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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003
or
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to _________
Commission File Number 1-12031
UNIVERSAL DISPLAY CORPORATION
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2372688
------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
375 Phillips Boulevard
Ewing, New Jersey 08618
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(609) 671-0980
---------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes __X__ No ____
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act):
Yes __X__ No ____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
As of November 4, 2003, the registrant had outstanding 24,066,485 shares of
Common Stock.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets - September 30, 2003 (unaudited) and December 31, 2002 1
Consolidated Statements of Operations - Three months ended September 30, 2003
and 2002 (unaudited) 2
Consolidated Statements of Operations - Nine months ended September 30, 2003
and 2002 and inception to September 30, 2003 (unaudited) 3
Consolidated Statements of Cash Flows - Nine months ended September 30, 2003
and 2002 and inception to September 30, 2003 (unaudited) 4
Notes to Consolidated Financial Statements (unaudited) 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 16
ITEM 4. CONTROLS AND PROCEDURES 16
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 16
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 16
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 16
ITEM 5. OTHER INFORMATION 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 17
- i -
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARY
(a development-stage company)
CONSOLIDATED BALANCE SHEETS
ASSETS
September 30, 2003 December 31,
(unaudited) 2002
------------------- ----------------
CURRENT ASSETS:
Cash and cash equivalents $ 21,658,422 $ 15,905,416
Short-term investments 5,347,865 4,662,898
Accounts receivable 609,148 662,822
Inventory 28,812 --
Other current assets 207,946 177,219
-------------- ------------
Total current assets 27,852,193 21,408,355
PROPERTY AND EQUIPMENT, net 3,981,509 4,617,570
AQUIRED TECHNOLOGY, net 11,828,471 13,099,775
INVESTMENTS 3,710,838 379,753
OTHER ASSETS 134,773 133,763
-------------- ------------
$ 47,507,784 $ 39,639,216
============== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Capital lease obligations $ 5,113 $ 4,713
Accounts payable 442,265 388,286
Accrued expenses 1,146,547 1,084,889
Deferred license fees 1,266,667 1,066,667
Deferred revenue 67,204 322,204
-------------- ------------
Total current liabilities 2,927,796 2,866,759
-------------- ------------
CAPITAL LEASE OBLIGATIONS -- 3,886
DEFERRED LICENSE FEES 3,100,000 3,100,000
-------------- ------------
Total liabilities 6,027,796 5,970,645
COMMITMENTS AND CONTINGENCIES (Note 8)
SHAREHOLDERS' EQUITY:
Preferred Stock, par value $0.01 per share, 5,000,000 shares authorized,
200,000 shares Series A Nonconvertible Preferred Stock issued and
Outstanding (liquidation value of $7.50 per share or $1,500,000),
300,000 shares Series B Convertible Preferred Stock issued and
outstanding (liquidation value of $21.48 per share or $6,444,000),
5,000 shares of Series C-1 Convertible Preferred Stock authorized and
none outstanding, 5,000 shares of Series D Convertible Preferred Stock
authorized and none outstanding 5,000 5,000
Common Stock, par value $.01 per share, 50,000,000
shares authorized, 23,879,753 and 21,525,412 shares issued and
outstanding, respectively 238,798 215,254
Additional paid-in capital 133,983,125 113,541,408
Accumulated other comprehensive loss (18,505) (18,586)
Deficit accumulated during development-stage (92,728,430) (80,074,505)
-------------- ------------
Total shareholders' equity 41,479,988 33,668,571
-------------- ------------
$ 47,507,784 $ 39,639,216
============== ============
The accompanying notes are an integral part of these statements.
1
UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARY
(a development-stage company)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended September 30,
--------------------------------------
2003 2002
------------- --------------
REVENUE:
Contract research $ 267,860 $ 331,138
Development chemicals 303,725 254,936
Commercial chemicals 19,890 --
License fees 46,410 --
Technology development fees 1,450,000 --
------------ -------------
Total revenue 2,087,885 586,074
COSTS AND EXPENSES:
Cost of chemicals sold 37,003 13,061
Research and development 4,385,019 3,908,777
General and administrative 1,298,880 1,077,341
Royalty expense 87,500 25,000
------------ -------------
Total operating expenses 5,808,402 5,024,179
------------ -------------
Operating loss (3,720,517) (4,438,105)
INTEREST INCOME 57,883 111,300
INTEREST EXPENSE (161) (651,325)
DEBT CONVERSION AND EXTINGUISHMENT EXPENSE -- (10,011,780)
------------ -------------
NET LOSS (3,662,795) (14,989,910)
DEEMED DIVIDEND TO PREFERRED
SHAREHOLDERS (1,034,302) (1,953,479)
------------ -------------
NET LOSS ATTRIBUTABLE TO COMMON
SHAREHOLDERS $ (4,697,097) $ (16,943,389)
============ =============
BASIC AND DILUTED NET LOSS PER
COMMON SHARE $ (0.21) $ (0.89)
============ =============
WEIGHTED AVERAGE SHARES USED
IN COMPUTING BASIC AND DILUTED
NET LOSS PER COMMON SHARE 22,504,673 19,105,553
============ =============
The accompanying notes are an integral part of these statements.
2
UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARY
(a development-stage company)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Nine Months Ended September 30, Period from Inception
----------------------------------- (June 17, 1994) to
2003 2002 September 30, 2003
------------- ------------- ---------------------
REVENUE:
Contract research $ 1,105,213 $ 1,143,197 $ 5,107,433
Development chemicals 1,549,726 442,435 2,560,241
Commercial chemicals 19,890 -- 19,890
License fees 46,410 -- 46,410
Technology development fees 1,950,000 -- 2,132,796
------------ ------------- --------------
Total revenue 4,671,239 1,585,632 9,866,770
OPERATING EXPENSES:
Cost of chemicals sold 84,542 22,667 107,209
Research and development 12,493,267 11,475,574 59,722,785
General and administrative 3,637,342 3,350,880 23,981,489
Royalty expense 262,500 75,000 587,500
------------ ------------- --------------
Total operating expenses 16,477,651 14,924,121 84,398,983
------------ ------------- --------------
Operating loss (11,806,412) (13,338,489) (74,532,213)
INTEREST INCOME 171,336 358,598 2,226,301
INTEREST EXPENSE (579) (2,874,835) (5,147,310)
DEBT CONVERSION AND EXTINGUISHMENT EXPENSE -- (10,011,780) (10,011,780)
OTHER INCOME 16,032 -- 241,689
------------ ------------- --------------
NET LOSS (11,619,623) (25,866,506) (87,223,313)
DEEMED DIVIDEND TO PREFERRED
SHAREHOLDERS (1,034,302) (1,953,479) (5,505,117)
------------ ------------- --------------
NET LOSS ATTRIBUTABLE TO COMMON
SHAREHOLDERS $(12,653,925) $ (27,819,985) $ (92,728,430)
============ ============= =============
BASIC AND DILUTED NET LOSS PER
COMMON SHARE $ (0.58) $ (1.50)
============ =============
WEIGHTED AVERAGE SHARES USED
IN COMPUTING BASIC AND DILUTED
NET LOSS PER COMMON SHARE 21,899,091 18,490,810
============ =============
The accompanying notes are an integral part of these statements.
3
UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARY
(a development-stage company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended September 30, Period from Inception
--------------------------------- (June 17, 1994) to
2003 2002 September 30, 2003
----------- ----------- ---------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (11,619,623) $ (25,866,506) $ (87,223,313)
Non-cash charges to statement of operations:
Depreciation 1,571,227 1,332,825 5,258,307
Amortization of intangibles 1,271,304 1,271,304 5,122,247
Amortization of discounts on Convertible Promissory Note -- 13,044,467 14,734,168
Issuance of Common Stock options and warrants for services 40,399 423,962 1,650,959
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 redeemable Common Stock, Common Stock options and
warrants in connection with the PPG development agreement 4,004,638 3,830,753 12,438,446
Issuance of Common Stock options and warrants for
Scientific Advisory Board -- -- 1,947,369
Issuance of Common Stock in connection with License Agreement -- -- 71,816
Acquired in-process technology -- -- 350,000
(Increase) decrease in assets:
Accounts receivable 53,674 (58,868) (609,148)
Inventory (28,812) -- (28,812)
Other current assets (30,727) (350,907) 140,370
Other assets (1,010) (13,638) (134,773)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses 246,967 278,467 1,539,562
Deferred license fees 200,000 -- 4,366,667
Deferred revenue (255,000) 634,167 67,204
------------- ------------- ---------------
Net cash used in operating activities (4,546,963) (5,457,824) (36,749,232)
------------- ------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment (935,166) (1,066,496) (8,357,795)
Purchase of intangibles -- -- (25,750)
Purchases of investments (8,513,163) (3,087,506) (41,379,768)
Proceeds from sale of investments 4,497,192 4,819,585 32,302,560
Restricted cash -- 15,162,414 --
------------- ------------- ---------------
Net cash (used in) provided by investing activities (4,951,137) 15,827,997 (17,460,753)
------------- ------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Common Stock, net 14,841,857 7,644,337 45,873,794
Proceeds from issuance of Preferred Stock -- -- 9,137,079
Proceeds from issuance of Convertible Promissory
Notes and equity instruments -- -- 15,000,000
Repayment of Convertible Promissory Notes -- (8,399,997) (8,819,997)
Proceeds from the exercise of Common Stock options and warrants 412,735 17,750 14,692,439
Principal payments on capital lease (3,486) (3,128) (14,908)
------------- ------------- ---------------
Net cash provided by (used in) financing activities 15,251,106 (741,038) 75,868,407
------------- ------------- ---------------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS 5,753,006 9,629,135 21,658,422
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 15,905,416 7,883,132 --
------------- ------------- ---------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 21,658,422 $ 17,512,267 $ 21,658,422
============= ============= ===============
The accompanying notes are an integral part of these statements.
4
UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARY
(a development-stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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.
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 3). 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 3). 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.
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. In September 2003, the Company renewed its lease for this facility for
an additional five years through the end of 2008. In connection with renewing
this lease, the Company negotiated an option to purchase the entire facility at
any time after the first six months of the renewal period.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Interim Financial Information
In the opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly the financial position as of September
30, 2003, and the results of operations and cash flows for the three and nine
months ended September 30, 2003 and 2002. While management believes that the
disclosures presented are adequate to make the information not misleading, these
unaudited consolidated financial statements should be read in conjunction with
the audited consolidated financial statements and the notes thereto in the
Company's latest year-end financial statements, which were included in the
Company's Annual Report on Form 10-K for the year ended December 31, 2002.
Cash, Cash Equivalents and Short-term Investments
Cash and cash equivalents are defined as cash and highly liquid investments with
original maturities of less than three months. At September 30, 2003, cash and
cash equivalents included cash on hand, cash in banks, money market accounts and
certificate of deposits.
5
The Company classifies its investments as available-for-sale in accordance with
the provisions of Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." These
investments are carried at fair market value, with unrealized gains and losses
reported in shareholders' equity as a component of other comprehensive income
(loss). Gains or losses on securities sold are based on the specific
identification method. Investments classified as current have maturity dates of
greater then three months but less than one year. Investments classified as
long-term have maturity dates greater than one year.
The Company reported unrealized holding losses of $18,505 and $18,586 at
September 30, 2003 and December 31, 2002, respectively. Comprehensive loss,
which includes the net loss and change in unrealized holding losses, was
$11,619,704 and $25,866,060 for the nine months ended September 30, 2003 and
2002, respectively and $3,666,004 and $14,991,898 for the three months ended
September 30, 2003 and 2002, respectively.
Inventory
Inventory consists of chemicals held at the Company's location. Inventory is
valued at the lower of cost or market, with the cost determined using the
specific identification method.
Acquired Technology
Acquired technology consists of acquired license rights for patents and know-how
obtained from PD-LD, Inc. and Motorola, Inc. (Note 4). These intangible assets
consist of the following:
September 30, 2003 December 31, 2002
------------------ -----------------
PD-LD, Inc. $ 1,481,250 $ 1,481,250
Motorola 15,469,468 15,469,468
------------ ------------
16,950,718 16,950,718
Less: Accumulated amortization (5,122,247) (3,850,943)
------------ ------------
Acquired Technology, net $ 11,828,471 $ 13,099,775
============ ============
Acquired technology is amortized on a straight-line basis over its estimated
useful life of ten years.
Net Loss Per Common Share
Basic net loss per common share is computed by dividing 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 three and nine months ended September 30, 2003 and 2002, the
effects of the exercise of 8,228,936 and 7,872,683 outstanding stock options and
warrants, respectively, were excluded from the calculation of diluted EPS as the
impact would be antidilutive.
Research and Development
Expenditures for research and development are charged to operations as incurred.
Certain Reclassifications
Certain prior year amounts have been reclassified to conform to the current year
presentation.
6
Recent Accounting Pronouncements
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. The adoption of this statement had no effect on the
Company's financial statements.
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. As such, the
disclosure requirements have been incorporated in the Company's financial
statements.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities," ("FIN 46"), as amended, 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. For variable interest entities created before February 1, 2003, FIN 46 is
effective as of December 31, 2003. The Company has not yet determined the effect
of FIN 46 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 adoption of EITF Issue No.
00-21 had no significant impact on the Company's financial position, results of
operations, or liquidity.
In May 2003, SFAS No. 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity", as amended, was issued
establishing standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify certain financial instruments within its scope
as a liability. Some of the provisions of this Statement are consistent with the
current definition of liabilities in FASB Concepts Statement No. 6, "Elements of
Financial Statements". The remaining provisions of the Statement are consistent
with the Board's proposal to revise that definition to encompass certain
obligations that a reporting entity can or must settle by issuing its own equity
shares, depending on the nature of the relationship established between the
holder and the issuer. The adoption of SFAS No. 150 had no impact on the
Company's financial statements.
Statement of Cash Flow Information
The following non-cash investing and financing activities occurred:
Nine Months Ended September 30,
---------------------------------------
2002 2001
--------------- ---------------
Common Stock issued upon conversion
of Notes (Note 6) -- 7,999,998
Warrants issued to placement agent in connection
with registered direct offering 314,112 --
Stock Options
The Company accounts for its stock option plans under Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees," ("APB No. 25")
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.
7
SFAS No. 123, as amended by SFAS No. 148, permits companies to (i) recognize as
expense the fair value of stock-based awards, or (ii) continue to apply the
provisions of APB No. 25, and provide pro forma net income and earnings per
share disclosures for employee stock option grants as if the fair-value-based
method defined in SFAS No. 123 had been applied. The Company continues to apply
the provisions of APB No. 25 and provide the pro forma disclosures in accordance
with the provisions of SFAS No. 123 and 148 to its stock option plans. Under APB
No. 25, the Company has not recorded any stock-based employee compensation cost
associated with the Company's stock option plan, as all options granted under
the plan had an exercise price equal to the market value of the underlying
common stock on the date of grant.
The following table illustrates the effect on net loss and net loss per share if
the Company had applied the fair value recognition provisions of SFAS No. 123 to
its stock option plans:
Three months ended September 30,
------------------------------------------
2003 2002
------------- -------------
Net loss applicable to Common shareholders:
As reported $ (4,697,097) $(16,943,389)
Add stock-based employee compensation
expense included in reported net income -- --
Deduct total stock-based employee compensation
expense determined under fair-value-based
method for all rewards (263,328) (2,245,598)
------------- -------------
Pro forma $ (4,960,425) $(19,188,987)
============= =============
Basic and diluted net loss per share:
As reported $ (0.21) $ (0.89)
Pro forma (0.22) (1.00)
Nine months ended September 30,
------------------------------------------
2003 2002
------------- -------------
Net loss applicable to Common shareholders:
As reported $(12,653,925) $(27,819,985)
Add stock-based employee compensation
expense included in reported net income -- --
Deduct total stock-based employee compensation
expense determined under fair-value-based
method for all rewards (755,193) (2,791,888)
------------- -------------
Pro forma $(13,409,118) $(30,611,873)
============= =============
Basic and diluted net loss per share:
As reported $ (0.58) $ (1.50)
Pro forma (0.61) (1.66)
3. RESEARCH AND LICENSE AGREEMENTS WITH PRINCETON UNIVERSITY:
In April 2002, the Company amended the 1997 Research Agreement with Princeton
University 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. As of September 30, 2003, the Company
has funded $1,681,540 of this agreement and is obligated to fund an additional
$5,796,453 through July 2007.
8
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.
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. Since the minimum royalty exceeded the actual royalties for the nine
months ended September 30, 2003, the Company accrued $75,000 of royalty expense.
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.
4. 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 2).
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 ("Series B"),
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 was 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 2).
The Company is required under the License Agreement to pay Motorola annual
royalties 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. 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. Since the minimum royalty exceeded
the actual royalties for the nine months ended September 30, 2003, the Company
accrued $187,500 of royalty expense.
9
In September 2003 and 2002, the Company adjusted the conversion price of the
Series B in accordance with the terms of the Series B, to take into account
75,000 shares of the Series B that became convertible into the Company's Common
Stock in each such period. As such, the original conversion price was reduced to
$16.59 and $9.85, for the shares issuable in each respective period, resulting
in an additional 22,107 and 88,553 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 Emerging Issues Task Force No. 00-27, "Application of Issue No.
98-5 to Certain Convertible Instruments" and the Company recorded a CBCF in the
amount of $487,681 and $1,953,479 for each respective period. The CBCF was
treated as a deemed dividend.
5. 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. In January
2003, the Company amended the Development and License Agreement, providing for
additional consideration to PPG for services provided under the agreement, which
are to be paid for in cash. The Company records these expenses to research and
development as they are incurred.
During each respective first quarter of 2003 and 2002, the Company issued to PPG
305,715 and 344,379 shares of the Company's Common Stock as consideration for
services required to be provided by PPG under the Development and License
Agreement. During the nine months ended September 30, 2003 and 2002,
respectively, the Company recorded a charge of $2,099,284 and $2,078,539 to
research and development expense for the portion of the shares issued that were
earned during the period the services were provided. The charge was determined
based on the fair value of the Common Stock earned by PPG.
As required under the Development and License Agreement, the Company issued
16,645 shares of Common Stock to PPG in February 2003. The additional shares
were issued to PPG based on a final accounting for actual costs incurred by PPG
under the agreement through December 31, 2002. Accordingly, the Company accrued
$131,329 of additional research and development expense as of December 31, 2002,
for 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 issued warrants to PPG to acquire 361,024 shares of the
Company's Common Stock as part of the consideration for services performed by
PPG during 2002. The warrants were earned and charged to research and
development expenses during 2002, but were not issued until February 2003. The
Company will similarly issue warrants to PPG for services performed during 2003
in the first quarter of 2004 and charges the related fair value of the warrants
to research and development in 2003 as they are earned.
During the nine months ended September 30, 2003 and 2002, the Company recorded
charges to research and development expense of $1,675,999 and $1,652,094,
respectively, for the portion of the warrants that were earned by PPG during
these periods. These charges were recorded based on the estimated fair value of
the warrants earned. The Company determined the fair value of the warrants
earned during each such period using the Black-Scholes option-pricing model with
the following assumptions: (1) risk free interest rate of 3.030-3.410% and
3.25-5.443%, respectively, (2) no expected dividend yield, (3) expected life of
7 years, and (4) expected volatility of 94%, 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. Subject to certain contingencies, all of these options vest
one-year from the date of grant and expire 10 years from the date of grant.
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 the nine months ended
September 30, 2002, the Company recorded $97,010 in research and development
costs related to these options.
On September 23, 2002, the Company granted 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. During the nine months ended September 30,
2003 and 2002, the Company recorded $229,355 and $3,109, respectively, in
research and development costs related to these options.
10
The Company determined the fair value of the options earned during the nine
months ended September 30, 2003 and 2002, using the Black-Scholes option-pricing
model with the following assumptions: (1) risk free interest rate of 3.70% and
5.421%, respectively, (2) no expected dividend yield, (3) expected life of 10
years, and (4) expected volatility of 94%.
6. RESTRICTED CASH AND CONVERTIBLE PROMISSORY NOTES:
In an August 2001 private placement transaction, the Company issued two
$7,500,000 notes, each with a maturity date of August 22, 2004 (the "Notes").
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.
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. In
September 2002, $7,000,002 in principal amount of the Notes was converted into
1,375,246 shares of Common Stock and $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.
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 the
conversion and repayment of the Notes, the $15,000,000 in cash proceeds plus
accrued but unpaid interest had been classified as restricted cash.
In accordance with APB No. 14, "Accounting for Convertible Debt and Debt Issued
with Stock Purchase Warrants" ("APB No. 14"), the Company determined in August
2001 the relative fair value of the Notes to be $9,857,006. The resulting
original issuance discount ("OID") of $5,142,994 was being amortized as interest
expense, using the effective interest method, over the original maturity period
of three years.
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 in August 2001 that the Notes contained an initial beneficial
conversion feature ("BCF"). The BCF existed at the commitment date due to the
fact that the carrying value of the Notes, after the initial allocation of the
proceeds, was less than the fair market value of the Common Stock that was
issuable upon conversion. Accordingly, the Company recorded $3,258,468 of BCF in
August 2001 as a debt discount. The BCF debt discount was being amortized as
interest expense, using the effective interest method, over the original
maturity period of three years.
At the date of the conversion and repayment of the Notes in September 2002, the
$15,000,000 face value of the Notes exceeded the then carrying value of the
Notes as a result of the unamortized OID and BCF. 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.
7. SHAREHOLDERS' EQUITY
The following table summarizes the shareholders' equity activity from January 1,
2003 through September 30, 2003:
------------------------------------------------------------------------------------------------
Accumulated
Preferred Stock, Deficit and
Series A & Series B Common Stock Additional Other
----------------------------------------------- Paid-In Comprehensive
Shares Amount Shares Amount Capital Loss Total Equity
------------------------------------------------------------------------------------------------
BALANCE, JANUARY 1, 2003 500,000 $5,000 21,525,412 $ 215,254 $ 113,541,408 $ (80,093,091) $ 33,668,571
Exercise of Common Stock
options and warrants -- -- 98,000 980 411,755 -- 412,735
Issuance of Common Stock through
registered direct offering, net
of fees of $1,258,143 -- -- 2,012,500 20,125 14,821,732 -- 14,841,857
Deemed dividend -- -- -- -- 1,034,302 (1,034,302) -- (A)
Issuance of Common Stock
options to non-employees -- -- -- -- 40,399 -- 40,399
Issuance of Common Stock,
options and warrants in
connection with Development
Agreements -- -- 243,841 2,439 4,133,529 -- 4,135,968 (B)
Unrealized gain on available-
for-sales securities -- -- -- -- -- 81 81
Net loss -- -- -- -- -- (11,619,623) (11,619,623)
------------------------------------------------------------------------------------------------
BALANCE, September 30, 2003 500,000 $ 5,000 23,879,753 $ 238,798 $ 133,983,125 $ (92,746,935) $ 41,479,988
================================================================================================
11
(A) In August 2003, the Company sold 2,012,500 shares of the Company's
Common Stock in a registered direct offering, resulting in gross
proceeds of $16,100,000. Costs of raising the capital were $1,258,143.
In addition, the Company issued a warrant to purchase 50,313 shares of
the Company's Common Stock, with a fair value of $314,112, to the
placement agent. The Common Stock was issued at $8.00 per share. The
offering was deemed dilutive under the terms of certain warrants the
Company has previously issued and resulted in the reduction of the
exercise price of those warrants and increases in the number of shares
issuable under certain of those warrants. The Company treated this
occurrence as a deemed dividend and recorded a deemed dividend of
$546,621.
In September 2003, the Company adjusted the conversion price of the
Series B issued to Motorola for acquired technology (see Note 4) in
accordance with the terms of the Series B to take into account 75,000
shares of the Series B that became convertible into the Company's
Common Stock. As such, the original conversion price was reduced to
$16.59, resulting in an additional 22,107 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 Emerging Issues Task
Force No. 00-27, "Application of Issue No. 98-5 to Certain Convertible
Instruments" and the Company recorded a CBCF in the amount of $487,681.
The CBCF was treated as a deemed dividend.
(B) In accordance with the PPG Development and License Agreement (Note 5),
PPG earned the Company's Common Stock, warrants and options for the
nine months ended September 30, 2003.
8. COMMITMENTS AND CONTINGENCIES
Under the terms of the Company's License Agreement with Motorola (Note 4), the
Company agreed to make minimum royalty payments to Motorola. To the extent that
the royalties otherwise payable to Motorola under the agreement are less than
these minimum amounts, 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 April 2002 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 3), the Company is
required to pay Princeton University minimum annual royalties. To the extent
that the royalties otherwise payable to Princeton University under the agreement
are less than these minimum amounts, 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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CAUTIONARY STATEMENT
CONCERNING FORWARD-LOOKING STATEMENTS
All statements in this document that are not historical, such as financial or
product forecasts and market growth predictions, are forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995.
Often, though not always, these statements are accompanied by the words
"estimate," "project," "believe," "anticipate," "intend," "expect" and similar
expressions. You are cautioned not to place undue reliance on any
forward-looking statements in this document, as they 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 include, but are not limited to, the following: the
feasibility and market acceptance of OLEDs and the Company's OLED materials for
use in commercial product applications; the success of the Company and its
research and development partners in accomplishing advances in OLED technologies
and materials development, including the Company's TOLED(TM), FOLED(TM),
PHOLED(TM), P2OLED(TM) and Organic Vapor Phase Deposition (OVPD(TM))
technologies; the ability of the Company to enter into licensing and other
strategic alliances with manufacturers of OLEDs and OLED-containing products;
the Company's ability to obtain patent protection for its OLED technologies and
materials and to assert these patents against others; and future developments
and advances by the Company's competitors in OLED and other display
technologies. These and other risks and uncertainties are discussed in greater
detail in the Company's periodic reports on Form 10-K and Form 10-Q filed with
the Securities and Exchange Commission, including, in particular, the section
entitled "Factors that May Affect Future Results and Financial Condition" in the
Company's annual report on Form 10-K for the year ended December 31, 2002. The
Company expressly disclaims any obligation or undertaking to release publicly
any updates or revisions to any forward-looking statement contained in this
document to reflect events or circumstances after the date hereof, or to reflect
the occurrence of unanticipated events.
12
General
Since inception, the Company has been exclusively engaged, and for the
foreseeable future expects to continue to be exclusively engaged, in funding and
performing research and development activities related to the Company's OLED
technologies and materials, and in commercializing these technologies and
materials. The Company has incurred significant losses since its inception,
resulting in an accumulated deficit of $92,728,430 as of September 30, 2003.
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
Three Months Ended September 30, 2003 Compared to Three Months Ended September
30, 2002
The Company had a net loss of $4,697,097 (or $0.21 per share) for the quarter
ended September 30, 2003, compared to a net loss of $16,943,389 (or $0.89 per
share) for the same period in 2002. The decrease in net loss is primarily
attributed to the following:
o a decrease in interest and debt conversion expense as a result of the
conversion and repayment of convertible promissory notes in September
2002, which is described in greater detail in Note 6 of the Notes to
Consolidated Financial Statements, and
o an increase in revenues.
The Company's revenues were $2,087,885 for the quarter ended September 30, 2003
compared to $586,074 for the same period in 2002. The increase is mainly due to
the recognition of technology development revenue in the quarter ended September
30, 2003. There were no such revenues in the same period in 2002.
The Company earned $267,860 in contract research revenue from the U.S.
Government in the quarter ended September 30, 2003, compared to $331,138 for the
same period in 2002. In the quarter ended September 30, 2003, contract research
revenue was generated from five existing government contracts, one of which was
completed and one of which was awarded in the third quarter. In the third
quarter of 2002, approximately 90% of the Company's contract research revenue
was generated from two contracts, one of which was completed in December 2002
with the other being completed in March 2003. In the quarter ended September 30,
2003, contract research revenue was mainly derived from the following government
contracts:
o $131,834 recognized under a 24-month, $1,963,725 cooperative agreement
received from the U.S. Army Research Laboratories ("ARL"), which
commenced in August 2002 and,
o $95,768 recognized under a 24-month, $729,997 SBIR Phase II contract
received from the U.S. Department of the Army, which commenced in
January 2003.
The Company earned $303,725 from its sales of OLED materials for evaluation
purposes in the quarter ended September 30, 2003, compared to $254,936 for the
same period in 2002. 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 entered into an agreement in the third quarter under which the
Company began supplying one of its proprietary OLED materials to a customer for
use in the manufacture of commercial passive matrix OLED displays. As a result,
the Company earned $19,890 in commercial chemical revenue and $46,410 in license
fees in connection with this agreement for the three months ended September 30,
2003. There were no such agreements in effect for the same period in 2002.
The Company recognized $1,450,000 in technology development revenue in
connection with two technology development and evaluation agreements, one of
which was executed in October 2002 with the other being executed in September
2003. There were no such revenues for the same period in 2002.
13
The Company incurred research and development expenses of $4,385,019 for the
quarter ended September 30, 2003, compared to $3,908,777 for the same period
2002. The increase in these expenses was primarily a result of the following:
o increased expenses relating to patent and other related costs,
o an increase in non-cash charges, in connection with the Development and
License Agreement with PPG, due to the increased price of the Company's
Common Stock, and
o the further development and operation of the Company's facility in
Ewing, New Jersey.
The Company's interest income was $57,883 for the quarter ended September 30,
2003, compared to $111,300 for the same period in 2002. The decrease is due
mainly to decreased interest rates on investments.
The Company's interest expense was $161 for the quarter ended September 30,
2003, compared to $651,325 for the same period in 2002. The decrease is a result
of the conversion and repayment of convertible promissory notes in September
2002. For further discussion, see Note 6 of the Notes to Consolidated Financial
Statements.
Nine Months Ended September 30, 2003 Compared to Nine Months Ended September 30,
2002
The Company had a net loss of $12,653,925 (or $0.58 per share) for the nine
months ended September 30, 2003, compared to a net loss of $27,819,985 (or $1.50
per share) for the same period in 2002. The decrease in net loss is primarily
attributed to the following:
o a decrease in interest and debt conversion expense as a result of the
conversion and repayment of convertible promissory notes in September
2002, which is described in greater detail in Note 6 of the Notes to
Consolidated Financial Statements, and
o an increase in revenues.
The Company's revenues were $4,671,239 in the nine months ended September 30,
2003 compared to $1,585,632 for the same period in 2002. The increase is mainly
due to the increase in development chemical sales and the recognition of
technology development revenue in the nine months ended September 30, 2003.
The Company earned $1,105,213 in contract research revenue from the U.S.
Government in the nine months ended September 30, 2003, compared to $1,143,197
for the same period in 2002. In the nine months ended September 30, 2003,
contract revenue was derived from nine existing government contracts and
options, of which five were completed by the end of the third quarter with three
new contracts having been awarded in the nine months ended September 30, 2003.
For the same period in 2002, 80% of the contract revenue was generated from two
contracts, one of which was completed in December 2002 with the other being
completed in March 2003. In the nine months ended September 30, 2003, contract
research revenue was mainly derived from the following government contracts:
o $105,412 recognized under a 24-month, $729,158 SBIR Phase II contract
received from the Department of Defense ("DoD"), which commenced in
February 2001 and was completed in February 2003,
o $173,868 recognized under two 11-month SBIR Phase I grants, totaling
$200,000 received from the Department of Energy, which commenced in
July 2002 and were completed in June 2003,
o $399,687 recognized under a 24-month, $1,963,725 cooperative agreement
received from the U.S. Army Research Laboratories ("ARL"), which
commenced in August 2002,
o $252,536 recognized under a 24-month, $729,997 SBIR Phase II contract
received from the U.S. Department of the Army, which commenced in
January 2003.
o $69,850 recognized under a $69,850 SBIR Phase I contract received from
the U.S Department of the Army, which commenced in February 2003.
14
The Company earned $1,549,726 from its sales of OLED materials for evaluation
purposes in the nine months ended September 30, 2003, compared to $442,435 for
the same period in 2002. 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 entered into an agreement in the third quarter under which the
Company began supplying one of its proprietary OLED materials to a customer for
use in the manufacture of commercial OLED displays. As a result, the Company
earned $19,890 in commercial chemical revenue and $46,410 in license fees in
connection with this agreement for the nine months ended September 30, 2003.
There were no such agreements in effect for the same period in 2002.
The Company recognized $1,950,000 in technology development revenue in
connection with technology and development evaluation agreements, one of which
commenced in October 2002 with the other having commenced in September 2003.
There were no such revenues for the same period in 2002.
The Company incurred research and development expenses of $12,493,267 for the
nine months ended September 30, 2003, compared to $11,475,574 for the same
period 2002. The increase in these expenses was primarily a result of:
o increased expenses relating to patent and other related costs,
o increase in non-cash charges, in connection with the Development and
License Agreement with PPG, due to the increased price of the Company's
stock, and
o the further development and operation of the Company's facility in
Ewing, New Jersey.
The Company's interest income was $171,336 for the nine months ended September
30, 2003, compared to $358,598 for the same period in 2002. The decrease is due
mainly to decreased interest rates on investments.
The Company's interest expense was $579 for the nine months ended September 30,
2003, compared to $2,874,835 for the same period in 2002. The decrease is a
result of the conversion and repayment of convertible promissory notes in
September 2002. For further discussion, see Note 6 of the Notes to Consolidated
Financial Statements.
Liquidity and Capital Resources
As of September 30, 2003, the Company had cash and cash equivalents of
$21,658,422, short-term investments of $5,347,865 and long-term investments of
$3,710,838, for a total of $30,717,125. This compares to cash and cash
equivalents of $15,905,416, short-term investments of $4,662,898 and long-term
investments of $379,753, for a total of $20,948,067, as of December 31, 2002.
In the nine months ended September 30, 2003, the cash used in operating
activities was $4,546,963 as compared to $5,457,824 for the same period in 2002.
The decreased use of cash in operating activities is primarily due to a decrease
in the operating loss, as a result of increased revenues, supplemented by a
decrease in accounts receivable.
In the nine months ended September 30, 2003, the cash used in investing
activities was $4,951,137 as compared to net cash provided by investing
activities of $15,827,997 for the same period in 2002. The decrease is mainly
due to the elimination of restricted cash in the amount of $15,162,414 as a
result of the conversion and repayment of the Notes in September 2002 (Note 6).
The decrease is also attributable to the increased purchase of short-term and
long-term investments.
In the nine months ended September 30, 2003, the net cash provided by financing
activities was $15,251,106, as compared to net cash used in financing activities
of $741,038 for the same period in 2002. The increase is primarily due to the
Company's completion of a registered direct offering in August 2003 of 2,012,500
shares of the Company's Common Stock at $8.00 per share. The offering resulted
in proceeds to the Company of 14,841,857, net of $1,258,143 in costs associated
with the completion of the offering.
Working capital increased to $24,924,397 at September 30, 2003 from working
capital of $18,541,596 at December 31, 2002. The net increase is due primarily
to the net cash proceeds received from the Company's registered direct offering.
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 for
the next twelve months. 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 receipts 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 up to $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.
15
Critical Accounting Policies
Refer to the Company's Annual Report on Form 10-K for the year ended December
31, 2002 for a discussion of critical accounting policies.
Contractual Obligations
Refer to the Company's Annual Report on Form 10-K for the year ended December
31, 2002 for a discussion of the Company's contractual obligations. In September
2003, the Company renewed its lease for its facility for an additional five
years through the end of 2008. See Note 1 for further discussion.
Off-balance Sheet Arrangements
Refer to Company's Annual Report on Form 10-K for the year ended December 31,
2002 for a discussion of off-balance sheet arrangements. As of September 2003,
the Company had no off-balance sheet arrangements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not utilize financial instruments for trading purposes and
holds no derivative financial instruments 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 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
The Company's management, with the participation of its Chief Executive Officer
and Chief Financial Officer, evaluated the effectiveness of the Company's
disclosure controls and procedures as of the end of the period covered by this
report. Based on this evaluation, the Company's Chief Executive Officer and
Chief Financial Officer have concluded that the Company's disclosure controls
and procedures, as of the end of the period covered by this report, are
functioning effectively to provide reasonable assurance that information
required to be disclosed by the Company in its reports filed or submitted under
the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission's rules and forms.
(b) Changes in Internal Control Over Financial Reporting
There have been no changes in the Company's internal control over financial
reporting identified in connection with the evaluation of the Company's
disclosure controls and procedures described above that occurred during the
Company's last fiscal quarter and that have materially affected, or are
reasonably likely to materially affect, the Company's internal control over
financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
The following is a list of the exhibits filed as part of this report.
Exhibit
Number Description
------ -----------
10.48* Lease Agreement between the Company and Gesipa Real Estate Partners, dated as of October 12, 1998.
10.49* First Amendment of Lease Agreement between the Company and Gesipa Real Estate Partners, dated as of January
11, 2001.
10.50* Second Amendment of Lease Agreement between the Company and Gesipa Real Estate Partners, dated as of
September 22, 2003.
10.51* Amendment #1 to the Research Agreement between the Company and the Trustees of Princeton University, dated
as of November 14, 2000.
10.52* Amendment #2 to the Research Agreement between the Company and the Trustees of Princeton University, dated
as of April 11, 2002.
10.53* Amendment #1 to the Amended License Agreement between the Company, the Trustees of Princeton University
and the University of Southern California, dated as of August 7, 2003.
31.1* Certifications of Sherwin I. Seligsohn, Chief Executive Officer, as required by Rule 13a-14(a) or Rule 15d-14(a).
31.2* Certifications of Sidney D. Rosenblatt, Chief Financial Officer, as required by Rule 13a-14(a) or Rule 15d-14(a).
32.1** Certifications of Sherwin I. Seligsohn, Chief Executive Officer, as required by Rule 13a-14(b) or Rule 15d-14(b),
and by 18 U.S.C. Section 1350. (This exhibit shall not be deemed "filed" for purposes of Section 18 of the
Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section. Further, this
exhibit shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as
amended, or the Securities Exchange Act of 1934, as amended.)
32.2** Certifications of Sidney D. Rosenblatt, Chief Financial Officer, as required by Rule 13a-14(b) or Rule 15d-14(b),
and by 18 U.S.C. Section 1350. (This exhibit shall not be deemed "filed" for purposes of Section 18 of the
Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section. Further, this
exhibit shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as
amended, or the Securities Exchange Act of 1934, as amended.)
- ------------
* Filed herewith.
** Furnished herewith.
(b) Reports on Form 8-K:
i. Current Report on Form 8-K, furnished to the SEC on August 13, 2003,
reporting Items 7 and 9, and containing, as an exhibit, a press release
announcing the Company's financial results for the quarter ended June
30, 2003.
ii. Current Report on Form 8-K, filed with the SEC on August 25, 2003,
reporting Items 5 and 7, and containing, as exhibits, (1) the Placement
Agent Agreement between the Company and the placement agent for the
Company's registered direct offering, and (2) the form of the warrant
agreement executed with the placement agent in connection with the
offering.
17
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report on form 10-Q for the quarter ended
September 30, 2003, to be signed on its behalf by the undersigned thereunto duly
authorized.
UNIVERSAL DISPLAY CORPORATION
Date: November 10, 2003 By: /s/ Sidney D. Rosenblatt
----------------------------------
Sidney D. Rosenblatt
Executive Vice President and
Chief Financial Officer