U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
( ) TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to _________
Commission File No. 1-12031
UNIVERSAL DISPLAY CORPORATION
------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
PENNSYLVANIA 23-2372688
------------------------------------ --------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
375 Phillips Boulevard Ewing, New Jersey 08618
--------------------------------------------- -------------
(Address of Principal Executive Offices) (Zip Code)
(609) 671-0980
--------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date: As of November 11, 2002, the
registrant had outstanding 21,509,610 shares of Common Stock, par value $.01 per
share.
Subsequent to the filing of the Quarterly Report on Form 10-Q for the quarter
ended September 30, 2002, the Company identified a $1,953,479 understatement of
deemed dividends to Preferred shareholders as of September 30, 2002 relating to
the terms of the Series B Convertible Preferred Stock. The understatement
affects the reported net loss applicable to Common shareholders, net loss per
Common share, additional paid-in capital and accumulated deficit. However, the
understatement does not affect reported expenses, net loss and cash flows for
the quarter ended September 30, 2002. In addition, the understatement has no
impact on the previously filed Annual Report on Form 10-K for the years ended
December 31, 2001 and 2000. Note 7 in Notes to the Consolidated Financial
Statements has been added to fully describe the restatement.
This amendment to the Company's Form 10-Q for the quarter ended September 30,
2002 amends and restates those items of the Form 10-Q originally filed on
November 14, 2002 (the Original Filing) which have been affected by the
restatement. In order to preserve the nature and character of the disclosures
set forth in such items as originally filed, no attempt has been made in this
amendment to update such disclosures. Except as required to reflect the effects
of the restatement, all information contained in this amendment is stated as of
the date of the Original Filing.
INDEX PAGE
Part I - Financial Information
Item 1. Unaudited Financial Statements
Consolidated Balance Sheets
September 30, 2002 and December 31, 2001 3
Consolidated Statements of Operations -
Three months ended September 30, 2002 and
2001, and inception to September 30, 2002 4
Consolidated Statements of Operations -
Nine months ended September 30, 2002 and
2001, and inception to September 30, 2002 5
Consolidated Statements of Cash Flows -
Nine months ended September 30, 2002 and
2001, and inception to September 30, 2002 6
Notes to Consolidated Financial Statements 7-14
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 15-19
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 19
Item 4. Controls and Procedures 19
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K 19-20
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARY
(a development-stage company)
CONSOLIDATED BALANCE SHEETS
Restated
September 30, 2002
(unaudited) December 31, 2001
------------------ -----------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 17,512,267 $ 7,883,132
Short-term investments 2,784,566 4,516,199
Restricted cash (Note 6) -- 15,162,414
Accounts receivables 599,723 540,855
Prepaid and other current assets 706,727 355,820
------------- -------------
Total current assets 21,603,283 28,458,420
PROPERTY AND EQUIPMENT, net 5,029,848 5,296,177
ACQUIRED TECHNOLOGY, net 13,523,543 14,794,847
OTHER ASSETS 33,763 20,125
------------- -------------
Total assets $ 40,190,437 $ 48,569,569
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Convertible promissory notes (face value of
$15,000,000, net of discounts) (Note 6) $ -- $ 8,288,239
Capital lease obligations 4,596 4,228
Accounts payable 1,177,124 649,100
Accrued expenses 795,591 1,072,621
Deferred revenues 1,084,167 450,000
------------- -------------
Total current liabilities 3,061,478 10,464,188
------------- -------------
CAPITAL LEASE OBLIGATIONS 5,103 8,599
------------- -------------
SHAREHOLDERS' EQUITY
Preferred Stock, par value $0.01 per share, 5,000,000 shares
authorized, 200,000 shares Series A Nonconvertible
Preferred Stock, issued and outstanding (liquidation value
of $7.50 per share, $1,500,000 in the aggregate) and 300,000
shares Series B Convertible Preferred Stock issued and
outstanding (liquidation value of $21.48 per share,
$6,444,000 in the aggregate) 5,000 5,000
Common Stock, par value $.01 per share, 50,000,000
shares authorized, 21,400,580 and 18,093,124
issued and outstanding, respectively 214,006 180,931
Additional paid-in capital 111,830,139 85,016,601
Accumulated other comprehensive loss (3,479) (3,925)
Deficit accumulated during development-stage (74,921,810) (47,101,825)
------------- -------------
Total shareholders' equity 37,123,856 38,096,782
------------- -------------
Total liabilities and shareholders' equity $ 40,190,437 $ 48,569,569
============= =============
The accompanying notes are an integral part of these statements.
3
UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARY
(a development-stage company)
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended
September 30,
------------------------------
2002
(restated) 2001
------------- ------------
REVENUE:
Contract research revenue $ 331,138 $ 436,801
Development chemicals 241,875 132,432
------------ ------------
Total revenue 573,013 569,233
------------ ------------
OPERATING EXPENSES:
Research and development 3,933,777 1,203,473
General and administrative 1,077,341 900,803
------------ ------------
Total operating expenses 5,011,118 2,104,276
------------ ------------
Operating loss (4,438,105) (1,535,043)
INTEREST INCOME 111,300 133,087
INTEREST EXPENSE (651,325) (509,236)
DEBT CONVERSION AND EXTINGUISHMENT EXPENSE (10,011,780) --
------------ ------------
NET LOSS (14,989,910) (1,911,192)
DEEMED DIVIDEND TO PREFERRED SHAREHOLDERS (1,953,479) (689,416)
------------ ------------
NET LOSS APPLICABLE TO COMMON SHAREHOLDERS $(16,943,389) (2,600,608)
============ ============
BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (0.89) $ (0.15)
============ ============
WEIGHTED AVERAGE SHARES USED
IN COMPUTING BASIC AND DILUTED
NET LOSS PER COMMON SHARE 19,105,553 17,024,804
============ ============
The accompanying notes are an integral part of these statements.
4
UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARY
(a development-stage company)
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Nine Months Ended
September 30,
------------------------------ Period from Inception
2002 (June 17, 1994) to
(restated) 2001 September 30, 2002
------------- ------------ ---------------------
REVENUE:
Contract research revenue $ 1,143,197 $ 891,714 $ 3,676,459
Development chemicals 419,768 140,730 614,098
------------ ------------ --------------
Total revenue 1,562,965 1,032,444 4,290,557
------------ ------------ --------------
OPERATING EXPENSES:
Research and development 11,550,574 8,528,379 42,865,911
General and administrative 3,350,880 2,827,227 19,125,091
------------ ------------ --------------
Total operating expenses 14,901,454 11,355,606 61,991,002
------------ ------------ --------------
Operating loss (13,338,489) (10,323,162) (57,700,445)
INTEREST INCOME 358,598 373,646 1,984,207
INTEREST EXPENSE (2,874,835) (509,236) (4,722,977)
DEBT CONVERSION AND EXTINGUISHMENT EXPENSE (10,011,780) -- (10,011,780)
------------ ------------ --------------
NET LOSS (25,866,506) (10,458,752) (70,450,995)
DEEMED DIVIDEND TO PREFERRED SHAREHOLDERS (1,953,479) (689,416) (4,470,815)
------------ ------------ --------------
NET LOSS APPLICABLE TO COMMON SHAREHOLDERS $(27,819,985) $(11,148,168) $ (74,921,810)
============ ============ ==============
BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (1.50) $ (0.66)
============ ============
WEIGHTED AVERAGE SHARES USED
IN COMPUTING BASIC AND DILUTED
NET LOSS PER COMMON SHARE 18,490,810 16,881,743
============ ============
The accompanying notes are an integral part of these statements.
5
UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARY
(a development-stage company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Ended September 30, Period from Inception
-------------------------------- (June 17, 1994) to
2002 2001 September 30, 2002
------------ ------------ ---------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(25,866,506) $(10,458,752) $(70,450,995)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 1,332,825 815,848 3,171,353
Amortization of intangibles 1,271,304 1,271,304 3,427,175
Amortization of discounts on Convertible Promissory Note 13,044,467 509,236 14,734,168
Issuance of Common Stock options and warrants for services 423,962 46,754 1,491,954
Issuance of Common Stock and warrants in connection
with amended research and license agreements -- -- 3,120,329
Issuance of Common Stock in connection with
executive compensation 16,150 -- 439,370
Issuance of redeemable Common Stock, Common Stock
options and warrants in connection with
development agreement 3,830,753 1,694,824 6,777,046
Issuance of Common Stock options and warrants for
Scientific Advisory Board -- 539,757 1,947,369
Acquired in-process technology -- -- 350,000
(Increase) decrease in assets:
Accounts Receivables (58,868) (111,208) (599,723)
Other current assets (350,907) (330,335) (277,742)
Other assets (13,638) 17,347 (33,763)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses 278,467 (851,902) 1,673,464
Payable to related parties -- -- 250,000
Deferred revenue 634,167 350,000 1,084,167
------------ ------------ ------------
Net cash used in operating activities (5,457,824) (6,507,127) (32,895,828)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment (1,066,496) (657,744) (7,319,180)
Purchase of intangibles -- -- (25,750)
Purchase of short-term investments (3,087,506) (4,661,915) (29,053,413)
Proceeds from sale of short-term investments 4,819,585 3,540,000 26,265,368
Restricted cash 15,162,414 -- --
------------ ------------ ------------
Net cash provided by (used in) investing activities 15,827,997 (1,779,659) (10,132,975)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Common Stock 7,644,337 1,348,984 30,621,088
Proceeds from issuance of Preferred Stock -- 4,496,477 9,137,079
Proceeds from issuance of Convertible Promissory Note -- 15,000,000 15,000,000
Repayment of Convertible Promissory Notes (8,399,997) -- (8,399,997)
Proceeds from the exercise of Common Stock options and warrants 17,750 1,127,510 14,193,222
Principal payments on capital lease (3,128) (2,805) (10,322)
------------ ------------ ------------
Net cash provided by (used in) financing activities (741,038) 21,970,166 60,541,070
------------ ------------ ------------
INCREASE(DECREASE) IN CASH AND CASH EQUIVALENTS 9,629,135 13,683,380 17,512,267
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 7,883,132 7,701,040 --
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 17,512,267 $ 21,384,420 $ 17,512,267
============ ============ ============
The accompanying notes are an integral part of these statements.
6
UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARY
(a development-stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1. BACKGROUND
Universal Display Corporation (the "Company"), a development-stage company, is
engaged in the research, development and commercialization of organic light
emitting diode ("OLED") technology for potential flat panel display
applications.
The Company, formerly known as Enzymatics, Inc. ("Enzymatics"), was incorporated
under the laws of the Commonwealth of Pennsylvania on April 24, 1985 and
commenced its current business activities on August 1, 1994. The New Jersey
corporation formerly known as Universal Display Corporation ("UDC") was
incorporated under the laws of the State of New Jersey on June 17, 1994. UDC was
renamed UDC, Inc. on December 14, 1995 and is a wholly-owned subsidiary of the
Company.
Research and development of the OLED technology is being conducted at the
Advanced Technology Center for Photonics and Optoelectronic Materials at
Princeton University and at the University of Southern California ("USC") (on a
subcontract basis with Princeton University), pursuant to a Sponsored Research
Agreement dated August 1, 1994, as amended (the "1994 Sponsored Research
Agreement"), originally between the Trustees of Princeton University ("Princeton
University") and American Biomimetics Corporation ("ABC"), a privately held
Pennsylvania corporation and affiliate of the Company. In October 1997, the
Company entered into a new 5-year Sponsored Research Agreement with Princeton
University and USC (the "1997 Sponsored Research Agreement") for research and
development of the OLED technology (Note 3). In the second quarter of 2002, the
Company amended the 1997 Sponsored Research Agreement with Princeton providing,
among other things, for an additional five-year term, extending it through July
31, 2007. Pursuant to a license agreement dated August 1, 1994 (the "1994
License Agreement") between Princeton University and ABC, assigned to the
Company by ABC in June 1995, the Company has a worldwide exclusive license to
manufacture and market products based on Princeton University's pending patent
application relating to the OLED technology and the right to obtain a similar
license to inventions conceived or discovered under the 1994 Sponsored Research
Agreement and to sublicense such rights. In October 1997, the Company amended
the 1994 License Agreement (the "1997 Amended License Agreement") to modify
certain terms of its license thereunder (Note 3).
The Company is also engaged in research, development and commercialization
activities at its 21,000 square foot facility leased in Ewing, New Jersey. In
1999 the Company entered into a lease for 11,000 square feet. The Company moved
its operations to this facility in the fourth quarter of 1999. In the second
quarter of 2001, the Company signed a lease for an additional 10,000 square
feet.
The Company is a development-stage entity with no significant operating activity
to date. Expenses incurred have primarily been in connection with research and
development funding and activities, obtaining financing and administrative
activities. The developmental nature of the activities is such that significant
inherent risks exist in the Company's operations. Completion of the
commercialization of the Company's technology will require funds substantially
greater than the Company currently has available. There is no assurance that
such financing will be available to the Company, on commercially reasonable
terms or at all. The Company anticipates, based on management's internal
forecasts and assumptions relating to its operations, that it has sufficient
cash, cash equivalents and short term investments to meet its obligations
through at least the end of its current fiscal year, which will end December 31,
2002. To the extent that Princeton University's research efforts do not result
in the development of commercially viable applications for the OLED technology,
the Company will not have any meaningful operations. Even if a product
incorporating the OLED technology is developed and introduced into the
marketplace, additional time and funding may be necessary before significant
revenues are realized. While the Company funds the OLED technology research, the
scope of and technical aspects of the research and the resources and efforts
directed to such research are subject to the control of Princeton University and
the principal investigators.
7
Accordingly, the Company's success is largely dependent on the efforts of
Princeton University and the principal investigators. The 1997 Sponsored
Research Agreement provides that if certain of the principal investigators are
unavailable to continue to serve as principal investigators, because such
persons are no longer associated with Princeton University or otherwise, and
successors acceptable to both the Company and Princeton University are not
available, the 1997 Sponsored Research Agreement will terminate.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INTERIM FINANCIAL INFORMATION
In the opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly the financial position as of September
30, 2002, the results of operations for the three and nine months ended
September 30, 2002 and 2001, and cash flows for the nine months ended September
30, 2002 and 2001. Interim results may not be indicative of the results that may
be expected for the year. While management believes that the disclosures
presented are adequate to make the information not misleading, these unaudited
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and the notes thereto in the Company's latest
year-end financial statements, which were included in the Company's Annual
Report on Form 10-K for the year ended December 31, 2001.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Universal Display
Corporation and its wholly owned subsidiary, UDC, Inc. All significant
intercompany transactions and accounts have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers all highly liquid investments 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 accumulated other comprehensive income
(loss). Gains or losses on securities sold are based on the specific
identification method. The Company reported accumulated unrealized holding
losses of $3,479 and $3,925 at September 30, 2002 and December 31, 2001,
respectively. Comprehensive loss, which includes the net loss and change in
unrealized holding losses, was $25,866,060 and $11,142,876 for the nine months
ended September 30, 2002 and 2001, respectively and $14,991,898 and $2,595,316
for the three months ended September 30, 2002 and 2001, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash and cash equivalents, short-term investments, restricted cash, accounts
receivables, prepaid and other current assets, accounts payable and accrued
expenses are reflected in the accompanying financial statements at fair value
due to the short-term nature of those instruments. The carrying amounts of
capital lease obligations approximate fair value at the balance sheet dates.
8
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciated on a straight-line
basis over 3 to 7 years for office and lab equipment and furniture and fixtures,
and over the lesser of the lease term or useful life for leasehold improvements.
Repair and maintenance costs are charged to expense as incurred. Additions and
betterments are capitalized.
ACQUIRED TECHNOLOGY
Acquired technology consists of acquired license rights for patents and know-how
obtained from PD-LD, Inc. and Motorola (Note 4). The intangible asset consists
of the following:
September 30, 2002 December 31, 2001
------------------ -----------------
PD-LD, Inc. $ 1,481,250 $ 1,481,250
Motorola 15,469,468 15,469,468
--------------- ---------------
16,950,718 16,950,718
Less: Accumulated amortization (3,427,175) (2,155,871)
--------------- ---------------
Acquired technology, net $ 13,523,543 $ 14,794,847
=============== ===============
Acquired technology is amortized on a straight-line basis over its estimated
useful life of ten years.
LONG-LIVED ASSETS
Management continually evaluates whether events and circumstances have occurred
that indicate that the remaining estimated useful life of long-lived assets may
warrant revision or that the remaining balance may not be recoverable. When
factors indicate that long-lived assets should be evaluated for possible
impairment, the Company uses an estimate of the related undiscounted cash flows
in measuring whether the long-lived asset should be written down to fair value.
Measurement of the amount of the impairment will be based on generally accepted
valuation methodologies, as deemed appropriate. As of September 30, 2002 and
December 31, 2001, management believes that no revision to the remaining useful
lives or write-down of long-lived assets is required.
NET LOSS PER COMMON SHARE
Basic earnings per share (EPS) is computed by dividing the net loss by the
weighted-average number of Common shares outstanding for the period. Diluted EPS
reflects the potential dilution from the exercise or conversion of securities
into Common Stock. For the three and nine months ended September 30, 2002 and
2001 the effects of the exercise of 7,872,683 and 6,645,527 outstanding stock
options and warrants, respectively, were excluded from the calculation of
diluted EPS as the impact would be antidilutive.
REVENUE RECOGNITION AND DEFERRED REVENUE
Contract revenues represent reimbursements by government entities for all or a
portion of the research and development costs the Company incurs related to the
contracts. Revenues are recognized proportionally as the research and
development costs are incurred.
9
Development chemical revenues represent the sale of evaluation chemicals to
potential OLED display manufacturers. The chemicals are used to evaluate the
Company's proprietary OLED material system. Revenues are recognized at the time
of shipment and passage of title.
The Company also receives non-refundable advanced license payments in connection
with certain joint development and technology evaluation agreements it enters
into. These payments are deferred until a license agreement is executed, or
negotiations have ceased, and there is no likelihood of executing a license
agreement. Revenues will be recorded over the expected life of the licensed
technology, if there is an effective license agreement, or at the time the
negotiations show no likelihood of an executable license agreement.
RESEARCH AND DEVELOPMENT
Expenditures for research and development are charged to operations as incurred.
RECENT ACCOUNTING PRONOUNCEMENTS
In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards ("SFAS") No. 143, "Accounting for
Asset Retirement Obligations" ("SFAS No. 143"), which is effective for fiscal
years beginning after June 15, 2002. SFAS No. 143 addresses accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and retirement of assets. The Company does not expect the adoption of
SFAS No. 143 to have an impact on the consolidated financial statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
The Statement updates, clarifies and simplifies existing accounting
pronouncements relating to gains and losses from extinguishment of debt and
certain lease modifications. Certain provisions of SFAS No. 145 are effective
for fiscal years beginning after May 15, 2002, while other provisions are
effective for transactions occurring after May 15, 2002. The Company has adopted
SFAS No. 145 early, and as a result, the loss on extinguishment of debt (Note
6), has been classified within continuing operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability is
incurred and nullifies EITF 94-3. The Company plans to adopt SFAS No. 146 in
January 2003. Management believes that the adoption of this statement will not
have a material effect on the Company's future results of operations or
financial position.
STATEMENT OF CASH FLOW INFORMATION
The following non-cash investing and financing activities occurred:
Nine Months Ended
September 30,
---------------------------------
2002 2001
----------- ------------
Common Stock, options and warrants
to acquire Common Stock in development
agreement (Note 5) $ 3,830,753 $ 1,694,824
Common Stock issued upon conversion
of Notes (Note 6) 7,999,998 -
Common Stock issued for the purchase
of equipment - 43,776
----------- -----------
$11,830,751 $ 1,738,600
=========== ===========
10
STOCK OPTIONS
The Company accounts for its stock option plans under Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees," under which no
compensation cost has been recognized for options issued to employees at fair
market value on the date of grant. In 1995, the Financial Accounting Standards
Board issued SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No.
123 established a fair value based method of accounting for stock-based
compensation plans. SFAS No. 123 requires that a company's financial statements
include certain disclosures about stock-based employee compensation 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.
NOTE 3. SPONSORED RESEARCH AGREEMENT WITH PRINCETON UNIVERSITY
On October 9, 1997, the Company entered into the 1997 Sponsored Research
Agreement with Princeton University and entered into a 1997 Amended License
Agreement with Princeton University and USC amending its 1994 License Agreement
with Princeton University. The 1997 Sponsored Research Agreement continues and
expands the sponsored research, which commenced in 1994, under which the Company
funds additional research and development work at Princeton University (and at
USC under a subcontract with Princeton University) in OLED technology. The 1997
Sponsored Research Agreement requires the Company to pay up to $4.4 million
commencing on July 31, 1998 through July 31, 2002. In April 2002, the Company
amended the 1997 Sponsored Research Agreement with Princeton providing, among
other things, for an additional five-year term. The Company is obligated to pay
Princeton up to $7.5 million commencing on July 31, 2002 through July 31, 2007.
The amounts due to Princeton University are charged to expense when paid by the
Company. Under the 1997 License Agreement, the Company has the worldwide
exclusive and perpetual license to manufacture and market products based on
Princeton University's and USC's pending patent applications relating to the
OLED technology and conceived under the 1994 and 1997 Sponsored Research
Agreements, and the right to sublicense its rights under the 1997 License
Agreement. The Company is required to pay Princeton University a royalty of 3%
of the Company's net sales of products utilizing the OLED technology. In
circumstances where the Company sublicenses the OLED technology (except to
affiliates), the royalty required to be paid by the Company was reduced in the
1997 License Agreement from 50% to 3%. These royalty rates are subject to upward
adjustments under certain conditions. Under the 1997 Amended License Agreement,
the Company is obligated to pay to Princeton University minimum royalties of
$100,000 per year. Accordingly, the Company accrued $75,000 of research and
development expense for the nine months ended September 30, 2002 for the minimum
royalties due.
In order to protect Princeton University's tax exempt status, the 1997 License
Agreement provides that Princeton University may, in its sole discretion,
determine whether, pursuant to the provisions of the Tax Reform Act of 1986, it
is required to negotiate the royalties and other considerations payable to
Princeton University on products not reasonably conceivable by the parties at
the time of execution of the 1994 License Agreement. If Princeton University
reasonably concludes that the consideration payable by the Company for any such
product is not fair and competitive, Princeton University may exercise its right
to renegotiate the royalties and other consideration payable by the Company for
any such product prior to the expiration of 180 days after the first patent is
filed or other intellectual property protection is sought. The Company has the
right to commence arbitration proceedings to challenge Princeton University's
exercise of such renegotiation rights. If the parties are unable to agree to
royalties and other consideration for such products within a specified period of
time, then Princeton University is free to license to third parties without
repayment of any funds provided under the 1997 Sponsored Research Agreement.
NOTE 4. ACQUIRED TECHNOLOGY
On July 19, 2000, the Company, PD-LD, Inc. ("PD-LD") and Princeton University
entered into a Termination, Amendment and License Agreement whereby the Company
acquired all PD-LD's rights to certain issued and pending patents and technology
known as organic vapor phase deposition ("OVPD") in exchange for 50,000 shares
11
of the Company's Common Stock. Pursuant to this transaction, the Company has
included in its License Agreement with Princeton the exclusive license to all
Princeton patents and technology related to OVPD, whether developed pursuant to
its research agreements with Princeton or otherwise. The acquisition of these
patents had a fair value of $1,481,250 (Note 2).
On September 29, 2000, the Company entered into a license agreement with
Motorola, Inc. ("Motorola"). Pursuant to the license agreement, the Company
licensed from Motorola 72 US patents, 6 US patent applications, and additional
foreign patents. These patents expire between 2012 and 2018. The Company has the
sole right to sublicense these Motorola patents to manufacturers. As
consideration for the licenses, the Company issued to Motorola 200,000 shares of
Common Stock (valued at $4,412,500), 300,000 shares of Series B Convertible
Preferred Stock (valued at $6,618,750), and a warrant to purchase 150,000 shares
of Common Stock at $21.60 per share. The warrant was exercisable immediately and
will remain exercisable until September 29, 2007. The warrant was recorded at
fair market value of $2,206,234 based on the Black-Scholes option-pricing model
and was recorded as a component of the costs of the acquired technology. The
Company also issued a warrant to acquire 150,000 shares of Common Stock as a
finder's fee in connection with this transaction. The warrant was granted with
an exercise price of $21.60 per share. The warrant was exercisable immediately
upon grant 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 warrants to purchase an aggregate of 300,000 shares of
Common Stock 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). In addition, the Company
will pay to Motorola a royalty based on future sales of products incorporating
OLED technology. Such royalty payments may be made, at the Company's discretion,
either all in cash or (50%) in cash and (50%) in shares of Common Stock. The
number of shares of Common Stock used to pay the royalty portion shall be equal
to 50% of the royalty amount due divided by the average daily closing price per
share of stock over the ten trading days ending two business days prior to the
date the Common Stock is issued.
NOTE 5. COMMON STOCK AND WARRANTS ISSUED IN DEVELOPMENT AND LICENSE AGREEMENT
On October 1, 2000, the Company entered into a five- year Development and
License Agreement with PPG Industries, Inc. ("PPG") to leverage the Company's
OLED flat panel display technology with PPG's expertise in the development and
manufacturing of organic materials. A team of PPG scientists and engineers are
assisting the Company in developing and commercializing its proprietary OLED
material system. In consideration for PPG's services under the agreement, the
Company will issue shares of Common Stock and warrants to acquire Common Stock
to PPG on an annual basis over the period from January 1, 2001 through December
31, 2005. The amount of securities issued is subject to adjustment under certain
circumstances, as described in the agreement.
In accordance with the PPG agreement, the Company issued 3,019 shares of Common
Stock to PPG in February 2002. The additional shares were issued as a result of
the final accounting for actual costs incurred by PPG in 2001. Accordingly, the
Company accrued $27,473 of research and development expense as of December 31,
2001 based on the fair value of the additional shares.
In accordance with the agreement, the Company also issued warrants to PPG to
acquire 121,843 shares of Common Stock as part of the consideration for services
performed during 2001. The warrants were earned during 2001, but were not issued
until February 2002. The number of warrants earned and issued is based on the
number of shares of Common Stock earned by, and issued by the Company to, PPG
during the calendar year.
During the first quarter of 2002 and 2001, the Company issued to PPG 344,379 and
118,824 shares of Common Stock, respectively, as consideration for services
required under the agreement for 2002 and 2001.
12
Under Emerging Issues Task Force Topic D-90, equity instruments that are
conditionally transferred to another party and subject to forfeiture for
non-performance of future goods or services should not be considered issued for
accounting purposes until such time as performance has occurred. Accordingly,
the Company will record the issuance of the shares as they are earned. For the
nine months ended September 30, 2002 and 2001, PPG earned 262,225 and 89,850
shares of the Common Stock, respectively. The Company recorded charges to
research and development expense of $2,078,539 and $1,023,504 during the nine
months ended September 30, 2002 and 2001, respectively, representing the fair
value of the shares earned.
During the nine months ended September 30, 2002 and 2001, the Company also
recorded charges to research and development expense of $1,652,094 and $597,422,
respectively. These charges were recorded based on the estimated fair value of
warrants that were earned by PPG during these periods. The Company determined
the fair value of the warrants earned during 2002 and 2001 using the
Black-Scholes option-pricing model with the following assumptions: (1) risk free
interest rate of 3.250%-5.443% and 4.511%-5.595, (2) no expected dividend yield,
(3) expected life of 7 years, and (4) expected volatility of 94% and 70%,
respectively.
In accordance with the terms of the PPG agreement, on December 14, 2000, the
Company granted options to PPG employees to acquire 26,000 shares of Common
Stock. These options vested over a one-year period, have an exercise price of
$9.44 per share and expire ten years after the date of grant. During the nine
months ended September 30, 2001, the Company recorded a charge of $73,899 to
research and development expense, representing the fair market value, determined
in accordance with the Black-Scholes option-pricing model, of the stock option
awards that were earned. On December 17, 2001, the Company granted options to
purchase an additional 26,333 shares of Common Stock to PPG employees. These
options vest over a one-year period, have an exercise price of $8.56 per share
and expire ten years after the date of grant. During the nine months ended
September 30, 2002, the Company recorded $104,987 in research and development
costs related to these options. On September 23, 2002, the Company granted
options to purchase an additional 30,000 shares to PPG employees. These options
vest over a one-year period, have an exercise price of $5.45 and expire ten
years after the date of grant. The Company recorded $3,109 in research and
development costs related to these options. The Company determined the fair
value of the options earned during the nine months ended September 30, 2002 and
2001 using the Black-Scholes option-pricing model with the following
assumptions: (1) risk free interest rate of 3.7%, 5.421% and 4.767%, (2) no
expected dividend yield, (3) expected life of 10, and (4) expected volatility of
94% and 70%, respectively.
NOTE 6. RESTRICTED CASH AND CONVERTIBLE PROMISSORY NOTES
In August 2001, the Company issued two $7,500,000 Notes, each with a maturity
date of August 22, 2004, in a private placement. The Notes were convertible into
shares of the Common Stock at an initial conversion price of $13.97 per share,
with such conversion price subject to change based on anti-dilution provisions
and other adjustments. In August 2002, the Company completed a registered direct
offering of Common Stock to institutional investors that was deemed dilutive
under the terms of the Notes. As a result, the conversion price of the Notes was
reduced to $5.09. In September 2002, $7,000,002 in principal amount of the Notes
was converted into 1,375,246 shares of Common Stock and $7,999,998 in principal
amount of the Notes was repaid, together with a prepayment premium, established
under the Notes, of $400,000.
The Company's obligations under the Notes were secured by irrevocable letters of
credit issued with a face amount equal to the outstanding principal of the
related Notes. The $15,000,000 in proceeds from the sale of the Notes was
pledged as collateral to the bank issuing the letters of credit. Prior to the
conversion and repayment of the Notes, the $15,000,000 in cash proceeds plus
accrued but unpaid interest had been classified as restricted cash on the
accompanying consolidated balance sheet as of December 31, 2001.
In accordance with APB No. 14, "Accounting for Convertible Debt and Debt Issued
with Stock Purchase Warrants" ("APB No. 14"), the Company determined in August
2001 the relative fair value of the Notes to be $9,857,006. The resulting
original issuance discount ("OID") of $5,142,994 was being amortized as interest
expense, using the effective interest method, over the original maturity period
of three years. During the nine months ended September 30, 2002, the Company
recognized a non-cash charge to interest expense of $1,819,989 for the
amortization of the OID.
13
In accordance with Emerging Issues Task Force ("EITF") No. 00-27, "Application
of Issue No. 98-5 to Certain Convertible Instruments" ("EITF No. 00-27"), and
EITF No. 98-5, "Accounting for Convertible Securities with Beneficial Conversion
Features or Contingently Adjustable Conversion Ratios" ("EITF No. 98-5"), and
after considering the allocation of the proceeds to the Notes, the Company
determined in August 2001 that the Notes contained an initial beneficial
conversion feature ("BCF"). The BCF existed at the commitment date due to the
fact that the carrying value of the Notes, after the initial allocation of the
proceeds, was less than the fair market value of the Common Stock that was
issuable upon conversion. Accordingly, the Company recorded $3,258,468 of BCF in
August 2001 as a debt discount. The BCF debt discount was being amortized as
interest expense, using the effective interest method, over the original
maturity period of three years. During the nine months ended September 30, 2002,
the Company recognized a non-cash charge to interest expense of $1,212,697 for
the amortization of the BCF.
In connection with the August 2002 registered direct offering, the conversion
price of the Notes was reduced to $5.09 per share. In accordance with EITF No.
98-5, the reduction in the conversion price resulted in $7,441,547 of contingent
BCF which was recorded as additional debt discount to be amortized over the
remaining term of the Notes. At the date of the conversion and repayment of the
Notes in September 2002, the $15,000,000 face value of the Notes exceeded the
then carrying value of the Notes as a result of the unamortized OID and BCF. As
a result, the Company recognized a non-cash debt conversion and extinguishment
expense of $10,011,780 upon conversion and repayment of the Notes.
NOTE 7. 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). The Series B shares rank senior to the
Common Stock and any other capital stock of the Company ranking junior to the
Series B as to dividends and upon liquidation, dissolution or winding up. There
are no restrictions upon the Company to create any other class of stock ranking
equivalent or senior to the Series B shares. The Series B shares have a
liquidation value of $21.48 per share, plus accrued and unpaid dividends.
Holders of Series B shares are entitled to that number of votes equal to the
largest of whole shares of Common Stock into which the Series B shares could be
converted on matters which shareholders are generally entitled to vote. The
Series B shareholders are entitled to dividends that are declared or paid to
holders of the Common Stock.
Each share of the Series B is convertible, at the option of the holder, into
such number of fully paid and nonassessable shares of Common Stock as is
determined by dividing the original purchase price by the conversion price
applicable to such share determined on the date the certificate is surrendered
for conversion. Of the 300,000 shares of the Series B, 75,000 shares become
convertible on each of September 29, 2001, 2002, 2003 and 2004, with all
outstanding shares of the Series B being converted automatically into shares of
the Company's Common Stock on September 29, 2004. The conversion price for the
Series B shares is initially the original issuance price per share of the Common
Stock, but is subject to change if the average price of the Common Stock falls
below $12.00 for the 30 trading days ending two business days prior to the
relevant conversion date, regardless of prior changes to the conversion price.
The Company has the option to pay Series B shareholders an amount of cash equal
to the difference between $12.00 and the average price of the Common Stock,
multiplied by the number of shares of Common Stock into which the Series B
shares would be convertible. Two business days prior to the September 29, 2002
and 2001 conversion dates, the Company's average stock price for the preceding
30 trading days was $5.50 and $10.81, respectively. As such, the original
conversion price was adjusted in accordance with the conversion terms of the
Series B, the conversion prices were reduced to $9.85 and $19.35, respectively,
resulting in additional 88,553 and 8,256 shares of Common Stock being issuable
to Motorola upon conversion. The incremental shares issuable upon conversion
were accounted for as a contingent beneficial conversion feature ("CBCF") in
accordance with EITF No. 00-27. The CBCF was measured by multiplying the
incremental shares by the fair value of the Company's Common Stock on the
commitment date of September 29, 2000, which was $22.06. Accordingly, the
Company recorded a CBCF in an amount of $1,953,479 and $182,127 in 2002 and
2001, respectively. The CBCF was treated as a deemed dividend to the Series B
shareholders.
As a result of the deemed dividend in 2002, the following amounts have been
restated in this Form 10-Q/A:
Originally reported Restated
------------------- --------------
Additional paid-in-capital $ 109,876,660 $ 111,830,139
Deficit accumulated during development stage (72,968,331) (74,921,810)
Deemed dividend (three and nine months ended
September 30, 2002) -- 1,953,479
Net loss applicable to Common shareholders
(three months ended September 30, 2002) (14,989,910) (16,943,389)
Basic and diluted net loss per Common
share (three months ended September 30, 2002) (0.78) (0.89)
Net loss applicable to Common shareholders
(nine months ended September 30, 2002) (25,866,506) (27,819,985)
Basic and diluted net loss per Common
share (nine months ended September 30, 2002) (1.40) (1.50)
Deemed dividend (period from inception (June
17, 1994) to September 30, 2002) 2,517,336 4,470,815
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
All statements in this document that are not historical are forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995, subject to risks and uncertainties that could cause Universal Display
Corporation's actual results to differ materially from those projected,
including, but not limited to, statements regarding Universal Display
Corporation's beliefs, expectations, hopes or intentions regarding the future.
Forward-looking statements in this document also include statements regarding
any financial forecasts or market growth predictions. Universal Display
Corporation expressly disclaims any obligation or undertaking to release
publicly any updates or revisions to any forward-looking statements contained
herein to reflect any change in Universal Display Corporation's expectations
with regard thereto or any change in events, conditions, or circumstances on
which any such statements are based. It is important to note that actual
outcomes and Universal Display Corporation's actual results could differ
materially from those in such forward-looking statements. Factors that could
cause actual results to differ materially include risks and uncertainties such
as: uncertainties relating to developments and advances in display technologies,
including OLED, TOLED, FOLED, SOLED and PHOLED technology; the development and
expansion of applications for OLED technology; the success of Universal Display
Corporation and its development partners in accomplishing technological
advances; the ability of Universal Display Corporation to enter into alliances
with product manufacturers; product development, manufacturing, and marketing
acceptance; uncertainties related to cost and pricing of Universal Display
Corporation products; dependence on collaborative partners; and other
competition, risks relating to intellectual property of others and the
uncertainties of patent protection.
GENERAL
Since inception, the Company has been exclusively engaged, and for the
foreseeable future expects to continue to be exclusively engaged, in funding and
performing research and development activities related to the OLED technology
and attempting to commercialize such technology. To date, the Company has not
generated any significant revenues and does not expect to generate any
meaningful revenues for the foreseeable future and until such time, if ever, as
it successfully demonstrates that the OLED technology is commercially viable for
one or more flat panel display applications and enters into license agreements
with third parties with respect to the OLED technology. The Company has incurred
significant losses since its inception, resulting in an accumulated deficit of
$74,921,810 at September 30, 2002. The rate of loss is expected to increase as
the Company's activities increase and losses are expected to continue for the
foreseeable future and until such time, if ever, as the Company is able to
achieve sufficient levels of revenue from the commercial exploitation of the
OLED technology to support its operations.
RESULTS OF OPERATIONS
Three Months Ended September 30, 2002 Compared to Three Months Ended
September 30, 2001
The Company had a net loss applicable to Common shareholders of $16,943,389 (or
$0.89 per share) (restated) for the quarter ended September 30, 2002 compared to
a loss of $2,600,608 (or $0.15 per share) for the same period in 2001. In the
quarter ended September 30, 2002, 82% ($13,879,480) of the net loss was
attributed to three non-cash items, including a charge of $10,948,025 for the
amortization of discounts, conversion and repayment on convertible promissory
notes (Note 6), a charge of $977,976 for the issuance of Common Stock, options
and warrants to purchase Common Stock to PPG in connection with a development
agreement (Note 5), and a charge of $1,953,479 related to the adjustment of the
conversion price on the Series B (Note 7). In the same period in 2001, 39%
($750,250) of the net loss was attributed to two non-cash items, including a
charge of $509,236 for the amortization of discounts on convertible promissory
notes (Note 6), and a charge of $241,014 for the issuance of Common Stock,
options and warrants to purchase Common Stock to PPG in connection with a
development agreement (Note 5).
The Company earned $331,138 from contract research revenue in the quarter ended
September 30, 2002 compared to $436,801 for the same period in 2001. In the
quarter ended September 30, 2002, contract research revenue consisted of: (i)
15
$151,907 recognized under a 24-month, $2,977,471 Phase I contract received from
the Defense Advanced Research Project Agency (DARPA), (ii) $157,630 recognized
under a two-year U.S. Department of Defense (DoD) Phase II SBIR Army Contract,
(iii) $19,455 recognized under a 9-month, $100,000 Phase I contract received by
the U.S. Department of Energy (DoE), and (iv) $2,146 recognized under a 9-month,
$100,000 Phase I contract received by the DoE. In the same period in 2001,
contract research revenue consisted of: (i) $281,117 recognized under an
18-month, $2,977,471 Phase I contract received from Defense Advanced Research
Project Agency (DARPA), (ii) $38,459 recognized under a two-year, $400,000 Phase
II contract from the National Science Foundation (NSF) under the Small Business
Technology Transfer Program, and (iii) $117,225 recognized under a two-year DoD
Phase II Small Business Innovation Research (SBIR) Army Contract.
The Company also earned $241,875 from the sale of evaluation chemicals to
potential OLED display manufacturers during the quarter ended September 30,
2002. The chemicals are used to evaluate the Company's proprietary OLED material
system. In the same period in 2001, the Company earned $132,432 in chemical
sales.
Research and development costs were $3,933,777 for the quarter ended September
30, 2002 compared to $1,203,473 for the same period in 2001. For the quarter
ended September 30, 2002, research and development expenses consisted of: (i)
costs incurred of $1,875,111 for the development and operations conducted in the
Company's facility, (ii) costs incurred of $342,030 for patent applications,
prosecutions and other intellectual property rights, (iii) costs incurred of
$314,892 to the Company's Research Partners (Note 3) under the 1997 Sponsored
Research Agreement and 1997 Amended License Agreement, (iv) non-cash charges of
$977,976 incurred in connection with the development agreement with PPG (Note
5), and (v) non-cash charges of $423,768 for the amortization of the Company's
acquired technology (Note 2 and Note 4). Research and development costs in the
same period in 2001 consisted of: (i) payments of $139,777 to the Company's
research partners (Note 3) under the 1997 Sponsored Research Agreement, (ii)
costs incurred of $256,813 for patent applications, prosecutions, and other
intellectual property rights, (iii) costs incurred of $1,315,080 for the
development and operations conducted in the Company's facility, (iv) non-cash
charges of $241,014 incurred in connection with the development agreement with
PPG (Note 5), (v) non-cash credit of $1,172,979 recorded for warrants and
options previously issued to the Scientific Advisory Board members, and (vi)
non-cash charges of $423,768 for the amortization of the Company's acquired
technology (Note 2 and Note 4).
Interest expense, excluding costs related to the debt conversion and debt
extinguishment, was $651,325 for the quarter ended September 30, 2002, compared
to $509,236 for the same period in 2001. The increase is primarily due to the
amortization of original issuance discount and beneficial conversion feature on
the convertible promissory note issued on August 22, 2001 (Note 6).
In September 2002, $7,000,002 of the $15,000,000 convertible promissory Notes
were converted into shares of Common Stock and the remainder was repaid. At the
date of conversion and repayment, the $15,000,000 face value of the Notes
exceeded the then carrying value due to unamortized OID and BCF. As a result,
the Company recognized a non-cash debt conversion and extinguishment expense of
$10,011,780 upon the conversion and repayment of the Notes (Note 6). In the same
period in 2001, there were no such expenses.
Nine Months Ended September 30, 2002 Compared to Nine Months Ended
September 30, 2001
The Company had a net loss applicable to Common shareholders of $27,819,985 (or
$1.50 per share) (restated) for the nine months ended September 30, 2002,
compared to $11,148,168 (or $0.66 per share) for the same period in 2001. In the
nine months ended September 30, 2002, 68% ($18,828,699) of the net loss was
attributed to three non-cash items, including a charge of $13,044,467 for the
amortization of discounts, conversion and repayment on convertible promissory
notes (Note 6), a charge of $3,830,753 for the issuance of Common Stock, options
and warrants to purchase Common Stock to PPG in connection with a development
agreement (Note 5), and a charge of $1,953,479 related to the adjustment of the
conversion price on the Series B (Note 7). In the same period in 2001, 21%
($2,204,060) of the net loss was attributed to two non-cash items, including a
charge of $509,236 for the amortization of discounts on convertible promissory
notes (Note 6), and a charge of $1,694,824 for the issuance of Common Stock,
options and warrants to purchase Common Stock to PPG in connection with a
development agreement (Note 5).
16
The Company earned $1,143,197 from contract research revenue for the nine months
ended September 30, 2002 compared to $891,714 for the same period in 2001. In
the nine months ended September 30, 2001, contract research revenue consisted
of: (i) $652,133 recognized under a 24-month, $2,977,471 Phase I contract
received from the DARPA, (ii) $132,000 recognized under a subcontract received
from Princeton University, pursuant to an 18-month, $700,000 contract Princeton
received from DARPA, (iii) $267,512 recognized under a two-year DoD Phase II
SBIR Army Contract, and (iv) $69,951 under an 11-month, $69,951 Phase I contract
received from the US Department of Army, (v) $19,455 recognized under a 9-month,
$100,000 Phase I contract received by the DoE, and (vi) $2,146 recognized under
a 9-month, $100,000 Phase I contract received by the DoE. In the same period in
2001, contract research revenue consisted of: (i) $619,603 recognized under an
18-month, $2,977,471 Phase I contract received from DARPA, (ii) $105,537
recognized under a two-year, $400,000 Phase II contract from the National
Science Foundation (NSF) under the Small Business Technology Transfer Program,
(iii) $7,878 recognized under a DoD Phase I, SBIR contract which is completed at
this time, (iv) $161,651 recognized under a two-year DoD Phase II SBIR Army
Contract, and (v) a $2,955 charge against revenue for an overpayment on the
final costs of a subcontract under a 3-year, $3 million contract Princeton
University received from DARPA.
The Company also earned $419,768 from the sale of evaluation chemicals to
potential OLED display manufacturers during the nine months ended September 30,
2002. The chemicals are used to evaluate the Company's proprietary OLED material
system. In the same period in 2001, the Company earned $140,730 in chemical
sales.
Research and development costs were $11,550,574 for the nine months ended
September 30, 2002 compared to $8,528,379 for the same period in 2001. For the
nine months ended September 30, 2002, research and development expenses
consisted of: (i) costs incurred of $4,927,797 for the development and
operations conducted in the Company's facility, (ii) costs incurred of $876,274
for patent applications, prosecutions and other intellectual property rights,
(iii) costs incurred of $644,446 to the Company's research partners (Note 3)
under the 1997 Sponsored Research Agreement and the 1997 Amended License
Agreement, (iv) non-cash charges of $3,830,753 incurred in connection with the
development agreement with PPG (Note 5), and (v) non-cash charges of $1,271,304
for the amortization of the Company's acquired technology (Note 2 and Note 4).
Research and development costs in the same period in 2001 consisted of: (i)
payments of $568,955 to the Company's research partners (Note 3) under the 1997
Sponsored Research Agreement, (ii) costs incurred of $684,065 for patent
applications, prosecutions, and other intellectual property rights, (iii) costs
incurred of $3,769,474 for the development and operations conducted in the
Company's facility, (iv) non-cash charges of $1,694,824 incurred in connection
with the development agreement with PPG (Note 5), (v) non-cash charge of
$539,757 recorded for warrants and options previously issued to the Scientific
Advisory Board members, and (vi) non-cash charges of $1,271,304 for the
amortization of the Company's acquired technology (Note 2 and Note 4).
Interest expense, excluding costs related to the debt conversion and debt
extinguishment, was $2,874,835 for the nine months ended September 30, 2002,
compared to $509,236 for the same period in 2001. The increase is primarily due
to the amortization of original issuance discount and beneficial conversion
feature on the convertible promissory note issued on August 22, 2001 (Note 6).
In September 2002, $7,000,002 of the $15,000,000 convertible promissory Notes
were converted into shares of Common Stock and the remainder was repaid. At the
date of conversion and repayment, the $15,000,000 face value of the Notes
exceeded the then carrying value due to unamortized OID and BCF. As a result,
the Company recognized a non-cash debt conversion and extinguishment expense of
$10,011,775 upon the conversion and repayment of the Notes (Note 6). In the same
period in 2001, there were no such expenses.
In September 2002, the Company adjusted the conversion price for 75,000 shares
of the Series B, in accordance with the conversion terms of the Series B (Note
7). The adjustment resulted in a contingent beneficial conversion feature valued
at $1,953,479, which the Company treated as a dividend for the nine months ended
September 30, 2002. In the same period in 2001, the Company recorded a similar
dividend in the amount of $182,127.
17
The conversion features of the Series C Convertible Preferred Stock issued on
August 22, 2001 resulted in a beneficial conversion feature valued at $689,416,
which the Company treated as a dividend for the nine months ended September 30,
2001. As a result of the dividend, net loss applicable to common stockholders
was $11,148,168 (or $0.66 per share) for the nine months ended September 30,
2001. As the Series C was converted into Common Stock on December 5, 2001, there
were no such deemed dividends in the nine months ended September 30, 2002.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2002, the Company had cash and cash equivalents of
$17,512,267, short-term investments of $2,784,566, compared to cash and cash
equivalents of $7,883,132, short-term investments of $4,516,199 and restricted
cash of $15,162,414 at December 31, 2001. During the nine months ended September
30, 2002, the Company received non-refundable cash payments of $716,667 in
connection with joint development and technology evaluation agreements.
During the nine months ended September 30, 2002, cash used in operating
activities was $5,457,824 as compared to $6,507,127 for the same period in 2001.
The decrease in use of cash in operating activities was due to a decrease in
accounts receivable and an increase to accounts payable, accrued expenses and
deferred revenues.
In September 2002, $7,000,002 of convertible promissory Notes were converted
into 1,375,246 shares of Common Stock, with the balance of $7,999,998 of the
Notes being repaid. As a result, the Company has received $6,180,000 of cash
(after costs associated with the conversion and repayment) previously restricted
in use and no longer has restricted cash as of September 30, 2002.
In August and September 2002, the Company completed registered direct offerings
(the "Offerings") for 1,277,014 and 383,452 shares of Common Stock at $5.09 and
$5.41 per share, respectively. The completion of the Offerings resulted in
proceeds to the Company of $8,064,338, net of $510,138 in costs associated with
the completion of the Offerings.
In the fourth quarter of 2001, the Company commenced construction on the
expansion of its current location in Ewing, New Jersey. The expansion was
completed in the first quarter of 2002. As of September 30, 2002, the Company
had incurred costs of $1,921,936 relating to the construction and purchase of
equipment for the expansion.
The Company anticipates, based on management's internal forecasts and
assumptions relating to its operations (including assumptions regarding working
capital requirements of the Company, the progress of research and development,
the availability and amount of other sources of funding available to Princeton
University for research relating to the OLED technology and the timing and costs
associated with the preparation, filing and prosecution of patent applications
and the enforcement of intellectual property rights), that it has sufficient
cash, cash equivalents and short term investments to meet its obligations
through at least the current fiscal year. Management believes that potential
additional financing sources for the Company include long-term and short-term
borrowings, public and private sales of the Company's equity and debt securities
and receipt of cash upon the exercise of warrants. The 1997 Sponsored Research
Agreement requires the Company to pay up to $4.4 million to Princeton University
from July 1998 through July 2002. In April 2002, the Company amended the 1997
Sponsored Research Agreement with Princeton providing, among other things, for
an additional five-year term. The Company is obligated to pay Princeton up to
$7.5 million commencing on July 31, 2002 through July 31, 2007. From inception
of the Sponsored Research Agreement with Princeton University in 1994, through
September 30, 2002, $4,771,534 of this commitment has been funded. Pursuant to
its development and license agreement with PPG, the Company is to issue shares
of Common Stock, on an annual basis, in consideration of the services provided
by PPG. In certain circumstances, the Company may also be required to pay cash
to PPG for such services. Substantial additional funds will be required in the
future for the research, development and commercialization of OLED technology,
obtaining and maintaining intellectual property rights, working capital and
other purposes, the timing and amount of which is difficult to ascertain. There
can be no assurance that additional funds will be available when needed, on
commercially reasonable terms or at all.
18
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not utilize financial instruments for trading purposes and
holds no derivative financial instruments, which could expose the Company to
significant market risk. The Company's primary market risk exposure with regard
to financial instruments is to changes in interest rates, which would impact
interest income earned on investments.
ITEM 4. CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and Chief Financial Officer have
concluded, based on an evaluation conducted within 90 days prior to the filing
date of this Quarterly Report on Form 10-Q, that the Company's disclosure
controls and procedures have functioned effectively so as to provide those
officers the information necessary to evaluate whether:
(i) this Quarterly Report on Form 10-Q contains any untrue statement of a
material fact or omits to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this Quarterly Report on Form
10-Q, and
(ii) the financial statements, and other financial information included in this
Quarterly Report on Form 10-Q, fairly present in all material respects the
financial condition, results of operations and cash flows of the Company as of,
and for, the periods presented in this Quarterly Report on Form 10-Q.
There have been no significant changes in the Company's internal controls or in
other factors since the date of the Chief Executive Officer's and Chief
Financial Officer's evaluation that could significantly affect these internal
controls, including any corrective actions with regard to significant
deficiencies and material weaknesses.
PART II. OTHER INFORMATION
ITEM 1. NONE
ITEM 2. Changes in Securities/Use of Proceeds
(a) None
(b) None
(c) None.
(d) None
ITEM 3. NONE
ITEM 4. NONE
ITEM 5. NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS:
19
99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(B) REPORTS ON FORM 8-K:
1. Current Report on Form 8-K, filed with the Commission on July 30, 2002,
reporting Items 4 and 7, and describing a change in the Company's independent
auditors.
2. Current Report on Form 8-K, filed with the Commission on August 7, 2002,
reporting Items 5 and 7, and containing as an exhibit the Company's prospectus
supplement, dated August 5, 2002, relating to the sale by the Company of
1,277,014 shares of its Common Stock at $5.09 per share.
20
CERTIFICATION
I, Sherwin I. Seligsohn, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Universal Display
Corporation (the "registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
the registrant's board of directors (or persons fulfilling the equivalent
function):
(a) All significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: March 27, 2003 /s/ Sherwin I. Seligsohn
----------------------------
Sherwin I. Seligsohn
Chief Executive Officer
21
CERTIFICATION
I, Sidney D. Rosenblatt, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Universal Display
Corporation (the "registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
the registrant's board of directors (or persons fulfilling the equivalent
function):
(a) All significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: March 27, 2003 /s/ Sidney D. Rosenblatt
---------------------------------
Sidney D. Rosenblatt
Executive Vice President, Chief
Financial Officer, Treasurer and
Secretary
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Amendment No. 1 to Form 10-Q to be signed on its
behalf by the undersigned, thereunto duly authorized.
UNIVERSAL DISPLAY CORPORATION
/s/ Sidney D. Rosenblatt
Date: March 27, 2003 -------------------------------
Sidney D. Rosenblatt
(Executive Vice President, Chief
Financial Officer, Treasurer and
Secretary)
23