,972,680 (or $1.71 per share) for the year ended December 31, 2002, compared
to a net loss attributable to holders of Common Stock of $18,873,436 (or $1.11
per share) for the year ended December 31, 2001. The increase in net loss
attributable to holders of Common Stock is primarily attributed to:
o an increase in cash and non-cash research and development expenses;
o an increase in non-cash interest expense on convertible promissory
notes issued by the Company in August 2001, and the incurrence of
non-cash expenses relating to the conversion and extinguishment of
these notes (see Note 10 of the Notes to Consolidated Financial
Statements); and
The Company earned $1,468,958 in contract research revenue from the U.S.
Government in 2002, compared to $1,058,571 in 2001. The increase is primarily
due to the Company's commencement of work under six new government contracts in
2002, with work under four of these contracts beginning in the third and fourth
quarters of 2002. In 2001, contract revenue was derived from three government
contracts, one of which was completed in the third quarter of 2001. In 2002,
contract revenue was derived from the following government contracts:
o $695,468 recognized under a 30-month, $2,977,471 Phase I contract
received from the U.S. Department of Defense Advanced Research
Projects Agency ("DARPA"), which commenced in June 2000 and was
completed in December 2002,
o $398,667 recognized under a 24-month, $729,158 SBIR Phase II
contract received from the Department of Defense ("DoD"), which
commenced in February 2001,
o $132,000 recognized under a $132,000 subcontract with Princeton
University, pursuant to a 24-month, $700,000 prime contract
Princeton University received from DARPA, which commenced in June
2001, however work on the contract commenced in 2002,
o $115,907 recognized under a 24-month, $2,013,725 cooperative
agreement received from the U.S. Army Research Laboratories ("ARL"),
which commenced in August 2002,
o $69,951 recognized under a 12-month $69,951 SBIR Phase I contract
received from the U.S. Department of the Army, which commenced in
February 2002,
-14-
o $32,339 recognized under a 9-month, $100,000 SBIR Phase I contract
received from the U.S. Department of Energy ("DoE"), which commenced
in July 2002,
o $13,413 recognized under a subcontract with Princeton University,
pursuant to a 24-month $600,000 prime contract Princeton University
received from ARL, which commenced in July 2002 and
o $11,213 recognized under a 9-month, $100,000 SBIR Phase I contract
received from DoE, which commenced in July 2002.
The Company earned $793,518 from its sales of OLED materials for evaluation
purposes in 2002, compared to $194,330 in 2001. The increase in this amount is
mainly due to an increased volume of OLED materials purchased for evaluation by
potential OLED manufacturers, including the Company's current joint development
partners. The Company commenced sales of OLED materials for evaluation purposes
in 2001.
During 2002, the Company received non-refundable cash payments of $4,266,667 in
the aggregate in connection with its joint development, technology development
and evaluation and license agreements compared to $400,000 in 2001. The Company
recognized revenues of $182,796 of this amount as fees for technology
development and evaluation, with the remainder being recorded as unearned
revenue. The increase in these payments resulted from the Company entering into
new agreements of this nature in 2002 and receiving additional amounts under
such agreements that were in place during 2001.
During 2002, the Company sold approximately $3 million of it net operating
losses (NOLs) to New Jersey under the Technology Tax Certificate Transfer
Program. The Company received $225,657 for the sale of the NOLs and recorded it
as other revenue. The Company has not sold any of its NOLs in the past but may
sell more in the future.
The Company incurred research and development expenses of $15,804,267 for the
year ended December 31, 2002, compared to $12,310,036 for the year ended
December 31, 2001. The increase is mainly attributed to the following:
o The Company incurring costs in 2002 in the amount of $6,189,638 for
further development and operation of the Company's facility in
Ewing, New Jersey, compared to $5,287,884 in such costs during 2001.
The increase is mainly attributable to increased salaries and costs
incurred in connection with, and as a result of, the expansion of
this facility.
o The Company incurring costs in 2002 in the amount of $1,282,803 for
the preparation, filing and prosecution of patent applications and
for other intellectual property rights protection, compared to
$940,480 in such costs during 2001. The increase is attributable to
increased number of patents filed in 2002 as compared to 2001.
o The Company incurring non-cash charges in the amount of $5,487,515
during 2002 in connection with its Development and License Agreement
with PPG Industries, Inc. ("PPG"), compared to $2,283,182 in similar
charges during 2001. The increase is due to the Company issuing
361,024 shares of its Common Stock, warrants to purchase 361,024
shares of its Common Stock to PPG and options to purchase 30,000
shares of its Common Stock to PPG employees for services performed
in 2002, as compared to the Company having issued 121,843 shares of
its Common Stock, warrants to purchase 121,843 shares of its Common
Stock to PPG and options to purchase 26,333 of its Common Stock to
PPG's employees for services performed in 2001. For further
discussion, see Note 8 of the Notes to Consolidated Financial
Statements.
o The Company incurring non-cash charges in the amount of $289,900
during 2002 for options granted to its Scientific Advisory Board
(the "SAB"), compared to similar charges of $1,344,686 during 2001
for the vesting of warrants issued to the SAB in 2000 and for
options granted to the SAB in 2001. The decrease is due mainly to
the warrants issued in 2000 becoming fully vested in 2001. For
further discussion, see Note 11 of the Notes to Consolidated
Financial Statements.
General and administrative expenses for the Company were $4,754,850 for the
year ended December 31, 2002, compared to $3,915,854 for the year ended December
31, 2001. The increase in these expenses is mainly due to increased salaries and
costs incurred in connection with, and as a result of, the expansion of the
Company's facility in Ewing, New Jersey. The Company also experienced an
increase in marketing costs, including costs relating to public relations and
shareholder services.
In September 2002, $7,000,002 of the $15,000,000 in convertible promissory notes
that had been issued by the Company in August 2001 (the "Notes") were converted
into shares of the Company's Common Stock, with the remaining amount being
repaid by the Company in cash. As of the date of conversion and repayment, the
$15,000,000 face value of the Notes exceeded their then-carrying value due to an
unamortized original issuance discount (OID) and beneficial conversion feature
(BCF) on the Notes. As a result, upon the conversion and repayment of the Notes,
the Company recognized a non-cash debt conversion and extinguishment expense of
$10,011,780 related to the unamortized portion of the OID and BCF and the
intrinsic value of the Notes repurchased. In the same period in 2001, there were
no such expenses. For further discussion, see Note 10 of the Notes to
Consolidated Financial Statements.
-15-
The Company's interest expense was $3,298,589 for the year ended December 31,
2002, compared to $1,848,142 for the year ended December 31, 2001. The increase
is primarily due to amortization of the original issuance discount (OID) and the
beneficial conversion feature (BCF) of the Notes. For further discussion, see
Note 10 of the Notes to Consolidated Financial Statements.
In September 2002, the conversion price of the Series B Convertible Preferred
Stock issued to Motorola in September 2000 was adjusted in accordance with the
Certificate of Designations for this stock. The Company accounted for this
adjustment as a contingent beneficial conversion feature ("CBCF"). As a result,
the Company recorded the CBCF as a deemed dividend in the amount of $1,953,479.
In 2001, the adjustment resulted in a deemed dividend of $182,127. For further
discussion, see Note 9 of the Notes to Consolidated Financial Statements.
In August 2001, the Company completed a private placement financing transaction
with institutional investors for the purchase of the Notes, Convertible
Preferred Stock and warrants to purchase the Company's Common Stock. As a result
of this financing transaction and the conversion of the preferred stock into
shares of the Company's Common Stock in December 2001, the Company recorded
deemed dividends in the amount of $2,335,209 in 2001. In 2002, the Company
recorded no such deemed dividends.
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000
The Company had a net loss attributable to Common Stock shareholders of
$18,873,436 (or $1.11 per share) for the year ended December 31, 2001, compared
to a net loss attributable to Common Stock shareholders of $9,529,046 (or $0.62
per share) for the year ended December 31, 2000. The increase in net loss
attributable to Common Stock shareholders was primarily attributed to the
following:
o an increase in cash and non-cash research and development expenses;
o an increase in non-cash interest expenses due to convertible
promissory notes issued by the Company in August 2001 (see Note 10
of the Notes to Consolidated Financial Statements); and
o non-cash deemed dividends associated with a private placement
completed in August 2001 (see Note 10 of the Notes to Consolidated
Financial Statements).
The Company earned $1,058,571 in contract research revenue from the U.S.
Government in 2001, compared to $492,756 in 2000. The increase was primarily due
to the Company being awarded and commencing work on additional government
contracts. In 2001, contract revenue was derived primarily from the following
government contracts:
o $723,034 recognized under an 24-month, $2,977,471 Phase I contract
received from DARPA, which commenced in June 2000,
o $225,079 recognized under a 24-month, $729,158 SBIR Phase II
contract received from DoD, which commenced in February 2001, and
o $105,536 recognized under a two-year, $400,000 Phase II contract
from the National Science Foundation under the Small Business
Technology Transfer Program, which commenced in October 1999 and was
completed in September 2001.
The Company earned $194,330 from its sales of OLED materials for evaluation
purposes in 2001, compared to no such earnings in 2000. The Company commenced
these sales in 2001.
During 2001, the Company received non-refundable cash payments of $400,000 in
the aggregate in connection with joint development and technology evaluation
agreements, all of which was recorded as unearned revenue. In 2000, the Company
had no such agreements in place.
The Company incurred research and development expenses of $12,310,036 for the
year ended December 31, 2001, compared to $7,109,205 for the year ended December
31, 2000. The increase was mainly attributed to the following:
o The Company incurring costs in 2001 in the amount of $5,287,884 for
the development and operation of the Company's facility in Ewing,
New Jersey, compared to $3,422,198 in such costs during 2000. The
increase was mainly attributable to the expansion of the Company's
research and development team and increased costs associated with an
additional 10,000 square feet added to the facility in April 2001.
o The Company incurring non-cash charges in the amount of $2,283,182
during 2001 in connection with the Development and License Agreement
with PPG, compared to $663,111 in similar charges during 2000. The
increase was mainly due to timing of services performed, since work
under this agreement had only commenced in October 2000. For further
discussion, see Note 8 of the Notes to Consolidated Financial
Statements.
-16-
o The Company incurring non-cash charges of $1,695,072 for
amortization of the Company's acquired technology, compared to
similar charges of $460,799 in 2000. The increase was due to the
timing of the Company's acquisition of this technology. Amortization
commenced on the date of the acquisition. For further discussion,
see Note 6 of the Notes to Consolidated Financial Statements.
o The Company incurring non-cash charges of $1,344,686 for warrants
issued to the SAB in 2000 and options granted to the SAB in 2001,
compared to $602,683 in similar charges for 2000. The increase was
due to the required accounting treatment for the vesting of warrants
and the issuance of options. The warrants became fully vested as of
December 31, 2001. For further discussion, see Note 11 of the Notes
to Consolidated Financial Statements.
General and administrative expenses for the Company 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 was mainly due to
increased salaries and costs associated with expansion of the Company's facility
in Ewing, New Jersey and the Company's hiring of additional employees.
In August 2001, the Company completed a private placement financing transaction
with institutional investors for the purchase of the Notes, Convertible
Preferred Stock and warrants to purchase the Company's Common Stock. As a result
of this financing transaction and the conversion of the preferred stock into
shares of the Company's Common Stock in December 2001, the Company recorded
deemed dividends in the amount of $2,335,209 in 2001. In 2000, the Company
recorded no such deemed dividends.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2002, the Company had cash and cash equivalents of
$15,905,416 and short-term investments of $4,662,898. This compares to cash and
cash equivalents of $7,883,132, short-term investments of $4,516,199 and
restricted cash of $15,162,414 as of December 31, 2001.
During 2002, cash used in operating activities was $4,764,265 as compared to
$7,702,583 in 2001. This decreased use of cash in operating activities was
mainly due to an increase in deferred license fees and deferred revenues. In
2002, the Company received non-refundable cash payments of $4,266,667 in the
aggregate in connection with its new and existing joint development, technology
development and evaluation and license agreements. In 2001, the Company
received non-refundable cash payments of $400,000 in the aggregate in connection
with its joint development and technology evaluation agreements, all of which
was recorded as unearned revenue.
Also during 2002, the Company received cash proceeds of $104,232 as a result of
the exercise of warrants and options to purchase 22,533 shares of the Company's
Common Stock. During 2001, warrants and options to purchase 271,431 shares of
the Company's Common Stock were exercised, resulting in cash proceeds to the
Company of $1,127,510. During 2000, warrants and options to purchase 1,754,353
shares of the Company's Common Stock were exercised, resulting in cash proceeds
to the Company of $6,854,843.
In August and September 2002, the Company completed registered direct offerings
(the "Offerings") of 1,277,014 and 383,452 shares, respectively, of the
Company's Common Stock at $5.09 per share and $5.41 per share, respectively. The
Offerings resulted in aggregate proceeds to the Company of $8,055,186, net of
$519,288 in costs associated with completion of the Offerings.
In August 2001, the Company sold in a private placement transaction 5,000 shares
of Series C Convertible Preferred Stock and warrants to purchase shares of the
Company's Common Stock, resulting in net cash proceeds of $4,496,477. In
December 2001, the Company completed the second tranche of this private
placement by selling 5,000 shares of Series D Convertible Preferred Stock and
warrants to purchase shares of the Company's Common Stock, resulting in
additional net cash proceeds of $4,640,602. In December 2001, all shares of
Series C and Series D Convertible Preferred Stock were converted into Common
Stock. For further discussion, see Note 10 of the Consolidated Financial
Statements.
In the same transaction, the Company issued secured convertible promissory notes
(the "Notes") that resulted in the Company receiving restricted cash proceeds of
$15,000,000 (the "Notes"). In September 2002, $7,000,002 of the Notes were
converted into 1,375,246 shares of the Company's Common Stock, with the balance
of $7,999,998 of the Notes being repaid by the Company in cash. As a result, the
Company received $6,180,000 in cash, net of costs associated with conversion and
repayment of the Notes, the use of which was previously restricted. The Company
has no restricted cash as of December 31, 2002.
-17-
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. The units were issued at $8.50 per unit and the
transaction resulted in net cash proceeds to the Company of $5,367,979. In the
first quarter of 2001, the Company received additional net cash proceeds of
$1,348,984 from the completion of this private placement transaction through the
issuance of an additional 158,704 units.
In the fourth quarter of 2001, the Company commenced construction on the
expansion of its current facility in Ewing, New Jersey. This construction was
completed in the first quarter of 2002. As of December 31, 2002, the Company had
incurred costs of $2,023,000 relating to the construction and purchase of
equipment for the expansion.
Working capital increased to $18,541,596 at December 31, 2002 from working
capital of $17,994,232 at December 31, 2001. The net increase is due primarily
to a decrease from conversion and repayment of the Notes and an increase from
the receipt of cash payments in connection with the Company's joint development,
technology development and evaluation and license agreements. The Company's net
cash used in operating activities was $4,764,265, $7,702,583, and $6,493,590 in
2002, 2001 and 2000, respectively. Non-cash expenses related to the issuance of
Common Stock, warrants and options, and the amortization of discounts relating
to the issuance, conversion and repayment of convertible debt (see Note 10 of
the Notes to Consolidated Financial Statements) were $19,162,516, $5,705,890 and
$1,275,794 in 2002, 2001 and 2000, 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, cash equivalents and short term investments to meet its obligations into
2004. Management believes that potential additional financing sources for the
Company include long-term and short-term borrowings, public and private sales of
the Company's equity and debt securities and receipt of cash upon the exercise
of warrants. It should be noted, however, that substantial additional funds will
be required in the future for research, development and commercialization of the
Company's OLED technologies and OLED materials, to obtain and maintain patents
and other intellectual property rights in these technologies and materials, and
for working capital and other purposes, the timing and amount of which are
difficult to ascertain. For example, under the Company's Research Agreement with
Princeton University, the Company is required to pay Princeton University
$1,495,599 per year through July 2007. There can be no assurance that additional
funds will be available to the Company when needed, on commercially reasonable
terms or at all.
CRITICAL ACCOUNTING POLICIES
Management believes the following represent the Company's critical accounting
policies:
Revenue Recognition
Contract research revenues represent reimbursements by the U.S. Government for
all or a portion of the research and development costs the Company incurs
related to its government contracts. Revenues are recognized proportionally as
the research and development costs are incurred or as defined milestones are
achieved.
Development chemical revenues represent sales of OLED materials to potential
OLED manufacturers for evaluation and product development purposes. These
revenues are recognized at the time of shipment and passage of title to the OLED
materials. The customer does not have the right to return the materials.
The Company also receives non-refundable advanced license payments under certain
of its joint development and technology evaluation agreements. These payments
are deferred until a license agreement is executed or negotiations have ceased
and there is no likelihood of executing a license agreement with the other
party. If a license agreement is executed, these revenues will be recorded over
the expected life of the licensed technology; otherwise, they will be recorded
at the time negotiations with the other party show no further likelihood of
success.
Valuation of Acquired Technology
The Company continually reviews its acquired OLED technologies for events or
changes in circumstances that might indicate the carrying value of such
technologies may not be recoverable. Factors considered important that could
cause impairment include, but are not limited to, significant changes in the
Company's anticipated future use of these technologies or the Company's overall
business strategy as it pertains to the technology, particularly in light of
patents owned by others in the same field of use. As of December 31, 2002,
management of the Company believed that no revision of the remaining useful
lives or write-down of the Company's acquired technology was required in 2002
and no such revision was needed in 2001 and 2000.
-18-
Valuation of Stock-Based Compensation
The Company accounts for its stock option plans (see Note 11 of the Notes to
Consolidated Financial Statements) under Accounting Principles Board Opinion
("APB") No. 25, "Accounting for Stock Issued to Employees," under which no
compensation cost has been recognized for options issued to employees at fair
market value on the date of grant. In 1995, the Financial Accounting Standards
Board issued SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No.
123 established a fair value based method of accounting for stock-based
compensation plans. SFAS No. 123 requires that a company's financial statements
include certain disclosures about stock-based employee compensation arrangement
regardless of the method used to account for the plan. The Company accounts for
its stock option and warrant grants to non-employees in exchange for goods or
services in accordance with SFAS No. 123 and Emerging Issues Task Force No.
96-18 ("EITF 96-18"). SFAS 123 and EITF 96-18 require that the Company account
for its option and warrant grants to non-employees based on the fair value of
the options and warrants granted.
The Company uses the Black-Scholes option-pricing model to estimate the fair
value of the options granted. In order to calculate the fair value of the
options, assumptions are made for certain components of the model, including
risk-free interest rate, volatility, expected dividend yield rate and expected
option life. Although, the Company uses available resources and information when
setting these assumptions, changes to the assumptions, could cause significant
adjustments to the valuation.
CONTRACTUAL OBLIGATIONS
As of December 31, 2002, the Company had the following contractual commitments:
---------------------------------------------------------------------------
Payments due by period
------------- ------------- ------------- -------------- ------------------
Less than
Contractual Obligations Total 1 year 1-3 years 3-5 years More than 5 years
-------------------------- ------------- ------------- ------------- -------------- ------------------
Long-Term Debt -- -- -- -- --
------------- ------------- ------------- -------------- ------------------
Operating Lease Obligations $274,131 $267,062 $7,069 -- --
------------- ------------- ------------- -------------- ------------------
Capital Lease Obligations $8,599 $4,713 $3,886 -- --
------------- ------------- ------------- -------------- ------------------
Purchase Obligations -- -- -- -- --
------------- ------------- ------------- -------------- ------------------
Other Long-Term Liabilities Reflected
on the Registrant's Balance Sheet
under GAAP -- -- -- -- --
------------- ------------- ------------- -------------- ------------------
Other Obligations:
------------- ------------- ------------- -------------- ------------------
Sponsored Research Obligation $6,854,827 $1,495,599 $4,486,796 $872,433 --
------------- ------------- ------------- -------------- ------------------
Minimum Royalty Obligation $2,200,000 $100,000 $1,800,000 $300,000 $100,000/year(1)
------------- ------------- ------------- -------------- ------------------
Total $9,337,557 $1,867,374 $6,297,751 $1,172,433 $100,000/year(1)
------------- ------------- ------------- -------------- ------------------
(1) Under the Amended License Agreement with Princeton University and USC, the
Company is obligated to pay Princeton University minimum royalties of
$100,000 per year until such time the agreement is no longer in effect.
OFF-BALANCE SHEET ARRANGEMENTS
As of December 31, 2002, the Company had no off-balance sheet arrangements in
the nature of guarantee contracts, retained or contingent interests in assets
transferred to unconsolidated entities (or similar arrangements serving as
credit, liquidity or market risk support to unconsolidated entities for any such
assets), or obligations (including contingent obligations) arising out of
variable interests in unconsolidated entities providing financing, liquidity,
market risk or credit risk support to, or that engage in leasing, hedging or
research and development services with, the Company.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Company does not expect that the adoption of any recently issued accounting
pronouncements would have a significant impact on the Company's consolidated
financial statements. For further discussion, see Note 4 of the Notes to
Consolidated Financial Statements.
FACTORS THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL CONDITION
The following factors, as well as other factors affecting the Company's
operating results and financial condition, could cause the Company's actual
future results and financial condition to differ materially from those
projected.
-19-
The Company does not expect to be profitable in the foreseeable future, and may
never be profitable.
Since inception, the Company has generated limited revenues while incurring
significant losses. The Company expects to incur losses for the foreseeable
future and until such time, if ever, as the Company is able to achieve
sufficient levels of revenue from the commercial exploitation of its OLED
technologies to support its operations. You should note, however, that:
o OLED technology may never become commercially viable;
o markets for flat panel displays utilizing OLED technology may be
limited; and
o the Company may never generate sufficient revenues from the
commercial exploitation of its OLED technologies to become
profitable.
Additionally, even if the Company finds commercially viable applications for its
OLED technologies, the Company may never recover its research and development
costs.
If the Company does not receive additional financing in the future, it might not
be able to continue the research, development and commercialization of its OLED
technologies.
The Company's capital requirements have been and will continue to be
significant. The completion of the research, development and commercialization
of OLED technologies for potential applications will require significant
additional effort and resources. The Company's cash on hand may not be
sufficient to meet all of its future obligations. When the Company needs
additional funds, such funds may not be available on commercially reasonable
terms or at all. If the Company cannot obtain more money when needed, its
business might fail. Additionally, if the Company attempts to raise money in an
offering of shares of its Common Stock, or if the Company engages in
acquisitions involving the issuance of additional shares of its Common Stock,
the issuance of these shares will dilute the Company's then-existing
shareholders.
If its OLED technologies are not feasible for broad-based product applications,
the Company may never generate revenues sufficient to support ongoing
operations.
Before OLED manufacturers will agree to utilize the Company's OLED technologies
for wide-scale commercial production, it is likely that the Company must first
demonstrate to the satisfaction of these manufacturers that the Company's OLED
technologies are feasible for broad-based product applications. This, in turn,
will require substantial advances in the Company's research and development
efforts in a number of areas, including:
o device reliability;
o the development of long-lived OLED materials for full color OLED
displays; and
o issues related to scalability and cost effective fabrication
technologies for product applications.
The Company's efforts may never demonstrate the feasibility of its OLED
technologies for broad-based product applications, particularly full color,
large area, high resolution and high information content flat panel displays
such as those used in televisions.
The Company's research and development efforts remain subject to all of the
risks associated with the development of new products based on emerging and
innovative technologies, including, without limitation, unanticipated technical
or other problems and the possible insufficiency of the funds allocated to
complete development of these products. Technical problems may result in delays
and cause the Company to incur additional expenses that would increase its
losses. If the Company cannot complete research and development of its OLED
technologies successfully, or if the Company experiences delays in completing
research and development of its OLED technologies for use in potential
applications, particularly after the occurrence of significant expenditures, the
Company's business may fail.
Even if the Company's OLED technologies are technically feasible, they may not
be adopted by manufacturers of OLEDs and OLED-containing products.
The potential size, timing and viability of market opportunities targeted by the
Company are uncertain at this time. Market acceptance of the Company's OLED
technologies will depend, in part, upon these technologies providing benefits
comparable to CRT and LCD technologies (the current standard display
technologies) at an appropriate cost, and the adoption of these technologies by
consumers, neither of which have been achieved. Also, there may be a number of
additional technologies that OLED manufacturers need to utilize in order to
bring OLED-containing products to the market. Many potential licensees of the
Company's OLED technologies manufacture flat panel displays utilizing competing
technologies, and may, therefore, be reluctant to redesign their products or
manufacturing processes to incorporate the Company's OLED technologies.
Moreover, even if the Company's OLED technologies are a viable alternative to
competing technologies, if additional technologies are required to bring
OLED-containing products to the market and potential licensees are unable to
obtain access to these technologies, they may not utilize the Company's OLED
technologies.
-20-
If the Company's research partners fail to make advances in their research, or
if they terminate their relationships with the Company, the Company might not
succeed in commercializing its OLED technologies.
Research and development of commercially viable applications for the Company's
OLED technologies depend substantially on the success of the sponsored research
conducted by the Company's research partners. The Company cannot be certain that
its research partners will make additional advances in the research and
development of OLED technology. Moreover, although the Company funds OLED
technology research, the scope of and technical aspects of this research and the
resources and efforts directed to this research are in large part subject to the
control of the Company's research partners.
The Company's most significant research and development relationships are with
Princeton University and USC. The Company's Research Agreement with Princeton
University expires in July 2007 and both this agreement and the Amended License
Agreement with Princeton University and USC can be terminated for various
reasons. For example, the Research Agreement provides that if Dr. Forrest is
unavailable to continue to serve as the principal investigator, because he is no
longer associated with Princeton University or for any other reason, and a
successor acceptable to both the Company and Princeton University is not
available, Princeton University has the right to terminate the Research
Agreement without impacting the Amended License Agreement. The termination of
the Research Agreement or the Amended License Agreement would materially and
adversely affect the Company's ability to research, develop and commercialize
its OLED technologies.
If the Company cannot form strategic relationships with companies that
manufacture OLEDs and OLED-containing products, its commercialization strategy
will fail.
The Company's strategic plan depends upon the development of strategic licensing
relationships with high-volume manufacturers of OLEDs and OLED-containing
products. The Company has entered into only one such strategic licensing
relationship with Dupont Displays. All of the Company's other relationships with
manufacturers of OLEDs and OLED-containing products are currently limited to
research, development and pre-commercial evaluation and qualification of the
Company's OLED technologies and materials. The Company's ability to enter into
additional strategic licensing and sublicensing relationships may require it to
make financial or other commitments. The Company might not be able, for
financial or other reasons, to enter into these relationships on commercially
acceptable terms, or at all. Failure to do so would have a material adverse
effect on the Company.
The Company's prospects also will be significantly affected by its ability to
sell its proprietary OLED materials to manufacturers of OLEDs. The Company's
current Supply Agreement with PPG provides the Company with a source for these
OLED materials and with exclusive rights to sell them to OLED manufacturers, but
this agreement expires at the end of 2007. The Company's inability to continue
obtaining these OLED materials from PPG or another source would have a material
adverse effect on the Company.
If the Company cannot protect its intellectual property rights, or if the
Company's OLED technologies are found to infringe the rights of others, the
Company's business will suffer.
The value of the Company's OLED technologies is dependent on the Company's
ability to secure and maintain appropriate patent and other intellectual
property rights protection. Although the Company owns or licenses many OLED
technology patents that have already issued, there can be no assurance that
additional patents applied for will be obtained, or that any of these patents,
once issued, will afford commercially significant protection for the Company's
OLED technologies, or will be found valid if challenged. Moreover, the Company
has not obtained patent protection for some of its OLED technologies in all
foreign countries in which OLEDs might be manufactured or sold. In any event,
the patent laws of other countries may differ from those of the United States as
to the patentability of OLED technology and the degree of protection afforded.
Other companies and institutions may independently develop OLED technologies
that are equivalent or superior to those of the Company, and may obtain patent
or similar rights with respect to these technologies. 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 Kodak,
which holds a number of patents related to OLED technology. There can be no
assurance that the exercise of some aspects of the patent rights respecting the
Company's OLED technologies, including that being developed by Princeton
University and USC or licensed from Motorola, will not infringe on the patents
of others. In this event, the Company or its partners may be required to obtain
licenses, pay damages, modify their products or methods of operation, or be
prohibited from making, using, selling or offering to sell some or all OLEDs and
OLED-containing products. The Company also might not have the financial or other
resources necessary to enforce or defend a patent infringement action, and the
licensors of the Company's licensed patents might not enforce such an action in
a timely manner. If products incorporating the Company's OLED technologies are
found to infringe upon the patent or other intellectual property rights of
others, it could have a material adverse effect on the Company.
-21-
The U.S. Government has rights to the Company's OLED technologies that might
prevent the Company from realizing the benefits of these technologies.
The U.S. Government, through various government agencies, has provided and
continues to provide funding to the Company, Princeton University and USC for
research activities related to certain aspects of the Company's OLED
technologies. Based on its having provided this funding, the government has
rights to these OLED technologies that could restrict the Company's ability to
market them to the government for military and other applications, or to third
parties for commercial applications. Moreover, if the government determines that
the Company has not taken effective steps to achieve practical application of
these OLED technologies in any field of use in a reasonable time, the government
may require the Company to grant licenses to other parties in this field of use.
Any of these occurrences would limit the Company's ability to obtain the full
benefits of its OLED technologies.
Because many of the Company's competitors have better name-recognition and
greater financial, technical, marketing and research capabilities, the Company
may never be able to compete successfully in the flat panel display industry.
The flat panel display industry is characterized by intense competition. The
market is currently, and will likely continue to be for some time, dominated by
products utilizing LCD technology. Numerous companies are making substantial
investments in, and conducting research to improve characteristics of, LCD
technology. Several other flat panel display technologies have been, or are
being, developed, including technologies for the production of field emission,
inorganic electroluminescence, gas plasma and vacuum fluorescent displays. In
addition, other companies are engaged in research and development activities
with respect to technology using OLEDs. Advances in LCD technology or any of
these developing technologies may overcome their current limitations and permit
them to become the leading technologies for flat panel displays, either of which
could limit the potential market for flat panel displays utilizing the Company's
OLED technologies.
Substantially all of the Company's competitors have better name recognition and
greater financial, technical, marketing, personnel and research capabilities
than the Company. The Company's competitors may succeed in developing
technologies and applications that are more cost-effective or have fewer display
limitations than the Company's OLED technologies. In addition, the Company may
never be able to compete successfully or develop commercial applications for its
OLED technologies.
If the Company cannot keep its key employees or hire other talented persons as
it grows, the Company's business might not succeed.
The Company's performance is substantially dependent on the continued services
of senior management and other key personnel, and its ability to offer
competitive salaries and benefits to its employees. The Company does not have
employment agreements with any of its management or key personnel. Additionally,
competition for highly skilled technical, managerial and other personnel is
intense. The Company might not be able to attract, hire, train, retain and
motivate the highly skilled managers and employees it needs to be successful. If
the Company fails to attract and retain the necessary technical and managerial
personnel, it will suffer and might fail.
The Company can issue shares of Preferred Stock that can adversely affect the
rights of shareholders of its Common Stock.
The Company's articles of incorporation authorize it to issue up to 5,000,000
shares of Preferred Stock with designations, rights and preferences determined
from time-to-time by the Company's Board of Directors. Accordingly, the Board of
Directors is empowered, without shareholder approval, to issue Preferred Stock
with dividend, liquidation, conversion, voting or other rights superior to those
of shareholders of its Common Stock. For example, an issuance of shares of
Preferred Stock could:
o adversely affect the voting power of the shareholders of Common Stock;
o make it more difficult for a third party to gain control of the Company;
o discourage bids for the Company's Common Stock at a premium; or
o otherwise adversely affect the market price of the Common Stock.
The Company's Board of Directors has designated and issued two series of
Preferred Stock that are currently outstanding: (a) 200,000 shares of Series A
Nonconvertible Preferred Stock, all of which are held by an entity controlled by
Sherwin Seligsohn, and (b) 300,000 shares of Series B Convertible Preferred
Stock that is held by Motorola. The Series B Convertible Preferred Stock is
convertible into shares of Common Stock in accordance with the Company's
articles of incorporation. As of December 31, 2002, 150,000 shares of this
Series B Convertible Preferred Stock are convertible into Common Stock and
246,809 shares of Common Stock would be issuable upon the conversion of these
shares. The Company may issue additional shares of authorized Preferred Stock at
any time in the future.
-22-
The market price of the Company's Common Stock might be highly volatile.
The market price of the Company's Common Stock might be highly volatile, as has
been the case with the securities of many other companies, particularly other
small and emerging-growth companies. Factors such as the following may have a
significant impact on the market price of the Company's Common Stock:
o the Company's expenses and operating results;
o announcements by the Company or its competitors of technological
developments, new product applications or license arrangements;
and
o other factors affecting the flat panel display and related
industries in general.
The issuance of other publicly traded shares of the Company's Common Stock could
drive the stock price down.
The price of the Company's Common Stock can be expected to decrease if:
o other shares of the Company's Common Stock that are currently
subject to restriction on sale become freely salable, whether
through an effective registration statement or under Rule 144 of
the Securities Act of 1933; or
o the Company issues additional shares of Common Stock that might be
or become freely salable, including shares that would be issued
upon conversion of its Series B Convertible Preferred Stock.
If the price of the Company's Common Stock goes down, the Company may have to
issue more shares than are presently anticipated to be issued under the terms of
its Development and License Agreement with PPG.
Under the Development and License Agreement between the Company and PPG, the
Company is required to issue to PPG shares of the Company's Common Stock for
services rendered by PPG. If, at the time of issuance, the price of the
Company's Common Stock has declined materially since the date of the Development
and License Agreement, the Company may be required to issue to PPG more shares
of the Company's Common Stock than were initially anticipated. This increase in
the number of shares available for public sale could cause people to sell the
Company's Common Stock, including in short sales, which could drive the price of
the Common Stock down, thus reducing its value and perhaps hindering the
Company's ability to raise additional funds in the future. In addition, such an
increase in the number of outstanding shares of the Company's Common Stock would
further dilute existing holders of this stock.
The Company's executive officers and directors own a large percentage of the
Company's Common Stock and could exert significant influence over matters
requiring shareholder approval, including takeover attempts.
The Company's executive officers and directors, and their respective affiliates,
beneficially own as of December 31, 2002, approximately 13.4% of the outstanding
shares of the Company's Common Stock. Moreover, Pine Ridge Financial Inc. and
Strong River Investments, Inc. assigned to management of the Company their
rights to vote the shares of Common Stock issued to them upon conversion of the
Convertible Preferred Stock, notes and warrants issued to them in an August 2001
private placement transaction. Accordingly, these shareholders and members of
management may, as a practical matter, be able to exert significant influence
over matters requiring approval by the Company's shareholders, including the
election of directors and the approval of mergers or other business
combinations. This concentration could also have the effect of delaying or
preventing a change in control of the Company.
The Company's past use of Arthur Andersen as its independent auditor limits the
ability of shareholders to seek potential recoveries from them related to their
work.
On July 30, 2002, the Company announced that it had appointed KPMG to replace
Arthur Andersen as the Company's independent public auditor. The Company's
consolidated financial statements as of and for each of the years ended December
31, 1999 through 2001 have been audited by Arthur Andersen, as stated in its
report dated March 5, 2002, which report is incorporated herein. After
reasonable efforts, the Company has been unable to obtain Arthur Andersen's
consent to the incorporation by reference into this document of its report with
respect to the Company's financial statements. Under these circumstances, Rule
437a under the Securities Act of 1933 permits the Company to file this document
without a written consent from Arthur Andersen.
The absence of this consent may limit recovery by investors in the Company's
Common Stock on certain claims. In particular, and without limitation, investors
will not be able to assert claims against Arthur Andersen under Section 11 of
the Securities Act of 1933. In addition, the ability of Arthur Andersen to
satisfy any claims (including claims arising from Arthur Andersen's provision of
auditing and other services to the Company) will be limited as a practical
matter due to recent events regarding Arthur Andersen. This means that if an
investor in the Company's Common Stock were to assert a claim under Section 11
of the Securities Act relating to the purchase of this stock, that investor
would not be able to seek damages from Arthur Andersen. Thus, as compared to a
hypothetical investor in stock of a company whose inclusion of financial
statements in its annual report was consented to by that company's independent
auditor, an investor in the Company's Common Stock would have fewer alternatives
in seeking damages relating to the investor's purchase of such stock.
-23-
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not utilize financial instruments for trading purposes and
holds no derivative financial instruments that could expose the Company to
significant market risk. The Company's primary market risk exposure with regard
to financial instruments is to changes in interest rates, which would impact
interest income earned on investments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's financial statements and the relevant notes thereto 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
26, 2003, 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
at the end of Part I of this report.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to this item is set forth in the Company's Proxy
Statement under the heading "Executive Management Compensation," and is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Information with respect to the ownership of the Company's securities by certain
persons is set forth in the Company's 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 the Company's managers and other
related parties is set forth in the Company's Proxy Statement under the heading
"Certain Transactions", and is incorporated herein by reference.
ITEM 14. CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and Chief Financial Officer have
concluded, based on an evaluation conducted within 90 days prior to the filing
date of this report, that the Company's disclosure controls and procedures have
functioned effectively so as to provide those officers the information necessary
to evaluate whether:
(i) this report contains any untrue statement of a material fact or
omits to state a material fact necessary to make the statements made, in light
of the circumstances under which such statements were made, not misleading with
respect to the period covered by this report, and
(ii) the financial statements and other financial information included
in this report fairly present, in all material respects, the financial
condition, results of operations and cash flows of the Company as of, and for,
the periods presented in this report.
-24-
There have been no significant changes in the Company's internal controls or
other procedures since the date of the Chief Executive Officer's and the Chief
Financial Officer's evaluation that could significantly affect these internal
controls, including any corrective actions with regard to significant
deficiencies and material weaknesses.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(1) Financial Statements:
Independent Auditors' Report................................. F-2
Consolidated Balance Sheets.................................. F-4
Consolidated Statements of Operations........................ F-5
Consolidated Statements of Shareholders' Equity (Deficit).... F-6
Consolidated Statements of Cash Flows........................ F-8
Notes to Consolidated Financial Statements................... F-9
(2) Financial Statement Schedules:
None.
(3) Exhibits:
The following is a list of the exhibits filed as part of this
report. Where so indicated by footnote, exhibits that 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. (12)
3.3 Bylaws of the Company. (1)
4.1 Specimen stock certificate representing the Common Stock. (2)
4.2 Specimen warrant certificate representing the Warrants. (3)
4.3 Form of Public Warrant Agreement. (2)
4.4 Statement of Designations and Preferences of Series A Non-Convertible
Preferred Stock. (2)
4.5 Form of Private Placement Warrant. (6)
4.6 Certificate of Designations for Series B Convertible Preferred Stock.
(12)
4.7 Amended and Restated Warrant of Strong River Investments, Inc. to
Purchase 78,740 Shares of Common Stock dated as of August 22, 2001 (11)
4.8 Amended and Restated Warrant of Pine Ridge Financial Inc. to Purchase
78,740 Shares of Common Stock dated as of August 22, 2001 (11)
4.9 Amended and Restated Warrant of Strong River Investments, Inc. to
Purchase 78,740 Shares of Common Stock dated as of August 22, 2001 (11)
-25-
4.10 Amended and Restated Warrant of Pine Ridge Financial Inc. to Purchase
78,740 Shares of Common Stock dated as of August 22, 2001 (11)
4.11 Amended and Restated Warrant of Strong River Investments, Inc. to
Purchase 214,746 Shares of Common Stock dated as of August 22, 2001
(11)
4.12 Amended and Restated Warrant of Pine Ridge Financial Inc. to Purchase
214,746 Shares of Common Stock dated as of August 22, 2001 (11)
4.13 Warrant of Gerard Klauer Mattison & Co., Inc. to Purchase 186,114
Shares of Common Stock dated as of August 22, 2001 (10)
10.1 License Agreement dated August 1, 1994, between The Trustees of
Princeton University and American Biomimetics Corporation. (2)
10.2 Amendment to License Agreement (August 1, 1994) dated April 11, 1995,
between the Trustees of Princeton University and American Biomimetics
Corporation. (2)
10.3 Sponsored Research Agreement dated August 1, 1994, between the Trustees
of Princeton University and American Biomimetics Corporation. (2)
10.4 Letter Amendment dated May 5, 1995, between the Trustees of Princeton
University and American Biomimetics Corporation. (2)
10.5 Amendment to Sponsored Research Agreement (August 1, 1994) dated April
18, 1995, between the Trustees of Princeton University and American
Biomimetics Corporation. (2)
10.6 Technology Transfer Agreement dated June 22, 1995, between American
Biomimetics Corporation and the Company. (2)
10.7 Assignment and Assumption of License dated June 22, 1995, between
American Biomimetics Corporation and the Company. (2)
10.8 Sublicense Agreement and Option dated June 22, 1995, between American
Biomimetics Corporation and the Company. (2)
10.9 Assignment and Assumption of Agreement dated August 1, 1995, between
the Trustees of Princeton University and the University of Southern
California. (2)
10.10 Subcontract No. 341-4014-1 dated August 16, 1995, between the Trustees
of Princeton University and the University of Southern California. (2)
10.11 Assignment of 1994 Sponsored Research Agreement dated November 1, 1995,
between American Biomimetics Corporation and the Company. (2)
10.12# Stock Option Agreement dated as of June 23, 1995, between the Company
and Thomas D. Hays, III. (2)
10.13# Stock Option Agreement dated as of June 23, 1995, between the Company
and Harvey Nachman. (2)
10.14 Registration Rights Agreement dated as of June 23, 1995, between the
Company and Thomas D. Hays, III. (2)
10.15 Registration Rights Agreement dated as of June 23, 1995, between the
Company and Harvey Nachman. (2)
10.16 Form of Registration Rights Agreement between the Company and Certain
Subscribers to Purchase Common Stock of the Company. (1)
10.17# Form of Stock Option Agreement dated as of June 23, 1995 between the
Company and Sidney D. Rosenblatt. (2)
-26-
10.18# 1992 Stock Option Plan. (1)
10.19# 1995 Stock Option Plan. (7)
10.20# Form of Stock Option Agreement dated as of June 23, 1995, between the
Company and Sidney D. Rosenblatt. (2)
10.21# Form of Stock Option Agreement dated as of September 1, 1995, between
the Company and Stephen R. Forrest. (2)
10.22# Form of Stock Option Agreement dated as of September 1, 1995, between
the Company and Mark E. Thompson. (2)
10.23# Form of Stock Option Agreement dated as of September 1, 1995, between
the Company and Paul E. Burrows. (2)
10.24 License Agreement dated January 26, 1996 between the Company and
University of Southern California. (2)
10.25 Letter Agreement dated September 20, 1995 Agreeing to a Royalty Rate
between the Trustees of Princeton University and the Company. (2)
10.26 Agreement and Plan of Reorganization dated as of April 6, 1995, between
Enzymatics, Inc., Enzymatics Merger Subsidiary, Inc. and the Company.
(2)
10.27 Form of Consulting Agreement between the Company and Whale Securities
Co., L.P. (2)
10.28# Warrant Agreement dated April 25, 1996, between the Company and Steven
V. Abramson. (4)
10.29# Warrant Agreement dated April 25, 1996, between the Company and Sherwin
Seligsohn. (4)
10.30# Warrant Agreement dated April 25, 1996, between the Company and Dean L.
Ledger. (4)
10.31# Warrant Agreement dated April 25, 1996, between the Company and Sidney
D. Rosenblatt. (4)
10.32 1997 Research Agreement between the Company and Princeton University.
(5)
10.33 1997 Amended License Agreement between the Company, Princeton
University and the University of Southern California. (5)
10.34 Development and License Agreement dated as of October 1, 2000, by and
between PPG Industries, Inc. and the Company. (8)
10.35 Form of Warrant Agreement issuable by the Company to PPG Industries,
Inc. pursuant to the Development and License Agreement. (8)
10.36 Amendment Number 1 to the Development and License Agreement dated as of
March 7, 2001, by and between PPG Industries, Inc. and the Company. (8)
10.37# Form of Warrant Agreement dated as of April 18, 2000, between the
Company and Julia Brown. (9)
10.38 License Agreement between the Company and Motorola, Inc. dated as of
September 29, 2000. (12)
10.39 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. (12)
10.40* Amendment Number 2 to the Development and License Agreement dated as of
October 15, 2002, by and between PPG Industries, Inc. and the Company.
10.41* Amendment Number 3 to the Development and License Agreement dated as of
January 21, 2003, by and between PPG Industries, Inc. and the Company.
-27-
21* Subsidiaries of the Registrant
23.1* Consent of KPMG LLP
99.1* Certification of Sherwin I. Seligsohn pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
99.2* Certification of Sidney D. Rosenblatt pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
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 SEC on December 21, 1995.
(2) Filed as an Exhibit to Amendment No. 1 to Registration Statement (No.
33-80703) on Form SB-2 filed with the SEC on March 20, 1996.
(3) Filed as an Exhibit to Amendment No. 2 to Registration Statement (No.
33-80703) on Form SB-2 filed with the SEC on April 2, 1996.
(4) Filed as an Exhibit to the Annual Report on Form 10K-SB for the year ended
December 31, 1996, filed with the SEC on March 31, 1997.
(5) Filed as an Exhibit to the Annual Report on Form 10K-SB for the year ended
December 31, 1997, filed with the SEC on March 31, 1998.
(6) Filed as an Exhibit to Amendment No. 1 to Registration Statement (No.
333-81983) on Form SB-2 filed with the SEC on August 25, 1999.
(7) Filed as an Exhibit to Registration Statement (No. 333-92649) on Form S-8
filed with the SEC on December 13, 1999.
(8) Filed as an Exhibit to Amendment No. 1 to Registration Statement (No.
333-50990) on Form S-3 filed with the SEC on March 7, 2001.
(9) Filed as an Exhibit to the Annual Report on Form 10-K for the year ended
December 31, 2000, filed with the SEC on March 29, 2001.
(10) Filed as an Exhibit to the Current Report on Form 8-K filed with the SEC on
September 6, 2001.
(11) Filed as an Exhibit to Registration Statement (No. 333-72846) on Form S-3
filed with the SEC on November 6, 2001.
(12) Filed as an Exhibit to the Quarterly Report on Form 10-Q for the quarter
ended September 30, 2000, filed with the SEC on November 20, 2001.
Note: Any of the exhibits listed in the foregoing index not included with this
report 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, 2002.
(c) The exhibits required to be filed by the Company with this report are
listed above and are incorporated herein by reference.
(d) The financial statement schedules required to be filed by the Company with
this report are listed above and are incorporated herein by reference.
-28-
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 31, 2003
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 31, 2003
- ---------------------------
Sherwin I. Seligsohn
/s/ Steven V. Abramson President, Chief Operating Officer and Director March 31, 2003
- ---------------------------
Steven V. Abramson
/s/ Sidney D. Rosenblatt Executive Vice President, Chief Financial Officer, March 31, 2003
- --------------------------- Treasurer, Secretary and Director
Sidney D. Rosenblatt
/s/ Leonard Becker Director March 31, 2003
- ---------------------------
Leonard Becker
/s/ Elizabeth Gemmill Director March 31, 2003
- ---------------------------
Elizabeth Gemmill
/s/ C. Keith Hartley Director March 31, 2003
- ---------------------------
C. Keith Hartley
/s/ Lawrence Lacerte Director March 31, 2003
- ---------------------------
Lawrence Lacerte
-29-
CERTIFICATION
I, Sherwin I. Seligsohn, certify that:
1. I have reviewed this annual report on Form 10-K of Universal Display
Corporation (the "registrant");
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
the registrant's board of directors (or persons fulfilling the equivalent
functions):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 31, 2003 By: /s/ Sherwin I. Seligsohn
------------------------------
Sherwin I. Seligsohn
Chairman of the Board and
Chief Executive Officer
-30-
CERTIFICATION
I, Sidney D. Rosenblatt, certify that:
1. I have reviewed this annual report on Form 10-K of Universal Display
Corporation (the "registrant");
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
the registrant's board of directors (or persons fulfilling the equivalent
functions):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 31, 2003 By: /s/ Sidney D. Rosenblatt
-----------------------------
Sidney D. Rosenblatt
Executive Vice President and
Chief Financial Officer
-31-
UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARY
(a development-stage company)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Financial Statements:
Reports of Independent Auditors..................................... F-2
Consolidated Balance Sheets......................................... F-4
Consolidated Statements of Operations............................... F-5
Consolidated Statements of Shareholders' Deficit.................... F-6
Consolidated Statements of Cash Flows............................... F-8
Notes to Consolidated Financial Statements.......................... F-9
F-1
Independent Auditors' Report
The Board of Directors and Stockholders
Universal Display Corporation:
We have audited the accompanying consolidated balance sheet of Universal Display
Corporation and subsidiary (a development stage company) as of December 31,
2002, and the related consolidated statements of operations, shareholders'
equity (deficit) and cash flows for the year then ended, and for the period from
June 17, 1994 (inception) through December 31, 2002. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit. The consolidated financial statements of
Universal Display Corporation and subsidiary as of December 31, 2001 and for
each of the years in the two-year period ended December 31, 2001, and for the
period from June 17, 1994 (inception) through December 31, 2002 to the extent
related to the period from June 17, 1994 (inception) through December 31, 2001,
were audited by other auditors who have ceased operations. Those auditors
expressed an unqualified opinion on those consolidated financial statements in
their report dated March 5, 2002. Our opinion on the statements of operations,
shareholders' equity (deficit) and cash flows, insofar as it relates to the
amounts included for the period from June 17, 1994 (inception) through December
31, 2001, is based solely on the report of the other auditors.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. 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 audit provides a
reasonable basis for our opinion.
In our opinion, based on our audit and the report of the other auditors, the
2002 consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Universal Display Corporation and
subsidiary (a development stage company) as of December 31, 2002, and the
results of their operations and their cash flows for the year then ended, and
for the period from June 17, 1994 (inception) through December 31, 2002, in
conformity with accounting principles generally accepted in the United States of
America.
/s/ KPMG LLP
Philadelphia, Pennsylvania
March 11, 2003
F-2
The following report is a copy of a previously issued Arthur Andersen LLP
("Andersen") report, and the report has not been reissued by Andersen. The
Andersen report refers to the consolidated balance sheet as of December 31, 2000
and the consolidated statements of operations, cash flows and shareholders'
equity (deficit) for the year ended December 31, 1999, which are no longer
included in the accompanying consolidated financial statements.
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-3
UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARY
(a development-stage company)
CONSOLIDATED BALANCE SHEETS
ASSETS December 31, December 31,
2002 2001
------------- -------------
CURRENT ASSETS:
Cash and cash equivalents $ 15,905,416 $ 7,883,132
Short-term investments 4,662,898 4,516,199
Restricted cash (Note 10) -- 15,162,414
Accounts receivable 662,822 540,855
Prepaid and other current assets 177,219 355,820
------------- -------------
Total current assets 21,408,355 28,458,420
PROPERTY AND EQUIPMENT, net 4,617,570 5,296,177
ACQUIRED TECHNOLOGY, net 13,099,775 14,794,847
INVESTMENTS 379,753 --
OTHER ASSETS 133,763 20,125
------------- -------------
$ 39,639,216 $ 48,569,569
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Convertible promissory note (face value of $15,000,000,
net of discounts) (Note 10) $ -- $ 8,288,239
Capital lease obligations 4,713 4,228
Accounts payable 388,286 649,100
Accrued expenses 1,084,889 1,072,621
Deferred license fees 1,066,667 400,000
Deferred revenue 322,204 50,000
------------- -------------
Total current liabilities 2,866,759 10,464,188
CAPITAL LEASE OBLIGATIONS 3,886 8,599
DEFERRED LICENSE FEES 3,100,000 --
------------- -------------
Total liabilities 5,970,645 10,472,787
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
share or $6,444,000), 5,000 shares of Series C-1 Convertible
Preferred Stock authorized and none outstanding, 5,000 shares
of Series D Convertible Preferred Stock
authorized and none outstanding 5,000 5,000
Common Stock, par value $0.01 per share, 50,000,000 shares
authorized, 21,525,412 and 18,093,124 shares issued and outstanding 215,254 180,931
Additional paid-in-capital 113,541,408 85,016,601
Accumulated other comprehensive loss (18,586) (3,925)
Deficit accumulated during development-stage (80,074,505) (47,101,825)
------------- -------------
Total shareholders' equity 33,668,571 38,096,782
------------- -------------
$ 39,639,216 $ 48,569,569
============= =============
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 OPERATIONS
Period from
Inception
Year Ended December 31, (June 17, 1994) to
2002 2001 2000 December 31, 2002
------------ ------------ ------------ -----------------
REVENUE:
Contract research revenue $ 1,468,958 $ 1,058,571 $ 492,756 $ 4,002,220
Development chemicals 793,518 194,330 -- 987,848
Technology development revenue 182,796 -- -- 182,796
------------ ------------ ------------ ------------
Total revenue 2,445,272 1,252,901 492,756 5,172,864
OPERATING EXPENSES:
Research and development 15,804,267 12,310,036 7,109,205 47,229,518
General and administrative 4,754,850 3,915,854 3,261,113 20,344,147
Royalty expense 250,000 75,000 -- 325,000
------------ ------------ ------------ ------------
Total operating expenses 20,809,117 16,300,890 10,370,318 67,898,665
------------ ------------ ------------ ------------
Operating loss (18,363,845) (15,047,989) (9,877,562) (62,725,801)
INTEREST INCOME 429,356 540,031 348,516 2,054,965
INTEREST EXPENSE (3,298,589) (1,848,142) -- (5,146,731)
DEBT CONVERSION AND EXTINGUISHMENT EXPENSE (10,011,780) -- -- (10,011,780)
OTHER REVENUE 225,657 -- -- 225,657
------------ ------------ ------------ ------------
NET LOSS (31,019,201) (16,356,100) (9,529,046) (75,603,690)
DEEMED DIVIDENDS TO PREFERRED
SHAREHOLDERS (Notes 9 and 10) (1,953,479) (2,517,336) -- (4,470,815)
------------ ------------ ------------ ------------
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS $(32,972,680) $(18,873,436) $ (9,529,046) $(80,074,505)
============ ============ ============ ============
BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (1.71) $ (1.11) $ (0.62)
============ ============ ============
WEIGHTED AVERAGE SHARES USED IN COMPUTING
BASIC AND DILUTED NET LOSS PER COMMON SHARE 19,227,697 16,994,537 15,260,837
============ ============ ============
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)
Series A Series B Series C Series C-1
Nonconvertible Convertible Convertible Convertible
Preferred Stock Preferred Stock Preferred Stock Preferred Stock
------------------ ---------------- ----------------- ------------------
Shares Amount Shares Amount 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 Enyzmatics, 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
Placement, net of 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 through private
placement, net of issuance 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 through private
placement, net of issuance 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 200,000 2,000 300,000 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 -- -- -- -- 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 200,000 2,000 300,000 3,000 -- -- -- --
Exercise of Common Stock options and
warrants -- -- -- -- -- -- -- --
Issuance of Common Stock through direct
offerings, net of expenses of $519,288 -- -- -- -- -- -- -- --
Reduction of conversion price of
convertible notes -- -- -- -- -- -- -- --
Deemed dividends to Preferred Shareholders -- -- -- -- -- -- -- --
Issuance of Common Stock in connection with
the executive employee bonus -- -- -- -- -- -- -- --
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 upon conversion of
Convertible Notes -- -- -- -- -- -- -- --
Issuance of Common Stock in connection with
License Agreement -- -- -- -- -- -- -- --
Unrealized loss on available-for-sale
securities -- -- -- -- -- -- -- --
Net loss -- -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------
Comprehensive loss -- -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------
BALANCE, DECEMBER 31, 2002 200,000 $ 2,000 300,000 $ 3,000 -- $ -- -- $ --
======= ======= ======= ======= ======= ======= ======= ======
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARY
(a development-stage company)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
Series D
Convertible
Preferred Stock Common Stock
------------------ -------------------
Additional
Paid-in
Shares Amount Shares Amount Capital
------------ ------------- ------------- -------------- --------------
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 (243,393)
Issuance of Common Stock options to
former sole director of Enzymatics, Inc.
to satisfy an Enyzmatics, 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
Placement, net of expenses of $50,000 -- -- 1,114,000 11,140 2,166,860
Issuance of Common Stock options -- -- -- -- 9,950
Net loss -- -- -- -- --
------------- ------------- ------------- ------------- -------------
BALANCE, DECEMBER 31, 1995 -- -- 7,637,268 76,373 2,421,417
Issuance of Common Stock in Initial
Public Offering on April 11, 1996 -- -- 1,300,000 13,000 5,492,928
Issuance of Common Stock warrants -- -- -- -- 25,000
Net loss -- -- -- -- --
------------- ------------- ------------- ------------- -------------
BALANCE, DECEMBER 31, 1996 -- -- 8,937,268 89,373 7,939,345
Exercise of private placement warrants -- -- 1,124,000 11,240 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 -- -- 200,000 2,000 3,118,329
Exercise of Common Stock options and
warrants -- -- 41,000 410 80,590
Net loss -- -- -- -- --
------------- ------------- ------------- ------------- -------------
BALANCE, DECEMBER 31, 1997 -- -- 10,302,268 103,023 15,812,809
Exercise of private placement warrants -- -- 675 7 2,356
Exercise of Common Stock options and
warrants -- -- 10,000 100 2,800
Issuance of Common Stock warrants -- -- -- -- 234,916
Net loss -- -- -- -- --
------------- ------------- ------------- ------------- -------------
BALANCE, DECEMBER 31, 1998 -- -- 10,312,943 103,130 16,052,881
Exercise of Common Stock options and
warrants -- -- 1,687,586 16,876 6,220,104
Issuance of Common Stock through private
placement, net of issuance expenses of
$488,220 -- -- 1,414,034 14,140 4,778,657
Issuance of Common Stock for purchase of
equipment -- -- 100,000 1,000 430,000
Issuance of Common Stock in connection
with the executive employee bonus -- -- 200,000 2,000 421,220
Issuance of Common Stock options to
non-employees -- -- -- -- 83,805
Net loss -- -- -- -- --
------------- ------------- ------------- ------------- -------------
BALANCE, DECEMBER 31, 1999 -- -- 13,714,563 137,146 27,986,667
Exercise of Common Stock options and
warrants -- -- 1,754,353 17,544 6,837,299
Issuance of Common Stock through private
placement, net of issuance expenses of
$311,313 -- -- 631,527 6,315 5,050,351
Issuance of Common Stock for purchase of
equipment -- -- 89,843 898 386,325
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 -- -- 250,000 2,500 16,919,468
Issuance of Common Stock options and
warrants to Scientific Advisory Board -- -- -- -- 602,683
Net loss -- -- -- -- --
------------- ------------- ------------- ------------- -------------
BALANCE, DECEMBER 31, 2000 -- -- 16,440,286 164,403 57,885,790
Exercise of Common Stock options and
warrants -- -- 271,431 2,714 1,124,796
Issuance of Convertible Preferred Stock
and warrants through private placement,
net of expenses of $863,1 5,000 50 -- -- 9,136,979
Exchange of Series C to Series C-1 (Note 10) -- -- -- -- --
Issuance of Common Stock upon conversion
of Convertible Preferred Stock (5,000) (50) 1,064,804 10,648 (10,548)
Deemed dividends to Preferred
Shareholders -- -- -- -- 10,918,798
Issuance of Common Stock and warrants
through private placement -- -- 158,704 1,587 1,347,397
Issuance of Common Stock for purchase of
equipment -- -- 10,157 101 43,675
Issuance of Common Stock options to
non-employees -- -- 750 8 388,313
Issuance of Common Stock, options and
warrants in connection with the
Development Agreements -- -- 146,992 1,470 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 -- -- -- -- --
------------- ------------- ------------- ------------- -------------
Comprehensive loss -- -- -- -- --
------------- ------------- ------------- ------------- -------------
BALANCE, DECEMBER 31, 2001 -- -- 18,093,124 180,931 85,016,601
Exercise of Common Stock options and
warrants -- -- 22,533 225 104,007
Issuance of Common Stock through direct
offerings, net of expenses of $519,288 -- -- 1,660,466 16,605 8,038,581
Reduction of conversion price of
convertible notes -- -- -- -- 7,441,547
Deemed dividends to Preferred
Shareholders -- -- -- -- 1,953,479
Issuance of Common Stock in connection
with the executive employee bonus -- -- 2,000 20 16,130
Issuance of Common Stock options to
non-employees -- -- -- -- 461,899
Issuance of Common Stock, options and
warrants in connection with the
Development Agreements -- -- 364,043 3,641 5,380,019
Issuance of Common Stock upon conversion
of Convertible Notes -- -- 1,375,246 13,752 5,057,409
Issuance of Common Stock in connection
with License Agreement -- -- 8,000 80 71,736
Unrealized loss on available-for-sale
securities -- -- -- -- --
Net loss -- -- -- -- --
------------- ------------- ------------- ------------- -------------
Comprehensive loss -- -- -- -- --
------------- ------------- ------------- ------------- -------------
BALANCE, DECEMBER 31, 2002 -- $ -- 21,525,412 $ 215,254 $ 113,541,408
============= ============= ============= ============= =============
[RSTUBBED TABLE]
Deficit
Accumulated Accumulated
During Other
Development Comprehensive Total
Stage Loss Equity/(Deficit
-------------- ------------- ---------------
BALANCE, INCEPTION (JUNE 17, 1994) $ -- $ -- $ 6,000
Net loss (11,121) -- (11,121)
------------- ------------- -------------
BALANCE, DECEMBER 31, 1994 (11,121) -- (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 Enyzmatics, 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
Placement, net of expenses of $50,000 -- -- 2,178,000
Issuance of Common Stock options -- -- 9,950
Net loss (3,072,661) -- (3,072,661)
------------- ------------- -------------
BALANCE, DECEMBER 31, 1995 (3,083,782) -- (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) -- (1,768,995)
------------- ------------- -------------
BALANCE, DECEMBER 31, 1996 (4,852,777) -- 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) -- (5,927,718)
------------- ------------- -------------
BALANCE, DECEMBER 31, 1997 (10,780,495) -- 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) -- (2,793,842)
------------- ------------- -------------
BALANCE, DECEMBER 31, 1998 (13,574,337) -- 2,583,674
Exercise of Common Stock options and
warrants -- -- 6,236,980
Issuance of Common Stock through private
placement, net of issuance 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) -- (5,125,006)
------------- ------------- -------------
BALANCE, DECEMBER 31, 1999 (18,699,343) -- 9,426,470
Exercise of Common Stock options and
warrants -- -- 6,854,843
Issuance of Common Stock through private
placement, net of issuance 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) -- (9,529,046)
------------- ------------- -------------
BALANCE, DECEMBER 31, 2000 (28,228,389) -- 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 $863,1 -- -- 9,137,079
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 (2,517,336) -- 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) -- (16,356,100)
------------- ------------- -------------
Comprehensive loss -- -- (16,360,025)
------------- ------------- -------------
BALANCE, DECEMBER 31, 2001 (47,101,825) (3,925) 38,096,782
Exercise of Common Stock options and
warrants -- -- 104,232
Issuance of Common Stock through direct
offerings, net of expenses of $519,288 -- -- 8,055,186
Reduction of conversion price of
convertible notes -- -- 7,441,547
Deemed dividends to Preferred
Shareholders (1,953,479) -- --
Issuance of Common Stock in connection
with the executive employee bonus -- -- 16,150
Issuance of Common Stock options to
non-employees -- -- 461,899
Issuance of Common Stock, options and
warrants in connection with the
Development Agreements -- -- 5,383,660
Issuance of Common Stock upon conversion
of Convertible Notes -- -- 5,071,161
Issuance of Common Stock in connection
with License Agreement -- -- 71,816
Unrealized loss on available-for-sale
securities -- (14,661) (14,661)
Net loss (31,019,201) -- (31,019,201)
------------- ------------- -------------
Comprehensive loss -- -- (31,033,862)
------------- ------------- -------------
BALANCE, DECEMBER 31, 2002 $ (80,074,505) $ (18,586) $ 33,668,571
============= ============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
F-7
UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARY
(a development-stage company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Period from
Inception
Year Ended December 31, (June 17, 1994)
-------------------------------------------- to
2002 2001 2000 December 31, 2002
------------ ------------ ------------ -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(31,019,201) $(16,356,100) $ (9,529,046) $(75,603,690)
Non-cash charges to statement of operations:
Depreciation 1,848,552 1,124,644 590,284 3,687,080
Amortization of intangibles 1,695,072 1,695,072 460,799 3,850,943
Amortization of discounts on Convertible
Promissory Notes 13,044,467 1,689,701 -- 14,734,168
Issuance of Common Stock options and warrants
for services 542,568 388,321 10,000 1,610,561
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 16,150 -- -- 439,370
Issuance of Common Stock, options and warrants
in connection with Development Agreement 5,487,515 2,283,182 663,111 8,433,808
Issuance of Common Stock options and warrants
for Scientific Advisory Board -- 1,344,686 602,683 1,947,369
Issuance of Common Stock in connection with
License Agreement 71,816 -- -- 71,816
Acquired in-process technology -- -- -- 350,000
(Increase) decrease in assets:
Accounts receivable (121,967) (228,779) (44,653) (662,822)
Prepaids and other current assets 97,932 (151,010) 247,908 171,097
Other assets (113,638) 17,347 20,739 (133,763)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses (352,402) 40,353 484,585 1,042,595
Payable to related parties -- -- -- 250,000
Deferred license fees 3,766,667 400,000 -- 4,166,667
Deferred revenue 272,204 50,000 -- 322,204
------------ ------------ ------------ ------------
Net cash used in operating activities (4,764,265) (7,702,583) (6,493,590) (32,202,268)
------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment and leasehold
improvements (1,169,945) (1,746,788) (1,153,353) (7,422,629)
Purchase of intangibles -- -- (25,750) (25,750)
Purchases of short-term investments (6,900,698) (7,099,904) (3,368,621) (32,866,605)
Proceeds from sale of short-term investments 6,359,585 5,284,000 4,964,461 27,805,368
Restricted cash 15,162,414 (15,162,414) -- --
------------ ------------ ------------ ------------
Net cash provided by (used in) investing
activities 13,451,356 (18,725,106) 416,737 (12,509,616)
------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of Common Stock 8,055,186 1,348,984 5,367,979 31,031,936
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
Payments for Convertible Promissory Notes (8,819,997) (8,819,997)
Proceeds from the exercise of Common Stock
options and warrants 104,232 1,127,510 6,854,843 14,279,704
Principal payments on capital lease (4,228) (3,792) (3,402) (11,422)
------------ ------------ ------------ ------------
Net cash provided by (used in) financing
activities (664,807) 26,609,781 12,219,420 60,617,300
------------ ------------ ------------ ------------
INCREASE IN CASH AND CASH EQUIVALENTS 8,022,284 182,092 6,142,567 15,905,416
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 7,883,132 7,701,040 1,558,473 --
------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 15,905,416 $ 7,883,132 $ 7,701,040 $ 15,905,416
============ ============ ============ ============
Cash paid for interest $ 281,106 $ 51,944 $ -- $ 333,050
============ ============ ============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
F-8
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 device ("OLED") technologies and materials for potential flat panel
display and other 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 and now known as
UDC, Inc. ("UDC") was incorporated under the laws of the State of New Jersey on
June 17, 1994 (Note 3).
The Company also sponsors substantial OLED technology research 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 Research Agreement
between the Company and the Trustees of Princeton University dated October 9,
1997 (as amended, the "1997 Research Agreement") (Note 5). The Company
previously sponsored OLED technology research conducted at Princeton University
under a Sponsored Research Agreement between the Trustees of Princeton
University and American Biomimetics Corporation ("ABC") dated August 1, 1994 (as
amended, the "1994 Sponsored Research Agreement"). ABC, a privately held
Pennsylvania corporation that is affiliated with the Company, assigned its
rights and obligations under the 1994 Sponsored Research Agreement to the
Company in October 1995.
Pursuant to a License Agreement between the Trustees of Princeton University and
ABC dated August 1, 1994 (as amended, the "1994 License Agreement"), Princeton
University granted the Company a worldwide exclusive license, with rights to
sublicense, to make, have made, use, lease and/or sell products and to practice
processes based on a pending patent application of Princeton University relating
to OLED technology. Under the 1994 License Agreement, Princeton University
further granted ABC similar license rights with respect to patent applications
and issued patents arising out of work performed by Princeton University under
the 1994 Sponsored Research Agreement. ABC assigned its rights and obligations
under the 1994 License Agreement to the Company in June 1995. On October 9,
1997, the Company and Princeton University entered into an Amended License
Agreement that amended and restated the 1994 License Agreement (as amended, the
"1997 Amended License Agreement") (Note 5). Under the 1997 Amended License
Agreement, Princeton University granted the Company corresponding license rights
with respect to patent applications and issued patents arising out of work
performed by Princeton University and USC under the 1997 Research Agreement.
2. LIQUIDITY:
As of December 31, 2002, the Company had an accumulated deficit of $80,074,505.
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, 2002 are sufficient to fund its operations into 2004.
3. MERGER, RECAPITALIZATION AND PUBLIC OFFERING:
On June 22, 1995, a wholly-owned subsidiary of the Company merged into UDC
pursuant to an Agreement and Plan of Reorganization by and among Enzymatics, UDC
and this subsidiary (the "Merger Agreement"). At the time of the merger, UDC was
engaged in the business currently being conducted by the Company. Enzymatics was
an inactive corporation at the time of the merger, having sold substantially all
of its assets to a third party on June 30, 1994. Prior to that time, Enzymatics
was engaged in the business of developing, manufacturing and marketing
quantitative diagnostic medical devices. 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 also determined that such additional
capital would be necessary to fulfill UDC's financial obligations under the
Transfer Agreement (as herein defined), pursuant to which UDC had both acquired
certain rights and assumed certain obligations relating to specified OLED
technology, and obtained funds to commercialize this OLED technology, acquire
additional OLED technology and fund working capital.
As of the date of the merger, Enzymatics had 523,268 shares issued and
outstanding (after giving effect to a reverse stock split of 10.9672), which
were not being 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,
F-9
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 was 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.
Contemporaneous with the merger, the Company and American Biomimetics
Corporation ("ABC") entered into a Technology Transfer Agreement dated June 22,
1995 (the "Transfer Agreement") pursuant to which, among other things, ABC (a)
assigned the 1994 License Agreement to the Company and (b) granted to the
Company an exclusive worldwide sublicense in the field of display technology to
specified patent rights licensed to ABC under a License Agreement between ABC
and the Trustees of Princeton University dated October 22, 1993 (the "1993
License Agreement"), and to any patents claiming inventions in the field of
display technology that were developed under a Sponsored Research Agreement
between ABC and the Trustees of Princeton University dated October 22, 1993 (the
"1993 Sponsored Research Agreement"). In exchange for this assignment and
sublicense, the Company agreed to (i) pay ABC $500,000 and reimburse ABC
$674,000 for its scheduled payments and expenses previously made to Princeton
University under the 1993 Sponsored Research Agreement, both of which amounts
were charged as research and development expenses; (ii) assume 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
that were estimated to be $500,000, for a total of $2,110,000; and (iii) issue
ABC 200,000 shares of the Company's Series A Nonconvertible Preferred Stock
(Note 9), which stock had a fair value of $350,000.
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 the Company's Common Stock and one warrant to purchase
one share of the Company's 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. The Company sold an additional 207,500
Units, which generated gross proceeds of $415,000, on July 17, 1995.
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 this 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
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."
F-10
These securities are carried at fair market value, with unrealized gains and
losses reported in shareholders' equity as a component of other comprehensive
loss. Gains or losses on securities sold are based on the specific
identification method. The Company reported accumulated unrealized holding
losses of $18,586 and $3,925 at December 31, 2002 and 2001, respectively.
Comprehensive loss, which includes the net loss and change in unrealized holding
losses, was $31,033,862 and $16,360,025 for the year ended December 31, 2002 and
2001, respectively. The gross proceeds from sales and maturities of investments
were $6,359,585 and $5,284,000 for the years ended December 31, 2002 and 2001,
respectively. Gross realized gains and losses for the years ended December 31,
2002 and 2001 were not material.
Fair Value of Financial Instruments
Cash and cash equivalents, short-term investments, restricted cash, accounts
receivable, prepaid and other current assets, accounts payable and accrued
expenses are reflected in the accompanying financial statements at fair value
due to the short-term nature of those instruments. The carrying amount of
capital lease obligations approximate fair value at the balance sheet dates.
Property and Equipment
Property and equipment are stated at cost and depreciated on a straight-line
basis over their estimated useful life of 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 and capital leases. Equipment under capital
leases are stated at the present value of the minimum lease payments. Repair and
maintenance costs are charged to expense as incurred. Additions and betterments
are capitalized.
Property and equipment consists of the following:
December 31,
-------------------------------
2002 2001
------------ ------------
Office and lab equipment $ 5,718,178 $ 4,652,925
Furniture and fixtures 215,675 146,496
Leasehold improvements 2,058,670 1,055,298
Construction-in-progress 256,197 1,226,370
------------ ------------
8,248,720 7,081,089
Less: Accumulated depreciation (3,631,150) (1,784,912)
------------ ------------
Property and Equipment, net $ 4,617,570 $ 5,296,177
============ ============
Depreciation expense was $1,848,552, $1,124,644 and $590,284 for the years ended
December 31, 2002, 2001 and 2000, respectively and is included in research and
development expense.
Construction-in-progress 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 cost associated with such assets will be depreciated
over their estimated useful lives.
Acquired Technology
Acquired technology consists of acquired license rights for patents and know-how
obtained from PD-LD, Inc. and Motorola, Inc. (Note 6). These intangible assets
consist of the following:
December 31,
-------------------------------
2002 2001
------------- -------------
PD-LD, Inc. $ 1,481,250 $ 1,481,250
Motorola, Inc. 15,469,468 15,469,468
------------- -------------
16,950,718 16,950,718
Less: Accumulated amortization (3,850,943) (2,155,871)
------------- -------------
Acquired Technology, net $13,099,775 $14,794,847
============= =============
Acquired technology is amortized on a straight-line basis over its estimated
useful life of ten years. Amortization expense was $1,695,072, $1,695,072 and
$460,799 for the years ended December 31, 2002, 2001 and 2000, respectively. For
each of the five succeeding fiscal years, amortization expense will be
$1,695,072.
F-11
Impairment of Long-Lived Assets
In accordance with SFAS 144, "Accounting for Impairment or Disposal of
Long-Lived Assets," management continually evaluates whether events or changes
in circumstances might 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 impairment would be
based on generally accepted valuation methodologies, as deemed appropriate. As
of December 31, 2002, management of the Company believed that no revision to the
remaining useful lives or write-down of the Company's long-lived assets was
required, and no such revisions were required in 2002, 2001 and 2000.
Net Loss Per Common Share
Basic net loss per common share is computed by dividing the net loss
attributable to Common Stock shareholders by the weighted-average number of
shares of Common Stock outstanding for the period. Diluted net loss per common
share reflects the potential dilution from the exercise, or conversion of
securities into Common Stock. For the years ended December 31, 2002, 2001 and
2000, 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.
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 in relation to
its government contracts. Revenues are recognized proportionally as research and
development costs are incurred, or as defined milestones are achieved.
Development chemical revenues represent revenues from sales of OLED materials to
OLED manufacturers for evaluation and product development purposes. Revenues are
recognized at the time of shipment and passage of title. The customer does not
have the right to return the materials.
The Company receives non-refundable advanced payments in connection with certain
joint development, technology evaluation and license agreements it enters into.
Certain of these payments are creditable against future license fees payable
under commercial license agreements that the parties may subsequently enter into
and are deferred until such license agreements are executed or negotiations have
ceased and there is no likelihood of executing a license agreement. Revenues
would then 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. Advanced payments under these
agreements that are received under a technology evaluation agreement and are not
creditable against license fees are deferred and revenue is recognized over the
term of the agreement as technology development revenue.
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,
------------------------------------------------
2002 2001 2000
------------ ------------ -------------
Development and operations in the Company's facility $ 6,189,638 $ 5,287,884 $ 3,422,198
Patent application expenses 1,282,803 940,480 1,227,184
Costs incurred to Princeton University and USC under the
1997 Research Agreement (Note 5) 859,339 758,732 733,230
PPG Development and License Agreement (Note 8) 5,487,515 2,283,182 663,111
Amortization of intangibles 1,695,072 1,695,072 460,799
Scientific Advisory Board Compensation (Note 11) 289,900 1,344,686 602,683
------------ ------------ -------------
$15,804,267 $12,310,036 $7,109,205
============ ============ =============
Recent Accounting Pronouncements
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
The Statement updates, clarifies and simplifies existing accounting
pronouncements relating to gains and losses from extinguishment of debt and
certain lease modifications. Certain provisions of SFAS No. 145 are effective
for fiscal years beginning after May 15, 2002, while other provisions are
effective for transactions occurring after May 15, 2002. The Company has adopted
SFAS No. 145 early, and as a result, the debt conversion and extinguishment
expense (Note 6), has been classified within continuing operations.
F-12
In July 2002, the FASB Issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which addresses the financial accounting and
reporting of expenses related to restructurings initiated after 2002, and
applies to costs associated with an exit activity (including a restructuring) or
with a disposal of long-lived assets. Those activities can include eliminating
or reducing product lines, terminating employees and contracts, and relocating
plant facilities or personnel. Under SFAS No. 146, a company will record a
liability for a cost associated with an exit or disposal activity when the
liability is incurred and can be measured at fair value. The provisions of SFAS
No. 146 are effective prospectively for exit or disposal activities initiated
after December 31, 2002. Management believes that the adoption of this statement
will not have a material effect on the Company's future results of operations or
financial position.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others," which elaborates on the disclosures to be made by a
guarantor in its interim and annual financial statements about its obligations
under guarantees issued. The Interpretation also clarifies that a guarantor is
required to recognize, at inception of a guarantee, a liability for the fair
value of the obligation undertaken. The initial recognition and measurement
provisions of the Interpretation are applicable to guarantees issued or modified
after December 31, 2002 and are not expected to have a material effect on the
Company's financial statements. The disclosure requirements are effective for
financial statements in interim or annual periods ending after December 15,
2002.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation- Transition and Disclosure," which amends SFAS No. 123, to provide
alternative methods of transition for a voluntary change to the fair value
method of accounting for stock-based employee compensation. In addition, SFAS
No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements. Certain of the
disclosure modifications are required for fiscal years ending after December 15,
2002.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities," which addresses the consolidation by business
enterprises of variable interest entities as defined in the Interpretation. The
Interpretation applies immediately to variable interests in variable interest
entities created after January 31, 2003, and to variable interests in variable
interest entities obtained after January 31, 2003. The application of this
Interpretation is not expected to have a material effect on the Company's
financial statements.
The EITF recently reached a consensus on EITF Issue No. 00-21, which provides
accounting guidance for customer solutions where delivery or performance of
products, services and/or performances may occur at different points in time or
over different periods of time. Companies are required to adopt this consensus
for fiscal periods beginning after June 15, 2003. The Company believes the
adoption of EITF Issue No. 00-21 will not have a material impact on the
Company's financial position, results of operations, or liquidity.
Statement of Cash Flow Information
The following non-cash investing and financing activities occurred:
Year Ended December 31,
--------------------------------------------------
2002 2001 2000
-------------- ------------- --------------
Common Stock issued for the purchase of equipment $ -- $ 43,776 $ 387,223
Unrealized loss on available-for-sale securities 14,661 3,925 --
Redeemable Common Stock issued in development agreement (Note 8) -- -- 570,114
Reclassification of Redeemable Common Stock (Note 8) -- 570,114 --
Conversion of Series C and D Preferred Stock into Common Stock -- 10,648 --
Deemed dividends to Preferred shareholders (Note 10) 1,953,479 2,517,336 --
Capital lease obligations incurred on equipment -- -- --
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) --
Reduction of conversion price of Convertible Notes (Note 10) 7,441,547 -- --
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.
F-13
Stock Options
The Company accounts for its stock option plans (Note 11) under Accounting
Principles Board Opinion ("APB") 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.
As allowed by SFAS 123, the Company has elected to continue to account for its
employee stock-based compensation plans under APB Opinion No. 25, and adopted
only the disclosure requirements of SFAS No. 123. 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,
-------------------------------------------------
2002 2001 2000
------------- ------------- --------------
Net loss applicable to Common shareholders:
As reported $(32,972,680) $(18,873,436) $(9,529,046)
Add stock-based employee compensation
expense included in reported net income, net
of tax -- -- --
Deduct total stock-based employee compensation
expense determined under fair-value-based
method for all rewards, net of tax (3,056,777) (6,642,246) (2,408,576)
------------- ------------- --------------
Pro forma (36,029,457) (25,515,682) (11,937,622)
============= ============= ==============
Basic and diluted net loss per share:
As reported $ (1.71) $ (1.11) $ (0.62)
Pro forma (1.87) (1.50) (0.78)
The fair value of the options granted is estimated using the Black-Scholes
option-pricing model with the following assumptions:
2002 2001 2000
------------ ---------- ------------
Risk-free interest rate 3.3-5.0% 4.6% 4.7%
Volatility 94% 94% 60%
Expected dividend yield 0% 0% 0%
Expected option life 7 years 7 years 7 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.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year
presentation.
5. RESEARCH AND LICENSE AGREEMENTS WITH PRINCETON UNIVERSITY:
The Company paid Princeton University $4,481,641 under the 1994 Sponsored
Research Agreement and the 1997 Research Agreement through the period ending on
July 31, 2002. In April 2002, the Company amended the 1997 Research Agreement
with Princeton providing, among other things, for an additional five-year term.
The Company is obligated to pay Princeton University up to $7,477,993 under the
1997 Research Agreement from July 31, 2002 through July 31, 2007. Payments to
Princeton University under this agreement are charged to research and
development expenses when they become due.
Under the 1997 Amended License Agreement, the Company is required to pay
Princeton University royalties for licensed products sold by the Company or its
sublicensees. For licensed products sold by the Company, the Company is required
to pay Princeton University 3% of the net sales price of these products. For
licensed products sold by the Company's sublicensees, the Company is required to
pay Princeton University 3% of the revenues received by the Company from these
sublicensees. These royalty rates are subject to upward adjustments under
certain conditions.
F-14
The Company is obligated under the 1997 Amended License Agreement to pay to
Princeton University minimum annual royalties. The minimum royalty payment was
$25,000 in 1999, $50,000 in 2000, $75,000 in 2001, and $100,000 in 2002 and
thereafter. These royalties are charged to research and development expense in
the year they become due.
The Company also is required under the 1997 Amended License Agreement to use
commercially reasonable efforts to bring the licensed OLED technology to market.
However, this requirement is deemed satisfied provided the Company performs its
obligations under the 1997 Research Agreement and, when that agreement ends, the
Company invests a minimum of $800,000 per year in research, development,
commercialization or patenting efforts respecting the patent rights licensed to
the Company.
In connection with executing the Research Agreement and the Amended License
Agreement, in 1997 the Company issued to Princeton University 140,000 shares of
the Company's Common Stock and 10 year warrants to purchase an additional
175,000 shares of the Common Stock at an exercise price of $7.25 per share
vesting immediately. The Company also issued to USC 60,000 shares of the Common
Stock and 10 year warrants to purchase an additional 75,000 shares of the Common
Stock at an exercise price of $7.25 per share vesting immediately.
6. ACQUIRED TECHNOLOGY:
On July 19, 2000, the Company, PD-LD, Inc. ("PD-LD"), its president Dr. Vladimir
Ban and the Trustees of Princeton University entered into a Termination,
Amendment and License Agreement whereby the Company acquired all PD-LD's rights
to certain issued and pending OLED technology patents in exchange for 50,000
shares of the Company's Common Stock. Pursuant to this transaction, these
patents were included in the patent rights exclusively licensed to the Company
under the 1997 Amended License Agreement. The acquisition of these patents had a
fair value of $1,481,250 (Note 4).
On September 29, 2000, the Company entered into a License Agreement with
Motorola, Inc. ("Motorola"). Pursuant to this agreement, the Company licensed
from Motorola 72 U.S. patents, 6 U.S. patent applications and additional foreign
patents relating to OLED technologies. These patents expire between 2012 and
2018. The Company has the sole right to sublicense these patents to OLED
manufacturers. As consideration for this license, the Company issued to Motorola
200,000 shares of the Company's Common Stock (valued at $4,412,500), 300,000
shares of the Company's Series B Convertible Preferred Stock (valued at
$6,618,750), and a warrant to purchase 150,000 shares of the Company's Common
Stock at $21.60 per share. This warrant became exercisable on September 29,
2001, and will remain exercisable until September 29, 2008. The warrant was
recorded at a fair market value of $2,206,234 based on the Black-Scholes
option-pricing model, and was recorded as a component of the cost of the
acquired technology. The Company also issued a warrant to an unaffiliated third
party to acquire 150,000 shares of Common Stock as a finder's fee in connection
with this transaction. This warrant was granted with an exercise price of $21.60
per share and 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).
The Company is required under the License Agreement to pay Motorola on gross
revenues earned by the Company for its sales of OLED products or components, or
from its sublicensees for their sales of OLED products or components, whether or
not these products or components are based on inventions claimed in the patent
rights licensed from Motorola (Note 13). Moreover, the Company is required to
pay Motorola minimum royalties of $150,000 for the two-year period ending on
December 31, 2002, $500,000 for the two-year period ending on December 31, 2004,
and $1,000,000 for the two-year period ending on December 31, 2006. All royalty
payments may be made, at the Company's discretion, in either all cash or 50%
cash and 50% in shares of the Company's Common Stock. The number of shares of
Common Stock used to pay the stock portion of the royalty is equal to 50% of the
royalty due divided by the average daily closing price per share of the
Company's Common Stock over the 10 trading days ending two business days prior
to the date the Common Stock is issued. For the two-year period ending on
December 31, 2002, the Company issued to Motorola 8,000 shares of the Company's
Common Stock, valued at $71,816, and paid Motorola $78,184 in cash to satisfy
the minimum royalty obligation of $150,000.
F-15
7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
Accrued expenses consist of the following:
December 31,
-------------------------------
--
2002 2001
------------- --------------
Accrued professional fees $ 223,988 $ 118,076
Payroll 186,050 145,025
Utilities 15,986 24,511
Vacation and sick 337,608 176,812
Subcontractor 74,175 137,889
Research and development agreements 231,329 102,473
Interest expense -- 84,997
Construction costs -- 261,906
Other 15,753 20,932
------------- --------------
$ 1,084,889 $ 1,072,621
============= ==============
8. COMMON STOCK AND WARRANTS ISSUED UNDER THE PPG DEVELOPMENT AND LICENSE
AGREEMENT:
On October 1, 2000, the Company entered into a five-year Development and License
Agreement with PPG Industries, Inc. ("PPG") to leverage the Company's OLED
technologies 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 materials. In
consideration for PPG's services under the agreement, the Company is required to
issue shares of its Common Stock and warrants to acquire its Common Stock to PPG
on an annual basis over the period from January 1, 2001 through December 31,
2005. The amount of securities the Company is required to issue is subject to
adjustment under certain circumstances, as defined in the agreement.
On November 11, 2000, in consideration for PPG's services under the Development
and License Agreement through December 31, 2000, the Company issued to PPG
26,448 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, and
the Company recorded a charge to research and development expense of $535,300 in
2000. On May 11, 2001, the required registration statement for the Redeemable
Common Shares was declared effective by the SEC. Accordingly, the promissory
note was settled and the Redeemable Common Shares were reclassified as Common
Stock and additional paid-in-capital.
As required under the Development and License Agreement, the Company issued
1,720 shares of Common Stock to PPG on January 31, 2001. These additional shares
were issued to PPG based on a final accounting for actual costs incurred by PPG
under the agreement through December 31, 2000. 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.
During the first quarter of each of 2002 and 2001, the Company issued to PPG
344,379 and 118,824 shares of the Company's Common Stock as consideration for
services required to be provided by PPG under the Development and License
Agreement in 2002 and 2001, respectively. During 2002 and 2001, the Company
recorded the issuance of these shares as a charge of $2,858,063 and $1,314,640
to research and development expense based on the fair value of the Common Stock
as it was earned. The Company issued an additional 16,645 and 3,019 shares of
its Common Stock to PPG on February 15, 2003 and February 15, 2002, based on a
final accounting for actual costs incurred by PPG in 2002 and 2001,
respectively. Accordingly, the Company accrued $131,329 and $27,473 of
additional research and development expense as of December 31, 2002 and December
31, 2001, respectively, based on the fair value of these additional shares.
In further consideration of the services performed by PPG under the Development
and License Agreement, the Company is required to issue warrants to PPG to
acquire shares of the Company's Common Stock. 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 each calendar year of the term of the agreement.
Accordingly, the Company recorded charges to research and development expense of
$2,263,737, $804,988 and $98,286 during the years ended December 31, 2002, 2001
and 2000, respectively. These charges were recorded based on the estimated fair
value of warrants that were earned by PPG during each of 2002, 2001 and 2000. As
a result, PPG earned warrants to acquire 361,024, 121,843 and 28,168 shares of
the Company's Common Stock at exercise prices of $10.14, $24.28 and $24.28,
respectively. The warrants vest immediately and each have a contractual term of
seven years. The warrants were issued on February 15, 2003, 2002 and 2001,
respectively. The Company determined the fair value of the warrants earned
during each of 2002, 2001 and 2000 using the Black-Scholes option-pricing model
with the following assumptions: (1) risk free interest rate of 3.3%-5.4%,
4.5%-5.6% and 5.3%, (2) no expected dividend yield, (3) expected life of seven
years, and (4) expected volatility of 94%, 70%-94% and 70%, respectively.
The Company is required to grant options to purchase the Company's Common Stock
to PPG employees performing services for the Company under the Development and
License Agreement.
F-16
On December 14, 2000, the Company granted options to these PPG employees to
acquire 26,000 shares of the Company's Common Stock at an exercise price of
$9.44 per share. During 2001 and 2000, the Company recorded charges of $155,578
and $7,072, respectively, to research and development expense for the fair
market value of these options, as determined in accordance with the
Black-Scholes option-pricing model.
On December 17, 2001, the Company granted to PPG employees performing services
under the agreement options to purchase 26,333 shares of the Company's Common
Stock at an exercise price of $8.56 per share. During 2002 and 2001
respectively, the Company recorded $176,779 and $7,977 in research and
development expense related to these options.
On September 23, 2002, the Company granted options to PPG employees performing
services under the agreement options to purchase 30,000 shares of the Company's
Common Stock at an exercise price of $5.45. In 2002, the Company recorded
$57,607 in research and development expense related to these options.
The Company determined the fair value of the options earned during 2002, 2001
and 2000, respectively, using the Black-Scholes option-pricing model with the
following assumptions: (1) risk free interest rate of 3.7%-3.8%, 5.4% and
4.8-5.3%, (2) no expected dividend yield, (3) expected life of 10 years, and (4)
expected volatility of 94%, 94% and 70-94%, respectively. Subject to certain
contingencies, all of these options vested one-year from the date of grant and
expire 10 years from the date of issuance.
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 shares have a liquidation value
of $7.50 per share. Series A shareholders, as a single class, have the right to
elect two of the Company's Board of Directors. Holders of the Series A shares
are entitled to one vote per share on matters which shareholders are generally
entitled to vote. The Series A shareholders are not entitled to any dividends.
The Series A shares 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 shares. The Series B shares have a
liquidation value of $21.48 per share, plus accrued and unpaid dividends.
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 shares could be
converted on matters which shareholders are generally entitled to vote. The
Series B shareholders are entitled to dividends that are declared or paid to
holders of the Common Stock.
Each share of the Series B is convertible, at the option of the holder, into
such number of fully paid and nonassessable shares of Common Stock as is
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. Of the 300,000 shares of the Series B, 75,000 shares become
convertible on each of September 29, 2001, 2002, 2003 and 2004, with all
outstanding shares of the Series B being converted automatically into shares of
the Company's Common Stock on September 29, 2004. The conversion price for the
Series B shares is initially the original issuance price per share of the Common
Stock, but is subject to change if the average price of the Common Stock falls
below $12.00 for the 30 trading days ending two business days prior to the
relevant conversion date, regardless of prior changes to the conversion price.
The Company has the option to pay Series B shareholders an amount of cash equal
to the difference between $12.00 and the average price of the Common Stock,
multiplied by the number of shares of Common Stock into which the Series B
shares would be convertible. Two business days prior to the September 29, 2002
and 2001 conversion dates, the Company's average stock price for the preceding
30 trading days was $5.50 and $10.81, respectively. As such, the original
conversion price was adjusted in accordance with the conversion terms of the
Series B, the conversion prices were reduced to $9.85 and $19.35, respectively,
resulting in an additional 88,553 and 8,256 shares of Common Stock being
issuable to Motorola 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, which was $22.06. Accordingly, the
Company recorded a CBCF in an amount of $1,953,479 and $182,127 in 2002 and
2001, respectively. The CBCF was treated as a deemed dividend to the Series B
shareholders.
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 the Company's Common Stock for a total of $20,000,000.
The Company accounted for this financing transaction as a package sale and
allocated the cash proceeds received to the Notes, the Series C shares and the
warrants to acquire Common Stock based on the relative fair value of each
instrument.
F-17
Notes
The Company issued two $7,500,000 Notes, each with a maturity date of August 22,
2004. The Notes were convertible into shares of the Company's Common Stock at an
initial conversion price of $13.97 per share, with such conversion price subject
to change based on anti-dilution provisions and other adjustments.
The Company's obligations under the Notes were secured by irrevocable letters of
credit issued with face amounts equal to the outstanding principal of the
related Notes. The $15,000,000 in proceeds from the sale of the Notes was
pledged as collateral to the bank issuing the letters of credit. Prior to
conversion and repayment of the Notes, the $15,000,000 in cash proceeds plus
accrued but unpaid interest was 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 shares, the
Notes and the warrants based on their relative fair values as of the commitment
date. The fair value of the Notes was determined based on a three-year
discounted cash flow analysis using a risk-adjusted interest rate of 11%. The
Company determined the relative fair value of the Notes to be $9,857,006. The
resulting original issuance discount ("OID") of $5,142,994 was amortized as
interest expense, using the effective interest method, over the maturity period
of three years. During the years ended December 31, 2002 and 2001, the Company
recognized non-cash charges to interest expense of $1,819,989 and $1,015,418,
respectively, for 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 a $3,258,468 BCF as a debt discount on the commitment date.
The BCF debt discount was being amortized as interest expense, using the
effective interest method, over the maturity period of three years. During the
years ended December 31, 2002 and 2001, the Company recognized non-cash charges
to interest expense of $1,212,697 and $674,283, respectively, for amortization
of the BCF.
In August 2002, the Company completed a registered direct offering of Common
Stock to institutional investors that was deemed dilutive under the terms of the
Notes. As a result, the conversion price of the Notes was reduced to $5.09 per
share. In accordance with EITF No. 98-5, this reduction in the conversion price
resulted in a CBCF of $7,441,547 that was recorded as additional debt discount
to be amortized over the remaining term of the Notes.
In September 2002, $7,000,002 in principal amount of the Notes was converted
into 1,375,246 shares of Common Stock and the remaining $7,999,998 in principal
amount of the Notes was repaid, together with a prepayment premium, established
under the Notes, of $400,000 in cash. As of the date of conversion and repayment
of the Notes in September 2002, the $15,000,000 face value of the Notes exceeded
their then-carrying value as a result of the unamortized OID,BCF and CBCF by
$9,611,781 and the intrisic value of the Notes repurchased by $1,508,841. As a
result, the Company recognized a non-cash debt conversion and extinguishment
expense of $10,011,780 upon conversion and repayment of the Notes.
F-18
A reconciliation of the face amount of the Notes and the carrying value at
December 31, 2002 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
Less:
CBCF 7,441,547
Add:
2002 amortization of OID treated as interest expense 1,819,989
2002 amortization of BCF treated as interest expense 1,212,697
Unamortized OID,BCF and CBCF charged to interest expense upon conversion 9,611,781
Intrinsic value of the Notes repurchased through and charged to APIC 1,508,841
Less:
Conversion of debt 7,000,002
Repayment of debt 7,999,998
------------
Notes carrying value at December 31, 2002 $ --
============
Series C
The Company issued 5,000 shares of Series C on August 22, 2001, and received
proceeds of $4,496,477, net of $503,523 in cash offering costs. Holders of
Series C shares are not entitled to voting rights except as is required by law.
Each share of the Series C has a stated value of $1,000, which increased by
$4.16 for each month during which such share of Series C was outstanding. There
are no dividends payable on the Series C shares.
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 shares 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, the Series C shares, and the warrants based on their relative fair
values. The fair value of the Series C shares 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 shares.
In accordance with EITF No. 00-27 and EITF No. 98-5, and after considering the
allocation of the proceeds to the Series C shares, the Company determined that a
BCF existed on the Series C shares. The BCF existed at the commitment date due
to the fact that the carrying value of the Series C shares, after the initial
allocation of the proceeds, was less than the fair market value of the Common
Stock that was issuable upon conversion of these shares. Accordingly, the
Company recorded a BCF of $616,793 immediately as the Series C shares were
convertible on 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 shares, 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 shares so long as these shares are
outstanding. In 2001, the CBCF was recorded based upon the increase in the
stated price, which results in additional shares of Common Stock being issuable
upon conversion of the Series C shares. The Company recorded a CBCF of $163,749,
which was 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
shares from $12.70 to $9.45. Under the terms of the original conversion
privileges, holders of the Series C shares were entitled to receive 393,701
shares of Common Stock upon conversion of these shares. As a result of the
reduced conversion price, the Series C shareholders 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, on December 5, 2001 (the conversion date) the Company recorded a deemed
dividend in the amount of $1,123,808 for the reduced conversion price.
On December 5, 2001, the holders converted all 5,000 shares of the Series C into
the Company's 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 to the
Series C shareholders.
F-19
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 the
Company's Common Stock for an aggregate price of $5,000,000. The terms of the
Series D, regarding voting rights, stated value, increase in stated value 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 shares and the warrants based on their relative fair values. The fair
value of the Series D shares 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 shares 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 shares, the Company determined that,
as a result of the monthly increase in the stated price, a CBCF existed on the
Series D shares. The monthly increase in stated price reduced the conversion
price of the Series D shares, so long as the Series D shares were outstanding.
Since the Series D was convertible on the commitment date, the Company recorded
a CBCF of $98,614 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 Series D shareholders converted all 5,000 shares of the
Series D into the Company's Common Stock. This was done at a $9.45 conversion
price per share. Upon conversion, the Company issued 529,100 shares of Common
Stock to the Series D shareholders.
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 Relative Fair
Series Number Exercise Price Expiration date 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 their holders.
The Series II warrants were exercisable as of 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 their
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. In this regard, 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 were 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-20
Effective November 5, 2001, the Company and the investors agreed to amend the
terms of the private placement transaction by, among other things, reducing the
exercise prices on the Series I and II warrants to $9.93 per share and extending
the expiration date on the Series I, II and III warrants to August 22, 2011.
This represented a new measurement date and the Company revalued the warrants as
of 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, II and III warrants were 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 the
Series C were exchanged for Series C-1 shares. As the term, rights and
preferences of the Series C-1 shares were substantially similar to those of the
Series C, the Company recorded the exchange based upon the carrying value of the
Series C shares.
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 to the Company 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 as of 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
among the Company, PD-LD, its president Vladimir Ban and The Trustees of
Princeton University (Note 6). These shares were recorded at the fair market
value of the Common Stock on the date of issuance. Accordingly, the Company
recorded an intangible asset of $1,481,250.
On September 29, 2000, the Company issued to Motorola 200,000 shares of the
Company's Common Stock, 300,000 shares of Series B and a warrant to purchase
150,000 shares of Common Stock in accordance with the License Agreement between
the Company and Motorola (Note 6). The Company also issued a warrant to an
unaffiliated third party 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
unit consisting of one share of Common Stock and one warrant, resulting in gross
proceeds to the Company of $5,367,979. Costs of raising the capital were
$311,313. The units were issued at $8.50 per unit and the shares of Common Stock
and warrants were valued at $4.66 and $3.84, respectively, based on their
relative fair values. The warrants vested immediately, have an exercise price of
$10.00 and expire five year from the date of issuance. In connection with the
private placement, the Company issued an additional 161,000 warrants as finders'
fees, which vested immediately, have an exercise price of $10.00 and expire five
years from the date of issuance. The warrants were collectively valued at
$890,722 using the Black-Scholes option-pricing model, with this amount being
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 five years(a contractual term), (3) 70% expected volatility,
and (4) zero expected dividend yield.
During January 2001, the December 2000 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 to the
Company of $1,348,984. In connection with the completion of this private
placement, the Company issued warrants to purchase an additional 22,500 shares
of Common Stock as finders' fees. All of these warrants vested immediately, have
an exercise price of $10.00 and expire five years from the date of issuance. The
warrants were valued at $551,645 using the Black-Scholes option-pricing model,
with this amount being 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 five years (a contractual term), (3) 70%
expected volatility, and (4) zero expected dividend yield.
F-21
In 2000, the Company granted warrants to purchase shares of Common Stock to
members of the Company's Scientific Advisory Board. The Company recorded a
charge of $556,612 to research and development expense for the year ended
December 31, 2001 for the vesting of these warrants during this period. These
warrants became fully vested in December 2001.
In August and September 2002, the Company completed registered direct offerings
(the "Offerings") of 1,277,014 and 383,452 shares, respectively, of Common Stock
at $5.09 and $5.41 per share, respectively. The completion of the Offerings
resulted in aggregate proceeds to the Company of $8,055,186, net of $519,288 in
costs associated with the completion of the Offerings.
Enzymatics 1992 Stock Option Plan
Stock options granted by Enzymatics prior to the merger (Note 1) under the 1992
Stock Option Plan were assumed by the Company and converted into options to
purchase 20,538 shares of the Company's Common Stock 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 Board of Directors of the Company adopted the 1995 Stock Option
Plan (the "1995 Plan"), under which options to purchase a maximum of 500,000
shares of the Company's Common Stock were authorized to be granted at prices not
less than the fair market value of the Common Stock on the date of the grant, as
determined by the Board of Directors. Through 2002, the Company's shareholders
have approved increases in the number of shares of reserved for issuance under
the 1995 Plan to 3,800,000. 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 periods
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, 2002 for all grants under the 1995 Plan:
Exercise Year of
Year Granted Price Expiration Exercised Forfeited Exercisable Outstanding
- --------- ----------- -------------- ------------ ---------- ---------- ------------ ------------
2002 606,730 $ 5.45-11.17 2012 -- -- 552,730 606,730
2001 824,833 8.56-13.900 2011 1,000 -- 754,333 823,833
2000 430,250 9.437-24.375 2010 9,500 2,500 363,250 418,250
1999 479,250 3.375- 9.625 2009 74,817 17,000 366,433 387,433
1998 303,000 3.75- 6.220 2008 21,000 42,000 240,000 240,000
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 50,000 - 265,000 265,000
----------- ---------- ---------- ------------ ------------
Totals 3,263,563 205,064 69,500 2,789,499 2,988,999
=========== ========== ========== ============ ============
The following tables summarize the stock options grant activity for each year
from inception through December 31, 2002 for grants under the 1995 Plan:
2002 grants and activity through December 31, 2002:
Exercise Year of
Grantee Granted Price Expiration Exercisable Outstanding
--------------------------- ---------- --------- ------------ ------------- --------------
Employees 500 8.39 2012 500 500
Employees 5,000 9.24 2012 1,000 5,000
Employees 10,000 9.66 2012 2,000 10,000
Employees 5,000 9.94 2012 5,000 5,000
Employees 10,000 11.17 2012 2,000 10,000
Employees and Officers 6,000 9.10 2012 2,000 6,000
Employees and Officers 448,480 5.45 2012 448,480 448,480
Scientific Advisory Board 60,000 5.45 2012 60,000 60,000 (A)
Consultant 10,500 5.45 2012 10,500 10,500 (B)
Consultant 11,000 9.94 2012 11,000 11,000 (B)
Consultant 10,000 9.50 2012 10,000 10,000 (B)
Consultant 250 8.39 2012 250 250 (B)
PPG 30,000 5.45 2012 -- 30,000 (C)
---------- ------------- --------------
Totals 606,730 552,730 606,730
========== ============= ==============
F-22
(A) The Company recorded a charge of $289,900 to research and
development expense in 2002 for options granted to members of the
Company's Scientific Advisory Board. The charge represents the fair
value of these 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 3.7%, (2) no expected dividend yield, (3) expected
life of 10 years, and (4) expected volatility of 94%.
(B) The Company recorded charges of $224,954 to research and
development expense and $2,416 to general and administrative expense in
2002 for options granted to consultants. These charges represent 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 3.7%-4.9%, (2) no expected dividend yield, (3)
expected life of 7-10 years, and (4) expected volatility of 94%.
(C) See Note 8.
2001 grants and activity through December 31, 2002:
Exercise Year of
Grantee Granted Price Expiration Exercised Exercisable Outstanding
-------------------------- ---------- --------- ------------ ----------- ------------- -------------
Employees 28,750 $ 10.375 2011 -- 13,750 28,750
Employees and Officers 116,622 10.313 2011 -- 86,622 116,622
Employees 2,000 13.900 2011 -- 2,000 2,000
Employees 12,500 12.000 2011 -- 5,000 12,500
Employees and Officers 111,932 8.560 2011 -- 108,932 111,932
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 1,000 300,818 300,818
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 -- 10,000 25,000 (B)
Consultant 10,000 9.438 2011 -- 10,000 10,000 (C)
Consultant 10,000 12.000 2011 -- 10,000 10,000 (C)
Consultant 250 10.375 2011 -- 250 250 (C)
Consultant 250 13.900 2011 -- 250 250 (C)
Consultant 5,500 8.560 2011 -- 5,500 5,500 (C)
PPG 26,333 8.560 2011 -- 26,333 26,333 (D)
---------- ----------- ------------- -------------
Totals 824,833 1,000 753,333 823,833
========== =========== ============= =============
(A) The Company recorded a charge of $788,074 to research and
development expense in 2001 for options granted to members of the
Company's 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 $25,299 and $110,371 to research
and development expense in 2002 and 2001, respectively, related to
options granted to a consultant in 2001, which vest over five years.
These charges represent the fair value of the options earned 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% and
4.8%-5.6%, (2) no expected dividend yield, (3)expected life of 10
years, and (4) expected volatility of 70% and 70%-94%, in 2002 and
2001, respectively.
(C) The Company recorded charges of $43,213 to research and development
expense and $188,639 to general and administrative expense in 2001 for
options granted to consultants. These charges represent 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%-5.5%, (2) no expected dividend yield, (3)
expected life of 10 years, and (4) expected volatility of 70%-94%.
(D) See Note 8.
F-23
2000 grants and activity through December 31, 2002:
Exercise Year of
Grantee Granted Price Expiration Exercised Forfeited Exercisable Outstanding
- -------------------------- ---------- --------- ---------- ---------- ---------- ------------ ------------
Employees 20,000 $ 14.120 2010 - 2,500 13,500 17,500
Employees 60,000 18.125 2010 2,000 - 34,000 58,000
Employees 64,500 24.375 2010 - - 43,500 64,500
Employees 5,000 21.688 2010 - - 3,000 5,000
Employees 5,000 16.375 2010 - - 5,000 5,000
Employees and Officers 229,750 9.4375 2010 7,500 - 218,250 222,250
Scientific Advisory Board 20,000 9.4375 2010 - - 20,000 20,000 (A)
PPG 26,000 9.4375 2010 - - 26,000 26,000 (B)
---------- ---------- ---------- ------------ ------------
Totals 430,250 9,500 2,500 363,250 418,250
========== ========== ========== ============ ============
(A) The Company recorded a charge of $140,036 to research and
development expense in 2000 for options granted to members of the
Company's 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, 2002:
Exercise Year of
Grantee Granted Price Expiration Exercised Forfeited Exercisable Outstanding
- -------------------------- --------- ---------- ----------- ---------- ---------- ------------ ------------
Employees 51,000 $ 4.1875 2009 14,000 12,000 19,000 25,000
Employees 20,000 3.7500 2009 - - 16,000 20,000
Employees 5,000 9.6250 2009 3,000 - 1,000 2,000
Employees and Officers 280,750 3.8750 2009 30,817 5,000 234,933 244,933
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 74,817 17,000 366,433 387,433
========= ========== ========== ============ ============
(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 represent 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 five to seven
years, and (4) expected volatility of 81.48%.
1998 grants and activity through December 31, 2002:
Exercise Year of
Grantee Granted Price Expiration Exercised Forfeited Exercisable Outstanding
- -------------------------- --------- --------- ----------- ---------- ---------- ------------ ------------
Employees 5,000 $ 6.22 2008 - - 5,000 5,000
Employees 50,000 5.88 2008 - - 50,000 50,000
Employees 40,000 3.75 2008 - 40,000 - -
Employees and Officers 153,000 4.50 2008 21,000 2,000 130,000 130,000
Scientific Advisory Board 55,000 4.50 2008 - - 55,000 55,000
--------- ---------- ---------- ------------ ------------
Totals 303,000 21,000 42,000 240,000 240,000
========= ========== ========== ============ ============
1997 grants and activity through December 31, 2002:
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
========= ========== ========== ============ ============
F-24
(A) The Company recorded a charge of $216,000 to general and
administrative expense in 1997 for options issued to principal
investigators of Princeton University. This 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, 2002:
Exercise Year of
Grantee Granted Price Expiration Exercised Forfeited Exercisable Outstanding
- -------------------------- --------- --------- ----------- ---------- ---------- ------------ ------------
Employees 20,000 $ 4.12 2006 4,000 8,000 8,000 8,000
Consultant 10,000 4.12 2006 10,000 - - -
--------- ---------- ---------- ------------ ------------
Totals 30,000 14,000 8,000 8,000 8,000
========= ========== ========== ============ ============
1995 grants and activity through December 31, 2002:
Exercise Year of
Grantee Granted Price Expiration Exercised Forfeited Exercisable Outstanding
- -------------------------- --------- --------- ----------- ---------- ---------- ------------ ------------
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)
Scientific Advisory Board 240,000 4.00 2005 45,000 - 195,000 195,000
--------- ---------- ---------- ------------ ------------
Totals 315,000 50,000 - 265,000 265,000
========= ========== ========== ============ ============
(A) The Company recorded a charge of $9,950 to general and
administrative expense in 1995 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.
Other Options
In connection with NHA's services relative to consummation of the merger
discussed in Note 3, in June 1995, the Company granted to NHA options to
purchase 84,234 shares of the Company's Common Stock at an exercise price of
$.29 per share. 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 the grant and options to purchase 59,234 of these
shares have been exercised through December 31, 2002. Accordingly, as of
December 31, 2002, options to purchase 25,000 additional shares remain
exercisable. These options expire in 2005.
The following table summarizes all stock option activity:
2002 2001 2000
-------------------------- ------------------------- -------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------------ ---------- ----------- ---------- ---------- ----------
Outstanding at beginning of
year 2,422,769 $7.58 1,665,599 $6.57 1,379,530 $4.19
Granted 606,730 5.87 824,833 9.29 430,250 13.19
Exercised (15,500) 4.67 (56,617) 3.83 (132,181) 3.94
Forfeited -- -- (11,046) 19.70 (12,000) 4.19
------------ ---------- ----------- ---------- ---------- ----------
Outstanding at end of year 3,013,999 7.25 2,422,769 7.58 1,665,599 6.57
============ ========== =========== ========== ========== ==========
Exercisable at end of year 2,814,499 6.88 2,177,106 6.94 1,260,371 5.55
============ ========== =========== ========== ========== ==========
Available for future grant 605,937 128,433 142,210
============ =========== ==========
Weighted average fair value
of options granted $4.69 $6.94 $8.28
========== ========== ==========
The weighted average remaining contractual life for options outstanding as of
December 31, 2002, 2001 and 2000 was seven, eight and eight years, respectively.
F-25
Common Stock Warrants
The following table summarizes all of the warrant activity from inception
through December 31, 2002:
Exercise Year of
Year Granted Price Expiration Exercised Forfeited Exercisable Outstanding
---------- ---------- ------------- ----------- ---------- ---------- ------------ ------------
2002 121,843 $ 24.28 2007 -- -- 121,843 121,843
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 - 1,539,496 1,539,496
1999 1,602,701 4.28-4.53 2004 1,385,636 8,055 209,010 209,010
1998 525,000 6.38-7.25 2008 - 75,000 450,000 450,000
1997 450,000 4.80-7.25 2002-2007 245,357 829 203,814 203,814
1996 3,278,000 3.50-8.25 1999-2006 2,089,156 89,344 1,099,500 1,099,500
1995 1,114,000 3.50 1997 1,114,000 - - -
---------- ---------- ---------- ------------ ------------
Totals 9,837,828 4,883,999 181,228 4,772,601 4,772,601
========== ========== ========== ============ ============
Warrant Activity
The following tables summarize the warrant activity for each year from inception
through December 31, 2002:
2002 grants and activity through December 31, 2002:
Exercise Year of
Grantee Granted Price Expiration Exercised Forfeited Exercisable Outstanding
- -------------------- -------- ---------- ----------- ---------- ---------- ------------ ------------
PPG 121,843 24.280 2007 - - 121,843 121,843 (A)
========== ============ ============
(A) See Note 8.
2001 grants and activity through December 31, 2002:
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, 2002:
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 - - 90,000 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
---------- ---------- ---------- ------------ ------------
Totals 1,589,346 49,850 - 1,539,496 1,539,496
========== ========== ========== ============ ============
(A) The Company recorded charges of $556,612 and $461,090 to research
and development expenses, in 2001 and 2000 for the vesting of these
warrants. The warrants became fully vested on December 31, 2001. The
charges represent the fair value of the warrants earned 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% and 5.3%-6.6%,
respectively, (2) no expected dividend yield, (3) expected life of 10
years and (4) expected volatility of 60%.
(B) See Note 6.
F-26
1999 grants and activity through December 31, 2002:
Exercise Year of
Grantee Granted Price Expiration Exercised Forfeited Exercisable Outstanding
- ------------------------- ---------- ----------- ----------- ---------- ---------- ------------ ------------
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 167,055 102 21,510 21,510
---------- ---------- ---------- ------------ ------------
Totals 1,602,701 1,385,636 8,055 209,010 209,010
========== ========== ========== ============ ============
1998 grants and activity through December 31, 2002:
Exercise Year of
Grantee Granted Price Expiration Exercised Forfeited Exercisable Outstanding
- ----------------------- ---------- ----------- ---------- ---------- ---------- ------------ -------------
Employees and Officers 400,000 $6.38 2008 -- -- 400,000 400,000
Consultant 100,000 7.00 2008 -- 75,000 25,000 25,000 (A)
Consultant 25,000 7.25 2008 -- -- 25,000 25,000 (B)
---------- ----------- ---------- ---------- ------------ -------------
Totals 525,000 -- 75,000 450,000 450,000
========== ========== ========== ============ =============
(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 amount the
Company recorded a charge of $26,890 to general and administrative
expenses. This charge represented the fair value of the 25,000 vested
warrants and the remaining unamortized portion of the $80,669 was
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 seven years, and (4) expected volatility of 81.48%. In
2002, the 75,000 unearned warrants were forfeited and the prepaid amount
of $80,669 was reversed.
(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 seven years, and (4) expected
volatility of 81.48%.
1997 grants and activity through December 31, 2002:
Exercise Year of
Grantee Granted Price Expiration Exercised Forfeited Exercisable Outstanding
- ---------------------- ------------ ----------- ---------- ---------- ---------- ----------- -----------
Princeton University
and USC under 1997
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 these warrants as a result of a cashless
exercise.
(B) The Company recorded charges in 2000, 1999 and 1998 in the amounts
of $76,329, $176,328 and $176,328, respectively, related to warrants
issued to consultants, which vested over three years. 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-27
1996 grants and activity through December 31, 2002:
Exercise Year of
Grantee Granted Price Expiration Exercised Forfeited Exercisable Outstanding
- ------------------- ------------- --------- ----------- ----------- ---------- ------------ ------------
Public Offering 1,495,000 $3.500 1999 1,495,000 -- -- --
Underwriter of (A)
Public Offering 130,000 8.250 2001 74,753 55,247 -- --
Underwriter of (A)
Public Offering 130,000 3.675 2001 97,650 32,350 -- --
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 these 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 in
1996, 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 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, 2002:
Exercise Year of
Grantee Granted Price Expiration Exercised Forfeited Exercisable Outstanding
- --------------------- ----------- --------- ----------- ----------- ---------- ------------- ------------
Private Placement 1,114,000 $3.50 1997 1,114,000 -- -- --
=========== =========== ========== ============= ============
12. RESEARCH CONTRACTS:
Contract research revenue consists of the following:
December 31,
---------------------------------------------
2002 2001 2000
------------ ------------ ------------
Department of Defense Advanced Research Projects
Agency (DARPA) $ 827,468 $ 720,079 $ 186,179
U.S. Army Small Business Innovative Research (SBIR) 468,618 232,957 112,113
Army Research Laboratory (ARL) 129,320
Department of Energy (DoE) SBIR 43,552
National Science Foundation (NSF) -- 105,535 194,464
------------ ------------ ------------
$ 1,468,958 $ 1,058,571 $ 492,756
============ ============ ============
13. COMMITMENTS:
Lease Commitments
The Company has several operating lease arrangements for office space and
equipment. Total rent expense was $411,300, $415,952, and $330,320, for the
years ended December 31, 2002, 2001 and 2000, respectively. During 1999, the
Company entered into one capital lease. Minimum future rental payments for
operating and capital leases as of December 31, 2002 are as follows:
Operating Capital
Year Lease Lease
---------------------------------- ------------- -------------
2003 $ 267,062 $ 5,420
2004 3,147 4,065
2005 2,477 --
2006 1,445 --
2007 and thereafter -- --
------------- -------------
$ 274,131 9,485
=============
Less amount representing interest (886)
-------------
Present value of capital lease $ 8,599
=============
F-28
Other Commitments
Under the terms of the Company's License Agreement with Motorola (Note 6), the
Company agreed to make minimum royalty payments. To the extent that the
royalties otherwise payable to Motorola under this agreement are not sufficient
to meet the minimums, the Company is required to pay the shortfall, at its
discretion, in all cash or in 50% cash and 50% Common Stock within 90 days after
the end of each two-year period specified below in which the shortfall occurs.
For the two-year period ending December 31, 2002, the Company issued to Motorola
8,000 shares of the Company's Common Stock, valued at $71,816, and paid $78,184
in cash as a result of the minimum royalty due of $150,000. Future required
minimum royalty payments are as follows:
January 1, 2003 - December 31, 2004 $ 500,000
January 1, 2005 - December 31, 2006 $1,000,000
In accordance with the amendment to the 1997 Research Agreement with the
Princeton University, the Company is required to pay annually to Princeton
University up to $1,495,999 from July 31, 2002 through July 31, 2007.
Under the terms of the 1997 Amended License Agreement (Note 5), the Company is
required to pay Princeton University minimum royalty payments. To the extent
that the royalties otherwise payable to Princeton University under this
agreement are not sufficient to meet the minimums for the relevant calendar
year, the Company is required to pay Princeton University the difference between
the royalties paid and the minimum royalty. The minimum royalty was $25,000 in
1999, $50,000 in 2000 and $75,000 in 2001, and is $100,000 in 2002 and each year
thereafter.
14. INCOME TAXES:
The components of income taxes are as follows:
December 31,
---------------------------------------------
2002 2001 2000
------------ ------------ ------------
Current $ -- $ -- $ --
Deferred (15,615,859) (6,354,493) (3,019,639)
------------ ------------ ------------
(15,615,859) (6,354,493) (3,019,639)
Increase in valuation allowance 15,615,859 6,354,493 3,019,639
------------ ------------ ------------
$ -- $ -- $ --
============ ============ ============
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, 2002, the Company had net operating loss carryforwards of
approximately $30,497,346, 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.
Significant components of the Company's deferred tax assets and liabilities are
as follows:
December 31,
---------------------------------
2002 2001
--------------- --------------
Gross deferred tax assets:
Net operating loss carryforwards $12,024,057 $ 7,660,868
Capitalized start-up costs 10,328,905 5,781,789
Capitalized technology license 199,700 170,000
Stock options and warrants 2,814,109 1,563,593
Amortization of BCF 3,670,955 --
Accruals and reserves 272,840 225,945
Deferred revenue 1,792,855 23,572
Other 17,962 79,757
--------------- --------------
31,121,383 15,505,524
Valuation allowance (31,121,383) (15,505,524)
--------------- --------------
Net deferred tax assets $ -- $ --
=============== ==============
During 2002, the Company sold approximately $3 million of it net operating
losses (NOLs) to New Jersey under the Technology Tax Certificate Transfer
Program. The Company received $225,657 for the sale of the NOLs and recorded it
as other revenue.
A valuation allowance was established for all of the net deferred tax assets
because the Company has incurred substantial operating losses since inception
and expects to incur additional losses in 2003. The Company's management has
concluded that the realizability of these deferred tax assets is uncertain.
F-29
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, 2002, 2001
and 2000, the Company contributed $91,043, $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,
2002. 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, 2002:
Three Months Ended
--------------------------------------------------------------------------
March 31 June 30 September 30 December 31
--------------- --------------- ---------------- ---------------
Revenue............................................. $ 534,926 $ 455,026 $ 573,013 $ 882,307
Net loss............................................ (5,298,809) (5,577,787) (14,989,910) (5,152,695)
Deemed dividends to Preferred shareholders.......... -- -- (1,953,479) --
Net loss attributable to Common shareholders........ (5,298,809) (5,577,787) (16,943,389) (5,152,695)
Basic and diluted loss per share.................... (0.29) (0.31) (0.89) (0.24)
Year ended December 31, 2001:
Three Months Ended
--------------------------------------------------------------------------
March 31 June 30 September 30 December 31
--------------- --------------- ---------------- ---------------
Revenue............................................. $ 200,242 $ 257,159 $ 569,233 $ 26,267
Net loss............................................ (3,778,979) (4,768,582) (1,911,192) (5,897,347)
Deemed dividends to Preferred shareholders.......... -- -- (689,416) (1,827,920)
Net loss attributable to Common shareholders........ (3,778,979) (4,768,582) (2,600,608) (7,725,267)
Basic and diluted loss per share.................... (0.23) (0.28) (0.15) (0.45)
F-30