Back to GetFilings.com
===============================================================================
FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended December 31, 2003
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from to
Commission File Number 1-12031
UNIVERSAL DISPLAY CORPORATION
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2372688
- --------------------------------------------- ----------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
375 Phillips Boulevard,
Ewing, New Jersey 08618
- --------------------------------------------- ----------------------------
(Address of principal executive offices) (Zip Code)
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)
-----------------------------------------
(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 |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act) Yes X No
----- -----
The aggregate market value of the voting and non-voting common equity held
by non-affiliates of the registrant as of February 20, 2004, computed by
reference to the closing sale price of the registrant's common stock on the
Nasdaq National Market on June 30, 2003, was approximately $178,049,681. 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 February 20, 2004, the registrant had outstanding 24,781,720 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 16, 2004 are incorporated by reference into Part III of this report.
===============================================================================
TABLE OF CONTENTS
PART I
ITEM 1. BUSINESS ....................................................... 4
ITEM 2. PROPERTIES ..................................................... 14
ITEM 3. LEGAL PROCEEDINGS .............................................. 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ............ 14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS ............................................ 16
ITEM 6. SELECTED FINANCIAL DATA ........................................ 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS ...................................... 17
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ..... 29
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA .................... 29
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE ........................................... 29
ITEM 9A. CONTROLS AND PROCEDURES ........................................ 29
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ............ 30
ITEM 11. EXECUTIVE COMPENSATION ........................................ 30
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT .................................................... 30
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ................ 30
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES ........................ 30
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K ................................................... 31
2
CAUTIONARY STATEMENT
CONCERNING FORWARD-LOOKING STATEMENTS
This report and the documents incorporated by reference in this report
contain some "forward-looking statements" as defined in the Private Securities
Litigation Reform Act of 1995. They also contain information relating to us
that is based on the beliefs of our management, as well as assumptions made
by, and the information currently available to, our management. Among other
things, these statements include, but are not limited to, the statements in
this report and the documents incorporated by reference regarding:
o the outcomes of our ongoing and future organic light emitting diode
(OLED) technology research and development activities;
o our ability to access future OLED technology developments of our
academic and commercial research partners;
o our ability to form and continue strategic relationships with
manufacturers of OLED displays;
o the protections afforded to us by the patents that we own or license;
o the anticipated success of our OLED technologies, materials and
manufacturing equipment commercialization strategies;
o the potential commercial applications of our OLED technologies and
materials, and of OLED displays in general;
o future demand for our OLED technologies and materials;
o the comparative advantages and disadvantages of our OLED technologies
and materials versus competing technologies and materials currently on
the market;
o the nature and potential advantages of any competing technologies that
may be developed in the future;
o the payments that we expect to receive under our existing and future
contracts;
o our future capital requirements;
o the amount and type of securities that we will issue in the future to
our business partners and others; and
o our 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 involving potential future developments are
intended to identify forward-looking statements. All of these forward-looking
statements reflect our 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 by the statements, including those risks
discussed in 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. Except for special
circumstances in which a duty to update arises when prior disclosure becomes
materially misleading in light of subsequent events, we do not intend to
update any of these forward-looking statements to reflect events or
circumstances after the date of this report or to reflect the occurrence of
unanticipated events.
3
PART I
ITEM 1. BUSINESS
Our Company
We are a leader in the research, development and commercialization of
organic light emitting diode, or OLED, technologies for use in a variety of
flat panel display and other applications. OLEDs are thin, lightweight and
power efficient solid state devices, highly suitable for use in portable,
full-color display applications. We believe OLED displays will capture a share
of the growing flat panel display market because they offer advantages over
competing technologies with respect to brightness, power efficiency, viewing
angle, video response time and manufacturing cost. We believe that our
technology leadership and intellectual property position will enable us to
share in the revenues from OLED displays as they enter the mainstream consumer
electronics market.
Our strategy is to further develop and license our proprietary OLED
technologies to display manufacturers for use in applications such as mobile
phones, digital cameras, laptop computers, televisions and other consumer
electronic devices. In support of this primary objective, we also sell our
OLED materials to these display manufacturers and others. Through our internal
research and development efforts and our relationships with world-class
partners such as Princeton University, the University of Southern California
and PPG Industries, Inc., we have established a significant portfolio of OLED
technologies and associated intellectual property rights. We currently own,
exclusively license or have the sole right to sublicense more than 500 patents
issued and pending worldwide. We are currently selling one of our proprietary
OLED materials to Tohoku Pioneer Corporation, have established a cross-license
agreement with DuPont Displays, Inc. and have entered into technology
development and evaluation agreements with AU Optronics Corporation, Samsung
SDI Co., Sony Corporation and Toyota Industries Corporation.
Industry Overview
The Flat Panel Display Market
Flat panel displays have been used for many years in a wide variety of
portable consumer electronics products, including mobile phones, personal
digital assistants, or PDAs, cameras, camcorders, electronic games and laptop
computers. Due to their narrow profile, light weight and high resolution, flat
panel displays are displacing cathode ray tube, or CRT, displays in larger
product applications such as desktop computer monitors and televisions.
The OLED Display Market
An OLED is a solid-state device made by placing a series of organic thin
films between two electrodes. When electrical current is applied to an OLED, a
bright light is emitted. OLEDs use red, green and blue pixels, or white light
with color filters, to generate full-color displays that exhibit a broad
spectrum of colors. Currently, there are two mechanisms through which OLEDs
emit light, phosphorescence and fluorescence. Fluorescent OLEDs emit light
from a singlet state of the emissive material and phosphorescent OLEDs emit
light from a triplet state of the emissive material. By emitting light from a
triplet state, phosphorescence offers up to four times the power efficiencies
of fluorescence.
The initial market for OLED technologies and materials is flat panel
displays, a market currently dominated by liquid crystal displays, or LCDs.
However, OLED displays are an attractive alternative to LCDs as they offer a
number of potential advantages, including:
o a thinner profile and lighter weight;
o higher brightness and contrast ratios, leading to a sharper picture
image and graphics;
o wider viewing angles;
o faster response times for video;
o higher efficiencies, thereby reducing power consumption; and
4
o lower cost manufacturing methods and materials.
We believe OLED displays will be adopted for use in small- to medium-sized
product applications, such as mobile phone main and sub-displays, car audio
systems, digital cameras, PDAs, DVDs, handheld TVs, notebook PCs and
industrial applications. For larger applications such as laptop computers,
desktop computer monitors and televisions, OLED displays may have advantages
over LCDs because of their sharper picture image and graphics, superior video
response time, wider viewing angle and potentially lower manufacturing cost.
All of these characteristics are qualities that are particularly important in
larger display applications.
While the display characteristics of OLEDs and LCDs are different, they
share many similarities in terms of manufacturing technology and
infrastructure, such as those relating to active matrix backplane
technologies. These similarities may enable the conversion of existing LCD
manufacturing facilities to OLED display production with relatively low
capital investment.
Many companies currently are engaged in efforts to develop and commercialize
OLED displays. We believe that if their efforts are successful, they could
result in flat panel displays nearly as thin as a piece of paper with
performance characteristics similar to those of CRT displays. In addition, due
to the inherent transparency of organic materials and through the use of
transparent electrode technology, OLEDs eventually may enable the production
of transparent displays for use in products such as automotive windshields and
windows with enbedded displays. Organic materials also make technically
possible the development of flexible displays for use in an entirely new set
of product applications, such as display devices that can be rolled up for
storage. Research also is being conducted on OLEDs for applications such as
energy-efficient solid-state lighting.
Our Competitive Strengths
We believe our position as one of the leading technology developers in the
OLED industry is the direct result of our technological innovation. We have
built an extensive intellectual property portfolio around our OLED
technologies and are working diligently to enable our manufacturing partners
to adopt our technologies for commercial usage. Our key competitive strengths
include:
Technology Leadership. We are a recognized technology leader in the OLED
industry. We and our research partners at Princeton University and the
University of Southern California pioneered the development of our
phosphorescent OLED, or PHOLED, technology, which can be used to produce OLED
displays that are up to four times as power efficient as current LCDs or
fluorescent OLED displays. We believe that our PHOLED technology is well-
suited for industry usage in the commercial production of OLED displays.
Through our relationships with companies such as PPG Industries and our
academic partners we have developed and continue to develop novel OLED
materials that we believe will facilitate the adoption of our OLED
technologies by display manufacturers.
Relationships with Leading Display Manufacturers. We have established
relationships with well-known display manufacturers that are using, or are
evaluating, our OLED technologies and materials for commercial applications.
In August 2003, we began supplying Tohoku Pioneer with our proprietary red
phosphorescent material for its commercial production of full-color OLED
displays for mobile phones currently being sold in Japan. In addition, we have
entered into a cross-license agreement with DuPont Displays and have
established technology development and evaluation agreements with a number of
companies, including AU Optronics, DuPont Displays, Samsung SDI, Sony and
Toyota Industries.
Broad Portfolio of Intellectual Property. We believe that our extensive
portfolio of patents, trade secrets and know-how provides us with a
competitive advantage in the OLED industry. Through our internal development
efforts and our relationships with Princeton University, the University of
Southern California and Motorola, Inc., we own, exclusively license or have
the sole right to sublicense over 500 patents issued and pending worldwide
related to our PHOLED and other OLED technologies and materials. We also
continue to accumulate valuable trade secret information and technical know-
how relating to our OLED technologies and materials.
Business Model Focused on Technology Licensing. We have adopted an
innovative business model for the display industry in which we neither
manufacture nor sell OLED displays incorporating our technologies and
materials. Rather, we are focused on licensing our OLED technologies to
display manufacturers on a non-exclusive basis. PPG Industries currently
manufactures our proprietary OLED materials which we then qualify
5
and sell to display manufacturers. We believe our business model allows us to
concentrate on our core strengths of technology development and innovation,
while at the same time providing significant operating leverage. We also
believe that this approach may reduce potential competitive conflicts between
us and our customers.
Established U.S. Government Contracts to Fund Research and Development. We
have entered into several research and development contracts with U.S.
government agencies such as the Department of Defense Advanced Research
Projects Agency (DARPA), U.S. Army Research Laboratories, U.S. Department of
the Army and the Department of Energy. Under these contracts, the U.S.
government funds a portion of our efforts to develop next-generation OLED
technologies for applications such as flexible displays and energy-efficient
solid-state lighting. This enables us to supplement our internal research and
development budget with additional funding.
Experienced Management and Scientific Advisory Team. Our management team has
significant experience in developing business models focused on licensing
disruptive technologies in high growth industries which serves to
differentiate us from our competitors. In addition, our management team has
assembled a Scientific Advisory Board that includes some of the leading
researchers in the OLED industry. We believe our Scientific Advisory Board,
which includes OLED researchers Dr. Stephen R. Forrest of Princeton
University, Dr. Mark E. Thompson of the University of Southern California and
Dr. Phillip C. Yu, Associate Director of Research and Development of PPG
Industries, as well as Dr. Julia J. Brown, the Chair of our Scientific
Advisory Board and our Chief Technical Officer and Dr. Michael Hack, our Vice
President of Strategic Product Development, has enhanced our reputation and
our competitive profile.
Our Business Strategy
Our business strategy is to promote our OLED technologies and materials for
widespread use OLED displays and other product applications. We presently are
focused on the following steps to implement our business strategy:
Target Leading Display Manufacturers. We are targeting leading display
manufacturers as potential commercial licensees of our OLED technologies and
purchasers of our OLED materials. For example, we have entered into a
relationship with Tohoku Pioneer to purchase our proprietary red
phosphorescent material for its commercial production of full-color OLED
displays and are pursuing other such relationships. We provide technical
assistance and support to display manufacturers evaluating our OLED
technologies and materials because we believe that successful incorporation of
our technologies and materials in commercial applications may place
competitive pressure on other industry participants to adopt them.
Enhance Our Portfolio of Existing OLED Technologies. We believe that a
strong portfolio of OLED technologies is critical to our success in the
display industry. Consequently, we are continually seeking to expand this
portfolio through our internal development efforts, our collaborative
relationships and other strategic opportunities. Our primary focus is to
develop additional red, green, blue and white PHOLED materials, with increased
efficiencies, enhanced color gamut and extended lifetimes that would allow
them to be used in a broader array of OLED display products, such as
televisions. Currently, our red material is in production with one
manufacturer, our red and green materials are being evaluated by a number of
manufacturers and our blue and white materials are still under development.
Expand Development of Next-Generation Technologies. We currently are
conducting research activities relating to next-generation OLED technologies.
For example, our present OLED initiatives include applications involving
flexible displays, transparent displays and energy-efficient solid-state
lighting. We also are conducting research with our partners on the use of
organic thin-film technology in applications such as lasers, transistors,
photo detectors, memories and other related devices. Our focus on next-
generation technologies is designed to enable us to continue our position as a
leading provider of OLED technologies as new markets emerge.
Our Phosphorescent OLED Technologies
Phosphorescent OLEDs, or PHOLEDs, our key proprietary technology, utilize
novel materials and device structures that allow OLEDs to emit light through a
process known as phosphorescence. Conversely, fluorescent OLEDs emit light
through an inherently less efficient process. Testing has demonstrated that
PHOLEDs exhibit device efficiencies up to four times higher than those
exhibited by fluorescent OLEDs. This substantially reduces
6
the power requirements of an OLED and is potentially useful for hand-held
devices, such as mobile phones, where battery power is often a limiting
factor. Phosphorescence also may be important for large-area displays such as
televisions, where higher efficiency may enable longer product lifetimes.
Through our commercial relationships with PPG Industries and several display
manufacturers, as well as through research we are sponsoring with our academic
partners, we are conducting research and development work directed towards
both improving our existing PHOLED technologies and materials and developing
new PHOLED technologies and materials. A significant portion of this work
involves the evaluation and qualification of PHOLED materials for possible use
in the commercial production of OLED displays.
OLEDs can be manufactured using different processing methods. Currently, the
most common method is through vacuum thermal evaporation, or VTE. Another
method involves preparing solutions of the various organic materials in an
OLED that can be solution processed by techniques such as spin coating or
inkjet printing onto the substrate. Solution processing methods, and inkjet
printing in particular, have the potential to be lower cost approaches to OLED
manufacturing and scalable to large area displays. Others have demonstrated
that solution processing methods can be used to produce OLEDs containing
polymer-based organic materials, and we are developing printable PHOLEDs, or
P2OLEDs, to demonstrate that these methods can be used with our PHOLEDs
technologies. We currently are conducting this work on P2OLEDs under our Joint
Development Agreement with DuPont Displays.
Our Additional Proprietary OLED Technologies
We currently are focusing our research, development and commercialization
efforts on a number of OLED device and manufacturing technologies, including
the following:
Transparent OLEDs (TOLEDs). We are developing a technology based on the
production of OLEDs that have transparent cathodes. Conventional OLEDs use a
reflective metal cathode and a transparent anode. In contrast, TOLEDs use a
transparent cathode and either a transparent, or reflective or opaque metal
anode. TOLEDs utilizing transparent cathodes and reflective metal anodes are
known as "top-emission" OLEDs. In a "top-emission" active matrix OLED, light
is emitted without having to travel through much of the device electronics
where a substantial portion of it is absorbed. This is expected to result in
OLED displays having image qualities and lifetimes superior to those of
conventional active matrix OLEDs. TOLEDs utilizing cathodes and anodes that
are both transparent may be useful in novel flat panel display applications
requiring semi-transparency or transparency, such as graphical displays in
automotive windshields. We have agreements with several display manufacturers
that have expressed interest in evaluating our TOLED technology for possible
use in the commercial production of OLED displays.
Flexible OLEDs (FOLEDs). We are developing a technology that involves the
fabrication of small molecule OLEDs on flexible substrates. Most OLED and
other flat panel displays are built on rigid substrates such as glass. FOLEDs
are OLEDs built on non-rigid substrates such as plastic or metal foil. FOLEDs
are expected to be conformable to specific shapes, able to withstand repeated
bending or flexing, and eventually capable of being rolled into a cylinder,
similar to a window shade. These features create the possibility of new flat
panel display product applications that do not exist today, such as a
portable, roll-up Internet connectivity and communications device. FOLEDs also
may be amenable to being produced using more efficient continuous, or roll-to-
roll, processing methods. We currently are conducting research and development
on FOLEDs under several of our U.S. government programs.
Organic Vapor Phase Deposition (OVPD). The standard approach for
manufacturing a small molecule OLED, including a PHOLED, is based on a process
known as vacuum thermal evaporation. In VTE, the thin layers of organic
material in an OLED are deposited in a high-vacuum environment. An alternate
approach for manufacturing a small molecule OLED is based on OVPD. In contrast
to the VTE process, the OVPD process utilizes a carrier gas stream in a hot
walled reactor in a low pressure environment to deposit the layers of organic
material in an OLED. The OVPD process may offer advantages over the VTE
process through the reduction of material waste and by being more readily
scalable to the production of large-area OLED displays. Furthermore, the OVPD
process may offer advantages in OLED performance by enhanced deposition
control. We currently are working with Aixtron AG, a leading manufacturer of
metal-organic chemical vapor deposition equipment, to develop and qualify a
tool for the fabrication of OLED displays utilizing an OVPD process.
7
Our Strategic Relationships with Display Manufacturers
We have established evaluation, joint development, technical assistance,
licensing, supply and other similar relationships with numerous display
manufacturers. These relationships generally are directed towards tailoring
our proprietary OLED technologies and materials for use by the display
manufacturers. Our ultimate objective is to license our OLED technologies and
sell our OLED materials to these manufacturers for their commercial production
of OLED displays. Our key relationships with display manufacturers include:
Tohoku Pioneer. In August 2003, we entered into an arrangement to provide
our proprietary red PHOLED material to Tohoku Pioneer Corporation, a
subsidiary of Pioneer Corporation, for the commercial production of its
passive matrix OLED displays on glass substrates. Under this arrangement, we
receive payments from Tohoku Pioneer for the PHOLED material and license fees
for allowing Tohoku Pioneer to use this material in the production of passive
matrix OLED displays. Tohoku Pioneer sells these displays to one of its
customers who uses them as the exterior sub-display for a mobile phone
currently being sold in Japan.
DuPont Displays. In December 2002, we entered into a Joint Development
Agreement with DuPont Displays, Inc. and its parent E.I. DuPont de Nemours and
Company (DuPont) for the development of novel phosphorescent materials and
device structures for solution processed OLEDs (our P2OLEDs). Under the Joint
Development Agreement, we have the exclusive right to sublicense any
intellectual property developed under the program for use with solution
processed OLED displays on rigid glass substrates.
We also entered into a Cross-License Agreement and a Developed Device
Additional Payment Agreement with DuPont in December 2002. Under these
agreements, we granted DuPont a non-exclusive license under our background
phosphorescent emission, transparent cathode and inkjet printing patents, and
under any intellectual property developed by us under our joint development
program with DuPont, to make and sell solution processed OLED displays on
rigid glass substrates. DuPont paid us an up-front license fee and agreed to
pay us running royalties on its sales of these displays. DuPont has the option
to reduce the royalty rates on these sales if it elects to make a cash payment
to us by January 2005. DuPont had a similar right to reduce these royalty
rates by making a cash payment to us by January 2004, but it did not elect to
do so. As of December 31, 2003, DuPont had not commenced commercial sales of
P2OLED displays and had not paid us royalties under either of these
agreements.
Sony. We entered into a new Joint Development and Evaluation Agreement with
Sony Corporation effective February 2003. This agreement is directed towards
tailoring our proprietary PHOLED materials for use in Sony's OLED device
structures. This follows an earlier agreement with Sony under which we
assisted Sony in its development of active matrix OLED displays utilizing our
high-efficiency PHOLED technology and materials. We continue to sell our
proprietary PHOLED materials to Sony in support of its work under this new
agreement.
Samsung SDI. In July 2001, we entered into a Joint Development Agreement
with Samsung SDI Co. The original focus of our agreement with Samsung SDI was
the joint development of a prototype portable, low-power OLED display for use
in mobile phones and other devices. We continue to work with Samsung SDI under
this agreement and are selling our proprietary PHOLED materials to Samsung SDI
in support of this work.
Toyota Industries. In October 2002, we entered into an OLED Technology
Development and Evaluation Agreement with Toyota Industries Corporation. Under
this agreement, we are conducting development activities with Toyota
Industries relating to the use of our proprietary PHOLED technology and
materials to produce sources of white light.
AU Optronics. In May 2003, we announced that AU Optronics Corporation had
fabricated a low-power consumption, full-color active matrix OLED display
combining its proprietary amorphous silicon backplane technology with our
proprietary PHOLED technology. The display was showcased at the 2003 Society
for Information Display International Symposium and was the subject of a
scientific paper presented jointly by us and AU Optronics at the symposium.
This work stemmed from a joint development agreement we have had in place with
AU Optronics since October 2001.
8
Our OLED Materials Supply Business
In support of our primary objective of licensing our OLED technologies, we
supply our OLED materials to display manufacturers and others. We device
qualify our materials before shipment in order to ensure the materials meet
the specifications we agree upon with our customers.
In October 2000, we entered into a Supply Agreement and a Development and
License Agreement with PPG Industries. Under the Supply Agreement, we
appointed PPG Industries as the exclusive supplier of OLED materials
proprietary to us that are intended for use in the commercial production of
OLEDs. PPG Industries sells these OLED materials to us and we, in turn, resell
them to display manufacturers. Under the Development and License Agreement,
PPG Industries, among other things, supplies us with OLED materials that we
resell to display manufacturers and others for evaluation purposes. The
current term of the Development and License Agreement extends through 2005 and
the current term of the Supply Agreement extends through 2007.
In August 2003, we commenced commercial sales of our proprietary red PHOLED
material to Tohuko Pioneer. Tohuko Pioneer is currently using this material in
the commercial production of its passive matrix OLED displays on glass
substrates. Tohuko Pioneer sells these displays to one of its customers who
uses them as the exterior sub-display for a mobile phone currently being sold
in Japan.
Research and Development
Our research and development activities are focused on the advancement of
our OLED technologies and materials. We conduct this research and development
both internally and through various relationships with our commercial business
partners and academic institutions.
Internal Development Efforts
We conduct a substantial portion of our OLED development activities at our
state-of-the-art development and pilot-line facility in Ewing, New Jersey.
Built in 1999 and expanded in 2001, this facility is designed to perform
technology development including device and process optimization, prototype
fabrication, manufacturing scale-up studies, process and product testing, and
characterization and reliability studies. The pilot line is designed to
produce several hundred 6" x 6" OLED plates per month, and contains substrate
patterning, organic material deposition, display packaging, module assembly,
and extensive test equipment in Class 100 and 100,000 clean rooms and opto-
electronic test laboratories. The facility also serves as a technology
transfer site for work with our business partners. We also are in the process
of qualifying a new OLED deposition system at this facility that will enhance
our OLED product testing pilot production capabilities.
As of December 31, 2003, we employed a team of 28 research scientists,
engineers and laboratory assistants at our Ewing, New Jersey facility. This
team includes chemists, physicists, engineers with electrical, chemical and
mechanical backgrounds, and highly-trained experimentalists.
University Sponsored Research
We have long-standing relationships with Princeton University and the
University of Southern California for the conduct of research relating to our
OLED and other organic thin-film technologies and materials for applications
such as displays and lighting. This research is performed at Princeton
University's Advanced Technology Center for Photonics and Optoelectronic
Materials (POEM) under the direction of Dr. Stephen R. Forrest and at the
University of Southern California's Synthetic Materials Laboratories under the
direction of Dr. Mark E. Thompson.
We fund the research conducted at Princeton University and the University of
Southern California under a Research Agreement we executed with the Trustees
of Princeton University in October 1997. The University of Southern California
conducts its portion of this research under a subcontract between it and
Princeton University. In April 2002, we extended the term of our Research
Agreement with Princeton University through July 2007. Under the Research
Agreement, we incurred costs to Princeton University of $933,156 in 2003,
$859,339 in 2002 and $758,732 in 2001. Our maximum funding commitment under
the Research Agreement for the period from August 2002 through July 2007 is
$1,495,599 per year. We have exclusive license rights to all patents arising
out
9
of the research conducted by Princeton University and the University of
Southern California under the Research Agreement.
In May 2001, we entered into a Contract Research Agreement with the Chitose
Institute of Science and Technology of Japan (CIST), under which we funded
research at CIST relating to high-efficiency OLED materials and device
structures. This relationship ran through April 2003, and we are currently
negotiating an agreement to renew our collaborative work with CIST.
PPG Industries
Under our Development and License Agreement with PPG Industries, a team of
approximately eight PPG Industries' scientists and engineers are assisting us
in developing and commercializing various OLED materials in which we have a
proprietary interest. PPG Industries receives shares of our common stock and
warrants to purchase shares of our common stock as compensation for this work,
though under limited circumstances PPG Industries has the right to demand
payment in cash in lieu of stock. In January 2003, we amended this agreement
with PPG Industries to cover the supply of OLED materials for purposes of
development and manufacturing qualification at our facilities and the
facilities of our customers.
Aixtron
In July 2000, we entered into a Development and License Agreement with
Aixtron AG of Aachen, Germany to jointly develop and commercialize equipment
for the manufacture of OLEDs using the OVPD process. A pre-production OVPD
manufacturing tool was delivered to our Ewing, New Jersey facility in January
2002. We continue to work with Aixtron to upgrade and qualify this tool for
the production of OLEDs.
Under the Development and License Agreement, we granted Aixtron an exclusive
license to produce and sell equipment used to manufacture OLEDs and other
devices using our proprietary OVPD process. Aixtron is required to pay us
royalties on its sales of this equipment. Purchasers of the equipment also
must obtain rights to use our proprietary OVPD process to manufacture OLEDs
and other devices, which they may do through us or Aixtron. If these rights
are granted through Aixtron, Aixtron is required to make additional payments
to us.
U.S. Government-Funded Research
We have entered into several U.S. government contracts and subcontracts to
fund a portion of our efforts to develop next-generation OLED technologies for
applications such as flexible displays and energy-efficient solid-state
lighting. These include, among others, Small Business Innovation Research
(SBIR) Phase I program contracts for the demonstration of technical merit and
feasibility and SBIR Phase II program contracts for the development of well-
defined prototypes. On contracts for which we are the prime contractor, we
subcontract portions of the work to various entities and institutions,
including Princeton University, the University of Southern California,
Pennsylvania State University, Kyung Hee University in South Korea, L-3
Communications Corporation and Vitex Systems. All of our government contracts
and subcontracts are subject to termination at the election of the contracting
governmental agency. Our government contracts include, among others, the
following:
o Roll-Up OLED Displays in Handheld Devices. In October 2002, we were
awarded a two-year $1,761,465 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 next-generation mobile communication devices. An example of such a
device is a pen-like unit that functions as a portable computer with
an OLED display that rolls up into the device. ARL has an option to
extend the program for a third-year, for which ARL would provide us
with additional funding of $2,000,000 and we and our subcontractors
would make additional contributions through cost sharing.
o Conformable OLED Displays for Head-Mounted Devices. In January 2003,
we were 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 displays for use in helmets and other
head-mounted devices. In February 2002, we completed our Phase I work
on this program.
10
o OLED Displays on Metal Foil. In November 2003, we were awarded a two-
year $730,000 SBIR Phase II program contract by the U.S. Department of
the Army to build a prototype of a rugged, light-weight active matrix
OLED display on durable metal foil. This award followed our completion
of Phase I work on this program.
o OLEDs for White Lighting. In June 2003, we were awarded a two-year
$750,000 SBIR Phase II program contract by the U.S. Department of
Energy to demonstrate the feasibility of our proprietary PHOLED and
FOLED technologies for high-performance lighting applications. This
award followed our completion of Phase I work on two earlier programs.
One of these earlier programs was designed to demonstrate a broadband
white light source derived from the combination of red, green and blue
PHOLED stripes; the other was intended to demonstrate an innovative
PHOLED structure that emits light simultaneously from monomer and
aggregate energy states.
The United States Display Consortium
We are a member of the United States Display Consortium (USDC), a
cooperative industry and governmental effort aimed at developing an
infrastructure to support North American flat panel display manufacturing. The
USDC's role is to provide a common platform for flat panel display
manufacturers, developers, users and the manufacturing equipment and supplier
base. It has more than 90 members, as well as support from ARL. We are one of
12 members on the Governing Board of the USDC and we actively participate on
its Technical Council.
Intellectual Property
Along with our personnel, our primary assets are intellectual property. This
includes numerous U.S. and foreign patents and patent applications that we
own, exclusively license or have the sole right to sublicense. It also
includes a substantial body of trade secrets and technical know-how that we
have accumulated over time.
Our Patents
Our research and development activities, conducted both internally and
through collaborative programs with our partners, have resulted in the filing
of a substantial number of patent applications relating to our OLED
technologies and materials. As of December 31, 2003, we owned 34 issued and
pending patents in the U.S., together with numerous counterparts filed in
various foreign countries. These patents will start expiring in 2020.
Patents We License from Princeton University and the University of Southern
California
We exclusively license the bulk of our patent rights under an Amended
License Agreement we executed with the Trustees of Princeton University and
the University of Southern California in October 1997. As of December 31,
2003, these licensed patent rights included 143 issued and pending patents in
the U.S., together with numerous counterparts filed in various foreign
countries. These patents will start expiring in 2014.
Under the Amended License Agreement, Princeton University and the University
of Southern California granted us a worldwide, exclusive license to specified
patents and patent applications relating to OLED technologies and materials.
This license grant also extends to any patent rights arising out of the
research conducted under our Research Agreement with Princeton University. We
are free to sublicense to third parties all or any portion of our patent
rights under the Amended License Agreement. The term of the Amended License
Agreement is perpetual, though it is subject to termination for an uncured
material breach or default by us, or if we become bankrupt or insolvent.
Princeton University is responsible for the filing, prosecution and
maintenance of all patent rights licensed to us under the Amended License
Agreement pursuant to an Interinstitutional Agreement between Princeton
University and the University of Southern California. However, we participate
closely in this process and have the right to instruct patent counsel on
additional matters to be covered in any patent applications filed by Princeton
University. We are required to bear all costs associated with the filing,
prosecution and maintenance of these patent rights.
11
We are required under the Amended License Agreement to pay Princeton
University royalties for licensed products sold by us or our sublicensees.
These royalties amount to 3% of the net sales price for licensed products sold
by us and 3% of the revenues we receive for licensed products sold by our
sublicensees. These royalty rates are subject to renegotiation for products
not reasonably conceivable as arising out of the Research Agreement if
Princeton University reasonably determines that the royalty rates payable with
respect to these products are not fair and competitive. Princeton University
shares a portion of these royalties with the University of Southern California
under their Interinstitutional Agreement.
We paid Princeton University minimum royalties under the Amended License
Agreement in the amounts of $100,000 for 2003, $100,000 for 2002 and $75,000
for 2001. For 2004 and thereafter, this minimum royalty obligation is $100,000
per year. We also are required under the Amended License Agreement to use
commercially reasonable efforts to bring the licensed OLED technology to
market. However, this requirement is deemed satisfied if we perform our
obligations under the Research Agreement and, when that agreement ends, if we
invest a minimum of $800,000 per year in research, development,
commercialization or patenting efforts respecting the patent rights licensed
to us under the Amended License Agreement.
Patents We License from Motorola
In September 2000, we entered into a License Agreement with Motorola whereby
Motorola granted us perpetual license rights to what are now 74 issued U.S.
patents relating to Motorola's OLED technologies, together with numerous
foreign counterparts in various countries. These patents will start expiring
in 2014. We have the right to freely sublicense these patents to third parties
and, with limited exceptions, Motorola has agreed not to license these patents
to others in the OLED industry.
Motorola remains responsible for the filing, prosecution and maintenance of
all patent rights licensed to us under the License Agreement, including all
associated costs. Motorola is obligated to keep us informed as to the status
of these activities.
We are required under the License Agreement to pay Motorola royalties on
gross revenues received by us on account of our sales of OLED products or
components, or from our sublicensees on account of their sales of OLED
products or components, whether or not these products or components are based
on inventions claimed in the patent rights licensed from Motorola. We have the
option to pay these royalties to Motorola in either all cash or 50% cash and
50% shares of our common stock. We also have minimum royalty obligations to
Motorola of $500,000 in cash or cash and stock for the 2003-2004 period and
$1,000,000 in cash or cash and stock for the 2005-2006 period. Thereafter, we
have no minimum royalty obligations to Motorola.
In connection with our execution of the License Agreement, in 2000 we issued
to Motorola 200,000 shares of our common stock, 300,000 shares of our Series B
Convertible Preferred Stock, and immediately vesting seven-year warrants to
purchase an additional 150,000 shares of our common stock at an exercise price
of $21.60 per share. As of December 31, 2003, 225,000 shares of the Series B
Convertible Preferred Stock were convertible into 343,916 shares of our common
stock. The remaining 75,000 shares of the Series B Convertible Preferred Stock
will vest and all shares of Series B Convertible Preferred Stock will
automatically convert into shares of our common stock in September 2004.
Intellectual Property Developed under Our Government Contracts
We and our subcontractors have developed and may continue to develop
patentable OLED technology inventions under our various U.S. government
contracts and subcontracts. Under these arrangements, we or our subcontractors
generally can elect to take title to any patents on these inventions, and to
control the manner in which these patents are licensed to third parties.
However, the U.S. government reserves the right to utilize, and to permit
others to utilize, these inventions and any associated technical data for
government purposes, and, in some cases, for unlimited purposes. In addition,
if the U.S. government determines that we or our subcontractors have not taken
appropriate steps to achieve practical application of these inventions, it may
require that we or our subcontractors license these inventions to third
parties.
12
Trade Secrets and Technical Know-How
We have accumulated, and continue to accumulate, a substantial amount of
valuable trade secret information and technical know-how relating to OLED
technologies and materials. Where practicable, we share portions of this
information and know-how with display manufacturers and other business
partners on a confidential basis. We also employ various methods to protect
this information and know-how from unauthorized use or disclosure, although no
such methods can afford complete protection. Moreover, because we derive some
of this information and know-how from academic institutions such as Princeton
University and the University of Southern California, there is an increased
potential for public disclosure.
Competition
The display industry in which we operate is highly competitive. We compete
against existing flat panel display technologies, dominated by LCDs, as well
as emerging OLED technologies.
Flat Panel Display Competitors
Numerous domestic and foreign companies have developed or are developing LCD
and other flat panel display technologies that will compete with our OLED
display technologies. These include plasma, field emissive and vacuum
fluorescent display technologies. Companies pursuing these technologies,
include, among others, Sony, Pioneer Corporation, Sharp Corporation, Toshiba
Matsushita Display Technology Co., Ltd., Fujitsu, Ltd., Hitachi Displays,
Ltd., NEC Corporation, Sanyo Electric Co., Ltd., Samsung Electronics Co.,
Ltd., Samsung SDI, LG Electronics, Ltd., AU Optronics, Chi Mei Optoelectronics
Corporation, RiTdisplay Corporation, Chunghwa Picture Tubes, Ltd., TECO
Optronics Corporation, Toppoly Optoelectronics Corporation and HannStar
Display Corporation. Many of these competitors have greater name recognition
and more extensive financial, marketing and research resource capabilities
than we do.
We believe that OLED display technologies ultimately may be able to overcome
certain existing limitations of LCD and other flat panel display technologies,
such as high power consumption, costly manufacturing methods, poor contrast
ratios and limited viewing angles, for many product applications. However,
other companies, including those listed above, may succeed in improving these
competing display technologies, or in developing new display technologies,
that are superior to OLED display technologies in various respects. We cannot
predict the timing or extent to which such improvements or developments may
occur.
OLED Competitors
Eastman Kodak Company has licensed its competing fluorescent OLED technology
and other patents for passive matrix OLED display applications to a number of
display manufacturers, including several of those with whom we have been
working. In addition, Eastman Kodak and Sanyo Electric through a joint venture
known as SK Display Corporation, Samsung NEC Mobile Display Co., Ltd.,
RiTdisplay and Pioneer are presently manufacturing OLED products using
technologies different from ours. Eastman Kodak and other competitors of ours,
such as Covion Organic Semiconductors GmbH and Idemitsu Kosan Co., are selling
OLED materials that compete with our proprietary PHOLED materials. Another
OLED industry participant, Cambridge Display Technology, Ltd., has licensed
and is working with a number of display manufacturers on its competing polymer
OLED technology.
A number of companies, including many of our flat panel display competitors,
together with Seiko Epson Corporation, Fuji Film Co., Ltd., Canon, Inc., Dow
Chemical Corporation, Dupont Displays, Toyo Ink Mfg. Co., Ltd., Sumitomo
Chemical Co., Ltd., Mitsubishi Chemical Corporation, Covion Organic
Semiconductors and Idemitsu Kosan, are engaged in research, development and
commercialization activities with respect to OLED technologies and materials.
Many of these competitors have greater name recognition and more extensive
financial, marketing and research resource capabilities than we do.
Our existing business relationships with Tohoku Pioneer and other display
manufacturers suggest that our OLED technologies and materials, particularly
our PHOLED technologies and materials, may be adopted by other manufacturers
for use in the production of commercial OLED displays. However, Eastman Kodak,
Cambridge Display Technology and others may succeed in improving their
competing OLED technologies and
13
materials so as to render them superior to ours. We cannot be sure of the
extent to which display manufacturers ultimately may adopt our OLED
technologies and materials for the production of commercial OLED displays.
Employees
As of December 31, 2003, we had 45 full-time employees and one part-time
employee, none of whom are unionized. We believe that relations with our
employees are good.
Our Company History
Our corporation was organized under the laws of the Commonwealth of
Pennsylvania in April 1985. Our business was commenced in June 1994 by a
company then-known as Universal Display Corporation, which had been
incorporated under the laws of the State of New Jersey. On June 22, 1995, a
wholly-owned subsidiary of ours merged with and into this New Jersey
corporation. The surviving corporation in this merger became a wholly-owned
subsidiary of ours and changed its name to UDC, Inc. Simultaneously with the
consummation of this merger, we changed our name to Universal Display
Corporation. UDC, Inc. now functions as an operating subsidiary of ours and
has overlapping officers and directors.
Our Compliance with Environmental Protection Laws
We are not aware of any current federal, state or local environmental
compliance regulations that have a material effect on our business activities.
We have not expended material amounts to comply with any environmental
protection statutes and do not anticipate having to do so in the foreseeable
future.
Our Internet Site
Our Internet website can be found at www.universaldisplay.com. Through our
website, free of charge, you can access our Annual Report on Form 10-K, our
Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K and any
amendments to those reports that we may file with or furnish to the SEC.
ITEM 2. PROPERTIES
Our main corporate offices and our research and development facility are
located at 375 Phillips Boulevard in Ewing, New Jersey. We currently lease
approximately 21,000 square feet of space at this facility. In September 2003,
we extended the term of this lease through December 31, 2008. At the same time
we secured the right, exercisable by us at any time on or after July 1, 2004,
to purchase the building in which our offices and research and development
facility are located for a fixed price. Should we exercise this purchase
option, we would need to lease back a portion of the building space to the
current landlord on terms substantially the same as those of our current lease
agreement.
ITEM 3. LEGAL PROCEEDINGS
We are not currently a party to any legal proceedings of a material nature.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
We submitted no matters to a vote of our security holders in the fourth
quarter of 2003.
14
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information with respect to our
executive officers:
Name Age Position
- ---- --- ------------------
Sherwin I. Seligsohn 68 Chairman of the Board and Chief
Executive Officer
Steven V. Abramson 52 President, Chief Operating Officer
and Director
Sidney D. Rosenblatt 56 Executive Vice President, Chief
Financial Officer,
Treasurer, Secretary and Director
Julia J. Brown, Ph.D. 42 Vice President and Chief Technical
Officer
Our Board of Directors has appointed these executive officers to hold office
until their successors are duly appointed.
Sherwin I. Seligsohn has been our Chief Executive Officer and Chairman of
the Board since June 1995. He also served as our President from June 1995
through May 1996. Mr. Seligsohn founded and since has served as the sole
Director, President and Secretary of American Biomimetics Corporation,
International Multi-Media Corporation, and Wireless Unified Network Systems
Corporation. He is also Chairman of the Board and Chief Executive Officer of
Global Photonic Energy Corporation. From June 1990 to October 1991, Mr.
Seligsohn was Chairman Emeritus of InterDigital Communications, Inc.
(InterDigital), formerly International Mobile Machines Corporation. He founded
InterDigital and from August 1972 to June 1990 served as its Chairman of the
Board. Mr. Seligsohn is a member of the Advisory Board of the Advanced
Technology Center for Photonics and Optoelectronic Materials (POEM) at
Princeton University.
Steven V. Abramson has been our President and Chief Operating Officer and a
member of our Board of Directors since May 1996. From March 1992 to May 1996,
he was Vice President, General Counsel, Secretary and Treasurer of Roy F.
Weston, Inc., a worldwide environmental consulting and engineering firm. From
December 1982 to December 1991, he held various positions at InterDigital,
including General Counsel, Executive Vice President and General Manager of the
Technology Licensing Division. Mr. Abramson is a member of the Advisory Board
of the Advanced Technology Center for Photonics and Optoelectronic Materials
(POEM) at Princeton University and is also a member of the Board of Governors
of the United States Display Consortium.
Sidney D. Rosenblatt has been our Executive Vice President, Chief Financial
Officer, Treasurer and Secretary since June 1995, and has been a member of our
Board of Directors since May 1996. Mr. Rosenblatt is the owner of and served
as the President of S. Zitner Company from August 1990 through December 1998.
From May 1982 to August 1990, Mr. Rosenblatt served as the Senior Vice
President, Chief Financial Officer and Treasurer of InterDigital.
Julia J. Brown, Ph.D. has been our Vice President and Chief Technical
Officer since June 2002. She joined us in June 1998 as our Vice President of
Technology Development. From November 1991 to June 1998, Dr. Brown was a
Research Department Manager at Hughes Research Laboratories where she directed
the pilot line production of high-speed Indium Phosphide-based integrated
circuits for insertion into advanced airborne radar and satellite
communication systems. Dr. Brown received an M.S. and Ph.D. in Electrical
Engineering/Electrophysics at the University of Southern California under the
advisement of Professor Stephen R. Forrest. Dr. Brown has served as an
Associate Editor of the Journal of Electronic Materials and as an elected
member of the Electron Device Society Technical Board. She co-founded an
international engineering mentoring program sponsored by the Institute of
Electrical and Electronics Engineers and is a Senior Member of the IEEE. Dr.
Brown has served on numerous technical conference committees and is presently
a member of the Society of Information Display.
15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is quoted on the Nasdaq National Market under the symbol
"PANL," and listed on the Philadelphia Stock Exchange under the symbol "PNL."
The following table sets forth, for the periods indicated, the high and low
closing prices of our common stock as reported on the Nasdaq National Market.
High Low
Close Close
------ ------
2003
First Quarter...................................... $ 8.70 $ 6.33
Second Quarter..................................... 10.80 8.22
Third Quarter...................................... 10.74 8.17
Fourth Quarter..................................... 15.45 10.30
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
Based on a review of our most recent proxy tabulation and security position
listing reports, there were in excess of 400 holders of record of our common
stock as of February 20, 2004.
We have never declared or paid cash dividends on our common stock. We
currently intend to retain any future earnings for the operation and expansion
of our business. We do not anticipate declaring or paying cash dividends on
our common stock in the foreseeable future. Any future payment of cash
dividends on our common stock will be at the discretion of our Board of
Directors and will depend upon our results of operations, earnings, capital
requirements, contractual restrictions and other factors deemed relevant by
our Board of Directors.
16
ITEM 6. SELECTED FINANCIAL DATA
The following selected condensed consolidated financial data has been
derived from, and should be read in conjunction with, our audited consolidated
financial statements and the notes thereto, and with "Management's Discussion
and Analysis of Financial Condition and Results of Operations," included
elsewhere in this report and incorporated herein by reference.
Fiscal Year Ended December 31,
------------------------------------------------------------------------
2003 2002 2001 2000 1999
------------ ------------ ------------ ----------- -----------
Operating Results:
Total revenue.......................................... $ 6,593,193 $ 2,484,948 $ 1,252,901 $ 492,756 $ 519,536
Research and development expense....................... 17,897,522 15,804,267 12,310,036 7,109,205 3,171,497
General and administrative expense..................... 5,766,761 4,754,850 3,915,854 3,261,113 2,727,856
Net loss............................................... (17,353,205) (31,019,201) (16,356,100) (9,529,046) (5,125,006)
Net loss attributable to Common shareholders........... (18,387,507) (32,972,680) (18,873,436) (9,529,046) (5,125,006)
Net loss per share, basic and diluted.................. (0.82) (1.71) (1.11) (0.62) (0.42)
Balance Sheet Data:
Total assets........................................... $ 46,201,646 $ 39,639,216 $ 48,569,569 $32,079,794 $10,316,850
Current liabilities.................................... 4,194,776 2,866,759 10,464,188 1,670,016 873,761
Capital lease obligations.............................. 3,886 8,599 12,827 16,619 20,021
Shareholders' equity................................... 38,906,870 33,668,571 38,096,782 29,826,804 9,426,470
Other Financial Data:
Working capital........................................ $ 23,679,705 $ 18,541,596 $ 17,994,232 $ 9,252,130 $ 5,704,913
Capital expenditures................................... 957,328 1,169,945 1,790,564 1,540,577 3,680,122
Acquired technology.................................... -- -- -- 16,924,968 --
Weighted average Common Shares, basic and diluted...... 22,428,219 19,227,697 16,994,537 15,260,837 12,269,943
Shares of Common Stock
outstanding.......................................... 24,196,765 21,525,412 18,093,124 16,440,286 13,714,563
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results
of operations should be read in conjunction with the section entitled
"Selected Financial Data" in this report and our consolidated financial
statements and related notes to this report. This discussion and analysis
contains forward-looking statements based on our current expectations,
assumptions, estimates and projections. These forward-looking statements
involve risks and uncertainties. Our actual results could differ materially
from those indicated in these forward-looking statements as a result of
certain factors, as more fully discussed in the section below entitled "Risk
Factors."
Overview
We are a leader in the research, development and commercialization of
organic light emitting diode, or OLED, technologies for use in a variety of
flat panel display and other applications. Since 1994, we have been
exclusively engaged, and expect to continue to be exclusively engaged, in
funding and performing research and development activities relating to OLED
technologies and materials, and in attempting to commercialize these
technologies and materials. Our revenues are generated through contract
research, sales of development and commercial chemicals, development and
technology evaluation agreements and license fees.
During 2003, we recognized our first commercial chemical sales and license
fee revenues. Also in 2003, we entered into an expanded technology development
contract with a longstanding partner and recognized revenue from that and
other similar contracts. Although these events show the progress we have made
in introducing our OLED technologies and materials into the marketplace, there
can be no certainty that these trends will continue. We have incurred
significant losses since our inception, resulting in an accumulated deficit of
$98,462,012 as of
17
December 31, 2003. Moreover, we expect our losses to continue for the
foreseeable future and until such time, if ever, as we are able to achieve,
from the commercial licensing of our OLED technologies and the sale of our
OLED materials, sustained licensing and chemical sales revenues that are
sufficient to support our ongoing research and development activities and
other operations.
We anticipate fluctuations in our annual and quarterly results of operations
for the foreseeable future due to uncertainty regarding:
o the timing of our receipt of license fees and fees for future
technology development and evaluation;
o the timing and volume of sales of our OLED materials for both
commercial usage and evaluation purposes;
o the timing and magnitude of expenditures we may incur in connection
with our ongoing research and development activities; and
o the timing and financial consequences of our formation of new business
relationships and alliances.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of
operations is based on our financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires us to make estimates
and judgments that affect our reported assets and liabilities, revenues and
expenses, and other financial information. Actual results may, under different
assumptions and conditions, differ significantly from our estimates.
We believe that our accounting policies related to revenue recognition and
deferred license fees, valuation of acquired technology and stock-based
compensation as described below, are our "critical accounting policies" as
contemplated by the Securities and Exchange Commission. These policies are
discussed in greater detail below.
Revenue Recognition and Deferred License Fees
Contract research revenues represent reimbursements by the U.S. government
for all or a portion of the research and development expenses we incur related
to our government contracts. Revenues are recognized proportionally as
research and development expenses are incurred or as defined milestones are
achieved. In order to ascertain the revenues associated with these contracts
for a period, we estimate the proportion of related research and development
expenses incurred and whether defined milestones have been achieved. Different
estimates would result in different revenues for the period.
We also receive non-refundable advance payments under certain of our
development and technology evaluation agreements. These payments are deferred
until a license agreement is executed or negotiations have ceased and there is
no likelihood of executing a license agreement with the other party. If a
license agreement is executed, these revenues will be recorded over the
expected life of the licensed technology; otherwise, they will be recorded at
the time negotiations with the other party show no further likelihood of
success. If we estimate differently the expected life of this licensed
technology, reported revenue during the relevant period will differ. To date,
no deferred license fees have been recognized as revenue. As of December 31,
2003, $4,366,667 was recorded as deferred revenue.
Valuation of Acquired Technology
We regularly review our acquired OLED technologies for events or changes in
circumstances that might indicate the carrying value of these technologies may
not be recoverable. Factors considered important that could cause impairment
include, among others, significant changes in our anticipated future use of
these technologies and our overall business strategy as it pertains to these
technologies, particularly in light of patents owned by others in the same
field of use. As of December 31, 2003, we believe that no revision of the
remaining useful lives or write-down of our acquired technology was required
for 2003, nor was such a revision needed in 2002 or 2001. If such a write-down
is required in the future, it could be for up to $11,404,703, the net book
value of the acquired technology as of December 31, 2003.
18
Valuation of Stock-Based Compensation
We account for our stock-based compensation (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 is recognized for options issued to employees at fair market
value on the date of grant. In 1995, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting
for Stock-Based Compensation," as amended by SFAS No. 148. SFAS 123
establishes a fair value-based method of accounting for stock-based
compensation plans. SFAS 123 requires that a company's financial statements
include certain disclosures about stock-based employee compensation
arrangements regardless of the method used to account for the plan. We account
for our stock option and warrant grants to non-employees in exchange for goods
or services in accordance with SFAS 123 and Emerging Issues Task Force No. 96-
18 (EITF 96-18). SFAS 123 and EITF 96-18 require that we account for our
option and warrant grants to non-employees based on the fair value of the
options and warrants granted.
We use the Black-Scholes option-pricing model to estimate the fair value of
options we have granted for purposes of making the disclosure required by SFAS
123. In order to calculate the fair value of the options, assumptions are made
for certain components of the model, including risk-free interest rate,
volatility, expected dividend yield rate and expected option life. Although we
use available resources and information when setting these assumptions,
changes to the assumptions could cause significant adjustments to the
valuation.
Results of Operations
Year Ended December 31, 2003 Compared to Year Ended December 31, 2002
We had a net loss attributable to holders of our common stock of $18,387,507
(or $0.82 per share) for the year ended December 31, 2003, compared to a net
loss attributable to holders of our common stock of $32,972,680 (or $1.71 per
share) for the year ended December 31, 2002. The decrease in net loss
attributable to holders of our common stock was primarily due to:
o an increase in total revenue, as described below; and
o a decrease of non-cash expense relating to the debt conversion and
extinguishment of convertible promissory notes we issued in August
2001, and a decrease in non-cash interest expense (see Note 10 of the
Notes to Consolidated Financial Statements).
Our revenues were $6,593,193 for the year ended December 31, 2003, compared
to $2,484,948 for the year ended December 31, 2002. The increase was primarily
due to:
o additional payments under technology development and evaluation
agreements and additional purchases of materials by our development
partners; and
o providing OLED material to a customer for its use in the manufacture
of commercial OLED displays under an arrangement entered into in 2003.
We earned $2,295,009 from sales of our OLED materials for evaluation
purposes for the year ended December 31, 2003, compared to $833,194 for the
year ended December 31, 2002. The increase was mainly due to an increased
volume of OLED materials purchased for evaluation by potential OLED display
manufacturers, including our current development partners.
We entered into an arrangement in the third quarter of 2003 under which we
began supplying one of our proprietary OLED materials to a customer for use in
the manufacture of commercial passive matrix OLED displays. As a result, we
earned $68,160 in commercial chemical revenue and $159,040 in license fees in
connection with this arrangement for the year ended December 31, 2003. There
were no such arrangements in effect during 2002.
We recognized $2,650,000 in technology development revenue for the year
ended December 31, 2003, compared to $182,796 for the year ended December 31,
2002. The increase related to new and continuing technology development and
evaluation agreements in 2003.
19
We earned $1,420,984 in contract research revenue from the U.S. government
for the year ended December 31, 2003, compared to $1,468,958 for the year
ended December 31, 2002. The dollar value and the number of our government
contracts remained relatively constant during 2002 and 2003, and several of
these contracts are expected to continue into 2005.
We incurred research and development expenses of $17,897,522 for the year
ended December 31, 2003, compared to $15,804,267 for the year ended December
31, 2002. The increase was primarily a result of:
o an increase of $973,657 in non-cash operating expense associated with
our Development and License Agreement with PPG Industries, due to the
increased price of our common stock;
o an increase of $312,919 in costs associated with the increased number
of patents filed in 2003 as compared to 2002;
o an increase of $641,451 in costs for the further development and
operation of our facility in Ewing, New Jersey; and
o stock performance bonuses of $356,311 to research and development
employees. No such bonuses were awarded in 2002.
The increase was offset by a $289,900 decrease in costs associated with our
Scientific Advisory Board, due to the timing of payments.
We incurred general and administrative expenses of $5,766,761 for the year
ended December 31, 2003, compared to $4,754,850 for the year ended December
31, 2002. The increase was a result of an increase of $1,125,887 in costs
associated with new and existing personnel and stock performance bonuses of
$661,775 awarded to employees. There were no such stock performance bonuses
issued in 2002.
In September 2002, $7,000,002 of the $15,000,000 in convertible promissory
notes that we had issued in August 2001 (the Notes) were converted into shares
of our common stock, with the remaining amount being repaid in cash. As of the
date of conversion and repayment, the $15,000,000 face value of the Notes
exceeded their then-carrying value due to an unamortized original issuance
discount (OID) and beneficial conversion feature (BCF) on the Notes. As a
result, upon the conversion and repayment of the Notes, we recognized a non-
cash debt conversion and extinguishment expense of $10,011,780 related to the
unamortized portion of the OID and BCF and the intrinsic value of the Notes
repurchased. During 2003, there were no such expenses (see Note 10 of the
Notes to Consolidated Financial Statements).
We had no interest expense for the year ended December 31, 2003, compared to
$3,298,589 for the year ended December 31, 2002. The decrease was primarily
due to the retirement and conversion of the Notes in September 2002 and the
fact that there was no debt in 2003, which compares to 2002 in which we
recorded the amortization of OID and BCF of the Notes (see Note 10 of the
Notes to Consolidated Financial Statements).
In September 2003, the conversion price of the Series B Convertible
Preferred Stock we issued to Motorola, Inc. in September 2000 was adjusted in
accordance with the Certificate of Designations for this stock. We accounted
for this adjustment as a contingent beneficial conversion feature (CBCF). As a
result, we recorded the CBCF as a deemed dividend in the amount of $487,680.
In 2002, the adjustment resulted in a deemed dividend of $1,953,479 (see Note
9 of the Notes to Consolidated Financial Statements).
In August 2003, we completed an offering that was deemed dilutive under the
terms of certain warrants we had previously issued and resulted in a reduction
of the exercise prices of some of these warrants and an increase in the number
of shares issuable under certain of these warrants. We treated and recorded
this occurrence as a deemed dividend in the amount of $546,622. No such
dividends were recorded in 2002. The weighted-average anti-dilution provisions
of these warrants will be triggered in the future if we issue additional
shares below the various exercise prices of these warrants.
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001
We had a net loss attributable to holders of our 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 our common stock of $18,873,436 (or $1.11 per
share) for the year ended December 31, 2001. The increase was primarily due
to:
20
o an increase in cash and non-cash research and development expenses, as
described below; and
o an increase in non-cash interest expense on the Notes we issued in
August 2001, as well as our incurring non-cash expense relating to the
conversion and extinguishment of the Notes (see Note 10 of the Notes
to Consolidated Financial Statements).
Our revenues were $2,484,948 for the year ended December 31, 2002, compared
to $1,252,901 for the year ended December 31, 2001. We earned $1,468,958 in
contract research revenue from the U.S. government in 2002, compared to
$1,058,571 in 2001. The increase was primarily due to our 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.
We earned $833,194 from our sales of OLED materials for evaluation purposes
in 2002, compared to $194,330 in 2001. The increase was mainly due to an
increased volume of OLED materials purchased for evaluation by potential OLED
display manufacturers, including our technology development and evaluation
partners. We commenced sales of OLED materials for evaluation purposes in
2001.
During 2002, we received non-refundable cash payments of $4,266,667 in the
aggregate in connection with our technology development and evaluation and
license agreements, compared to $400,000 in similar cash payments we received
in 2001. Of the cash payments we received in 2002, we recognized revenues of
$182,796 as fees for technology development and evaluation, with the remainder
being recorded as unearned revenue. The increase in cash payments received
resulted from our entering into new technology development and evaluation and
license agreements in 2002, as well as from our receiving additional payments
under agreements of this nature that were in place during 2001.
During 2002, we sold approximately $3 million of our state-related income
tax net operating losses (NOLs) to New Jersey under the Technology Tax
Certificate Transfer Program. We received $225,657 for the sale of these NOLs
and recorded it as other revenue. We did not sell any of our NOLs prior to
2002, but may do so in the future.
We 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 was mainly attributable to the following:
o an increase of $901,754 in costs associated with increased salaries
and costs incurred in connection with, and as a result of, the
expansion of our facility in Ewing, New Jersey;
o an increase of $342,323 in costs associated with an increased number
of patents filed in 2002 as compared to 2001; and
o an increase of $3,204,333 in non-cash charges in connection with our
Development and License Agreement with PPG Industries (see Note 8 of
the Notes to Consolidated Financial Statements).
The increase was offset by a $1,054,786 decrease in costs associated with
our Scientific Advisory Board, relating to the valuation of warrants received
for compensation.
General and administrative expenses 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 was mainly due to increased salaries and costs incurred in
connection with, and as a result of, the expansion of our facility in Ewing,
New Jersey. We 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 Notes that we had issued
were converted into shares of our common stock, with the remaining amount
being repaid by us 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 OID and BCF on the Notes. As a result, upon the conversion and
repayment of the Notes, we recognized a non-cash debt conversion and
extinguishment expense of $10,011,780 related to the unamortized portion of
the OID and BCF and the intrinsic value of the Notes repurchased. In the same
period in 2001, there were no such expenses (see Note 10 of the Notes to
Consolidated Financial Statements).
21
Our 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 was
primarily due to amortization of the OID and BCF of the Notes (see Note 10 of
the Notes to Consolidated Financial Statements).
In September 2002, the conversion price of the Series B Convertible
Preferred Stock we issued to Motorola in September 2000 was adjusted in
accordance with the Certificate of Designations for this stock. We accounted
for this adjustment as a CBCF. As a result, we recorded the CBCF as a deemed
dividend in the amount of $1,953,479.
Liquidity and Capital Resources
As of December 31, 2003, we had cash and cash equivalents of $14,070,207,
short-term investments of $12,811,704 and investments in certificates of
deposit and other liquid instruments with an original maturity of more than
one year of $3,255,574. This compares to cash and cash equivalents of
$15,905,416, short-term investments of $4,662,898 and investments in
certificates of deposit and other liquid instruments with an original maturity
of more than one year of $379,753, as of December 31, 2002. The increase in
cash and cash equivalents and short-term and long-term investments of
$9,189,418 was primarily due to an increase in funds from our registered
direct offering in 2003, less cash used in operations, as detailed below.
During 2003, cash used in operating activities was $5,797,609, as compared
to $4,764,265 in 2002. The increase was mainly due to a decrease in non-
refundable cash payments received in 2003 as compared to 2002. In 2003, we
received $3,000,000 in the aggregate in connection with our new and existing
technology development and evaluation and license agreements, of which
$2,655,000 was recognized as revenue in 2003. This compares to $4,266,667 in
aggregate payments that we received in 2002 in connection with similar
agreements, of which $182,796 was recognized as revenue in 2002. This decrease
was offset in part by an increase in accounts payable and accrued expenses.
In August 2003, we completed a registered direct offering of 2,012,500
shares of our common stock at a price of $8.00 per share. The offering
resulted in proceeds to us of $14,829,357, net of $1,270,643 in costs
associated with completion of the offering.
In August 2002, we completed a registered direct offering of 1,277,014
shares of our common stock at a price of $5.09 per share. In September 2002,
we completed a subsequent registered direct offering of 383,452 shares of our
common stock at a price of $5.41 per share. These offerings resulted in
aggregate proceeds to us of $8,055,186, net of $519,288 in costs associated
with completion of the offerings.
Working capital increased to $23,679,705 as of December 31, 2003, from
working capital of $18,541,596 as of December 31, 2002. The net increase was
due primarily to the completion of the August 2003 registered direct offering
of our common stock. Our net cash used in operating activities was $5,797,609
in 2003 and $4,764,265 in 2002. Non-cash expenses related to the issuance of
our common stock, warrants and options to purchase our common stock, 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 $6,450,016 in 2003 and $19,162,516 in 2002.
We anticipate, based on our internal forecasts and assumptions relating to
our operations (including, among others, assumptions regarding our working
capital requirements, the progress of our research and development efforts,
the availability of sources of funding for our research and development work,
and the timing and costs associated with the preparation, filing, prosecution,
maintenance and enforcement of our patents and patent applications), that we
have sufficient cash, cash equivalents and short-term investments to meet our
obligations into 2005. We believe that potential additional financing sources
for us include long-term and short-term borrowings, public and private sales
of our equity and debt securities and the receipt of cash upon the exercise of
warrants and options. We have an effective shelf registration statement that
would enable us to offer, from time to time, up to $75,325,524 of our common
stock, preferred stock, debt securities and other securities, subject to
market conditions and other factors. It should be noted, however, that
substantial additional funds will be required in the future for research,
development and commercialization of our OLED technologies and materials, to
obtain and maintain patents respecting these technologies and materials, and
for working capital and other purposes, the timing and amount of which are
difficult to ascertain. For example, under our 1997 Research Agreement with
22
Princeton University, we are required to pay Princeton University $1,495,599
per year through July 2007. There can be no assurance that additional funds
will be available to us when needed, on commercially reasonable terms or at
all.
Contractual Obligations
As of December 31, 2003, we 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.............................. 1,483,217 302,207 887,010 294,000 --
---------- ---------- ---------- -------- ----------------
Capital lease obligations................................ 3,886 3,886 -- -- --
---------- ---------- ---------- -------- ----------------
Purchase obligations..................................... -- -- -- -- --
---------- ---------- ---------- -------- ----------------
Other long-term liabilities reflected on the balance
sheet under GAAP....................................... -- -- -- -- --
---------- ---------- ---------- -------- ----------------
Other Obligations:
Sponsored research obligation........................... 5,359,230 1,495,599 3,863,631 -- --
---------- ---------- ---------- -------- ----------------
Minimum royalty obligation.............................. 2,100,000(1) 600,000 1,300,000 200,000 $100,000/year(1)
---------- ---------- ---------- -------- ----------------
Total.................................................... $8,946,333(1)$2,401,692 $6,050,641 $494,000 $100,000/year(1)
---------- ---------- ---------- -------- ----------------
- ---------------
(1) Under our Amended License Agreement with Princeton University and the
University of Southern California, we are obligated to pay Princeton
University minimum royalties of $100,000 per year until such time as the
agreement is no longer in effect.
Off-Balance Sheet Arrangements
As of December 31, 2003, we had no off-balance sheet arrangements in the
nature of guarantee contracts, retained or contingent interests in assets
transferred to unconsolidated entities (or similar arrangements serving as
credit, liquidity or market risk support to unconsolidated entities for any
such assets), or obligations (including contingent obligations) arising out of
variable interests in unconsolidated entities providing financing, liquidity,
market risk or credit risk support to us, or that engage in leasing, hedging
or research and development services with us.
Recently Issued Accounting Pronouncements
The adoption of SFAS Nos. 145, 146, 148 and 150 and FASB Interpertation Nos.
45 and 46 did not have a material impact on our 2003 consolidated financial
statements.
The EITF reached a consensus on EITF Issue No. 00-21, which provides
accounting guidance for customer solutions where delivery or performance of
products, services and/or performances may occur at different points in time
or over different periods of time. Companies are required to adopt this
consensus for fiscal periods beginning after June 15, 2003. We believe the
adoption of EITF Issue No. 00-21 will not have a material impact on our
financial position, results of operations, or liquidity.
FACTORS THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL CONDITION
The following factors, as well as other factors affecting our operating
results and financial condition, could cause our actual future results and
financial condition to differ materially from those projected.
We do not expect to be profitable in the foreseeable future, and may never be
profitable.
Since inception, we have generated limited revenues while incurring
significant losses. We expect to incur losses for the foreseeable future and
until such time, if ever, as we are able to achieve sufficient levels of
revenue from the commercial exploitation of our OLED technologies and
materials to support our operations. You should note, however, that:
o OLED technologies may never become commercially viable;
23
o markets for flat panel displays utilizing OLED technologies may be
limited; and
o we may never generate sufficient revenues from the commercial
exploitation of our OLED technologies and materials to become
profitable.
Even if we find commercially viable applications for our OLED technologies
and materials, we may never recover our research and development expenses.
If we do not receive additional financing in the future, we might not be able
to continue the research, development and commercialization of our OLED
technologies and materials.
Our capital requirements have been and will continue to be significant.
Substantial additional funds will be required in the future for research,
development and commercialization of our OLED technologies and materials, to
obtain and maintain patents and other intellectual property rights in these
technologies and materials, and for working capital and other purposes, the
timing and amount of which are difficult to ascertain. Our cash on hand may
not be sufficient to meet all of our future needs. When we need additional
funds, such funds may not be available on commercially reasonable terms or at
all. If we cannot obtain more money when needed, our business might fail.
Additionally, if we attempt to raise money in an offering of shares of our
common stock, preferred stock, warrants or depositary shares, or if we engage
in acquisitions involving the issuance of such securities, the issuance of
these shares will dilute our then-existing shareholders.
If our OLED technologies and materials are not feasible for broad-based
product applications, we may never generate revenues sufficient to support
ongoing operations.
Before display manufacturers will agree to utilize our OLED technologies and
materials for wide-scale commercial production, they will likely require us to
demonstrate to their satisfaction that our OLED technologies and materials are
feasible for broad-based product applications. This, in turn, will require
substantial advances in our 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.
Our efforts may never demonstrate the feasibility of our OLED technologies
and materials for broad-based product applications.
Our research and development efforts remain subject to all of the risks
associated with the development of new products based on emerging and
innovative technologies, including, without limitation, unanticipated
technical or other problems and the possible insufficiency of funds for
completing development of these products. Technical problems may result in
delays and cause us to incur additional expenses that would increase our
losses. If we cannot complete research and development of our OLED
technologies and materials successfully, or if we experience delays in
completing research and development of our OLED technologies and materials for
use in potential commercial applications, particularly after incurring
significant expenditures, our business may fail.
Even if our OLED technologies are technically feasible, they may not be
adopted by display manufacturers.
The potential size, timing and viability of market opportunities targeted by
us are uncertain at this time. Market acceptance of our OLED technologies will
depend, in part, upon these technologies providing benefits comparable to
cathode ray tube, or CRT, display and LCD technologies (the current standard
display technologies) at an appropriate cost, and the adoption of these
technologies by consumers, neither of which has been achieved. Also, there may
be a number of additional technologies that display manufacturers need to
utilize to be used in conjunction with our OLED technologies in order to bring
OLED displays and products containing them to the market. Many potential
licensees of our OLED technologies manufacture flat panel displays utilizing
competing technologies, and may, therefore, be reluctant to redesign their
products or manufacturing processes to incorporate our OLED technologies.
Moreover, even if our OLED technologies are a viable alternative to competing
technologies, if additional technologies are required to be used in
conjunction with our OLED
24
technologies to bring OLED displays and products containing them to the market
and display manufacturers are unable to obtain access to these technologies,
they may not utilize our OLED technologies.
There are numerous potential alternatives to OLEDs for flat panel displays,
which may limit our ability to commercialize our OLED technologies and
materials.
The flat panel display market is currently, and will likely continue to be
for some time, dominated by displays based on LCD technology. Numerous
companies are making substantial investments in, and conducting research to
improve characteristics of, LCDs. 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. Advances in LCD technology or any of these
technologies may overcome their current limitations and permit them to become
the leading technologies for flat panel displays, either of which could limit
the potential market for flat panel displays utilizing our OLED technologies
and materials. This, in turn, would cause display manufacturers to avoid
entering into commercial relationships with us, or to terminate or not renew
their existing relationships with us.
Other OLED technologies may be more successful than ours.
Our competitors have developed OLED technologies that differ from or compete
with our OLED technologies. These competing OLED technologies entered the
marketplace prior to ours and may become entrenched in the flat panel industry
before our OLED technologies have a chance to become widely utilized.
Moreover, our competitors may succeed in developing new OLED technologies that
are more cost-effective or have fewer display limitations than our OLED
technologies. If our OLED technologies, and particularly our phosphorescent
OLED technology, are unable to capture a substantial portion of the OLED
display market, our business strategy may fail.
Many of our competitors have greater resources, and it may be difficult to
compete against them.
The flat panel display industry is characterized by intense competition.
Many of our competitors have better name recognition and greater financial,
technical, marketing, personnel and research capabilities than us. Because of
these differences, we may never be able to compete successfully in the OLED
display market.
The flat panel display industry has historically experienced significant
downturns, which may adversely affect the demand for and pricing of our OLED
technologies and materials.
The flat panel display industry has experienced significant periodic
downturns, often in connection with, or in anticipation of, declines in
general economic conditions. These downturns have been characterized by lower
product demand, production overcapacity and erosion of average selling prices.
Our business strategy is dependent on display manufacturers building and
selling displays that incorporate our OLED technologies and materials.
Industry-wide fluctuations and downturns in the demand for flat panel
displays, and OLED displays in particular, could cause significant harm to our
business.
If our research partners fail to make advances in their research, or if they
terminate or elect not to renew their relationships with us, we might not
succeed in commercializing our OLED technologies and materials.
Research and development of commercially viable applications for our OLED
technologies and materials depend substantially on the success of the work
conducted by our research partners. We cannot be certain that our research
partners will make additional advances in the research and development of
these technologies and materials. Moreover, although we fund OLED technology
research, the scope of and technical aspects of this research and the
resources and efforts directed to this research are in large part subject to
the control of our research partners.
Our most significant research and development relationships are with
Princeton University and the University of Southern California. Our Research
Agreement with Princeton University expires in July 2007 and both this
agreement and our Amended License Agreement with Princeton University and the
University of Southern California (the agreement under which we license our
key OLED technology patents) can be terminated for various reasons. For
example, the Research Agreement provides that if Dr. Stephen R. Forrest, the
principal investigator for our research program with Princeton University, is
unavailable to continue to serve in this
25
capacity, because he is no longer associated with Princeton University or for
any other reason, and a successor acceptable to both us and Princeton
University is not available, Princeton University has the right to terminate
the Research Agreement without impacting the Amended License Agreement.
Termination of the Research Agreement or the Amended License Agreement would
materially and adversely affect our ability to research, develop and
commercialize our OLED technologies and materials.
If we cannot form and maintain lasting business relationships with OLED
display manufacturers, our business strategy will fail.
Our business strategy ultimately depends upon our development and
maintenance of commercial licensing and material supply relationships with
high-volume manufacturers of OLED displays. As of December 31, 2003, we had
entered into only two such relationships, one with Dupont Displays, Inc. and
one with Tohoku Pioneer Corporation. All of our other relationships with
display manufacturers currently are limited to technology development and the
evaluation of our OLED technologies and materials for possible use in
commercial production. Some or all of these relationships may not succeed or,
even if they are successful, may not result in the display manufacturers
entering into commercial licensing and material supply relationships with us.
Under our existing technology development and evaluation agreements, we are
working with display manufacturers to incorporate our technologies into their
products for the commercial production of OLED displays. However, these
technology development and evaluation agreements typically last for limited
periods of time, such that our relationships with the display manufacturers
will expire unless they continually are renewed. The display manufacturers may
not agree to renew their relationships with us on a continuing basis. In
addition, we regularly continue working with display manufacturers evaluating
our OLED technologies and materials after our existing agreements with them
have expired while we are attempting to negotiate contract extensions or new
agreements with them. Should our relationships with the display manufacturers
not continue or be renewed, our business would suffer.
Our ability to enter into additional commercial licensing and material
supply relationships, or to maintain our existing technology development and
evaluation relationships, may require us to make financial or other
commitments. We might not be able, for financial or other reasons, to enter
into or continue these relationships on commercially acceptable terms, or at
all. Failure to do so would have a material adverse effect on us.
We rely solely on PPG Industries to manufacture the OLED materials we use and
sell to display manufacturers.
Our business prospects depend significantly on our ability to obtain
proprietary OLED materials for our own use and for sale to display
manufacturers. Our current Development and License Agreement with PPG
Industries, Inc. provides us with a source for these materials for research,
development and evaluation purposes, and our current Supply Agreement with PPG
Industries provides us with a source for these materials for commercial
purposes. However, the Development and License Agreement expires at the end of
2005 and the Supply Agreement expires at the end of 2007. Our inability to
continue obtaining these OLED materials from PPG Industries or another source
would have a material adverse effect on our revenues from sales of these
materials, as well as on our ability to perform research and development work
and to support those display manufacturers currently evaluating our OLED
technologies and materials for possible commercial use.
If we cannot obtain and maintain appropriate patent and other intellectual
property rights protection for our OLED technologies and materials, our
business will suffer.
The value of our OLED technologies and materials is dependent on our ability
to secure and maintain appropriate patent and other intellectual property
rights protection. Although we own or license many patents respecting our OLED
technologies and materials that have already been issued, there can be no
assurance that additional patents applied for will be obtained, or that any of
these patents, once issued, will afford commercially significant protection
for our OLED technologies and materials, or will be found valid if challenged.
Moreover, we have not obtained patent protection for some of our OLED
technologies and materials in all foreign countries in which OLED displays or
materials might be manufactured or sold. In any event, the patent laws of
other countries may differ from those of the United States as to the
patentability of our OLED technologies and materials and the degree of
protection afforded.
26
We may become engaged in litigation to protect or enforce our patent and
other intellectual property rights, or in International Trade Commission
proceedings to abate the importation of goods that would compete unfairly with
those of our licensees. In addition, we may have to participate in
interference or reexamination proceedings before the U.S. Patent and Trademark
Office, or in opposition, nullity or other proceedings before foreign patent
offices, with respect to our patents or patent applications. All of these
actions would place our patents and other intellectual property rights at risk
and may result in substantial costs to us as well as a diversion of management
attention. Moreover, if successful, these actions could result in the loss of
patent or other intellectual property rights protection for the key OLED
technologies and materials on which our business depends.
If our OLED technologies or materials are found to infringe the rights of
others, we may not be able to commercially license or sell them.
Other companies and institutions may independently develop OLED technologies
and materials that are equivalent or superior to ours, 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 technologies and materials,
including Eastman Kodak Company, Fuji Film Co., Ltd., Canon, Inc., Pioneer
Corporation, Semiconductor Energy Laboratories Co. and Mitsubishi Chemical
Corporation, all of whom have patent rights related to OLED technologies and
materials. There can be no assurance that the utilization of our OLED
technologies or the sale of our OLED materials, including technologies and
materials developed by or licensed from Princeton University, the University
of Southern California, PPG Industries or Motorola, Inc., will not infringe on
the patent or other intellectual property rights of others. In this event, we
or our partners may be required to obtain licenses, pay damages, modify our
products or methods of operation, or be prohibited from making, using, selling
or offering to sell some or all of our OLED materials or products
incorporating our OLED technologies. We also might not have the financial or
other resources necessary to enforce or defend a patent infringement action,
and the licensors of our licensed patents might not enforce or defend such an
action in a timely manner. If our OLED materials or products incorporating our
OLED technologies are found to infringe on the patent or other intellectual
property rights of others, it could have a material adverse effect on us by
limiting our ability to license our OLED technologies or to sell our OLED
materials to display manufacturers.
The U.S. government has rights to our OLED technologies that might prevent us
from realizing the benefits of these technologies.
The U.S. government, through various government agencies, has provided and
continues to provide funding to us, Princeton University and the University of
Southern California for research activities related to certain aspects of our
OLED technologies. Because we have been provided with this funding, the
government has rights to these OLED technologies that could restrict our
ability to market them to the government for military and other applications,
or to third parties for commercial applications. Moreover, if the government
determines that we have not taken effective steps to achieve practical
application of these OLED technologies in any field of use in a reasonable
time, the government could require us to grant licenses to other parties in
that field of use. Any of these occurrences would limit our ability to obtain
the full benefits of our OLED technologies.
If we cannot keep our key employees or hire other talented persons as we grow,
our business might not succeed.
Our performance is substantially dependent on the continued services of
senior management and other key personnel, and on our ability to offer
competitive salaries and benefits to our employees. We do not have employment
agreements with any of our management or other key personnel. Additionally,
competition for highly skilled technical, managerial and other personnel is
intense. We might not be able to attract, hire, train, retain and motivate the
highly skilled managers and employees we need to be successful. If we fail to
attract and retain the necessary technical and managerial personnel, our
business will suffer and might fail.
We can issue shares of preferred stock that may adversely affect your rights
as a shareholder of our common stock.
Our Articles of Incorporation authorize us to issue up to 5,000,000 shares
of preferred stock with designations, rights and preferences determined from
time-to-time by our Board of Directors. Accordingly, our Board of Directors is
empowered, without shareholder approval, to issue preferred stock with
dividend,
27
liquidation, conversion, voting or other rights superior to those of
shareholders of our common stock. For example, an issuance of shares of
preferred stock could:
o adversely affect the voting power of the shareholders of our common
stock;
o make it more difficult for a third party to gain control of us;
o discourage bids for our common stock at a premium; or
o otherwise adversely affect the market price of our common stock.
Our Board of Directors has designated and issued two series of preferred
stock that were outstanding as of December 31, 2003: (a) 200,000 shares of
Series A Nonconvertible Preferred Stock, all of which are held by an entity
controlled by members of the family of Sherwin Seligsohn, our Chairman of the
Board and Chief Executive Officer; and (b) 300,000 shares of Series B
Convertible Preferred Stock that are held by Motorola. As of December 31,
2003, 225,000 shares of the Series B Convertible Preferred Stock were
convertible into 343,916 shares of our common stock. The remaining 75,000
shares of the Series B Convertible Preferred Stock will vest and all shares of
Series B Convertible Preferred Stock will automatically convert into shares of
our common stock in September 2004. We may issue additional shares of
authorized preferred stock at any time in the future.
If the price of our common stock goes down, we may have to issue more shares
than are presently anticipated to be issued under our agreement with PPG
Industries.
Under our Development and License Agreement with PPG Industries, we are
required to issue to PPG Industries shares of our common stock for services
rendered by it. If, at the time of issuance, the price of our common stock has
declined materially since the date of the Development and License Agreement,
we would be required to issue to PPG Industries more shares of our common
stock than were initially anticipated. This increase in the number of shares
available for public sale could cause people to sell our common stock,
including in short sales, which could drive down the price of our common
stock, thus reducing its value and perhaps hindering our ability to raise
additional funds in the future. In addition, such an increase in the number of
outstanding shares of our common stock would further dilute existing holders
of this stock.
Our executive officers and directors own a large percentage of our common
stock and could exert significant influence over matters requiring shareholder
approval, including takeover attempts.
Our executive officers and directors, their respective affiliates and the
adult children of Sherwin Seligsohn, our Chairman of the Board and Chief
Executive Officer beneficially own as of February 20, 2004, approximately
25.5% of the outstanding shares of our common stock. Moreover, Pine Ridge
Financial Inc. and First Investors Holding Co., Inc., as successor to Strong
River Investments, Inc., assigned to our management their rights to vote the
shares of our common stock they received or are entitled to receive upon
conversion of warrants, notes and preferred stock issued in an August 2001
private placement transaction, of which warrants to purchase 744,452 shares
remain outstanding as of February 20, 2004. Accordingly, these shareholders
and members of management may, as a practical matter, be able to exert
significant influence over matters requiring approval by our shareholders,
including the election of directors and the approval of mergers or other
business combinations. This concentration also could have the effect of
delaying or preventing a change in control of us.
The market price of our common stock might be highly volatile.
The market price of our common stock might be highly volatile, as has been
the case with our common stock in the past as well as the securities of many
companies, particularly other small and emerging-growth companies. We have