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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to ______________
Commission File Number 1-12031
UNIVERSAL DISPLAY CORPORATION
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2372688
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Three Bala Plaza East
Suite 104
Bala Cynwyd, Pennsylvania 19004
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (610) 617-4010
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock (par value $0.01 per share)
----------------------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No ___
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will 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-KSB or any
amendment of this Form 10-KSB [ ]
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The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing sale price of Common Stock reported by The
Nasdaq Stock Market on March 17, 1999, was approximately $22,734,452. For the
purposes of calculation, all executive officers and directors of the Company and
all beneficial owners of more than 10% of the Company's stock (and their
affiliates) were considered affiliates. As of March 17, 1999, the Registrant had
outstanding 10,348,073 shares of Common Stock.
Documents Incorporated by Reference
Portions of the Company's Proxy Statement to be filed with the Securities and
Exchange Commission for the Annual Meeting of Shareholders to be held on June
23, 1999 are incorporated by reference into Part III of this report.
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TABLE OF CONTENTS
PART 1
ITEM 1. BUSINESS
ITEM 2. PROPERTIES
ITEM 3. LEGAL PROCEEDINGS
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
EXECUTIVE OFFICERS OF THE REGISTRANT
PART II
ITEM 5. MARKET FOR THE REGISTRANTS COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
ITEM 7. FINANCIAL STATEMENTS
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE
EXCHANGE ACT
ITEM 10. EXECUTIVE COMPENSATION
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
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This document contains certain forward-looking statements that are subject to
risks and uncertainties. Forward-looking statements include certain information
relating to the flat panel display industry, OLED technology, strategy, markets,
research, development, manufacturing, intellectual property, competition, and
properties, as well as information contained elsewhere in this Report where
statements are preceded by, followed by or include the words "believes,"
"expects", "anticipates", "potential" or similar expressions. For such
statements, the Company claims the protection of the safe harbor for
forward-looking statements contained in the Private Securities Litigation Reform
Act of 1995. Actual events or results may differ materially from those discussed
in forward-looking statements as a result of various factors, including without
limitation, those discussed elsewhere in this Report and in the documents
incorporated herein by reference.
PART I
ITEM 1. BUSINESS
General
Universal Display Corporation (the "Company") is engaged in the research,
development and commercialization of Organic Light Emitting Diode ("OLED")
technology for use in flat panel displays and other applications. The research
is being performed by Princeton University and the University of Southern
California ("USC") (collectively "Research Partners") pursuant to a certain
Sponsored Research Agreement funded by the Company (See: Business- "Research").
The Company has the exclusive right to commercialize the technology being
developed pursuant to a certain License Agreement (See: Business- "Intellectual
Property"). The Company's present commercialization strategy is to enter into
licensing arrangements, joint ventures, and other strategic alliances for the
volume manufacturing of products utilizing this technology, the Company does not
presently intend to become a volume manufacturer. The Company anticipates that
its OLED technology, if successfully developed, may have a variety of
applications, including full color, large area, high resolution, high
information content displays, such as laptop and notebook computer screens,
computer monitors and televisions. Potential applications also include
multi-color, and monochrome small area, low information content displays, such
as consumer electronic equipment, vehicular dashboard displays, cellular phones
and other telecommunication displays, computer games, and personal digital
assistants, as well as transparent applications such as head up displays for
automobile windshields.
The Company was incorporated under the laws of the Commonwealth of Pennsylvania
in April 1985 under the name Enzymatics, Inc. ("Enzymatics"). Another
corporation named "Universal Display Corporation" ("UDC") was incorporated under
the laws of the State of New Jersey in June 1994. On June 22, 1995, a
wholly-owned subsidiary of Enzymatics merged with and into UDC. UDC, the
surviving corporation in the Merger, became a wholly-owned subsidiary of
Enzymatics and changed its name to "UDC, Inc." Simultaneously with the
consummation of the Merger, Enzymatics changed its name to "Universal Display
Corporation."
Flat Panel Display Industry
The market for flat panel displays has been driven by a number of market forces,
including, but not limited to, the increasing popularity of portable computers
and other consumer electronic devices, the increasing availability of
information and visual content of electronic formats, the proliferation of
graphical interfaces and emerging multimedia applications and the conversion of
traditional analog displays to digital or graphical displays. Existing products
that use flat panel displays include notebook and laptop computers, portable
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televisions, video cameras, cellular phones, pagers, portable electronic
devices, digital watches, calculators, electronic games and audiovisual
equipment, copiers, fax machines, telephones and answering machines. In
addition, flat panel displays have been utilized in military applications,
including missile controls, ground support and communications equipment and
avionics.
The Company believes that competition in this market, particularly for full
color, large area, high resolution, high information content displays is based
upon image and color quality, viewing angle, power requirements, cost and
manufacturability. The dominant technology for displays today is the cathode ray
tube ("CRT"), the type of technology in most televisions and computer monitors.
The dominant technology today for flat panel displays is liquid crystal display
("LCD") technology, the type of technology in most laptop computers. The Company
believes LCD technology has certain limitations, such as a limited viewing
angle, limited scalability, narrow temperature ranges, low contrast and inferior
image and color quality when compared to CRT displays. The Company believes that
flat panel displays utilizing its OLED technology, if successfully developed,
will provide image and color quality, brightness, contrast, scalability and
viewing angles comparable to CRT displays, and be manufacturable from light
weight, low cost materials and require a relatively low power source.
The Company's OLED Technology
OLED technology is an emerging innovative technology and the Company is not
aware of any full color, flat panel displays utilizing OLED technology currently
being marketed and sold, although there are numerous companies engaged in
research and development efforts respecting OLED technology. Pioneer Corporation
of Japan is currently marketing and selling a monochrome OLED device for
automotive applications. The Company believes that its OLED technology, if fully
developed, will have the capability to address many of the limitations of LCD
and other developing technologies.
Light emitting diodes ("LED's") are solid-state semiconductor devices that emit
light when electrical current passes through them. The color of light emitted
depends on the bandgap of the semiconductor material; narrow bandgap materials
emit light in the red/orange range and wide bandgap materials emit green or blue
light. Traditional LEDs are created from inorganic semiconductors. The OLED
technology currently under development by the Company and its research partners
at Princeton University and USC utilizes a new type of LED created from organic
materials. Presently, the Company's OLED technology is designed around four
technology platforms: transparency, flexibility, vertically stacked pixels, and
lasing.
The Company believes that flat panel displays utilizing its OLED technology, if
successfully developed, will provide image and color quality, brightness,
contrast and viewing angles comparable or superior to CRT displays and superior
to LCD; will be manufacturable from light weight, low cost materials; will
demonstrate efficiency in converting electrical power into light and require
very low voltage for operation, which will make the OLED technology compatible
for a variety of flat panel display applications which require light weight and
portability; and will be scaleable for use in large area, high resolution, high
information, full color, flat panel displays.
One technology platform being researched by the Company and its Research
Partners is based upon the ability to create a transparent organic display. In
the March 7, 1996 issue of the scientific journal Nature, the researchers at
Princeton University and USC announced the laboratory demonstration of the first
transparent, thin film organic light emitting device, ("TOLED") which is
believed to be the crucial first step toward realizing high-definition,
full-color organic displays. In addition, it provides the ability to develop
head up, transparent
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and high contrast displays using organic materials. In December 1997, a U.S.
patent was issued respecting aspects of the TOLED technology. See
"Business--Intellectual Property"
A second technology platform being researched by the Company and its Research
Partners is based upon the vertically stacked pixel structure. In the June 27,
1997 issue of the scientific journal Science, the researchers at Princeton
University and USC announced the laboratory demonstration of an independently
controlled, tunable three color organic light emitting device employing a novel
vertically stacked pixel architecture ("SOLED") which stacks the red, green and
blue pixels on top of each other, rather than side by side as in CRTs and LCD's,
theoretically providing for very high image resolution, since one pixel can
occupy the same space as three or more pixels would in a side by side
architecture. The SOLED, which was made possible by the creation of the TOLED,
permits the independent tuning of color, greyscale and intensity and is expected
to allow an individual pixel to emit red, blue and green, either at the same
time or separately. Combinations of such colors create additional colors so that
each individual pixel will be capable of producing a full range of colors. In
1998, four U.S. patents were issued respecting aspects of the SOLED technology.
See: "Business--Intellectual Property"
A third technology platform being researched by the Company and its Research
Partners is the ability to fabricate organic displays on flexible substrates. In
the February 1, 1997 issue of the scientific journal, Optics Letters, the
researchers at Princeton University and USC announced the laboratory
demonstration of an OLED deposited on a flexible plastic film ("FOLED"). Flat
panel displays are commonly built on glass. The Company believes that this is
the first time that small molecule organic layers have been deposited on a
flexible plastic substrate, flexibility being a property that was previously
believed to be unique to polymer materials. This development may also allow the
potential for fabricating FOLED products using low cost "roll to roll"
processing methods. In 1998, one U.S. Patent was issued respecting aspects of
FOLED technology.
A fourth technology platform being researched by the Company and its Research
Partners is based upon the ability to fabricate an optically pumped organic
laser. In the September 25, 1997 issue of the scientific journal Nature, the
researchers at Princeton University and USC announced what they believed to be
the first evidence of lasing from vacuum deposited thin films of organic
molecules. The Company believes this is a significant first step towards the
realization of a electrically pumped solid state lasers based on organic thin
films
While significant advances have been made in the research on OLEDs being
sponsored by the Company, substantial additional research and development work
needs to be performed before products utilizing this technology are manufactured
and sold, including issues of operating life, reliability, the development of
additional and more fully saturated colors, integration with drive electronics
and issues related to scalability into a production environment and cost
effective fabrication technologies for monochrome, transparent, flexible and
full color, large area and small area applications. The development of an
electrically pumped laser is also necessary before products based on the organic
laser are manufactured and sold.
There can be no assurance that the necessary research and development work will
be successfully completed and that the Company or its Licensees will
successfully commercialize any products based upon its proprietary technology.
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Commercialization Strategy and Markets
The Company's present commercialization strategy is to continue the research and
development of OLED technology and to license the technology or enter into joint
ventures or other strategic relationships with experienced manufacturers (who
may have much of the needed infrastructure already in place) and users of
display products for the manufacture, distribution and sale of OLED display
products or laser products. The Company does not presently intend to become a
volume manufacturer.
The Company believes that an initial market may be for low information content
applications using segmented or character displays such as for cellular phones,
instrumentation displays, or consumer electronics. These applications may be
multicolor or monochrome. There are also potential markets for a transparent
device, for example, as head-up displays on vehicle windshields. The Company
also believes that the OLED technology under development could also have
significant applicability for small, full color displays, such as for personal
digital assistants, projection displays, viewfinders in camcorders, video
phones, hand held computers and numerous industrial, medical and military uses.
The Company also believes that the technology has potential application in large
area, full color displays such as laptop computers, desktop computers and
televisions and in numerous defense-related markets. The Company believes that
an electrically pumped organic semiconductor laser could have applications in a
number of markets, including fiber-optic communications, audio compact discs
(CDs), CD-ROM drives, DVD Discs, DVD-ROM's, laser printers, rewritable optical
storage drives, bar code scanners and digital printing presses.
There can be no assurance that the Company will be able to enter into
appropriate licensing, joint ventures or other strategic relationships, or that
the terms of such relationships, if entered into, would be favorable to the
Company.
The Company is part of a team that includes Princeton University, the University
of Southern California, and Hughes Research Laboratories that was awarded a $3
million research contract from the U.S.Department of Defense Advanced Research
Projects Agency ("DARPA") to fund the development of "Multi-Color
Ultralightweight Organic Light Emitting Diode (OLED) Displays." The three year
contract commenced September 1, 1997 and the Company expects to receive
approximately $700,000 for its part of the project relating principally to the
fabrication of prototypes and reliability improvements. As of December 31, 1998
the Company has recognized $262,638 in revenue related to DARPA.
In September 1997, the Company and Princeton University were jointly awarded a
$100,000 Phase I grant by the National Science Foundation ("NSF") under the
Small Business Technology Transfer Program for further development of its OLED
technology principally related to more fully saturated colors. The Company
completed the Phase I grant and has submitted a Phase II proposal for additional
funding from the NSF.
The Company is a member of the United States Display Consortium ("USDC"), a
cooperative industry/government effort aimed at developing an infrastructure to
support a North American flat panel display infrastructure. The USDC's role is
to provide a common platform for flat panel display manufacturers, developers,
users and the manufacturing equipment and supplier base. It has more than 130
members, as well as support from DARPA. The Company is one of 16 members on the
Governing Board of USDC.
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Research and Development
Research relating to the OLED technology is being conducted at Princeton
University's Advanced Technology Center for Photonics and Optoelectronic
Materials and at the USC Synthetic Materials Laboratories (on a subcontract
basis with Princeton University). In October 1997, the Company entered into a
new five year Sponsored Research Agreement (the "1997 Sponsored Research
Agreement") for research activities related to Organic Light Emitters, which
continues and expands the scope of the Sponsored Research Agreement dated August
1, 1994 (the "1994 Sponsored Research Agreement"). In October 1997, the Company,
Princeton University and USC also entered into an Amended License Agreement (the
"1997 License Agreement). See "Business--Intellectual Property". The development
of commercially viable applications for the OLED technology is principally
dependent on the success of the research efforts of Dr. Stephen Forrest and Dr.
Mark Thompson (the "Principal Investigators") conducted pursuant to such
agreements. The scope and technical aspects of the research and the resources
and efforts directed to such research is subject to the control of Princeton
University and the Principal Investigators. In addition to the Sponsored
Research Agreement, UDC currently has 5 engineers working as guest researchers
at Princeton University's Manufacturing Technologies Development facility, where
they are engaged in fabricating prototypes and product and process development.
The Company paid Princeton University $125,842 in 1998 pursuant to the 1997
Sponsored Research Agreement. The 1997 Sponsored Research Agreement requires the
Company to pay up to $4.4 million to Princeton University from July 1998
thorough July 2002, which period is subject to extension. The 1997 Sponsored
Research Agreement provides that if Dr. Forrest is unavailable to continue to
serve as a Principal Investigator, either because he is no longer associated
with Princeton University or otherwise, and a successor acceptable to both the
Company and Princeton University is not available, Princeton University has the
right to terminate the 1997 Sponsored Research Agreement. The Company believes
that additional research and development efforts are required for the
development of products based upon the OLED technology. See "Business--The
Company's OLED Technology". Loss to the Company of the Principal Investigators'
services or termination of the 1997 Sponsored Research Agreement would have a
material adverse effect on the Company.
Intellectual Property
The Company's rights to the OLED technology are governed by the 1997 Sponsored
Research Agreement and the 1997 License Agreement. Pursuant to such agreements,
all patents and other intellectual property rights relating to the OLED
technology are the property of Princeton University, or USC, as applicable, and
the Company is the worldwide exclusive licensee.
Ten patents have been issued to Princeton University and the University of
Southern California by the U.S. Patent and Trademark Office in connection with
the Sponsored Research. Princeton University and USC have filed approximately 40
additional patent applications relating to the OLED technology in the United
States, and have filed for intellectual property protection internationally. In
addition, the Company has obtained an exclusive worldwide royalty-free license
from USC (the "USC License") to manufacture and market products based on
inventions claimed in a patent issued to USC in May 1994, relating to, among
other things, a method of depositing ultra-thin, very smooth, ordered organic
layers using vacuum deposition.
Under an Interinstitutional Agreement between Princeton University and USC,
Princeton University manages the intellectual property rights being developed
pursuant to the 1994 and 1997 Sponsored Research Agreement
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and licensed to the Company pursuant to the 1997 License Agreement, and the
Company is required to reimburse Princeton University for all costs incurred in
filing, prosecuting and maintaining patent applications and patents.
The Company has the worldwide exclusive license to manufacture and market
products based on such patents, pending patent applications and any future
patent applications and inventions conceived or discovered under the 1997
Sponsored Research Agreement, and to sublicense those rights. In circumstances
where the Company sublicenses the OLED technology (except to affiliates), or
sells products utilizing the OLED technology, the Company is required to pay to
Princeton University a royalty in the amount of 3% of the Company's net
sublicense fees or net sales of products utilizing the OLED technology.
There can be no assurance that patents applied for will be obtained or that any
such patents will afford the Company and Princeton University commercially
significant protection of its OLED technology. In addition, the patent laws of
other countries may differ from those of the United States as to the
patentability of the OLED technology and the degree of protection afforded.
Other companies and institutions may independently develop equivalent or
superior technologies and may obtain patent or similar rights with respect
thereto. There are a number of other companies and organizations that have been
issued patents and are filing additional patent applications relating to OLED
technology including Eastman Kodak Company and the companies described in
"Competition" below. There can be no assurance that the exercise of the
Company's licensing rights respecting its OLED technology being developed by
Princeton University and USC will not infringe on the patents of others. In the
event of infringement, the Company and Princeton University could, under certain
circumstances, be required to obtain a license or modify its methods or other
aspects of the OLED technology. Under the 1997 License Agreement, the Company
has the right to prosecute at it's own expense any infringement of the patent
rights. Princeton is entitled to 23% of the net proceeds, if any, received from
final judgments in infringement actions respecting the patent rights.
In connection with the 1997 License Agreement and the 1997 Sponsored Research
Agreement, the Company issued to Princeton University 140,000 shares of Common
Stock and 10 year warrants to purchase 175,000 shares of common stock at an
exercise price of $7.25 per share. The Company also issued to USC 60,000
shares of Common Stock and 10 year warrants to purchase 75,000 shares of common
stock at an exercise price of $7.25 per share. Under the 1997 License Agreement,
the Company is required to use commercially reasonable efforts to bring the OLED
technology to market. This requirement is deemed satisfied provided the Company
performs its obligations under the 1997 Sponsored Research Agreement, and, upon
expiration or termination thereof, the Company invests a minimum of $800,000 per
year in research, development, commercialization or patenting efforts respecting
the OLED technology. Princeton University has the right to terminate the 1997
License Agreement in certain specified circumstances, and prior to any
termination, all disputes under the 1997 License Agreement and the 1997
Sponsored Research Agreement are subject to mediation and arbitration, except
those relating to the validity, construction or effect of patents.
The United States government, through DARPA, has provided funding to Princeton
University and the Company for research activities related to certain aspects of
its OLED technology. In the event that all or certain aspects of its OLED
technology developed (if any) from the Company's funding to Princeton University
is deemed to fall within the planned and committed activities of DARPA's
funding, the federal government, pursuant to federal law, could have certain
rights relating to the OLED technology, including a license to practice or have
practiced on its behalf any such technology and, if the federal government
determines that the Company has not taken effective steps to achieve practical
application of such technology in a field of use in a reasonable time, require
the Company to grant licenses to other parties
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in any such field of use. In addition, the federal government's rights could
restrict the Company's ability to market the OLED technology to the federal
government for military and other applications which could have a material
adverse effect on the Company. There can be no assurance as to which aspects of
the OLED technology the federal government has any rights and the extent of such
rights. Continued funding of Princeton University's research activities by the
federal government, which is anticipated, may give the federal government rights
to aspects of the OLED technology developed in the future.
In order to protect Princeton University's tax exempt status, the 1997 License
Agreement provides that Princeton University may, in its sole discretion,
determine whether, pursuant to the provisions of the Tax Reform Act of 1986, it
is required to negotiate the royalties and other considerations payable to
Princeton University on products not reasonably conceivable by the parties at
the time of execution of the 1994 License Agreement. If Princeton University
reasonably concludes that the consideration payable by the Company for any such
product is not fair and competitive, Princeton University may exercise its right
to renegotiate the royalties and other consideration payable by the Company for
any such product prior to the expiration of 180 days after the first patent is
filed or other intellectual property protection is sought. The Company has the
right to commence arbitration proceedings to challenge Princeton University's
exercise of such renegotiation rights. If the parties are unable to agree to
royalties and other consideration for such products within a specified period of
time, then Princeton University is free to license third parties without
repayment of any funds provided under the 1994 Sponsored Research Agreement.
The Company and Princeton University may also rely on proprietary know-how and
trade secrets and employ various methods to protect concepts, ideas and
documentation of their technology. However, such methods may not afford complete
protection, and there can be no assurance that others will not independently
develop similar know-how or obtain access to the Company's or Princeton
University's know-how, trade secrets, concepts, ideas and documentation.
Competition
The display industry is characterized by intense competition. CRTs currently
dominate the television and desktop computer monitor market and improvements in
CRTs have further increased display quality. Flat panel displays have been
developed and are in commercial use in certain applications where the weight,
power requirements, and bulky size of the CRT inhibit its use. Flat panel
displays have been available for a significant period of time and a variety of
advancements in flat panel displays have been made over the last several years.
However, flat panel displays with the capabilities necessary to replace CRTs in
all applications have not been developed.
The flat panel display market is currently dominated by products utilizing LCD
technology and is expected to be dominated by LCD technology for the foreseeable
future. The Company believes that LCDs have certain limitations, such as a
limited viewing angle, limited scalability, low response rate, low contrast and
inferior image and color quality when compared to CRT displays (the current
standard for display quality). LCDs are also more expensive to produce than
CRTs. However, compared to CRTs, LCD displays are smaller, have lower power
requirements (leading to longer battery life), emit no measurable radiation, are
not affected by magnetic fields generated by speakers or VCRs and have uniform
brightness throughout the screen. Numerous companies, however, are making
substantial investments in, and conducting research to improve these
characteristics of LCD technology.
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Several other flat panel display technologies have recently been developed or
are being developed, such as field emissive, inorganic electroluminescent,
polymeric light emitting diode, gas plasma, and vacuum fluorescent displays.
Field emissive displays essentially employ an array of miniature CRTs, may be
efficient in converting electrical power into light at a relatively low cost,
but high voltage power sources and high temperature fabrication equipment may be
required. Inorganic electroluminescent displays offer better contrast and
broader viewing angles than LCDs and gas plasma displays, but also use more
power than LCDs and are difficult to view in bright ambient light. Displays
utilizing polymeric light emitting diodes may, if successfully developed, offer
better image and color quality and broader viewing angles than LCDs, but require
improvements in operating life, saturated colors and manufacturing technologies.
Gas plasma displays, used in outdoor signs, some laptop computers and recently
introduced for large screen televisions are durable and reliable, have long
lives and superior video speed (useful in video applications) but have high
power requirements; dot matrix display panels on copiers, microwave ovens and
video cassette recorders, have superior brightness, are inexpensive and are
capable of providing full color, but are difficult to manufacture and have high
power requirements, making them unsuitable for portable products.
The Company believes that each of these developing technologies may have one or
more of the limitations associated with LCD technology or other limitations,
such as lack of reliability, high power requirements (restricting portability),
high production cost and/or difficulty of manufacture. The Company believes that
flat panel displays utilizing its OLED technology, if successfully developed,
will provide image and color quality, brightness, contrast, scalability and
viewing angles comparable to CRT displays, be manufacturable from light weight,
low cost materials and require a relatively low power source.
Numerous domestic and foreign companies have developed or are developing CRT,
LCD, gas plasma and other display technologies. Substantially all of these
competitors, including Sony Corporation, NEC Corporation, Fujitsu Corporation,
Hitachi Corporation, Toshiba Corporation and Samsung Corporation have greater
name recognition and financial, technical, marketing, personnel and research
capabilities than the Company. There can be no assurance that the Company's
competitors will not succeed in developing technologies and applications that
are more cost effective, have fewer display limitations than or have other
advantages as compared to its OLED technology.
In addition, a number of companies, including those mentioned above, and Eastman
Kodak Company, Pioneer Electronic Corporation, Sharp Corporation, Sanyo
Corporation, TDK Corporation, Mitsubishi Chemical Corporation, Seiko-Epson
Corporation and Idemitsu Corporation are engaged in research and development
activities with respect to technology using OLEDs . There can be no assurance
that the Company will be able to compete successfully or develop commercial
applications for its OLED technology.
Employees
The Company has sixteen employees, nine of whom are full-time employees.
Facilities
The Company's corporate offices are located at Three Bala Plaza East, Suite 104,
Bala Cynwyd, Pennsylvania.
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ITEM 2. PROPERTIES
The Company currently leases approximately 2,700 square feet of office space in
Bala Cynwyd, Pennsylvania. The Company also leases approximately 900 square feet
in Princeton, New Jersey, and certain of its employees are guest researchers at
the Princeton University Center for Photonic and Optoelectronic Research,
("POEM") where they are entitled to use the laboratories and facilities. The
Company also leases approximately 620 square feet in Coeur D'Alene, Idaho.
Effective January 1, 1999, the Company has also leased an 11,000 square foot
facility near Princeton, New Jersey.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders in the fourth quarter of
1997.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information with respect to the Company's
executive officers:
Name Age Position
- - ---- --- --------
Sherwin I. Seligsohn 63 Chairman, Chief Executive Officer and
Director
Steven V. Abramson 47 President, Chief Operating Officer and
Director
Sidney D. Rosenblatt 51 Executive Vice President, Chief
Financial Officer, Treasurer,
Secretary and Director
Executive Officers are elected annually and hold office until their successors
are elected and qualified.
Sherwin I. Seligsohn has been Chairman and Chief Executive Officer of
the Company since the Company's inception. He was President of the Company until
May 1996. Mr. Seligsohn founded, and since August 1991 has served as sole
Director, Chairman, President and Secretary of, American Biomimetics Corporation
("ABC"), International Multi-Media Corporation ("IMMC"), and Wireless Unified
Network Systems Corporation ("WUNSC"). He is also Chairman and Chief Executive
Officer of Global Photonic Energy Corporation ("Global"). From June 1990 to
October 1991, Mr. Seligsohn was Chairman Emeritus of InterDigital
Communications, Inc. ("InterDigital"), formerly International Mobile Machines
Corporation. Mr. Seligsohn was the founder of InterDigital and from August 1972
to June 1990 served as its Chairman. Mr. Seligsohn is a member of the Advisory
Board of the Advanced Technology Center for Photonics and Optoelectronic
Materials (POEM) at Princeton University.
Steven V. Abramson joined Universal Display Corporation as President
and Chief Operating Officer in May 1996. He is also a member of the Board of
Directors. Mr. Abramson is also a member of the Board of Directors of Global.
From March, 1992--May, 1996 he was Vice President, General Counsel, Secretary
and Treasurer of Roy F. Weston, Inc. a worldwide environmental consulting and
engineering firm. From 1982-1991 he was with InterDigital, where he held various
positions, including General Counsel, Executive Vice President and General
Manager of the Technology Licensing Division. Mr. Abramson is a member of the
Advisory
12
<PAGE>
Board of the Advanced Technology Center for Photonics and Optoelectronic
Materials (POEM) at Princeton University and a member of the Board of
Governors of the USDC.
Sidney D. Rosenblatt has been Executive Vice President, Chief Financial
Officer, Treasurer and Secretary of the Company since June 1995. He has been a
member of the Board of Directors since May 1996. Mr. Rosenblatt is also
Executive Vice President, Chief Financial Officer, Secretary and Treasurer of
Global, and a member of its Board of Directors. Mr. Rosenblatt is the owner of
and has served as the President of S. Zitner Company from August 1990 through
December 1998. From May 1982 to August 1990, Mr. Rosenblatt served as the Senior
Vice President, Chief Financial Officer and Treasurer of InterDigital. Mr.
Rosenblatt sits on the Board of Directors and Executive Committee for the
Greater Philadelphia Chamber of Commerce, Chairman of the Board for the Small
Business Division of the Greater Philadelphia Chamber of Commerce and sits on
various Boards for non-profit organizations.
PART II
ITEM 5. MARKET FOR THE REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The following table sets forth the high and low sales prices of the
Company's Common Stock as reported by the The Nasdaq Stock Market for the period
indicated. The Company completed its initial public offering of Common Stock on
April 11, 1996, at $5.00 per share.
High Low
Close Close
1996
Second Quarter (from April 11, 1996) 10 1/2 4
Third Quarter 8 4 5/8
Fourth Quarter 6 5/8 4 3/4
1997
First Quarter 7 3/8 3 5/8
Second Quarter 5 3/4 3 7/8
Third Quarter 6 4
Fourth Quarter 7 7/8 4 1/4
1998
First Quarter 6 11/16 4 17/32
Second Quarter 6 17/32 5 1/2
Third Quarter 6 3/4 3 9/16
Fourth Quarter 5 1/8 3 9/16
As of March 17, 1999, there were more than 300 holders of the Company's
Common Stock. The Company's Common Stock is listed on The Nasdaq SmallCap Market
under the symbol PANL.
13
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
Since inception, the Company has been engaged, and for the foreseeable future
expects to continue to be engaged, exclusively in the research and development
and commercialization of its OLED technology for use in flat panel displays and
other applications. To date, the Company has generated minimal revenues and does
not expect to generate any meaningful revenues for the foreseeable future and
until such time, if ever, it successfully demonstrates that its OLED technology
is commercially viable for one or more flat panel display and other applications
and enters into license agreements, joint ventures or strategic alliances with
third parties with respect to the technology. The Company has incurred
significant losses since its inception, resulting in an accumulated deficit of
$13,574,337 at December 31, 1998.
Results of Operations
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
The Company had a net loss of $2,793,842(or $.27 per share) for the year ended
December 31, 1998 compared to a net loss of $5,927,718 (or $.64 per share) for
the year ended December 31, 1997. The decrease in the net loss was primarily
attributable to the decrease in research and development expenses, which in 1997
included a non-cash expense related to the value of Common Stock and warrants
issued to Princeton University and USC in the amount of $3,120,392, or .34 per
share. The Company earned $368,794 from contract research revenue in 1998
compared to $93,605 in 1997. The revenue was derived primarily from a
subcontract with Princeton University pursuant to a 3-year, $3 million contract
Princeton University received from the Defense Advanced Research Projects
Administration, a National Science Foundation grant and a grant from the New
Jersey Commission on Science and Technology.
Research and development expenses were $1,419,394 for the year ended December
31, 1998 compared to $4,207,898 for the year ended December 31, 1997. For the
year ended December 31, 1998, research and development expenses consisted of (i)
payments in the amount of $125,842 to Princeton University under the 1997
Sponsored Research Agreement; (ii) payments in the amount of $630,929 for patent
applications, prosecution and other intellectual property rights; and (iii)
costs in the amount of $662,623 associated with the Company's development team
located at Princeton. Research and development expenses for the same period in
1997 consisted of (i) the issuance of common stock and warrants in connection
with the Company's 1997 Sponsored Research Agreement, which resulted in a
non-cash charge of $3,120,329; (ii) payments in the amount of $347,374 to
Princeton University under the 1994 Sponsored Research Agreement; and (iii)
payments in the amount of $740,195 for patent applications, prosecution, and
other intellectual property rights expenses.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
The Company had a net loss of $5,927,718(or $.64 per share) for the year ended
December 31, 1997 compared to a net loss of $1,768,995 (or $.21 per share) for
the year ended December 31, 1996. The increase in the net loss was primarily
attributable to increased research and development expenses of which $3,120,392,
or .34 per share, was a non-cash expense related to the value of Common Stock
and warrants issued to Princeton University and USC, and increased general and
administrative expenses in 1997 compared to 1996. The Company earned $93,605
from
14
<PAGE>
contract research revenue in 1997 compared to no revenue in 1996. The revenue
was derived primarily from a subcontract with Princeton University pursuant to a
3-year, $3 million contract Princeton University received from the Defense
Advanced Research Projects Administration.
Research and development expenses were $4,207,898 for the year ended December
31, 1997 compared to $948,568 for the year ended December 31, 1996. For the year
ended December 31, 1997, research and development expenses consisted of (i) the
issuance of common stock and warrants in connection with the Company's 1997
Sponsored Research Agreement, which resulted in a non-cash charge of $3,120,329;
(ii) payments in the amount of $347,374 to Princeton University under the 1994
Sponsored Research Agreement; and (iii) payments in the amount of $740,195 for
patent applications, prosecution, and other intellectual property rights
expenses. Research and development expenses for the same period in 1996
consisted primarily of payments to Princeton University under the 1994 Sponsored
Research Agreement.
General and administrative expenses were $1,986,628 for the year ended December
31, 1997 compared to $938,741 for the year ended December 31, 1996. The
increased general and administrative expenses in 1997 compared to 1996 were
primarily related to the increased general and administrative expenses
associated with the hiring of executives, technical personnel, and support staff
and leasing of office space for the Company's headquarters and a non-cash charge
in the amount of $100,000 relating to a Consulting Agreement with the
Underwriter of the Company's 1996 Public Offering.
Liquidity and Capital Resources
As of December 31, 1998, the Company had cash of $1,828,381 and short-term
investments of $527,502 compared to cash of $85,470 and short-term investments
of $4,539,571 at December 31, 1997. During 1997, private placement warrants to
purchase 1,124,000 shares of the Company's Common Stock were exercised,
resulting in net cash proceeds of $3,940,800 to the Company. On April 11, 1996,
the Company completed a public offering of 1,300,000 shares of Common Stock at a
price of $5.00 per share and redeemable warrants to purchase 1,495,000 shares of
Common Stock at an exercise price of $3.50 per share, at a price of $.10 per
warrant. The Company received net cash proceeds of $5,282,665 from the public
offering (excluding $223,263 representing a portion of the offering expenses
previously charged to general and administrative expenses). Net working capital
decreased to $2,429,390 at December 31, 1998 from working capital of $5,003,863
at December 31, 1997, which is the result of the Company using its working
capital to fund operations. The Company's net cash used in operating activities
was $2,247,731; $2,441,698; and $2,370,449 in 1998, 1997 and 1996 respectively.
Non-cash expenses related to the issuance of Common Stock, warrants and options
were $154,247; $3,436,329; and $25,000 in 1998, 1997, and 1996 respectively.
The Company anticipates, based on management's internal forecasts and
assumptions relating to its operations (including assumptions regarding working
capital requirements of the Company, the progress of research and development,
the availability and amount of other sources of funding available to Princeton
University for research relating to the OLED technology and the timing and costs
associated with the preparation, filing and prosecution of patent applications
and the enforcement of intellectual property rights) that it will need
additional cash to meet its obligations for 1999. The Company is currently
negotiating a private sale of equity and also expects the exercise of at least a
portion of the outstanding public warrants, which expire on April 12, 1999. The
Company believes that successful completion of either of the above will provide
adequate resources to meet its obligations during 1999. The 1997 Sponsored
Research Agreement requires the Company to pay up to $4.4 million to Princeton
University from
15
<PAGE>
July 1998 through July 2002, which period is subject to extension. The Company
expects funding under this agreement in 1999 to be less than $1.1 million
maximum per the agreement. Substantial additional funds will be required
for the research, development and commercialization of OLED technology,
obtaining and maintaining intellectual property rights, working capital and
other purposes, the timing and amount of which is difficult to ascertain. There
can be no assurance that additional funds will be available when needed, or if
available, on commercially reasonable terms.
The Company is currently in the process of evaluating its information technology
infrastructure for Year 2000 compliance. The Company does not expect that the
cost to modify such infrastructure to Year 2000 compliance will be material to
its financial condition or results of operations. The Company does not
anticipate any material disruption in its operations as a result of any failure
by the Company to be in compliance.
ITEM 7. FINANCIAL STATEMENTS WITHIN THE 10-KSB
The financial statements and notes thereto of the Company are attached
hereto beginning on page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Information with respect to this item is set forth in the Company's
definitive Proxy Statement (the "Proxy Statement") to be filed with the
Securities and Exchange Commission for the Annual Meeting of Shareholders to be
held on June 23, 1999 under the headings "Nominees for Election as Directors"
and "Compliance with Section 16(a) of the Exchange Act" and is incorporated
herein by reference. Information regarding the Company's executive officers is
included in Part I on page 8 herein.
ITEM 10. EXECUTIVE COMPENSATION
Information with respect to this item is set forth in the Proxy
Statement under the heading "Executive Management Compensation" and is
incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to the ownership of securities of the Company
by certain persons is set forth in the Proxy Statement under the heading
"Principal Shareholders" and is incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to transactions with management and others is
set forth in the Proxy Statement under the heading "Certain Transactions," and
is incorporated herein by reference.
16
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
The following is a list of exhibits filed as part of this Annual Report on Form
10-K. Where so indicated by footnote, exhibits which were previously filed are
incorporated by reference. For exhibits incorporated by reference, the location
of the exhibit in the previous filing is indicated parenthetically, together
with a reference to the filing indicated by footnote.
<TABLE>
<CAPTION>
EXHIBIT INDEX
Exhibit Page
Number Description Number
- - ------- ----------- ------
<S> <C> <C>
3.1 Articles of Incorporation of the Company. (Exhibit 3.1) (1)
3.2 Bylaws of the Company. (Exhibit 3.1) (1)
4.1 Specimen stock certificate representing the Common Stock. (Exhibit 4.1) (3)
4.2 Specimen warrant certificate representing the Warrants. (Exhibit 4.2) (3)
4.3 Form of Public Warrant Agreement. (Exhibit 4.3) (1)
4.4 Form of Underwriter's Warrant Agreement. (Exhibit 4.4) (1)
4.5 Statement of Designations and Preferences of Series A Non-Convertible Preferred Stock. (Exhibit
4.5) (2)
10.1 License Agreement dated August 1, 1994 between The Trustees of Princeton University and American
Biomimetics Corporation. (Exhibit 10.1) (3)
10.2 Amendment to License Agreement (August 1, 1994) dated April 11, 1995 between the Trustees of Princeton
University and American Biomimetics Corporation. (Exhibit 10.2) (2)
10.3 Sponsored Research Agreement dated August 1, 1994 between the Trustees of Princeton University and
American Biomimetics Corporation. (Exhibit 10.3) (3)
10.4 Letter Amendment dated May 5, 1995, between the Trustees of Princeton University and American
Biomimetics Corporation. (Exhibit 10.4) (3)
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
10.5 Amendment to Sponsored Research Agreement (August 1, 1994) dated April 18, 1995 between the
Trustees of Princeton University and American Biomimetics Corporation. (Exhibit 10.5) (2)
10.6 Technology Transfer Agreement dated June 22, 1995 between American Biomimetics Corporation and
Universal Display Corporation. (Exhibit 10.6) (2)
10.7 Assignment and Assumption of License dated June 22, 1995 between American Biomimetics Corporation
and Universal Display Corporation. (Exhibit 10.7) (3)
10.8 Sublicense Agreement and Option dated June 22, 1995 between American Biomimetics Corporation and
Universal Display Corporation. (Exhibit 10.8) (3)
10.9 Assignment and Assumption of Agreement dated August 1, 1995 between the Trustees of Princeton
University and the University of Southern California. (Exhibit 10.9) (2)
10.10 Subcontract No. 341-4014-1 dated August 16, 1995 between the Trustees of Princeton University and
the University of Southern California. (Exhibit 10.10) (3)
10.11 Assignment of 1994 Sponsored Research Agreement dated November 1, 1995 between American
Biomimetics Corporation and Universal Display Corporation. (Exhibit 10.11) (2)
10.12 # Stock Option Agreement dated as of June 23, 1995 between Universal Display Corporation and Thomas
D. Hays, III. (Exhibit 10.12) (2)
10.13 # Stock Option Agreement dated as of June 23, 1995 between Universal Display Corporation and Harvey
Nachman. (Exhibit 10.13) (2)
10.14 Registration Rights Agreement dated as of June 23, 1995 between Universal Display Corporation and
Thomas D. Hays, III. (Exhibit 10.14) (2)
10.15 Registration Rights Agreement dated as of June 23, 1995 between Universal Display Corporation and
Harvey Nachman. (Exhibit 10.15) (2)
10.16 Form of Registration Rights Agreement between Universal Display Corporation and Certain
Subscribers to Purchase Common Stock of Universal Display Corporation. (Exhibit 10.16) (2)
10.17 # Form of Stock Option Agreement dated as of June 23, 1995 between Universal Display Corporation and
Sidney D. Rosenblatt. (Exhibit 10.17) (2)
10.18 # 1992 Stock Option Plan. (Exhibit 10.18) (2)
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
10.19 # 1995 Stock Option Plan. (Exhibit 10.19) (2)
10.20 # Employment Agreement dated as of November 1, 1995 between Universal Display Corporation and
Sherwin I. Seligsohn. (Exhibit 10.20) (2)
10.21 # Form of Services Agreement dated as of December 1, 1995 between Universal Display Corporation and
Dean L. Ledger. (Exhibit 10.21) (2)
10.22 # Form of Stock Option Agreement dated as of June 23, 1995 between Universal Display Corporation and
Sidney D. Rosenblatt. (Exhibit 10.22) (2)
10.23 # Form of Stock Option Agreement dated as of September 1, 1995 between Universal Display Corporation
and Stephen R. Forrest. (Exhibit 10.23) (2)
10.24 # Form of Stock Option Agreement dated as of September 1, 1995 between Universal Display Corporation
and Mark E. Thompson. (Exhibit 10.24) (2)
10.25 # Form of Stock Option Agreement dated as of September 1, 1995 between Universal Display Corporation
and Paul E. Burrows. (Exhibit 10.25) (2)
10.26 License Agreement dated January 26, 1996 between Universal Display Corporation and University of
Southern California. (Exhibit 10.26) (2)
10.27 Letter Agreement dated September 20, 1995 Agreeing to a Royalty Rate between the Trustees of
Princeton University and Universal Display Corporation. (Exhibit 10.27) (2)
10.28 Agreement and Plan of Reorganization dated as of April 6, 1995 between Enzymatics, Inc.,
Enzymatics Merger Subsidiary, Inc. and Universal Display Corporation. (Exhibit 10.28) (2)
10.29 Form of Consulting Agreement between the Universal Display Corporation and Whale Securities Co.,
L.P. (Exhibit 10.29) (2)
10.30 # Warrant Agreement dated April 25, 1996 between the Company and Steven V. Abramson (Exhibit 10.30)
(4)
10.31 Warrant Agreement dated April 25, 1996 between the Company and Sherwin I. Seligsohn (Exhibit
10.31) (4)
10.32 # Warrant Agreement dated April 25, 1996 between the Company and Dean L. Ledger (Exhibit 10.32) (4)
10.33 # Warrant Agreement dated April 25, 1996 between the Company and Sidney D. Rosenblatt (Exhibit
10.33) (4)
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
10.34 1997 Sponsored Research Agreement between the Company and Princeton
University (5)
10.35 1997 Amended License Agreement between the Company, Princeton University and the University of
Southern California (5)
21 Subsidiaries of the Registrant.
23 Consent of Arthur Andersen LLP
27 Financial Data Schedule
</TABLE>
Note: Any of the exhibits listed in the foregoing index not included with this
Annual Report on Form 10-KSB may be obtained without charge by writing to Mr.
Sidney D. Rosenblatt, Corporate Secretary, Universal Display Corporation, Three
Bala Plaza, Suite 104 East, Bala Cynwyd, Pennsylvania 19004.
(b) No reports were filed on Form 8-K.
Explanation of Footnotes to Listing of Exhibits
* Filed herewith
# Management contract or compensatory plan or arrangement
(1) Filed as an Exhibit to Registration Statement (No. 33-80703) on Form
SB-2 filed with the Securities and Exchange Commisson on December 21,
1995
(2) Filed as an Exhibit to Amendment No. 1 to Registration Statement
(No. 33-80703) on Form SB-2 filed with the Securities and Exchange
Commission on March 20, 1996
(3) Filed as an Exhibit to Amendment No. 1 to Registration Statement
(No. 33-80703) on Form SB-2 filed with the Securities and Exchange
Commission on March 20, 1996
(4) Filed as an Exhibit to the Annual Report on Form 10K-SB for the year
ended December 31, 1996 filed with the Securities and Exchange
Commission on March 31, 1996
(5) Filed as Exhibit to the Annual Report on Form 10 KSB for the year ended
December 31, 1997, filed with the Securities and Exchange Commission on
March 31, 1998.
20
<PAGE>
UNIVERSAL DISPLAY CORPORATION
SIGNATURES
Pursuant to the requirements of Section 13 and 15(d) of the Securities Exchange
Act of 1934, Universal Display Corporation has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized:
UNIVERSAL DISPLAY CORPORATION
By: /s/ Sherwin I. Seligsohn
-------------------------------------------------
Sherwin I. Seligsohn
Chairman of the Board and Chief Executive Officer
Date: March 30, 1999
------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities indicated on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ Sherwin I. Seligsohn Chairman of Board and Chief March 30, 1999
- - -------------------------- Executive Officer
Sherwin I. Seligsohn
/s/ Steven V. Abramson President, Chief Operating Officer March 30, 1999
- - -------------------------- and Director
Steven V. Abramson
/s/ Sidney D. Rosenblatt Executive Vice President, Chief March 30, 1999
- - -------------------------- Financial Officer, Treasurer,
Sidney D. Rosenblatt Secretary and Director
/s/ Dean L. Ledger Executive Vice President and Director March 30, 1999
- - --------------------------
Dean L. Ledger
/s/ Camille Naffah Director March 30, 1999
- - --------------------------
Camille Naffah
/s/ Elizabeth Gemmil Director March 30, 1999
- - --------------------------
Elizabeth Gemmil
/s/ Stephen R. Forrest Director March 30, 1999
- - --------------------------
Stephen R. Forrest
</TABLE>
<PAGE>
UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARY
--------------------------------------------
(a development-stage company)
INDEX TO FINANCIAL STATEMENTS
Consolidated Financial Statements of the Company:
Report of Independent Public Accountants F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Shareholders' Equity (Deficit) F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Universal Display Corporation:
We have audited the accompanying consolidated balance sheets of Universal
Display Corporation (a Pennsylvania corporation in the development-stage) and
subsidiary as of December 31, 1998 and 1997, and the related consolidated
statements of operations, shareholders' equity (deficit) and cash flows for each
of the three years in the period ended December 31, 1998 and the period from
inception (June 17, 1994) to December 31, 1998. These 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 generally accepted auditing
standards. 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 consolidated financial position of
Universal Display Corporation and subsidiary as of December 31, 1998 and 1997,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1998 and the period from inception (June
17, 1994) to December 31, 1998, in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company is in the development
stage, has incurred losses since its inception and has a significant accumulated
deficit. These matters raise substantial doubt about the Company's ability to
continue as a going concern. Further, the completion of the commercialization of
the Company's technology will require funds substantially greater than the
Company currently has available. Management plans in regard to these matters are
described in Note 2. The accompanying financial statements do not include any
adjustments relating to the recoverability and classification of recorded asset
amounts or amounts and classifications of liabilities that might result should
the Company be unable to continue as a going concern.
Philadelphia, PA ARTHUR ANDERSEN LLP
March 5, 1999
F-2
<PAGE>
UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARY
--------------------------------------------
(a development-stage company)
CONSOLIDATED BALANCE SHEETS
---------------------------
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
--------------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents (See Note 3) $ 1,828,381 $ 85,470
Short-term investments (See Note 3) 527,502 4,539,570
Contract research receivables 121,941 88,366
Interest receivable - 51,906
Prepaid consulting fee 376,493 428,985
Other current assets 70,393 89,806
--------------- ---------------
2,924,710 5,284,103
--------------- ---------------
PROPERTY AND EQUIPMENT, net of accumulated depreciation
of 67,233 and $39,353 56,211 57,401
DEPOSITS 98,073 76,073
--------------- ---------------
$ 3,078,994 $ 5,417,577
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 495,320 $ 280,240
--------------- ---------------
SHAREHOLDERS' EQUITY
Preferred Stock, par value $0.01 per share, 5,000,000 shares authorized,
Series A Nonconvertible Preferred Stock, par value - -
$.01 per share, 200,000 issued and outstanding
(liquidation value of $7.50 per share or $1,500,000) 2,000 2,000
Common Stock, par value $.01 per share, 25,000,000 shares authorized,
10,312,943 and 10,302,268 shares issued and outstanding,
respectively (see Note 2) 103,130 103,023
Additional paid-in capital 16,052,881 15,812,809
Deficit accumulated during development-stage (13,574,337) (10,780,495)
--------------- ---------------
Total shareholders' equity 2,583,674 5,137,337
--------------- ---------------
$ 3,078,994 $ 5,417,577
=============== ===============
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARY
--------------------------------------------
(a development-stage company)
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
<TABLE>
<CAPTION>
Period from Inception
Year Ended Year Ended Year Ended (June 17, 1994) to
December31, 1998 December 31, 1997 December 31, 1996 December 31, 1997
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
REVENUE:
Contract research revenue $ 368,794 $ 93,605 $ -- $ 462,399
------- ------ --------- -------
OPERATING EXPENSES:
Research and development (See Note 3) 1,419,394 4,207,898 948,568 8,649,599
General and administrative 1,933,976 1,986,628 938,741 5,869,388
--------- --------- ------- ---------
Total operating expenses 3,353,370 6,194,526 1,887,309 14,518,987
--------- --------- --------- ----------
Operating loss (2,984,576) (6,100,921) (1,887,309) (14,056,588)
INTEREST INCOME 190,734 173,203 118,314 482,251
--------- --------- --------- ----------
NET LOSS $(2,793,842) (5,927,718) $(1,768,995) $(13,574,337)
========= ========= ========= ==========
BASIC AND DILUTED NET LOSS PER
COMMON SHARE $ (0.27) $ (0.64) $ (0.21)
==== ==== ====
WEIGHTED AVERAGE SHARES USED IN COMPUTING BASIC
AND DILUTED NET LOSS PER COMMON SHARE 10,310,353 9,327,521 8,287,268
========== ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARY
--------------------------------------------
(a development-stage company)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
---------------------------------------------------------
<TABLE>
<CAPTION>
Series A Nonconvertible
Preferred Stock Common Stock
-------------------------- --------------------------
Shares Amount Shares Amount
---------- --------- ---------- ----------
<S> <C> <C> <C> <C>
BALANCE, INCEPTION - (JUNE 17, 1994) -- $ -- 6,000,000 $ 6,000
Net Loss -- -- -- --
-------- -------- ---------- --------
BALANCE, DECEMBER 31, 1994 -- -- 6,000,000 6,000
Recapitalization by issuance of Common Stock to
Enzymatics, Inc. (Note 2) -- -- 523,268 59,233
Issuance of Common Stock options to former sole
director of Enzymatics, Inc. to satisfy an
Enzymatics, Inc. liability (Note 2) -- -- -- --
Issuance of Series A Nonconvertible Preferred Stock
in connection with assignment of research and
license agreements (Note 2) 200,000 2,000 -- --
Issuance of Common Stock through private Placements,
net of issuance expenses of $50,000 (Note 2) -- -- 1,114,000 11,140
Issuance of Common Stock options (Note 2) -- -- -- --
Net loss -- -- -- --
-------- -------- ---------- --------
BALANCE, DECEMBER 31, 1995 200,000 2,000 7,637,268 76,373
Issuance of Common Stock (Note 2) -- -- 1,300,000 13,000
Issuance of Common Stock warrants (Note 6) -- -- -- --
Net loss -- -- -- --
-------- -------- ---------- --------
BALANCE, DECEMBER 31, 1996 200,000 2,000 8,937,268 89,373
Exercise of private placement warrants -- -- 1,124,000 11,240
Issuance of Common Stock warrants -- -- -- --
Issuance of Common Stock options -- -- -- --
Issuance of Common Stock and warrants in connection
with 1997 Sponsored Research Agreement (Note 4) -- -- 200,000 2,000
Exercise of Common Stock options and warrants -- -- 41,000 410
Net loss -- -- -- --
-------- -------- ---------- --------
BALANCE, DECEMBER 31, 1997 200,000 2,000 10,302,268 103,023
Exercise of private placement warrants -- -- 675 7
Exercise of Common Stock options and public warrants -- -- 10,000 100
Issuance of Common Stock warrants (Note 6) -- -- -- --
Net loss -- -- -- --
-------- -------- ---------- --------
BALANCE, DECEMBER 31, 1998 200,000 $2,000 10,312,943 $103,130
-------- -------- ---------- --------
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
[RESTUBBED FROM PREVIOUS TABLE]
<TABLE>
<CAPTION>
Deficit
Accumulated
Additional During Total
Paid-In Development Shareholders'
Capital Stage Equity (Deficit)
---------- ----------- --------------
<S> <C> <C> <C>
BALANCE, INCEPTION - (JUNE 17, 1994) $ -- $ -- $ 6,000
Recapitalization by issuance of Common Stock to
Enzymatics, Inc. (Note 2) (243,393) -- (184,160)
Issuance of Common Stock options to former sole
director of Enzymatics, Inc. to satisfy an
Enzymatics, Inc. liability (Note 2) 140,000 -- 140,000
Issuance of Series A Nonconvertible Preferred Stock
in connection with assignment of research and
license agreements (Note 2) 348,000 -- 350,000
Issuance of Common Stock through private Placements,
net of issuance expenses of $50,000 (Note 2) 2,166,860 -- 2,178,000
Issuance of Common Stock options (Note 2) 9,950 -- 9,950
Net loss -- (3,072,661) (3,072,661)
----------- ------------ -----------
BALANCE, DECEMBER 31, 1995 2,421,417 (3,083,782) (583,992)
Issuance of Common Stock in Initial Public Offering
on April 11, 1996 (Note 2) 5,492,928 -- 5,505,928
Issuance of Common Stock warrants (Note 6) 25,000 -- 25,000
Net loss -- (1,768,995) (1,768,995)
----------- ------------ -----------
BALANCE, DECEMBER 31, 1996 7,939,345 (4,852,777) 3,177,941
Exercise of private placement warrants 3,929,560 -- 3,940,800
Issuance of Common Stock warrants 528,985 -- 528,985
Issuance of Common Stock options 216,000 -- 216,000
Issuance of Common Stock and warrants in connection
with 1997 Sponsored Research Agreement (Note 4) 3,118,329 -- 3,120,329
Exercise of Common Stock options and warrants 80,590 -- 81,000
Net loss -- (5,927,718) (5,927,718)
----------- ------------ -----------
BALANCE, DECEMBER 31, 1997 15,812,809 (10,780,495) 5,137,337
Exercise of private placement warrants 2,356 -- 2,363
Exercise of Common Stock options and warrants 2,800 -- 2,900
Issuance of Common Stock warrants (Note 6) 234,916 -- 234,916
Net loss -- (2,793,842) (2,793,842)
----------- ------------ -----------
BALANCE, DECEMBER 31, 1998 $16,052,881 $(13,574,337) $2,583,674
=========== ============ ===========
</TABLE>
F-5
<PAGE>
UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARY
--------------------------------------------
(a development-stage company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1998 1997
----------------- -----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,793,842) $(5,927,718)
Depreciation 27,879 27,398
Issuance of Common Stock options and warrants for services 330,575 316,000
Issuance of Common Stock and warrants as consideration in
connection with amended research and license agreements -- 3,120,329
Acquired in-process technology -- --
Adjustments to reconcile net loss to net cash used in
operating activities:
(Increase) decrease in assets:
Contract research receivables (33,575) (88,366)
Receivable from related party 51,906 (51,906)
Other current assets (23,754) (30,715)
Deposits (22,000) 17,346
Increase (decrease) in liabilities:
Accounts payable and accrued expenses 215,080 175,934
Payable to related parties -- --
----------- -----------
Net cash used in operating activities (2,247,731) (2,441,698)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment (26,689) (23,287)
Purchases of short-term investments (270,932) (5,019,570)
Proceeds from sale of short-term investments 4,283,000 2,910,000
----------- -----------
Net cash provided by (used) in investing activities 3,985,379 (2,132,857)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Common Stock and warrants 5,263 4,021,800
----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,742,911 (552,755)
CASH AND CASH EQUIVALENT, BEGINNING OF PERIOD 85,470 638,225
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD: $ 1,828,381 $ 85,470
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
[RESTUBBED FROM PREVIOUS TABLE]
<TABLE>
<CAPTION>
Period from
Inception
(June 17, 1994)
to
1996 December 31, 1997
----------------- -----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,768,995) $(13,574,337)
Depreciation 10,926 67,232
Issuance of Common Stock options and warrants 25,000 505,197
Issuance of Common Stock and warrants in connection with
amended research and license agreements -- 3,120,329
Acquired in-process technology -- 350,000
Adjustments to reconcile net loss to net cash used in
operating activities:
(Increase) decrease in assets:
Contract research receivables -- (121,941)
Receivable from related party -- ---
Other current assets (59,091) 62,768
Deposits (93,419) (98,073)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses (379,394) 451,160
Payable to related parties (105,476) 250,000
----------- ------------
Net cash used in operating activities (2,370,449) (8,987,665)
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES: --
Purchases of equipment (67,294) (123,443)
Purchases of short-term investments (2,430,000) (7,720,502)
Proceeds from sale of short-term investments -- 7,193,000
----------- ------------
Net cash provided by (used) in investing activities (2,497,294) (650,945)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Common Stock 5,505,928 11,466,991
----------- ------------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS 638,185 1,828,381
CASH AND CASH EQUIVALENT, BEGINNING OF PERIOD 40 --
----------- ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD: $ 638,225 $ 1,828,381
=========== ============
</TABLE>
F-6
<PAGE>
UNIVERSAL DISPLAY CORPORATION
(a development-stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BACKGROUND
Universal Display Corporation (the "Company"), a development-stage company, is
engaged in the research and development and commercialization of organic light
emitting diode ("OLED") technology for potential flat panel display
applications.
The Company, formerly known as Enzymatics, Inc. ("Enzymatics"), was incorporated
under the laws of the Commonwealth of Pennsylvania on April 24, 1985 and
commenced its current business activities on August 1, 1994. The New Jersey
corporation formerly known as Universal Display Corporation ("UDC") was
incorporated under the laws of the State of New Jersey on June 17, 1994. See
Note 2.
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. (See Note 4). Pursuant to a license
agreement dated August 1, 1994 (the "1994 License Agreement") between Princeton
University and ABC, assigned to the Company by ABC in June 1995, the Company has
a worldwide exclusive license to manufacture and market products based on
Princeton University's pending patent application relating to the OLED
technology and the right to obtain a similar license to inventions conceived or
discovered under the 1994 Sponsored Research Agreement and to sublicense such
rights. In October 1997, the Company amended the 1994 License Agreement (the
"1997 Amended License Agreement") to modify certain terms of the license (See
Note 4). The Company's Chairman and Chief Executive Officer holds similar
positions in ABC, a company which is controlled by members of his family. See
Notes 2 and 8.
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, obtaining financing and administrative activities. The
developmental nature of the activities is such that significant inherent risks
exist in the Company's operations. 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. Completion of the commercialization of
the Company's technology will require funds substantially greater than the
Company currently has available. Notwithstanding the risks discussed above, the
Company anticipates, based on management's internal forecasts and assumptions
relating to its operations, that it requires funds in addition to its current
cash and short-term investments to meet its obligations for at least 1999, the
current fiscal year. There is no assurance that such financing will be available
to the Company, on commercially reasonable terms or at all. Also, while the
Company funds the OLED technology research, the scope of and technical aspects
of the research and the resources and efforts directed to such research is
subject to the control of Princeton University and the principal investigators.
Accordingly, the Company's success is dependent on the efforts of Princeton
University and the principal investigators. The 1997 Sponsored Research
Agreement provides that if certain of the principal investigators are
unavailable to continue to serve as principal investigators, because such
persons are no longer associated with Princeton University or otherwise, and
successors acceptable to both the Company and Princeton University are not
available, the 1997 Sponsored Research Agreement will terminate.
2. LIQUIDITY:
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As of December 31, 1998, the Company
has an accumulated deficit of $13,574,337. In addition, the Company has incurred
losses since its inception and is subject to those risks associated with
companies in the early stages of development. The completion of the
commercialization of the Company's technology will require funds substantially
greater than the Company currently has available. These matters, among others,
raise substantial doubt about the Company's ability to continue as a going
concern. The Company believes that it requires funds in addition to its current
cash and short-term investments
<PAGE>
on hand to maintain its operating activities through 1999. The Company is
currently working on several alternatives, including the private sale of equity,
to raise the funds required. Also, the Company expects some portion of its
public warrants to be exercised prior to expiration on April 12, 1999.
Management believes that successful completion of the above financing
alternatives will provide sufficient capital to maintain operations through 1999
and into 2000. However, there is no assurance that the Company will be able to
obtain equity financing on favorable terms or at all. If the Company is unable
to secure additional financing, its ability to implement its growth strategy
will be impaired and its financial condition and results of operations are
likely to be materially adversely affected.
3. STOCK TRANSACTIONS, MERGER, RECAPITALIZATION AND PUBLIC OFFERING
On June 22, 1995, a wholly-owned subsidiary of the Company consummated an
Agreement and Plan of Reorganization ("Merger Agreement") with a New Jersey
corporation formerly known as Universal Display Corporation (herein referred to
as "UDC"). At the time of the merger, UDC was engaged in the business which is
currently being conducted by the Company. Prior to the merger, the Company was
known as Enzymatics, an inactive Pennsylvania corporation, and was engaged in a
business separate from and unrelated to that of UDC. Enzymatics had incurred
significant losses since its inception in 1985 and, notwithstanding a public
offering, failed to find significant alternative sources of financing to enable
it to continue its operations on any scale. In June 1994, the shareholders of
Enzymatics approved the sale of substantially all of its assets to a third
party. Management of UDC concluded that merging with a former publicly traded
company, and acquiring access to its shareholder base, would facilitate its
ability to raise additional capital in the private or public markets. Management
of UDC determined that such additional capital would be necessary to fulfill its
financial obligations under the Transfer Agreement (as herein defined) pursuant
to which it obtained certain rights and
7
<PAGE>
UNIVERSAL DISPLAY CORPORATION
(a development-stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
obligations related to the OLED technology, obtain funds to commercialize the
OLED technology, fund the acquisition of additional intellectual property rights
useful to the OLED technology and to fund working capital. As of June 22, 1995,
Enzymatics had 523,268 shares issued and outstanding (after giving effect to a
reverse stock split of 10.9672) which were not actively traded. Pursuant to the
Merger Agreement, the former Enzymatics shareholders received 523,268 shares of
the merged entity's Common Stock. Additionally, Nachman, Hays & Associates
(NHA), a consulting firm, received options to purchase 84,234 shares of the
merged entity's Common Stock at an exercise price of $.29 per share (see Note 6)
as payment of NHA's consulting services in connection with the wind-down of
Enzymatics. These options were issued to satisfy a liability which was reflected
on the balance sheet of Enzymatics on the date of the merger. The sole director
of Enzymatics, is also a principal of NHA.
The merger was treated, for accounting purposes, as a recapitalization of UDC
whereby UDC issued 523,268 shares of Common Stock to the Enzymatics shareholders
and assumed Enzymatics shareholders' deficit of $184,160. The assets and
liabilities of both companies have been recorded at their historical book values
in these financial statements. The assets of Enzymatics consisted of cash and
its liabilities consisted of payables related to the merger and other
professional fees.
Upon consummation of the merger, UDC's shareholders collectively owned
approximately 92% of the outstanding shares of the merged entity, with the
former Enzymatics shareholders retaining the balance of approximately 8%. UDC
was the surviving corporation in the merger, changed its name to UDC, Inc., and,
as a result of the merger, became a wholly-owned subsidiary of Enzymatics. At
the effective time of the merger, Enzymatics changed its name to Universal
Display Corporation. Universal Display Corporation and its wholly owned
subsidiary, UDC, Inc., are herein referred to collectively as the "Company."
Contemporaneous with the merger, the Company and ABC entered into a Technology
Transfer Agreement dated June 22, 1995 (the "Transfer Agreement") pursuant to
which, among other things, ABC assigned the 1994 License Agreement to the
Company, and granted to the Company an exclusive worldwide sublicense to patents
and other intellectual property rights to display technology developed under a
Sponsored Research Agreement dated October 22, 1993 between ABC and Princeton
University (the "1993 Sponsored Research Agreement") in exchange of (i)
reimbursement of ABC's scheduled payments and expenses previously made to
Princeton University under the 1994 Sponsored Research Agreement in the amount
of $674,000 and a payment of $500,000 for the sublicense under the 1993
Sponsored Research Agreement which were charged to research and development
expense (see Notes 3 and 4); (ii) the Company's assumption of ABC's obligation
to pay all future scheduled payments under the 1994 Sponsored Research
Agreement, which were approximately $1,610,000, plus expenses related thereto
estimated to be $500,000 for a total of $2,110,000; and (iii) 200,000 shares of
the Company's Series A Nonconvertible Preferred Stock (see Notes 3 and 6) with a
fair value of $350,000.
Also, contemporaneous with the merger, the Company sold 781,500 units ("Units")
at a price of $2.00 per Unit, in a private placement, which generated proceeds
of $1,513,000, net of offering expenses in the amount of $50,000. Each Unit
consisted of one share of Common Stock and one warrant to purchase one share of
Common Stock at an exercise price of $3.50 per share. Additionally, 125,000
Units with a fair value of $250,000, based upon the price of the Units, were
transferred to a non-affiliate debt holder of ABC to satisfy $250,000 of ABC's
outstanding debt. Therefore, the Company had a receivable of this amount from
ABC. Accordingly, ABC netted this $250,000 receivable against the Company's
payable to related parties account as shown on the accompanying Consolidated
Balance Sheets (see Note 8). In addition, on July 17, 1995, the Company sold an
additional 207,500 Units which generated gross proceeds of $415,000.
On April 11, 1996, the Company consummated a public offering of 1,300,000 shares
of Common Stock at a price of $5.00 per share and redeemable warrants to
purchase 1,495,000 shares of Common Stock at an exercise price of $3.50 per
share, at a price of $.10 per warrant. The Company received net cash proceeds of
$5,282,665 from the public offering (excluding $223,263 representing a portion
of the offering expenses previously charged to general and administration
expenses).
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The consolidated financial statements include the accounts of Universal Display
Corporation and its wholly-owned subsidiary, UDC, Inc. (see Note 3). All
significant intercompany transactions and accounts have been eliminated.
8
<PAGE>
UNIVERSAL DISPLAY CORPORATION
(a development-stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Management's Use of Estimates
The preparation of financial statements in conformity with 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. Investments
are carried at market value, and at December 31, 1997, were classified as
short-term investments. In 1998, all of the Company's investments that were
classified as available for sale pursuant to Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," (SFAS 115) were sold. At December 31, 1997, unrealized holding
gains or losses were not material. The gross proceeds from sales and maturities
of investments were $4,283,000 and $2,910,000 for the year ended December 31,
1998 and 1997, respectively. Gross realized gains and losses for the year ended
December 31, 1998 and 1997 were not material. For the purpose of determining
gross realized gains and losses, the cost of securities sold is based upon
specific identification.
Cash, cash equivalents and short-term investments consisted of the following:
December 31
-------------------------------------
Cash and cash equivalents: 1998 1997
------------------ ---------------
Money market funds and
demand accounts $ 1,828,381 $ 85,470
=========== ===========
Short-term investments:
Certificates of deposit $ 527,502 $ 2,622,014
Corporate bonds -- 1,917,556
----------- -----------
$ 527,502 $ 4,539,570
=========== ===========
Property and Equipment
Property and equipment are stated at cost and depreciated on a straight-line
basis over 3 to 7 years.
Net Loss Per Common Share
The Company applies Statement of Financial Accounting Standards No. 128 ("SFAS
128"), "Earnings per Share" to compute net loss per share. SFAS 128 requires
dual presentation of basic and diluted earnings per share ("EPS") for complex
capital structures on the face of the Statements of Operations. Basic EPS is
computed by dividing net income by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution from the
exercise of conversion of securities into common stock. For the years ended
December 31, 1998, 1997 and 1996 the effects of the exercise of outstanding
stock options and warrants were excluded from the calculation of diluted EPS
because their effect was antidilutive.
9
<PAGE>
UNIVERSAL DISPLAY CORPORATION
(a development-stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income." SFAS
No. 130 establishes standards for reporting and presenting comprehensive income
and its components in a full set of general-purpose financial statements that is
presented with equal prominence as other financial statements. SFAS 130 became
effective for fiscal years beginning after December 15, 1997 and was adopted by
the Company in 1998. As the Company had no other comprehensive income items,
SFAS No. 130 had no effect on the Company's financial statement disclosures.
Segment Reporting
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures About Segments of an
Enterprise and Related Information." This statement establishes additional
standards for segment reporting in the financial statements and is effective for
fiscal years beginning after December 15, 1997. As the Company operates in one
reportable segment, SFAS No. 131 had no effect on the Company's financial
statements.
Contract Research Revenue
Contract research revenues are recognized as the related expenses are incurred.
Research and Development
Expenditures for research and development are charged to operations as incurred.
Research and development expenses consist of the following:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, 1998 December 31, 1997 December 31, 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
Payments made to Princeton University and to University of
Southern California under the 1997 Sponsored Research
Agreement (See Note 5) $ 125,842 $ ----- $ -----
Payments made to Princeton University under the 1994
Sponsored Research Agreement (See Note 3) ----- 347,374 713,815
Patent application expenses 630,929 715,406 234,753
Issuance of 200,000 shares of the Company's Common Stock
and warrants to purchase 250,000 shares of Common Stock
under the 1997 Sponsored Research Agreement (See Note 4) ----- 3,120,329 -----
Other Expenses 662,623 24,789 -----
----------- ----------- ---------
$ 1,419,394 $ 4,207,898 $ 948,568
=========== =========== =========
</TABLE>
Income Taxes
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income
Taxes." SFAS No. 109 requires the liability method of accounting for deferred
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.
10
<PAGE>
UNIVERSAL DISPLAY CORPORATION
(a development-stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. SPONSORED RESEARCH AGREEMENT WITH PRINCETON UNIVERSITY
On October 9, 1997, the Company entered into a new 5-year Sponsored Research
Agreement (the "1997 Sponsored Research Agreement"), with Princeton University
and entered into an Amended License Agreement with Princeton University and USC
amending its 1994 License Agreement with Princeton University (the "1997 Amended
License Agreement"). The 1997 Sponsored Research Agreement continues and expands
the sponsored research which commenced in 1994 under which the Company funds
additional research and development work at Princeton University (and at USC
under a subcontract with Princeton University) in OLED technology. The 1997
Sponsored Research Agreement requires the Company to pay up to $4.4 million
commencing on July 31, 1998 through July 31, 2002, which period is subject to
extension. The amounts due to Princeton University will be expensed when paid by
the Company. Under the 1997 License Agreement, the Company has the exclusive
worldwide license to manufacture and market products, and to sublicense those
rights, based on Princeton University's and USC's pending patent applications
relating to the OLED technology and conceived under the 1994 and 1997 Sponsored
Research Agreements. The Company is required to pay Princeton University a
royalty in the amount of 3% of the Company's net sales of products utilizing the
OLED technology. In circumstances where the Company sublicenses the OLED
technology (except to affiliates), the royalty required to be paid by the
Company was reduced in the 1997 License Agreement from 50% to 3%. These royalty
rates are subject to upward adjustments under certain conditions. In connection
with the 1997 License Agreement and Sponsored Research Agreement, in October
1997, the Company has issued 140,000 common shares and 175,000 warrants to
purchase Common Stock to Princeton University as well as 60,000 common shares
and 75,000 warrants to purchase Common Stock to the University of Southern
California. The Company recorded a charge of $3,120,329 related to the issuance
of the Common Stock and warrants to purchase Common Stock. The value of the
warrants was determined in accordance with Statement of Financial Accounting
Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation." This
charge is included in research and development expenses in the accompanying
Consolidated Statement of Operations.
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
Accounts payable and accrued expenses consist of the following:
December 31, 1998 December 31, 1997
----------------- -----------------
Accrued professional fees $ 158,150 $ 156,857
Other 337,170 123,383
--------- ----------
$ 495,320 $ 280,240
========= ==========
7. SERIES A NONCONVERTIBLE PREFERRED STOCK, STOCK OPTIONS AND WARRANTS:
Series A Nonconvertible Preferred Stock
In 1995, the Company issued 200,000 shares of Series A Nonconvertible Preferred
Stock ("Series A") to ABC (See Notes 3 and 4), which has a liquidation value of
$7.50 per share. Series A holders, as a single class, have the right to elect
two of the Company's Board of Directors. The holders of Series A shares are
entitled to one vote per share on matters which shareholders are generally
entitled to vote. The Series A holders are not entitled to any dividends.
The 200,000 shares of the Company's Series A Nonconvertible Preferred Stock that
were issued in 1997, were valued at $1.75 per share which was based upon an
independent appraisal.
Stock Options
Enzymatics 1992 Stock Option Plan
The stock options granted prior to the merger by Enzymatics under the 1992 Stock
Option Plan and which have been assumed by the Company and after giving effect
to the reverse stock split, were converted into options to purchase 20,538
shares of Common Stock of the Company at exercise prices ranging from $11.74 to
$29.61 per share. All of such options are currently exercisable and expired on
December 31, 1998.
11
<PAGE>
UNIVERSAL DISPLAY CORPORATION
(a development-stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1995 Stock Option Plan
In 1995, the directors of the Company adopted the 1995 Stock Option Plan (the
"1995 Plan"), under which a maximum of 500,000 options may be granted at prices
not less than 100% of the fair market value of the Common Stock on the date of
grant as determined by the Board of Directors . In 1997, the Shareholders
approved the Plan to increase the number of Common shares reserved for the 1995
Plan to 800,000 options. In 1998, the Shareholders approved the Plan to increase
the number of Common shares reserved for the 1995 Plan to 1,200,000 options. The
1995 Plan provides for the granting of both incentive and nonqualified stock
options to employees, officers, directors and consultants of the Company. The
stock options are exercisable over a period determined by the Board of
Directors, but no longer than ten years after the grant date.
In June 1995, the Company granted options to purchase 70,000 shares of Common
Stock to an officer of the Company at an exercise price of $2.00 per share,
which approximated the fair market value of the Common Stock at the grant date.
These options vest as follows: 20,000 options vested immediately upon grant with
the remaining 50,000 options vesting in equal amounts over three years.
Accordingly, as of December 31, 1998, 70,000 options were exercisable. These
options expire in 2005. In addition, in June 1995, the Company granted options
to purchase 5,000 shares of Common Stock to the same officer of the Company at
an exercise price of $.01 per share, all of which were exercised in October
1997. These options vested on the grant date. The Company recorded a charge of
$9,950, which represents the difference between the deemed value of the Common
Stock for accounting purposes and the exercise price of the options at the grant
date. This charge is included in general and administrative expenses in the
accompanying Consolidated Statements of Operations.
In 1995, the Company granted nonqualified stock options to three principal
investigators who are conducting research under the 1994 Sponsored Research
Agreement and the 1993 Sponsored Research Agreement. The Company granted options
to purchase an aggregate of 240,000 shares of Common Stock to the three
principal investigators at an exercise price of $4.00 per share, which
approximated the fair market value of the Common Stock at the grant date. These
options vest as follows: 33% at the grant date with the remaining 67% vesting
over two years. Accordingly, as of December 31, 1998, options to purchase
240,000 shares of Common Stock were exercisable. These options expire in 2005.
In 1996, the Company granted nonqualified stock options to two employees and one
consultant. The Company granted options to purchase an aggregate of 30,000
shares of Common Stock at an exercise price of $4.12 per share, which was the
fair market value of the Common Stock at the date of grant. These options vest
as follows: 10,000 shares at the grant date with the remaining 20,000 shares
vesting over 5 years. During 1997, 6,000 of these options were forfeited when an
employee left the Company. As of December 31, 1998, options to purchase 9,000
shares of Common Stock were exercisable. These options expire in 2006.
In 1997, the Company granted incentive and nonqualfied stock options to several
employees, officers, and principal investigators. The Company granted options to
purchase an aggregate of 271,500 shares of Common Stock at exercise prices
ranging from $4.06 to $5.25 per share, which was the fair market value
of the Common Stock at the date of grant. These options vest either immediately
upon grant or over a five year period. As 55,000 of these options were granted
to non-employee principal investigators, the Company recorded a charge of
$216,000, which represents the value of the options as determined in accordance
with SFAS 123. This charge included general and administrative expenses in the
accompanying Consolidated Statements of Operations. As of December 31, 1998,
options to purchase 233,300 shares of Common Stock were exercisable. These
options expire in 2007.
In 1998, the Company granted nonqualified stock options to several employees.
The Company granted options to purchase an aggregate of 242,047 shares of Common
Stock at exercise prices ranging from $3.75 to $6.22 per share, which was the
fair market value of the Common Stock at the date of grant. These options vest
either immediately upon grant or over a five year period. As of December 31,
1998, options to purchase 181,417 shares of Common Stock were exercisable. These
options expire in 2008.
Other Options
In connection with NHA's services relative to consummation of the merger
discussed in Note 2, in June 1995, the Company granted options to purchase
84,234 shares of Common Stock at an exercise price of $.29 per share to NHA.
These options were used to satisfy a liability reflected on the balance sheet of
Enzymatics on the date of the merger. These options vested 100% upon grant and
15,000 were exercised in 1997. Accordingly, as of December 31, 1998, 59,234
options were exercisable. These options expire in 2005.
12
<PAGE>
UNIVERSAL DISPLAY CORPORATION
(a development-stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes all stock option activity:
<TABLE>
<CAPTION>
1998 1997 1996
---------------------------------- ---------------------------------- -------------------------
Weighted Average Weighted Average Weighted Average
---------------- ---------------- ----------------
Shares Exercise Price Shares Exercise Price Shares Exercise Price
------ -------------- ------ -------------- ------ --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 690,272 $ 4.17 449,772 $3.72 419,772 $3.69
Granted 242,047 $ 4.70 271,500 $4.99 30,000 $4.12
Exercised (10,000) $ 0.29 (25,000) $1.00 -- --
Forfeited (14,538) $20.67 (6,000) $4.12 -- --
-------- ---------- --------
Outstanding at end of year 907,781 $ 4.09 690,272 $4.17 449,772 $3.72
======= ========== =======
Exercisable at end of year 792,951 $ 4.00 604,006 $4.16 316,439 $3.80
======= ========== =======
Available for future grant 377,991 189,500 155,000
Weighted average fair value of
options granted $ 3.60 $3.85 $3.18
====== ===== =====
</TABLE>
The weighted average remaining contractual life for options outstanding at
December 31, 1998, 1997 and 1996 was 8 years.
Common Stock Warrants
In connection with the June 22, 1995 private placement and the July 17, 1995
private placement (See Note 3), the Company issued 906,500 warrants and 207,500
warrants, respectively each warrant entitled the holder to purchase one share of
Common Stock at an exercise price of $3.50 per share. In 1997, all of these
outstanding warrants were exercised.
On April 11, 1996, the Company consummated a public offering of 1,300,000 shares
of Common Stock at a price of $5.00 per share and redeemable warrants to
purchase 1,495,000 shares of Common Stock at an exercise price of $3.50 per
share. These warrants expire April 12, 1999. In connection with the public
offering, the Company issued warrants to its underwriter to purchase up to
130,000 shares of Common Stock at an exercise price of $8.25 per share and
warrants to purchase an additional 130,000 shares of Common Stock at an exercise
price of $3.675 per share. In April 1996, the Company issued warrants to third
parties to purchase up to 578,000 shares of Common Stock at an exercise price of
$4.125 per share.
In August 1996, the Company granted warrants to purchase 20,000 shares of Common
Stock to an individual in exchange for consulting services. These warrants have
an exercise price of $6.00 per share, vest immediately, and expire in August
2006. The Company recorded a charge of $25,000, which represents the value of
the warrant as determined in accordance with SFAS 123. This charge is included
in general and administrative expenses in the accompanying Consolidated
Statements of Operations.
In April 1996, the Company granted warrants to four employees and one consultant
to purchase 925,000 shares of the Company's Common Stock at an exercise price of
$4.125 per share, which approximated the fair market value of the Common Stock
at the date of grant. These warrants vest at 25% at the date of grant and the
remaining 75% over 5 years, provided these employees are employed by the Company
on the vesting date. These warrants expire in 2006.
In 1997, the Company granted warrants to Princeton University and the University
of Southern California under the 1997 Sponsored Research Agreement (see Note 5)
to purchase an aggregate of 250,000 shares of Common Stock at an exercise price
of $7.25 per share, which approximated the fair market value of the Common Stock
at the date of grant. These warrants vest immediately upon grant and expire in
2007. Also in 1997, the Company granted warrants to consultants to purchase
200,000 shares of Common Stock at an exercise price of $4.80 per share. These
warrants vest immediately upon grant and expire in 2002. The Company valued the
warrants in accordance with SFAS 123. The warrants will be expensed over the
three year consulting period. In 1998 and 1997, the Company recorded a charge of
$176,328, $100,000, respectively which is included in general and administrative
expenses in the accompanying Consolidated Statement of Operations. The
unamortized portion of this charge is recorded as prepaid consulting fee on the
accompanying Consolidated Balance Sheet.
In 1998, the Company granted warrants to two employees and two directors to
purchase 400,000 shares of Common Stock at an exercise price of $6.38 per share,
which was the fair market value of the Common Stock at the date of grant. These
warrants vest immediately and expire in 2008. Also in 1998, the Company granted
warrants to two consultants to purchase 125,000 shares
13
<PAGE>
UNIVERSAL DISPLAY CORPORATION
(a development-stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
of Common Stock at exercise prices ranging from $7.00 to $7.25 per share. Of the
125,000 warrants granted, 25,000 warrants were granted to one consultant which
vested immediately. These warrants were valued using the Black- Scholes option
pricing model. Accordingly, the Company recorded a charge to record expense in
the amount of $113,913, which is included in general and administrative
expenses. The remaining 100,000 warrants were granted to another consultant of
which 25,000 vested immediately and 75,000 will vest based upon the Company's
successful entrance into the Taiwanese market. Only the 25,000 which vested were
valued using the Black-Scholes option pricing model. The remaining 75,000 will
be valued upon ultimate determination of performance. As the consulting
agreement is for a period of three years, the Company is recognizing expense
ratably over a three year period. Accordingly, in 1998, the Company recorded a
charge of $40,334, which is included in general and administrative expenses. The
unamortized portion of this charge is recorded as prepaid consulting fee on the
accompanying Consolidated Balance Sheets.
Pro Forma Disclosure for Stock-Based Compensation
The Company accounts for its employee stock-based compensation plans under APB
Opinion No. 25, "Accounting for Stock Issued to Employees." Accordingly, no
compensation expense has been recognized other than the $9,950 charge relating
to 5,000 options granted to an officer in the Company in 1995. In 1995, the
Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS
123 establishes a fair value based method of accounting for stock-based
compensation plans. SFAS 123 requires that an employer's financial statements
include certain disclosures about stock-based employee compensation arrangements
regardless of the method used to account for the plan. 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:
1998 1997 1996
----------------- ----------------- --------------
Net Loss:
As Reported $(2,793,842) $(5,927,718) $(1,768,995)
Pro Forma (5,803,012) (6,985,174) (2,432,979)
Net Loss per Share:
As Reported $(.27) $(.64) $(.21)
Pro Forma $(.56) $(.75) (.29)
The fair value of each option or warrant granted is estimated on the date of
grant using the Black-Scholes option pricing model with the following
assumptions used for grants in 1998, 1997 and 1996, respectively: risk-free
interest rates of 4.7% to 5.7%, 5.9% to 6.7% and 6.6%, expected dividend yields
of zero for each year, expected volatility of 81%, 81% and 80% and expected
lives of 7 years for each year.
Because the SFAS 123 method of accounting has not been applied to options and
warrants granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
8. RESEARCH CONTRACTS
Contract research revenue consists of the following:
Year Ended Year Ended
December 31, 1998 December 31, 1997
----------------- -----------------
Department of Defense Advanced
Research Projects Agency (DARPA) $190,008 $72,630
New Jersey Commission on Science
and Technology (NJCST) 94,521 15,736
National Science Foundation (NSF) 84,265 5,239
-------- --------
$368,794 $93,605
======== =======
14
<PAGE>
UNIVERSAL DISPLAY CORPORATION
(a development-stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. RELATED PARTY TRANSACTIONS
As discussed in Note 3, the Company had a payable to ABC of $1,174,000 (due to
the Transfer Agreement) and a receivable from ABC of $250,000 (see Note 3). As
of December 31, 1995, the Company had reimbursed ABC the net amount due of
$924,000.
In 1997, the Company shared certain administrative support and office space with
Global Photonic Energy Corporation managed by certain officers of the Company
and in which certain shareholders have a significant minority interest. The
officers of the Company are also the officers of this related company. The
Company charged Global Photonic Energy Corporation $51,906 in 1997 for these
services. In 1998, this amount was written off, as the balance was deemed
uncollectible. The charge for the write-off was included in selling, general and
administrative expense in the accompanying Consolidated Statements of
Operations.
In 1998, there were no related party transactions.
15
<PAGE>
UNIVERSAL DISPLAY CORPORATION
(a development-stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. COMMITMENTS
Lease Commitments
The Company has several operating lease arrangements for office space and office
equipment. Total rent expense was $91,467 and $78,078 for the year ended
December 31, 1998 and 1997, respectively. Minimum future rental payments for
operating lease s as of December 31, 1998 are as follows:
Year Amount
---- ------
1999 $220,089
2000 $216,698
2001 $167,049
2002 $132,000
2003 $132,000
--------
$867,836
========
11. INCOME TAXES
The components of income taxes are as follows:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997 December 31, 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
Current $ -- $ -- $ --
Deferred (484,848) (2,015,424) (601,344)
----------- ----------- ---------
(484,848) (2,015,424) (601,344)
Increase in valuation
allowance provision (484,848) $2,015,424 $601,344
----------- ----------- -----------
$ -- $ -- $ --
=========== =========== = ===========
</TABLE>
The difference between the Company's federal statutory income tax rate and its
effective income tax rate is primarily due to non-deductible expenses and the
valuation allowance.
As of December 31, 1998, the Company had net operating loss carryforwards of
approximately $6,120,000, which will begin to expire in 2010. The net operating
loss carryforwards differ from the accumulated deficit principally due to the
timing of the recognition of certain expenses. In accordance with the Tax Reform
Act of 1986, the net operating loss carryforwards could be subject to certain
limitations.
Significant components of the Company's deferred tax assets and liabilities as
of December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
----------------- -----------------
<S> <C> <C>
Gross deferred tax assets
Net operating loss carryforwards $2,080,146 $2,051,418
Capitalized start-up costs 1,557,836 1,192,472
Capitalized technology license 170,000 170,000
Other 259,786 169,030
------- -------
4,067,768 3,582,920
Valuation allowance $(4,067,768) $(3,582,920)
------------ -----------
Net deferred tax assets
-- --
============ ===========
</TABLE>
A valuation allowance was established for 100% of the net deferred tax asset,
since the Company has incurred substantial operating losses and expects
additional losses in 1999. The Company's management has concluded that the
realizability of the deferred tax assets is uncertain.
16
