10-Q 1 tenq.txt 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2003 or [ ] TRANSITION REPORT UNDER 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 Identification No.) incorporation or organization) 375 Phillips Boulevard Ewing, New Jersey 08618 ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code)
(609) 671-0980 --------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes __X__ No ____ Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act): Yes __X__ No ____ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: As of November 4, 2003, the registrant had outstanding 24,066,485 shares of Common Stock. TABLE OF CONTENTS PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS Consolidated Balance Sheets - September 30, 2003 (unaudited) and December 31, 2002 1 Consolidated Statements of Operations - Three months ended September 30, 2003 and 2002 (unaudited) 2 Consolidated Statements of Operations - Nine months ended September 30, 2003 and 2002 and inception to September 30, 2003 (unaudited) 3 Consolidated Statements of Cash Flows - Nine months ended September 30, 2003 and 2002 and inception to September 30, 2003 (unaudited) 4 Notes to Consolidated Financial Statements (unaudited) 5 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 12 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 16 ITEM 4. CONTROLS AND PROCEDURES 16 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS 16 ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 16 ITEM 3. DEFAULTS UPON SENIOR SECURITIES 16 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 16 ITEM 5. OTHER INFORMATION 16 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 17
- i - PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARY (a development-stage company) CONSOLIDATED BALANCE SHEETS
ASSETS September 30, 2003 December 31, (unaudited) 2002 ------------------- ---------------- CURRENT ASSETS: Cash and cash equivalents $ 21,658,422 $ 15,905,416 Short-term investments 5,347,865 4,662,898 Accounts receivable 609,148 662,822 Inventory 28,812 -- Other current assets 207,946 177,219 -------------- ------------ Total current assets 27,852,193 21,408,355 PROPERTY AND EQUIPMENT, net 3,981,509 4,617,570 AQUIRED TECHNOLOGY, net 11,828,471 13,099,775 INVESTMENTS 3,710,838 379,753 OTHER ASSETS 134,773 133,763 -------------- ------------ $ 47,507,784 $ 39,639,216 ============== ============ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Capital lease obligations $ 5,113 $ 4,713 Accounts payable 442,265 388,286 Accrued expenses 1,146,547 1,084,889 Deferred license fees 1,266,667 1,066,667 Deferred revenue 67,204 322,204 -------------- ------------ Total current liabilities 2,927,796 2,866,759 -------------- ------------ CAPITAL LEASE OBLIGATIONS -- 3,886 DEFERRED LICENSE FEES 3,100,000 3,100,000 -------------- ------------ Total liabilities 6,027,796 5,970,645 COMMITMENTS AND CONTINGENCIES (Note 8) SHAREHOLDERS' EQUITY: Preferred Stock, par value $0.01 per share, 5,000,000 shares authorized, 200,000 shares Series A Nonconvertible Preferred Stock issued and Outstanding (liquidation value of $7.50 per share or $1,500,000), 300,000 shares Series B Convertible Preferred Stock issued and outstanding (liquidation value of $21.48 per share or $6,444,000), 5,000 shares of Series C-1 Convertible Preferred Stock authorized and none outstanding, 5,000 shares of Series D Convertible Preferred Stock authorized and none outstanding 5,000 5,000 Common Stock, par value $.01 per share, 50,000,000 shares authorized, 23,879,753 and 21,525,412 shares issued and outstanding, respectively 238,798 215,254 Additional paid-in capital 133,983,125 113,541,408 Accumulated other comprehensive loss (18,505) (18,586) Deficit accumulated during development-stage (92,728,430) (80,074,505) -------------- ------------ Total shareholders' equity 41,479,988 33,668,571 -------------- ------------ $ 47,507,784 $ 39,639,216 ============== ============
The accompanying notes are an integral part of these statements. 1 UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARY (a development-stage company) CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended September 30, -------------------------------------- 2003 2002 ------------- -------------- REVENUE: Contract research $ 267,860 $ 331,138 Development chemicals 303,725 254,936 Commercial chemicals 19,890 -- License fees 46,410 -- Technology development fees 1,450,000 -- ------------ ------------- Total revenue 2,087,885 586,074 COSTS AND EXPENSES: Cost of chemicals sold 37,003 13,061 Research and development 4,385,019 3,908,777 General and administrative 1,298,880 1,077,341 Royalty expense 87,500 25,000 ------------ ------------- Total operating expenses 5,808,402 5,024,179 ------------ ------------- Operating loss (3,720,517) (4,438,105) INTEREST INCOME 57,883 111,300 INTEREST EXPENSE (161) (651,325) DEBT CONVERSION AND EXTINGUISHMENT EXPENSE -- (10,011,780) ------------ ------------- NET LOSS (3,662,795) (14,989,910) DEEMED DIVIDEND TO PREFERRED SHAREHOLDERS (1,034,302) (1,953,479) ------------ ------------- NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS $ (4,697,097) $ (16,943,389) ============ ============= BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (0.21) $ (0.89) ============ ============= WEIGHTED AVERAGE SHARES USED IN COMPUTING BASIC AND DILUTED NET LOSS PER COMMON SHARE 22,504,673 19,105,553 ============ =============
The accompanying notes are an integral part of these statements. 2 UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARY (a development-stage company) CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Nine Months Ended September 30, Period from Inception ----------------------------------- (June 17, 1994) to 2003 2002 September 30, 2003 ------------- ------------- --------------------- REVENUE: Contract research $ 1,105,213 $ 1,143,197 $ 5,107,433 Development chemicals 1,549,726 442,435 2,560,241 Commercial chemicals 19,890 -- 19,890 License fees 46,410 -- 46,410 Technology development fees 1,950,000 -- 2,132,796 ------------ ------------- -------------- Total revenue 4,671,239 1,585,632 9,866,770 OPERATING EXPENSES: Cost of chemicals sold 84,542 22,667 107,209 Research and development 12,493,267 11,475,574 59,722,785 General and administrative 3,637,342 3,350,880 23,981,489 Royalty expense 262,500 75,000 587,500 ------------ ------------- -------------- Total operating expenses 16,477,651 14,924,121 84,398,983 ------------ ------------- -------------- Operating loss (11,806,412) (13,338,489) (74,532,213) INTEREST INCOME 171,336 358,598 2,226,301 INTEREST EXPENSE (579) (2,874,835) (5,147,310) DEBT CONVERSION AND EXTINGUISHMENT EXPENSE -- (10,011,780) (10,011,780) OTHER INCOME 16,032 -- 241,689 ------------ ------------- -------------- NET LOSS (11,619,623) (25,866,506) (87,223,313) DEEMED DIVIDEND TO PREFERRED SHAREHOLDERS (1,034,302) (1,953,479) (5,505,117) ------------ ------------- -------------- NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS $(12,653,925) $ (27,819,985) $ (92,728,430) ============ ============= ============= BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (0.58) $ (1.50) ============ ============= WEIGHTED AVERAGE SHARES USED IN COMPUTING BASIC AND DILUTED NET LOSS PER COMMON SHARE 21,899,091 18,490,810 ============ =============
The accompanying notes are an integral part of these statements. 3 UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARY (a development-stage company) CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months Ended September 30, Period from Inception --------------------------------- (June 17, 1994) to 2003 2002 September 30, 2003 ----------- ----------- --------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (11,619,623) $ (25,866,506) $ (87,223,313) Non-cash charges to statement of operations: Depreciation 1,571,227 1,332,825 5,258,307 Amortization of intangibles 1,271,304 1,271,304 5,122,247 Amortization of discounts on Convertible Promissory Note -- 13,044,467 14,734,168 Issuance of Common Stock options and warrants for services 40,399 423,962 1,650,959 Issuance of Common Stock and warrants in connection with amended research and license agreements -- -- 3,120,329 Issuance of Common Stock in connection with executive compensation -- 16,150 439,370 Issuance of redeemable Common Stock, Common Stock options and warrants in connection with the PPG development agreement 4,004,638 3,830,753 12,438,446 Issuance of Common Stock options and warrants for Scientific Advisory Board -- -- 1,947,369 Issuance of Common Stock in connection with License Agreement -- -- 71,816 Acquired in-process technology -- -- 350,000 (Increase) decrease in assets: Accounts receivable 53,674 (58,868) (609,148) Inventory (28,812) -- (28,812) Other current assets (30,727) (350,907) 140,370 Other assets (1,010) (13,638) (134,773) Increase (decrease) in liabilities: Accounts payable and accrued expenses 246,967 278,467 1,539,562 Deferred license fees 200,000 -- 4,366,667 Deferred revenue (255,000) 634,167 67,204 ------------- ------------- --------------- Net cash used in operating activities (4,546,963) (5,457,824) (36,749,232) ------------- ------------- --------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of equipment (935,166) (1,066,496) (8,357,795) Purchase of intangibles -- -- (25,750) Purchases of investments (8,513,163) (3,087,506) (41,379,768) Proceeds from sale of investments 4,497,192 4,819,585 32,302,560 Restricted cash -- 15,162,414 -- ------------- ------------- --------------- Net cash (used in) provided by investing activities (4,951,137) 15,827,997 (17,460,753) ------------- ------------- --------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of Common Stock, net 14,841,857 7,644,337 45,873,794 Proceeds from issuance of Preferred Stock -- -- 9,137,079 Proceeds from issuance of Convertible Promissory Notes and equity instruments -- -- 15,000,000 Repayment of Convertible Promissory Notes -- (8,399,997) (8,819,997) Proceeds from the exercise of Common Stock options and warrants 412,735 17,750 14,692,439 Principal payments on capital lease (3,486) (3,128) (14,908) ------------- ------------- --------------- Net cash provided by (used in) financing activities 15,251,106 (741,038) 75,868,407 ------------- ------------- --------------- (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS 5,753,006 9,629,135 21,658,422 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 15,905,416 7,883,132 -- ------------- ------------- --------------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 21,658,422 $ 17,512,267 $ 21,658,422 ============= ============= ===============
The accompanying notes are an integral part of these statements. 4 UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARY (a development-stage company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. BACKGROUND: Universal Display Corporation (the "Company"), a development-stage company, is engaged in the research and development and commercialization of organic light emitting device ("OLED") technologies and materials for potential flat panel display and other applications. The Company, formerly known as Enzymatics, Inc. ("Enzymatics"), was incorporated under the laws of the Commonwealth of Pennsylvania on April 24, 1985, and commenced its current business activities on August 1, 1994. The New Jersey corporation formerly known as Universal Display Corporation and now known as UDC, Inc. ("UDC") was incorporated under the laws of the State of New Jersey on June 17, 1994. The Company also sponsors substantial OLED technology research being conducted at the Advanced Technology Center for Photonics and Optoelectronic Materials at Princeton University and at the University of Southern California ("USC") (on a subcontract basis with Princeton University), pursuant to a Research Agreement between the Company and the Trustees of Princeton University dated October 9, 1997 (as amended, the "1997 Research Agreement") (Note 3). The Company previously sponsored OLED technology research conducted at Princeton University under a Sponsored Research Agreement between the Trustees of Princeton University and American Biomimetics Corporation ("ABC") dated August 1, 1994 (as amended, the "1994 Sponsored Research Agreement"). ABC, a privately held Pennsylvania corporation that is affiliated with the Company, assigned its rights and obligations under the 1994 Sponsored Research Agreement to the Company in October 1995. Pursuant to a License Agreement between the Trustees of Princeton University and ABC dated August 1, 1994 (as amended, the "1994 License Agreement"), Princeton University granted the Company a worldwide exclusive license, with rights to sublicense, to make, have made, use, lease and/or sell products and to practice processes based on a pending patent application of Princeton University relating to OLED technology. Under the 1994 License Agreement, Princeton University further granted ABC similar license rights with respect to patent applications and issued patents arising out of work performed by Princeton University under the 1994 Sponsored Research Agreement. ABC assigned its rights and obligations under the 1994 License Agreement to the Company in June 1995. On October 9, 1997, the Company and Princeton University entered into an Amended License Agreement that amended and restated the 1994 License Agreement (as amended, the "1997 Amended License Agreement") (Note 3). Under the 1997 Amended License Agreement, Princeton University granted the Company corresponding license rights with respect to patent applications and issued patents arising out of work performed by Princeton University and USC under the 1997 Research Agreement. The Company conducts a substantial portion of its OLED technology development activities at its technology development and transfer facility in Ewing, New Jersey. The Company moved its operations to this facility in the fourth quarter of 1999 and expanded the facility from 11,000 square feet to 21,000 square feet in 2001. In September 2003, the Company renewed its lease for this facility for an additional five years through the end of 2008. In connection with renewing this lease, the Company negotiated an option to purchase the entire facility at any time after the first six months of the renewal period. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Interim Financial Information In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the financial position as of September 30, 2003, and the results of operations and cash flows for the three and nine months ended September 30, 2003 and 2002. While management believes that the disclosures presented are adequate to make the information not misleading, these unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto in the Company's latest year-end financial statements, which were included in the Company's Annual Report on Form 10-K for the year ended December 31, 2002. Cash, Cash Equivalents and Short-term Investments Cash and cash equivalents are defined as cash and highly liquid investments with original maturities of less than three months. At September 30, 2003, cash and cash equivalents included cash on hand, cash in banks, money market accounts and certificate of deposits. 5 The Company classifies its investments as available-for-sale in accordance with the provisions of Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities." These investments are carried at fair market value, with unrealized gains and losses reported in shareholders' equity as a component of other comprehensive income (loss). Gains or losses on securities sold are based on the specific identification method. Investments classified as current have maturity dates of greater then three months but less than one year. Investments classified as long-term have maturity dates greater than one year. The Company reported unrealized holding losses of $18,505 and $18,586 at September 30, 2003 and December 31, 2002, respectively. Comprehensive loss, which includes the net loss and change in unrealized holding losses, was $11,619,704 and $25,866,060 for the nine months ended September 30, 2003 and 2002, respectively and $3,666,004 and $14,991,898 for the three months ended September 30, 2003 and 2002, respectively. Inventory Inventory consists of chemicals held at the Company's location. Inventory is valued at the lower of cost or market, with the cost determined using the specific identification method. Acquired Technology Acquired technology consists of acquired license rights for patents and know-how obtained from PD-LD, Inc. and Motorola, Inc. (Note 4). These intangible assets consist of the following:
September 30, 2003 December 31, 2002 ------------------ ----------------- PD-LD, Inc. $ 1,481,250 $ 1,481,250 Motorola 15,469,468 15,469,468 ------------ ------------ 16,950,718 16,950,718 Less: Accumulated amortization (5,122,247) (3,850,943) ------------ ------------ Acquired Technology, net $ 11,828,471 $ 13,099,775 ============ ============
Acquired technology is amortized on a straight-line basis over its estimated useful life of ten years. Net Loss Per Common Share Basic net loss per common share is computed by dividing net loss attributable to Common Stock shareholders by the weighted-average number of shares of Common Stock outstanding for the period. Diluted net loss per common share reflects the potential dilution from the exercise, or conversion of securities into Common Stock. For the three and nine months ended September 30, 2003 and 2002, the effects of the exercise of 8,228,936 and 7,872,683 outstanding stock options and warrants, respectively, were excluded from the calculation of diluted EPS as the impact would be antidilutive. Research and Development Expenditures for research and development are charged to operations as incurred. Certain Reclassifications Certain prior year amounts have been reclassified to conform to the current year presentation. 6 Recent Accounting Pronouncements In July 2002, the FASB Issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," which addresses the financial accounting and reporting of expenses related to restructurings initiated after 2002, and applies to costs associated with an exit activity (including a restructuring) or with a disposal of long-lived assets. Those activities can include eliminating or reducing product lines, terminating employees and contracts, and relocating plant facilities or personnel. Under SFAS No. 146, a company will record a liability for a cost associated with an exit or disposal activity when the liability is incurred and can be measured at fair value. The provisions of SFAS No. 146 are effective prospectively for exit or disposal activities initiated after December 31, 2002. The adoption of this statement had no effect on the Company's financial statements. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation- Transition and Disclosure," which amends SFAS No. 123, to provide alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements. As such, the disclosure requirements have been incorporated in the Company's financial statements. In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities," ("FIN 46"), as amended, which addresses the consolidation by business enterprises of variable interest entities as defined in the Interpretation. The Interpretation applies immediately to variable interests in variable interest entities created after January 31, 2003, and to variable interests in variable interest entities obtained after January 31, 2003. For variable interest entities created before February 1, 2003, FIN 46 is effective as of December 31, 2003. The Company has not yet determined the effect of FIN 46 on the Company's financial statements. The EITF recently 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. The adoption of EITF Issue No. 00-21 had no significant impact on the Company's financial position, results of operations, or liquidity. In May 2003, SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity", as amended, was issued establishing standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify certain financial instruments within its scope as a liability. Some of the provisions of this Statement are consistent with the current definition of liabilities in FASB Concepts Statement No. 6, "Elements of Financial Statements". The remaining provisions of the Statement are consistent with the Board's proposal to revise that definition to encompass certain obligations that a reporting entity can or must settle by issuing its own equity shares, depending on the nature of the relationship established between the holder and the issuer. The adoption of SFAS No. 150 had no impact on the Company's financial statements. Statement of Cash Flow Information The following non-cash investing and financing activities occurred:
Nine Months Ended September 30, --------------------------------------- 2002 2001 --------------- --------------- Common Stock issued upon conversion of Notes (Note 6) -- 7,999,998 Warrants issued to placement agent in connection with registered direct offering 314,112 --
Stock Options The Company accounts for its stock option plans under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," ("APB No. 25") under which no compensation cost has been recognized for options issued to employees at fair market value on the date of grant. In 1995, the Financial Accounting Standards Board issued SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123 established a fair value based method of accounting for stock-based compensation plans. SFAS No. 123 requires that a company's financial statements include certain disclosures about stock-based employee compensation arrangement regardless of the method used to account for the plan. The Company accounts for its stock option and warrant grants to non-employees in exchange for goods or services in accordance with SFAS No. 123 and Emerging Issues Task Force No. 96-18 ("EITF 96-18"). SFAS 123 and EITF 96-18 require that the Company account for its option and warrant grants to non-employees based on the fair value of the options and warrants granted. 7 SFAS No. 123, as amended by SFAS No. 148, permits companies to (i) recognize as expense the fair value of stock-based awards, or (ii) continue to apply the provisions of APB No. 25, and provide pro forma net income and earnings per share disclosures for employee stock option grants as if the fair-value-based method defined in SFAS No. 123 had been applied. The Company continues to apply the provisions of APB No. 25 and provide the pro forma disclosures in accordance with the provisions of SFAS No. 123 and 148 to its stock option plans. Under APB No. 25, the Company has not recorded any stock-based employee compensation cost associated with the Company's stock option plan, as all options granted under the plan had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net loss and net loss per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to its stock option plans:
Three months ended September 30, ------------------------------------------ 2003 2002 ------------- ------------- Net loss applicable to Common shareholders: As reported $ (4,697,097) $(16,943,389) Add stock-based employee compensation expense included in reported net income -- -- Deduct total stock-based employee compensation expense determined under fair-value-based method for all rewards (263,328) (2,245,598) ------------- ------------- Pro forma $ (4,960,425) $(19,188,987) ============= ============= Basic and diluted net loss per share: As reported $ (0.21) $ (0.89) Pro forma (0.22) (1.00)
Nine months ended September 30, ------------------------------------------ 2003 2002 ------------- ------------- Net loss applicable to Common shareholders: As reported $(12,653,925) $(27,819,985) Add stock-based employee compensation expense included in reported net income -- -- Deduct total stock-based employee compensation expense determined under fair-value-based method for all rewards (755,193) (2,791,888) ------------- ------------- Pro forma $(13,409,118) $(30,611,873) ============= ============= Basic and diluted net loss per share: As reported $ (0.58) $ (1.50) Pro forma (0.61) (1.66)
3. RESEARCH AND LICENSE AGREEMENTS WITH PRINCETON UNIVERSITY: In April 2002, the Company amended the 1997 Research Agreement with Princeton University providing, among other things, for an additional five-year term. The Company is obligated to pay Princeton University up to $7,477,993 under the 1997 Research Agreement from July 31, 2002 through July 31, 2007. Payments to Princeton University under this agreement are charged to research and development expenses when they become due. As of September 30, 2003, the Company has funded $1,681,540 of this agreement and is obligated to fund an additional $5,796,453 through July 2007. 8 Under the 1997 Amended License Agreement, the Company is required to pay Princeton University royalties for licensed products sold by the Company or its sublicensees. For licensed products sold by the Company, the Company is required to pay Princeton University 3% of the net sales price of these products. For licensed products sold by the Company's sublicensees, the Company is required to pay Princeton University 3% of the revenues received by the Company from these sublicensees. These royalty rates are subject to upward adjustments under certain conditions. The Company is obligated under the 1997 Amended License Agreement to pay to Princeton University minimum annual royalties. The minimum royalty payment was $25,000 in 1999, $50,000 in 2000, $75,000 in 2001, and $100,000 in 2002 and thereafter. Since the minimum royalty exceeded the actual royalties for the nine months ended September 30, 2003, the Company accrued $75,000 of royalty expense. These royalties are charged to research and development expense in the year they become due. The Company also is required under the 1997 Amended License Agreement to use commercially reasonable efforts to bring the licensed OLED technology to market. However, this requirement is deemed satisfied provided the Company performs its obligations under the 1997 Research Agreement and, when that agreement ends, the Company invests a minimum of $800,000 per year in research, development, commercialization or patenting efforts respecting the patent rights licensed to the Company. In connection with executing the Research Agreement and the Amended License Agreement, in 1997 the Company issued to Princeton University 140,000 shares of the Company's Common Stock and 10 year warrants to purchase an additional 175,000 shares of the Common Stock at an exercise price of $7.25 per share vesting immediately. The Company also issued to USC 60,000 shares of the Common Stock and 10 year warrants to purchase an additional 75,000 shares of the Common Stock at an exercise price of $7.25 per share vesting immediately. 4. ACQUIRED TECHNOLOGY: On July 19, 2000, the Company, PD-LD, Inc. ("PD-LD"), its president Dr. Vladimir Ban and the Trustees of Princeton University entered into a Termination, Amendment and License Agreement whereby the Company acquired all PD-LD's rights to certain issued and pending OLED technology patents in exchange for 50,000 shares of the Company's Common Stock. Pursuant to this transaction, these patents were included in the patent rights exclusively licensed to the Company under the 1997 Amended License Agreement. The acquisition of these patents had a fair value of $1,481,250 (Note 2). On September 29, 2000, the Company entered into a License Agreement with Motorola, Inc. ("Motorola"). Pursuant to this agreement, the Company licensed from Motorola 72 U.S. patents, 6 U.S. patent applications and additional foreign patents relating to OLED technologies. These patents expire between 2012 and 2018. The Company has the sole right to sublicense these patents to OLED manufacturers. As consideration for this license, the Company issued to Motorola 200,000 shares of the Company's Common Stock, valued at $4,412,500, 300,000 shares of the Company's Series B Convertible Preferred Stock ("Series B"), valued at $6,618,750, and a warrant to purchase 150,000 shares of the Company's Common Stock at $21.60 per share. This warrant became exercisable on September 29, 2001, and will remain exercisable until September 29, 2008. The warrant was recorded at a fair market value of $2,206,234 based on the Black-Scholes option-pricing model, and was recorded as a component of the cost of the acquired technology. The Company also issued a warrant to an unaffiliated third party to acquire 150,000 shares of Common Stock as a finder's fee in connection with this transaction. This warrant was granted with an exercise price of $21.60 per share and was exercisable immediately and will remain exercisable until September 29, 2007. This warrant was accounted for at its fair value based on the Black-Scholes option pricing model and $2,206,234 was recorded as a component of the cost of the acquired technology. The Company used the following assumptions in the Black-Scholes option pricing model for the 300,000 warrants issued in connection with this transaction: (1) 6.3% risk-free interest rate, (2) expected life of 7 years, (3) 60% volatility, and (4) zero expected dividend yield. In addition, the Company incurred $25,750 of direct cash transaction costs that have been included in the cost of the acquired technology. In total, the Company recorded an intangible asset of $15,469,468 for the technology acquired from Motorola (Note 2). The Company is required under the License Agreement to pay Motorola annual royalties on gross revenues earned by the Company for its sales of OLED products or components, or from its sublicensees for their sales of OLED products or components, whether or not these products or components are based on inventions claimed in the patent rights licensed from Motorola. Moreover, the Company is required to pay Motorola minimum royalties of $150,000 for the two-year period ending on December 31, 2002, $500,000 for the two-year period ending on December 31, 2004, and $1,000,000 for the two-year period ending on December 31, 2006. All royalty payments may be made, at the Company's discretion, in either all cash or 50% cash and 50% in shares of the Company's Common Stock. The number of shares of Common Stock used to pay the stock portion of the royalty is equal to 50% of the royalty due divided by the average daily closing price per share of the Company's Common Stock over the 10 trading days ending two business days prior to the date the Common Stock is issued. Since the minimum royalty exceeded the actual royalties for the nine months ended September 30, 2003, the Company accrued $187,500 of royalty expense. 9 In September 2003 and 2002, the Company adjusted the conversion price of the Series B in accordance with the terms of the Series B, to take into account 75,000 shares of the Series B that became convertible into the Company's Common Stock in each such period. As such, the original conversion price was reduced to $16.59 and $9.85, for the shares issuable in each respective period, resulting in an additional 22,107 and 88,553 shares of Common Stock being issuable to Motorola upon conversion. The incremental shares issuable upon conversion were accounted for as a contingent beneficial conversion feature ("CBCF") in accordance with Emerging Issues Task Force No. 00-27, "Application of Issue No. 98-5 to Certain Convertible Instruments" and the Company recorded a CBCF in the amount of $487,681 and $1,953,479 for each respective period. The CBCF was treated as a deemed dividend. 5. COMMON STOCK AND WARRANTS ISSUED UNDER THE PPG DEVELOPMENT AND LICENSE AGREEMENT: On October 1, 2000, the Company entered into a five-year Development and License Agreement with PPG Industries, Inc. ("PPG") to leverage the Company's OLED technologies with PPG's expertise in the development and manufacturing of organic materials. A team of PPG scientists and engineers are assisting the Company in developing and commercializing its proprietary OLED materials. In consideration for PPG's services under the agreement, the Company is required to issue shares of its Common Stock and warrants to acquire its Common Stock to PPG on an annual basis over the period from January 1, 2001 through December 31, 2005. The amount of securities the Company is required to issue is subject to adjustment under certain circumstances, as defined in the agreement. In January 2003, the Company amended the Development and License Agreement, providing for additional consideration to PPG for services provided under the agreement, which are to be paid for in cash. The Company records these expenses to research and development as they are incurred. During each respective first quarter of 2003 and 2002, the Company issued to PPG 305,715 and 344,379 shares of the Company's Common Stock as consideration for services required to be provided by PPG under the Development and License Agreement. During the nine months ended September 30, 2003 and 2002, respectively, the Company recorded a charge of $2,099,284 and $2,078,539 to research and development expense for the portion of the shares issued that were earned during the period the services were provided. The charge was determined based on the fair value of the Common Stock earned by PPG. As required under the Development and License Agreement, the Company issued 16,645 shares of Common Stock to PPG in February 2003. The additional shares were issued to PPG based on a final accounting for actual costs incurred by PPG under the agreement through December 31, 2002. Accordingly, the Company accrued $131,329 of additional research and development expense as of December 31, 2002, for these additional shares. In further consideration of the services performed by PPG under the Development and License Agreement, the Company is required to issue warrants to PPG to acquire shares of the Company's Common Stock. The number of warrants earned and issued is based on the number of shares of Common Stock earned by, and issued to, PPG by the Company during each calendar year of the term of the agreement. Accordingly, the Company issued warrants to PPG to acquire 361,024 shares of the Company's Common Stock as part of the consideration for services performed by PPG during 2002. The warrants were earned and charged to research and development expenses during 2002, but were not issued until February 2003. The Company will similarly issue warrants to PPG for services performed during 2003 in the first quarter of 2004 and charges the related fair value of the warrants to research and development in 2003 as they are earned. During the nine months ended September 30, 2003 and 2002, the Company recorded charges to research and development expense of $1,675,999 and $1,652,094, respectively, for the portion of the warrants that were earned by PPG during these periods. These charges were recorded based on the estimated fair value of the warrants earned. The Company determined the fair value of the warrants earned during each such period using the Black-Scholes option-pricing model with the following assumptions: (1) risk free interest rate of 3.030-3.410% and 3.25-5.443%, respectively, (2) no expected dividend yield, (3) expected life of 7 years, and (4) expected volatility of 94%, respectively. The Company is required to grant options to purchase the Company's Common Stock to PPG employees performing services for the Company under the Development and License Agreement. Subject to certain contingencies, all of these options vest one-year from the date of grant and expire 10 years from the date of grant. On December 17, 2001, the Company granted to PPG employees performing services under the agreement options to purchase 26,333 shares of the Company's Common Stock at an exercise price of $8.56 per share. During the nine months ended September 30, 2002, the Company recorded $97,010 in research and development costs related to these options. On September 23, 2002, the Company granted to PPG employees performing services under the agreement options to purchase 30,000 shares of the Company's Common Stock at an exercise price of $5.45. During the nine months ended September 30, 2003 and 2002, the Company recorded $229,355 and $3,109, respectively, in research and development costs related to these options. 10 The Company determined the fair value of the options earned during the nine months ended September 30, 2003 and 2002, using the Black-Scholes option-pricing model with the following assumptions: (1) risk free interest rate of 3.70% and 5.421%, respectively, (2) no expected dividend yield, (3) expected life of 10 years, and (4) expected volatility of 94%. 6. RESTRICTED CASH AND CONVERTIBLE PROMISSORY NOTES: In an August 2001 private placement transaction, the Company issued two $7,500,000 notes, each with a maturity date of August 22, 2004 (the "Notes"). The Notes were convertible into shares of the Company's Common Stock at an initial conversion price of $13.97 per share, with such conversion price subject to change based on anti-dilution provisions and other adjustments. In August 2002, the Company completed a registered direct offering of Common Stock to institutional investors that was deemed dilutive under the terms of the Notes. As a result, the conversion price of the Notes was reduced to $5.09. In September 2002, $7,000,002 in principal amount of the Notes was converted into 1,375,246 shares of Common Stock and $7,999,998 in principal amount of the Notes was repaid, together with a prepayment premium, established under the Notes, of $400,000 in cash. The Company's obligations under the Notes were secured by irrevocable letters of credit issued with face amounts equal to the outstanding principal of the related Notes. The $15,000,000 in proceeds from the sale of the Notes was pledged as collateral to the bank issuing the letters of credit. Prior to the conversion and repayment of the Notes, the $15,000,000 in cash proceeds plus accrued but unpaid interest had been classified as restricted cash. In accordance with APB No. 14, "Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants" ("APB No. 14"), the Company determined in August 2001 the relative fair value of the Notes to be $9,857,006. The resulting original issuance discount ("OID") of $5,142,994 was being amortized as interest expense, using the effective interest method, over the original maturity period of three years. In accordance with Emerging Issues Task Force ("EITF") No. 00-27, "Application of Issue No. 98-5 to Certain Convertible Instruments" ("EITF No. 00-27"), and EITF No. 98-5, "Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios" ("EITF No. 98-5"), and after considering the allocation of the proceeds to the Notes, the Company determined in August 2001 that the Notes contained an initial beneficial conversion feature ("BCF"). The BCF existed at the commitment date due to the fact that the carrying value of the Notes, after the initial allocation of the proceeds, was less than the fair market value of the Common Stock that was issuable upon conversion. Accordingly, the Company recorded $3,258,468 of BCF in August 2001 as a debt discount. The BCF debt discount was being amortized as interest expense, using the effective interest method, over the original maturity period of three years. At the date of the conversion and repayment of the Notes in September 2002, the $15,000,000 face value of the Notes exceeded the then carrying value of the Notes as a result of the unamortized OID and BCF. As a result, the Company recognized a non-cash debt conversion and extinguishment expense of $10,011,780 upon conversion and repayment of the Notes. 7. SHAREHOLDERS' EQUITY The following table summarizes the shareholders' equity activity from January 1, 2003 through September 30, 2003:
------------------------------------------------------------------------------------------------ Accumulated Preferred Stock, Deficit and Series A & Series B Common Stock Additional Other ----------------------------------------------- Paid-In Comprehensive Shares Amount Shares Amount Capital Loss Total Equity ------------------------------------------------------------------------------------------------ BALANCE, JANUARY 1, 2003 500,000 $5,000 21,525,412 $ 215,254 $ 113,541,408 $ (80,093,091) $ 33,668,571 Exercise of Common Stock options and warrants -- -- 98,000 980 411,755 -- 412,735 Issuance of Common Stock through registered direct offering, net of fees of $1,258,143 -- -- 2,012,500 20,125 14,821,732 -- 14,841,857 Deemed dividend -- -- -- -- 1,034,302 (1,034,302) -- (A) Issuance of Common Stock options to non-employees -- -- -- -- 40,399 -- 40,399 Issuance of Common Stock, options and warrants in connection with Development Agreements -- -- 243,841 2,439 4,133,529 -- 4,135,968 (B) Unrealized gain on available- for-sales securities -- -- -- -- -- 81 81 Net loss -- -- -- -- -- (11,619,623) (11,619,623) ------------------------------------------------------------------------------------------------ BALANCE, September 30, 2003 500,000 $ 5,000 23,879,753 $ 238,798 $ 133,983,125 $ (92,746,935) $ 41,479,988 ================================================================================================
11 (A) In August 2003, the Company sold 2,012,500 shares of the Company's Common Stock in a registered direct offering, resulting in gross proceeds of $16,100,000. Costs of raising the capital were $1,258,143. In addition, the Company issued a warrant to purchase 50,313 shares of the Company's Common Stock, with a fair value of $314,112, to the placement agent. The Common Stock was issued at $8.00 per share. The offering was deemed dilutive under the terms of certain warrants the Company has previously issued and resulted in the reduction of the exercise price of those warrants and increases in the number of shares issuable under certain of those warrants. The Company treated this occurrence as a deemed dividend and recorded a deemed dividend of $546,621. In September 2003, the Company adjusted the conversion price of the Series B issued to Motorola for acquired technology (see Note 4) in accordance with the terms of the Series B to take into account 75,000 shares of the Series B that became convertible into the Company's Common Stock. As such, the original conversion price was reduced to $16.59, resulting in an additional 22,107 shares of Common Stock being issuable to Motorola upon conversion. The incremental shares issuable upon conversion were accounted for as a contingent beneficial conversion feature ("CBCF") in accordance with Emerging Issues Task Force No. 00-27, "Application of Issue No. 98-5 to Certain Convertible Instruments" and the Company recorded a CBCF in the amount of $487,681. The CBCF was treated as a deemed dividend. (B) In accordance with the PPG Development and License Agreement (Note 5), PPG earned the Company's Common Stock, warrants and options for the nine months ended September 30, 2003. 8. COMMITMENTS AND CONTINGENCIES Under the terms of the Company's License Agreement with Motorola (Note 4), the Company agreed to make minimum royalty payments to Motorola. To the extent that the royalties otherwise payable to Motorola under the agreement are less than these minimum amounts, the Company is required to pay the shortfall, at its discretion, in all cash or in 50% cash and 50% Common Stock within 90 days after the end of each two-year period specified below in which the shortfall occurs. For the two-year period ending December 31, 2002, the Company issued to Motorola 8,000 shares of the Company's Common Stock, valued at $71,816, and paid $78,184 in cash as a result of the minimum royalty due of $150,000. Future required minimum royalty payments are as follows: January 1, 2003 - December 31, 2004 $ 500,000 January 1, 2005 - December 31, 2006 $1,000,000 In accordance with the April 2002 amendment to the 1997 Research Agreement with the Princeton University, the Company is required to pay annually to Princeton University up to $1,495,999 from July 31, 2002 through July 31, 2007. Under the terms of the 1997 Amended License Agreement (Note 3), the Company is required to pay Princeton University minimum annual royalties. To the extent that the royalties otherwise payable to Princeton University under the agreement are less than these minimum amounts, the Company is required to pay Princeton University the difference between the royalties paid and the minimum royalty. The minimum royalty was $25,000 in 1999, $50,000 in 2000 and $75,000 in 2001, and is $100,000 in 2002 and each year thereafter. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS All statements in this document that are not historical, such as financial or product forecasts and market growth predictions, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Often, though not always, these statements are accompanied by the words "estimate," "project," "believe," "anticipate," "intend," "expect" and similar expressions. You are cautioned not to place undue reliance on any forward-looking statements in this document, as they reflect the Company's current views with respect to future events and are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated. These include, but are not limited to, the following: the feasibility and market acceptance of OLEDs and the Company's OLED materials for use in commercial product applications; the success of the Company and its research and development partners in accomplishing advances in OLED technologies and materials development, including the Company's TOLED(TM), FOLED(TM), PHOLED(TM), P2OLED(TM) and Organic Vapor Phase Deposition (OVPD(TM)) technologies; the ability of the Company to enter into licensing and other strategic alliances with manufacturers of OLEDs and OLED-containing products; the Company's ability to obtain patent protection for its OLED technologies and materials and to assert these patents against others; and future developments and advances by the Company's competitors in OLED and other display technologies. These and other risks and uncertainties are discussed in greater detail in the Company's periodic reports on Form 10-K and Form 10-Q filed with the Securities and Exchange Commission, including, in particular, the section entitled "Factors that May Affect Future Results and Financial Condition" in the Company's annual report on Form 10-K for the year ended December 31, 2002. The Company expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statement contained in this document to reflect events or circumstances after the date hereof, or to reflect the occurrence of unanticipated events. 12 General Since inception, the Company has been exclusively engaged, and for the foreseeable future expects to continue to be exclusively engaged, in funding and performing research and development activities related to the Company's OLED technologies and materials, and in commercializing these technologies and materials. The Company has incurred significant losses since its inception, resulting in an accumulated deficit of $92,728,430 as of September 30, 2003. Losses are expected to continue for the foreseeable future and until such time, if ever, as the Company is able to achieve, from the commercial licensing of its OLED technologies and sale of its OLED materials, revenues that are sufficient to support its operations. Results of Operations Three Months Ended September 30, 2003 Compared to Three Months Ended September 30, 2002 The Company had a net loss of $4,697,097 (or $0.21 per share) for the quarter ended September 30, 2003, compared to a net loss of $16,943,389 (or $0.89 per share) for the same period in 2002. The decrease in net loss is primarily attributed to the following: o a decrease in interest and debt conversion expense as a result of the conversion and repayment of convertible promissory notes in September 2002, which is described in greater detail in Note 6 of the Notes to Consolidated Financial Statements, and o an increase in revenues. The Company's revenues were $2,087,885 for the quarter ended September 30, 2003 compared to $586,074 for the same period in 2002. The increase is mainly due to the recognition of technology development revenue in the quarter ended September 30, 2003. There were no such revenues in the same period in 2002. The Company earned $267,860 in contract research revenue from the U.S. Government in the quarter ended September 30, 2003, compared to $331,138 for the same period in 2002. In the quarter ended September 30, 2003, contract research revenue was generated from five existing government contracts, one of which was completed and one of which was awarded in the third quarter. In the third quarter of 2002, approximately 90% of the Company's contract research revenue was generated from two contracts, one of which was completed in December 2002 with the other being completed in March 2003. In the quarter ended September 30, 2003, contract research revenue was mainly derived from the following government contracts: o $131,834 recognized under a 24-month, $1,963,725 cooperative agreement received from the U.S. Army Research Laboratories ("ARL"), which commenced in August 2002 and, o $95,768 recognized under a 24-month, $729,997 SBIR Phase II contract received from the U.S. Department of the Army, which commenced in January 2003. The Company earned $303,725 from its sales of OLED materials for evaluation purposes in the quarter ended September 30, 2003, compared to $254,936 for the same period in 2002. The increase in this amount is mainly due to an increased volume of OLED materials purchased for evaluation by potential OLED manufacturers, including the Company's current joint development partners. The Company entered into an agreement in the third quarter under which the Company began supplying one of its proprietary OLED materials to a customer for use in the manufacture of commercial passive matrix OLED displays. As a result, the Company earned $19,890 in commercial chemical revenue and $46,410 in license fees in connection with this agreement for the three months ended September 30, 2003. There were no such agreements in effect for the same period in 2002. The Company recognized $1,450,000 in technology development revenue in connection with two technology development and evaluation agreements, one of which was executed in October 2002 with the other being executed in September 2003. There were no such revenues for the same period in 2002. 13 The Company incurred research and development expenses of $4,385,019 for the quarter ended September 30, 2003, compared to $3,908,777 for the same period 2002. The increase in these expenses was primarily a result of the following: o increased expenses relating to patent and other related costs, o an increase in non-cash charges, in connection with the Development and License Agreement with PPG, due to the increased price of the Company's Common Stock, and o the further development and operation of the Company's facility in Ewing, New Jersey. The Company's interest income was $57,883 for the quarter ended September 30, 2003, compared to $111,300 for the same period in 2002. The decrease is due mainly to decreased interest rates on investments. The Company's interest expense was $161 for the quarter ended September 30, 2003, compared to $651,325 for the same period in 2002. The decrease is a result of the conversion and repayment of convertible promissory notes in September 2002. For further discussion, see Note 6 of the Notes to Consolidated Financial Statements. Nine Months Ended September 30, 2003 Compared to Nine Months Ended September 30, 2002 The Company had a net loss of $12,653,925 (or $0.58 per share) for the nine months ended September 30, 2003, compared to a net loss of $27,819,985 (or $1.50 per share) for the same period in 2002. The decrease in net loss is primarily attributed to the following: o a decrease in interest and debt conversion expense as a result of the conversion and repayment of convertible promissory notes in September 2002, which is described in greater detail in Note 6 of the Notes to Consolidated Financial Statements, and o an increase in revenues. The Company's revenues were $4,671,239 in the nine months ended September 30, 2003 compared to $1,585,632 for the same period in 2002. The increase is mainly due to the increase in development chemical sales and the recognition of technology development revenue in the nine months ended September 30, 2003. The Company earned $1,105,213 in contract research revenue from the U.S. Government in the nine months ended September 30, 2003, compared to $1,143,197 for the same period in 2002. In the nine months ended September 30, 2003, contract revenue was derived from nine existing government contracts and options, of which five were completed by the end of the third quarter with three new contracts having been awarded in the nine months ended September 30, 2003. For the same period in 2002, 80% of the contract revenue was generated from two contracts, one of which was completed in December 2002 with the other being completed in March 2003. In the nine months ended September 30, 2003, contract research revenue was mainly derived from the following government contracts: o $105,412 recognized under a 24-month, $729,158 SBIR Phase II contract received from the Department of Defense ("DoD"), which commenced in February 2001 and was completed in February 2003, o $173,868 recognized under two 11-month SBIR Phase I grants, totaling $200,000 received from the Department of Energy, which commenced in July 2002 and were completed in June 2003, o $399,687 recognized under a 24-month, $1,963,725 cooperative agreement received from the U.S. Army Research Laboratories ("ARL"), which commenced in August 2002, o $252,536 recognized under a 24-month, $729,997 SBIR Phase II contract received from the U.S. Department of the Army, which commenced in January 2003. o $69,850 recognized under a $69,850 SBIR Phase I contract received from the U.S Department of the Army, which commenced in February 2003. 14 The Company earned $1,549,726 from its sales of OLED materials for evaluation purposes in the nine months ended September 30, 2003, compared to $442,435 for the same period in 2002. The increase in this amount is mainly due to an increased volume of OLED materials purchased for evaluation by potential OLED manufacturers, including the Company's current joint development partners. The Company entered into an agreement in the third quarter under which the Company began supplying one of its proprietary OLED materials to a customer for use in the manufacture of commercial OLED displays. As a result, the Company earned $19,890 in commercial chemical revenue and $46,410 in license fees in connection with this agreement for the nine months ended September 30, 2003. There were no such agreements in effect for the same period in 2002. The Company recognized $1,950,000 in technology development revenue in connection with technology and development evaluation agreements, one of which commenced in October 2002 with the other having commenced in September 2003. There were no such revenues for the same period in 2002. The Company incurred research and development expenses of $12,493,267 for the nine months ended September 30, 2003, compared to $11,475,574 for the same period 2002. The increase in these expenses was primarily a result of: o increased expenses relating to patent and other related costs, o increase in non-cash charges, in connection with the Development and License Agreement with PPG, due to the increased price of the Company's stock, and o the further development and operation of the Company's facility in Ewing, New Jersey. The Company's interest income was $171,336 for the nine months ended September 30, 2003, compared to $358,598 for the same period in 2002. The decrease is due mainly to decreased interest rates on investments. The Company's interest expense was $579 for the nine months ended September 30, 2003, compared to $2,874,835 for the same period in 2002. The decrease is a result of the conversion and repayment of convertible promissory notes in September 2002. For further discussion, see Note 6 of the Notes to Consolidated Financial Statements. Liquidity and Capital Resources As of September 30, 2003, the Company had cash and cash equivalents of $21,658,422, short-term investments of $5,347,865 and long-term investments of $3,710,838, for a total of $30,717,125. This compares to cash and cash equivalents of $15,905,416, short-term investments of $4,662,898 and long-term investments of $379,753, for a total of $20,948,067, as of December 31, 2002. In the nine months ended September 30, 2003, the cash used in operating activities was $4,546,963 as compared to $5,457,824 for the same period in 2002. The decreased use of cash in operating activities is primarily due to a decrease in the operating loss, as a result of increased revenues, supplemented by a decrease in accounts receivable. In the nine months ended September 30, 2003, the cash used in investing activities was $4,951,137 as compared to net cash provided by investing activities of $15,827,997 for the same period in 2002. The decrease is mainly due to the elimination of restricted cash in the amount of $15,162,414 as a result of the conversion and repayment of the Notes in September 2002 (Note 6). The decrease is also attributable to the increased purchase of short-term and long-term investments. In the nine months ended September 30, 2003, the net cash provided by financing activities was $15,251,106, as compared to net cash used in financing activities of $741,038 for the same period in 2002. The increase is primarily due to the Company's completion of a registered direct offering in August 2003 of 2,012,500 shares of the Company's Common Stock at $8.00 per share. The offering resulted in proceeds to the Company of 14,841,857, net of $1,258,143 in costs associated with the completion of the offering. Working capital increased to $24,924,397 at September 30, 2003 from working capital of $18,541,596 at December 31, 2002. The net increase is due primarily to the net cash proceeds received from the Company's registered direct offering. The Company anticipates, based on management's internal forecasts and assumptions relating to its operations (including assumptions regarding working capital requirements of the Company, the progress of research and development, the availability and amount of other sources of funding available to Princeton University for research relating to the OLED technology and the timing and costs associated with the preparation, filing and prosecution of patent applications and the enforcement of intellectual property rights), that it has sufficient cash, cash equivalents and short term investments to meet its obligations for the next twelve months. Management believes that potential additional financing sources for the Company include long-term and short-term borrowings, public and private sales of the Company's equity and debt securities and receipts of cash upon the exercise of warrants. It should be noted, however, that substantial additional funds will be required in the future for research, development and commercialization of the Company's OLED technologies and OLED materials, to obtain and maintain patents and other intellectual property rights in these technologies and materials, and for working capital and other purposes, the timing and amount of which are difficult to ascertain. For example, under the Company's Research Agreement with Princeton University, the Company is required to pay Princeton University up to $1,495,599 per year through July 2007. There can be no assurance that additional funds will be available to the Company when needed, on commercially reasonable terms or at all. 15 Critical Accounting Policies Refer to the Company's Annual Report on Form 10-K for the year ended December 31, 2002 for a discussion of critical accounting policies. Contractual Obligations Refer to the Company's Annual Report on Form 10-K for the year ended December 31, 2002 for a discussion of the Company's contractual obligations. In September 2003, the Company renewed its lease for its facility for an additional five years through the end of 2008. See Note 1 for further discussion. Off-balance Sheet Arrangements Refer to Company's Annual Report on Form 10-K for the year ended December 31, 2002 for a discussion of off-balance sheet arrangements. As of September 2003, the Company had no off-balance sheet arrangements. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company does not utilize financial instruments for trading purposes and holds no derivative financial instruments that could expose the Company to significant market risk. The Company's primary market risk exposure with regard to financial instruments is to changes in interest rates, which would impact interest income earned on investments. ITEM 4. CONTROLS AND PROCEDURES (a) Evaluation of Disclosure Controls and Procedures The Company's management, with the participation of its Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company's disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, the Company's Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures, as of the end of the period covered by this report, are functioning effectively to provide reasonable assurance that information required to be disclosed by the Company in its reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. (b) Changes in Internal Control Over Financial Reporting There have been no changes in the Company's internal control over financial reporting identified in connection with the evaluation of the Company's disclosure controls and procedures described above that occurred during the Company's last fiscal quarter and that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Not applicable. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. ITEM 5. OTHER INFORMATION Not applicable. 16 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: The following is a list of the exhibits filed as part of this report.
Exhibit Number Description ------ ----------- 10.48* Lease Agreement between the Company and Gesipa Real Estate Partners, dated as of October 12, 1998. 10.49* First Amendment of Lease Agreement between the Company and Gesipa Real Estate Partners, dated as of January 11, 2001. 10.50* Second Amendment of Lease Agreement between the Company and Gesipa Real Estate Partners, dated as of September 22, 2003. 10.51* Amendment #1 to the Research Agreement between the Company and the Trustees of Princeton University, dated as of November 14, 2000. 10.52* Amendment #2 to the Research Agreement between the Company and the Trustees of Princeton University, dated as of April 11, 2002. 10.53* Amendment #1 to the Amended License Agreement between the Company, the Trustees of Princeton University and the University of Southern California, dated as of August 7, 2003. 31.1* Certifications of Sherwin I. Seligsohn, Chief Executive Officer, as required by Rule 13a-14(a) or Rule 15d-14(a). 31.2* Certifications of Sidney D. Rosenblatt, Chief Financial Officer, as required by Rule 13a-14(a) or Rule 15d-14(a). 32.1** Certifications of Sherwin I. Seligsohn, Chief Executive Officer, as required by Rule 13a-14(b) or Rule 15d-14(b), and by 18 U.S.C. Section 1350. (This exhibit shall not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section. Further, this exhibit shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.) 32.2** Certifications of Sidney D. Rosenblatt, Chief Financial Officer, as required by Rule 13a-14(b) or Rule 15d-14(b), and by 18 U.S.C. Section 1350. (This exhibit shall not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section. Further, this exhibit shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.)
------------ * Filed herewith. ** Furnished herewith. (b) Reports on Form 8-K: i. Current Report on Form 8-K, furnished to the SEC on August 13, 2003, reporting Items 7 and 9, and containing, as an exhibit, a press release announcing the Company's financial results for the quarter ended June 30, 2003. ii. Current Report on Form 8-K, filed with the SEC on August 25, 2003, reporting Items 5 and 7, and containing, as exhibits, (1) the Placement Agent Agreement between the Company and the placement agent for the Company's registered direct offering, and (2) the form of the warrant agreement executed with the placement agent in connection with the offering. 17 SIGNATURES Pursuant to the requirement of the Securities Exchange Act of 1934, the registrant has duly caused this report on form 10-Q for the quarter ended September 30, 2003, to be signed on its behalf by the undersigned thereunto duly authorized. UNIVERSAL DISPLAY CORPORATION Date: November 10, 2003 By: /s/ Sidney D. Rosenblatt ---------------------------------- Sidney D. Rosenblatt Executive Vice President and Chief Financial Officer