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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, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ___________
Commission File Number 1-12031
UNIVERSAL DISPLAY CORPORATION
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(Exact name of registrant as specified in its charter)
Pennsylvania 23-2372688
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
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 as of June 30, 2004, computed by reference to
the closing sale price of the registrant's common stock on the Nasdaq National
Market on that date, was approximately $244,061,829. 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 8, 2005, the registrant had outstanding 28,077,428 shares of common
stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement to be filed with the Securities and
Exchange Commission for the Annual Meeting of Shareholders to be held on June
30, 2005 are incorporated by reference into Part III of this report.
TABLE OF CONTENTS
PART I
ITEM 1. BUSINESS.......................................................... 4
ITEM 2. PROPERTIES........................................................13
ITEM 3. LEGAL PROCEEDINGS.................................................13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...............13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.................15
ITEM 6. SELECTED FINANCIAL DATA...........................................16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.........................................16
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........29
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.......................29
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE...............................29
ITEM 9A. CONTROLS AND PROCEDURES...........................................29
ITEM 9B. OTHER INFORMATION.................................................29
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................30
ITEM 11. EXECUTIVE COMPENSATION............................................30
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT........................................................30
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................30
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES............................30
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES...........................31
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CAUTIONARY STATEMENT
CONCERNING FORWARD-LOOKING STATEMENTS
This report and the documents incorporated by reference in this report
contain some "forward-looking statements." Forward-looking statements concern
our possible or assumed future results of operations, including descriptions of
our business strategies. These statements often include words such as "believe,"
"expect," "anticipate," "intend," "plan," "estimate," "seek," "will," "may" or
similar expressions. These statements are based on assumptions that we have made
in light of our experience in the industry, as well as our perceptions of
historical trends, current conditions, expected future developments and other
factors we believe are appropriate in these circumstances.
As you read and consider this report, you should not place undue
reliance on any forward-looking statements. You should understand that these
statements involve substantial risk and uncertainty and are not guarantees of
future performance or results. They depend on many factors that are discussed
further in the section of this report entitled "Factors that May Affect Future
Results and Financial Condition," including:
o the outcomes of our ongoing and future research and development
activities, and those of others, relating to organic light
emitting diode (OLED) technologies and materials;
o our ability to access future OLED technology developments of our
academic and commercial research partners;
o the potential commercial applications of and future demand for
our OLED technologies and materials, and of OLED products in
general;
o our ability to form and continue strategic relationships with
manufacturers of OLED products;
o successful commercialization of products incorporating our OLED
technologies and materials by OLED manufacturers, and their
continued willingness to utilize our OLED technologies and
materials;
o the comparative advantages and disadvantages of our OLED
technologies and materials versus competing technologies and
materials currently on the market;
o the nature and potential advantages of any competing
technologies that may be developed in the future;
o our ability to compete against third parties with resources
greater than ours;
o our ability to maintain and improve our competitive position
following the expiration of our fundamental OLED patents;
o the adequacy of protections afforded to us by the patents that
we own or license and the cost to us of enforcing those
protections;
o our ability to obtain, expand and maintain patent protection in
the future, and to protect our unpatentable intellectual
property;
o the payments that we expect to receive in the future under our
existing contracts and the terms that we are able to enter into
with new OLED display manufacturers;
o our future capital requirements and our ability to obtain
additional financing if and when needed; and
o our future OLED technology licensing and OLED material sales
revenues and results of operations.
Changes or developments in any of these areas could affect our financial results
or results of operations, and could cause actual results to differ materially
from those contemplated in the forward-looking statements.
All forward looking statements speak only as of the date of this report
or the documents incorporated by reference, as the case may be. Except for
special circumstances in which a duty to update arises when prior disclosure
becomes materially misleading in light of subsequent events, we do not intend 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.
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PART I
ITEM 1. BUSINESS
OUR COMPANY
We are a leader in the research, development and commercialization of
organic light emitting diode, or OLED, technologies for use in a variety of flat
panel display and other applications. OLEDs are thin, lightweight and
power-efficient solid-state devices, highly suitable for use in portable,
full-color display applications. We believe OLED displays will capture a share
of the growing flat panel display market because they offer advantages over
competing technologies with respect to brightness, power efficiency, viewing
angle, video response time and manufacturing cost. We believe that our
technology leadership and intellectual property position will enable us to share
in the revenues from OLED displays as they enter the mainstream consumer
electronics market.
Our strategy is to further develop and license our proprietary OLED
technologies to display manufacturers for use in applications such as mobile
phones, digital cameras, laptop computers, televisions and other consumer
electronic devices. In support of this primary objective, we also develop new
OLED materials and sell those materials to these OLED manufacturers. Through our
internal research and development efforts and our relationships with world-class
partners such as Princeton University, the University of Southern California and
PPG Industries, Inc., we have established a significant portfolio of OLED
technologies and associated intellectual property rights. We currently own,
exclusively license or have the sole right to sublicense more than 625 patents
issued and pending worldwide. We are currently selling one of our proprietary
OLED materials to Tohoku Pioneer Corporation, have established a cross-license
agreement with DuPont Displays, Inc. and have entered into technology
development and/or evaluation agreements with several other companies, including
AU Optronics Corporation, Samsung SDI Co., Ltd., Sony Corporation, Seiko Epson
Corporation and Toyota Industries Corporation.
INDUSTRY OVERVIEW
THE FLAT PANEL DISPLAY MARKET
Flat panel displays have been used for many years in a wide variety of
portable consumer electronics products, including mobile phones, personal
digital assistants, or PDAs, cameras, camcorders, electronic games and laptop
computers. Due to their narrow profile, light weight and high resolution, flat
panel displays are displacing cathode ray tube, or CRT, displays in larger
product applications such as desktop computer monitors and televisions.
THE OLED DISPLAY MARKET
An OLED is a solid-state device made by placing a series of organic thin
films between two electrodes. When electrical current is applied to an OLED, a
bright light is emitted. OLEDs use red, green and blue pixels, or white light
with color filters, to generate full-color displays that exhibit a broad
spectrum of colors. Currently, there are two mechanisms through which OLEDs emit
light, phosphorescence and fluorescence. Fluorescent OLEDs emit light from a
singlet state of the emissive material and phosphorescent OLEDs emit light from
a triplet state of the emissive material. By emitting light from a triplet
state, phosphorescence offers up to four times the power efficiencies of
fluorescence.
The initial market for OLED technologies and materials is flat panel
displays, a market currently dominated by liquid crystal displays, or LCDs.
However, OLED displays are an attractive alternative to LCDs as they offer a
number of potential advantages, including:
o a thinner profile and lighter weight;
o higher brightness and contrast ratios, leading to sharper
picture images and graphics;
o wider viewing angles;
o faster response times for video;
o higher efficiencies, thereby reducing power consumption; and
o lower cost manufacturing methods and materials.
We believe OLED displays will be adopted for use in small- to
medium-sized product applications, such as mobile phone main and sub-displays,
car audio systems, digital cameras, PDAs, DVD players, handheld TVs, notebook
PCs and industrial applications. Additionally, the sharper picture images and
graphics, superior video response time, wider viewing angle and potentially
lower manufacturing cost of OLED displays may give them an advantage over LCDs
in larger applications such as laptop computers, desktop computer monitors and
televisions, in which these characteristics are important.
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While the display characteristics of OLEDs and LCDs are different, they
share many similarities in terms of manufacturing technology and infrastructure,
such as those relating to active matrix backplane technologies. These
similarities may enable the conversion of existing LCD manufacturing facilities
to OLED display production with relatively low capital investment.
Many companies currently are engaged in efforts to develop and
commercialize OLED displays. We believe that if their efforts are successful,
they could result in flat panel displays nearly as thin as a piece of paper with
performance characteristics similar to those of CRT displays. In addition, due
to the inherent transparency of organic materials and through the use of
transparent electrode technology, OLEDs eventually may enable the production of
transparent displays for use in products such as automotive windshields and
windows with embedded displays. Organic materials also make technically possible
the development of flexible displays for use in an entirely new set of product
applications, such as display devices that can be rolled up for storage.
Research also is being conducted on OLEDs for applications such as
energy-efficient solid-state lighting.
OUR COMPETITIVE STRENGTHS
We believe our position as one of the leading technology developers in
the OLED industry is the direct result of our technological innovation. We have
built an extensive intellectual property portfolio around our OLED technologies
and materials, and are working diligently to enable our manufacturing partners
to adopt our OLED technologies and materials for commercial usage. Our key
competitive strengths include:
Technology Leadership. We are a recognized technology leader in the OLED
industry. We and our research partners at Princeton University and the
University of Southern California pioneered the development of our
phosphorescent OLED, or PHOLED(TM), technology, which can be used to produce
OLED displays that are up to four times as efficient as fluorescent OLED
displays and more than twice as efficient as current LCDs. We believe that our
PHOLED technology is well-suited for industry usage in the commercial production
of OLED displays. Through our relationships with companies such as PPG
Industries and our academic partners, we have developed and continue to develop
novel OLED materials that we believe will facilitate the adoption of our OLED
technologies by display manufacturers.
Relationships with Leading Display Manufacturers. We have established
relationships with well-known display manufacturers that are using, or are
evaluating, our OLED technologies and materials for commercial applications. In
August 2003, we began supplying Tohoku Pioneer with our proprietary red
phosphorescent material for its commercial production of full-color OLED
displays for a mobile phone being sold in Japan. In addition, we have entered
into a cross-license agreement with DuPont Displays and have established
evaluation, technology development, licensing and/or material supply agreements
with a number of display manufacturers, including AU Optronics, Samsung SDI,
Sony, Epson and Toyota Industries. As of December 31, 2004, we had entered into
twenty such agreements, eight of which were newly established in 2004.
Broad Portfolio of Intellectual Property. We believe that our extensive
portfolio of patents, trade secrets and know-how provides us with a competitive
advantage in the OLED industry. Through our internal development efforts and our
relationships with Princeton University, the University of Southern California
and Motorola, Inc., we own, exclusively license or have the sole right to
sublicense more than 625 patents issued and pending worldwide related to our
PHOLED and other OLED technologies and materials. We also continue to accumulate
valuable trade secret information and technical know- how relating to our OLED
technologies and materials.
Business Model Focused on Technology Licensing. Our current business
model does not involve the manufacture or sale of OLED displays incorporating
our technologies and materials. Rather, we are focused on licensing our OLED
technologies to display manufacturers on a non-exclusive basis. PPG Industries
currently manufactures our proprietary OLED materials, which we then qualify and
sell to display manufacturers. We believe this business model allows us to
concentrate on our core strengths of technology development and innovation,
while at the same time providing significant operating leverage. We also believe
that this approach may reduce potential competitive conflicts between us and our
customers.
Established U.S. Government Contracts to Fund Research and Development.
We have entered into several research and development contracts with U.S.
government agencies such as the U.S. Department of the Army, the Army Research
Laboratories, and the Department of Energy. Under these contracts, the U.S.
government funds a portion of our efforts to develop next-generation OLED
technologies for applications such as flexible displays and energy-efficient
solid-state lighting. This enables us to supplement our internal research and
development budget with additional funding.
Experienced Management and Scientific Advisory Team. Our management team
has significant experience in developing business models focused on licensing
disruptive technologies in high growth industries, which serves to differentiate
us from our competitors. In addition, our management team has assembled a
Scientific Advisory Board that includes some of the leading researchers in the
OLED industry. We believe our Scientific Advisory Board, which includes
Professor Stephen R. Forrest of Princeton University and Professor Mark E.
Thompson of the University of Southern California, PPG Industries' researchers
Dr. Peter B. Mackenzie, Scientist and Dr. David B. Knowles, Senior Research
Associate, as well as Dr. Julia J. Brown, the Chair of our
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Scientific Advisory Board and our Chief Technical Officer and Dr. Michael Hack,
our Vice President of Strategic Product Development, has enhanced our reputation
and our competitive profile.
OUR BUSINESS STRATEGY
Our business strategy is to promote our OLED technologies and materials
for widespread use in OLED displays and other product applications. We presently
are focused on the following steps to implement our business strategy:
Target Leading Display Manufacturers. We are targeting leading display
manufacturers as potential commercial licensees of our OLED technologies and
purchasers of our OLED materials. For example, we have entered into a
relationship with Tohoku Pioneer to purchase our proprietary red phosphorescent
material for its commercial production of full-color OLED displays and are
pursuing other such relationships. We provide technical assistance and support
to display manufacturers evaluating our OLED technologies and materials because
we believe that successful incorporation of our technologies and materials in
commercial applications may place competitive pressure on other industry
participants to adopt them.
Enhance Our Portfolio of Existing PHOLED Technologies and Materials. We
believe that a strong portfolio of OLED technologies and materials is critical
to our success in the display industry. Consequently, we are continually seeking
to expand this portfolio through our internal development efforts, our
collaborative relationships with academic and other research partners, and other
strategic opportunities. Our primary focus is to develop new and improved PHOLED
materials, with increased efficiencies, enhanced color gamut and extended
lifetimes, and which are compatible with different manufacturing methods, so
that they can be used in a broader array of OLED display products, such as
televisions. Currently, one of our red materials is in production with an OLED
display manufacturer, several of our red and green materials are being evaluated
by a number of OLED display manufacturers for use in production, and our blue
and white materials are still under development.
Expand Development of Next-Generation Technologies. We continue to
conduct research and development activities relating to next-generation OLED
technologies. Our current research and development initiatives involve flexible
OLED displays, transparent or top-emitting OLED displays and OLEDs for
energy-efficient solid-state lighting. We also are conducting research with our
partners on the use of organic thin-film technology in applications such as
lasers, transistors, photo detectors, electronic memories and other related
devices. Our focus on next- generation technologies is designed to enable us to
continue our position as a leading provider of OLED technologies and materials
as new markets emerge.
OUR PHOSPHORESCENT OLED TECHNOLOGIES
Phosphorescent OLEDs, or PHOLEDs, our key proprietary technology,
utilize novel materials and device structures that allow OLEDs to emit light
through a process known as phosphorescence. Conversely, fluorescent OLEDs emit
light through an inherently less efficient process. Testing has demonstrated
that PHOLEDs exhibit device efficiencies up to four times higher than those
exhibited by fluorescent OLEDs. This substantially reduces the power
requirements of an OLED and is potentially useful for hand-held devices, such as
mobile phones, where battery power is often a limiting factor. Phosphorescence
also may be important for large-area displays such as televisions, where higher
efficiency may enable longer product lifetimes. Through our commercial
relationships with PPG Industries and several display manufacturers, as well as
through research we are sponsoring with our academic partners, we are conducting
research and development work directed towards both improving our existing
PHOLED technologies and materials and developing new PHOLED technologies and
materials. A significant portion of this work involves the evaluation and
qualification of PHOLED materials for possible use in the commercial production
of OLED displays.
OLEDs can be manufactured using different processing methods. Currently,
the most common method is through vacuum thermal evaporation, or VTE. Another
method involves preparing solutions of the various organic materials in an OLED
that can be solution processed by techniques such as spin coating or inkjet
printing onto the substrate. Solution processing methods, and inkjet printing in
particular, have the potential to be lower cost approaches to OLED manufacturing
and scalable to large area displays. Others have demonstrated that solution
processing methods can be used to produce OLEDs containing polymer-based
fluorescent organic materials, and we are developing printable PHOLEDs, or
P(2)OLEDs((TM)), to demonstrate that these methods can be used with our PHOLED
technologies. We have Joint Development Agreements with both DuPont Displays and
Epson relating to P(2)OLEDs.
OUR ADDITIONAL PROPRIETARY OLED TECHNOLOGIES
We currently are focusing our research, development and
commercialization efforts on a number of OLED device and manufacturing
technologies, including the following:
Transparent OLEDs (TOLEDs(TM)). We have developed a technology for the
production of OLEDs that have transparent cathodes. Conventional OLEDs use a
reflective metal cathode and a transparent anode. In contrast, TOLEDs use a
transparent cathode and either a transparent, or reflective or opaque metal
anode. TOLEDs utilizing transparent cathodes and reflective metal anodes are
known as "top-emission" OLEDs. In a "top-emission" active matrix OLED, light is
emitted without having to travel
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through much of the device electronics where a substantial portion of it is
absorbed. This is expected to result in OLED displays having image qualities and
lifetimes superior to those of conventional active matrix OLEDs. TOLEDs
utilizing cathodes and anodes that are both transparent may in the future be
useful in novel flat panel display applications requiring semi-transparency or
transparency, such as graphical displays in automotive windshields.
Flexible OLEDs (FOLEDs(TM)). We are working on a number of technologies
required for the fabrication of small molecule OLEDs on flexible substrates.
Most OLED and other flat panel displays are built on rigid substrates such as
glass. FOLEDs are OLEDs built on non-rigid substrates such as plastic or metal
foil. FOLEDs are expected to be conformable to specific shapes, able to
withstand repeated bending or flexing, and eventually capable of being rolled
into a cylinder, similar to a window shade. These features create the
possibility of new flat panel display product applications that do not exist
today, such as a portable, roll-up Internet connectivity and communications
device. Manufacturers eventually may be able to produce FOLEDs using more
efficient continuous, or roll-to- roll, processing methods. We currently are
conducting research and development on FOLED technologies internally, under
several of our U.S. government programs and in connection with the
government-sponsored Flexible Display Center at Arizona State University.
Organic Vapor Phase Deposition (OVPD(TM)). The standard approach for
manufacturing a small molecule OLED, including a PHOLED, is based on a process
known as vacuum thermal evaporation, or VTE. In VTE, the thin layers of organic
material in an OLED are deposited in a high-vacuum environment. An alternate
approach for manufacturing a small molecule OLED is based on OVPD. In contrast
to the VTE process, the OVPD process utilizes a carrier gas stream in a hot
walled reactor in a low pressure environment to deposit the layers of organic
material in an OLED. The OVPD process may offer advantages over the VTE process
through more efficient materials utilization and by being more readily scalable
to the production of large-area OLED displays. Furthermore, the OVPD process may
offer advantages in OLED performance by enhanced deposition control. We are
working with Aixtron AG, a leading manufacturer of metal-organic chemical vapor
deposition equipment, to develop and qualify a tool for our fabrication of OLED
displays utilizing an OVPD process, and we have granted Aixtron an exclusive
license to sell OVPD equipment.
OUR STRATEGIC RELATIONSHIPS WITH DISPLAY MANUFACTURERS
We have established evaluation, technology development, licensing and
material supply relationships with numerous display manufacturers. As of
December 31, 2004, we had entered into twenty such relationships, eight of which
were newly established in 2004. These relationships generally are directed
towards tailoring our proprietary OLED technologies and materials for use by
each individual manufacturer. Our ultimate objective is to license our OLED
technologies and sell our OLED materials to these manufacturers for their
commercial production of OLED displays. Our key relationships with display
manufacturers include:
Tohoku Pioneer. In August 2003, we entered into an arrangement to
provide our proprietary red PHOLED material to Tohoku Pioneer Corporation, a
subsidiary of Pioneer Corporation, for the commercial production of its passive
matrix OLED displays on glass substrates. Under this arrangement, we receive
payments from Tohoku Pioneer for the PHOLED material and license fees for
allowing Tohoku Pioneer to use this material in the production of passive matrix
OLED displays. Tohoku Pioneer sells these displays to one of its customers who
uses them as the exterior sub-display for a mobile phone being sold in Japan.
DuPont Displays. In December 2002, we entered into a Joint Development
Agreement with DuPont Displays, Inc. and its parent E.I. DuPont de Nemours and
Company (DuPont) for the development of novel phosphorescent materials and
device structures for solution processed OLEDs (our P(2)OLEDs). Under the Joint
Development Agreement, we have the exclusive right to sublicense any
intellectual property developed under the program for use with solution
processed OLED displays on rigid glass substrates.
We also entered into a Cross-License Agreement and a Developed Device
Additional Payment Agreement with DuPont in December 2002. Under these
agreements, we granted DuPont a non-exclusive license under our background
phosphorescent emission, transparent cathode and inkjet printing patents, and
under any intellectual property developed by us under our joint development
program with DuPont, to make and sell solution processed OLED displays on rigid
glass substrates. DuPont paid us an up-front license fee and agreed to pay us
running royalties on its sales of these displays. As of December 31, 2004,
DuPont had not commenced commercial sales of P(2)OLED displays and had not paid
us royalties under either of these agreements.
Sony. In February 2001, we entered into an agreement with Sony
Corporation under which we worked with Sony in its development of active matrix
OLED displays utilizing our high-efficiency PHOLED technology and materials. We
subsequently entered into a Joint Development and Evaluation Agreement with
Sony, effective as of February 2003, which agreement was directed towards
tailoring our proprietary PHOLED materials for use in Sony's OLED device
structures. We continue to have an agreement with Sony under which we sell Sony
our proprietary PHOLED materials for their evaluation in OLED devices.
Samsung SDI. In July 2001, we entered into a Joint Development Agreement
with Samsung SDI Co., Ltd. The original focus of our agreement with Samsung SDI
was the joint development of a portable, low-power OLED display prototype for
use in mobile phones and other devices. We have since renewed this agreement
with Samsung SDI on several occasions and we continue to sell our proprietary
PHOLED materials to Samsung SDI for its evaluation and for purposes of
development, manufacturing qualification and product testing.
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Toyota Industries. In October 2002, we entered into an OLED Technology
Development and Evaluation Agreement with Toyota Industries Corporation. Under
this agreement, we conduct development activities with Toyota Industries
relating to the use of our proprietary PHOLED technology and materials to
produce sources of white light, and we sell our proprietary PHOLED materials to
Toyota Industries for its evaluation and for development purposes. At the 2004
Society for Information Display International Symposium, we reported a joint
paper with Toyota Industries that highlighted a high-efficiency white OLED
device made using our PHOLED technology.
AU Optronics. In May 2003, we announced that AU Optronics Corporation
had fabricated a low-power consumption, full-color active matrix OLED display
combining its proprietary amorphous-silicon backplane technology with our
proprietary PHOLED technology. The display was showcased at the 2003 Society for
Information Display International Symposium and was the subject of a scientific
paper presented jointly by us and AU Optronics at the conference. This work
stemmed from a joint development agreement we have had in place with AU
Optronics since October 2001. We continue to sell our proprietary PHOLED
materials to AU Optronics for its evaluation.
Epson. In December 2004, we entered into a Joint Development Agreement
with Seiko Epson Corporation. Under this agreement, we are conducting
development activities with Epson relating to the application of our proprietary
PHOLED technology and materials to ink jet printing processes used by Epson. We
also sell our proprietary PHOLED materials to Epson for its evaluation and for
use under our development program.
OUR OLED MATERIALS SUPPLY BUSINESS
In support of our primary objective of licensing our OLED technologies,
we supply our OLED materials to display manufacturers and others. We device
qualify our materials before shipment in order to ensure the materials meet the
specifications we agree upon with our customers.
In October 2000, we entered into a Supply Agreement and a Development
and License Agreement with PPG Industries. Under the Supply Agreement, we
appointed PPG Industries as the exclusive supplier of our proprietary OLED
materials that are intended for use in the commercial production of OLEDs. PPG
Industries sells these OLED materials to us and we, in turn, device qualify
these materials before reselling them to display manufacturers. Under the
Development and License Agreement, PPG Industries, among other things, supplies
us with OLED materials that we provide to display manufacturers and others for
evaluation purposes.
The current term of the Development and License Agreement extends
through the end of 2005 and the current term of the Supply Agreement extends
through the end of 2007. In December 2004, we amended the Development and
License Agreement for 2005 with regard to, among other things, the compensation
to PPG Industries for the work it performs and the OLED materials it provides to
us under that agreement. We also amended the Supply Agreement to address
analytical, health and safety and other ancillary activities conducted by PPG
Industries for us under that agreement. We are currently negotiating with PPG
Industries the revised terms under which we would extend our existing
relationship.
In August 2003, we commenced commercial sales of one of our proprietary
red PHOLED materials to Tohoku Pioneer. Tohoku Pioneer is currently using this
material in the commercial production of its passive matrix OLED displays on
glass substrates. Tohoku Pioneer sells these displays to one of its customers
that uses them as the exterior sub-display for a mobile phone being sold in
Japan.
RESEARCH AND DEVELOPMENT
Our research and development activities are focused on the advancement
of our OLED technologies and materials for displays, lighting and other
applications. We conduct this research and development both internally and
through various relationships with our commercial business partners and academic
institutions. In the years 2004, 2003 and 2002, we spent approximately
$16,651,335, $17,897,522 and $15,804,267, respectively, on research and
development with respect to our various OLED technologies and materials.
INTERNAL DEVELOPMENT EFFORTS
We conduct a substantial portion of our OLED development activities at
our state-of-the-art development and testing facility in Ewing, New Jersey. At
this facility, we perform technology development, including device and process
optimization, prototype fabrication, manufacturing scale-up studies, process and
product testing, and characterization and reliability studies. The facility
houses three OLED deposition systems that allow us to produce several hundred
OLED plates per month, as well as an OVPD system that we are using to study that
technology. We are also awaiting delivery of a fourth deposition system that is
designed to process full-color, flexible OLED substrates. The facility also
contains equipment for substrate patterning, organic material deposition,
display packaging, module assembly, and extensive testing in Class 100 and
100,000 clean rooms and opto- electronic test laboratories.
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In addition, we utilize the facility as a technology transfer site for work with
our business partners. We are in the process of expanding our operations and
laboratory space in the building, which we recently purchased, in order to
better support our research and development efforts.
We also conduct OLED materials and chemistry research activities in
approximately 1,600 square feet of laboratory space that we lease in Princeton,
New Jersey. This research involves the fabrication of small quantities of new
OLED materials that we then test in OLED devices at our main facility.
As of December 31, 2004, we employed a team of 29 research scientists,
engineers and laboratory assistants at our facilities in Ewing and Princeton,
New Jersey. This team includes chemists, physicists, engineers with electrical,
chemical and mechanical backgrounds, and highly-trained experimentalists.
UNIVERSITY SPONSORED RESEARCH
We have long-standing relationships with Princeton University and the
University of Southern California for the conduct of research relating to our
OLED and other organic thin-film technologies and materials for applications
such as displays and lighting. This research is performed at Princeton
University under the direction of Dr. Stephen R. Forrest and at the University
of Southern California under the direction of Dr. Mark E. Thompson.
We fund the research conducted at Princeton University and the
University of Southern California under a Research Agreement we executed with
the Trustees of Princeton University in October 1997. The University of Southern
California conducts its portion of this research under a subcontract between it
and Princeton University. In April 2002, we extended the term of our Research
Agreement with Princeton University through July 2007. Under the Research
Agreement, we incurred costs to Princeton University of $679,910 in 2004,
$933,156 in 2003 and $859,339 in 2002. Our maximum funding commitment under the
Research Agreement for the period from August 2002 through July 2007 is
$1,495,599 per year. We have exclusive license rights to all patents arising out
of the research conducted by Princeton University and the University of Southern
California under the Research Agreement.
In April 2004, we entered into a Contract Research Agreement with the
Chitose Institute of Science and Technology of Japan (CIST), under which we fund
a research program at CIST relating to high-efficiency OLED materials and
devices. We receive exclusive rights to all intellectual property developed
under this program. This relationship runs through December 2005.
In December 2004, we entered into a Sponsored Research Agreement with
the Yuen Tjing Ling Industrial Research Institute of National Taiwan University
(TLIRI). Under that agreement we fund a research program at TLIRI relating to
new OLED materials, and we receive exclusive rights to all intellectual property
developed under that program. The term of that arrangement extends through
December 2005.
PPG INDUSTRIES
Under our Development and License Agreement with PPG Industries, a team
of approximately eight PPG Industries' scientists and engineers is assisting us
in developing various OLED materials in which we have a proprietary interest.
PPG Industries receives cash and shares of our common stock as compensation for
this work, though under limited circumstances PPG Industries has the right to
demand payment of cash in full. This agreement also covers the supply to us of
OLED materials for purposes of development and manufacturing qualification at
our facilities and the facilities of our customers.
AIXTRON
In July 2000, we entered into a Development and License Agreement with
Aixtron AG of Aachen, Germany to jointly develop and commercialize equipment for
the manufacture of OLEDs using the OVPD process. A pre-production OVPD
manufacturing tool was delivered to our Ewing, New Jersey facility in January
2002. We are working with Aixtron to upgrade and qualify this tool to further
develop our OVPD technology and for the future development of OLEDs and other
organic electronic devices utilizing this technology.
Under the Development and License Agreement, we granted Aixtron an
exclusive license to produce and sell equipment used to manufacture OLEDs and
other devices using our proprietary OVPD process. Aixtron is required to pay us
royalties on its sales of this equipment. Purchasers of the equipment also must
obtain rights to use our proprietary OVPD process to manufacture OLEDs and other
devices using the equipment, which they may do through us or Aixtron. If these
rights are granted through Aixtron, Aixtron is required to make additional
payments to us under our agreement.
- 9 -
Aixtron has reported to us the delivery of five OVPD systems since July
2002, including a second generation system that was sold to RiTdisplay
Corporation of Taiwan in April 2003. We recorded our first royalty income from
Aixtron's sale of these systems in the fourth quarter of 2004.
U.S. GOVERNMENT-FUNDED RESEARCH
We have entered into several U.S. government contracts and subcontracts
to fund a portion of our efforts to develop next-generation OLED technologies
and materials for applications such as flexible displays and energy-efficient
solid-state lighting. These include, among others, Small Business Innovation
Research (SBIR) Phase I program contracts for the demonstration of technical
merit and feasibility and SBIR Phase II program contracts for continued research
and development and the fabrication of prototypes. On contracts for which we are
the prime contractor, we subcontract portions of the work to various entities
and institutions, including Princeton University, the University of Southern
California, Pennsylvania State University, Kyung Hee University in South Korea,
L-3 Communications Corporation, the Palo Alto Research Center (PARC), a
subsidiary of Xerox Corporation, and Vitex Systems, Inc. All of our government
contracts and subcontracts are subject to termination at the election of the
contracting governmental agency. Our government contracts include, among others,
the following:
o OLED Displays on Flexible Metal Foil Substrates. In the first
quarter of 2004, the U.S. Army Research Laboratory (ARL), the
U.S. Army Communications - Electronics Command (CECOM) and the
Air Force Research Laboratory partnered to award us $2,505,000
in funding under two government contracts and one subcontract
through L-3 Communications for the development and delivery of
prototype OLED displays on flexible metal foil substrates. This
two-year program is scheduled for completion at the end of 2005.
o Conformable, Transparent OLED Displays for Head-Mounted Devices.
In January 2003, the U.S. Army (CECOM) awarded us a two-year,
$729,996 SBIR Phase II program contract for the development and
delivery of a prototype conformable and transparent OLED display
for use in helmets and other head-mounted devices. This program
was recently extended for three months and is scheduled for
completion in April 2005.
o OLEDs for White Lighting. In the third quarter of 2004, the U.S.
Department of Energy (DOE) awarded us three new program
contracts, for a total of $1,600,000 in funding, to develop
various technical approaches for using our proprietary PHOLED
and other technologies for white lighting applications. These
awards followed DOE's award to us in September 2003 of a
$750,000 program contract for related work on PHOLEDs for
high-performance white lighting. Two of these DOE programs are
scheduled to end in the second quarter of 2005 and the other two
are scheduled to end in July 2006.
o Novel Printing of Striped OLEDs. In October 2004, the U.S.
Department of Energy awarded us $2,400,000 in funding for the
fabrication of white OLEDs using a novel deposition process,
called organic vapor jet printing (OVJP). Under this program, we
are expected to deliver to DOE various prototypes of white OLED
devices wherein the PHOLED materials are deposited in red, green
and blue stripes using the OVJP process. The three-year program
is scheduled for completion in September 2007.
THE ARMY FLEXIBLE DISPLAY CENTER
In December 2004, we entered into an agreement to participate as a
charter member of The Army Flexible Display Center (FDC) being established at
Arizona State University. The FDC is being supported through a $51.5 million
Cooperative Agreement between Arizona State University and the U.S. Army
Research Laboratory. The goal of the FDC is to develop flexible, low power,
light-weight, information displays for the future war fighter and other military
and commercial applications. We anticipate expanding our flexible OLED display
technology development efforts through our involvement with the FDC.
THE UNITED STATES DISPLAY CONSORTIUM
We are a member of the United States Display Consortium (USDC), a
cooperative industry and governmental effort aimed at developing an
infrastructure to support North American flat panel display manufacturing. 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. We are one of 12
members on the Governing Board of the USDC and we actively participate on its
Technical Council.
INTELLECTUAL PROPERTY
Along with our personnel, our primary assets are intellectual property.
This includes numerous U.S. and foreign patents and patent applications that we
own, exclusively license or have the sole right to sublicense. It also includes
a substantial body of trade secrets and technical know-how that we have
accumulated over time.
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OUR PATENTS
Our research and development activities, conducted both internally and
through collaborative programs with our partners, have resulted in the filing of
a substantial number of patent applications relating to our OLED technologies
and materials. As of December 31, 2004, we owned 48 issued and pending patents
in the U.S., together with numerous counterparts filed in various foreign
countries. These patents will start expiring in 2020.
PATENTS WE LICENSE FROM PRINCETON UNIVERSITY AND THE UNIVERSITY OF
SOUTHERN CALIFORNIA
We exclusively license the bulk of our patent rights under an Amended
License Agreement we executed with the Trustees of Princeton University and the
University of Southern California in October 1997. As of December 31, 2004,
these licensed patent rights included 169 issued and pending patents in the
U.S., together with numerous counterparts filed in various foreign countries.
These patents will start expiring in 2014.
Under the Amended License Agreement, Princeton University and the
University of Southern California granted us a worldwide, exclusive license to
specified patents and patent applications relating to OLED technologies and
materials. This license grant also extends to any patent rights arising out of
the research conducted by Princeton University or the University of Southern
California under our Research Agreement with Princeton University. We are free
to sublicense to third parties all or any portion of our patent rights under the
Amended License Agreement. The term of the Amended License Agreement is
perpetual, though it is subject to termination for an uncured material breach or
default by us, or if we become bankrupt or insolvent.
Princeton University is responsible for the filing, prosecution and
maintenance of all patent rights licensed to us under the Amended License
Agreement pursuant to an Interinstitutional Agreement between Princeton
University and the University of Southern California. However, we participate
closely in this process and have the right to instruct patent counsel on
additional matters to be covered in any patent applications filed by Princeton
University. We are required to bear all costs associated with the filing,
prosecution and maintenance of these patent rights.
We are required under the Amended License Agreement to pay Princeton
University royalties for licensed products sold by us or our sublicensees. These
royalties amount to 3% of the net sales price for licensed products sold by us
and 3% of the revenues we receive for licensed products sold by our
sublicensees. These royalty rates are subject to renegotiation for products not
reasonably conceivable as arising out of the Research Agreement if 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 the University of Southern California under
their Interinstitutional Agreement.
We paid Princeton University minimum royalties under the Amended License
Agreement in the amounts of $100,000 for each of 2004, 2003 and 2002. This
minimum royalty obligation of $100,000 per year continues during the term of the
Amended License Agreement. We also are required under the Amended License
Agreement to use commercially reasonable efforts to bring the licensed OLED
technology to market. However, this requirement is deemed satisfied if we
perform our obligations under the Research Agreement and, when that agreement
ends, if we invest a minimum of $800,000 per year in research, development,
commercialization or patenting efforts respecting the patent rights licensed to
us under the Amended License Agreement.
PATENTS WE LICENSE FROM MOTOROLA
In September 2000, we entered into a License Agreement with Motorola
whereby Motorola granted us perpetual license rights to what are now 74 issued
U.S. patents relating to Motorola's OLED technologies, together with numerous
foreign counterparts in various countries. These patents will start expiring in
2012. We have the right to freely sublicense these patents to third parties and,
with limited exceptions, Motorola has agreed not to license these patents to
others in the OLED industry.
Motorola remains responsible for the filing, prosecution and maintenance
of all patent rights licensed to us under the License Agreement, including all
associated costs. Motorola is obligated to keep us informed as to the status of
these activities.
We are required under the License Agreement to pay Motorola royalties on
gross revenues received by us on account of our sales of OLED products or
components, or from our 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. We have the
option to pay these royalties to Motorola in either all cash or 50% cash and 50%
shares of our common stock. We also have 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. Thereafter, we have no minimum
royalty obligations to Motorola.
In connection with our execution of the License Agreement, in 2000 we
issued to Motorola 200,000 shares of our common stock, 300,000 shares of our
Series B Convertible Preferred Stock, and immediately vesting seven-year
warrants to purchase an additional 150,000 shares of our common stock at an
exercise price of $21.60 per share. On October 6, 2004, all 300,000 shares of
the Series B Convertible Preferred Stock were converted into 418,916 shares of
our common stock.
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INTELLECTUAL PROPERTY DEVELOPED UNDER OUR GOVERNMENT CONTRACTS
We and our subcontractors have developed and may continue to develop
patentable OLED technology inventions under our various U.S. government
contracts and subcontracts. Under these arrangements, we or our subcontractors
generally can elect to take title to any patents on these inventions, and to
control the manner in which these patents are licensed to third parties.
However, the U.S. government reserves rights to these inventions and associated
technical data that could restrict our ability to market them to the government
for military and other applications, or to third parties for commercial
applications. In addition, if the U.S. government determines that we or our
subcontractors have not taken effective steps to achieve practical application
of these inventions in any field of use in a reasonable time, the government may
require that we or our subcontractors license these inventions to third parties
in that field of use.
TRADE SECRETS AND TECHNICAL KNOW-HOW
We have accumulated, and continue to accumulate, a substantial amount of
valuable trade secret information and technical know-how relating to OLED
technologies and materials. Where practicable, we share portions of this
information and know-how with display manufacturers and other business partners
on a confidential basis. We also employ various methods to protect this
information and know-how from unauthorized use or disclosure, although no such
methods can afford complete protection. Moreover, because we derive some of this
information and know-how from academic institutions such as Princeton University
and the University of Southern California, there is an increased potential for
public disclosure.
COMPETITION
The display industry in which we operate is highly competitive. We
compete against existing flat panel display technologies, dominated by LCDs, as
well as emerging OLED technologies.
FLAT PANEL DISPLAY COMPETITORS
Numerous domestic and foreign companies have developed or are developing
LCD, plasma and other flat panel display technologies that will compete with our
OLED display technologies. Companies pursuing these technologies, include, among
others, Sony Corporation, Pioneer Corporation, Sharp Corporation, Toshiba
Matsushita Display Technology Co., Ltd., Fujitsu, Ltd., Hitachi Displays, Ltd.,
NEC Corporation, Sanyo Electric Co., Ltd., Samsung Electronics Co., Ltd.,
Samsung SDI Co., Ltd., LG Electronics, Ltd., LG Phillips LCD Co., Ltd., AU
Optronics Corporation, Chi Mei Optoelectronics Corporation, RiTdisplay
Corporation, Chunghwa Picture Tubes, Ltd., TECO Optronics Corporation, Toppoly
Optoelectronics Corporation and HannStar Display Corporation. Many of these
competitors have greater name recognition and more extensive financial,
marketing and research resource capabilities than we do.
We believe that OLED display technologies ultimately may be able to
overcome certain existing limitations of LCD and other flat panel display
technologies, such as high power consumption, costly manufacturing methods, poor
contrast ratios and limited viewing angles, for many product applications.
However, other companies, including those listed above, may succeed in improving
these competing display technologies, or in developing new display technologies,
that are superior to OLED display technologies in various respects. We cannot
predict the timing or extent to which such improvements or developments may
occur.
OLED COMPETITORS
Eastman Kodak Company has licensed its competing fluorescent OLED
technology and other patents for passive matrix OLED display applications to a
number of display manufacturers, including several of those with whom we have
been working such as Pioneer. Another OLED industry participant, Cambridge
Display Technology, Ltd., has licensed and is working with several display
manufacturers on its competing polymer OLED technology. In addition, according
to industry reports Pioneer, Samsung OLED Co., Ltd., RiTdisplay and Philips
Electronics NV, along with other smaller companies, are presently manufacturing
OLED products. Eastman Kodak and other competitors of ours, such as Covion
Organic Semiconductors GmbH and Idemitsu Kosan Co., are selling OLED materials
that compete with our proprietary PHOLED materials.
A number of companies, including many of our flat panel display
competitors, together with Seiko Epson Corporation, Fuji Film Co., Ltd., Canon,
Inc., Semiconductor Energy Laboratories Co., Dow Chemical Corporation, Dupont
Displays Inc., Toyo Ink Mfg. Co., Ltd., Sumitomo Chemical Co., Ltd., Mitsubishi
Chemical Corporation, Covion Organic Semiconductors and Idemitsu Kosan, are
engaged in research, development and commercialization activities with respect
to OLED technologies and materials. Many of these competitors have greater name
recognition and more extensive financial, marketing and research resource
capabilities than we do.
Our existing business relationships with Tohoku Pioneer and other
display manufacturers suggest that our OLED technologies and materials,
particularly our PHOLED technologies and materials, may be adopted by other
manufacturers for use in the production of commercial OLED displays. However,
Eastman Kodak, Cambridge Display Technology and others may succeed in improving
their competing OLED technologies and materials so as to render them superior to
ours. We cannot be sure of the extent to
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which display manufacturers ultimately may adopt our OLED technologies and
materials for the production of commercial OLED displays.
EMPLOYEES
As of December 31, 2004, we had 46 full-time employees and three
part-time employees, none of whom are unionized. We believe that relations with
our employees are good.
OUR COMPANY HISTORY
Our corporation was organized under the laws of the Commonwealth of
Pennsylvania in April 1985. Our business was commenced in June 1994 by a company
then known as Universal Display Corporation, which had been incorporated under
the laws of the State of New Jersey. On June 22, 1995, a wholly-owned subsidiary
of ours merged into this New Jersey corporation. The surviving corporation in
this merger became a wholly-owned subsidiary of ours and changed its name to
UDC, Inc. Simultaneously with the consummation of this merger, we changed our
name to Universal Display Corporation. UDC, Inc. now functions as an operating
subsidiary of ours and has overlapping officers and directors.
OUR COMPLIANCE WITH ENVIRONMENTAL PROTECTION LAWS
We are not aware of any material effects that compliance with Federal,
State or local environmental protection laws or regulations will have on our
business. We have not expended material amounts to comply with any environmental
protection laws or regulations and do not anticipate having to do so in the
foreseeable future.
OUR INTERNET SITE
Our Internet website can be found at www.universaldisplay.com. Through
our website, free of charge, you can access our Annual Report on Form 10-K, our
Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K and any
amendments to those reports that we may file with or furnish to the SEC. These
materials are made available through our website as soon as reasonably
practicable after we electronically file the material with the SEC.
ITEM 2. PROPERTIES
Our main corporate offices and research and development laboratories are
located at 375 Phillips Boulevard in Ewing, New Jersey. On December 1, 2004, we
acquired the entire building at which this facility is located. We currently
occupy approximately one-half of the 41,000 square feet of space in the
building, and are in the process of expanding our operations into an additional
12,000 square feet in the building.
We also lease approximately 1,600 square feet of laboratory space at the
Princeton Corporate Plaza in South Brunswick, New Jersey, and 850 square feet of
office space in Coeur d'Alene, Idaho.
ITEM 3. LEGAL PROCEEDINGS
We are not currently a party to any legal proceedings of a material
nature.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We submitted no matters to a vote of our security holders in the fourth
quarter of 2004.
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EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information with respect to our
executive officers as of March 8, 2004:
NAME AGE POSITION
- --------------------------------------- --- -------------------------------------------------------------
Sherwin I. Seligsohn................... 69 Chairman of the Board and Chief Executive Officer
Steven V. Abramson..................... 53 President, Chief Operating Officer and Director
Sidney D. Rosenblatt................... 57 Executive Vice President, Chief Financial Officer, Treasurer,
Secretary and Director
Julia J. Brown......................... 43 Vice President and Chief Technical Officer
Our Board of Directors has appointed these executive officers to hold
office until their successors are duly appointed.
SHERWIN I. SELIGSOHN has been our Chief Executive Officer and Chairman
of the Board since June 1995. He also served as our President from June 1995
through May 1996. Mr. Seligsohn founded and since has served as the sole
Director, President and Secretary of American Biomimetics Corporation,
International Multi-Media Corporation, and Wireless Unified Network Systems
Corporation. He is also Chairman of the Board and Chief Executive Officer of
Global Photonic Energy Corporation. From June 1990 to October 1991,
Mr. Seligsohn was Chairman Emeritus of InterDigital Communications, Inc.
(InterDigital), formerly International Mobile Machines Corporation. He founded
InterDigital and from August 1972 to June 1990 served as its Chairman of the
Board. Mr. Seligsohn ia a member of the Industrial Advisory Board of the
Princeton Institute for the Science and Technology of Materials (PRISM) at
Princeton University.
STEVEN V. ABRAMSON has been our President and Chief Operating Officer
and a member of our Board of Directors since May 1996. 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
December 1982 to December 1991, he held various positions at InterDigital,
including General Counsel, Executive Vice President and General Manager of the
Technology Licensing Division. Mr. Abramson is a member of the Executive
Committee of PRISM and is also a member of the Board of Governors of the United
States Display Consortium.
SIDNEY D. ROSENBLATT has been our Executive Vice President, Chief
Financial Officer, Treasurer and Secretary since June 1995, and has been a
member of our Board of Directors since May 1996. 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.
JULIA J. BROWN, PH.D. has been our Vice President and Chief Technical
Officer since June 2002. She joined us in June 1998 as our 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. Dr. Brown received an M.S. and Ph.D. 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 the Journal of Electronic Materials and as an elected member of the
Electron Device Society Technical Board. She co-founded an international
engineering mentoring program sponsored by the Institute of Electrical and
Electronics Engineers 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.
- 14 -
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
OUR COMMON STOCK
Our common stock is quoted on the Nasdaq National Market under the
symbol "PANL." The following table sets forth, for the periods indicated, the
high and low closing prices of our common stock as reported on the Nasdaq
National Market.
HIGH LOW
CLOSE CLOSE
--------- ---------
2004
First Quarter $ 18.00 $ 11.50
Second Quarter 14.89 10.27
Third Quarter 10.73 7.04
Fourth Quarter 10.19 8.22
2003
First Quarter $ 8.70 $ 6.33
Second Quarter 10.80 8.22
Third Quarter 10.74 8.17
Fourth Quarter 15.45 10.30
As of March 8, 2005, there were approximately 13,227 holders of record
of our common stock.
We have never declared or paid cash dividends on our common stock. We
currently intend to retain any future earnings for the operation and expansion
of our business. We do not anticipate declaring or paying cash dividends on our
common stock in the foreseeable future. Any future payment of cash dividends on
our common stock will be at the discretion of our Board of Directors and will
depend upon our results of operations, earnings, capital requirements,
contractual restrictions and other factors deemed relevant by our Board of
Directors.
ISSUANCE OF SECURITIES TO PPG INDUSTRIES
Pursuant to our Development and License Agreement with PPG Industries,
Inc. we are required to issue shares of our common stock and warrants to acquire
our common stock to PPG Industries on periodic basis in return for services
performed by PPG Industries under that agreement. As previously disclosed, on
January 1, 2004 and February 15, 2004, we issued to PPG Industries 157,609 and
9,746 shares of our common stock, respectively, as consideration for services
provided by PPG Industries under the agreement. We recorded charges of
$1,626,003 and $133,715 to research and development expense in 2004 and 2003,
respectively, for the issuance of these shares.
Prior to its amendment in December 2004, the Development and License
Agreement also required us to issue warrants to PPG Industries to acquire shares
of our common stock in return for services performed by PPG Industries under the
agreement. The number of shares issuable upon exercise of each warrant was to be
based on the number of shares of common stock issued to PPG Industries under the
agreement for services provided during the preceding calendar year. On February
15, 2004, we issued to PPG Industries a warrant to acquire 315,461 shares of our
common stock at an exercise price of $10.39 per share. We recorded a charge of
$2,692,418 to research and development expense in 2003 for the issuance of this
warrant. The warrant vested immediately and may be exercised for seven years
from the date of issuance.
The securities issued to PPG Industries pursuant to the Development and
License Agreement were not registered under the Securities Act of 1933, as
amended. The issuances were exempt from registration under Section 4(2) of the
Securities Act, as not involving any public offering.
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ITEM 6. SELECTED FINANCIAL DATA
The following selected condensed consolidated financial data has been
derived from, and should be read in conjunction with, our audited consolidated
financial statements and the notes thereto, and with "Management's Discussion
and Analysis of Financial Condition and Results of Operations," included
elsewhere in this report and incorporated herein by reference.
FISCAL YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
2004 2003 2002 2001 2000
------------ ------------ ------------ ------------ ------------
OPERATING RESULTS:
Total revenue ........................... $ 7,006,913 $ 6,593,193 $ 2,484,948 $ 1,252,901 $ 492,756
Research and development expense ........ 16,651,335 17,897,522 15,804,267 12,310,036 7,109,205
General and administrative expense ...... 7,052,047 5,766,761 4,754,850 3,915,854 3,261,113
Interest income ......................... 795,620 162,356 429,356 540,031 348,516
Income tax benefit ...................... 612,966 -- 225,657 -- --
Net loss ................................ (15,776,574) (17,353,205) (31,019,201) (16,356,100) (9,529,046)
Net loss attributable to Common
shareholders ........................... (15,906,198) (18,387,507) (32,972,680) (18,873,436) (9,529,046)
Net loss per share, basic and
diluted ................................ (0.59) (0.82) (1.71) (1.11) (0.62)
BALANCE SHEET DATA:
Total assets ............................ $ 73,892,163 $ 46,201,646 $ 39,639,216 $ 48,569,569 $ 32,079,794
Current liabilities ..................... 7,404,278 4,194,776 2,866,759 10,464,188 1,670,016
Capital lease obligations ............... -- 3,886 8,599 12,827 16,619
Long-term debt .......................... 4,200,000 -- -- -- --
Shareholders' equity .................... 59,187,885 38,906,870 33,668,571 38,096,782 29,826,804
OTHER FINANCIAL DATA:
Working capital ......................... $ 40,630,913 $ 23,679,705 $ 18,541,596 $ 17,994,232 $ 9,252,130
Capital expenditures .................... 7,418,053 957,328 1,169,945 1,790,564 1,540,577
Acquired technology ..................... -- -- -- -- 16,924,968
Weighted average Common Shares, basic and
diluted ................................ 26,791,158 22,428,219 19,227,697 16,994,537 15,260,837
Shares of Common Stock outstanding ...... 27,903,385 24,196,765 21,525,412 18,093,124 16,440,286
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with the section entitled
"Selected Financial Data" in this report and our consolidated financial
statements and related notes to this report. This discussion and analysis
contains forward-looking statements based on our current expectations,
assumptions, estimates and projections. These forward-looking statements involve
risks and uncertainties. Our actual results could differ materially from those
indicated in these forward-looking statements as a result of certain factors, as
more fully discussed in the section below entitled "Factors That May Affect
Future Results and Financial Condition."
OVERVIEW
We are a leader in the research, development and commercialization of
organic light emitting diode, or OLED, technologies for use in a variety of flat
panel display and other applications. Since 1994, we have been exclusively
engaged, and expect to continue to be exclusively engaged, in funding and
performing research and development activities relating to OLED technologies and
materials, and in attempting to commercialize these technologies and materials.
Our revenues are generated through contract research, sales of development and
commercial chemicals, technology development and evaluation agreements and
license fees. In the future, we anticipate that the revenues from licensing our
intellectual property will become a more significant part of our revenue stream.
While we have made significant progress over the past few years
developing and commercializing our family of OLED technologies (PHOLED, TOLED,
FOLED, etc.) we have incurred significant losses and will continue to do so
until our OLED technologies become more widely adopted by flat panel display
manufacturers. We have incurred significant losses since our inception,
resulting in an accumulated deficit of $114,368,210 as of December 31, 2004.
We anticipate fluctuations in our annual and quarterly results of
operations due to uncertainty regarding:
o the timing of our receipt of license fees and fees for future
technology development and evaluation;
o the timing and volume of sales of our OLED materials for both
commercial usage and evaluation purposes;
o the timing and magnitude of expenditures we may incur in
connection with our ongoing research and development activities;
and
o the timing and financial consequences of our formation of new
business relationships and alliances.
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CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The discussion and analysis of our financial condition and results of
operations is based on our financial statements, which have been prepared in
accordance with U.S. generally accepted accounting principles. The preparation
of these financial statements requires us to make estimates and judgments that
affect our reported assets and liabilities, revenues and expenses, and other
financial information. Actual results may, under different assumptions and
conditions, differ significantly from our estimates.
We believe that our accounting policies related to revenue recognition
and deferred license fees, valuation of acquired technology and stock-based
compensation as described below, are our "critical accounting policies" as
contemplated by the SEC. These policies, which have been reviewed with our Audit
Committee, are discussed in greater detail below.
REVENUE RECOGNITION AND DEFERRED LICENSE FEES
Contract research revenues represent reimbursements by the U.S.
government for all or a portion of the research and development expenses we
incur related to our government contracts. Revenues are recognized
proportionally as research and development expenses are incurred or as defined
milestones are achieved. In order to ascertain the revenues associated with
these contracts for a period, we estimate the proportion of related research and
development expenses incurred and whether defined milestones have been achieved.
Different estimates would result in different revenues for the period.
We also receive non-refundable advance payments under certain of our
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. If we
estimate differently the expected life of this licensed technology, reported
revenue during the relevant period will differ. To date, no deferred license
fees have been recognized as revenue. As of December 31, 2004, $4,866,667 was
recorded as deferred revenue.
Royalty revenue is received from OVPD equipment sold under a development
and license agreement with Aixtron AG. Revenue is recognized upon notification
of equipment sold and royalties due from Aixtron AG.
VALUATION OF ACQUIRED TECHNOLOGY
We regularly review our acquired OLED technologies for events or changes
in circumstances that might indicate the carrying value of these technologies
may not be recoverable. Factors considered important that could cause impairment
include, among others, significant changes in our anticipated future use of
these technologies and our overall business strategy as it pertains to these
technologies, particularly in light of patents owned by others in the same field
of use. As of December 31, 2004, we believe that no revision of the remaining
useful lives or write-down of our acquired technology was required for 2004, nor
was such a revision needed in 2003 or 2002. If such a write-down is required in
the future, it could be for up to $9,709,631 - the net book value of our
acquired technology as of December 31, 2004.
VALUATION OF STOCK-BASED COMPENSATION
We account for our stock-based compensation (see Note 2 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 is recognized for options issued to employees at fair market
value on the date of grant. In 1995, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting
for Stock-Based Compensation," as amended by SFAS No. 148. SFAS No. 123
establishes 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 arrangements
regardless of the method used to account for the plan. We account for our 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 No. 123 and EITF 96-18 require that we account for our option and
warrant grants to non-employees based on the fair value of the options and
warrants granted.
We use the Black-Scholes option-pricing model to estimate the fair value
of options we have granted for purposes of making the disclosure required by
SFAS No. 123. 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 we
use available resources and information when setting these assumptions, changes
to the assumptions could cause significant adjustments to the valuation.
- 17 -
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2004 COMPARED TO YEAR ENDED DECEMBER 31, 2003
We had a net loss attributable to holders of our common stock of
$15,906,198 (or $0.59 per diluted share) for the year ended December 31, 2004,
compared to a net loss attributable to holders of our common stock of
$18,387,507 (or $0.82 per diluted share) for the year ended December 31, 2003.
The decrease was primarily due to:
o increased contract revenues by $413,720,
o an increase in interest income of $633,264 and income tax
benefit of $612,966,
o and a decrease in deemed dividends of $404,232.
Our revenues were $7,006,913 for the year ended December 31, 2004,
compared to $6,593,193 for the year ended December 31, 2003. We earned
$2,621,636 in contract research revenue from the U.S. government in 2004,
compared to $1,420,984 in 2003. The increase in 2004 was primarily due to:
o our commencement of work under seven new or continuing
government contracts; and
o final billings on two Phase I contracts and one subcontract.
In 2003, contract revenue was derived from eight government contracts, three of
which were completed by the second quarter of 2003 and one which commenced in
the third quarter of 2003.
We earned $2,484,070 from our sales of OLED materials for evaluation
purposes in 2004, compared to $2,295,009 for corresponding sales in 2003. The
increase was mainly due to an increased volume of OLED materials purchased for
evaluation by potential OLED display manufacturers, including our technology
development and evaluation partners. We commenced sales of OLED materials for
evaluation purposes in 2001.
Our commercial chemical revenue and license fees for 2004 were $147,600
and $344,400, respectively, compared to $68,160 and 159,040 for the
corresponding period in 2003. The increase was due to continued and expanded
sales of one of our proprietary PHOLED materials to a customer for use in the
exterior sub-display of a mobile phone being sold in Japan.
We recorded royalty revenue of $58,670 in 2004 from sales of OVPD
equipment by the exclusive licensee of our OVPD technology, Aixtron AG. We had
no corresponding royalty revenue in 2003.
We recognized $1,350,000 in technology development revenue in 2004 in
connection with two technology development and evaluation agreements, one of
which was executed in October 2002 and the other in September 2003, compared to
$2,650,000 in 2003. The latter of these two agreements, which represented
$1,650,000 of the $2,650,000 in 2003, expired in accordance with its terms at
the end of March 2004. The amount and timing of our receipt of fees fir
technology development services is difficult to predict due to the early stage
of the OLED industry.
We incurred research and development expenses of $16,651,335 for the
year ended December 31, 2004, compared to $17,897,522 for the year ended
December 31, 2003. The decrease was mainly attributable to a decrease of
$2,394,267 in charges in connection with our Development and License Agreement
with PPG Industries (see Note 7 of the Notes to Consolidated Financial
Statements), offset in part by an increase in additional employees, salary
increases and patent legal costs.
General and administrative expenses were $7,052,047 for the year ended
December 31, 2004, compared to $5,766,761 for the year ended December 31, 2003.
The increase was mainly due to:
o increased salaries in connection with accruals for year-end
stock bonuses; and
o increased costs as a result of stock issuances to members of the
Board of Directors for 2003 Board and Committee service.
Interest income increased to $795,620 for the year ended December 31,
2004, compared to $162,356 for the year ended December 31, 2003. This was the
result of increased cash balances from our August 2003 and March 2004 registered
offerings of common stock.
- 18 -
During 2004, we sold approximately $8 million of our state-related
income tax net operating losses (NOLs) to New Jersey under the Technology Tax
Certificate Transfer Program. In 2004, we received proceeds of $612,966 for the
sale of these NOLs and recorded it as an income tax benefit.
Deemed dividends were $129,624 for the year ended December 31, 2004,
compared to $ 1,034,302 for the year ended December 31, 2003. In 2004, we issued
a warrant to purchase shares of our common stock and completed an offering that
were deemed dilutive under the terms of a warrant we had previously issued and
resulted in the reduction of the exercise price of that warrant and an increase
in the number of shares issuable under that warrant. We treated this occurrence
as a deemed dividend of $46,176. In 2003, we recorded a deemed dividend in the
amount of $546,622 for similar reasons.
In September 2004, the conversion price of the Series B Convertible
Preferred Stock we issued to Motorola, Inc. in September 2000 was adjusted in
accordance with the Certificate of Designations for that stock. We accounted for
this adjustment as a contingent beneficial conversion feature (CBCF). As a
result, we recorded the CBCF as a deemed dividend in the amount of $83,448. In
September 2003, we recorded a deemed dividend in the amount of $487,680 for
similar reasons.
YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002
We had a net loss attributable to holders of our common stock of
$18,387,507 (or $0.82 per diluted share) for the year ended December 31, 2003,
compared to a net loss attributable to holders of our common stock of
$32,972,680 (or $1.71 per diluted share) for the year ended December 31, 2002.
The decrease in net loss attributable to holders of our common stock was
primarily due to:
o an increase in total revenue, as described below; and
o a decrease in non-cash expense relating to the debt conversion
and extinguishment of convertible promissory notes we issued in
August 2001, as well as a decrease in non-cash interest expense
(see Note 9 of the Notes to Consolidated Financial Statements).
Our revenues were $6,593,193 for the year ended December 31, 2003,
compared to $2,484,948 for the year ended December 31, 2002. The increase was
primarily due to:
o additional payments under technology development and evaluation
agreements and additional purchases of materials by our
development partners; and
o the provision of OLED material to a customer for its use in the
manufacture of commercial OLED displays under an arrangement
entered into in 2003.
We earned $2,295,009 from sales of our OLED materials for evaluation
purposes for the year ended December 31, 2003, compared to $833,194 for the year
ended December 31, 2002. The increase was mainly due to an increased volume of
OLED materials purchased for evaluation by potential OLED display manufacturers,
including our current development partners.
We entered into an arrangement in the third quarter of 2003 under which
we began supplying one of our proprietary OLED materials to a customer for use
in the manufacture of commercial passive matrix OLED displays. As a result, we
earned $68,160 in commercial chemical revenue and $159,040 in license fees in
connection with this arrangement for the year ended December 31, 2003. There
were no such arrangements in effect during 2002.
We recognized $2,650,000 in technology development revenue for the year
ended December 31, 2003, compared to $182,796 for the year ended December 31,
2002. The increase related to new and continuing technology development and
evaluation agreements in 2003.
We earned $1,420,984 in contract research revenue from the U.S.
government for the year ended December 31, 2003, compared to $1,468,958 for the
year ended December 31, 2002. The dollar value and the number of our government
contracts remained relatively constant during 2002 and 2003, and several of
these contracts are expected to continue into 2005.
We incurred research and development expenses of $17,897,522 for the
year ended December 31, 2003, compared to $15,804,267 for the year ended
December 31, 2002. The increase was primarily a result of:
o an increase of $973,657 in non-cash operating expense associated
with our Development and License Agreement with PPG Industries,
due to the increased market price of our common stock;
o an increase of $312,919 in costs associated with the increased
number of patents we filed in 2003 as compared to 2002;
o an increase of $641,451 in costs for the further development and
operation of our facility in Ewing, New Jersey; and
- 19 -
o stock performance bonuses of $356,311 to research and
development employees. No such bonuses were awarded in 2002.
The increase was offset by a $289,900 decrease in costs associated with our
Scientific Advisory Board (SAB), due to the timing of payments to members of our
SAB.
We incurred general and administrative expenses of $5,766,761 for the
year ended December 31, 2003, compared to $4,754,850 for the year ended December
31, 2002. The increase resulted from an increase of $1,125,887 in costs
associated with new and existing personnel and with employee stock performance
bonus awards of $661,775. There were no such stock performance bonus awards
issued in 2002.
In September 2002, $7,000,002 of the $15,000,000 in convertible
promissory notes that we had issued in August 2001 (the Notes) were converted
into shares of our common stock, with the remaining amount being repaid 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, we 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. During 2003, there were no such expenses (see Note 9 of the Notes
to Consolidated Financial Statements).
We had no interest expense for the year ended December 31, 2003,
compared to $3,298,589 for the year ended December 31, 2002. The decrease was
primarily due to the retirement and conversion of the Notes in September 2002
and the fact that we incurred no new debt in 2003. This compares to 2002, during
which we recorded the amortization of OID and BCF of the Notes (see Note 9 of
the Notes to Consolidated Financial Statements).
In September 2003, the conversion price of the Series B Convertible
Preferred Stock we issued to Motorola, Inc. in September 2000 was adjusted in
accordance with the Certificate of Designations for that stock. We accounted for
this adjustment as a contingent beneficial conversion feature (CBCF). As a
result, we recorded the CBCF as a deemed dividend in the amount of $487,680. In
2002, the adjustment resulted in a deemed dividend of $1,953,479 (see Note 8 of
the Notes to Consolidated Financial Statements).
In August 2003, we completed an offering that was deemed dilutive under
the terms of certain warrants we had previously issued and resulted in a
reduction of the exercise prices of these warrants and an increase in the number
of shares issuable under certain of these warrants. We treated and recorded this
occurrence as a deemed dividend in the amount of $546,622. No such deemed
dividends were recorded in 2002. The weighted-average anti-dilution provisions
of these warrants will be triggered in the future if we issue additional shares
below the various exercise prices of these warrants.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2004, we had cash and cash equivalents of
$18,930,581, short-term investments of $26,258,463 and investments in
certificates of deposit and other liquid instruments with an original maturity
of more than one year of $2,290,451. This compares to cash and cash equivalents
of $14,070,207, short-term investments of $12,811,704 and investments in
certificates of deposit and other liquid instruments with an original maturity
of more than one year of $3,255,574 as of December 31, 2003. The increase in
cash and cash equivalents and short-term and long-term investments of
$17,342,010 was primarily due to an increase in funds from our offering of
common stock in March 2004, less cash used in operations and restricted cash
that is being used as collateral on a loan we entered into in connection with
acquiring the building and property at which our main facility is located.
Cash used in operating activities was $6,965,083 in 2004, as compared
to $ 5,797,609 in 2003. The increase was mainly due to an increase in accounts
receivable. Accounts receivable was $2,588,279 as of December 31, 2004, compared
to $805,602 as of December 31, 2003. The increase in receivables resulted from
an increase in contract revenue and from our entering into a new joint
development agreement in December 2004 for which we did not receive payment
until after year end. The latter also resulted in an increase in deferred
revenue; however, it was offset by the recognition of revenue during 2004 on two
technology development and evaluation agreements which were previously
classified as deferred revenue.
In March 2004, we completed a public offering of 2,500,000 shares of our
common stock at a price of $12.00 per share. The offering resulted in proceeds
to us of $28,036,218, net of $1,963,782 in costs associated with completion of
the offering. In April 2004, we sold an additional 50,000 shares of our common
stock at $12.00 per share to cover over-allotments. The sale of these shares
resulted in proceeds to us of $486,031, net of $113,968 in associated costs.
Working capital increased to $40,630,913 as of December 31, 2004, from
working capital of $23,679,705 as of December 31, 2003. The net increase was due
primarily to the completion of the March 2004 public offering of our common
stock.
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We anticipate, based on our internal forecasts and assumptions relating
to our operations (including, among others, assumptions regarding our working
capital requirements, the progress of our research and development efforts, the
availability of sources of funding for our research and development work, and
the timing and costs associated with the preparation, filing, prosecution,
maintenance and enforcement of our patents and patent applications), that we
have sufficient cash, cash equivalents and short-term investments to meet our
obligations into 2006. We believe that potential additional financing sources
for us include long-term and short-term borrowings, public and private sales of
our equity and debt securities and the receipt of cash upon the exercise of
warrants and options. We have an effective shelf registration statement that
would enable us to offer, from time to time, up to $44,725,524 of our common
stock, preferred stock, debt securities and other securities, subject to market
conditions and other factors. It should be noted, however, that additional
funding may be required in the future for research, development and
commercialization of our OLED technologies and materials, to obtain and maintain
patents respecting these technologies and materials, and for working capital and
other purposes, the timing and amount of which are difficult to ascertain. For
example, under our 1997 Research Agreement with Princeton University, we are
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 us when
needed, on commercially reasonable terms or at all.
CONTRACTUAL OBLIGATIONS
As of December 31, 2004, we had the following contractual commitments:
PAYMENTS DUE BY PERIOD
-------------------------------------------------------------------------
LESS THAN MORE THAN
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR 1-3 YEARS 3-5 YEARS 5 YEARS
- ------------------------------------- ----------- ------------ ------------ ------------ --------------
Long-term debt $ 4,500,000 $ 300,000 $ 900,000 $ 3,300,000 $ --
Operating lease obligations 31,286 29,841 1,445 -- --
Capital lease obligations -- -- -- -- --
Purchase obligations -- -- -- -- --
Other long-term liabilities reflected
on the balance sheet under GAAP -- -- -- -- --
Other Obligations:
Sponsored research obligation 3,863,631 1,495,599 2,368,032 -- --
Minimum royalty obligation 2,100,000 600,000 1,300,000 200,000 $ 100,000/year(1)
TOTAL $10,494,917 $ 2,425,440 $ 4,569,477 $ 3,500,000 $ 100,000/year(1)
(1) Under our Amended License Agreement with Princeton University and the
University of Southern California, we are obligated to pay Princeton
University minimum royalties of $100,000 per year until such time as the
agreement is no longer in effect.
OFF-BALANCE SHEET ARRANGEMENTS
As of December 31, 2004, we 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 us, or that engage in leasing, hedging or
research and development services with us.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In November 2004, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 151, Inventory Costs,
which amends the guidance in Accounting Research Bulletin (ARB) No. 43, Chapter
4, Inventory Pricing , to clarify the accounting for abnormal amounts of idle
facility expense, freight, handling costs, and wasted material. SFAS No. 151
requires that those items be recognized as current-period charges regardless of
whether they meet the criterion of "so abnormal." In addition, SFAS No. 151
requires allocation of fixed production overheads to the costs of conversion be
based on the normal capacity of the production facilities. SFAS No. 151 is
effective for inventory costs incurred during fiscal years beginning after June
15, 2005. We believe the adoption of SFAS No. 151 will not have an impact on our
financial statements.
In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary
Assets. SFAS No. 153 is an amendment to APB Opinion No. 29, Accounting for
Nonmonetary Transactions. SFAS No. 153 eliminates the exception for nonmonetary
exchanges of similar productive assets and replaces it with a general exception
for exchanges of nonmonetary assets that do not have commercial substance. The
provision of SFAS No. 153 is effective for nonmonetary asset exchanges occurring
in fiscal periods beginning after
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June 15, 2005. We believe the adoption of SFAS No. 153 will not have an impact
on our financial statements.
In December 2004, the FASB issued SFAS No. 123R, Share-Based
Compensation, which supersedes Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees, and its related implementation
guidance. SFAS No. 123R focuses primarily on accounting for transactions in
which an entity obtains employee services through share-based payment
transactions. SFAS No. 123R requires a public entity to measure the cost of
employee services received in exchange for the award of equity investments based
on the fair value of the award at the date of grant. The cost will be recognized
over the period during which an employee is required to provide services in
exchange for the award. SFAS No. 123R is effective as of the beginning of the
first interim or annual reporting period that begins after June 15, 2005. The
impact on net earnings as a result of the adoption of SFAS No. 123R, from a
historical perspective, is set forth in Note 2 to the Notes to Consolidated
Financial Statements. We are currently evaluating the provisions of SFAS No.
123R and will adopt it in 2005, as required. We believe the adoption of SFAS No.
123R will have a significant impact on our financial statements.
FACTORS THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL CONDITION
The following factors, as well as other factors affecting our operating
results and financial condition, could cause our actual future results and
financial condition to differ materially from those projected.
WE HAVE A HISTORY OF LOSSES AND MAY NEVER BE PROFITABLE.
Since inception, we have generated limited revenues while incurring
significant losses. We expect to incur losses for the foreseeable future and
until such time, if ever, as we are able to achieve sufficient levels of revenue
from the commercial exploitation of our OLED technologies and materials to
support our operations. You should note, however, that:
o OLED technologies may never be adopted for broad commercial
usage;
o markets for flat panel displays utilizing OLED technologies may
be limited; and
o we may never generate sufficient revenues from the commercial
exploitation of our OLED technologies and materials to become
profitable.
WE MAY REQUIRE ADDITIONAL FUNDING IN THE FUTURE IN ORDER TO CONTINUE OUR
BUSINESS.
Our capital requirements have been and will continue to be significant.
We may require additional funding in the future for the research, development
and commercialization of our OLED technologies and 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. Our cash on hand may not be sufficient to
meet all of our future needs. When we need additional funds, such funds may not
be available on commercially reasonable terms or at all. If we cannot obtain
more money when needed, our business might fail. Additionally, if we attempt to
raise money in an offering of shares of our common stock, preferred stock,
warrants or depositary shares, or if we engage in acquisitions involving the
issuance of such securities, the issuance of these shares will dilute our
then-existing shareholders.
IF OUR OLED TECHNOLOGIES AND MATERIALS ARE NOT FEASIBLE FOR BROAD-BASED PRODUCT
APPLICATIONS, WE MAY NEVER GENERATE REVENUES SUFFICIENT TO SUPPORT ONGOING
OPERATIONS.
Our business strategy is to license our OLED technologies and sell our
OLED materials to display manufacturers for incorporation into the flat panel
display products that they sell. Consequently, our success depends on the
ability and willingness of these manufactures to develop, manufacture and sell
commercial flat panel display products integrating our technologies and
materials.
Before display manufacturers will agree to utilize our OLED technologies
and materials for wide-scale commercial production, they will likely require us
to demonstrate to their satisfaction that our OLED technologies and materials
are feasible for broad-based product applications. This, in turn, may require
additional advances in our research and development efforts, as well as those of
others, for applications in a number of areas, including:
o device reliability;
o the development of OLED materials with sufficient lifetimes,
brightness and color coordinates for full color OLED displays;
and
o issues related to scalability and cost-effective fabrication
technologies for product applications.
- 22 -
Our 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 funds for completing development of
these products. Technical problems may result in delays and cause us to incur
additional expenses that would increase our losses. If we cannot complete
research and development of our OLED technologies and materials successfully, or
if we experience delays in completing research and development of our OLED
technologies and materials for use in potential commercial applications,
particularly after incurring significant expenditures, our business may fail.
EVEN IF OUR OLED TECHNOLOGIES ARE TECHNICALLY FEASIBLE, THEY MAY NOT BE ADOPTED
BY DISPLAY MANUFACTURERS.
The potential size, timing and viability of market opportunities
targeted by us are uncertain at this time. Market acceptance of our OLED
technologies will depend, in part, upon these technologies providing benefits
comparable to cathode ray tube, or CRT, display and liquid crystal display, or
LCD, technologies (the current standard display technologies) at an advantageous
cost to manufacturers, and the adoption of products incorporating these
technologies by consumers. Many potential licensees of our OLED technologies
manufacture flat panel displays utilizing competing technologies, and may,
therefore, be reluctant to redesign their products or manufacturing processes to
incorporate our OLED technologies.
During the entire product development process for a new flat panel
display product, we face the risk that our technology will fail to meet the
manufacturer's technical, performance or cost requirements or will be replaced
by a competing product or alternative technology. For example, we are aware that
some of our licensees and prospective licensees have entered into arrangements
with our competitors regarding the development of competing technologies,
including the potential production of polymer-based OLED displays. Even if we
offer technologies that are satisfactory to a display manufacturer, the
manufacturer may choose to delay or terminate its product development efforts
for reasons unrelated to our technologies.
0
Mass production of OLED displays will require the availability of
suitable manufacturing equipment, components and materials, many of which are
available only from a limited number of suppliers. In addition, there may be a
number of other technologies that display manufacturers need to utilize to be
used in conjunction with our OLED technologies in order to bring OLED displays
and products containing them to the market. Thus, even if our OLED technologies
are a viable alternative to competing flat panel display technologies, if
display manufacturers are unable to obtain access to this equipment and these
components, materials and other technologies, they may not utilize our OLED
technologies.
THERE ARE NUMEROUS POTENTIAL ALTERNATIVES TO OLEDS FOR FLAT PANEL DISPLAYS,
WHICH MAY LIMIT OUR ABILITY TO COMMERCIALIZE OUR OLED TECHNOLOGIES AND
MATERIALS.
The flat panel display market is currently, and will likely continue to
be for some time, dominated by displays based on LCD technology. Numerous
companies are making substantial investments in, and conducting research to
improve characteristics of, LCDs. Plasma and other competing flat panel display
technologies have been, or are being, developed. Advances in LCD technology or
any of these other 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 our
OLED technologies and materials. This, in turn, would cause display
manufacturers to avoid entering into commercial relationships with us, or to
terminate or not renew their existing relationships with us.
OTHER OLED TECHNOLOGIES MAY BE MORE SUCCESSFUL OR COST-EFFECTIVE THAN OURS,
WHICH MAY LIMIT THE COMMERCIAL ADOPTION OF OUR OLED TECHNOLOGIES AND MATERIALS.
Our competitors have developed OLED technologies that differ from or
compete with our OLED technologies. In particular, Eastman Kodak Company's
competing fluorescent OLED technology, which entered the marketplace prior to
ours, may become entrenched in the flat panel industry before our OLED
technologies have a chance to become widely utilized. Moreover, our competitors
may succeed in developing new OLED technologies that are more cost-effective or
have fewer display limitations than our OLED technologies. If our OLED
technologies, and particularly our phosphorescent OLED technology, are unable to
capture a substantial portion of the OLED display market, our business strategy
may fail.
MANY OF OUR COMPETITORS HAVE GREATER RESOURCES, WHICH MAY MAKE IT DIFFICULT FOR
US TO COMPETE SUCCESSFULLY AGAINST THEM.
The flat panel display industry is characterized by intense competition.
Many of our competitors have better name recognition and greater financial,
technical, marketing, personnel and research capabilities than us. Because of
these differences, we may never be able to compete successfully in the OLED
display market.
- 23 -
THE FLAT PANEL DISPLAY INDUSTRY HAS HISTORICALLY EXPERIENCED SIGNIFICANT
DOWNTURNS, WHICH MAY ADVERSELY AFFECT THE DEMAND FOR AND PRICING OF OUR OLED
TECHNOLOGIES AND MATERIALS.
Because we do not sell any display products to consumers, our success
depends upon the ability and continuing willingness of our display manufacturer
licensees to market commercial products integrating our technologies and
materials, and the widespread acceptance of those products. Any slowdown in the
demand for our licensees' products would adversely affect our royalty revenues
and thus our business. The markets for our display manufacturer licensees'
products are highly competitive, with pressure on prices and profit margins due
largely to additional and growing capacity from flat panel display industry
competitors. Success in the market for end-user products that may integrate our
OLED technologies and materials also depends on factors beyond the control of
our licensees and us, including the cyclical and seasonal nature of the end-user
markets that our licensees serve, as well as industry and general economic
conditions.
The flat panel display industry has experienced significant periodic
downturns, often in connection with, or in anticipation of, declines in general
economic conditions. These downturns have been characterized by lower product
demand, production overcapacity and erosion of average selling prices. Our
business strategy is dependent on display manufacturers building and selling
displays that incorporate our OLED technologies and materials. Industry-wide
fluctuations and downturns in the demand for flat panel displays, and OLED
displays in particular, could cause significant harm to our business.
IF OUR RESEARCH PARTNERS FAIL TO MAKE ADVANCES IN THEIR RESEARCH, OR IF THEY
TERMINATE OR ELECT NOT TO RENEW THEIR RELATIONSHIPS WITH US, WE MIGHT NOT
SUCCEED IN COMMERCIALIZING OUR OLED TECHNOLOGIES AND MATERIALS.
Further advances in our OLED technologies and materials depend, in part,
on the success of the research and development work conducted by our research
partners. We cannot be certain that our research partners will make additional
advances in the research and development of these technologies and materials.
Moreover, although we fund 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 our research partners.
Our most significant research and development relationships are with
Princeton University and the University of Southern California. Our Research
Agreement with Princeton University expires in July 2007 and both this agreement
and our Amended License Agreement with Princeton University and the University
of Southern California (the agreement under which we license our key OLED
technology patents) can be terminated for various reasons. For example, the
Research Agreement provides that if Dr. Stephen R. Forrest, the principal
investigator for our research program with Princeton University, is unavailable
to continue to serve in this capacity, because he is no longer associated with
Princeton University or for any other reason, and a successor acceptable to both
us and Princeton University is not available, Princeton University has the right
to terminate the Research Agreement without impacting the Amended License
Agreement. Termination of the Research Agreement would negatively affect our
ability to research, develop and commercialize our OLED technologies and
materials.
IF WE CANNOT FORM AND MAINTAIN LASTING BUSINESS RELATIONSHIPS WITH OLED DISPLAY
MANUFACTURERS, OUR BUSINESS STRATEGY WILL FAIL.
Our business strategy ultimately depends upon our development and
maintenance of commercial licensing and material supply relationships with
high-volume manufacturers of OLED displays. As of December 31, 2004, we had
entered into only two such relationships, one with Dupont Displays, Inc. and one
with Tohoku Pioneer Corporation. All of our other relationships with display
manufacturers currently are limited to technology development and the evaluation
of our OLED technologies and materials for possible use in commercial
production. Some or all of these relationships may not succeed or, even if they
are successful, may not result in the display manufacturers entering into
commercial licensing and material supply relationships with us.
Under our existing technology development and evaluation agreements, we
are working with display manufacturers to incorporate our technologies into
their products for the commercial production of OLED displays. However, these
technology development and evaluation agreements typically last for limited
periods of time, such that our relationships with the display manufacturers will
expire unless they continually are renewed. The display manufacturers may not
agree to renew their relationships with us on a continuing basis. In addition,
we regularly continue working with display manufacturers evaluating our OLED
technologies and materials after our existing agreements with them have expired
while we are attempting to negotiate contract extensions or new agreements with
them. Should our relationships with the display manufacturers not continue or be
renewed, our business would suffer.
Our ability to enter into additional commercial licensing and material
supply relationships, or to maintain our existing technology development and
evaluation relationships, may require us to make financial or other commitments.
We might not be able, for financial or other reasons, to enter into or continue
these relationships on commercially acceptable terms, or at all. Failure to do
so may cause our business strategy to fail.
- 24 -
CONFLICTS MAY ARISE WITH OUR LICENSEES OR JOINT DEVELOPMENT PARTNERS, RESULTING
IN RENEGOTIATION OR TERMINATION OF, OR LITIGATION RELATED TO, OUR AGREEMENTS
WITH THEM. THIS WOULD ADVERSELY AFFECT OUR REVENUES.
Conflicts could arise between us and our licensees or joint development
partners as to royalty rates, milestone payments or other commercial terms.
Similarly, we may disagree with our licensees or joint development partners as
to which party owns or has the right to commercialize intellectual property that
is developed during the course of the relationship or as to other non-commercial
terms. If such a conflict were to arise, a licensee or joint development partner
might attempt to compel renegotiation of certain terms of their agreement or
terminate their agreement entirely, and we might lose the royalty revenues and
other benefits of the agreement. Either we or the licensee or joint development
partner might initiate litigation to determine commercial obligations, establish
intellectual property rights or resolve other disputes under the agreement. Such
litigation could be costly to us and require substantial attention of
management. If we were unsuccessful in such litigation, we could lose the
commercial benefits of the agreement, be liable for other financial damages and
suffer losses of intellectual property or other rights that are the subject of
dispute. Any of these adverse outcomes could cause our business strategy to
fail.
WE RELY SOLELY ON PPG INDUSTRIES TO MANUFACTURE THE OLED MATERIALS WE USE AND
SELL TO DISPLAY MANUFACTURERS.
Our business prospects depend significantly on our ability to obtain
proprietary OLED materials for our own use and for sale to display
manufacturers. Our Development and License Agreement with PPG Industries, Inc.
provides us with a source for these materials for research, development and
evaluation purposes, and our Supply Agreement with PPG Industries provides us
with a source for these materials for commercial purposes. However, the
Development and License Agreement is currently scheduled to expire at the end of
2005 and the Supply Agreement is currently scheduled to expire at the end of
2007. Our inability to continue obtaining these OLED materials from PPG
Industries or another source would have a material adverse effect on our
revenues from sales of these materials, as well as on our ability to perform
research and development work and to support those display manufacturers
currently evaluating our OLED technologies and materials for possible commercial
use.
IF WE CANNOT OBTAIN AND MAINTAIN APPROPRIATE PATENT AND OTHER INTELLECTUAL
PROPERTY RIGHTS PROTECTION FOR OUR OLED TECHNOLOGIES AND MATERIALS, OUR BUSINESS
WILL SUFFER.
The value of our OLED technologies and materials is dependent on our
ability to secure and maintain appropriate patent and other intellectual
property rights protection. Although we own or license many patents respecting
our OLED technologies and materials that have already been 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 our OLED technologies and materials, or will be found valid if challenged.
Moreover, we have not obtained patent protection for some of our OLED
technologies and materials in all foreign countries in which OLED displays or
materials 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
our OLED technologies and materials and the degree of protection afforded.
The strength of our current intellectual property position results
primarily from the essential nature of our fundamental patents covering
phosphorescent OLED devices and certain materials utilized in these devices.
These patents begin expiring in 2017. While we hold a wide range of additional
patents and patent applications whose expiration dates extend (and in the case
of patent applications, will extend) beyond 2017, many of which are also of key
importance in the OLED industry, none are of an equally essential nature as our
fundamental patents, and therefore our competitive position after 2017 may be
less certain.
We may become engaged in litigation to protect or enforce our patent and
other intellectual property rights, or in International Trade Commission
proceedings to abate the importation of goods that would compete unfairly with
those of our licensees. In addition, we may have to participate in interference
or reexamination proceedings before the U.S. Patent and Trademark Office, or in
opposition, nullity or other proceedings before foreign patent offices, with
respect to our patents or patent applications. All of these actions would place
our patents and other intellectual property rights at risk and may result in
substantial costs to us as well as a diversion of management attention.
Moreover, if successful, these actions could result in the loss of patent or
other intellectual property rights protection for the key OLED technologies and
materials on which our business depends.
In addition, we rely in part on unpatented proprietary technology, and
others may independently develop the same or similar technology or otherwise
obtain access to our unpatented technology. To protect our trade secrets,
know-how and other proprietary information, we require employees, consultants,
financial advisors and strategic partners to enter into confidentiality
agreements. These agreements may not ultimately provide meaningful protection
for our trade secrets, know-how or other proprietary information in the event of
any unauthorized use, misappropriation or disclosure of those trade secrets,
know-how or other proprietary information. In particular, we may not be able to
fully or adequately protect our proprietary information as we conduct
discussions with potential strategic partners. If we are unable to protect the
proprietary nature of our technology, it will harm our business.
- 25 -
WE OR OUR LICENSEES MAY INCUR SUBSTANTIAL COSTS OR LOSE IMPORTANT RIGHTS AS A
RESULT OF LITIGATION OR OTHER PROCEEDINGS RELATING TO OUR PATENT AND OTHER
INTELLECTUAL PROPERTY RIGHTS.
There are a number of other companies and organizations that have been
issued patents and are filing patent applications relating to OLED technologies
and materials, including Eastman Kodak Company, Cambridge Display Technology,
Fuji Film Co., Ltd., Canon, Inc., Pioneer Corporation, Semiconductor Energy
Laboratories Co. and Mitsubishi Chemical Corporation. As a result, there may be
issued patents or pending patent applications of third parties that would be
infringed by the use of our OLED technologies or materials, thus subjecting our
licensees to possible suits for patent infringement in the future. Such lawsuits
could result in our licensees being liable for damages or require our licensees
to obtain additional licenses that could increase the cost of their products,
which might have an adverse affect on their sales and thus our royalties or
cause them to seek to renegotiate our royalty rates.
In addition, in the future we may assert our intellectual property
rights by instituting legal proceedings against others. We cannot assure you
that we will be successful in enforcing our patents in any lawsuits we may
commence. Defendants in any litigation we may commence to enforce our patents
may attempt to establish that our patents are invalid or are unenforceable.
Thus, any patent litigation we commence could lead to a determination that one
or more of our patents are invalid or unenforceable. If a third party succeeds
in invalidating one or more of our patents, that party and others could compete
more effectively against us. Our ability to derive licensing revenues from
products or technologies covered by these patents could also be adversely
affected.
Whether our licensees are defending the assertion of third-party
intellectual property rights against their businesses arising as a result of the
use of our technology, or we are asserting our own intellectual property rights
against others, such litigation can be complex, costly, protracted and highly
disruptive to our or our licensees' business operations by diverting the
attention and energies of management and key technical personnel. As a result,
the pendency or adverse outcome of any intellectual property litigation to which
we or our licensees are subject could disrupt business operations, require the
incurrence of substantial costs and subject us or our licensees to significant
liabilities, each of which could severely harm our business.
Plaintiffs in intellectual property cases often seek injunctive relief
in addition to money damages. Any intellectual property litigation commenced
against our licensees could force them to take actions that could be harmful to
their business and thus to our royalties, including the following:
o stop selling their products that incorporate or otherwise use
technology that contains our allegedly infringing intellectual
property;
o attempt to obtain a license to the relevant third-party
intellectual property, which may not be available on reasonable
terms or at all; or
o attempt to redesign their products to remove our allegedly
infringing intellectual property to avoid infringement of the
third-party intellectual property.
If our licensees are forced to take any of the foregoing actions, they
may be unable to manufacture and sell their products that incorporate our
technology at a profit or at all. Furthermore, the measure of damages in
intellectual property litigation can be complex, and is often subjective or
uncertain. If our licensees were to be found liable for infringement of
proprietary rights of a third party, the amount of damages they might have to
pay could be substantial and is difficult to predict. Decreased sales of our
licensees' products incorporating our technology would have an adverse effect on
our royalty revenues under existing licenses. Any necessity to procure rights to
the third-party technology might cause our existing licensees to renegotiate the
royalty terms of their license with us to compensate for this increase in their
cost of production or, in certain cases, to terminate their license with us
entirely. Were this renegotiation to occur, it would likely harm our ability to
compete for new licensees and have an adverse effect on the terms of the royalty
arrangements we could enter into with any new licensees.
As is commonplace in technology companies, we employ individuals who
were previously employed at other technology companies. To the extent our
employees are involved in research areas that are similar to those areas in
which they were involved at their former employers, we may be subject to claims
that such employees or we have, inadvertently or otherwise, used or disclosed
the alleged trade secrets or other proprietary information of the former
employers. Litigation may be necessary to defend against such claims. The costs
associated with these actions or the loss of rights critical to our or our
licensees' business could negatively impact our revenues or cause our business
to fail.
THE U.S. GOVERNMENT HAS RIGHTS TO OUR OLED TECHNOLOGIES THAT MIGHT PREVENT US
FROM REALIZING THE BENEFITS OF THESE TECHNOLOGIES.
The U.S. government, through various government agencies, has provided
and continues to provide funding to us, Princeton University and the University
of Southern California for research activities related to certain aspects of our
OLED technologies. Because we have been provided with this funding, the
government has rights to these OLED technologies that could restrict our ability
- 26 -
to market them to the government for military and other applications, or to
third parties for commercial applications. Moreover, if the government
determines that we have not taken effective steps to achieve practical
application of these OLED technologies in any field of use in a reasonable time,
the government could require us to grant licenses to other parties in that field
of use. Any of these occurrences would limit our ability to obtain the full
benefits of our OLED technologies.
IF WE CANNOT KEEP OUR KEY EMPLOYEES OR HIRE OTHER TALENTED PERSONS AS WE GROW,
OUR BUSINESS MIGHT NOT SUCCEED.
Our performance is substantially dependent on the continued services of
senior management and other key personnel, and on our ability to offer
competitive salaries and benefits to our employees. We do not have employment
agreements with any of our management or other key personnel. Additionally,
competition for highly skilled technical, managerial and other personnel is
intense. We might not be able to attract, hire, train, retain and motivate the
highly skilled managers and employees we need to be successful. If we fail to
attract and retain the necessary technical and managerial personnel, our
business will suffer and might fail.
WE CAN ISSUE SHARES OF PREFERRED STOCK THAT MAY ADVERSELY AFFECT THE RIGHTS OF
SHAREHOLDERS OF OUR COMMON STOCK.
Our Articles of Incorporation authorize us to issue up to 5,000,000
shares of preferred stock with designations, rights and preferences determined
from time-to-time by our Board of Directors. Accordingly, our 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 our common stock. For example, an issuance of shares of
preferred stock could:
o adversely affect the voting power of the shareholders of our
common stock;
o make it more difficult for a third party to gain control of us;
o discourage bids for our common stock at a premium; or
o otherwise adversely affect the market price of our common stock.
As of December 31, 2004, we have issued and outstanding 200,000 shares
of Series A Nonconvertible Preferred Stock, all of which are held by an entity
controlled by members of the family of Sherwin I. Seligsohn, our Chairman of the
Board and Chief Executive Officer. Our Board of Directors has authorized and
issued other shares of preferred stock in the past - none of which are currently
outstanding - and may do so again at any time in the future.
IF THE PRICE OF OUR COMMON STOCK GOES DOWN, WE MAY HAVE TO ISSUE MORE SHARES
THAN ARE PRESENTLY ANTICIPATED TO BE ISSUED UNDER OUR AGREEMENT WITH PPG
INDUSTRIES.
Under our Development and License Agreement with PPG Industries, we are
required to issue to PPG Industries shares of our common stock for services
rendered by it. The number of shares of common stock that we are required to
deliver to PPG is determined based on a formula requiring that the lower the
price of our common stock at and around the time of issuance, the greater the
number of shares that we would be required to issue to PPG Industries. Lower
than anticipated market prices for our common stock, and correspondingly greater
numbers of shares issuable to PPG Industries, with a resulting increase in the
number of shares available for public sale, could cause people to sell our
common stock, including in short sales, which could drive down the price of our
common stock, thus reducing its value and perhaps hindering our ability to raise
additional funds in the future. In addition, such an increase in the number of
outstanding shares of our common stock would further dilute existing holders of
this stock.
OUR EXECUTIVE OFFICERS AND DIRECTORS OWN A LARGE PERCENTAGE OF OUR COMMON STOCK
AND COULD EXERT SIGNIFICANT INFLUENCE OVER MATTERS REQUIRING SHAREHOLDER
APPROVAL, INCLUDING TAKEOVER ATTEMPTS.
Our executive officers and directors, their respective affiliates and
the adult children of Sherwin Seligsohn, our Chairman of the Board and Chief
Executive Officer, beneficially own, as of March 8, 2005, approximately 17.1% of
the outstanding shares of our common stock. Moreover, Pine Ridge Financial Inc.
and First Investors Holding Co., Inc., as successor to Strong River Investments,
Inc., assigned to our management their rights to vote the shares of our common
stock they received or are entitled to receive upon conversion of warrants,
notes and preferred stock issued in an August 2001 private placement
transaction, of which warrants to purchase 744,452 shares remain outstanding as
of March 8, 2005. Accordingly, these shareholders and members of management may,
as a practical matter, be able to exert significant influence over matters
requiring approval by our shareholders, including the election of directors and
the approval of mergers or other business combinations. This concentration also
could have the effect of delaying or preventing a change in control of us.
- 27 -
BECAUSE THE VAST MAJORITY OF OLED DISPLAY MANUFACTURERS ARE LOCATED IN THE
ASIA-PACIFIC REGION, WE ARE SUBJECT TO INTERNATIONAL OPERATIONAL, FINANCIAL,
LEGAL AND POLITICAL RISKS WHICH MAY NEGATIVELY IMPACT OUR OPERATIONS.
Many of our licensees and prospective licensees have a majority of their
operations in countries other than the United States, particularly in the
Asia-Pacific region. Risks associated with our doing business outside of the
United States include:
o compliance with a wide variety of foreign laws and regulations;
o legal uncertainties regarding taxes, tariffs, quotas, export
controls, export licenses and other trade barriers;
o economic instability in the countries of our licensees, causing
delays or reductions in orders for their products and therefore
our royalties;
o political instability in the countries in which our licensees
operate, particularly in South Korea relating to its disputes
with North Korea and in Taiwan relating to its disputes with
China;
o difficulties in collecting accounts receivable and longer
accounts receivable payment cycles; and
o potentially adverse tax consequences.
Any of these factors could impair our ability to license our OLED technologies
and sell our OLED materials, thereby harming our business.
THE MARKET PRICE OF OUR COMMON STOCK MIGHT BE HIGHLY VOLATILE.
The market price of our common stock might be highly volatile, as has
been the case with our common stock in the past as well as the securities of
many companies, particularly other small and emerging-growth companies. We have
included a section in this report entitled "Market for Registrant's Common
Equity and Related Stockholder Matters" that contains a table indicating the
high and low closing prices of our common stock as reported on the Nasdaq
National Market for the periods indicated. Factors such as the following may
have a significant impact on the market price of our common stock in the future:
o our expenses and operating results;
o announcements by us or our competitors of technological
developments, new product applications or license arrangements;
and
o other factors affecting the flat panel display and related
industries in general.
OUR OPERATING RESULTS MAY HAVE SIGNIFICANT PERIOD-TO-PERIOD FLUCTUATIONS, WHICH
WOULD MAKE IT DIFFICULT TO PREDICT OUR FUTURE PERFORMANCE.
Due to the current stage of commercialization of our OLED technologies
and the significant development and manufacturing objectives that we and our
licensees must achieve to be successful, our quarterly operating results will be
difficult to predict and may vary significantly from quarter to quarter.
We believe that period-to-period comparisons of our operating results
are not a reliable indicator of our future performance at this time. Among other
factors affecting our period-to-period results, our license and technology
development fees often consist of large one-time or annual payments, resulting
in significant fluctuations in our revenues. If, in some future period, our
operating results or business outlook fall below the expectations of securities
analysts or investors, our stock price would be likely to decline and investors
in our common stock may not be able to resell their shares at or above the
initial public offering price. Broad market, industry and global economic
factors may also materially reduce the market price of our common stock,
regardless of our operating performance.
THE ISSUANCE OF ADDITIONAL SHARES OF OUR COMMON STOCK COULD DRIVE DOWN THE PRICE
OF OUR STOCK.
The price of our common stock can be expected to decrease if:
o other shares of our common stock that are currently subject to
restriction on sale become freely salable, whether through an
effective registration statement or based on Rule 144 under the
Securities Act of 1933, as amended; or
- 28 -
o we issue additional shares of our common stock that might be or
become freely salable, including shares that would be issued
upon conversion of our preferred stock or the exercise of
outstanding warrants and options.
BECAUSE WE DO NOT INTEND TO PAY DIVIDENDS, SHAREHOLDERS WILL BENEFIT FROM AN
INVESTMENT IN OUR COMMON STOCK ONLY IF IT APPRECIATES IN VALUE.
We have never declared or paid any cash dividends on our common stock.
We currently intend to retain our future earnings, if any, to finance further
research and development and do not expect to pay any cash dividends in the
foreseeable future. As a result, the success of an investment in our common
stock will depend upon any future appreciation in its value. There is no
guarantee that our common stock will appreciate in value or even maintain the
price at which shareholders have purchased their shares.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not utilize financial instruments for trading purposes and hold no
derivative financial instruments, other financial instruments or derivative
commodity instruments that could expose us to significant market risk. Our
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
Our consolidated financial statements and the relevant notes to those
statements are attached to this report beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
Our management, with the participation of our Chief Executive Officer
and Chief Financial Officer, evaluated the effectiveness of our disclosure
controls and procedures as of the end of the period covered by this report.
Based on that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures, as of the end of
the period covered by this report, are functioning effectively to provide
reasonable assurance that the information required to be disclosed by us in
reports filed or submitted under the Securities Exchange Act of 1934, as
amended, is (i) recorded, processed, summarized and reported within the time
periods specified in the SEC's rules and forms, and (ii) accumulated and
communicated to our management, including the Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely decisions regarding
disclosure.
(b) Management's report on internal control over financial reporting and
attestation report of public accounting firm.
The report of management on our internal control over financial
reporting and the associated attestation report of our independent registered
public accounting firm are set forth in Item 8 of this report and are
incorporated herein by reference.
(c) Changes in internal control over financial reporting.
During our most recent fiscal quarter, there was no change in our
internal control over financial reporting that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
ITEM 9B. OTHER INFORMATION
None.
- 29 -
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to this item is set forth in our definitive
Proxy Statement (the Proxy Statement) to be filed with the SEC for our Annual
Meeting of Shareholders to be held on June 30, 2005, under the headings
"Nominees for Election as Directors," "Compliance with Section 16(a) of the
Exchange Act" and "Code of Ethics," and is incorporated herein by reference.
Information regarding our 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 our Proxy
Statement under the heading "Executive Management Compensation," and is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to the ownership of our securities by certain
persons is set forth in our Proxy Statement under the headings "Principal
Shareholders" and "Equity Compensation Plans," and is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to transactions with our managers and other
related parties is set forth in our Proxy Statement under the heading "Certain
Transactions," and is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Information with respect to principal accounting fees and services is
set forth in our Proxy Statement under the heading "Information Regarding
Independent Registered Public Accounting Firm," and is incorporated herein by
reference.
- 30 -
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this report:
(1) Financial Statements:
Management's Report on Internal Control Over Financial Reporting................... F-2
Reports of Independent Registered Public Accounting Firm........................... F-3
Consolidated Balance Sheets........................................................ F-5
Consolidated Statements of Operations.............................................. F-6
Consolidated Statements of Shareholders' Equity..... .............................. F-7
Consolidated Statements of Cash Flows.............................................. F-9
Notes to Consolidated Financial Statements......................................... F-10
(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 Amended and Restated Articles of Incorporation of the registrant(1)
3.2 Bylaws of the registrant(1)
10.1# Warrant Agreement dated as of April 25, 1996 between the registrant
and Sherwin Seligsohn(2)
10.2# Warrant Agreement dated as of April 25, 1996 between the registrant
and Steven V. Abramson(2)
10.3# Warrant Agreement dated as of April 25, 1996 between the registrant
and Sidney D. Rosenblatt(2)
10.4# Warrant Agreement dated as of April 25, 1996 between the registrant
and Dean L. Ledger(2)
10.5# Warrant Agreement dated as of April 25, 1996 between the registrant
and Scott Seligsohn(3)
10.6#* Warrant Agreement dated as of April 2, 1998 between the registrant
and Steven V. Abramson
10.7#* Warrant Agreement dated as of April 2, 1998 between the registrant
and Sidney D. Rosenblatt
10.8# Warrant Agreement dated as of April 18, 2000 between the registrant
and Julia J. Brown(4)
10.9# Amendment No. 1 to Warrant Agreement between the registrant and Julia
J. Brown, dated as of April 18, 2000(1)
10.10# Change in Control Agreement dated as of April 28, 2003, between the
registrant and Sherwin I. Seligsohn(5)
10.11# Change in Control Agreement dated as of April 28, 2003, between the
registrant and Steven V. Abramson(5)
10.12# Change in Control Agreement dated as of April 28, 2003, between the
registrant and Sidney D. Rosenblatt(5)
- 31 -
10.13# Change in Control Agreement dated as of April 28, 2003, between the
registrant and Julia J. Brown(5)
10.14#* Executive Performance Compensation Program, dated as of April 20,
2004
10.15 Stock Option Plan dated as of September 1, 1995(6)
10.16 Amended and Restated Stock Option Plan (renamed the Equity
Compensation Plan), dated as of June 14, 2004(7)
10.17 1997 Research Agreement between the registrant and The Trustees of
Princeton University(8)
10.18 Amendment #1 to the 1997 Research Agreement between the registrant
and the Trustees of Princeton University, dated as of November 14,
2000(9)
10.19 Amendment #2 to the 1997 Research Agreement between the registrant
and the Trustees of Princeton University, dated as of April 11,
2002(9)
10.20 1997 Amended License Agreement among the registrant, The Trustees of
Princeton University and the University of Southern California(8)
10.21 Amendment #1 to the Amended License Agreement among the registrant,
the Trustees of Princeton University and the University of Southern
California, dated as of August 7, 2003(9)
10.22 Termination, Amendment and License Agreement by and among the
registrant, PD-LD, Inc., Dr. Vladimir S. Ban, and The Trustees of
Princeton University dated as of July 19, 2000(10)
10.23 Development and License Agreement dated as of October 1, 2000,
between the registrant and PPG Industries, Inc. (11)
10.24 Form of Warrant Agreement issuable by the registrant to PPG
Industries, Inc. pursuant to the Development and License
Agreement(11)
10.25 Amendment Number 1 to the Development and License Agreement between
the registrant and PPG Industries, Inc., dated as of March 7,
2001(11)
10.26 Amendment Number 2 to the Development and License Agreement between
the registrant and PPG Industries, Inc., dated as of October 15,
2002(12)
10.27 Amendment Number 3 to the Development and License Agreement between
the registrant and PPG Industries, Inc., dated as of January 21,
2003(12)
10.28 Amendment Number 4 to the Development and License Agreement between
the registrant and PPG Industries, Inc., dated as of April 11,
2003(13)
10.29 Amendment Number 5 to the Development and License Agreement between
the registrant and PPG Industries, Inc., dated as of December 28,
2004(14)
10.30 License Agreement between the registrant and Motorola, Inc., dated as
of September 29, 2000 (10)
10.31* Promissory Note issued to Wachovia Bank, National Association, dated
as of December 1, 2004
10.32 Terms and Conditions of Sale for Equipment Purchase(15)
21* Subsidiaries of the Registrant
23.1* Consent of KPMG LLP
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 -
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.)
Explanation of Footnotes to Listing of Exhibits:
* Filed herewith.
** Furnished herewith.
# Management contract or compensatory plan or arrangement.
(1) Filed as an Exhibit to the Annual Report on Form 10-K for the year
ended December 31, 2003, filed with the SEC on March 1, 2004.
(2) 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.
(3) Filed as an Exhibit to Registration Statement (No. 333-120737) on Form
S-3, filed with the SEC on November 24, 2004.
(4) 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.
(5) Filed as an Exhibit to the Quarterly Report on Form 10-Q for the
quarter ended March 31, 2003, filed with the SEC on May 13, 2003.
(6) Filed as an Exhibit to Registration Statement (No. 333-92649) on Form
S-8, filed with the SEC on December 13, 1999.
(7) Filed as an Exhibit to the Definitive Proxy Statement for the 2004
Annual Meeting of Shareholders, filed with the SEC on April 26, 2004.
(8) 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.
(9) Filed as an Exhibit to the Quarterly Report on Form 10-Q for the
quarter ended September 30, 2003, filed with the SEC on November 10,
2003.
(10) Filed as an Exhibit to the amended Quarterly Report on Form 10-Q for
the quarter ended September 30, 2000, filed with the SEC on November
20, 2001.
(11) 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.
(12) Filed as an Exhibit to the Annual Report on Form 10-K for the year
ended December 31, 2002, filed with the SEC on March 31, 2003.
(13) Filed as an Exhibit to the Quarterly Report on Form 10-Q for the
quarter ended June 30, 2003, filed with the SEC on August 13, 2003.
(14) Filed as an Exhibit to Amendment No. 1 to Registration Statement (No.
333-120737) on Form S-3, filed with the SEC on January 25, 2005.
(15) Filed as an Exhibit to the Quarterly Report on Form 10-Q for the
quarter ended September 30, 2004, filed with the SEC on November 5,
2004.
- 33 -
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) The exhibits required to be filed by us with this report are listed
above.
(c) The consolidated financial statement schedules required to be filed by
us with this report are listed above.
- 34 -
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report on Form 10-K to be
signed on its behalf by the undersigned, thereunto duly authorized:
UNIVERSAL DISPLAY CORPORATION
By: /s/ Sidney D. Rosenblatt
------------------------------------
Sidney D. Rosenblatt
Executive Vice President, Chief
Financial Officer, Treasurer and
Secretary
Date: March 14, 2005
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 and on the dates indicated.
Name Title Date
- -------------------------------- -------------------------------------------------- ---------------
/s/ Sherwin I. Seligsohn Chairman of Board and Chief Executive Officer March 14, 2005
- --------------------------------
Sherwin I. Seligsohn
/s/ Steven V. Abramson President, Chief Operating Officer and Director March 14, 2005
- --------------------------------
Steven V. Abramson
/s/ Sidney D. Rosenblatt Executive Vice President, Chief Financial Officer, March 14, 2005
- -------------------------------- Treasurer, Secretary and Director
Sidney D. Rosenblatt
/s/ Leonard Becker Director March 14, 2005
- --------------------------------
Leonard Becker
/s/ Elizabeth H. Gemmill Director March 14, 2005
- --------------------------------
Elizabeth H. Gemmill
/s/ C. Keith Hartley Director March 14, 2005
- --------------------------------
C. Keith Hartley
/s/ Lawrence Lacerte Director March 14, 2005
- --------------------------------
Lawrence Lacerte
- 35 -
UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Financial Statements:
Management's Report on Internal Control Over Financial Reporting... F-2
Reports of Independent Registered Public Accounting Firm........... F-3
Consolidated Balance Sheets........................................ F-5
Consolidated Statements of Operations.............................. F-6
Consolidated Statements of Shareholders' Equity.................... F-7
Consolidated Statements of Cash Flows.............................. F-9
Notes to Consolidated Financial Statements......................... F-10
F-1
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate
internal control over financial reporting for the company. Internal control over
financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles. Our system of internal control over financial reporting
includes those policies and procedures that (i) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or disposition of the
company's assets that could have a material effect on the financial statements.
Management performed an assessment of the effectiveness of our internal
control over financial reporting as of December 31, 2004 based upon criteria in
Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission ("COSO"). Based on this assessment,
management determined that the company's internal control over financial
reporting was effective as of December 31, 2004, based on the criteria in
Internal Control-Integrated Framework issued by COSO.
Management's assessment of the effectiveness of our internal control
over financial reporting as of December 31, 2004, has been audited by KPMG LLP,
an independent registered public accounting firm, as stated in its report which
appears on the following page.
Sherwin I. Seligsohn Sidney D. Rosenblatt
Chairman of the Board and Executive Vice President and
Chief Executive Officer Chief Financial Officer
Dated: March 3, 2005
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Universal Display Corporation:
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control Over Financial Reporting, that Universal
Display Corporation (the Company) maintained effective internal control over
financial reporting as of December 31, 2004, based on criteria established in
Internal Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The Company's management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express an opinion on management's
assessment and an opinion on the effectiveness of the Company's internal control
over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, management's assessment that Universal Display Corporation
maintained effective internal control over financial reporting as of December
31, 2004, is fairly stated, in all material respects, based on criteria
established in Internal Control--Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). Also, in our
opinion, Universal Display Corporation maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2004,
based on criteria established in Internal Control--Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
Universal Display Corporation and subsidiary as of December 31, 2004 and 2003,
and the related consolidated statements of operations, shareholders' equity and
cash flows for each of the years in the three-year period ended December 31,
2004, and our report dated March 11, 2005 expressed an unqualified opinion on
those consolidated financial statements.
/s/ KPMG LLP
Philadelphia, Pennsylvania
March 11, 2005
F-3
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Universal Display Corporation:
We have audited the accompanying consolidated balance sheets of Universal
Display Corporation and subsidiary (the Company) as of December 31, 2004 and
2003, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 2004. 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 audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Universal Display
Corporation and subsidiary as of December 31, 2004 and 2003, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 2004, in conformity with U.S. generally accepted
accounting principles.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of Universal
Display Corporation's internal control over financial reporting as of December
31, 2004, based on criteria established in Internal Control--Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), and our report dated March 11, 2005 expressed an unqualified
opinion on management's assessment of, and the effective operation of, internal
control over financial reporting.
/s/ KPMG LLP
Philadelphia, Pennsylvania
March 11, 2005
F-4
UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
2004 2003
------------- -------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 18,930,581 $ 14,070,207
Short-term investments 26,258,463 12,811,704
Accounts receivable 2,588,279 805,602
Inventory 19,941 33,044
Other current assets 237,927 153,924
------------- -------------
Total current assets 48,035,191 27,874,481
PROPERTY AND EQUIPMENT, net 9,551,532 3,532,115
ACQUIRED TECHNOLOGY, net 9,709,631 11,404,703
INVESTMENTS 2,290,451 3,255,574
RESTRICTED CASH 4,200,000 --
OTHER ASSETS 105,358 134,773
------------- -------------
$ 73,892,163 $ 46,201,646
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Capital lease obligations $ -- $ 3,886
Current portion of long-term debt 300,000 --
Accounts payable 723,512 436,809
Accrued expenses 3,697,432 2,020,210
Deferred license fees 1,766,667 1,266,667
Deferred revenue 916,667 467,204
------------- -------------
Total current liabilities 7,404,278 4,194,776
DEFERRED LICENSE FEES 3,100,000 3,100,000
LONG-TERM DEBT, less current portion 4,200,000 --
------------- -------------
14,704,278 7,294,776
COMMITMENTS (Note 12)
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 authorized and
none outstanding, 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 2,000 5,000
Common Stock, par value $0.01 per share, 50,000,000 shares authorized,
27,903,385 and 24,196,765 shares issued and outstanding 279,034 241,968
Additional paid-in-capital 173,372,344 137,160,751
Deferred compensation (17,446) --
Accumulated other comprehensive loss (79,837) (38,837)
Accumulated deficit (114,368,210) (98,462,012)
------------- -------------
Total shareholders' equity 59,187,885 38,906,870
------------- -------------
$ 73,892,163 $ 46,201,646
============= =============
The accompanying notes are an integral part of these consolidated
financial statements.
F-5
UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
--------------------------------------------------
2004 2003 2002
-------------- -------------- --------------
REVENUE:
Contract research revenue $ 2,621,636 $ 1,420,984 $ 1,468,958
Development chemical revenue 2,484,070 2,295,009 833,194
Commercial chemical revenue 147,600 68,160 --
Royalty and license revenue 403,070 159,040 --
Technology development revenue 1,350,537 2,650,000 182,796
-------------- -------------- --------------
Total revenue 7,006,913 6,593,193 2,484,948
-------------- -------------- --------------
OPERATING EXPENSES:
Cost of chemicals sold 155,283 110,503 39,676
Research and development 16,651,335 17,897,522 15,804,267
General and administrative 7,052,047 5,766,761 4,754,850
Royalty expense 350,000 350,000 250,000
-------------- -------------- --------------
Total operating expenses 24,208,665 24,124,786 20,848,793
-------------- -------------- --------------
Operating loss (17,201,752) (17,531,593) (18,363,845)
-------------- -------------- --------------
INTEREST INCOME 795,620 162,356 429,356
INTEREST EXPENSE (14,120) -- (3,298,589)
DEBT CONVERSION AND EXTINGUISHMENT EXPENSE -- -- (10,011,780)
OTHER REVENUE 30,712 16,032 --
INCOME TAX BENEFIT 612,966 -- 225,657
-------------- -------------- --------------
NET LOSS (15,776,574) (17,353,205) (31,019,201)
-------------- -------------- --------------
DEEMED DIVIDENDS (Notes 8 and 10) (129,624) (1,034,302) (1,953,479)
-------------- -------------- --------------
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS $ (15,906,198) $ (18,387,507) $ (32,972,680)
============== ============== ==============
BASIC AND DILUTED NET LOSS PER
COMMON SHARE $ (0.59) $ (0.82) $ (1.71)
============== ============== ==============
WEIGHTED AVERAGE SHARES USED IN COMPUTING
BASIC AND DILUTED NET LOSS PER COMMON SHARE 26,791,158 22,428,219 19,227,697
============== ============== ==============
The accompanying notes are an integral part of these consolidated
financial statements.
F-6
UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Series A Series B
Nonconvertible Convertible
Preferred Stock Preferred Stock
----------------------------- ------------------------------
Shares Amount Shares Amount
------------- ------------- ------------- -------------
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 -- -- -- --
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
Exercise of common stock options and warrants -- -- -- --
Issuance of common stock through direct
offerings, net of expenses of $1,270,643 -- -- -- --
Deemed dividends -- -- -- --
Issuance of common stock to employees -- -- -- --
Issuance of common stock and options to
non-employees -- -- -- --
Issuance of common stock, options and warrants
in connection with the Development Agreements -- -- -- --
Unrealized loss on available-for-sale securities -- -- -- --
Net loss -- -- -- --
------------- ------------- ------------- -------------
Comprehensive loss -- -- -- --
------------- ------------- ------------- -------------
BALANCE, DECEMBER 31, 2003 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 $2,077,750 -- -- -- --
Deemed dividends -- -- -- --
Issuance of common stock to employees -- -- -- --
Issuance of common stock and options to
non-employees -- -- -- --
Issuance of common stock to Board of Directors
and Scientific Advisory Board -- -- -- --
Issuance of common stock, options and warrants in
connection with the Development Agreements -- -- -- --
Issuance of common stock upon conversion of
Series B Preferred Stock -- -- (300,000) (3,000)
Amortization of Deferred Compensation -- -- -- --
Unrealized loss on available-for-sale securities -- -- -- --
Net loss -- -- -- --
------------- ------------- ------------- -------------
Comprehensive loss -- -- -- --
------------- ------------- ------------- -------------
BALANCE, DECEMBER 31, 2004 200,000 $ 2,000 -- $ --
============= ============= ============= =============
Common Stock Additional
----------------------------- Paid-in
Shares Amount Capital
------------- ------------- -------------
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 -- -- 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
Exercise of common stock options and warrants 317,302 3,173 1,197,879
Issuance of common stock through direct
offerings, net of expenses of $1,270,643 2,012,500 20,125 14,809,232
Deemed dividends -- -- 1,034,302
Issuance of common stock to employees 19,141 191 261,330
Issuance of common stock and options to
non-employees 50 1 83,912
Issuance of common stock, options and warrants
in connection with the Development Agreements 322,360 3,224 6,232,688
Unrealized loss on available-for-sale securities -- -- --
Net loss -- -- --
------------- ------------- -------------
Comprehensive loss -- -- --
------------- ------------- -------------
BALANCE, DECEMBER 31, 2003 24,196,765 241,968 137,160,751
Exercise of common stock options and warrants 467,599 4,676 2,918,964
Issuance of common stock through direct
offerings, net of expenses of $2,077,750 2,550,000 25,500 28,496,749
Deemed dividends -- -- 46,176
Issuance of common stock to employees 64,750 647 870,332
Issuance of common stock and options to
non-employees -- -- (5,485)
Issuance of common stock to Board of Directors
and Scientific Advisory Board 38,000 380 643,340
Issuance of common stock, options and warrants in
connection with the Development Agreements 167,355 1,674 3,242,706
Issuance of common stock upon conversion of
Series B Preferred Stock 418,916 4,189 (1,189)
Amortization of Deferred Compensation -- -- --
Unrealized loss on available-for-sale securities -- -- --
Net loss -- -- --
------------- ------------- -------------
Comprehensive loss -- -- --
------------- ------------- -------------
BALANCE, DECEMBER 31, 2004 27,903,385 $ 279,034 $ 173,372,344
============= ============= =============
The accompanying notes are an integral part of these consolidated
financial statements.
F-7
UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Deferred
Compensation and
Accumulated
Other
Accumulated Comprehensive
Deficit Loss Total Equity
--------------- ---------------- ---------------
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 (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
Exercise of common stock options and warrants -- -- 1,201,052
Issuance of common stock through direct offerings,
net of expenses of $1,270,643 -- -- 14,829,357
Deemed dividends (1,034,302) -- --
Issuance of common stock to employees -- -- 261,521
Issuance of common stock and options to non-employees -- -- 83,913
Issuance of common stock, options and warrants in
connection with the Development Agreements -- -- 6,235,912
Unrealized loss on available-for-sale securities -- (20,251) (20,251)
Net loss (17,353,205) -- (17,353,205)
--------------- ---------------- ---------------
Comprehensive loss -- -- (17,373,456)
--------------- ---------------- ---------------
BALANCE, DECEMBER 31, 2003 $ (98,462,012) $ (38,837) $ 38,906,870
Exercise of common stock options and warrants -- -- 2,923,640
Issuance of common stock through direct offerings,
net of expenses of $2,077,750 -- -- 28,522,249
Deemed dividends (129,624) -- (83,448)
Issuance of common stock to employees -- (353,513) 517,466
Issuance of common stock and options to non-employees -- -- (5,485)
Issuance of common stock to Board of Directors and
Scientific Advisory Board -- -- 643,720
Issuance of common stock, options and warrants in
connection with the Development Agreements -- -- 3,244,380
Issuance of common stock upon conversion of Series B
Preferred Stock -- -- --
Amortization of Deferred Compensation -- 336,067 336,067
Unrealized loss on available-for-sale securities -- (41,000) (41,000)
Net loss (15,776,574) -- (15,776,574)
--------------- ---------------- ---------------
Comprehensive loss -- -- (15,817,574)
--------------- ---------------- ---------------
BALANCE, DECEMBER 31, 2004 $ (114,368,210) $ (97,283) $ 59,187,885
=============== ================ ===============
The accompanying notes are an integral part of these consolidated
financial statements.
F-8
UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
-----------------------------------------------------
2004 2003 2002
--------------- --------------- ---------------
CASH FLOWS USED IN OPERATING ACTIVITIES:
Net loss $ (15,776,574) $ (17,353,205) $ (31,019,201)
Non-cash charges to statement of operations:
Depreciation 1,398,636 2,042,783 1,848,552
Amortization of intangibles 1,695,072 1,695,072 1,695,072
Amortization of discounts on Convertible Promissory Notes -- -- 13,044,467
Amortization of premium and discount on investments (24,143) 61,090 --
Issuance of common stock to employees 1,738,549 267,593 --
Issuance of common stock options and warrants for services (5,484) 77,842 542,568
Issuance of common stock in connection with executive
Compensation -- -- 16,150
Issuance of common stock, options and warrants in
connection with Development Agreement 3,356,146 6,104,581 5,487,515
Issuance of common stock to Board of Directors and
Scientific Advisory Board 643,720 -- --
Issuance of common stock in connection with License
Agreement -- -- 71,816
(Increase) decrease in assets:
Accounts receivable (1,782,677) (142,780) (121,967)
Inventory 13,103 (33,044) --
Other current assets (84,003) 23,295 97,932
Other assets 29,415 (1,010) (113,638)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses 883,694 1,115,174 (352,402)
Deferred license fees 500,000 200,000 3,766,667
Deferred revenue 449,463 145,000 272,204
--------------- --------------- ---------------
Net cash used in operating activities (6,965,083) (5,797,609) (4,764,265)
--------------- --------------- ---------------
CASH FLOWS (USED IN) PROVIDED BY INVESTING ACTIVITIES:
Purchases of property and equipment (7,418,053) (957,328) (1,169,945)
Purchase of intangibles -- -- --
Purchases of investments (48,653,858) (19,219,160) (6,900,698)
Proceeds from sale of investments 36,155,365 8,113,192 6,359,585
Restricted cash -- -- 15,162,414
--------------- --------------- ---------------
Net cash (used in) provided by investing activities (19,916,546) (12,063,296) 13,451,356
--------------- --------------- ---------------
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Net proceeds from issuance of common stock 28,522,249 14,829,357 8,055,186
Payments for Convertible Promissory Notes -- -- (8,819,997)
Proceeds from Loan 4,500,000 -- --
Restricted Cash (4,200,000) -- --
Proceeds from the exercise of common stock options
and warrants 2,923,640 1,201,052 104,232
Principal payments on capital lease (3,886) (4,713) (4,228)
--------------- --------------- ---------------
Net cash provided by (used in) financing activities 31,742,003 16,025,696 (664,807)
--------------- --------------- ---------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 4,860,374 (1,835,209) 8,022,284
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 14,070,207 15,905,416 7,883,132
--------------- --------------- ---------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 18,930,581 $ 14,070,207 $ 15,905,416
=============== =============== ===============
Cash paid for interest $ -- $ -- $ 281,106
=============== =============== ===============
The accompanying notes are an integral part of these consolidated
financial statements.
F-9
UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS:
Universal Display Corporation (the "Company") is engaged in the research,
development and commercialization of organic light emitting diode ("OLED"),
technologies for use in a variety of flat panel display and other applications.
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. On December 1, 2004, the Company acquired the entire building at which
the facility is located. The Company currently occupies approximately one-half
of the 41,000 square feet of space in the building, and is in the process of
expanding its operations into an additional 12,000 square feet in the building.
The Company also leases approximately 1,600 square feet of laboratory space
in South Brunswick, New Jersey, and 850 square feet of office space in Coeur
d'Alene, Idaho.
The Company also sponsors substantial OLED technology research being conducted
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).
2. 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. All intercompany
transactions and accounts have been eliminated.
MANAGEMENT'S USE OF ESTIMATES
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents. The Company
classifies its existing marketable securities as available-for-sale in
accordance with the provisions of Statement of Financial Accounting Standards
No. 115, "Accounting for Certain Investments in Debt and Equity Securities."
These securities are carried at fair market value, with unrealized gains and
losses reported in shareholders' equity as a component of other comprehensive
loss. Gains or losses on securities sold are based on the specific
identification method. The Company reported accumulated unrealized holding
losses of $79,837 and $38,837 at December 31, 2004 and 2003, respectively.
RESTRICTED CASH
At December 31, 2004, the Company had $4,500,000 of restricted cash, of which
$4,200,000 was classified as a noncurrent asset. The restricted cash serves as
collateral for a note payable in connection with the purchase of building and
property at which our main facility is located. The cash is held by the issuing
bank, is restricted, as to withdrawal or use, up to the outstanding balance of
the note, and is currently invested in corporate bonds. Income from these
investments is paid to the Company. The current portion of restricted cash of
$300,000 is classified as cash and cash equivalents and represents the amount of
the current liability due under the note.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash and cash equivalents, 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. Short-term and long-term investments and restricted cash are
recorded at fair market value. The carrying amount of the long-term debt
approximates fair value as the debt interest is a floating rate.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciated on a straight-line
basis over their estimated useful life of thirty years for building, three to
seven years for office and lab equipment, furniture and fixtures, fifteen years
for building improvements, and the lesser of the lease term or useful life for
capital leases. Repair and maintenance costs are charged to expense as incurred.
Additions and betterments are capitalized.
F-10
Property and equipment consist of the following:
December 31,
--------------------------------
2004 2003
-------------- --------------
Land $ 820,000 $ --
Building and improvements 6,795,900 2,058,670
Office and lab equipment 6,821,988 6,670,220
Furniture and fixtures 225,335 222,106
Construction-in-progress 1,844,536 206,628
-------------- --------------
16,507,759 9,157,624
Less: Accumulated depreciation (6,956,227) (5,625,509)
-------------- --------------
Property and Equipment, net $ 9,551,532 $ 3,532,115
============== ==============
Depreciation expense was $1,398,636, $2,042,783 and $1,848,552 for the years
ended December 31, 2004, 2003 and 2002, respectively.
Construction-in-progress consists of costs incurred for the expansion of the
Company's current 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.
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:
December 31,
--------------------------------
2004 2003
-------------- --------------
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 (7,241,087) (5,546,015)
-------------- --------------
Acquired Technology, net $ 9,709,631 $ 11,404,703
============== ==============
Acquired technology is amortized on a straight-line basis over its estimated
useful life of ten years. Amortization expense was $1,695,072 for each of the
years ended December 31, 2004, 2003 and 2002. For each of the five succeeding
fiscal years, amortization expense will be $1,695,072.
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, 2004, 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 2003 and 2002.
F-11
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, 2004, 2003 and
2002, the effects of the exercise of outstanding stock options and warrants of
3,269,043 and 5,153,154, respectively, 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
display 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.
Commercial chemical revenues represent sales of OLED materials to display
manufacturers for the production of commercial products. These revenues are
recognized at the time of shipment, or at time of delivery and passage of title,
depending upon the contractual agreement between the parties.
The Company receives non-refundable advanced payments in connection with certain
technology development and evaluation agreements and license agreements it
enters into. Certain of these payments are creditable against future amounts
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 received under technology development and evaluation agreements that
are not creditable against license fees are deferred and revenue is recognized
over the term of the agreement as technology development revenue.
Royalty revenue is received from OVPD equipment sold under a development and
license agreement with Aixtron AG. This revenue is recognized upon notification
of equipment sold and royalties due from Aixtron AG.
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,
------------------------------------------------
2004 2003 2002
-------------- -------------- --------------
Development and operations in the Company's facility $ 7,892,810 $ 7,212,400 $ 6,189,638
Patent application expenses 2,011,718 1,595,722 1,282,803
Costs incurred to Princeton University and USC under
the 1997 Research Agreement (Note 3) 679,910 933,156 859,339
PPG Development and License Agreement (Note 7) 4,066,905 6,461,172 5,487,515
Amortization of intangibles 1,695,072 1,695,072 1,695,072
Scientific Advisory Board Compensation 304,920 -- 289,900
-------------- -------------- --------------
$ 16,651,335 $ 17,897,522 $ 15,804,267
============== ============== ==============
STATEMENT OF CASH FLOW INFORMATION
The following non-cash investing and financing activities occurred:
Year Ended December 31,
------------------------------------------------
2004 2003 2002
-------------- -------------- --------------
Unrealized loss on available-for-sale securities $ 41,000 $ 20,251 $ 14,661
Deemed dividends (Notes 8 and 10) 129,624 1,034,302 1,953,479
Warrants issued for expenses on registered direct
offering -- 314,112 --
Reduction of conversion price of Convertible Notes
(Note 9) -- -- 7,441,547
F-12
INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." Deferred tax assets and liabilities are
determined based on the difference between the financial statement and tax bases
of assets and liabilities. Deferred tax assets or liabilities at the end of each
period are determined using the tax rate expected to be in effect when taxes are
actually paid or recovered.
STOCK OPTIONS
The Company accounts for its stock option plans (Note 10) under Accounting
Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to
Employees," under which no compensation cost is recognized for options issued to
employees when the option price equals the fair market value of the Company's
stock price 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 arrangements
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.
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 as amended by SFAS No. 148. 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,
------------------------------------------------
2004 2003 2002
-------------- -------------- --------------
Net loss applicable to Common shareholders:
As reported $ (15,906,198) $ (18,387,507) $ (32,972,680)
Add stock-based employee compensation expense
included in reported net income, net of tax 2,077,349 1,018,086 --
Deduct total stock-based employee compensation
expense determined under fair-value-based method
for all rewards, net of tax (6,883,549) (3,325,377) (3,056,777)
-------------- -------------- --------------
Pro forma (20,712,398) (20,694,798) (36,029,457)
============== ============== ==============
Basic and diluted net loss per share:
As reported $ (0.59) $ (0.82) $ (1.71)
Pro forma (0.77) (0.92) (1.87)
The fair value of the options granted is estimated using the Black-Scholes
option-pricing model with the following assumptions:
2004 2003 2002
-------------- -------------- --------------
Risk-free interest rate 3.8-4.3% 2.6-3.8% 3.3-5.0%
Volatility 86.3-94% 94% 94%
Expected dividend yield 0% 0% 0%
Expected option life 7 years 7 years 7 years
RECENT ACCOUNTING PRONOUNCEMENTS
In November 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 151, Inventory Costs ,
which amends the guidance in Accounting Research Bulletin ("ARB") No. 43,
Chapter 4, Inventory Pricing, to clarify the accounting for abnormal amounts of
idle facility expense, freight, handling costs, and wasted material. SFAS No.
151 requires that those items be recognized as current-period charges regardless
of whether they meet the criterion of "so
F-13
abnormal." In addition, SFAS No. 151 requires allocation of fixed production
overheads to the costs of conversion be based on the normal capacity of the
production facilities. SFAS No. 151 is effective for inventory costs incurred
during fiscal years beginning after June 15, 2005. The Company believes the
adoption of SFAS No. 151 will not have an impact on its financial statements.
In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets.
SFAS No. 153 is an amendment to APB Opinion No. 29, Accounting for Nonmonetary
Transactions. SFAS No. 153 eliminates the exception for nonmonetary exchanges of
similar productive assets and replaces it with a general exception for exchanges
of nonmonetary assets that do not have commercial substance. The provision of
SFAS No. 153 is effective for nonmonetary asset exchanges occurring in fiscal
periods beginning after June 15, 2005. The Company believes the adoption of SFAS
No. 153 will not have an impact on its financial statements.
In December 2004, the FASB issued SFAS No. 123R, Share-Based Compensation, which
supersedes Accounting Principles Board ("APB") Opinion No. 25, Accounting for
Stock Issued to Employees, and its related implementation guidance. SFAS No.
123R focuses primarily on accounting for transactions in which an entity obtains
employee services through share-based payment transactions. SFAS No. 123R
requires a public entity to measure the cost of employee services received in
exchange for the award of equity investments based on the fair value of the
award at the date of grant. The cost will be recognized over the period during
which an employee is required to provide services in exchange for the award.
SFAS No. 123R is effective as of the beginning of the first interim or annual
reporting period that begins after June 15, 2005. The impact on net earnings as
a result of the adoption of SFAS No. 123R, from a historical perspective, is set
forth above. The Company is currently evaluating the provisions of SFAS No. 123R
and will adopt it in 2005, as required. The Company believes that the adoption
of SFAS No. 123R will have a significant impact on its financial statements.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current year
presentation.
3. RESEARCH AND LICENSE AGREEMENTS WITH PRINCETON UNIVERSITY:
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.
The Company paid Princeton University $4,481,641 under the 1994 Sponsored
Research Agreement and the 1997 Research Agreement (Note 1) between them through
the period ending on July 31, 2002. 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.
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"). 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.
Under the 1997 Amended License Agreement with Princeton University and the
University of Southern California ("USC"), 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 renegotiation for products not
reasonably conceivable as arising out of the Research Agreement if Princeton
University reasonably determines that the royalty rates payable with respect to
these products are not fair and competitive.
The Company is obligated under the 1997 Amended License Agreement to pay to
Princeton University minimum annual royalties. The minimum royalty payment was
$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.
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 what are now 74 issued U.S. patents and corresponding foreign
patents relating to
F-14
OLED technologies. These patents expire between 2012 and 2018. The Company has
the sole right to sublicense these patents to OLED display 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 2).
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 12). 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 year ended December 31, 2004 and 2003, the Company
accrued $250,000 each year in royalty expense. 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.
5. ACCRUED EXPENSES:
Accrued expenses consist of the following:
December 31,
---------------------------
2004 2003
------------ ------------
Accrued professional fees $ 505,828 $ 160,203
Compensation 2,063,705 1,169,818
Research and development agreements 245,484 133,715
Accrued minimum royalties 600,000 350,000
Other 282,415 206,474
------------ ------------
$ 3,697,432 $ 2,020,210
============ ============
6. LONG-TERM DEBT
December 31,
---------------------------
2004 2003
------------ ------------
Note payable to bank in monthly
installments of $25,000, plus
interest at LIBOR plus 1.25% (3.65% at
December 31, 2004), due in December 2009,
secured by restricted cash $ 4,500,000 $ --
------------ ------------
4,500,000 --
Less: current portion 300,000 --
------------ ------------
Long-term debt $ 4,200,000 $ --
============ ============
F-15
Future maturities of long-term debt as of December 31, 2004 are as follows:
2005 $ 300,000
2006 300,000
2007 300,000
2008 300,000
2009 3,300,000
------------
Total $ 4,500,000
7. 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 accordance with the agreement, during the first quarter of each of 2004, 2003
and 2002, the Company issued to PPG 157,609, 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 in 2004, 2003 and 2002,
respectively. During 2004, 2003 and 2002, the Company recorded the issuance of
these shares as a charge of $1,626,003, $3,176,565 and $2,858,063 to research
and development expense based on the fair value of the common stock as it was
earned. The Company issued an additional 27,276, 9,746 and 16,645 shares of its
common stock to PPG on February 15, 2005, 2004 and 2003, based on a final
accounting for actual costs incurred by PPG in 2004, 2003 and 2002,
respectively. Accordingly, the Company accrued $245,484, $133,715 and $131,329
of additional research and development expense as of December 31, 2004, 2003 and
2002, 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
$1,296,748, $2,692,418 and $2,263,737 during the years ended December 31, 2004,
2003 and 2002, respectively. These charges were recorded based on the estimated
fair value of warrants that were earned by PPG during each of 2004, 2003 and
2002. As a result, PPG earned warrants to acquire 184,885, 315,461 and 361,024
shares of the Company's common stock at exercise prices of $24.28, $10.39 and
$10.14 respectively. The warrants vest immediately and each have a contractual
term of seven years. The warrants were issued on February 15, 2005, 2004 and
2003, respectively. The Company determined the fair value of the warrants earned
during each of 2004, 2003 and 2002 using the Black-Scholes option-pricing model
with the following assumptions: (1) risk free interest rate of 3.4-4.2%,
3.0-3.8% and 3.3%-5.4%, (2) no expected dividend yield, (3) expected life of
seven years, and (4) expected volatility of 86.3-94%,94% and 94%, respectively.
Also, in accordance with the agreement, the Company is required to reimburse PPG
for its raw materials and conversion costs for all development chemicals
supplied to the Company. The Company recorded $710,759 and $222,875 in research
and development expenses related to these costs during the years ended December
31, 2004 and 2003, 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.
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, the Company recorded
$176,779 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. During 2003 and 2002 respectively,
the Company recorded $229,355 and $57,607 in research and development expense
related to these options.
On April 20, 2004 and December 23, 2003, the Company granted to PPG employees
performing development services under the agreement options to purchase 4,000
and 21,000 shares, respectively, of the Company's common stock at exercise
prices of $13.28 and $13.92, respectively. During 2004 and 2003, the Company
recorded charges of $187,911 and $6,244, respectively, to research and
F-16
development expense for the fair market value of these options, as determined in
accordance with the Black-Scholes option-pricing model.
The Company determined the fair value of the options earned during 2004, 2003
and 2002, respectively, using the Black-Scholes option-pricing model with the
following assumptions: (1) risk free interest rate of 4.3-4.4%, 3.7%-4.3% and
3.7%-3.8%, (2) no expected dividend yield, (3) expected life of 10 years, and
(4) expected volatility of 94%, respectively. Subject to certain contingencies,
all of these options vest one year from the date of grant and expire 10 years
from the date of issuance.
8. 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 American Biomimetics Corporation, pursuant to a certain
Technology Transfer Agreement. 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 members 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 4). On October 6, 2004, all 300,000 shares
of the Series B were automatically converted into 418,916 shares of the
Company's common stock.
The Series B shares rank senior to the common stock and any other capital stock
of the Company ranking junior to the Series B shares 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 number 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 shares was convertible, at the option of the holder,
into such number of fully paid and nonassessable shares of common stock as was
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 convertible into shares of the
Company's common stock on September 29, 2004. The conversion price for the
Series B shares was initially the original issuance price per share of the
common stock, but was subject to change if the average price of the common stock
fell below $12.00 for the 30 trading days ending two business days prior to the
relevant vesting date, regardless of prior changes to the conversion price. The
Company had 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, 2004,
2003 and 2002 conversion dates, the Company's average stock price for the
preceding 30 trading days was $8.86, $9.27 and $5.50, 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 $15.86, $16.59 and $9.85,
respectively, resulting in an additional 26,576, 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 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 $487,680 and
$1,953,479 in 2003 and 2002, respectively. The CBCF was treated as a deemed
dividend to the Series B shareholders. In 2004, the Company made a cash payment
of $83,448 in lieu of reducing the conversion price of the Series B. The cash
payment was treated and recorded as a deemed dividend.
9. 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. In December 2001, the holders converted all of the Series C shares
into 535,704 shares of the Company's common stock.
F-17
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.
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 year ended December 31, 2002, the Company recognized
non-cash charges to interest expense of $1,819,989 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
year ended December 31, 2002, the Company recognized non-cash charges to
interest expense of $1,212,697, 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 intrinsic 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.
10. SHAREHOLDERS' EQUITY, STOCK OPTIONS AND WARRANTS:
SHAREHOLDERS' EQUITY
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.
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 $1,270,643. The common stock was issued at
$8.00 per share. 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 offering was deemed dilutive under the terms of certain
warrants the Company had 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 accounted for the change as a
deemed dividend of $546,622.
In March 2004, the Company sold 2,500,000 shares of its common stock at $12.00
per share in a registered underwritten public offering. The offering resulted in
proceeds to the Company of $28,036,218, net of $1,963,782 in associated costs.
In April 2004, the Company sold an additional 50,000 shares of its common stock
at $12.00 per share to cover over-allotments in connection with this public
offering. The sale of these additional shares resulted in proceeds of $486,031,
net of $113,968 in associated costs.
In February 2004, the Company issued to PPG a warrant to purchase 315,461
shares of the Company's common stock and in March 2004, it sold 2,500,000 shares
of its common stock in a public offering. These transactions were deemed
dilutive under the terms of a warrant the Company had previously issued and
resulted in the reduction of the exercise price of that warrant and an increase
in the number of shares issuable under that warrant. The Company treated this
occurrence as a deemed dividend of $46,176.
F-18
In September 2004, in accordance with the terms of the Series B, the Company
made a cash payment to Motorola in the amount of $83,448 to take into account a
conversion adjustment for 75,000 shares of the Series B that became convertible
into the Company's common stock. The Company made the payment in lieu of
reducing the conversion price of the Series B. The cash payment was treated and
recorded as a deemed dividend.
EQUITY COMPENSATION 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 Compensation Committee of the Board of Directors. Through
2004, the Company's shareholders have approved increases in the number of shares
of reserved for issuance under the 1995 Plan to 5,400,000, and have extended the
term of the plan through 2015. The 1995 Plan was also amended and restated in
2003 and is now called the Equity Compensation Plan. The 1995 Plan provides for
the granting of both incentive and nonqualified stock options, stock, stock
appreciation rights and performance units to employees, directors and
consultants of the Company. Stock options are exercisable over periods
determined by the Compensation Committee, but for no longer than ten years from
the grant date.
OPTION ACTIVITY
The following table summarizes the stock option activity for 2004, 2003 and 2002
for all grants under the Equity Compensation Plan:
Exercise Year of
Year Granted Price Expiration Exercised Forfeited Exercisable Outstanding
---- ------------ --------------- ------------ ------------ ------------- ------------ -----------
2004 302,500 $ 9.04-17.43 2014 -- -- 270,500 302,500
2003 337,625 6.65-13.92 2013 750 -- 224,375 336,875
2002 606,750 5.45-11.17 2012 86,665 -- 490,171 520,085
The following tables summarize the stock options grant activity for each year
for 2004, 2003 and 2002 for grants under the Equity Compensation Plan:
2004 grants and activity through December 31, 2004:
Exercise Year of
Grantee Granted Price Expiration Exercised Exercisable Outstanding
- ---------------------- ------------ ------------ ------------ ---------- ----------- -----------
Employees and Officers 198,500 $ 9.04-17.43 2014 -- 166,500 198,500
Board of Directors 100,000 16.94 2014 -- 100,000 100,000
PPG Employees 4,000 13.28 2014 -- 4,000 4,000 (A)
------------ ---------- ----------- -----------
Totals 302,500 -- 270,500 302,500
============ ========== =========== ===========
(A) See Note 7.
2003 grants and activity through December 31, 2004:
Exercise Year of
Grantee Granted Price Expiration Exercised Exercisable Outstanding
- ---------------------- ------------ ------------ ------------ ---------- ----------- -----------
Employees and Officers 315,625 $ 6.65-13.92 2013 750 202,375 314,875
Consultants 1,000 7.00-13.92 2013 -- 1,000 1,000 (A)
PPG Employees 21,000 13.92 2013 -- 21,000 21,000 (B)
------------ --------- ----------- -----------
Totals 337,625 750 224,375 336,875
============ ========= =========== ===========
(A) The Company recorded charges of $5,789 to research and development expense
and $6,192 to general and administrative expense
F-19
in 2003 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 3.1%-4.3%, (2) no expected
dividend yield, (3) expected life of 10 years, and (4) expected volatility of
94%.
(B) See Note 7.
2002 grants and activity through December 31, 2004:
Exercise Year of
Grantee Granted Price Expiration Exercised Exercisable Outstanding
- ---------------------- -------- --------------- ---------- ---------- ------------ --------------
Employees and Officers 405,000 $ 5.45-11.17 2012 79,250 295,836 325,750
Board of Directors 80,000 5.45 2012 -- 80,000 80,000
Scientific Advisory Board 60,000 5.45 2012 -- 60,000 60,000 (A)
Consultants 31,750 5.45-9.94 2012 500 31,250 31,250 (B)
PPG 30,000 5.45 2012 6,915 23,085 23,085 (C)
-------- ---------- ------------ --------------
Totals 606,750 86,665 490,171 520,085
======== ========== ============ ==============
(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 7.
The following table summarizes all stock option activity for 2004, 2003 and
2002:
2004 2003 2002
-------------------------- -------------------------- --------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------------ ---------- ------------ ---------- ------------ ----------
Outstanding at beginning of year 3,134,444 $ 8.05 3,014,019 $ 7.25 2,422,769 $ 7.58
Granted 302,500 16.58 337,625 12.49 606,750 5.87
Exercised (167,901) 5.01 (214,200) 3.73 (15,500) 4.67
Forfeited -- -- (3,000) 12.00 -- --
------------ ---------- ------------ ---------- ------------ ----------
Outstanding at end of year 3,269,043 8.99 3,134,444 8.05 3,014,019 7.25
============ ========== ============ ========== ============ ==========
Exercisable at end of year 3,072,629 8.77 2,873,944 6.22 2,814,499 6.88
============ ========== ============ ========== ============ ==========
Available for future grant 1,446,851 1,052,101 605,937
============ ============ ============
Weighted average fair value of
options granted $ 13.46 $ 10.37 $ 4.69
========== ========== ==========
The weighted average remaining contractual life for options outstanding as of
December 31, 2004, 2003 and 2002 was six, seven and seven years, respectively.
F-20
COMMON STOCK WARRANTS
The following table summarizes all of the warrant activity for 2004, 2003 and
2002 for all grants in each year:
Exercise Year of
Year Granted Price Expiration Exercised Forfeited Exercisable Outstanding
------ ------------ ------------ ----------- ------------ --------- ----------- -----------
2004 315,461 $ 10.39 2011 -- -- 315,461 315,461
2003 411,337 8.00-10.14 2008-2010 -- -- 411,337 411,337
2002 121,843 24.28 2009 -- -- 121,843 121,843
WARRANT ACTIVITY
The following table summarizes the stock warrant activity for 2004, 2003 and
2002:
2004 grants and activity through December 31, 2004:
Exercise Year of
Grantee Granted Price Expiration Exercised Forfeited Exercisable Outstanding
------- --------- -------- ---------- --------- --------- ----------- ------------
PPG 315,461 $ 10.39 2011 -- -- 315,461 315,461 (A)
========= ========= ========= =========== =============
(A) See Note 7.
2003 grants and activity through December 31, 2004:
Exercise Year of
Grantee Granted Price Expiration Exercised Forfeited Exercisable Outstanding
- ---------------------------- -------- -------- ---------- --------- --------- ----------- ------------
PPG 361,024 $ 10.14 2010 -- -- 361,024 361,024 (A)
Private Placement Agent fees 50,313 8.00 2008 -- -- 50,313 50,313
-------- --------- --------- ----------- ------------
Totals 411,337 -- -- 411,337 411,337
======== ========= ========= =========== ============
(A) See Note 7.
2002 grants and activity through December 31, 2004:
Exercise Year of
Grantee Granted Price Expiration Exercised Forfeited Exercisable Outstanding
- ---------------------------- -------- -------- ---------- --------- --------- ----------- ------------
PPG 121,843 $ 24.28 2009 -- -- 121,843 121,843 (A)
======== ========= ========= =========== ============
(A) See Note 7.
F-21
11. RESEARCH CONTRACTS:
Contract research revenue consists of the following:
December 31,
--------------------------------------------------
2004 2003 2002
-------------- -------------- --------------
U.S. Army $ 776,284 $ 610,885 $ 468,618
Army Research Laboratory (ARL) 759,767 594,789 129,320
Department of Energy (DoE) 725,793 215,310 43,552
Air Force Research Laboratory (AFRL) 343,793 -- --
Department of Defense Advanced Research Projects 15,999 -- 827,468
Agency (DARPA) -------------- -------------- --------------
$ 2,621,636 $ 1,420,984 $ 1,468,958
============== ============== ==============
12. COMMITMENTS:
LEASE COMMITMENTS
The Company has several operating lease arrangements for office space and
equipment. Total rent expense was $371,259, $356,071 and $411,300, for the years
ended December 31, 2004, 2003 and 2002, respectively. Minimum future rental
payments for operating leases as of December 31, 2004 are as follows:
2005 $ 29,841
2006 1,445
2007 --
2008 --
2009 and thereafter --
--------------
$ 31,286
==============
OTHER COMMITMENTS
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 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. For the two-year period ending December 31, 2004, the Company is
required to pay $500,000 to Motorola by March 31, 2005. A future minimum royalty
payment of $1,000,000 is required for the two-year period ending December 31,
2006.
In accordance with the amendment to the 1997 Research Agreement with Princeton
University, the Company is required to pay annually to Princeton University up
to $1,495,599 from July 31, 2002 through July 31, 2007.
Under the terms of the 1997 Amended License Agreement with Princeton University
(Note 3), 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, $75,000 in 2001, and is $100,000
in 2002 and each year thereafter.
13. INCOME TAXES:
The components of income taxes are as follows:
December 31,
--------------------------------------------------
2004 2003 2002
-------------- -------------- --------------
Current $ (612,966) $ -- $ (225,657)
Deferred (6,082,570) (7,494,070) (10,135,959)
-------------- -------------- --------------
(6,082,570) (7,494,070) (10,135,959)
Increase in valuation allowance 6,082,570 7,494,070 10,135,959
-------------- -------------- --------------
$ (612,966) $ -- $ (225,657)
============== ============== ==============
F-22
The difference between the Company's federal statutory income tax rate and its
effective income tax rate is due to state income tax benefits, non-deductible
expenses, general business credits and the increase in valuation allowance.
As of December 31, 2004, the Company had federal net operating loss
carryforwards of approximately $54,442,000 which will begin to expire in 2011,
and state net operating loss carryforwards of approximately $40,163,000, which
will begin to expire in 2008. The net operating loss carryforwards differ from
the accumulated deficit principally due to the timing of the recognition of
certain expenses. The Company also has other federal general business credit
carryforwards for tax purposes of approximately $1,021,000, which expire during
the years 2018 through 2023, and state general business credit carryforwards of
$681,000, which expire during the years 2013 and 2018. In accordance with the
Tax Reform Act of 1986, the utilization of the net operating loss and general
business credit carryforwards could be subject to certain limitations as a
result of certain ownership changes.
Significant components of the Company's deferred tax assets and liabilities are
as follows:
December 31,
--------------------------------
2004 2003
-------------- --------------
Gross deferred tax assets:
Net operating loss carryforwards $ 21,128,235 $ 14,187,288
Capitalized start-up costs 7,788,521 9,735,652
Capitalized technology license 2,394,808 2,414,778
Stock options and warrants 3,545,785 3,331,769
Accruals and reserves 210,094 325,867
Deferred revenue 2,309,864 1,930,648
Other 649,726 407,883
General business credit
carryforward 1,703,178 1,313,756
-------------- --------------
39,730,211 33,647,641
Valuation allowance (39,730,211) (33,647,641)
-------------- --------------
Net deferred tax asset $ -- $ --
============== ==============
During 2004 and 2002, the Company sold approximately $8 million and $3 million,
respectively, of its net state operating losses (NOLs) to New Jersey under the
Technology Tax Certificate Transfer Program. For the years ended December 31,
2004 and 2002, the Company received $612,966 and $225,657, respectively, for the
sale of the NOLs and recorded the proceeds as an income tax benefit.
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 2005. The Company's management has
concluded that these deferred tax assets will more likely than not be
recognized.
14. 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, 2004, 2003
and 2002, the Company contributed $133,780, $112,023 and $91,043 to the Plan,
respectively.
15. QUARTERLY SUPPLEMENTAL FINANCIAL DATA (UNAUDITED):
The following tables present certain unaudited consolidated quarterly financial
information for each of the eight quarters in the two-year period ended December
31, 2004. 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.
F-23
YEAR ENDED DECEMBER 31, 2004:
Three Months Ended
------------------------------------------------------------
March 31 June 30 September 30 December 31
------------ ------------ ------------ ------------
Revenue $ 2,129,990 $ 1,472,023 $ 1,711,629 $ 1,693,271
Net loss (4,061,424) (4,520,272) (3,669,214) (3,525,664)
Deemed dividends (46,176) -- (83,448) --
Net loss attributable to Common shareholders (4,107,600) (4,520,272) (3,752,662) (3,525,664)
Basic and diluted loss per share (0.17) (0.17) (0.14) (0.11)
YEAR ENDED DECEMBER 31, 2003:
Three Months Ended
------------------------------------------------------------
March 31 June 30 September 30 December 31
------------ ------------ ------------ ------------
Revenue $ 1,180,947 $ 1,349,956 $ 2,140,335 $ 1,921,955
Net loss (3,868,746) (4,092,994) (3,657,885) (5,733,580)
Deemed dividends -- -- (1,034,302) --
Net loss attributable to Common shareholders (3,868,746) (4,092,994) (4,692,187) (5,733,580)
Basic and diluted loss per share (0.18) (0.19) (0.21) (0.24)
F-24