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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
for the fiscal year ended December 31, 2002
OR
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
for the transition period from ____________ to ___________
Commission File Number 1-12031
UNIVERSAL DISPLAY CORPORATION
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(Exact name of registrant as specified in its charter)
Pennsylvania 23-2372688
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
375 Phillips Boulevard
Ewing, New Jersey 08618
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (609) 671-0980
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock (par value $0.01 per share)
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act) Yes _X_ No ___
The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant, based upon the closing sale price of the
registrant's Common Stock on the Nasdaq National Market on June 28, 2002, was
approximately $118,878,659. For purposes of this calculation, all executive
officers and directors of the registrant and all beneficial owners of more than
10% of the registrant's Common Stock (and their affiliates) were considered
affiliates.
As of March 26, 2003, the registrant had outstanding 21,864,003 shares of Common
Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Proxy Statement to be filed with the Securities and
Exchange Commission for the Annual Meeting of Shareholders to be held on June
26, 2003 are incorporated by reference into Part III of this report.
TABLE OF CONTENTS
PART I
ITEM 1. BUSINESS................................................... 3
ITEM 2. PROPERTIES................................................. 12
ITEM 3. LEGAL PROCEEDINGS.......................................... 12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........ 12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS........................................ 13
ITEM 6. SELECTED FINANCIAL DATA.................................... 13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS........................ 14
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK................................................ 24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................ 24
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE........................ 24
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT......... 24
ITEM 11. EXECUTIVE COMPENSATION..................................... 24
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS................. 24
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............. 24
ITEM 14. CONTROLS AND PROCEDURES.................................... 24
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K................................................ 25
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CAUTIONARY STATEMENT
CONCERNING FORWARD-LOOKING STATEMENTS
This report and the documents incorporated by reference herein contain some
"forward-looking statements" (as defined in the Private Securities Litigation
Reform Act of 1995) that involve risks and uncertainties. Among other things,
these include, but are not limited to, statements regarding the following:
o the outcomes of the Company's ongoing and future Organic Light Emitting
Device ("OLED") technology research and development activities;
o the Company's ability to access future OLED technology developments of its
academic and commercial research partners;
o the Company's ability to form and continue strategic relationships with
manufacturers of OLEDs and OLED-containing products;
o the protections afforded to the Company by the patents that it owns or
licenses;
o the anticipated success of the Company's OLED technology, materials and
manufacturing equipment commercialization strategies;
o the potential commercial applications of the Company's OLED technologies and
OLED materials, and of OLED-containing products in general;
o future demand for the Company's OLED technologies and OLED materials;
o the comparative advantages and disadvantages of the Company's OLED
technologies and OLED materials versus competing technologies and materials
currently being developed;
o the nature and potential advantages of any competing technologies that may
be developed in the future;
o the payments that the Company expects to receive in the future under its
existing contracts;
o the Company's future capital requirements;
o the amount and type of securities that the Company will issue in the future
to its business partners and others; and
o the Company's future OLED technology licensing and OLED material sales
revenues and results of operations.
In addition, when used in this report and the documents incorporated by
reference, the words "estimate," "project," "believe," "anticipate," "intend,"
"expect" and similar expressions are intended to identify forward-looking
statements. These statements reflect the Company's current views with respect to
future events and are subject to risks and uncertainties that could cause actual
results to differ materially from those contemplated. These risks are discussed
in greater detail in the subsection entitled "Factors That May Affect Future
Results and Financial Condition" under Part II, Item 7 of this report.
You are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date of this report or the documents
incorporated by reference, as the case may be. The Company undertakes no
obligation to update any of these forward-looking statements to reflect events
or circumstances after the date of this report, or to reflect the occurrence of
unanticipated events.
PART I
ITEM 1. BUSINESS
BACKGROUND AND COMPANY HISTORY
Universal Display Corporation (the "Company") is engaged in the research,
development and commercialization of OLED technologies and materials for use in
flat panel displays and other applications.
The Company was incorporated under the laws of the Commonwealth of Pennsylvania
in April 1985 under the name Enzymatics, Inc. ("Enzymatics"). Another
corporation named Universal Display Corporation ("UDC") was incorporated under
the laws of the State of New Jersey in June 1994. On June 22, 1995, a
wholly-owned subsidiary of Enzymatics merged with and into UDC. UDC, the
surviving corporation in this merger, became a wholly-owned subsidiary of
Enzymatics and changed its name to "UDC, Inc." Simultaneously with the
consummation of this merger, Enzymatics changed its name to "Universal Display
Corporation." UDC, Inc. functions as an operating subsidiary of the Company
having the same officers and directors.
OVERVIEW OF THE OLED INDUSTRY
The primary market for the Company's OLED technologies and materials is flat
panel displays. The market for flat panel displays has been driven by a number
of market forces, including:
o the increasing popularity of cell phones, personal digital assistants,
portable computers, flat panel monitors and other consumer electronic
devices;
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o the increasing availability of information and visual content in electronic
formats;
o the proliferation of graphical interfaces and emerging multimedia
applications; and
o a growing consumer preference for light weight, thin, low power and high
resolution displays.
Existing products that use flat panel displays include notebook and laptop
computers, portable televisions, video cameras, cellular phones, pagers,
electronic organizers, internet access devices, portable electronic devices,
digital watches, calculators, electronic games, audiovisual equipment, copiers,
fax machines, telephones and answering machines. In addition, flat panel
displays have been utilized in military applications, including missile
controls, ground support, communications equipment and avionics.
Competition in the flat panel display market, particularly for full color, large
area, high resolution, high information content displays, is based upon various
factors, including image and color quality, range of viewing angle, power
requirements, cost and manufacturability. The dominant technology today for flat
panel displays is liquid crystal display ("LCD") technology, the type of
technology used in most laptop computers. Though it has certain limitations, LCD
technology compares favorably to the more traditional cathode ray tube ("CRT")
technology, which is the technology used in conventional televisions.
Light emitting diodes ("LEDs") are discrete, solid-state semiconductor devices
that emit light when electrical current passes through them. The color of light
emitted by LEDs depends on the particular semiconductor material utilized in the
device. Traditional LEDs are created from inorganic semiconductors. In contrast,
OLEDs utilize an organic semiconductor material.
While LCDs currently dominate the market for flat panel displays, the Company
believes that OLEDs are a promising alternative technology for the future.
Compared to LCD displays, OLED displays are expected to have better image and
color quality, brightness, contrast, response rates and viewing angles, which in
many cases will be comparable or superior to those of CRT displays. OLED
displays also are believed to exhibit a thinner profile and be manufacturable
from lower cost materials; efficient in converting electrical power into light
(thereby requiring low power for operation as compared to backlit LCDs), and
scaleable for use in large area flat panel displays. These features would make
OLED displays useful for a variety of flat panel display applications,
particularly those requiring light weight and portability.
OLED technology is just emerging and there are many companies and institutions
engaged in research, development and commercialization efforts relating to
OLEDs. If successfully developed, OLED displays could have a variety of
applications, particularly in full color, small area displays such as consumer
electronic equipment, vehicular dashboards, cellular phones and other
telecommunication devices, computer games and personal digital assistants.
Potential applications of OLED displays also include use in full color, large
area displays such as laptop and notebook computer screens, computer monitors
and televisions, as well as in transparent and flexible items such as head-up
displays for automobile windshields and bendable electronic displays. OLEDs are
also being investigated for use in applications other than flat panel displays,
such as lasers and lighting sources.
BUSINESS STRATEGY AND MARKETS
The Company's present approach to developing technology and penetrating the OLED
market has three major components:
o the funding of additional OLED technology research by the Company's
research partners at Princeton University, the University of
Southern California and other academic institutions;
o the research, development and validation of reliable OLED
technologies and OLED materials for use in the commercial
manufacture of OLEDs; and
o the licensing of these technologies and the sale of these materials
to experienced manufacturers (who may already have much of the
needed infrastructure in place), suppliers and users of OLEDs and
OLED-containing products, as well as the equipment needed to
manufacture them.
The Company hopes to achieve these goals through internal development efforts
and by entering into various sponsored research agreements, joint development
agreements, licensing arrangements, sales arrangements, evaluation licenses and
other strategic alliances with others. The Company does not presently intend to
become a volume manufacturer of OLEDs, OLED materials or OLED manufacturing
equipment or devices.
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OLED Technologies
The Company is currently focusing its research, development and
commercialization efforts on a number of innovative OLED structure and device
technologies, including those discussed below.
Phosphorescent OLEDs (PHOLEDs(TM))
One of the Company's key technology applications involves the use of novel
materials and device structures that emit light in OLEDs through the process of
phosphorescence, referred to by the Company as PHOLEDs. In conventional OLEDs,
the light emission is based on the process of fluorescence. The use of
phosphorescent materials as dopants in OLEDs enables significantly higher device
efficiencies, thereby substantially reducing power requirements. This is
particularly relevant in hand-held devices where battery power is often a
limiting factor.
Printable Phosphorescent OLEDs (P(2)OLEDs(TM))
There are a number of different processing technologies that can be used for the
manufacture of OLEDs. Among other things, the Company is pursuing the
development of proprietary phosphorescent materials for the manufacture of OLEDs
using solution or liquid processing technologies. Solution processing
technologies, such as spin coating and ink jet printing, involve the use of
spraying or printing apparatus to deposit the organic material in an OLED. The
Company recently entered into a joint development relationship with DuPont
Displays, Inc. to conduct research and development in this area. This
relationship is discussed further below in subsection below entitled
"Relationships with OLED Manufacturers."
Flexible OLEDs (FOLEDs(TM))
Another important technology application for the Company is its technology for
the fabrication of small molecule OLEDs on flexible substrates. Flat panel
displays are commonly built on rigid substrates such as glass. The Company's
flexible OLED or FOLED technology permits the fabrication of small molecule
OLEDs on a flexible substrates. Flexible OLEDs have the potential for being used
in conformable, lighter weight and thinner electronic displays, and ultimately
in future roll-up display products. Flexible OLEDs also may possibly be
fabricated using potentially low cost "roll to roll" processing methods.
Transparent OLEDs (TOLEDs(TM))
Yet another significant technology application for the Company is based on the
fabrication of OLEDs with transparent cathodes. Traditional OLEDs use a
reflective metal cathode and a transparent anode. The Company's transparent
cathode technology, referred to by the Company as its TOLED technology, may
permit the fabrication of transparent OLED displays, such as "heads-up" displays
in windshields. This technology also enables "top emission" OLEDs to be built on
opaque surfaces, including active matrix thin-film transistors, thereby
resulting in devices with potentially better image quality and lifetime than
conventional OLEDs.
Organic Vapor Phase Deposition (OVPD)
The standard process for the manufacture of OLEDs using small molecules,
including PHOLEDs, involves the use of vacuum thermal evaporation ("VTE"). VTE
utilizes evaporation in a high vacuum to deposit the thin layers of organic
materials in an OLED. An alternate process for the manufacture of OLEDs is based
on organic vapor phase deposition ("OVPD") technology. In contrast to VTE, the
OVPD process utilizes a carrier gas stream in a hot walled reactor at low
pressure to precisely deposit the organic material in an OLED. The OVPD process
offers the potential advantage of being more readily scalable to larger area
OLED displays. The Company and its exclusive licensee, Aixtron AG, are actively
developing and qualifying a tool for the fabrication of OLED displays utilizing
OVPD processes. The Company's relationship with Aixtron AG is discussed further
below.
OLED Materials
The Company is developing novel phosphorescent and other materials for use in
OLEDs. Through its commercial relationship with PPG Industries, Inc. and
research being sponsored at Princeton University and the University of Southern
California (all of which are discussed further below in the section entitled
"Research and Development Activities"), the Company has developed, and continues
to develop, proprietary materials for use as phosphorescent emitters in OLEDs.
The evaluation and qualification of these materials is ongoing with OLED
manufacturers.
RESEARCH AND DEVELOPMENT ACTIVITIES
The Company's core activities involve the research and development of OLED
technologies. The Company conducts this research and development both internally
and through various relationships with for-profit entities and academic
institutions. The Company's costs and expenses for research and development
totaled $15,804,267 in 2002, $12,310,036 in 2001 and $7,109,205 in 2000.
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Company Internal Development
The Company conducts a substantial portion of its OLED technology development
activities at its technology development and transfer facility in Ewing, New
Jersey. The Company moved its operations to this facility in the fourth quarter
of 1999 and expanded the facility from 11,000 square feet to 21,000 square feet
in 2001. The facility includes a state-of-the-art OLED display pilot production
line designed to produce up to several hundred 6" x 6" OLED plates per month.
The facility also contains substrate patterning, organic deposition, display
packaging, module assembly and extensive test and characterization equipment in
Class 100 and 100,000 clean rooms, as well as opto-electronics laboratories.
Development and operations expenses for work conducted at this facility totaled
$6,189,638 in 2002, $5,287,884 in 2001 and $3,422,198 in 2000.
The Company currently employs a team of research scientists, engineers and
laboratory assistants at its Ewing facility. This team includes chemists,
physicists, engineers with electrical, chemical and mechanical backgrounds, and
highly-trained experimentalists.
University Sponsored Research
The Company has a long-standing relationship with Princeton University and the
University of Southern California ("USC") for the conduct of research related to
OLED technologies for applications such as displays and lighting. This research
is performed at Princeton University's Advanced Technology Center for Photonics
and Optoelectronic Materials (POEM) under the direction of Dr. Stephen R.
Forrest and at USC's Synthetic Materials Laboratories under the direction of Dr.
Mark E. Thompson. The scope and technical aspects of this research is controlled
by these investigators with advisory input from the Company.
The Company funds the research conducted at Princeton University and USC under a
Research Agreement executed by the Company and the Trustees of Princeton
University in October 1997. This OLED technology research was preceded by
similar research conducted at Princeton University and USC under a Sponsored
Research Agreement entered into by the Company and the Trustees of Princeton
University in 1994. USC conducts its portion of this research under subcontract
between Princeton University and USC. In April 2002, the Company and Princeton
University extended the term of their 1997 Research Agreement through July 2007.
Under the Research Agreement, the Company paid Princeton University $859,339 in
2002, $758,732 in 2001 and $733,230 in 2000. The Company's maximum funding
commitment under the Research Agreement for the period from August 2002 through
July 2007 is $1,495,599 per year. As discussed further below, the Company has an
exclusive license to all patent rights arising out of the research conducted by
Princeton University or USC under the Research Agreement.
In May 2001, the Company entered into a Contract Research Agreement with the
Chitose Institute of Science and Technology ("CIST") of Japan, under which the
Company is funding research at CIST relating to high efficiency OLED materials
and device structures. This collaborative relationship runs through April 2003.
In January 2002, the Company entered into a 13-month Research Agreement with the
Massachusetts Institute of Technology ("MIT"), under which the Company funded
research at MIT relating to high efficiency white OLEDs. This agreement followed
a one-year Research Agreement entered into by the Company and MIT in April 2001,
under which the Company funded research at MIT relating to high efficiency
hybrid organic/inorganic vacuum deposited LEDs.
PPG Industries
In October 2000, the Company and PPG Industries, Inc. ("PPG") entered into a
five-year Development and License Agreement. Under this agreement, a team of
approximately eight PPG scientists and engineers are assisting the Company in
developing and commercializing various OLED materials in which the Company has a
proprietary interest. The Company simultaneously entered into a commercial
Supply Agreement with PPG, which is discussed further below.
PPG is being compensated in the form of the Company's Common Stock for the
services provided under the Development and License Agreement, though under
limited circumstances PPG has the right to demand payment in cash in lieu of
stock. For services rendered by PPG under the Development and License Agreement
during 2002, the Company issued to PPG 344,379 shares of the Company's Common
Stock and seven-year warrants to purchase 344,379 shares of the Common Stock at
a per share exercise price of $10.14, which vested upon issuance. For services
rendered by PPG under this agreement from its inception through the end of 2001,
the Company issued to PPG 150,011 shares of the Common Stock and seven-year
warrants to purchase 150,011 shares of the Common Stock at a per share exercise
price of $24.28, which vested upon issuance.
In January 2003, the Company and PPG amended the Development and License
Agreement to cover the supply of OLED materials for purposes of development and
qualification in the facilities of the Company and its customers. There was no
cash consideration exchanged for this amendment.
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Aixtron AG
In July 2000, the Company entered into a Development and License Agreement with
Aixtron AG of Aachen, Germany ("Aixtron") to jointly develop and commercialize
equipment for the manufacture of OLEDs using the OVPD process. Aixtron is
considered a world leader in the production of manufacturing equipment for LEDs
using metal-organic chemical vapor deposition technology. A pre-production OVPD
manufacturing tool was delivered to the Company's Ewing facility in January
2002. The Company and Aixtron are in the process of upgrading and qualifying
this tool.
Under the Development and License Agreement, the Company granted Aixtron an
exclusive license to produce and sell equipment for use in the manufacture of
OLEDs and other devices using the OVPD process. Aixtron is required to pay the
Company royalties on its sales of this equipment. Purchasers of this equipment
also may obtain rights to use the Company's proprietary OVPD process to
manufacture OLEDs for additional fees.
Government-Funded Programs
The Company has entered into a number of government contracts and subcontracts
for the development of OLED technologies and OLED-containing products. These
include, among others, Phase I Small Business Innovation Research ("SBIR")
program contracts for the demonstration of technical merit and feasibility and
Phase II SBIR program contracts for the development of well-defined prototypes.
On those contracts where the Company is the prime contractor, the Company
subcontracts portions of its work to various entities and institutions,
including Princeton University, USC, Penn State University, L-3 Communications
Corporation and Vitex Systems, a Batelle Memorial Institute Company. All of the
Company's government contracts and subcontracts are subject to termination at
the election of the contracting agency.
The Company derived a substantial portion of its revenues from its government
contract and subcontract work. These revenues totaled $1,468,958 in 2002,
$1,058,571 in 2001 and $492,756 in 2000. The Company's government contracts
include, but are not limited to, those discussed below. For further discussion
of these contracts and their associated revenues see Part II, Item 7 of this
report, including the subsection entitled "Factors That May Affect Future
Results and Financial Condition".
OLED Displays in Head-Mounted Devices
In January 2003, the Company was awarded a two-year, $729,996 SBIR Phase II
program contract by the U.S. Department of the Army to further its development
of conformable and transparent display technologies for use in helmets and other
head-mounted devices. The Company will receive $444,017 for the first year of
the contract, and the remainder is expected to be funded in year two of the
contract. In February 2002, the Company completed its Phase I work on this same
program.
OLED Displays on Metal Foil
In January 2003, the Company was awarded a $69,850 SBIR Phase I program contract
by the U.S. Department of the Army to demonstrate the feasibility of building
rugged, light weight active-matrix OLED displays on durable metal foil.
Roll-Up OLED Displays in Pen-Like Devices
In October 2002, the Company was awarded a two-year $2,013,725 cooperative
agreement by the U.S. Army Research Laboratories ("ARL") to develop technology
for flexible, low-power consumption OLED displays and communication components
for use in advanced, next-generation mobile communication devices, such as a
pen-like device that functions as a portable computer with a roll-up OLED
display. ARL is expected to fund $1,200,000 and the remaining $813,725 would be
funded as a "cost-share" by the Company and its subcontractors. In addition, ARL
has an option to extend the agreement with a third-year, $2,850,000 program in
which ARL would provide additional funds of $2,000,000, with the Company and its
subcontractors contributing $850,000 through cost sharing.
White OLEDs for Lighting
In August 2002, the Company was awarded two $100,000 SBIR Phase I program
contracts by the U.S. Department of Energy to demonstrate the feasibility of
using its proprietary, high-efficiency phosphorescent OLED and flexible OLED
technologies for general lighting applications. One of these programs is to
demonstrate a broadband white light source that consists of a series of
highly-efficient red, green and blue PHOLED stripes which combine to emit white
light. The other program is to demonstrate an innovative PHOLED structure that
emits simultaneously from monomer and aggregate states, leading to a broad
spectrum and high quality white emission.
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Phosphorescent OLED Backlights
In December 2000, the Company was awarded a two-year $729,158 SBIR Phase II
program contract by the Department of Defense for the development of high
efficiency phosphorescent backlights as a result of the success of the Company's
Phase I program for similar work. The term of the Phase II program extends from
February 2001 through March 2003.
Ruggedized OLED Displays
In December 2002, the Company completed its work under a 30-month prime contract
from the U.S. Department of Defense Advanced Research Projects Agency ("DARPA")
for the development of ruggedized full-color flexible OLED displays. Pursuant to
this contract, the Company received $1,600,000 and contributed $2,024,636 in
goods and services through cost sharing. The work under this contract resulted
in the Company delivering to DARPA prototypes of a flexible OLED display.
United States Display Consortium
The Company is a member of the United States Display Consortium ("USDC"), a
cooperative industry/government effort aimed at developing an infrastructure to
support a North American flat panel display infrastructure. The USDC's role is
to provide a common platform for flat panel display manufacturers, developers,
users and the manufacturing equipment and supplier base. It has more than 90
members, as well as support from ARL. The Company is one of 16 members on the
Governing Board of the USDC and actively participates on its Technical Council.
OLED MATERIALS MANUFACTURING AND SUPPLY
In October 2000, the Company and PPG entered into a seven-year Supply Agreement.
Under this agreement, the Company has appointed PPG as the Company's exclusive
supplier of its proprietary materials for commercial use in OLEDs. PPG will sell
these OLED materials to the Company, which in turn will resell them to OLED
manufacturers. The current term of the Supply Agreement extends through 2007.
The Company also relies on PPG to supply OLED materials that are resold to the
Company's customers for evaluation purposes. The Company's payment terms for its
OLED material sales are typically net 30 days from the date of invoice. The
revenues received by the Company from its sales of OLED materials totaled
$793,518 in 2002, $194,330 in 2001 and $0 in 2000.
RELATIONSHIPS WITH OLED MANUFACTURERS
The Company has established relationships with several manufacturers of OLEDs
and OLED-containing products to further develop, qualify and license the
Company's OLED technologies and materials for use by these manufacturers in the
commercial production of OLEDs. Payments received by the Company on account of
these relationships (not including sales of OLED materials) totaled $4,266,667
in 2002 and $400,000 in 2001; there were no such payments received in 2000.
Portions of these payments are creditable against license fees paid by these
manufacturers to the Company for commercial license rights granted to them in
the future. The Company's relationships with manufacturers of OLEDs and
OLED-containing products include, but are not limited to, those discussed below.
DuPont Displays
In December 2002, the Company entered into a non-exclusive Joint Development
Agreement with DuPont Displays, Inc. and its parent E.I. DuPont de Nemours and
Company ("DuPont") for the development of liquid-processible phosphorescent
materials and OLEDs. The term of this joint development program runs for three
years. Under the Joint Development Agreement, the Company will have the
exclusive right to sublicense any intellectual property developed by either
party under the program for use with liquid processed OLED displays on rigid
glass substrates. Each of the Company and DuPont is responsible for its own
development costs and expenses in connection with the program.
The Company and DuPont also entered into a Cross-License Agreement in December
2002. Under this agreement, the Company granted DuPont a non-exclusive license
under the Company's background phosphorescent emitter, transparent cathode and
ink jet printing patents to make and sell liquid processed OLED displays on
rigid glass substrates. DuPont paid the Company an up-front license fee and
agreed to pay the Company running royalties on its sales of these displays.
DuPont has the option to reduce the royalty rates on these sales if it elects to
make cash payments to the Company in one or both of January 2004 and January
2005.
In addition, the Company and DuPont entered into a Developed Device Additional
Payment Agreement in December 2002. Under this agreement, the Company granted
DuPont a non-exclusive license to utilize any intellectual property developed by
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the Company under their joint development program for use with liquid processed
OLED displays on rigid glass substrates. For sales of these displays on which
DuPont is not already required to pay the Company a royalty under the
Cross-License Agreement, DuPont agreed to pay the Company running royalties at
rates reduced from those under the Cross-License Agreement.
Samsung SDI
In July 2001, the Company and Samsung SDI Co. Ltd. ("Samsung") entered into a
non-exclusive Joint Development Agreement focusing on portable, low-power OLED
displays for cell phones and other product applications. Under the agreement,
the parties are developing active matrix OLED displays utilizing the Company's
high efficiency phosphorescent materials and top-emitting device structures,
together with Samsung's low temperature poly silicon active matrix architecture.
Samsung and the Company presented the world's first full color active matrix
OLED display utilizing red and green phosphorescent emitting materials at the
40th Annual Society for Information Display Symposium in May 2002. The power
consumption of this display is believed to be approximately 50% less than a
comparable fluorescent OLED display and, under standard usage conditions, 20%
less than a similar backlight LCD.
Sony Corporation
In February 2001, the Company and Sony Corporation ("Sony") entered into a
non-exclusive Joint Development Agreement focusing on high efficiency OLED
displays for use in large area monitors, such as televisions, as well as for
other product applications. Under this Agreement, the parties are developing
active matrix OLED displays utilizing the Company's proprietary high efficiency
phosphorescent material technology and Sony's proprietary low temperature poly
silicon active matrix TAC (Top emission Adaptive Current drive) technology. Each
party is responsible for its own costs and expenses in connection with these
development efforts.
Toyota Industries Corporation
In October 2002, the Company and Toyota Industries Corporation ("TICO") entered
into an OLED Technology Development and Evaluation Agreement under which the
Company agreed to conduct specified development activities with TICO relating to
the use of certain OLED technologies of the Company as sources of white light.
INTELLECTUAL PROPERTY
Along with its scientific and technical personnel, the Company's primary assets
are its intellectual property. This includes numerous U.S. and foreign patents
and patent applications that the Company owns or has the exclusive right to
license. It also includes a substantial body of Company trade secrets and
technical know-how.
Company Patents
The Company's expanded research and development activities, both internally and
through its collaboration with PPG, have led to the Company's recent filing of a
substantial number of patent applications relating to its OLED technologies. As
of December 31, 2002, the Company had 24 issued and pending patents in the
United States, together with numerous foreign counterparts filed in key
countries such as Japan, Taiwan, Korea, China and the countries of the European
Union. The Company's issued U.S. patents are listed on its Internet website at
www.universaldisplay.com, under the heading "Intellectual Property."
Patents of Princeton University and USC
The bulk of the Company's patent rights are exclusively licensed to the Company
on a perpetual basis under an Amended License Agreement executed by and among
the Company, the Trustees of Princeton University and USC in October 1997. As of
December 31, 2002, these licensed patent rights included 70 issued U.S. patents
and 47 U.S. patents pending, together with numerous foreign counterparts in
various foreign countries. The U.S. patents that the Company exclusively
licenses from Princeton University and USC are listed on the Company's Internet
website at www.universaldisplay.com, under the heading "Intellectual Property."
Under the Amended License Agreement, Princeton and USC granted the Company a
worldwide, exclusive license to specified patents and patent applications
relating to OLEDs and OLED technologies. By the terms of the Amended License
Agreement and the 1997 Research Agreement between the Company and the Trustees
of Princeton University, this license grant extends to any patent rights arising
out of the OLED technology research conducted by Princeton University or USC
under the Research Agreement. The Company is free to sublicense these patent
rights to third parties.
Princeton University is responsible for the filing, prosecution and maintenance
of all patent rights licensed to the Company under the Amended License Agreement
pursuant to an Interinstitutional Agreement between Princeton University and
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USC. However, the Company participates closely in this process and has the right
to instruct patent counsel on additional matters to be covered in any patent
applications. The Company is required to bear all costs associated with the
filing, prosecution and maintenance of these patent rights.
The Company is required under the Amended License Agreement to pay Princeton
University royalties for licensed products sold by the Company or its
sublicensees. For licensed products sold by the Company, the Company is required
to pay Princeton University 3% of the net sales price of these products. For
licensed products sold by the Company's sublicensees, the Company is required to
pay Princeton University 3% of the revenues received by the Company from the
sublicense. These royalty rates are subject to renegotiation for products not
reasonably conceivable in 1997 (the inception of the agreement) and developed
under the Research Agreement and Princeton University reasonably determines that
the royalty rates payable with respect to these products are not fair and
competitive. Princeton University shares a portion of these royalties with USC
under their Interinstitutional Agreement.
The Company paid Princeton University minimum royalties under the Amended
License Agreement in the amounts of $50,000 for 2000, $75,000 for 2001 and
$100,000 for 2002. For 2002 and thereafter, this minimum royalty obligation is
$100,000 per year. The Company also is required to use commercially reasonable
efforts to bring the licensed OLED technology to market. However, this
requirement is deemed satisfied provided the Company performs its obligations
under the Research Agreement and, when that agreement ends, the Company invests
a minimum of $800,000 per year in research, development, commercialization or
patenting efforts respecting the patent rights licensed to the Company.
In connection with executing the Research Agreement and the Amended License
Agreement, in 1997 the Company issued to Princeton University 140,000 shares of
the Company's Common Stock and 10 year warrants to purchase an additional
175,000 shares of the Common Stock at an exercise price of $7.25 per share
vesting immediately. The Company also issued to USC 60,000 shares of the Common
Stock and 10 year warrants to purchase an additional 75,000 shares of the Common
Stock at an exercise price of $7.25 per share vesting immediately.
Motorola Patents
In September 2000, the Company entered into a License Agreement with Motorola,
Inc. ("Motorola"), whereby Motorola granted the Company perpetual license rights
to what are now 74 issued U.S. patents relating to Motorola's OLED technology,
together with foreign counterparts in various countries. With limited
exceptions, this license is exclusive in the OLED field even as to Motorola.
This includes the exclusive right to grant sublicenses to third parties. The
issued U.S. patents that the Company has licensed from Motorola are listed on
the Company's Internet website at www.universaldisplay.com, under the heading
"Intellectual Property."
Motorola remains responsible for the filing, prosecution and maintenance of all
patent rights licensed to the Company under the License Agreement, including all
associated costs. Motorola is obligated to keep the Company informed as to the
status of these activities.
The Company is required under the License Agreement to pay Motorola royalties on
gross revenues received by the Company on account of its sales of OLED products
or components, or from its sublicensees on account of their sales of OLED
products or components, whether or not these products or components are based on
inventions claimed in the patent rights licensed from Motorola. The Company has
the option to pay these royalties in either all cash or 50% cash and 50% in
shares of the Company's Common Stock. The Company met its minimum royalty
obligation of $150,000 to Motorola for the 2001-2002 period by issuing to
Motorola 8,000 shares of the Company's Common Stock, valued at $71,816, and
paying Motorola $78,184 in cash. The Company also has minimum royalty
obligations to Motorola of $500,000 in cash or cash and stock for the 2003-2004
period and $1,000,000 in cash or cash and stock for the 2005-2006 period.
In connection with the rights granted to the Company by Motorola, in 2000 the
Company issued to Motorola 200,000 shares of the Company's Common Stock, 300,000
shares of the Company's Convertible Preferred Stock, and warrants to purchase an
additional 150,000 shares of the Common Stock at an exercise price of $21.60 per
share which vested immediately.
DuPont Patents
Under the Joint Development Agreement entered into between the Company and
DuPont in December 2002, DuPont granted the Company a royalty-free, worldwide,
non-exclusive license under certain of DuPont's background OLED patents relating
to phosphorescent emitters to make and sell specific types of liquid processed
OLED displays on rigid glass substrates. However, these license rights are
triggered with respect to each type of OLED display only upon the parties'
achievement of specified milestones under their joint development program. The
Company has the right to sublicense these patent rights to third parties.
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Luxell Technologies Patents
Under a Development and License Agreement between the Company and Luxell
Technologies, Inc. ("Luxell") entered into in April 2001, Luxell granted the
Company a royalty-bearing, exclusive license under Luxell's Black Layer patents
to grant sublicenses to high-volume OLED manufacturers for these manufacturers
to make and sell Black Layer transparent OLED displays.
Intellectual Property under Government Contracts
The Company anticipates that it and its subcontractors may develop patentable
OLED technologies under their various government contracts and subcontracts.
Under these arrangements, the Company or its subcontractor generally can elect
to take title to any patents on these OLED technologies, and to control the
manner in which these patents are licensed to third parties. However, the U.S.
Government has reserved the rights to utilize, and to permit others to utilize,
these technologies and any associated technical data for government purposes,
and, in some cases, for unlimited purposes. In addition, if the government
determines that the Company or its subcontractors have not taken appropriate
steps to achieve practical application of these OLED technologies, the
government may require that they be licensed to third parties.
Trade Secrets and Technical Know-How
The Company has accumulated, and continues to accumulate, a substantial amount
of valuable trade secret information and technical know-how relating to OLEDs
and OLED technologies. Where practicable, the Company shares portions of this
information and know-how with its business partners and OLED manufacturers on a
confidential basis. The Company also employs various methods to protect this
information and know-how from unauthorized use or disclosure, although no such
methods can afford complete protection. Moreover, because the Company derives
some of this information and know-how from academic institutions such as
Princeton University and USC, there is an increased potential for public
disclosure.
COMPETITION
The display industry is characterized by intense competition. Numerous domestic
and foreign companies have developed or are developing LCD and other flat panel
display technologies that will compete with the Company's OLED technology. These
technologies include the plasma, field emissive and vacuum fluorescent display
technologies as well as various others. Substantially all of the companies
pursuing these technologies, including Sony Corporation, NEC Corporation,
Toshiba Matsushita Display Technology Co., Fujitsu Ltd., Hitachi, Ltd., Samsung
Electronics Co., LG Electronics Institute of Technology, AU Optronics Corp., Chi
Mei Optoelectronics Corp., Chunghwa Picture Tubes, Ltd., HannStar Display Corp.,
Quanta Display Inc., Toppoly Optoelectronics Corp. and Innolux Display Corp.
have greater name recognition and financial, technical, marketing, personnel and
research capabilities than the Company.
The Company believes that its OLED technology overcomes various limitations of
these other technologies, such as high power consumption, high temperature
manufacturing conditions, poor display contrasts and limited viewing angles.
However, these companies may ultimately succeed in developing competing
technologies and applications that are superior to the Company's OLED
technology.
In addition, a number of companies, including those mentioned above and Eastman
Kodak Company, Pioneer Corporation, Sharp Electronics Corporation, Sanyo
Electric Co., Samsung SDI Co., Samsung NEC Mobile Display Co., TDK Corporation,
RiTdisplay Corporation, Mitsubishi Chemical Corporation, Lite Array, Inc.,
Nippon Seiki Co., Seiko Epson Corporation, Dupont Displays, Inc., Cambridge
Display Technology, Opsys, Ltd., TECO Optronics Corp. and Idemitsu Kosan Co.,
are engaged in research, development and commercialization activities with
respect to technology using OLEDs. In particular, Pioneer Corporation,
RiTdisplay Corporation, Philips Electronics N.V. and other companies are
presently manufacturing OLED products using OLED technologies other than those
of the Company. Moreover, Eastman Kodak Company ("Kodak") has licensed its
competing OLED technology to OLED display manufacturers, and Kodak and Sanyo
Electric Co. are working through a joint venture, SK Display Corporation, to
manufacture OLED displays utilizing this technology. The Company cannot be sure
that its OLED technology will ultimately be adopted for commercial usage, or
that the Company will be able to compete successfully with Kodak or other
companies due to their established name recognition and greater resources.
ENVIRONMENTAL PROTECTION COMPLIANCE
The Company is not aware of any current federal, state or local environmental
compliance regulations that have a material effect on its business activities.
The Company has not expended any capital to comply with any environmental
protection statutes and does not anticipate incurring any such expenditures in
the future.
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EMPLOYEES
As of December 31, 2002, the Company had 40 full-time employees and one
part-time employee, none of whom are unionized. The Company believes that its
relations with its employees are good.
INTERNET SITE
The Company's Internet website can be found at www.universaldisplay.com. The
Company makes available free of charge, on or through its website, access to its
annual report on Form 10-K, its quarterly reports on Form 10-Q, its current
reports on Form 8-K and any amendments to those reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably
practicable after such materials are filed with, or furnished to, the SEC.
ITEM 2. PROPERTIES
The Company's corporate offices and research and development facility is located
at 375 Phillips Boulevard in Ewing, New Jersey. The Company currently leases
approximately 21,000 square feet of space at this facility. The current term of
this lease runs through December 31, 2003, and management expects to renew the
term of the lease when the current term ends. The Company also leases
approximately 900 square feet of office space in Coeur D'Alene, Idaho.
ITEM 3. LEGAL PROCEEDINGS
The Company is not currently a party to any legal proceedings of a material
nature.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
No matters were submitted by the Company to a vote of its security holders in
the fourth quarter of 2002.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information with respect to the Company's
executive officers:
Name Age Position
---- --- --------
Sherwin I. Seligsohn 67 Chairman of the Board, Chief Executive Officer and
Director
Steven V. Abramson 51 President, Chief Operating Officer and Director
Sidney D. Rosenblatt 55 Executive Vice President, Chief Financial Officer
Treasurer, Secretary and Director
Julia J. Brown 42 Vice President and Chief Technology Officer
The Company's Board of Directors has elected these executive officers to hold
office until their successors are duly elected and qualified.
Sherwin I. Seligsohn has been Chairman of the Board and Chief Executive Officer
of the Company since the Company's inception. He funded and was President of the
Company until May 1996. In addition, Mr. Seligsohn founded, and since August
1991 has served as sole Director, Chairman, President and Secretary of American
Biomimetics Corporation ("ABC"), International Multi-Media Corporation ("IMMC"),
and Wireless Unified Network Systems Corporation ("WUNS"). He is also Chairman
and Chief Executive Officer of Global Photonic Energy Corporation ("Global").
From June 1990 to October 1991, Mr. Seligsohn was Chairman Emeritus of
InterDigital Communications, Inc. ("InterDigital"), formerly International
Mobile Machines Corporation. Mr. Seligsohn was the founder of InterDigital and
from August 1972 to June 1990 served as its Chairman. Mr. Seligsohn is a member
of the Advisory Board of the Advanced Technology Center for Photonics and
Optoelectronic Materials (POEM) at Princeton University.
Steven V. Abramson joined Universal Display Corporation as President and Chief
Operating Officer in May 1996 and has been a member of the Company's Board of
Directors since May 1996. He is also a member of the Board of Directors of
Global and a consultant to Global. From March 1992 to May 1996, he was Vice
President, General Counsel, Secretary and Treasurer of Roy F. Weston, Inc., a
worldwide environmental consulting and engineering firm. From 1982 to 1991 he
was with InterDigital, where he held various positions, including General
Counsel, Executive Vice President and General Manager of the Technology
Licensing Division. Mr. Abramson is a member of the Advisory Board of the
Advanced Technology Center for Photonics and Optoelectronic Materials (POEM) at
Princeton University and is a member of the Board of Governors of the United
States Display Consortium.
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Sidney D. Rosenblatt has been Executive Vice President, Chief Financial Officer,
Treasurer and Secretary of the Company since June 1995, and has been a member of
the Company's Board of Directors since May 1996. Mr. Rosenblatt is also
Executive Vice President, Chief Financial Officer, Secretary and Treasurer of
Global, and a member of its Board of Directors. Mr. Rosenblatt is the owner of
and served as the President of S. Zitner Company from August 1990 through
December 1998. From May 1982 to August 1990, Mr. Rosenblatt served as the Senior
Vice President, Chief Financial Officer and Treasurer of InterDigital. Mr.
Rosenblatt sits on the Board of Directors of various non-profit organizations.
Dr. Julia J. Brown has been the Company's Vice President and Chief Technology
Officer since June 2002. She joined the Company in June 1998 as its Vice
President of Technology Development. From November 1991 to June 1998, Dr. Brown
was a Research Department Manager at Hughes Research Laboratories where she
directed the pilot line production of high-speed Indium Phosphide-based
integrated circuits for insertion into advanced airborne radar and satellite
communication systems. She received her B.S. in Electrical Engineering from
Cornell University in 1983 and then worked at Raytheon Company (1983-1984) and
AT&T Bell Laboratories (1984-1986) before returning to graduate school. Dr.
Brown received an M.S. (1988) and Ph.D. (1991) in Electrical
Engineering/Electrophysics at the University of Southern California under the
advisement of Professor Stephen R. Forrest. Dr. Brown has served as an Associate
Editor of Journal of Electronic Materials and as an elected member of the
Electron Device Society Technical Board. She co-founded an IEEE-sponsored
international engineering mentoring program and is a Senior Member of the IEEE.
Dr. Brown has served on numerous technical conference committees and is
presently a member of the Society of Information Display.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is listed on the Nasdaq National Market under the
symbol PANL. The following table sets forth the high and low bid quotation of
the Company's Common Stock as reported by the Nasdaq National Market for the
periods indicated.
High Close Low Close
------------- ------------
2001
First Quarter $ 14.13 $ 7.03
Second Quarter 20.00 7.88
Third Quarter 16.32 6.61
Fourth Quarter 9.88 6.55
2002
First Quarter $ 11.78 $ 8.17
Second Quarter 11.80 8.30
Third Quarter 8.30 4.95
Fourth Quarter 11.60 5.76
As of March 26, 2003, there were more than 300 holders of record of the
Company's Common Stock. The Company did not declare any cash dividends on its
Common Stock during 2001 or 2002, and does not expect to pay any cash dividends
to holders of its Common Stock in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
The following selected condensed consolidated financial data has been derived
from, and should be read in conjunction with, the audited consolidated financial
statements of the Company, and the notes thereto, and with "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
included elsewhere in this filing and incorporated herein by reference.
Fiscal Year Ended December 31,
------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
------------- ------------- ------------- ------------- --------------
Operating Results:
Total revenue........................... $ 2,445,272 $ 1,252,901 $ 492,756 $ 519,536 $ 368,794
Research and development expense........ 15,804,267 12,310,036 7,109,205 3,171,497 1,419,394
General and administrative expense...... 4,754,850 3,915,854 3,261,113 2,727,856 1,933,976
Net loss................................ (31,019,201) (16,356,100) (9,529,046) (5,125,006) (2,793,842)
Net loss attributable to Common
shareholders................. (32,972,680) (18,873,436) (9,529,046) (5,125,006) (2,793,842)
Net loss per share, basic and diluted... (1.71) (1.11) (0.62) (0.42) (0.27)
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Balance Sheet Data:
Total assets............................... $39,639,216 $48,569,569 $32,079,794 $10,316,850 $3,078,994
Current liabilities........................ 2,866,759 10,464,188 1,670,016 873,761 495,320
Capital lease obligations.................. 8,599 12,827 16,619 20,021 --
Shareholders' equity....................... 33,668,571 38,096,782 29,826,804 9,426,470 2,583,674
Other Financial Data:
Working capital............................ $18,541,596 $17,994,232 $9,252,130 $5,704,913 $2,429,390
Capital expenditures....................... 1,169,945 1,790,564 1,540,577 3,680,122 26,689
Acquired technology........................ -- -- 16,924,968 -- --
Weighted average Common Shares, basic and
diluted.................................. 19,227,697 16,994,537 15,260,837 12,269,943 10,310,353
Shares of Common Stock outstanding......... 21,525,412 18,093,124 16,440,286 13,714,563 10,312,943
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Since inception, the Company has been exclusively engaged, and for the
foreseeable future expects to continue to be exclusively engaged, in funding and
performing research and development activities related to OLED technologies and
associated materials, and in attempting to commercialize these technologies and
materials. The Company has incurred significant losses since its inception,
resulting in an accumulated deficit of $80,074,505 as of December 31, 2002. The
rate of loss is expected to increase as the Company's activities increase, and
losses are expected to continue for the foreseeable future and until such time,
if ever, as the Company is able to achieve, from the commercial licensing of its
OLED technologies and sale of its OLED materials, revenues that are sufficient
to support its operations.
RESULTS OF OPERATIONS
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001
The Company had a net loss attributable to holders of Common Stock of
$32,972,680 (or $1.71 per share) for the year ended December 31, 2002, compared
to a net loss attributable to holders of Common Stock of $18,873,436 (or $1.11
per share) for the year ended December 31, 2001. The increase in net loss
attributable to holders of Common Stock is primarily attributed to:
o an increase in cash and non-cash research and development expenses;
o an increase in non-cash interest expense on convertible promissory
notes issued by the Company in August 2001, and the incurrence of
non-cash expenses relating to the conversion and extinguishment of
these notes (see Note 10 of the Notes to Consolidated Financial
Statements); and
The Company earned $1,468,958 in contract research revenue from the U.S.
Government in 2002, compared to $1,058,571 in 2001. The increase is primarily
due to the Company's commencement of work under six new government contracts in
2002, with work under four of these contracts beginning in the third and fourth
quarters of 2002. In 2001, contract revenue was derived from three government
contracts, one of which was completed in the third quarter of 2001. In 2002,
contract revenue was derived from the following government contracts:
o $695,468 recognized under a 30-month, $2,977,471 Phase I contract
received from the U.S. Department of Defense Advanced Research
Projects Agency ("DARPA"), which commenced in June 2000 and was
completed in December 2002,
o $398,667 recognized under a 24-month, $729,158 SBIR Phase II
contract received from the Department of Defense ("DoD"), which
commenced in February 2001,
o $132,000 recognized under a $132,000 subcontract with Princeton
University, pursuant to a 24-month, $700,000 prime contract
Princeton University received from DARPA, which commenced in June
2001, however work on the contract commenced in 2002,
o $115,907 recognized under a 24-month, $2,013,725 cooperative
agreement received from the U.S. Army Research Laboratories ("ARL"),
which commenced in August 2002,
o $69,951 recognized under a 12-month $69,951 SBIR Phase I contract
received from the U.S. Department of the Army, which commenced in
February 2002,
-14-
o $32,339 recognized under a 9-month, $100,000 SBIR Phase I contract
received from the U.S. Department of Energy ("DoE"), which commenced
in July 2002,
o $13,413 recognized under a subcontract with Princeton University,
pursuant to a 24-month $600,000 prime contract Princeton University
received from ARL, which commenced in July 2002 and
o $11,213 recognized under a 9-month, $100,000 SBIR Phase I contract
received from DoE, which commenced in July 2002.
The Company earned $793,518 from its sales of OLED materials for evaluation
purposes in 2002, compared to $194,330 in 2001. The increase in this amount is
mainly due to an increased volume of OLED materials purchased for evaluation by
potential OLED manufacturers, including the Company's current joint development
partners. The Company commenced sales of OLED materials for evaluation purposes
in 2001.
During 2002, the Company received non-refundable cash payments of $4,266,667 in
the aggregate in connection with its joint development, technology development
and evaluation and license agreements compared to $400,000 in 2001. The Company
recognized revenues of $182,796 of this amount as fees for technology
development and evaluation, with the remainder being recorded as unearned
revenue. The increase in these payments resulted from the Company entering into
new agreements of this nature in 2002 and receiving additional amounts under
such agreements that were in place during 2001.
During 2002, the Company sold approximately $3 million of it net operating
losses (NOLs) to New Jersey under the Technology Tax Certificate Transfer
Program. The Company received $225,657 for the sale of the NOLs and recorded it
as other revenue. The Company has not sold any of its NOLs in the past but may
sell more in the future.
The Company incurred research and development expenses of $15,804,267 for the
year ended December 31, 2002, compared to $12,310,036 for the year ended
December 31, 2001. The increase is mainly attributed to the following:
o The Company incurring costs in 2002 in the amount of $6,189,638 for
further development and operation of the Company's facility in
Ewing, New Jersey, compared to $5,287,884 in such costs during 2001.
The increase is mainly attributable to increased salaries and costs
incurred in connection with, and as a result of, the expansion of
this facility.
o The Company incurring costs in 2002 in the amount of $1,282,803 for
the preparation, filing and prosecution of patent applications and
for other intellectual property rights protection, compared to
$940,480 in such costs during 2001. The increase is attributable to
increased number of patents filed in 2002 as compared to 2001.
o The Company incurring non-cash charges in the amount of $5,487,515
during 2002 in connection with its Development and License Agreement
with PPG Industries, Inc. ("PPG"), compared to $2,283,182 in similar
charges during 2001. The increase is due to the Company issuing
361,024 shares of its Common Stock, warrants to purchase 361,024
shares of its Common Stock to PPG and options to purchase 30,000
shares of its Common Stock to PPG employees for services performed
in 2002, as compared to the Company having issued 121,843 shares of
its Common Stock, warrants to purchase 121,843 shares of its Common
Stock to PPG and options to purchase 26,333 of its Common Stock to
PPG's employees for services performed in 2001. For further
discussion, see Note 8 of the Notes to Consolidated Financial
Statements.
o The Company incurring non-cash charges in the amount of $289,900
during 2002 for options granted to its Scientific Advisory Board
(the "SAB"), compared to similar charges of $1,344,686 during 2001
for the vesting of warrants issued to the SAB in 2000 and for
options granted to the SAB in 2001. The decrease is due mainly to
the warrants issued in 2000 becoming fully vested in 2001. For
further discussion, see Note 11 of the Notes to Consolidated
Financial Statements.
General and administrative expenses for the Company were $4,754,850 for the
year ended December 31, 2002, compared to $3,915,854 for the year ended December
31, 2001. The increase in these expenses is mainly due to increased salaries and
costs incurred in connection with, and as a result of, the expansion of the
Company's facility in Ewing, New Jersey. The Company also experienced an
increase in marketing costs, including costs relating to public relations and
shareholder services.
In September 2002, $7,000,002 of the $15,000,000 in convertible promissory notes
that had been issued by the Company in August 2001 (the "Notes") were converted
into shares of the Company's Common Stock, with the remaining amount being
repaid by the Company in cash. As of the date of conversion and repayment, the
$15,000,000 face value of the Notes exceeded their then-carrying value due to an
unamortized original issuance discount (OID) and beneficial conversion feature
(BCF) on the Notes. As a result, upon the conversion and repayment of the Notes,
the Company recognized a non-cash debt conversion and extinguishment expense of
$10,011,780 related to the unamortized portion of the OID and BCF and the
intrinsic value of the Notes repurchased. In the same period in 2001, there were
no such expenses. For further discussion, see Note 10 of the Notes to
Consolidated Financial Statements.
-15-
The Company's interest expense was $3,298,589 for the year ended December 31,
2002, compared to $1,848,142 for the year ended December 31, 2001. The increase
is primarily due to amortization of the original issuance discount (OID) and the
beneficial conversion feature (BCF) of the Notes. For further discussion, see
Note 10 of the Notes to Consolidated Financial Statements.
In September 2002, the conversion price of the Series B Convertible Preferred
Stock issued to Motorola in September 2000 was adjusted in accordance with the
Certificate of Designations for this stock. The Company accounted for this
adjustment as a contingent beneficial conversion feature ("CBCF"). As a result,
the Company recorded the CBCF as a deemed dividend in the amount of $1,953,479.
In 2001, the adjustment resulted in a deemed dividend of $182,127. For further
discussion, see Note 9 of the Notes to Consolidated Financial Statements.
In August 2001, the Company completed a private placement financing transaction
with institutional investors for the purchase of the Notes, Convertible
Preferred Stock and warrants to purchase the Company's Common Stock. As a result
of this financing transaction and the conversion of the preferred stock into
shares of the Company's Common Stock in December 2001, the Company recorded
deemed dividends in the amount of $2,335,209 in 2001. In 2002, the Company
recorded no such deemed dividends.
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000
The Company had a net loss attributable to Common Stock shareholders of
$18,873,436 (or $1.11 per share) for the year ended December 31, 2001, compared
to a net loss attributable to Common Stock shareholders of $9,529,046 (or $0.62
per share) for the year ended December 31, 2000. The increase in net loss
attributable to Common Stock shareholders was primarily attributed to the
following:
o an increase in cash and non-cash research and development expenses;
o an increase in non-cash interest expenses due to convertible
promissory notes issued by the Company in August 2001 (see Note 10
of the Notes to Consolidated Financial Statements); and
o non-cash deemed dividends associated with a private placement
completed in August 2001 (see Note 10 of the Notes to Consolidated
Financial Statements).
The Company earned $1,058,571 in contract research revenue from the U.S.
Government in 2001, compared to $492,756 in 2000. The increase was primarily due
to the Company being awarded and commencing work on additional government
contracts. In 2001, contract revenue was derived primarily from the following
government contracts:
o $723,034 recognized under an 24-month, $2,977,471 Phase I contract
received from DARPA, which commenced in June 2000,
o $225,079 recognized under a 24-month, $729,158 SBIR Phase II
contract received from DoD, which commenced in February 2001, and
o $105,536 recognized under a two-year, $400,000 Phase II contract
from the National Science Foundation under the Small Business
Technology Transfer Program, which commenced in October 1999 and was
completed in September 2001.
The Company earned $194,330 from its sales of OLED materials for evaluation
purposes in 2001, compared to no such earnings in 2000. The Company commenced
these sales in 2001.
During 2001, the Company received non-refundable cash payments of $400,000 in
the aggregate in connection with joint development and technology evaluation
agreements, all of which was recorded as unearned revenue. In 2000, the Company
had no such agreements in place.
The Company incurred research and development expenses of $12,310,036 for the
year ended December 31, 2001, compared to $7,109,205 for the year ended December
31, 2000. The increase was mainly attributed to the following:
o The Company incurring costs in 2001 in the amount of $5,287,884 for
the development and operation of the Company's facility in Ewing,
New Jersey, compared to $3,422,198 in such costs during 2000. The
increase was mainly attributable to the expansion of the Company's
research and development team and increased costs associated with an
additional 10,000 square feet added to the facility in April 2001.
o The Company incurring non-cash charges in the amount of $2,283,182
during 2001 in connection with the Development and License Agreement
with PPG, compared to $663,111 in similar charges during 2000. The
increase was mainly due to timing of services performed, since work
under this agreement had only commenced in October 2000. For further
discussion, see Note 8 of the Notes to Consolidated Financial
Statements.
-16-
o The Company incurring non-cash charges of $1,695,072 for
amortization of the Company's acquired technology, compared to
similar charges of $460,799 in 2000. The increase was due to the
timing of the Company's acquisition of this technology. Amortization
commenced on the date of the acquisition. For further discussion,
see Note 6 of the Notes to Consolidated Financial Statements.
o The Company incurring non-cash charges of $1,344,686 for warrants
issued to the SAB in 2000 and options granted to the SAB in 2001,
compared to $602,683 in similar charges for 2000. The increase was
due to the required accounting treatment for the vesting of warrants
and the issuance of options. The warrants became fully vested as of
December 31, 2001. For further discussion, see Note 11 of the Notes
to Consolidated Financial Statements.
General and administrative expenses for the Company were $3,915,854 for the year
ended December 31, 2001, compared to $3,261,113 for the year ended December 31,
2000. The increase in general and administrative expenses was mainly due to
increased salaries and costs associated with expansion of the Company's facility
in Ewing, New Jersey and the Company's hiring of additional employees.
In August 2001, the Company completed a private placement financing transaction
with institutional investors for the purchase of the Notes, Convertible
Preferred Stock and warrants to purchase the Company's Common Stock. As a result
of this financing transaction and the conversion of the preferred stock into
shares of the Company's Common Stock in December 2001, the Company recorded
deemed dividends in the amount of $2,335,209 in 2001. In 2000, the Company
recorded no such deemed dividends.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2002, the Company had cash and cash equivalents of
$15,905,416 and short-term investments of $4,662,898. This compares to cash and
cash equivalents of $7,883,132, short-term investments of $4,516,199 and
restricted cash of $15,162,414 as of December 31, 2001.
During 2002, cash used in operating activities was $4,764,265 as compared to
$7,702,583 in 2001. This decreased use of cash in operating activities was
mainly due to an increase in deferred license fees and deferred revenues. In
2002, the Company received non-refundable cash payments of $4,266,667 in the
aggregate in connection with its new and existing joint development, technology
development and evaluation and license agreements. In 2001, the Company
received non-refundable cash payments of $400,000 in the aggregate in connection
with its joint development and technology evaluation agreements, all of which
was recorded as unearned revenue.
Also during 2002, the Company received cash proceeds of $104,232 as a result of
the exercise of warrants and options to purchase 22,533 shares of the Company's
Common Stock. During 2001, warrants and options to purchase 271,431 shares of
the Company's Common Stock were exercised, resulting in cash proceeds to the
Company of $1,127,510. During 2000, warrants and options to purchase 1,754,353
shares of the Company's Common Stock were exercised, resulting in cash proceeds
to the Company of $6,854,843.
In August and September 2002, the Company completed registered direct offerings
(the "Offerings") of 1,277,014 and 383,452 shares, respectively, of the
Company's Common Stock at $5.09 per share and $5.41 per share, respectively. The
Offerings resulted in aggregate proceeds to the Company of $8,055,186, net of
$519,288 in costs associated with completion of the Offerings.
In August 2001, the Company sold in a private placement transaction 5,000 shares
of Series C Convertible Preferred Stock and warrants to purchase shares of the
Company's Common Stock, resulting in net cash proceeds of $4,496,477. In
December 2001, the Company completed the second tranche of this private
placement by selling 5,000 shares of Series D Convertible Preferred Stock and
warrants to purchase shares of the Company's Common Stock, resulting in
additional net cash proceeds of $4,640,602. In December 2001, all shares of
Series C and Series D Convertible Preferred Stock were converted into Common
Stock. For further discussion, see Note 10 of the Consolidated Financial
Statements.
In the same transaction, the Company issued secured convertible promissory notes
(the "Notes") that resulted in the Company receiving restricted cash proceeds of
$15,000,000 (the "Notes"). In September 2002, $7,000,002 of the Notes were
converted into 1,375,246 shares of the Company's Common Stock, with the balance
of $7,999,998 of the Notes being repaid by the Company in cash. As a result, the
Company received $6,180,000 in cash, net of costs associated with conversion and
repayment of the Notes, the use of which was previously restricted. The Company
has no restricted cash as of December 31, 2002.
-17-
In December 2000, the Company sold in a private placement 631,527 units, each
unit consisting of one share of the Company's Common Stock and one warrant with
an exercise price of $10.00. The units were issued at $8.50 per unit and the
transaction resulted in net cash proceeds to the Company of $5,367,979. In the
first quarter of 2001, the Company received additional net cash proceeds of
$1,348,984 from the completion of this private placement transaction through the
issuance of an additional 158,704 units.
In the fourth quarter of 2001, the Company commenced construction on the
expansion of its current facility in Ewing, New Jersey. This construction was
completed in the first quarter of 2002. As of December 31, 2002, the Company had
incurred costs of $2,023,000 relating to the construction and purchase of
equipment for the expansion.
Working capital increased to $18,541,596 at December 31, 2002 from working
capital of $17,994,232 at December 31, 2001. The net increase is due primarily
to a decrease from conversion and repayment of the Notes and an increase from
the receipt of cash payments in connection with the Company's joint development,
technology development and evaluation and license agreements. The Company's net
cash used in operating activities was $4,764,265, $7,702,583, and $6,493,590 in
2002, 2001 and 2000, respectively. Non-cash expenses related to the issuance of
Common Stock, warrants and options, and the amortization of discounts relating
to the issuance, conversion and repayment of convertible debt (see Note 10 of
the Notes to Consolidated Financial Statements) were $19,162,516, $5,705,890 and
$1,275,794 in 2002, 2001 and 2000, respectively.
The Company anticipates, based on management's internal forecasts and
assumptions relating to its operations (including assumptions regarding working
capital requirements of the Company, the progress of research and development,
the availability and amount of other sources of funding available to Princeton
University for research relating to the OLED technology and the timing and costs
associated with the preparation, filing and prosecution of patent applications
and the enforcement of intellectual property rights), that it has sufficient
cash, cash equivalents and short term investments to meet its obligations into
2004. Management believes that potential additional financing sources for the
Company include long-term and short-term borrowings, public and private sales of
the Company's equity and debt securities and receipt of cash upon the exercise
of warrants. It should be noted, however, that substantial additional funds will
be required in the future for research, development and commercialization of the
Company's OLED technologies and OLED materials, to obtain and maintain patents
and other intellectual property rights in these technologies and materials, and
for working capital and other purposes, the timing and amount of which are
difficult to ascertain. For example, under the Company's Research Agreement with
Princeton University, the Company is required to pay Princeton University
$1,495,599 per year through July 2007. There can be no assurance that additional
funds will be available to the Company when needed, on commercially reasonable
terms or at all.
CRITICAL ACCOUNTING POLICIES
Management believes the following represent the Company's critical accounting
policies:
Revenue Recognition
Contract research revenues represent reimbursements by the U.S. Government for
all or a portion of the research and development costs the Company incurs
related to its government contracts. Revenues are recognized proportionally as
the research and development costs are incurred or as defined milestones are
achieved.
Development chemical revenues represent sales of OLED materials to potential
OLED manufacturers for evaluation and product development purposes. These
revenues are recognized at the time of shipment and passage of title to the OLED
materials. The customer does not have the right to return the materials.
The Company also receives non-refundable advanced license payments under certain
of its joint development and technology evaluation agreements. These payments
are deferred until a license agreement is executed or negotiations have ceased
and there is no likelihood of executing a license agreement with the other
party. If a license agreement is executed, these revenues will be recorded over
the expected life of the licensed technology; otherwise, they will be recorded
at the time negotiations with the other party show no further likelihood of
success.
Valuation of Acquired Technology
The Company continually reviews its acquired OLED technologies for events or
changes in circumstances that might indicate the carrying value of such
technologies may not be recoverable. Factors considered important that could
cause impairment include, but are not limited to, significant changes in the
Company's anticipated future use of these technologies or the Company's overall
business strategy as it pertains to the technology, particularly in light of
patents owned by others in the same field of use. As of December 31, 2002,
management of the Company believed that no revision of the remaining useful
lives or write-down of the Company's acquired technology was required in 2002
and no such revision was needed in 2001 and 2000.
-18-
Valuation of Stock-Based Compensation
The Company accounts for its stock option plans (see Note 11 of the Notes to
Consolidated Financial Statements) under Accounting Principles Board Opinion
("APB") No. 25, "Accounting for Stock Issued to Employees," under which no
compensation cost has been recognized for options issued to employees at fair
market value on the date of grant. In 1995, the Financial Accounting Standards
Board issued SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No.
123 established a fair value based method of accounting for stock-based
compensation plans. SFAS No. 123 requires that a company's financial statements
include certain disclosures about stock-based employee compensation arrangement
regardless of the method used to account for the plan. The Company accounts for
its stock option and warrant grants to non-employees in exchange for goods or
services in accordance with SFAS No. 123 and Emerging Issues Task Force No.
96-18 ("EITF 96-18"). SFAS 123 and EITF 96-18 require that the Company account
for its option and warrant grants to non-employees based on the fair value of
the options and warrants granted.
The Company uses the Black-Scholes option-pricing model to estimate the fair
value of the options granted. In order to calculate the fair value of the
options, assumptions are made for certain components of the model, including
risk-free interest rate, volatility, expected dividend yield rate and expected
option life. Although, the Company uses available resources and information when
setting these assumptions, changes to the assumptions, could cause significant
adjustments to the valuation.
CONTRACTUAL OBLIGATIONS
As of December 31, 2002, the Company had the following contractual commitments:
---------------------------------------------------------------------------
Payments due by period
------------- ------------- ------------- -------------- ------------------
Less than
Contractual Obligations Total 1 year 1-3 years 3-5 years More than 5 years
-------------------------- ------------- ------------- ------------- -------------- ------------------
Long-Term Debt -- -- -- -- --
------------- ------------- ------------- -------------- ------------------
Operating Lease Obligations $274,131 $267,062 $7,069 -- --
------------- ------------- ------------- -------------- ------------------
Capital Lease Obligations $8,599 $4,713 $3,886 -- --
------------- ------------- ------------- -------------- ------------------
Purchase Obligations -- -- -- -- --
------------- ------------- ------------- -------------- ------------------
Other Long-Term Liabilities Reflected
on the Registrant's Balance Sheet
under GAAP -- -- -- -- --
------------- ------------- ------------- -------------- ------------------
Other Obligations:
------------- ------------- ------------- -------------- ------------------
Sponsored Research Obligation $6,854,827 $1,495,599 $4,486,796 $872,433 --
------------- ------------- ------------- -------------- ------------------
Minimum Royalty Obligation $2,200,000 $100,000 $1,800,000 $300,000 $100,000/year(1)
------------- ------------- ------------- -------------- ------------------
Total $9,337,557 $1,867,374 $6,297,751 $1,172,433 $100,000/year(1)
------------- ------------- ------------- -------------- ------------------
(1) Under the Amended License Agreement with Princeton University and USC, the
Company is obligated to pay Princeton University minimum royalties of
$100,000 per year until such time the agreement is no longer in effect.
OFF-BALANCE SHEET ARRANGEMENTS
As of December 31, 2002, the Company had no off-balance sheet arrangements in
the nature of guarantee contracts, retained or contingent interests in assets
transferred to unconsolidated entities (or similar arrangements serving as
credit, liquidity or market risk support to unconsolidated entities for any such
assets), or obligations (including contingent obligations) arising out of
variable interests in unconsolidated entities providing financing, liquidity,
market risk or credit risk support to, or that engage in leasing, hedging or
research and development services with, the Company.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Company does not expect that the adoption of any recently issued accounting
pronouncements would have a significant impact on the Company's consolidated
financial statements. For further discussion, see Note 4 of the Notes to
Consolidated Financial Statements.
FACTORS THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL CONDITION
The following factors, as well as other factors affecting the Company's
operating results and financial condition, could cause the Company's actual
future results and financial condition to differ materially from those
projected.
-19-
The Company does not expect to be profitable in the foreseeable future, and may
never be profitable.
Since inception, the Company has generated limited revenues while incurring
significant losses. The Company expects to incur losses for the foreseeable
future and until such time, if ever, as the Company is able to achieve
sufficient levels of revenue from the commercial exploitation of its OLED
technologies to support its operations. You should note, however, that:
o OLED technology may never become commercially viable;
o markets for flat panel displays utilizing OLED technology may be
limited; and
o the Company may never generate sufficient revenues from the
commercial exploitation of its OLED technologies to become
profitable.
Additionally, even if the Company finds commercially viable applications for its
OLED technologies, the Company may never recover its research and development
costs.
If the Company does not receive additional financing in the future, it might not
be able to continue the research, development and commercialization of its OLED
technologies.
The Company's capital requirements have been and will continue to be
significant. The completion of the research, development and commercialization
of OLED technologies for potential applications will require significant
additional effort and resources. The Company's cash on hand may not be
sufficient to meet all of its future obligations. When the Company needs
additional funds, such funds may not be available on commercially reasonable
terms or at all. If the Company cannot obtain more money when needed, its
business might fail. Additionally, if the Company attempts to raise money in an
offering of shares of its Common Stock, or if the Company engages in
acquisitions involving the issuance of additional shares of its Common Stock,
the issuance of these shares will dilute the Company's then-existing
shareholders.
If its OLED technologies are not feasible for broad-based product applications,
the Company may never generate revenues sufficient to support ongoing
operations.
Before OLED manufacturers will agree to utilize the Company's OLED technologies
for wide-scale commercial production, it is likely that the Company must first
demonstrate to the satisfaction of these manufacturers that the Company's OLED
technologies are feasible for broad-based product applications. This, in turn,
will require substantial advances in the Company's research and development
efforts in a number of areas, including:
o device reliability;
o the development of long-lived OLED materials for full color OLED
displays; and
o issues related to scalability and cost effective fabrication
technologies for product applications.
The Company's efforts may never demonstrate the feasibility of its OLED
technologies for broad-based product applications, particularly full color,
large area, high resolution and high information content flat panel displays
such as those used in televisions.
The Company's research and development efforts remain subject to all of the
risks associated with the development of new products based on emerging and
innovative technologies, including, without limitation, unanticipated technical
or other problems and the possible insufficiency of the funds allocated to
complete development of these products. Technical problems may result in delays
and cause the Company to incur additional expenses that would increase its
losses. If the Company cannot complete research and development of its OLED
technologies successfully, or if the Company experiences delays in completing
research and development of its OLED technologies for use in potential
applications, particularly after the occurrence of significant expenditures, the
Company's business may fail.
Even if the Company's OLED technologies are technically feasible, they may not
be adopted by manufacturers of OLEDs and OLED-containing products.
The potential size, timing and viability of market opportunities targeted by the
Company are uncertain at this time. Market acceptance of the Company's OLED
technologies will depend, in part, upon these technologies providing benefits
comparable to CRT and LCD technologies (the current standard display
technologies) at an appropriate cost, and the adoption of these technologies by
consumers, neither of which have been achieved. Also, there may be a number of
additional technologies that OLED manufacturers need to utilize in order to
bring OLED-containing products to the market. Many potential licensees of the
Company's OLED technologies manufacture flat panel displays utilizing competing
technologies, and may, therefore, be reluctant to redesign their products or
manufacturing processes to incorporate the Company's OLED technologies.
Moreover, even if the Company's OLED technologies are a viable alternative to
competing technologies, if additional technologies are required to bring
OLED-containing products to the market and potential licensees are unable to
obtain access to these technologies, they may not utilize the Company's OLED
technologies.
-20-
If the Company's research partners fail to make advances in their research, or
if they terminate their relationships with the Company, the Company might not
succeed in commercializing its OLED technologies.
Research and development of commercially viable applications for the Company's
OLED technologies depend substantially on the success of the sponsored research
conducted by the Company's research partners. The Company cannot be certain that
its research partners will make additional advances in the research and
development of OLED technology. Moreover, although the Company funds OLED
technology research, the scope of and technical aspects of this research and the
resources and efforts directed to this research are in large part subject to the
control of the Company's research partners.
The Company's most significant research and development relationships are with
Princeton University and USC. The Company's Research Agreement with Princeton
University expires in July 2007 and both this agreement and the Amended License
Agreement with Princeton University and USC can be terminated for various
reasons. For example, the Research Agreement provides that if Dr. Forrest is
unavailable to continue to serve as the principal investigator, because he is no
longer associated with Princeton University or for any other reason, and a
successor acceptable to both the Company and Princeton University is not
available, Princeton University has the right to terminate the Research
Agreement without impacting the Amended License Agreement. The termination of
the Research Agreement or the Amended License Agreement would materially and
adversely affect the Company's ability to research, develop and commercialize
its OLED technologies.
If the Company cannot form strategic relationships with companies that
manufacture OLEDs and OLED-containing products, its commercialization strategy
will fail.
The Company's strategic plan depends upon the development of strategic licensing
relationships with high-volume manufacturers of OLEDs and OLED-containing
products. The Company has entered into only one such strategic licensing
relationship with Dupont Displays. All of the Company's other relationships with
manufacturers of OLEDs and OLED-containing products are currently limited to
research, development and pre-commercial evaluation and qualification of the
Company's OLED technologies and materials. The Company's ability to enter into
additional strategic licensing and sublicensing relationships may require it to
make financial or other commitments. The Company might not be able, for
financial or other reasons, to enter into these relationships on commercially
acceptable terms, or at all. Failure to do so would have a material adverse
effect on the Company.
The Company's prospects also will be significantly affected by its ability to
sell its proprietary OLED materials to manufacturers of OLEDs. The Company's
current Supply Agreement with PPG provides the Company with a source for these
OLED materials and with exclusive rights to sell them to OLED manufacturers, but
this agreement expires at the end of 2007. The Company's inability to continue
obtaining these OLED materials from PPG or another source would have a material
adverse effect on the Company.
If the Company cannot protect its intellectual property rights, or if the
Company's OLED technologies are found to infringe the rights of others, the
Company's business will suffer.
The value of the Company's OLED technologies is dependent on the Company's
ability to secure and maintain appropriate patent and other intellectual
property rights protection. Although the Company owns or licenses many OLED
technology patents that have already issued, there can be no assurance that
additional patents applied for will be obtained, or that any of these patents,
once issued, will afford commercially significant protection for the Company's
OLED technologies, or will be found valid if challenged. Moreover, the Company
has not obtained patent protection for some of its OLED technologies in all
foreign countries in which OLEDs might be manufactured or sold. In any event,
the patent laws of other countries may differ from those of the United States as
to the patentability of OLED technology and the degree of protection afforded.
Other companies and institutions may independently develop OLED technologies
that are equivalent or superior to those of the Company, and may obtain patent
or similar rights with respect to these technologies. There are a number of
other companies and organizations that have been issued patents and are filing
additional patent applications relating to OLED technology, including Kodak,
which holds a number of patents related to OLED technology. There can be no
assurance that the exercise of some aspects of the patent rights respecting the
Company's OLED technologies, including that being developed by Princeton
University and USC or licensed from Motorola, will not infringe on the patents
of others. In this event, the Company or its partners may be required to obtain
licenses, pay damages, modify their products or methods of operation, or be
prohibited from making, using, selling or offering to sell some or all OLEDs and
OLED-containing products. The Company also might not have the financial or other
resources necessary to enforce or defend a patent infringement action, and the
licensors of the Company's licensed patents might not enforce such an action in
a timely manner. If products incorporating the Company's OLED technologies are
found to infringe upon the patent or other intellectual property rights of
others, it could have a material adverse effect on the Company.
-21-
The U.S. Government has rights to the Company's OLED technologies that might
prevent the Company from realizing the benefits of these technologies.
The U.S. Government, through various government agencies, has provided and
continues to provide funding to the Company, Princeton University and USC for
research activities related to certain aspects of the Company's OLED
technologies. Based on its having provided this funding, the government has
rights to these OLED technologies that could restrict the Company's ability to
market them to the government for military and other applications, or to third
parties for commercial applications. Moreover, if the government determines that
the Company has not taken effective steps to achieve practical application of
these OLED technologies in any field of use in a reasonable time, the government
may require the Company to grant licenses to other parties in this field of use.
Any of these occurrences would limit the Company's ability to obtain the full
benefits of its OLED technologies.
Because many of the Company's competitors have better name-recognition and
greater financial, technical, marketing and research capabilities, the Company
may never be able to compete successfully in the flat panel display industry.
The flat panel display industry is characterized by intense competition. The
market is currently, and will likely continue to be for some time, dominated by
products utilizing LCD technology. Numerous companies are making substantial
investments in, and conducting research to improve characteristics of, LCD
technology. Several other flat panel display technologies have been, or are
being, developed, including technologies for the production of field emission,
inorganic electroluminescence, gas plasma and vacuum fluorescent displays. In
addition, other companies are engaged in research and development activities
with respect to technology using OLEDs. Advances in LCD technology or any of
these developing technologies may overcome their current limitations and permit
them to become the leading technologies for flat panel displays, either of which
could limit the potential market for flat panel displays utilizing the Company's
OLED technologies.
Substantially all of the Company's competitors have better name recognition and
greater financial, technical, marketing, personnel and research capabilities
than the Company. The Company's competitors may succeed in developing
technologies and applications that are more cost-effective or have fewer display
limitations than the Company's OLED technologies. In addition, the Company may
never be able to compete successfully or develop commercial applications for its
OLED technologies.
If the Company cannot keep its key employees or hire other talented persons as
it grows, the Company's business might not succeed.
The Company's performance is substantially dependent on the continued services
of senior management and other key personnel, and its ability to offer
competitive salaries and benefits to its employees. The Company does not have
employment agreements with any of its management or key personnel. Additionally,
competition for highly skilled technical, managerial and other personnel is
intense. The Company might not be able to attract, hire, train, retain and
motivate the highly skilled managers and employees it needs to be successful. If
the Company fails to attract and retain the necessary technical and managerial
personnel, it will suffer and might fail.
The Company can issue shares of Preferred Stock that can adversely affect the
rights of shareholders of its Common Stock.
The Company's articles of incorporation authorize it to issue up to 5,000,000
shares of Preferred Stock with designations, rights and preferences determined
from time-to-time by the Company's Board of Directors. Accordingly, the Board of
Directors is empowered, without shareholder approval, to issue Preferred Stock
with dividend, liquidation, conversion, voting or other rights superior to those
of shareholders of its Common Stock. For example, an issuance of shares of
Preferred Stock could:
o adversely affect the voting power of the shareholders of Common Stock;
o make it more difficult for a third party to gain control of the Company;
o discourage bids for the Company's Common Stock at a premium; or
o otherwise adversely affect the market price of the Common Stock.
The Company's Board of Directors has designated and issued two series of
Preferred Stock that are currently outstanding: (a) 200,000 shares of Series A
Nonconvertible Preferred Stock, all of which are held by an entity controlled by
Sherwin Seligsohn, and (b) 300,000 shares of Series B Convertible Preferred
Stock that is held by Motorola. The Series B Convertible Preferred Stock is
convertible into shares of Common Stock in accordance with the Company's
articles of incorporation. As of December 31, 2002, 150,000 shares of this
Series B Convertible Preferred Stock are convertible into Common Stock and
246,809 shares of Common Stock would be issuable upon the conversion of these
shares. The Company may issue additional shares of authorized Preferred Stock at
any time in the future.
-22-
The market price of the Company's Common Stock might be highly volatile.
The market price of the Company's Common Stock might be highly volatile, as has
been the case with the securities of many other companies, particularly other
small and emerging-growth companies. Factors such as the following may have a
significant impact on the market price of the Company's Common Stock:
o the Company's expenses and operating results;
o announcements by the Company or its competitors of technological
developments, new product applications or license arrangements;
and
o other factors affecting the flat panel display and related
industries in general.
The issuance of other publicly traded shares of the Company's Common Stock could
drive the stock price down.
The price of the Company's Common Stock can be expected to decrease if:
o other shares of the Company's Common Stock that are currently
subject to restriction on sale become freely salable, whether
through an effective registration statement or under Rule 144 of
the Securities Act of 1933; or
o the Company issues additional shares of Common Stock that might be
or become freely salable, including shares that would be issued
upon conversion of its Series B Convertible Preferred Stock.
If the price of the Company's Common Stock goes down, the Company may have to
issue more shares than are presently anticipated to be issued under the terms of
its Development and License Agreement with PPG.
Under the Development and License Agreement between the Company and PPG, the
Company is required to issue to PPG shares of the Company's Common Stock for
services rendered by PPG. If, at the time of issuance, the price of the
Company's Common Stock has declined materially since the date of the Development
and License Agreement, the Company may be required to issue to PPG more shares
of the Company's Common Stock than were initially anticipated. This increase in
the number of shares available for public sale could cause people to sell the
Company's Common Stock, including in short sales, which could drive the price of
the Common Stock down, thus reducing its value and perhaps hindering the
Company's ability to raise additional funds in the future. In addition, such an
increase in the number of outstanding shares of the Company's Common Stock would
further dilute existing holders of this stock.
The Company's executive officers and directors own a large percentage of the
Company's Common Stock and could exert significant influence over matters
requiring shareholder approval, including takeover attempts.
The Company's executive officers and directors, and their respective affiliates,
beneficially own as of December 31, 2002, approximately 13.4% of the outstanding
shares of the Company's Common Stock. Moreover, Pine Ridge Financial Inc. and
Strong River Investments, Inc. assigned to management of the Company their
rights to vote the shares of Common Stock issued to them upon conversion of the
Convertible Preferred Stock, notes and warrants issued to them in an August 2001
private placement transaction. Accordingly, these shareholders and members of
management may, as a practical matter, be able to exert significant influence
over matters requiring approval by the Company's shareholders, including the
election of directors and the approval of mergers or other business
combinations. This concentration could also have the effect of delaying or
preventing a change in control of the Company.
The Company's past use of Arthur Andersen as its independent auditor limits the
ability of shareholders to seek potential recoveries from them related to their
work.
On July 30, 2002, the Company announced that it had appointed KPMG to replace
Arthur Andersen as the Company's independent public auditor. The Company's
consolidated financial statements as of and for each of the years ended December
31, 1999 through 2001 have been audited by Arthur Andersen, as stated in its
report dated March 5, 2002, which report is incorporated herein. After
reasonable efforts, the Company has been unable to obtain Arthur Andersen's
consent to the incorporation by reference into this document of its report with
respect to the Company's financial statements. Under these circumstances, Rule
437a under the Securities Act of 1933 permits the Company to file this document
without a written consent from Arthur Andersen.
The absence of this consent may limit recovery by investors in the Company's
Common Stock on certain claims. In particular, and without limitation, investors
will not be able to assert claims against Arthur Andersen under Section 11 of
the Securities Act of 1933. In addition, the ability of Arthur Andersen to
satisfy any claims (including claims arising from Arthur Andersen's provision of
auditing and other services to the Company) will be limited as a practical
matter due to recent events regarding Arthur Andersen. This means that if an
investor in the Company's Common Stock were to assert a claim under Section 11
of the Securities Act relating to the purchase of this stock, that investor
would not be able to seek damages from Arthur Andersen. Thus, as compared to a
hypothetical investor in stock of a company whose inclusion of financial
statements in its annual report was consented to by that company's independent
auditor, an investor in the Company's Common Stock would have fewer alternatives
in seeking damages relating to the investor's purchase of such stock.
-23-
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not utilize financial instruments for trading purposes and
holds no derivative financial instruments that could expose the Company to
significant market risk. The Company's primary market risk exposure with regard
to financial instruments is to changes in interest rates, which would impact
interest income earned on investments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's financial statements and the relevant notes thereto are attached
hereto beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to this item is set forth in the Company's definitive
Proxy Statement (the "Proxy Statement") to be filed with the Securities and
Exchange Commission for the Annual Meeting of Shareholders to be held on June
26, 2003, under the headings "Nominees for Election as Directors" and
"Compliance with Section 16(a) of the Exchange Act," and is incorporated herein
by reference. Information regarding the Company's executive officers is included
at the end of Part I of this report.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to this item is set forth in the Company's Proxy
Statement under the heading "Executive Management Compensation," and is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Information with respect to the ownership of the Company's securities by certain
persons is set forth in the Company's Proxy Statement under the heading
"Principal Shareholders," and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to transactions with the Company's managers and other
related parties is set forth in the Company's Proxy Statement under the heading
"Certain Transactions", and is incorporated herein by reference.
ITEM 14. CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and Chief Financial Officer have
concluded, based on an evaluation conducted within 90 days prior to the filing
date of this report, that the Company's disclosure controls and procedures have
functioned effectively so as to provide those officers the information necessary
to evaluate whether:
(i) this report contains any untrue statement of a material fact or
omits to state a material fact necessary to make the statements made, in light
of the circumstances under which such statements were made, not misleading with
respect to the period covered by this report, and
(ii) the financial statements and other financial information included
in this report fairly present, in all material respects, the financial
condition, results of operations and cash flows of the Company as of, and for,
the periods presented in this report.
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There have been no significant changes in the Company's internal controls or
other procedures since the date of the Chief Executive Officer's and the Chief
Financial Officer's evaluation that could significantly affect these internal
controls, including any corrective actions with regard to significant
deficiencies and material weaknesses.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(1) Financial Statements:
Independent Auditors' Report................................. F-2
Consolidated Balance Sheets.................................. F-4
Consolidated Statements of Operations........................ F-5
Consolidated Statements of Shareholders' Equity (Deficit).... F-6
Consolidated Statements of Cash Flows........................ F-8
Notes to Consolidated Financial Statements................... F-9
(2) Financial Statement Schedules:
None.
(3) Exhibits:
The following is a list of the exhibits filed as part of this
report. Where so indicated by footnote, exhibits that were
previously filed are incorporated by reference. For exhibits
incorporated by reference, the location of the exhibit in the
previous filing is indicated parenthetically, together with a
reference to the filing indicated by footnote.
Exhibit
Number Description
- ------- -----------
3.1 Articles of Incorporation of the Company. (1)
3.2 Articles of Amendment to the Company's Articles of Incorporation filed
with the Department of State of the Commonwealth of Pennsylvania on
July 31, 2000. (12)
3.3 Bylaws of the Company. (1)
4.1 Specimen stock certificate representing the Common Stock. (2)
4.2 Specimen warrant certificate representing the Warrants. (3)
4.3 Form of Public Warrant Agreement. (2)
4.4 Statement of Designations and Preferences of Series A Non-Convertible
Preferred Stock. (2)
4.5 Form of Private Placement Warrant. (6)
4.6 Certificate of Designations for Series B Convertible Preferred Stock.
(12)
4.7 Amended and Restated Warrant of Strong River Investments, Inc. to
Purchase 78,740 Shares of Common Stock dated as of August 22, 2001 (11)
4.8 Amended and Restated Warrant of Pine Ridge Financial Inc. to Purchase
78,740 Shares of Common Stock dated as of August 22, 2001 (11)
4.9 Amended and Restated Warrant of Strong River Investments, Inc. to
Purchase 78,740 Shares of Common Stock dated as of August 22, 2001 (11)
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4.10 Amended and Restated Warrant of Pine Ridge Financial Inc. to Purchase