SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(Mark
One)
[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For
the fiscal year ended December 31, 2007
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
incorporation or
organization) (I.R.S.
Employer 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 if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes No X
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes No X
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 a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer Accelerated
filer X
Non-accelerated
filer
(Do not check if a smaller reporting
company) Smaller
reporting company
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes No X
The
aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant computed by reference to the closing sale price
of the registrant’s common stock on the NASDAQ Global Market as of June 29,
2007, was $465,828,537. Solely for purposes of this calculation, all
executive officers and directors of the registrant and all beneficial owners of
more than 10% of the registrant’s common stock (and their affiliates) were
considered affiliates.
As of March
7, 2008, the registrant had outstanding 35,795,835 shares of common
stock.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the registrant’s Proxy Statement for the 2008 Annual Meeting of Shareholders,
which is to be filed with the Securities and Exchange Commission no later than
April 29, 2008, are incorporated by reference into Part III of this
report.
TABLE
OF CONTENTS
PART
I
ITEM
1.
|
BUSINESS……………………………………………………………………………………………...…………………………………..............…...……
|
2
|
|
|
|
ITEM
1A.
|
RISK
FACTORS…………………………...…………………………………………………………...………………………………….............…...……
|
13
|
|
|
|
ITEM
1B.
|
UNRESOLVED
STAFF
COMMENTS…………...………………………………………………………...…………………………….............…...……
|
19
|
|
|
|
ITEM
2.
|
LEGAL
PROCEEDINGS….....………………………………………………………………………...…………………………………….....….............…
|
19
|
|
|
|
ITEM
3.
|
PROPERTIES………………………………………………………………………………………………..………………………………...……..............
|
19
|
|
|
|
ITEM
4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY
HOLDERS……………....……………..………………………………...……..............
|
20
|
PART
II
ITEM
5.
|
MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS
AND ISSUER PURCHASES OF EQUITY
SECURITIES………………………………………………..………………………………....
|
22
|
|
|
|
ITEM
6.
|
SELECTED
FINANCIAL DATA
………...…………………………………………………………...…………………………………………………...
|
24
|
|
|
|
ITEM
7.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF
OPERATIONS …………...…………………………………………………………………………………………………...……...
|
24
|
|
|
|
ITEM
7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK……………………………………………………...…………
|
31
|
|
|
|
ITEM
8
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
…........………………………………………………………………………...……
|
31
|
|
|
|
ITEM
9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING
AND FINANCIAL
DISCLOSURE………………………………………………………………………...............…………………….
|
31
|
|
|
|
ITEM
9A.
|
CONTROLS
AND PROCEDURES
……………….………………………………………………………………………………………..……………..
|
31
|
|
|
|
ITEM
9B
|
OTHER
INFORMATION……………….…………………………………………………………………………………………………………...……..
|
32
|
PART
III
ITEM
10.
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE…………………………………………………………....……………
|
32
|
|
|
|
ITEM
11.
|
EXECUTIVE
COMPENSATION
………...………………………………………………………........................................................................…...……
|
32
|
|
|
|
ITEM
12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
……..………………………….....................................................................……...
|
32
|
|
|
|
ITEM
13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR
INDEPENDENCE
…………………………………………………………………….….........................................................................……
|
32
|
|
|
|
ITEM
14.
|
PRINCIPAL
ACCOUNTANT FEES AND SERVICES
…........……………….………………......................................................................……...……
|
33
|
PART
IV
ITEM
15.
|
EXHIBITS
AND FINANCIAL STATEMENT SCHEDULES
………………….…………......................................................................………………
|
33
|
CAUTIONARY
STATEMENT
CONCERNING
FORWARD-LOOKING STATEMENTS
This
report and the documents incorporated by reference in this report contain some
“forward-looking statements.” Forward-looking statements concern possible or
assumed future events, results and business outcomes. These statements often
include words such as “believe,” “expect,” “anticipate,” “intend,” “plan,”
“estimate,” “seek,” “will,” “may” or similar expressions. These statements are
based on assumptions that we have made in light of our experience in the
industry, as well as our perceptions of historical trends, current conditions,
expected future developments and other factors we believe are appropriate under
the circumstances.
As you
read and consider this report, you should not place undue reliance on any
forward-looking statements. You should understand that these statements involve
substantial risk and uncertainty and are not guarantees of future performance or
results. They depend on many factors that are discussed further under Item 1A
below (Risk Factors), including:
·
|
the
outcomes of our ongoing and future research and development activities,
and those of others, relating to organic light emitting diode (OLED)
technologies and materials;
|
·
|
our
ability to access future OLED technology developments of our academic and
commercial research partners;
|
·
|
the
potential commercial applications of and future demand for our OLED
technologies and materials, and of OLED products in
general;
|
·
|
our
ability to form and continue strategic relationships with manufacturers of
OLED products;
|
·
|
successful
commercialization of products incorporating our OLED technologies and
materials by OLED manufacturers, and their continued willingness to
utilize our OLED technologies and
materials;
|
·
|
the
comparative advantages and disadvantages of our OLED technologies and
materials versus competing technologies and materials currently on the
market;
|
·
|
the
nature and potential advantages of any competing technologies that may be
developed in the future;
|
·
|
our
ability to compete against third parties with resources greater than
ours;
|
·
|
our
ability to maintain and improve our competitive position following the
expiration of our fundamental OLED
patents;
|
·
|
the
adequacy of protections afforded to us by the patents that we own or
license and the cost to us of maintaining and enforcing those
patents;
|
·
|
our
ability to obtain, expand and maintain patent protection in the future,
and to protect our unpatentable intellectual
property;
|
·
|
our
exposure to and ability to withstand third-party claims and challenges to
our patents and other intellectual property
rights;
|
·
|
the
payments that we expect to receive under our existing contracts with OLED
manufacturers and the terms of contracts that we expect to enter into with
OLED manufacturers in the future;
|
·
|
our
future capital requirements and our ability to obtain additional financing
if and when needed; and
|
·
|
our
future OLED technology licensing and OLED material revenues and results of
operations.
|
Changes
or developments in any of these areas could affect our financial results or
results of operations, and could cause actual results to differ materially from
those contemplated by any forward-looking statements.
All
forward-looking statements speak only as of the date of this report or the
documents incorporated by reference, as the case may be. We do not undertake any
duty 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.
ITEM
1. BUSINESS
Our
Company
We are a
leader in the research, development and commercialization of organic light
emitting diode, or OLED, technologies and materials. OLEDs are thin, lightweight
and power-efficient solid-state devices that emit light, making them highly
suitable for use in full-color displays and as lighting products. We believe
that OLED displays have begun to capture a share of the growing flat panel
display market because they offer potential advantages over competing display
technologies with respect to brightness, power efficiency, viewing angle, video
response time and manufacturing cost. We also believe that OLED lighting
products have the potential to replace many existing light sources in the future
because of their high efficiency, excellent color rendering index, low heat
generation and novel form factors. Our technology leadership and intellectual
property position should enable us to share in the revenues from OLED displays
and lighting products as they enter mainstream consumer markets.
Our
primary business strategy is to further develop and license our proprietary OLED
technologies to manufacturers of products for display applications, such as cell
phones, MP3 players, laptop computers and televisions, and specialty and general
lighting products. In support of this objective, we also develop new OLED
materials and sell materials to those product manufacturers. Through our
internal research and development efforts and our relationships with world-class
partners such as Princeton University, the University of Southern California,
the University of Michigan, Motorola, Inc. and PPG Industries, Inc., we have
established a significant portfolio of proprietary OLED technologies and
materials. We currently own, exclusively license or have the sole right to
sublicense more than 825 patents issued and pending worldwide.
In 2007,
four manufacturers purchased our proprietary OLED materials for use in
commercial OLED display products: Samsung SDI Co., Ltd. of South Korea, Chi Mei
EL Corporation of Taiwan, Tohoku Pioneer Corporation of Japan, and LG.Philips
LCD Co., Ltd. of South Korea (now known as LG Display). We also have entered
into a patent license agreement with Samsung SDI, under which we began receiving
royalties in 2007 based on Samsung SDI’s commencement of sales of active matrix
OLED display products. In addition, we are working with many other companies who
are evaluating our OLED technologies and materials for possible use in
commercial OLED display and lighting products, including Seiko Epson
Corporation, Konica Minolta Technology Center, Inc. and Sony
Corporation.
Market
Overview
The
Flat Panel Display Market
Flat
panel displays are essential for a wide variety of portable consumer electronics
products, such as cell phones, MP3 players, digital cameras and laptop
computers. Due to their narrow profile and light weight, flat panel
displays have also become the display of choice for larger product applications,
such as desktop computer monitors and televisions.
Liquid
crystal displays, or LCDs, currently dominate the flat panel display
market. However, we believe that OLED displays are an attractive
alternative to LCDs because they offer a number of potential advantages,
including:
·
|
a
thinner profile and lighter weight;
|
·
|
higher
brightness and contrast ratios, leading to sharper picture images and
graphics;
|
·
|
faster
response times for video;
|
·
|
higher
operating efficiencies, thereby reducing energy consumption;
and
|
·
|
lower
cost manufacturing methods and
materials.
|
Based on
these characteristics, product manufacturers are starting to adopt small-area
OLED displays for use in portable electronic devices, such as cell phones and
MP3 players. These manufacturers are also working to develop OLED displays for
use in larger applications, such as computer monitors and
televisions. We believe that if these efforts are successful, they
could result in sizeable markets for OLED 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 embedded 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.
The
Solid-State Lighting Market
Traditional
incandescent light bulbs are inefficient because they convert only about 5% of
the energy they consume into visible light, with the rest emerging as
heat. Fluorescent lamps use excited gases, or plasmas, to achieve a
higher energy conversion efficiency of about 20%. However, the color
rendering index, or CRI, of most fluorescent lamps – how good their color is
compared to an ideal light source – is inferior to that of an incandescent
bulb. Fluorescent lamps also pose environmental concerns because they
contain mercury.
Solid-state
lighting relies on the direct conversion of electricity to visible white light
using semiconductor materials. By avoiding the heat and
plasma-producing processes of incandescent bulbs and fluorescent lamps,
solid-state lighting products can have substantially higher energy conversion
efficiencies, which in theory could approach 100%.
There are
currently two basic types of solid-state lighting devices: inorganic light
emitting diodes, or LEDs, and OLEDs. Current LEDs are very small in
size (about one square millimeter) and are extremely bright. Having
been developed about 25 years before OLEDs, they are already employed in various
specialty lighting products, such as traffic lights, billboards, replacements
for neon lighting and as border or accent lighting. However, their
intense brightness makes them less desirable for general illumination and
diffuse lighting applications.
OLEDs, on
the other hand, are larger in size and can be viewed directly, without using
diffusers that are required to temper the intense brightness of
LEDs. OLEDs can be built on any suitable flat surface, including
glass, plastic or metal foil, and could be cost-effective to manufacture in high
volume. Given these characteristics, product manufacturers are
working to develop OLEDs for diffuse specialty lighting applications and
ultimately general illumination. If these efforts are successful, we
believe that OLED lighting products could begin to be used for applications
currently addressed by incandescent bulbs and fluorescent lamps.
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
materials, and are working diligently to enable our manufacturing partners to
adopt our OLED technologies and materials 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 pioneered the development of our PHOLED™ phosphorescent OLED
technologies, which can be used to produce OLEDs that are up to four times as
efficient as traditional fluorescent OLEDs and significantly more efficient than
current backlit LCDs. We believe that our PHOLED technologies are well-suited
for industry usage in the commercial production of OLED displays and lighting
products. Through our relationships with companies such as PPG Industries and
our academic partners, we have also developed other important OLED technologies,
as well as novel OLED materials that we believe will facilitate the adoption of
our various OLED technologies by product manufacturers.
Relationships with Leading Product
Manufacturers. We have established relationships with well-known
manufacturers that are using, or are evaluating, our OLED technologies and
materials for use in commercial products. In 2007, Samsung SDI, Chi Mei EL,
Tohoku Pioneer and LG Display purchased our proprietary OLED materials for use
in commercial OLED display products. In 2005, we entered into a
license agreement with Samsung SDI for its manufacture of active matrix OLED
display products, and in 2002 we entered into a cross-license agreement with
DuPont Displays, Inc. for its manufacture of solution-processed OLED display
products. We also licensed one of our ink-jet printing patents and certain
related patent filings to Seiko Epson in 2006. We continue to work with many
product manufacturers who are evaluating our OLED technologies and materials for
use in commercial OLED displays and lighting products, including Seiko Epson,
Konica Minolta and Sony.
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, the University of
Michigan and Motorola, we own, exclusively license or have the sole right to
sublicense more than 825 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.
Focus on Licensing Our OLED
Technologies. We are focused on licensing our proprietary OLED
technologies to product manufacturers on a non-exclusive basis. Our current
business model does not involve the direct manufacture or sale of OLED display
or lighting products. Instead, we seek license fees and royalties from OLED
product manufacturers based on their sales of licensed products. We believe this
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.
Leading Supplier of PHOLED Emitter
Materials. We are the leading supplier of phosphorescent emitter
materials to OLED product manufacturers. PPG Industries currently manufactures
our proprietary emitter materials for us, which we then qualify and resell to
OLED product manufacturers. We record revenues based on our sales of
these materials to OLED product manufacturers. This allows us to
maintain close technical and business relationships with the OLED product
manufacturers purchasing our proprietary materials, which in turn further
supports our technology licensing business.
Established U.S. Government
Contracts to Fund Research and Development. In 2007, we started or
continued working under approximately 13 research and development contracts with
U.S. government agencies, such as the U.S. Department of the Army, the U.S.
Department of the Navy and the U.S. 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 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. In addition, our management team has assembled a
Scientific Advisory Board that includes some of the leading researchers in the
OLED industry, such as Professor Stephen R. Forrest of the University of
Michigan (formerly of Princeton University) and Professor Mark E. Thompson of
the University of Southern California.
Our
Business Strategy
Our
current business strategy is to both promote and continue to expand our
portfolio of OLED technologies and materials for widespread use in OLED displays
and lighting products, and to generate revenues by licensing our OLED
technologies and selling our proprietary OLED materials. We presently are
focused on the following steps to implement our business strategy:
Target Leading Product
Manufacturers. We are targeting leading manufacturers of flat panel
displays and lighting products as potential commercial licensees of our OLED
technologies and purchasers of our OLED materials. For example, in April 2005 we
entered into a patent license agreement with Samsung SDI for its manufacture and
sale of active-matrix OLED display products. In 2007, we also sold our
proprietary phosphorescent OLED materials to Samsung SDI, Chi Mei EL, LG Display
and Tohoku Pioneer for use in commercial OLED display products. We also provide
technical assistance and support to several manufacturers of displays and
lighting products who are evaluating our OLED technologies and materials, or
utilizing them in product development and/or for pre-commercial product
manufacturing. We concentrate on working closely with these manufacturers
because we believe that the successful incorporation of our technologies and
materials into commercial products is critical to their widespread
adoption.
Enhance Our Existing Portfolio of
PHOLED Technologies and Materials. We believe that a strong portfolio of
proprietary OLED technologies and materials is critical to our success.
Consequently, we are continually seeking to expand this portfolio through our
internal development efforts, our collaborative relationships with academic and
other research partners, and other strategic opportunities. One of our primary
goals is to develop new and improved PHOLED technologies and materials with
increased efficiencies, enhanced color gamut and extended lifetimes, which are
compatible with different manufacturing methods, so that they can be used by
various manufacturers in a broad array of OLED products.
Business
and Geographic Markets
We derive
revenue from the following:
·
|
technology
research and development, including government contract work and
collaborative R&D with third
parties;
|
·
|
intellectual
property and technology licensing;
and
|
·
|
sales
of OLED materials for evaluation, development and commercial
manufacturing.
|
Most
manufacturers of flat panel displays and lighting products who are or might
potentially be interested in our OLED technologies and materials are currently
located in foreign countries, particularly the Asia-Pacific
region. Consequently, we receive a substantial portion of our
revenues from external customers that are domiciled outside of the United
States, and our business is heavily dependent on our relationships with these
customers. In particular, two customers located in the Asia-Pacific
region, Samsung SDI and Seiko Epson accounted for 34.9% and 11.2%, respectively,
of our consolidated revenues for 2007.
For more
information on our revenues, costs and expenses associated with our business, as
well as a breakdown of revenues from domestic and foreign sources, please see
our audited Consolidated Financial Statements and the notes thereto, as well as
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations,” included elsewhere in this report.
Our
Phosphorescent OLED Technologies
Phosphorescent
OLEDs utilize specialized materials and device structures that allow OLEDs to
emit light through a process known as phosphorescence. Conversely, traditional
fluorescent OLEDs emit light through an inherently less efficient process.
Theory and experiment show that phosphorescent OLEDs exhibit device efficiencies
up to four times higher than those exhibited by fluorescent OLEDs.
Phosphorescence substantially reduces 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 is also important for
large-area displays such as televisions, where higher device efficiency and
lower heat generation may enable longer product lifetimes and increased energy
efficiency.
We have a
strong intellectual property portfolio surrounding our existing PHOLED
phosphorescent OLED technologies and materials. We also conduct work
to develop new and improved PHOLED technologies and materials, and to enhance
our intellectual property position. In 2007, we announced continued
advances in the development of our proprietary PHOLED materials and device
architectures. We also established commercial supply relationships
with Chi Mei EL and LG Display to use our PHOLED materials for their manufacture
of OLED displays on glass. In addition, we continued to work closely
with customers evaluating and qualifying our proprietary PHOLED materials for
commercial usage, and with other material suppliers to match our PHOLED emitters
with their phosphorescent hosts and other OLED materials.
Our
Additional Proprietary OLED Technologies
Our
research, development and commercialization efforts also encompass a number of
other OLED device and manufacturing technologies, including the
following:
TOLED™ Transparent OLEDs. We have
developed a technology for the fabrication 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 significant portion of the usable light is lost.
This results in OLED displays having image qualities and lifetimes superior to
those of conventional active-matrix OLEDs. TOLEDs utilizing transparent cathodes
and transparent anodes may also be useful in novel flat panel display
applications requiring semi- transparency or transparency, such as graphical
displays in automotive windshields.
FOLED™ Flexible OLEDs. We are
working on a number of technologies required for the fabrication of OLEDs on
flexible substrates. Most OLED and other flat panel displays are built on rigid
substrates such as glass. In contrast, FOLEDs are OLEDs built on non-rigid
substrates such as plastic or metal foil. FOLEDs are intended to be either
conformable to specific shapes or repeatedly bent or flexed. Eventually, FOLEDs
may be 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. Manufacturers also may be able to produce FOLEDs using
more efficient continuous, or roll-to-roll, processing methods. We currently are
conducting research and development on FOLED technologies internally, under
several of our U.S. government programs and in connection with the
government-sponsored Flexible Display Center at Arizona State
University.
OVPD™ Organic Vapor Phase Deposition.
The standard approach for manufacturing a small molecule OLED, including
a PHOLED, is based on a vacuum thermal evaporation, or VTE, process. With a VTE
process, 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 more efficient
materials utilization and enhanced deposition control. We have partnered with
Aixtron AG, a leading manufacturer of metal-organic chemical vapor deposition
equipment, to develop and qualify equipment for the fabrication of OLED displays
utilizing the OVPD process.
P2OLED™ Printable Phosphorescent
OLEDs. OLEDs can be manufactured using other processes as well. 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. Over the past several years, we have worked
on P2OLEDs
under Joint Development Agreements with Seiko Epson, and we have collaborated
with Mitsubishi Chemical Corporation to develop and evaluate novel P2OLED
materials. In December 2007, in collaboration with Seiko Epson, we
announced significant advances in P2OLED
material lifetimes that may be useful for ink-jet printing.
OVJP™ Organic Vapor Jet Printing.
Our groundbreaking OVJP technology is another direct printing method for the
manufacture of OLEDs. As a direct printing technique, OVJP technology has the
potential to offer high deposition rates for any size or shaped OLED. In
addition, OVJP technology avoids the OLED material wastage associated with use
of a shadow mask (i.e.,
the waste of material that deposits on the shadow mask itself when fabricating
an OLED). By comparison to inkjet printing, an OVJP process does not use
solvents and therefore the OLED materials utilized are not limited by their
viscosity or solvent solubility. We are working on developing our proprietary
OVJP technology in collaboration with Professor Forrest of the University of
Michigan under a U.S. Department of Energy (DOE) Solid State Lighting program.
We are currently qualifying a prototype OVJP tool that was recently installed at
our Ewing, New Jersey facility. We plan to use this tool to build prototype
white PHOLED lighting panels for delivery under our DOE program.
Our
Strategic Relationships with Product Manufacturers
We have
established evaluation, technology development, licensing and material supply
relationships with numerous manufacturers of displays and lighting products. As
of December 31, 2007, we had entered into 32 such relationships, three of
which were newly established in 2007. These relationships generally are directed
towards tailoring our proprietary OLED technologies and materials for use by
each individual manufacturer. Our ultimate objective is to license our OLED
technologies and sell our OLED materials to these manufacturers for their
commercial production of OLED products. Our key relationships with product
manufacturers in 2007 included the following:
Samsung SDI. In April 2005,
we entered into an OLED Patent License Agreement with Samsung SDI. Under this
agreement, we granted Samsung SDI license rights to make and sell active-matrix
OLED displays. Beginning in the fourth quarter of 2006 and throughout 2007, we
supplied several of our proprietary PHOLED materials to Samsung SDI for use in
the manufacture of these OLED displays. We also continue to supply
other of our proprietary PHOLED materials to Samsung SDI for evaluation and
development activities under a separate agreement that has been in place since
July 2001.
Chi Mei EL. In April 2007, we
entered into an agreement to supply our proprietary PHOLED materials and
technologies to Chi Mei EL for use in its manufacture of commercial AMOLED
display products. The agreement runs through the end of 2008, and we
will recognize commercial chemical sales and license fee revenues from our
supply of material to Chi Mei EL.
LG Display. In May 2007, we
entered into an agreement to supply LG Display with our proprietary PHOLED
materials for use in AMOLED display products. The agreement runs
through June 2008, and we will recognize commercial chemical sales and license
fee revenues from our supply of this material to LG Display. In May
2007, we also demonstrated with LG Display the world’s first high-resolution
AMOLED display built on flexible metal foil using amorphous-Silicon (a-Si)
backplane technology.
Sony. We have been supporting
Sony in its development of active-matrix OLED display products under various
agreements since February 2001. We are currently operating under an evaluation
agreement with Sony that has been in place since February 2005. That agreement
enables us to sell our proprietary PHOLED materials to Sony for
evaluation.
Seiko Epson. In December
2004, we entered into a joint development agreement with Seiko Epson. Under this
agreement, we have been conducting development activities with Seiko Epson
relating to the application of our proprietary PHOLED technologies and materials
to ink-jet printing processes used by Seiko Epson. In December 2007, we reported
significant progress in red, green and blue P2OLED
device performance in spin-coated devices and ink-jet printed devices. We also
supply our proprietary PHOLED materials to Seiko Epson for evaluation and for
use under this development program, and in July 2006 we licensed one of our
ink-jet printing patents and certain related patent filings to Seiko
Epson.
Tohoku Pioneer. In August
2003, we began supplying our proprietary red PHOLED material to Tohoku Pioneer,
a subsidiary of Pioneer Corporation, for the commercial production of a
passive-matrix OLED display product. Tohoku Pioneer continued purchasing this
material from us in 2007.
Konica Minolta. In September
2005, we entered into an agreement with Konica Minolta for the joint development
of high-efficiency white OLEDs for application as backlights. In June 2006,
Konica Minolta announced that it had developed a white OLED that used our red
and green PHOLED materials. Konica Minolta has continued to purchase PHOLED
materials from us under our agreement.
DuPont Displays. In December
2005, we completed work under a Joint Development Agreement with DuPont Displays
for the development of novel phosphorescent materials and device structures for
solution-processed OLEDs. In December 2002, we entered into a Cross-License
Agreement with DuPont Displays for its manufacture of solution-processed OLED
display products. As of December 31, 2007, we had not received any
royalties from DuPont under that agreement.
Our
OLED Materials Supply Business
In
support of our primary objective of licensing our OLED technologies, we supply
our proprietary OLED materials to display manufacturers and others. We
device-qualify our materials before shipment in order to ensure the materials
meet required specifications. We believe that our inventory-carrying
practices, along with the terms under which we sell our OLED materials
(including payment terms) are typical for the markets in which we
operate.
PPG
Industries
We have
maintained a close working relationship with PPG Industries since October
2000. Under our original agreements, PPG Industries conducted OLED
materials development work for us and supplied us with our proprietary OLED
materials. Our relationship with PPG Industries on the development of
OLED materials changed in 2006, at which time we assumed sole responsibility
over OLED materials development activities. In connection with that
change, we hired four chemists from the PPG Industries’ OLED materials
development team to work for us in our newly constructed synthetic chemistry
laboratories.
Our new
OLED Materials Supply and Service Agreement with PPG Industries went into effect
in January 2006. Under that agreement, PPG Industries remains
responsible, under our direction, for manufacturing scale-up of our proprietary
OLED materials, and for supplying us with those materials for research and
development, and for resale to our customers, both for their evaluation and for
use in commercial OLED products. Through our collaboration with PPG Industries,
key raw materials are sourced from multiple suppliers to ensure that we are able
to meet the needs of our customers on a timely basis. We recently
extended the term of the OLED Materials Supply and Service Agreement through
December 2011.
Our
OLED Material Customers
In 2007,
we continued supplying our proprietary PHOLED materials to Samsung SDI for use
in its commercial AMOLED display products. In September 2007, Samsung SDI
commenced volume production of AMOLED displays for its worldwide customer base
of handset and personal electronic manufacturers. Samsung SDI’s customers for
these products have included some well-known consumer electronics companies,
such as Sony Ericsson Mobile Communications AB, Toshiba Corporation, Hitachi,
Ltd., Sanyo Electric Co., Ltd., Kyocera Corporation and Nokia
Corporation.
In 2007,
we began supplying our proprietary PHOLED materials to Chi Mei EL for use in
commercial AMOLED display products that were launched during the third quarter.
We also continued supplying our proprietary PHOLED materials to Tohoku Pioneer
for use in commercial passive-matrix OLED display products, and we began
supplying one of our proprietary PHOLED materials to LG Display for its use in
AMOLED display products. Throughout the year, we supplied these and other of our
proprietary OLED materials to various other product manufacturers for evaluation
and for purposes of development, manufacturing qualification and product
testing.
Collaborations
with other OLED Material Manufacturers
We
continued our non-exclusive collaborative relationships with other manufacturers
of OLED materials during 2007. These included relationships with Nippon Steel
Chemical Company (NSCC) and Idemitsu Kosan Co., Ltd., both of which are focused
on matching our proprietary PHOLED emitters with the host and other OLED
materials of these companies. In 2007, we also continued our
relationship with Mitsubishi Chemical Company relating to solution-processible
P2OLED
materials. We believe that collaborative relationships such as these are
important for ensuring success of the OLED industry and broader adoption of our
PHOLED and other OLED technologies.
Research
and Development
Our
research and development activities are focused on the advancement of our OLED
technologies and materials for displays, lighting and other applications. We
conduct this research and development both internally and through various
relationships with our commercial business partners and academic institutions.
In the years 2007, 2006 and 2005, we spent approximately $20,909,262,
$19,562,004, and $18,798,024, respectively, on both internal and third-party
sponsored research and development activities with respect to our various OLED
technologies and materials.
Internal
Development Efforts
We
conduct a substantial portion of our OLED development activities at our
state-of-the-art development and testing facility in Ewing, New Jersey. At this
40,200 square-foot facility, we perform technology development, including device
and process optimization, prototype fabrication, manufacturing scale-up studies,
process and product testing, characterization and reliability studies, and
technology transfer with our business partners.
Our Ewing
facility houses six OLED deposition systems, including a full-color flexible
OLED system, a system for fabricating solution-processible OLEDs, an OVPD
organic vapor phase deposition system and an OVJP organic vapor jet printing
system. In addition, the facility contains equipment for substrate patterning,
organic material deposition, display packaging, module assembly and extensive
testing in Class 100 and 100,000 clean rooms and opto-electronic test
laboratories.
In 2006,
we opened state-of-the-art synthetic chemistry laboratories at our Ewing
facility. In these laboratories, our scientists conduct OLED materials research
and make small quantities of new materials that we then test in OLED devices.
Prior to opening these laboratories, we conducted this materials research in
laboratory space that we leased in Princeton, New Jersey.
As of
December 31, 2007, we employed a team of 39 research scientists, engineers
and laboratory technicians at our Ewing facility. This team includes chemists,
physicists, engineers with electrical, chemical and mechanical backgrounds, and
highly-trained experimentalists. Six members of our R&D team were
newly-hired in 2007.
University
Sponsored Research
We have
long-standing relationships with Princeton University and the University of
Southern California (USC), dating back to 1993, 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 has been performed at
Princeton University under the direction of Dr. Forrest and at USC under the
direction of Dr. Thompson. In 2006, Dr. Forrest transferred to the University of
Michigan, where we continue to fund his research.
We funded
research at Princeton University under a Research Agreement executed with the
Trustees of Princeton University in August 1997. The 1997 Research
Agreement was allowed to expire in July 2007, after Dr. Forrest had transferred
to the University of Michigan. We have exclusive license rights to all OLED and
other thin-film organic electronic patents (other than for organic photovoltaic
solar cells) arising out of research conducted under that
agreement.
In
connection with Dr. Forrest’s transfer to the University of Michigan, in May
2006 we entered into a new Sponsored Research Agreement with USC under which we
are funding organic electronics research being conducted by Drs. Forrest and
Thompson. Work by Dr. Forrest is being funded through a subcontract between USC
and the University of Michigan, and the arrangement currently runs through April
2009. We reimburse the universities for actual costs incurred for sponsored
research conducted under this agreement, up to a maximum of $4,936,296 over the
three-year agreement term. As with the 1997 Research Agreement, we have
exclusive license rights to all OLED and thin-film organic electronic patents
(other than for organic photovoltaic solar cells) arising out of this
research.
In
October 2005, we entered into a separate Sponsored Research Agreement with
Princeton University to fund research under the direction of Dr. Sigurd Wagner
on thin-film encapsulation and fabrication of OLED devices. In March 2007, we
extended this agreement through September 2008. Like our other relationships
with Princeton University, we have exclusive license rights to all patents
arising out of the research.
In
December 2004, we entered into a Sponsored Research Agreement with the Yuen
Tjing Ling Industrial Research Institute of National Taiwan University (TLIRI).
Under that agreement, we funded a research program under the direction of Dr.
Ken-Tsung Wong relating to new OLED materials. We have exclusive rights to all
intellectual property developed under that program. The program ran through
February 2008.
In April
2004, we entered into a Contract Research Agreement with the Chitose Institute
of Science and Technology of Japan (CIST). Under that agreement, we funded a
research program headed by Dr. Chihaya Adachi relating to high-efficiency OLED
materials and devices. We were granted exclusive rights to all intellectual
property developed under this program. This relationship with CIST ended in
March 2006 when Dr. Adachi transferred to Kyushu University. However,
we have continued our relationship with Dr. Adachi under a separate consulting
arrangement that currently runs through March 2009.
In March
2006, we entered into a Research Agreement with Kyung Hee University to sponsor
a research program on flexible, amorphous silicon TFT backplane
technology. The program was directed by Dr. Jin Jang and continued
for one year. In August 2007, we entered into a second Research
Agreement with Kyung Hee University to sponsor further research in this
area. This research is also being directed by Dr. Jang and the new
program runs through August 2008.
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. Under the Development and License
Agreement, we granted Aixtron an exclusive license to produce and sell its
equipment for the manufacture of 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 using the
equipment, which they may do through us or Aixtron. If these rights are granted
through Aixtron, Aixtron is required to make additional payments to us under our
agreement.
Aixtron
has reported to us the delivery of six OVPD systems since July
2002. These include two second-generation systems, one of which was
sold to the Fraunhofer Institute for Photonic Microsystems (IPMS) in Dresden,
Germany in November 2007, and the other of which was sold to RiTdisplay
Corporation of Taiwan in April 2003. We record royalty income from Aixtron’s
sales of these various systems in the quarter in which Aixtron notifies us of
the sale and the related royalties are due.
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 and
materials 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 continued research
and development and the fabrication of 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, the University of Michigan, L-3 Communications Corporation — Display
Systems (L-3DS), the Palo Alto Research Center (PARC), a subsidiary of Xerox
Corporation, Vitex Systems, Inc. and LG Display. 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:
·
|
OLED Displays on Flexible
Metal Foil Substrates. We continued our work during 2007 to develop
and deliver next-generation prototype OLED displays on flexible metal foil
substrates for the U.S. Army Communications-Electronics Research
Development and Engineering Center (CERDEC), the Air Force Research
Laboratory and the U.S. Department of the Navy. For 2007, these four
government agencies provided us with $1,737,000 in funding for the program
under several government contracts and one subcontract with L-3DS. In
2007, we delivered to these various government agencies several
full-color, active-matrix OLED display prototypes on flexible metal foil
that were developed under the program. Our contractual commitments to
conduct further work under this program currently run until November
2008.
|
·
|
Infrared OLED Displays for
Night-Vision Applications. In 2007, we continued working under an
SBIR Phase II program contract from CERDEC for the development of a
flexible OLED display containing infrared-emitting OLED pixels that would
be visible through night vision goggles. We will complete work under the
contract upon delivering a prototype infrared-emitting OLED display to
CERDEC in March 2008. For 2007, we received $413,274 in funding under this
program.
|
·
|
Novel Encapsulation Technology
for Flexible OLEDs. In 2007, we continued our work under an SBIR
Phase II program contract from the U.S. Army Research Laboratory (ARL) to
develop innovative encapsulation technology for flexible
OLEDs. Using technology pioneered at Princeton University, we
have demonstrated the feasibility of a novel encapsulation process based
on plasma-enhanced chemical vapor deposition (PECVD), which is an
important element on the development roadmap for flexible OLED
displays. We received $457,264 in funding from ARL for 2007
under this contract. The program is currently scheduled to run
through September 2008.
|
·
|
OLEDs for High-Efficiency
White Lighting. Our work on behalf of the U.S. Department of Energy
(DOE) to develop technical approaches for using our proprietary PHOLED and
other OLED technologies for high-efficiency white lighting applications
continued in 2007. For the year, the DOE provided us with $1,197,810 in
funding for this work under three SBIR Phase II program contracts and two
SBIR Phase I program contracts. Two of the SBIR Phase I programs were
completed in March 2007, and the others are currently scheduled for
completion between March 2008 and August
2009.
|
·
|
OVJP Technology for Lighting
Applications. In 2007, we continued our work on behalf of the DOE
to develop our proprietary OVJP organic vapor jet printing technology for
the printing of striped OLEDs for lighting applications. Funding to us
under this DOE Solid State Lighting program totaled $696,962 for 2007. The
program is currently funded through June 2008. At the
conclusion of the program, we are expected to deliver to the DOE prototype
OLED devices, wherein the OLED materials are deposited in red, green and
blue stripes using the OVJP process and the resulting device generates
white light.
|
The
Army Flexible Display Center
We have
been a charter member of The Army Flexible Display Center (FDC) since its
establishment at Arizona State University in December 2004. The FDC is being
supported through a $51.5 million Cooperative Agreement between Arizona
State University and the U.S. Army Research Laboratory. The goal of the FDC is
to develop flexible, low power, light-weight, information displays for future
usage by soldiers and for other military and commercial applications. We believe
our involvement with the FDC enhances our flexible OLED display technology
development efforts.
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 100 members, as well
as support from ARL. We are one of 12 members with representation on the
Governing Board of the USDC and we actively participate on its Technical
Council. Our President, Steven Abramson, previously served as Vice-Chairman of
the USDC’s Governing Board.
Intellectual
Property
Along
with our personnel, our primary and most fundamental assets are patents and
other 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, 2007, we owned, through assignment to us
alone or jointly with others, 101 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, the University of Southern California and
the University of Michigan
We
exclusively license the bulk of our patent rights, including our key PHOLED
technology patents, under an Amended License Agreement we executed with the
Trustees of Princeton University and the University of Southern California (USC)
in October 1997. Based on Dr. Forrest’s transfer to the University of Michigan,
in January 2006 the University of Michigan was added as a party to this
agreement. As of December 31, 2007, the patent rights we license
from these universities included 200 issued and pending patents in the U.S.,
together with numerous counterparts filed in various foreign countries. These
patents will start expiring in 2014, but our key PHOLED technology patents
licensed from these universities will not start expiring until
2017.
Under the
Amended License Agreement, Princeton University, USC and the University of
Michigan granted us worldwide, exclusive license rights to specified patents and
patent applications relating to OLED technologies and materials. Our license
rights also extend to any patent rights arising out of the research conducted by
Princeton University, USC or the University of Michigan under our various
research agreements with these entities. 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 primarily 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, USC and the
University of Michigan. However, we manage this process and have the right to
instruct patent counsel on specific 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.
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 agreements if Princeton University
reasonably determines that the royalty rates payable with respect to these
products are not fair and competitive. Princeton University shares portions of
these royalties with USC and the University of Michigan under their
Interinstitutional Agreement.
We have a
minimum royalty obligation of $100,000 per year during the term of the Amended
License Agreement. We paid Princeton University royalties under the Amended
License Agreement of $163,007 for 2007, $177,436 for 2006 and $110,098 for 2005.
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 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 2012. 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
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 annual royalties on gross
revenues received by us on account of our sales of OLED products or components,
or from our OLED technology licensees, whether or not these revenues relate
specifically to 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.
The
royalty due to Motorola for the year ended December 31, 2007 was
$132,839. We satisfied this royalty obligation by issuing 3,801
shares of our common stock to Motorola on March 6, 2007 and by paying Motorola
$66,436 in cash on March 7, 2008. The number of shares of common stock used to
pay the stock portion of the royalty was equal to approximately 50% of the total
royalty due divided by the average daily closing price per share of our common
stock on the NASDAQ Global Market over the 10 trading days ended two business
days prior to the date of payment.
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 seven-year warrants to purchase an additional
150,000 shares of our common stock at an exercise price of $21.60 per share.
These warrants became exercisable on September 29, 2001, and expired
unexercised on September 29, 2007. On October 6, 2004, all 300,000
shares of the Series B Convertible Preferred Stock were converted into 418,916
shares of our common stock, and Motorola has since sold all of these
shares.
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 rights to these inventions and associated technical data
that could restrict our ability to market them to the government for military
and other applications, or to third parties for commercial applications. In
addition, if the U.S. government determines that we or our subcontractors have
not taken effective steps to achieve practical application of these inventions
in any field of use in a reasonable time, the government may require that we or
our subcontractors license these inventions to third parties in that field of
use.
Trade
Secrets and Technical Know-How
We have
accumulated, and continue to accumulate, a substantial amount of 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, USC and the University
of Michigan, there is an increased potential for public disclosure.
Competition
The
industry in which we operate is highly competitive. We compete against
alternative flat panel display technologies, in particular LCDs, as well as
other OLED technologies. We also compete in the lighting market
against incumbent technologies, such as incandescent bulbs and fluorescent
lamps, and emerging technologies, such as inorganic LEDs.
Flat
Panel Display Industry Competitors
Numerous
domestic and foreign companies have developed or are developing LCD, plasma and
other flat panel display technologies that compete with our OLED display
technologies. We believe that OLED display technologies ultimately can compete
with LCDs and other display technologies for many product applications on the
basis of lower power consumption, better contrast ratios, faster video rates and
lower manufacturing cost. However, other companies may succeed in continuing to
improve 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.
Lighting
Industry Competitors
Traditional
incandescent bulbs and fluorescent lamps are well-entrenched products in the
lighting industry. In addition, compact fluorescent lamps and
solid-state LEDs have recently been introduced into the market and would compete
with OLED lighting products. Having attributes different than fluorescent lamps
and LEDs, OLEDs may compete directly with these products for certain lighting
applications. However, manufacturers of LEDs and compact fluorescent lamps may
succeed in more broadly adapting their products to various lighting
applications, or others may develop competing solid-state lighting technologies
that are superior to OLEDs. Again, we cannot predict whether or when this might
occur.
OLED
Technology and Materials Competitors
Eastman
Kodak Company has licensed its competing fluorescent OLED technology and other
patents to a number of display manufacturers, several of whom are presently
manufacturing OLED products. Cambridge Display Technology, Ltd., which recently
was acquired by Sumitomo Chemical Company, also has licensed its competing
polymer OLED technology and sells its polymer OLED materials to display
manufacturers. Many display manufacturers themselves are engaged in research,
development and commercialization activities with respect to OLED technologies
and materials. In addition, other material manufacturers, such as Idemitsu Kosan
Co., Ltd., Merck KGaA and BASF Corporation, are selling or sampling OLED
materials to the same customers to whom we sell our proprietary PHOLED
materials.
Our
existing business relationships with Samsung SDI and other product manufacturers
suggest that our OLED technologies and materials, particularly our PHOLED
technologies and materials, may achieve some level of market penetration in the
flat panel display and lighting industries. However, our competitors may succeed
in improving their competing OLED technologies and materials so as to render
them superior to ours. We cannot be sure of the extent to which product
manufacturers ultimately will adopt our OLED technologies and materials for the
production of commercial flat panel displays and lighting products.
Employees
As of
December 31, 2007, we had 62 full-time employees and two part-time
employees, 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 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. Simultaneous 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. In
January 2008, we also formed a second wholly-owned subsidiary, Universal Display
Corporation Hong Kong, Ltd.
Our
Compliance with Environmental Protection Laws
We are
not aware of any material effects that compliance with Federal, State or local
environmental protection laws or regulations will have on our business. We have
not expended material amounts to comply with any environmental protection laws
or regulations 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. These materials are
made available through our website as soon as reasonably practicable after we
electronically file the material with the SEC.
ITEM
1A. RISK
FACTORS
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.
If
our OLED technologies and materials are not feasible for broad-based product
applications, we may never generate revenues sufficient to support ongoing
operations.
Our main
business strategy is to license our OLED technologies and sell our OLED
materials to manufacturers for incorporation into the flat panel display and
lighting products that they sell. Consequently, our success depends on the
ability and willingness of these manufacturers to develop, manufacture and sell
commercial products integrating our technologies and materials.
Before
product 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, may require additional advances
in our technologies and materials, as well as those of others, for applications
in a number of areas, including, without limitation, advances with respect to
the development of:
·
|
OLED
materials with sufficient lifetimes, brightness and color coordinates for
full-color OLED displays and general lighting
products;
|
·
|
more
robust OLED materials for use in large-scale, more demanding manufacturing
environments; and
|
·
|
scalable
and cost-effective methods and technologies for the fabrication of OLED
products.
|
We cannot
be certain that these advances will ever occur, and hence our OLED technologies
and materials may never be feasible for broad-based product
applications.
Even
if our OLED technologies are technically feasible, they may not be adopted by
product 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 or superior to
current display and lighting technologies at an advantageous cost to
manufacturers, and the adoption of products incorporating these technologies by
consumers. Many potential licensees of our OLED technologies manufacture flat
panel displays and lighting products utilizing competing technologies, and may,
therefore, be reluctant to redesign their products or manufacturing processes to
incorporate our OLED technologies.
During
the entire product development process for a new product, we face the risk that
our technology will fail to meet the manufacturer’s technical, performance or
cost requirements or will be replaced by a competing product or alternative
technology. For example, we are aware that some of our licensees and prospective
licensees have entered into arrangements with our competitors regarding the
development of competing technologies. Even if we offer technologies that are
satisfactory to a product manufacturer, the manufacturer may choose to delay or
terminate its product development efforts for reasons unrelated to our
technologies.
Mass
production of OLED products will require the availability of suitable
manufacturing equipment, components and materials, many of which are available
only from a limited number of suppliers. In addition, there may be a number of
other technologies that manufacturers need to utilize to be used in conjunction
with our OLED technologies in order to bring OLED products containing them to
the market. Thus, even if our OLED technologies are a viable alternative to
competing approaches, if product manufacturers are unable to obtain access to
this equipment and these components, materials and other technologies, they may
not utilize our OLED technologies.
There
are numerous potential alternatives to OLEDs, 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. Plasma and other competing flat panel display technologies have been,
or are being, developed. A similar situation exists in the solid-state lighting
market, which is currently dominated by LED products. Advances in any
of these various technologies may overcome their current limitations and permit
them to become the leading technologies in their field, either of which could
limit the potential market for products utilizing our OLED technologies and
materials. This, in turn, would cause product 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 or cost-effective than ours, which may
limit the commercial adoption of our OLED technologies and
materials.
Our
competitors have developed OLED technologies that differ from or compete with
our OLED technologies. In particular, competing fluorescent OLED technology,
which entered the marketplace prior to ours, may become entrenched in the
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 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 product market, our business
strategy may fail.
If
we fail to make advances in our OLED research and development activities, we
might not succeed in commercializing our OLED technologies and
materials.
Further
advances in our OLED technologies and materials depend, in part, on the success
of the research and development work we conduct, both alone and with our
research partners. We cannot be certain that this work will yield additional
advances in the research and development of these technologies and
materials.
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.
If
we cannot form and maintain lasting business relationships with OLED product
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 products. We have entered into only a limited number of
such relationships. Our other relationships with product manufacturers currently
are limited to technology development and the evaluation of our OLED
technologies and materials for possible use in commercial products. Some or all
of these relationships may not succeed or, even if they are successful, may not
result in the product manufacturers entering into commercial licensing and
material supply relationships with us.
Under our
existing technology development and evaluation agreements, we are working with
manufacturers to incorporate our technologies into their commercial products.
However, these technology development and evaluation agreements typically last
for limited periods of time, such that our relationships with the product
manufacturers will expire unless they continually are renewed. These
manufacturers may not agree to renew their relationships with us on a continuing
basis. In addition, we regularly continue working with 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 various product
manufacturers not continue or be renewed, or if we are not able to identify
other product manufacturers and enter into contracts with them, 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 may
cause our business strategy to fail.
Conflicts
may arise with our licensees or joint development partners, resulting in
renegotiation or termination of, or litigation related to, our agreements with
them. This would adversely affect our revenues.
Conflicts
could arise between us and our licensees or joint development partners as to
royalty rates, milestone payments or other commercial terms. Similarly, we may
disagree with our licensees or joint development partners as to which party owns
or has the right to commercialize intellectual property that is developed during
the course of the relationship or as to other non-commercial terms. If such a
conflict were to arise, a licensee or joint development partner might attempt to
compel renegotiation of certain terms of their agreement or terminate their
agreement entirely, and we might lose the royalty revenues and other benefits of
the agreement. Either we or the licensee or joint development partner might
initiate litigation to determine commercial obligations, establish intellectual
property rights or resolve other disputes under the agreement. Such litigation
could be costly to us and require substantial attention of management. If we
were unsuccessful in such litigation, we could lose the commercial benefits of
the agreement, be liable for other financial damages and suffer losses of
intellectual property or other rights that are the subject of dispute. Any of
these adverse outcomes could cause our business strategy to fail.
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 products 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.
The
strength of our current intellectual property position results primarily from
the essential nature of our fundamental patents covering phosphorescent OLED
devices and certain materials utilized in these devices. Our existing
fundamental phosphorescent OLED patents expire in 2017 and 2019. While we hold a
wide range of additional patents and patent applications whose expiration dates
extend (and in the case of patent applications, will extend) beyond 2019, many
of which are also of key importance in the OLED industry, none are of an equally
essential nature as our fundamental patents, and therefore our competitive
position after 2019 may be less certain.
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 are participating in or have participated in, and
will likely have to participate in the future in, interference or reexamination
proceedings before the U.S. Patent and Trademark Office, and opposition, nullity
or other proceedings before foreign patent offices, with respect to our patents
or patent applications. All of these actions 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.
In
addition, we rely in part on unpatented proprietary technologies, and others may
independently develop the same or similar technologies or otherwise obtain
access to our unpatented technologies. To protect our trade secrets, know-how
and other proprietary information, we require employees, consultants, financial
advisors and strategic partners to enter into confidentiality agreements. These
agreements may not ultimately provide meaningful protection for our trade
secrets, know-how or other proprietary information. In particular, we may not be
able to fully or adequately protect our proprietary information as we conduct
discussions with potential strategic partners. If we are unable to protect the
proprietary nature of our technologies, it will harm our business.
We
or our licensees may incur substantial costs or lose important rights as a
result of litigation or other proceedings relating to our patent and other
intellectual property rights.
There are
a number of other companies and organizations that have been issued patents and
are filing patent applications relating to OLED technologies and materials,
including, without limitation, Eastman Kodak Company, Cambridge Display
Technology (recently acquired by Sumitomo Chemical Company), Fuji Film Co.,
Ltd., Canon, Inc., Pioneer Corporation, Semiconductor Energy Laboratories Co.
Idemitsu Kosan Co., Ltd. and Mitsubishi Chemical Corporation. As a result, there
may be issued patents or pending patent applications of third parties that would
be infringed by the use of our OLED technologies or materials, thus subjecting
our licensees to possible suits for patent infringement in the future. Such
lawsuits could result in our licensees being liable for damages or require our
licensees to obtain additional licenses that could increase
the cost of their products, which might have an adverse affect on their sales
and thus our royalties or cause them to seek to renegotiate our royalty
rates.
In
addition, we may be required from time-to-time to assert our intellectual
property rights by instituting legal proceedings against others. We cannot
assure you that we will be successful in enforcing our patents in any lawsuits
we may commence. Defendants in any litigation we may commence to enforce our
patents may attempt to establish that our patents are invalid or are
unenforceable. Thus, any patent litigation we commence could lead to a
determination that one or more of our patents are invalid or unenforceable. If a
third party succeeds in invalidating one or more of our patents, that party and
others could compete more effectively against us. Our ability to derive
licensing revenues from products or technologies covered by these patents would
also be adversely affected.
Whether
our licensees are defending the assertion of third-party intellectual property
rights against their businesses arising as a result of the use of our
technology, or we are asserting our own intellectual property rights against
others, such litigation can be complex, costly, protracted and highly disruptive
to our or our licensees’ business operations by diverting the attention and
energies of management and key technical personnel. As a result, the pendency or
adverse outcome of any intellectual property litigation to which we or our
licensees are subject could disrupt business operations, require the incurrence
of substantial costs and subject us or our licensees to significant liabilities,
each of which could severely harm our business.
Plaintiffs
in intellectual property cases often seek injunctive relief in addition to money
damages. Any intellectual property litigation commenced against our licensees
could force them to take actions that could be harmful to their business and
thus to our royalties, including the following:
·
|
stop
selling their products that incorporate or otherwise use technology that
contains our allegedly infringing intellectual
property;
|
·
|
attempt
to obtain a license to the relevant third-party intellectual property,
which may not be available on reasonable terms or at all;
or
|
·
|
attempt
to redesign their products to remove our allegedly infringing intellectual
property to avoid infringement of the third-party intellectual
property.
|
If our
licensees are forced to take any of the foregoing actions, they may be unable to
manufacture and sell their products that incorporate our technology at a profit
or at all. Furthermore, the measure of damages in intellectual property
litigation can be complex, and is often subjective or uncertain. If our
licensees were to be found liable for infringement of proprietary rights of a
third party, the amount of damages they might have to pay could be substantial
and is difficult to predict. Decreased sales of our licensees’ products
incorporating our technology would have an adverse effect on our royalty
revenues under existing licenses. Any necessity to procure rights to the
third-party technology might cause our existing licensees to renegotiate the
royalty terms of their license with us to compensate for this increase in their
cost of production or, in certain cases, to terminate their license with us
entirely. Were this renegotiation to occur, it would likely harm our ability to
compete for new licensees and have an adverse effect on the terms of the royalty
arrangements we could enter into with any new licensees.
As is
commonplace in technology companies, we employ individuals who were previously
employed at other technology companies. To the extent our employees are involved
in research areas that are similar to those areas in which they were involved at
their former employers, we may be subject to claims that such employees or we
have, inadvertently or otherwise, used or disclosed the alleged trade secrets or
other proprietary information of the former employers. Litigation may be
necessary to defend against such claims. The costs associated with these actions
or the loss of rights critical to our or our licensees’ business could
negatively impact our revenues or cause our business to fail.
A
2007 U.S. Supreme Court decision may raise the standards for all patent
applicants and holders for patentability.
On
April 30, 2007, the U.S. Supreme Court, in KSR International Co. vs. Teleflex,
Inc., mandated a more expansive and flexible approach towards a
determination as to whether a patent is obvious and invalid. This ruling may
make it more difficult for patent holders to secure or maintain existing
patents. At the present time, we are unable to predict the impact, if any, that
this recent ruling will have on our currently issued or future patents. As a
result of the Supreme Court ruling, however, it may be more difficult for us to
defend our currently issued patents or to obtain additional patents in the
future. If we are unable to defend our currently issued patents, or to obtain
new patents for any reason, our business would suffer.
We
have a history of losses and may never be profitable.
Since
inception, we have incurred significant losses and we expect to incur losses
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. This may never occur because:
·
|
OLED
technologies might not be adopted for broad commercial
usage;
|
·
|
markets
for flat panel displays and solid-state lighting products utilizing OLED
technologies may be limited; and
|
·
|
amounts
we can charge for access to our OLED technologies and materials may not be
sufficient for us to make a profit.
|
We
may require additional funding in the future in order to continue our
business.
Our
capital requirements have been and will continue to be significant. We may
require additional funding in the future for the 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.
Many
of our competitors have greater resources, which may make it difficult for us to
compete successfully against them.
The flat
panel display and solid-state lighting industries are 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
these markets.
The
consumer electronics industry has historically experienced significant
downturns, which may adversely affect the demand for and pricing of our OLED
technologies and materials.
Because
we do not sell any products to consumers, our success depends upon the ability
and continuing willingness of our licensees to manufacture and sell products
utilizing our technologies and materials, and the widespread acceptance of those
products. Any slowdown in the demand for our licensees’ products would adversely
affect our royalty revenues and thus our business. The markets for flat panel
displays and lighting products are highly competitive. Success in the market for
end-user products that may integrate our OLED technologies and materials also
depends on factors beyond the control of our licensees and us, including the
cyclical and seasonal nature of the end-user markets that our licensees serve,
as well as industry and general economic conditions.
The
markets that we hope to penetrate have 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 manufacturers building and selling products
that incorporate our OLED technologies and materials. Industry-wide fluctuations
and downturns in the demand for flat panel displays and solid-state lighting
products could cause significant harm to our business.
We
rely solely on PPG Industries to manufacture the OLED materials we use and sell
to product manufacturers.
Because
the vast majority of OLED product manufacturers are located in the Asia-Pacific
region, we are subject to international operational, financial, legal and
political risks which may negatively impact our operations.
Many of
our licensees and prospective licensees have a majority of their operations in
countries other than the United States, particularly in the Asia-Pacific region.
Risks associated with our doing business outside of the United States include,
without limitation:
·
|
compliance
with a wide variety of foreign laws and
regulations;
|
·
|
legal
uncertainties regarding taxes, tariffs, quotas, export controls, export
licenses and other trade barriers;
|
·
|
economic
instability in the countries of our licensees, causing delays or
reductions in orders for their products and therefore our
royalties;
|
·
|
political
instability in the countries in which our licensees operate, particularly
in South Korea relating to its disputes with North Korea and in Taiwan
relating to its disputes with
China;
|
·
|
difficulties
in collecting accounts receivable and longer accounts receivable payment
cycles; and
|
·
|
potentially
adverse tax consequences.
|
Any of
these factors could impair our ability to license our OLED technologies and sell
our OLED materials, thereby harming our business.
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, the University of Southern
California and the University of Michigan 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 the rights of
shareholders 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,
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:
·
|
adversely
affect the voting power of the shareholders of our common
stock;
|
·
|
make
it more difficult for a third party to gain control of
us;
|
·
|
discourage
bids for our common stock at a premium;
or
|
·
|
otherwise
adversely affect the market price of our common
stock.
|
As of
March 7, 2008, we have issued and outstanding 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 I. Seligsohn, our Founder and Chairman of the
Board of Directors. Our Board of Directors has authorized and issued other
shares of preferred stock in the past, none of which are currently outstanding,
and may do so again 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
agreement with PPG Industries, we are required to issue to PPG Industries shares
of our common stock as partial payment for services rendered by it, though under
limited circumstances we are required to compensate PPG Industries fully in cash
in lieu of common stock. The number of shares of common stock that we are
required to deliver to PPG Industries is based on a specified
formula. Under this formula, the lower the price of our common stock
at and around the time of issuance, the greater the number of shares that we are
required to issue to PPG Industries. Lower than anticipated market prices for
our common stock, and correspondingly greater numbers of shares issuable to PPG
Industries, with a resulting 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 Founder and Chairman of the Board of
Directors, beneficially own, as of March 7, 2008, approximately 14.5% of the
outstanding shares of our common stock. Accordingly, these individuals 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 included in the
section of this report entitled “Market for Registrant’s Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities,” a table
indicating the high and low closing prices of our common stock as reported on
the NASDAQ Global Market for the past two years. Factors such as the following
may have a significant impact on the market price of our common stock in the
future:
·
|
our
expenses and operating results;
|
·
|
announcements
by us or our competitors of technological developments, new product
applications or license arrangements;
and
|
·
|
other
factors affecting the flat panel display and solid-state lighting
industries in general.
|
Our
operating results may have significant period-to-period fluctuations, which
would make it difficult to predict our future performance.
Due to
the current stage of commercialization of our OLED technologies and the
significant development and manufacturing objectives that we and our licensees
must achieve to be successful, our quarterly operating results will be difficult
to predict and may vary significantly from quarter to quarter.
We
believe that period-to-period comparisons of our operating results are not a
reliable indicator of our future performance at this time. Among other factors
affecting our period-to-period results, our license and technology development
fees often consist of large one-time or annual payments, resulting in
significant fluctuations in our revenues. If, in some future period, our
operating results or business outlook fall below the expectations of securities
analysts or investors, our stock price would be likely to decline and investors
in our common stock may not be able to resell their shares at or above their
purchase price. Broad market, industry and global economic factors may also
materially reduce the market price of our common stock, regardless of our
operating performance.
The
issuance of additional shares of our common stock could drive down the price of
our stock.
The price
of our common stock might decrease if:
·
|
other
shares of our common stock that are currently subject to restriction on
sale become freely salable, whether through an effective registration
statement or based on Rule 144 under the Securities Act of 1933, as
amended; or
|
·
|
we
issue additional shares of our common stock that might be or become freely
salable, including shares that would be issued upon conversion of our
preferred stock or the exercise of outstanding warrants and
options.
|
Because
we do not intend to pay dividends, shareholders will benefit from an investment
in our common stock only if it appreciates in value.
We have
never declared or paid any cash dividends on our common stock. We currently
intend to retain our future earnings, if any, to finance further research and
development and do not expect to pay any cash dividends in the foreseeable
future. As a result, the success of an investment in our common stock will
depend upon any future appreciation in its value. There is no guarantee that our
common stock will appreciate in value or even maintain the price at which
shareholders have purchased their shares.
ITEM
1B. UNRESOLVED
STAFF COMMENTS
ITEM
2. PROPERTIES
Our
corporate offices and research and development laboratories are located at 375
Phillips Boulevard in Ewing, New Jersey. On December 1, 2004, we acquired
the building and property at which this facility is located. During 2005, we
conducted a two-stage expansion of our laboratory and office space in the
building. We currently occupy the entire 40,200 square feet facility. In 2007,
we leased a small portion of this office space to Global Photonic Energy
Corporation (GPEC); however, that arrangement ended in March 2008.
In 2007,
we also leased approximately 850 square feet of office space in Coeur d’Alene,
Idaho. However, that lease was assigned to GPEC effective as of January 1, 2008.
We have two employees we share with GPEC who work in this office.
ITEM
3. LEGAL
PROCEEDINGS
In
June 2006, Patent Interference No. 105,461 was declared by the United
States Patent and Trademark Office (the “USPTO”) between Semiconductor Energy
Laboratory Co., Ltd. (“SEL”), and Princeton and USC (the “Universities”). The
dispute concerned U.S. Patent No. 6,734,457, which had been issued to SEL.
The SEL patent claimed aspects of our phosphorescent OLED technology that we
believe were disclosed and claimed in U.S. Application Serial No.10/913,211,
which we exclusively license from the Universities. The Universities sought a
ruling by the USPTO that they should be granted a patent to the claimed
invention and that the SEL patent is invalid because the Universities were
first-to-invent and their invention was made prior to that of SEL. Under our
agreement with the Universities, we were required to pay all legal costs and
fees associated with the interference proceeding.
An oral
hearing in the matter was held before the Board of Patent Appeals and
Interferences (the “BPAI”) of the USPTO on April 25, 2007. The following
day, the BPAI issued a decision in favor of the Universities. The BPAI decision
confirmed that the Universities were first-to-invent the subject matter of the
interference and that the Universities’ invention is prior art to SEL’s patent.
As a result, all claims of the SEL patent were canceled. SEL did not appeal the
BPAI decision and the proceeding is effectively terminated.
Notice
of Opposition to European Patent No. 0946958
On
December 8, 2006, Cambridge Display Technology, Ltd. (“CDT”), which recently was
acquired by Sumitomo Chemical Company (“Sumitomo”), filed a Notice of Opposition
to European Patent No. 0946958 (the “EP ‘958 patent”). The EP ‘958 patent, which
was issued on March 8, 2006, is a European counterpart patent to U.S. patents
5,844,363, 6,602,540, 6,888,306 and 7,247,073. These patents relate to our FOLED
technology. They are exclusively licensed to us by Princeton, and under the
license agreement we are required to pay all legal costs and fees associated
with this proceeding.
The
European Patent Office (the “EPO”) set a date of May 12, 2007 for us to file a
response to the facts and arguments presented by CDT in its Notice of
Opposition. The response was timely filed. The opponents then filed their reply
to our response on December 7, 2007. We are still considering whether we will
file another response before the oral hearing date is set. At this stage of the
proceeding, we cannot make any prediction as to the probable outcome of this
opposition. However, based on our analysis of the evidence presented to date, we
continue to believe there is a substantial likelihood that the patent being
challenged will be declared valid, and that all or a significant portion of its
claims will be upheld.
Notices
of Opposition to European Patent No. 1449238
On March
8, 2007, Sumation Company Limited (“Sumation”), a joint venture between Sumitomo
and CDT, filed a first Notice of Opposition to European Patent No. 1449238 (the
“EP ‘238 patent”). The EP ‘238 patent, which was issued on November 2, 2006, is
a European counterpart patent, in part, to U.S. patents 6,830,828, 6,902,830,
7,001,536 and 7,291,406, and to pending U.S. patent application 11/879,379,
filed on July 16, 2007. These patents and this patent application relate to our
PHOLED technology. They are exclusively licensed to us by Princeton, and under
the license agreement we are required to pay all legal costs and fees associated
with this proceeding.
Two other
parties filed additional oppositions to the EP ‘238 patent just prior to the
August 2, 2007 expiration date for such filings. On July 24, 2007, Merck Patent
GmbH, of Darmstadt, Germany, filed a second Notice of Opposition to the EP ‘238
patent, and on July 27, 2007, BASF Aktiengesellschaft, of Mannheim, Germany,
filed a third Notice of Opposition to the EP ‘238 patent. Since there
is considerable overlap in the prior art evidence relied upon in each of the
filed oppositions, the EPO is handling them as a single opposition.
The EPO
set a January 6, 2008 due date for us to file our response to the opposition. We
requested a two-month extension to file this response, and we subsequently filed
it in a timely manner. We are waiting to see whether the other parties in the
opposition file any additional documents, to which we intend to respond. At this
time, we cannot make any prediction as to the probable outcome of the
opposition. However, based on our analysis of the evidence presented to date, we
continue to believe there is a substantial likelihood that the patent being
challenged will be declared valid, and that all or a significant portion of its
claims will be upheld.
ITEM
4. SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
The
following table sets forth certain information with respect to our executive
officers as of March 7, 2008:
Name
|
Age
|
Position
|
Sherwin
I. Seligsohn
|
72
|
Founder
and Chairman of the Board of Directors
|
Steven
V. Abramson
|
56
|
President,
Chief Executive Officer and Director
|
Sidney
D. Rosenblatt
|
60
|
Executive
Vice President, Chief Financial Officer, Treasurer, Secretary and
Director
|
Julia
J. Brown
|
46
|
Vice
President and Chief Technical Officer
|
Janice
K. Mahon
|
50
|
Vice
President of Technology Commercialization and General Manager of Material
Supply Business
|
Our Board
of Directors has appointed these executive officers to hold office until their
successors are duly appointed.
Sherwin I.
Seligsohn is our Founder and has been the Chairman of our Board of
Directors since June 1995. He also served as our Chief Executive
Officer from June 1995 through December 2007, and as our President from June
1995 through May 1996. Mr. Seligsohn serves 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 of Directors, President
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 of
Directors. Mr. Seligsohn is a member of the Industrial Advisory Board
of the Princeton Institute for the Science and Technology of Materials (PRISM)
at Princeton University.
Steven V.
Abramson is our President and Chief Executive Officer, and has been a
member of our Board of Directors since May 1996. Mr. Abramson served
as our President and Chief Operating Officer from May 1996 through December
2007. From March 1992 to May 1996, Mr. Abramson 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, Mr. Abramson 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 Executive
Committee 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 (“IEEE”) and
is a Fellow of the IEEE. Dr. Brown has served on numerous technical
conference committees and is presently a member of the Society of Information
Display.
Janice K.
Mahon has been our Vice President of Technology Commercialization since
January 1997, and became the General Manager of our Materials Supply Business in
January 2007. From 1992 to 1996, Ms. Mahon was Vice President of SAGE
Electrochromics, Inc., a thin-film electrochromic technology company, where she
oversaw a variety of business development and marketing programs and managed
finance and administration activities. From 1984 to 1989, Ms. Mahon was a Vice
President and General Manager for Chronar Corporation, a leading developer and
manufacturer of amorphous silicon photovoltaic (PV) panels. Prior to that, Ms.
Mahon worked as Senior Engineer for the Industrial Chemicals Division of FMC
Corporation, where she developed and implemented novel process technologies. Ms.
Mahon received her B. S. in Chemical Engineering from Rensselaer Polytechnic
Institute in 1979, and an M. B. A. from Harvard University in 1984. Ms. Mahon
has been a member of the USDC Technical Council since 1997, and a member of its
Governing Board since January 2008.
PART
II
ITEM
5.
|
MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
|
Our
Common Stock
Our
common stock is quoted on the NASDAQ Global Market under the symbol “PANL.” The
following table sets forth, for the periods indicated, the high and low closing
prices of our common stock as reported on the NASDAQ Global Market.
|
High
Close
|
Low
Close
|
|
--------------
|
--------------
|
2007
|
|
|
Fourth
Quarter
|
$ 21.88
|
$ 15.67
|
Third
Quarter
|
18.44
|
13.80
|
Second
Quarter
|
17.70
|
14.59
|
First
Quarter
|
15.80
|
12.03
|
2006
|
|
|
Fourth
Quarter
|
$ 15.15
|
$ 10.59
|
Third
Quarter
|
13.66
|
10.02
|
Second
Quarter
|
16.08
|
12.25
|
First
Quarter
|
15.25
|
10.94
|
As of
March 7, 2008, there were approximately 17,250 holders of record of our common
stock.
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.
Issuance
of Securities to PPG Industries
Under our
OLED Materials Supply and Service Agreement, we have the option to issue shares
of our common stock to PPG Industries on a periodic basis as payment for up to
50% of the amounts due for certain services performed for us by PPG Industries.
During the quarter ended December 31, 2007, we issued an aggregate of 21,552
shares of our common stock to PPG Industries as partial payment for these
services. The shares were issued in reliance on the exemption from
registration contained in Section 4(2) of the Securities Act of 1933, as
amended.
Issuance
of Securities Upon the Exercise of Outstanding Warrants
Receipt
of Shares Upon the Exercise of Outstanding Stock Options
As
illustrated in the following table, on December 14, 2007, certain of our
executive officers and a former executive officer tendered payment to us a total
of 22,222 shares of our common stock as payment of the exercise price for stock
options that had previously been granted to these individuals under our Equity
Compensation Plan. These stock options had an exercise price of $5.25
per share, and an expiration date of December 17, 2007. The shares we received
were valued at $17.72 per share, which was the closing price of our common stock
on the NASDAQ Global Market on December 14, 2007. The total value of
the shares we received was $393,774.
The
following table provides information relating to the shares we received during
the fourth quarter of 2007.
Period
|
|
Total Number
of Shares
Purchased
|
|
Average
Price Paid
per Share
|
|
Total
Number
of
Shares Purchased
as
Part of Publicly
Announced
Program
|
|
Approximate
Dollar Value
of Shares that
May
Yet Be
Purchased Under
the Program
|
|
|
|
|
|
|
|
|
|
October
1 – October 31
|
|
--
|
|
--
|
|
--
|
|
--
|
November
1 – November 30
|
|
--
|
|
--
|
|
--
|
|
--
|
December
1 – December 31
|
|
22,000
|
|
$17.72
|
|
22,000
|
|
--
|
Total
|
|
22,000
|
|
$17.72
|
|
22,000
|
|
--
|
Performance
Graph
The
performance graph below compares the change in the cumulative shareholder return
of our common stock from December 31, 2002 to December 31, 2007, with the
percentage change in the cumulative total return over the same period on (i) the
Russell 2000 Index, and (ii) the Nasdaq Electronics Components
Index. This performance graph assumes an initial investment of $100
on December 31, 2002 in each of our common stock, the Russell 2000 Index and the
Nasdaq Electronics Components Index.
|
Cumulative
Total Return
|
|
12/02
|
12/03
|
12/04
|
12/05
|
12/06
|
12/07
|
UNIVERSAL
DISPLAY CORP.
|
$
100.00
|
$
173.89
|
$
114.07
|
$
133.21
|
$
190.24
|
$
261.98
|
RUSSELL
2000
|
100.00
|
147.25
|
174.24
|
182.18
|
215.64
|
212.26
|
NASDAQ
ELECTRONIC COMPONENTS
|
100.00
|
196.18
|
153.08
|
166.42
|
155.47
|
180.19
|
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
Operating
Results:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenue
|
|
$
|
11,305,907
|
|
|
$
|
11,921,292
|
|
|
$
|
10,147,995
|
|
|
$
|
7,006,913
|
|
|
$
|
6,593,193
|
|
Research
and development expense
|
|
|
20,909,262
|
|
|
|
19,562,004
|
|
|
|
18,798,024
|
|
|
|
16,226,517
|
|
|
|
17,447,243
|
|
General
and administrative expense
|
|
|
9,569,381
|
|
|
|
8,902,462
|
|
|
|
7,704,931
|
|
|
|
7,052,047
|
|
|
|
5,766,761
|
|
Interest
income
|
|
|
3,599,229
|
|
|
|
2,168,933
|
|
|
|
1,419,858
|
|
|
|
795,620
|
|
|
|
162,356
|
|
Income
tax benefit
|
|
|
804,980
|
|
|
|
544,567
|
|
|
|
424,207
|
|
|
|
612,966
|
|
|
|
—
|
|
Net
loss
|
|
|
(15,975,841
|
)
|
|
|
(15,186,804
|
)
|
|
|
(15,801,612
|
)
|
|
|
(15,776,574
|
)
|
|
|
(17,353,205
|
)
|
Net
loss attributable to common shareholders
|
|
|
(15,975,841
|
)
|
|
|
(15,186,804
|
)
|
|
|
(15,801,612
|
)
|
|
|
(15,906,198
|
)
|
|
|
(18,387,507
|
)
|
Net
loss per share, basic and diluted
|
|
|
(0.47
|
)
|
|
|
(0.49
|
)
|
|
|
(0.56
|
)
|
|
|
(0.59
|
)
|
|
|
(0.82
|
)
|
Balance
Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
105,000,071
|
|
|
$
|
72,331,536
|
|
|
$
|
73,819,417
|
|
|
$
|
73,892,163
|
|
|
$
|
46,201,646
|
|
Current
liabilities
|
|
|
12,790,531
|
|
|
|
14,382,673
|
|
|
|
11,974,854
|
|
|
|
7,404,278
|
|
|
|
4,194,776
|
|
Capital
lease obligations
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,886
|
|
Long-term
debt
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,200,000
|
|
|
|
—
|
|
Shareholders’
equity
|
|
|
89,215,957
|
|
|
|
54,382,363
|
|
|
|
57,616,463
|
|
|
|
59,187,885
|
|
|
|
38,906,870
|
|
Other
Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working
capital
|
|
$
|
73,979,638
|
|
|
$
|
37,422,740
|
|
|
$
|
38,347,913
|
|
|
$
|
40,630,913
|
|
|
$
|
23,679,705
|
|
Capital
expenditures
|
|
|
1,225,857
|
|
|
|
2,349,033
|
|
|
|
5,656,905
|
|
|
|
7,418,053
|
|
|
|
957,328
|
|
Weighted
average shares used in computing basic and diluted net loss per common
share
|
|
|
33,759,581
|
|
|
|
30,855,297
|
|
|
|
28,462,925
|
|
|
|
26,791,158
|
|
|
|
22,428,219
|
|
Shares
of common stock outstanding, end of period
|
|
|
35,563,201
|
|
|
|
31,385,408
|
|
|
|
29,545,471
|
|
|
|
27,903,385
|
|
|
|
24,196,765
|
|
|
Certain
prior year amounts have been reclassified to conform to current year
presentation.
|
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 Section 1A of this report, 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 flat panel display, solid-state
lighting 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, technology development and evaluation agreements and
license fees and royalties. In the future, we anticipate that the revenues from
licensing our intellectual property will become a more significant part of our
revenue stream.
While we
have made significant progress over the past few years developing and
commercializing our family of OLED technologies (PHOLED, TOLED, FOLED, etc.) and
materials, we have incurred significant losses and will likely continue to do so
until our OLED technologies and materials become more widely adopted by product
manufacturers. We have incurred significant losses since our inception,
resulting in an accumulated deficit of $161,332,467 as of December 31,
2007.
We
anticipate fluctuations in our annual and quarterly results of operations due to
uncertainty regarding:
·
|
the
timing of our receipt of license fees and royalties, as well as fees for
future technology development and
evaluation;
|
·
|
the
timing and volume of sales of our OLED materials for both commercial usage
and evaluation purposes;
|
·
|
the
timing and magnitude of expenditures we may incur in connection with our
ongoing research and development activities;
and
|
·
|
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 consolidated financial statements, which have been prepared in
accordance with U.S. generally accepted accounting principles. 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 differ significantly from our
estimates under other assumptions and conditions.
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
SEC. These policies, which have been reviewed with our Audit Committee, are
discussed in greater detail below.
Revenue
Recognition and Deferred License Fees
Contract
research revenue represents reimbursements by the U.S. government for all or a
portion of the research and development expenses we incur related to our
government contracts. Revenue is recognized proportionally as research and
development expenses are incurred or as defined milestones are achieved. In
order to ascertain the revenue 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 license and royalty payments under certain of our
development and technology evaluation agreements. These payments are classified
as deferred revenue and deferred license fees, which represents the cash
received and recorded as a liability until such time revenue can be recognized.
Payments that are not creditable to a license are recognized as revenue over the
term of the agreement. Payments that are creditable to a license are deferred
until a license agreement is executed or negotiations have ceased and there is
no appreciable likelihood of executing a license agreement with the other party.
Upfront amounts received where a license agreement has not yet been executed are
recorded as a current liability in the consolidated balance sheet. If a license
agreement is executed, these payments would be recorded as revenues over the
expected term of the licensed technology and the associated deferred revenue for
the upfront payment would be classified based on the terms of the license;
otherwise, they will be recorded as revenues at the time negotiations with the
other party show that there is no appreciable likelihood of entering into a
license agreement. If we used different estimates for the expected term of this
licensed technology, reported revenue during the relevant period would differ.
As of December 31, 2007, $10,344,539 was recorded as deferred revenue and
deferred license fees, of which $6,666,667 has been received where a license
agreement has not yet been executed.
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, 2007, we believe that no revision of the
remaining useful lives or write-down of our acquired technology was required for
2007, nor was such a revision needed in 2006 or 2005. The net book value of our
acquired technology was $4,624,416 as of December 31, 2007.
Valuation
of Stock-Based Compensation
We
account for our stock-based compensation (see Notes 2 and 10 of the Notes to
Consolidated Financial Statements) under Statement of Financial Accounting
Standards (SFAS) No. 123(R), Share-Based Payment. We
recognize in the statement of operations the grant-date fair value of stock
options and other equity-based compensation issued to employees. The statement
eliminates the intrinsic value-based method prescribed by Accounting Principles
Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations, that we used prior to
2006. We account for our stock option and warrant grants to
non-employees in exchange for goods or services in accordance with SFAS No.
123(R) and Emerging Issues Task Force 96-18 (EITF 96-18). SFAS No. 123(R) and
EITF 96-18 require that we record an expense 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 recording charge to the statement of operations
required by SFAS No. 123(R). 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, 2007 Compared to Year Ended December 31,
2006
We had a
net loss of $15,975,841 (or $0.47 per diluted share) for the year ended
December 31, 2007, compared to a net loss of $15,186,804 (or $0.49 per
diluted share) for the year ended December 31, 2006. The increase in net
loss was primarily due to:
·
|
a
decrease in revenues of $615,385;
and
|
·
|
an
increase in operating expenses of
$1,866,356.
|
The
increase in operating loss was offset to some extent by an increase of
$1,430,296 in interest income. The decrease in net loss per diluted
share, despite the increase in total net loss, resulted from an increase in the
weighted average number of shares of our common stock outstanding in 2007, as
compared to 2006.
Our
revenues were $11,305,907 for the year ended December 31, 2007, compared to
$11,921,292 for the year ended December 31, 2006. The decrease in revenues
was mainly due to:
·
|
a
decrease in development chemical revenue of
$606,997;
|
·
|
a
decrease in royalty and license revenue of $1,571,808
and
|
·
|
a
decrease in technology development revenue of
$938,976.
|
These
decreases were offset by the following:
·
|
an
increase in contract research revenue of $778,790;
and
|
·
|
an
increase in commercial chemical revenue of
$1,723,606.
|
We earned
$4,600,693 in contract research revenue from the U.S. Government for 2007,
compared to $3,821,903 for 2006. The increase was mainly attributable to
increased work performed under government contracts and the achievement of
milestones as specified within government contracts. We commenced work on 10 new
government contracts during 2007 and completed work on eight government programs
during the year.
We earned
$1,049,854 from our sales of OLED materials for development purposes in 2007,
compared to $1,656,851 in 2006. The decrease was mainly due to decreased volume
of development chemical purchases as a result of an OLED product manufacturer
transitioning from exclusively development chemical purchases in 2006 to
primarily commercial chemical purchases in 2007. We cannot accurately predict
the timing and frequency of development chemical purchases by our customers due
to participants in the OLED industry having differing OLED technology
development and product launch strategies, which are subject to change and
adjustment.
For 2007,
our commercial chemical and royalty and license revenues were $3,599,677 and
$828,371, respectively, compared to $1,876,071 and $2,400,179, respectively, in
2006. The increase in commercial chemical revenue was due to increased purchases
of our proprietary PHOLED materials for use in commercial OLED products,
including by the OLED product manufacturers referred to above. In the fourth
quarter of 2006, we began supplying our proprietary PHOLED materials to Samsung
SDI for use in a commercial active-matrix OLED display product. This activity
continued in 2007, with Samsung SDI being responsible for the vast majority of
our commercial chemical sales for the year. As discussed further
below, in 2007 we also began recognizing royalty and license revenue from
Samsung SDI on account of its sales of commercial OLED products made using our
proprietary PHOLED technology and materials.
In 2007,
we also began supplying our proprietary PHOLED materials to Chi Mei EL and LG
Display, with whom we signed commercial supply agreements during the year. These
agreements are similar to the agreement we had entered into with AU Optronics,
in that we record both commercial chemical and royalty and license revenues from
our sales of materials under the agreements. A small portion of our commercial
chemical and royalty and license revenues for 2007 were from sales of our
materials to Chi Mei EL and LG Display.
For the
first seven months of 2006, we supplied one of our proprietary PHOLED materials
to AU Optronics Corporation for use in a commercial active-matrix OLED
display product. Under our agreement with AU Optronics, we recognized commercial
chemical revenue of $886,676 and royalty and license revenues of $1,773,324 on
account of our sales of this material to AU Optronics. However, those sales
ended when AU Optronics discontinued manufacturing the product for which it
ordered our materials in the third quarter of 2006, and we have not sold any
commercial chemicals to AU Optronics since that time. Commercial chemical and
royalty and license revenues from our material sales to AU Optronics represented
a substantial component of our revenues for 2006.
We cannot
accurately predict how long our material sales to Samsung SDI or other customers
will continue, as they frequently update and alter their product offerings.
Continued sales of our PHOLED materials to these customers will depend on
several factors, including, pricing, availability, continued technical
improvement and competitive product offerings.
Our
royalty and license revenue for 2007 decreased substantially from 2006 due in
large part to the difference in our business agreements with Samsung SDI and AU
Optronics. As previously indicated, under the terms of our agreement with AU
Optronics we recognized royalty and license revenue at the time we sold our
proprietary PHOLED material to AU Optronics. In contrast, under the terms of our
agreement with Samsung SDI, we recognize royalty revenue when Samsung SDI
reports to us the sale of commercial OLED products made using our proprietary
PHOLED technology and materials. This can occur up to six months or more after
the date on which we sell our PHOLED materials to Samsung SDI. For 2007, we
recognized $61,317 in royalty revenue on account of sales of these commercial
OLED products reported to us by Samsung SDI for the first three quarters of the
year. As Samsung SDI’s product sales increase and its production yields improve,
we anticipate our royalty revenue to increase as well. There was no
corresponding royalty revenue reported to us by Samsung SDI for
2006.
Our
royalty and license revenue for 2006 did, however, include license fees received
under our patent license agreement with Samsung SDI, as well as license fees
received under our cross-license agreement executed with DuPont Displays, Inc.
We received upfront payments of license fees in connection with both of these
agreements, and in addition we received an upfront payment of royalties under
the agreement with Samsung SDI. All of these payments have been classified as
deferred. The deferred license fees are being recognized as royalty and license
revenue over the life of our agreement with Samsung SDI, and over 10 years
for our agreement with DuPont Displays. The deferred royalties are being
recognized as royalty and license revenue when sales of commercial OLED products
are reported to us by Samsung SDI.
We
recognized $1,227,312 in technology development revenue for 2007, compared to
$2,166,288 in corresponding revenue for 2006. Technology development revenue for
2007 was derived from one technology development contract that we renewed and
continued working under for the entire year. For 2006, we derived technology
development revenue from this and three other contracts for technology
development and similar services. Although in 2007 we continued working with all
of the companies from which we derived technology development revenue for 2006,
our business arrangements with these companies have changed as the OLED industry
has evolved and our customers have refined their technology development
strategies. For example, we received a non-refundable payment for the
continuation of one of these technology development agreements in the third
quarter of 2006, which payment is creditable against future amounts payable
under a commercial license agreement, if one is executed by a specified date.
Due to this business arrangement, the payment has been recorded as a deferred
license fee rather than technology development revenue. Business changes
such as this one make it difficult for us to predict the amount and timing of
our recognition of future revenues for technology development and similar
services.
We
incurred research and development expenses of $20,909,262 for the year ended
December 31, 2007, compared to $19,562,004 for the year ended
December 31, 2006. The increase was mainly due to:
·
|
an
increase of $1,916,862 attributable to higher operating costs associated
with our Ewing facility;
|
·
|
in
2006, we received a refund from Princeton University for unspent research
and development funds of $1,011,358. No such refund was received in
2007
|
·
|
an
increase of $724,254 in personnel costs due mainly to increased salaries;
and
|
·
|
an
increase of $242,281 relating to the recognition of expenses for stock
issuances to non-employee members of our Scientific Advisory Board, and
for the vesting of shares of restricted stock previously issued to these
individuals.
|
The
increase was offset to some extent by a decrease of $1,673,560 in amounts paid
to PPG Industries under our OLED Materials Supply and Service Agreement, as we
brought a portion of the work previously performed by PPG Industries
in-house.
Included
within research and development expenses are patent defense costs of $315,177
and $507,006 for each of 2007 and 2006, respectively. These costs were
associated with the two European patent opposition matters and a patent
interference matter with Semiconductor Energy Laboratory (SEL) that was
concluded in April 2007, as described in response to Item 3 of this report
(Legal Proceedings). We anticipate that our patent defense costs may increase as
active matrix OLED products using our PHOLED and other OLED technologies and
materials enter the consumer marketplace.
General
and administrative expenses were $9,569,381 for the year ended December 31,
2007, compared to $8,902,462 for the year ended December 31, 2006. The
increase was due mainly to:
·
|
an
increase of $465,243 in personnel costs due to salary increases;
and
|
·
|
an
increase of $153,493 attributable to higher operating costs associated
with our Ewing facility.
|
Royalty
and license expenses were $305,846 for the year ended December 31, 2007,
compared to $687,436 for the year ended December 31, 2006. The decrease was
due to a reduction of $370,998 in royalties owed to Motorola. For 2006, we had a
minimum royalty obligation to Motorola of $500,000. Beginning with
2007, however, we were no longer required to make minimum royalty payments to
Motorola.
Interest
income increased to $3,599,229 for the year ended December 31, 2007,
compared to $2,168,933 for the year ended December 31, 2006. The increase
was mainly attributable to increased cash to invest due to funds received from a
common stock offering that we completed in May 2007, as well as higher rates of
return on investments during of 2007.
During
2007, we sold approximately $7.5 million of our state-related income tax
net operating losses (NOLs) and approximately $263,000 of our research and
development tax credits under the New Jersey Technology Tax Certificate Transfer
Program. In 2007, we received proceeds of $804,980 from our sale of these NOLs
and research and development tax credits, and we recorded these proceeds as an
income tax benefit. During 2006, we sold approximately $7 million of our
state-related income tax NOLs and we received proceeds of
$544,567. We expect to sell a similar quantity of NOLs to New Jersey
under the program in 2008.
Year
Ended December 31, 2006 Compared to Year Ended December 31,
2005
We had a
net loss of $15,186,804 (or $0.49 per diluted share) for the year ended
December 31, 2006, compared to a net loss of $15,801,612 (or $0.56 per
diluted share) for the year ended December 31, 2005. The decrease in net
loss was primarily due to:
·
|
increased
revenues of $1,773,297; and
|
·
|
an
increase of $2,203,209 in operating
expenses.
|
The
decrease in operating loss was offset to some extent by an increase of $749,075
in interest income.
Our
revenues were $11,921,292 for the year ended December 31, 2006, compared to
$10,147,995 for the year ended December 31, 2005. The increase in revenues
was mainly due to:
·
|
an
increase in commercial chemical revenue of
$1,844,676;
|
·
|
an
increase in royalty and license revenue of $2,166,624;
and
|
·
|
an
increase in technology development revenue of
$440,909.
|
The
increase was offset by the following:
·
|
a
decrease in contract research revenue of $832,078;
and
|
·
|
a
decrease in development chemical revenue of
$1,846,834.
|
We earned
$3,821,903 in contract research revenue from the U.S. Government for 2006,
compared to $4,653,981 for 2005. The decrease was mainly attributable to the
level of work performed under government contracts and the achievement of
milestones as specified within government contracts. The number of government
contracts we worked under and the level of effort performed under these
contracts remained essentially constant from 2005 to 2006.
We earned
$1,656,851 from our sales of OLED materials for development purposes in 2006,
compared to $3,503,685 for corresponding sales in 2005. The decrease was mainly
due to a decreased volume of development chemical purchases as a result of an
OLED product manufacturer transitioning from exclusively development chemical
purchases in 2005 to primarily commercial chemical purchases in 2006. We cannot
accurately predict the timing and frequency of development chemical purchases by
our customers due to participants in the OLED industry having differing OLED
technology development and product launch strategies, which are subject to
change and adjustment.
For 2006,
our commercial chemical and our royalty and license revenues were $1,876,071 and
$2,400,179, respectively, compared to $31,395 and $233,555, respectively, for
the corresponding period in 2005. The increase in commercial chemical revenue
was due to purchases of our proprietary PHOLED materials for use in commercial
OLED products by two new customers. In the fourth quarter of 2006, we began
supplying one of our proprietary PHOLED materials to Samsung SDI for use in a
commercial active-matrix OLED display product.
For the
first seven months of 2006, we also supplied one of our proprietary PHOLED
materials to AU Optronics Corporation for use in a commercial active-matrix
OLED display product. Under our agreement with AU Optronics, we recognized
commercial chemical and royalty and license revenues of $2,660,000 on account of
our sales of this material to AU Optronics. However, those sales ended when AU
Optronics discontinued manufacturing the product for which it ordered our
materials in the third quarter of 2006, and we did not sell any commercial
chemicals to AU Optronics after that time. Commercial chemical and royalty
and license revenues from our material sales to AU Optronics represented a
substantial component of our revenues for 2006.
Our
royalty and license revenue for 2006 included license fees received under our
patent license agreement with Samsung SDI, as well as license fees received
under our cross-license agreement executed with DuPont Displays, Inc. We
received upfront payments of license fees in connection with both of these
agreements, and in addition we received an upfront payment of royalties under
the agreement with Samsung SDI. All of these payments have been classified as
deferred license fees and deferred revenue. The deferred license fees are being
recognized as royalty and license revenue over the term of our agreement with
Samsung SDI, and over 10 years for our agreement with DuPont Displays. The
deferred royalties are being recognized as royalty and license revenue when
sales of commercial OLED products are reported to us by Samsung
SDI.
We
recognized $2,166,288 in technology development revenue for 2006, compared to
$1,725,379 in corresponding revenue for 2005. Although the number of technology
development contracts that we were working under did not change between 2005 and
2006, technology development revenues increased due mainly to work performed
under a contract that commenced in the third quarter of 2005. The amount and
timing of our receipt of fees for technology development and similar services is
difficult to predict due to participants in the OLED industry having differing
technology development strategies.
We
incurred research and development expenses of $19,562,004 for the year ended
December 31, 2006, compared to $18,798,024 for the year ended
December 31, 2005. The increase was mainly due to:
·
|
an
increase of $1,661,326 in personnel costs;
and
|
·
|
an
increase of $1,464,059 attributable to higher operating costs associated
with the expansion of our Ewing
facility.
|
The
increase was offset to some extent by the following:
·
|
a
refund from Princeton University for unspent research and development
funds of $1,011,358;
|
·
|
a
decrease of $528,966 in amounts payable to PPG Industries due to the
hiring of certain PPG employees as employees of ours;
and
|
·
|
a
decrease of $563,203 relating to the recognition of expense for stock
issuances to non-employee members of our Scientific Advisory
Board.
|
Included
within research and development expenses are patent defense costs of $507,006
and $97,353 for each of 2006 and 2005, respectively. These costs were associated
with the two European patent opposition matters and a patent interference matter
with Semiconductor Energy Laboratory (SEL) that was concluded in April 2007, as
described in response to Item 3 of this report (Legal
Proceedings).
General
and administrative expenses were $8,902,462 for the year ended December 31,
2006, compared to $7,704,931 for the same period in 2005. The increase was due
mainly to:
·
|
an
increase of $559,359 in personnel costs due to salary increases and the
recognition of stock-based compensation expenses under
SFAS No. 123(R); and
|
·
|
an
increase of $631,422 attributable to higher operating costs associated
with the expansion of our Ewing
facility.
|
Royalty
and license expenses were $687,436 for the year ended December 31, 2006,
compared to $610,098 for the year ended December 31, 2005. The increase was
due to $67,338 in additional royalties due to Princeton University.
Interest
income increased to $2,168,933 for the year ended December 31, 2006,
compared to $1,419,858 for the year ended December 31, 2005. This was the
result of higher rates of return on investments during 2006.
During
2006, we sold approximately $7 million of our state-related income tax net
operating losses (NOLs) under the New Jersey Technology Tax Certificate Transfer
Program. In 2006, we received proceeds of $544,567 from the sale of these NOLs
and we recorded these proceeds as an income tax benefit. During 2005, we sold
approximately $5 million of our state-related income tax NOLs and received
proceeds from these sales of $424,207.
Liquidity
and Capital Resources
As of
December 31, 2007, we had cash and cash equivalents of $33,870,696 and
short-term investments of $49,788,961, for a total of $83,659,657. This compares
to cash and cash equivalents of $31,097,533 and investments in certificates of
deposit and other liquid instruments of $18,000,522, for a total of $49,098,055,
as of December 31, 2006. The increase in cash and investments of
$34,561,602 was primarily due to proceeds received from the common stock
offering we completed in May 2007.
Cash used
in operating activities was $11,096,764 for 2007, compared to $4,703,792 for
2006. The increased use of cash was mainly due to a decrease in non-cash
expenses under a development agreement of $2,041,492, a decrease in our accounts
payable and accrued expenses of $2,061,519, and reduced receipts of deferred
license fees and other deferred revenues of $1,659,842. The decrease in non-cash
expenses related mainly to a change in our relationship with PPG Industries.
In 2006, we transferred development work, which was previously conducted
at PPG, to our own in-house laboratories. We had been paying for that work
by issuing shares of our common stock. Once the work was transferred to
us, those non-cash expenses were eliminated, and the overall amounts payable to
PPG Industries were reduced. The decrease in our accounts payable and
accrued expenses related primarily to our agreement with Motorola. At
December 31, 2006, we had $1 million in royalties due to Motorola, based on a
minimum royalty obligation under our agreement. This amount was included
in accounts payable and accrued expenses for 2006. No such minimum royalty
was due at December 31, 2007.
Cash used
in investing activities was $32,670,039 for 2007, compared to $1,134,692 for the
year ended 2006. The increase was mainly due to increased investment
purchases using the funds we received from the common stock offering we
completed in May 2007.
Cash
provided by financing activities was $46,539,966 for 2007, as compared to
$6,281,768 for 2006. The increase was mainly due to the completion in
May 2007 of our public offering of 2,800,000 shares of our common stock at a
price of $14.50 per share. The offering resulted in proceeds to us of
$38,000,023, net of $2,599,977 in underwriting discounts and commissions and
other costs associated with completion of the offering.
Working
capital increased to $73,979,638 as of December 31, 2007, from $37,422,740
as of December 31, 2006. Again, this increase was mainly due to proceeds
from the common stock offering we completed in May 2007.
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 defense of our patents and patent applications), that we have
sufficient cash, cash equivalents and short-term investments to meet our
obligations through at least 2009.
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. It
should be noted, however, that additional funding may be required in the future
for research, development and commercialization of our OLED technologies and
materials, to obtain, maintain and enforce patents respecting these technologies
and materials, and for working capital and other purposes, the timing and amount
of which are difficult to ascertain. 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, 2007, we had the following contractual
commitments:
|
|
Payments
due by period
|
|
Contractual
Obligations
|
|
Total
|
|
|
Less
than 1 year
|
|
|
1-3
years
|
|
|
3-5
years
|
|
|
More
than 5 years
|
|
Sponsored
research obligation
|
|
|
3,923,258 |
|
|
|
2,942,444 |
|
|
|
980,814 |
|
|
|
— |
|
|
|
— |
|
Minimum
royalty obligation
|
|
|
500,000 |
|
|
|
100,000 |
|
|
|
200,000 |
|
|
|
200,000 |
|
|
$100,000/year(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
(2)
|
|
$ |
4,423,258 |
|
|
$ |
3,042,444 |
|
|
$ |
1,180,814 |
|
|
$ |
200,000 |
|
|
$100,000/year(1)
|
|
(1)
|
Under
our Amended License Agreement with Princeton University, the University of
Southern California and the University of Michigan, we are obligated to
pay minimum royalties of $100,000 per year until such time as the
agreement is no longer in effect. The agreement has no scheduled
expiration date.
|
(2)
|
See
Note 12 to the Consolidated Financial Statements for discussion of
obligations upon termination of employment of executive officers as a
result of a change in control of the
Company.
|
Off-Balance
Sheet Arrangements
Recently
Issued Accounting Pronouncements
Recently
issued accounting pronouncements are addressed in Note 2 in the Notes to
Consolidated Financial Statements. We do not expect that the adoption of these
recently issued accounting pronouncements will have a material impact on our
consolidated financial statements or results of operations.
ITEM
7A. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not
utilize financial instruments for trading purposes and hold no derivative
financial instruments, other financial instruments or derivative commodity
instruments that could expose us to significant market risk. As such, a change
in interest rates of 1 percentage point would not have a material impact on our
operating results and cash flows. Our primary market risk exposure with regard
to financial instruments is to changes in interest rates, which would impact
interest income earned on investments.
ITEM
8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
Our
Consolidated Financial Statements and the relevant notes to those statements are
attached to this report beginning on page F-1.
ITEM
9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
|
ITEM
9A.
|
CONTROLS
AND PROCEDURES
|
Evaluation
of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive
Officer and Chief Financial Officer, evaluated the effectiveness of our
disclosure controls and procedures as of December 31, 2007. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures, as of the end of the period covered
by this report, are functioning effectively to provide reasonable assurance that
the information required to be disclosed by us in reports filed or submitted
under the Securities Exchange Act of 1934, as amended, is (i) recorded,
processed, summarized and reported within the time periods specified in the
SEC’s rules and forms, and (ii) accumulated and communicated to our management,
including the Chief Executive Officer and Chief Financial Officer, as
appropriate to allow timely decisions regarding disclosure. However, a controls
system, no matter how well designed and operated, cannot provide absolute
assurance that the objectives of the controls system are met, and no evaluation
of controls can provide absolute assurance that all control issues and instances
of fraud, if any, within a company have been detected.
Management’s
Report on Internal Control over Financial Reporting and Attestation Report of
Public Accounting Firm
The
report of management on our internal control over financial reporting and the
associated attestation report of our independent registered public accounting
firm are set forth in Item 8 of this report.
Changes
in Internal Control over Financial Reporting
ITEM
9B.
|
OTHER
INFORMATION
|
None.
PART
III
Information
with respect to this item is set forth in our definitive Proxy Statement for the
2008 Annual Meeting of Shareholders, which is to be filed with the Securities
and Exchange Commission no later than April 29, 2008, (our “Proxy
Statement”), and which is incorporated herein by reference. Information
regarding our executive officers is included at the end of Part I of this
report.
ITEM
11. EXECUTIVE
COMPENSATION
Information
with respect to this item is set forth in our Proxy Statement, and is
incorporated herein by reference.
ITEM
12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
|
Information
with respect to this item is set forth in our Proxy Statement, and is
incorporated herein by reference.
ITEM
13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Information
with respect to this item is set forth in our Proxy Statement, and is
incorporated herein by reference.
ITEM
14. PRINCIPAL
ACCOUNTANT FEES AND SERVICES
Information
with respect to this item is set forth in our Proxy Statement, and is
incorporated herein by reference.
PART
IV
(a) The
following documents are filed as part of this report:
(1)
|
Financial
Statements:
|
Management’s
Report on Internal Control Over Financial
Reporting…………………………………..……………………………………………………………………..
|
F-2
|
|
|
|
|
Report
of Independent Registered Public Accounting
Firm…………………………………………………..…………………………….…………………………………..
|
F-3
|
|
|
|
|
Report
of Independent Registered Public Accounting
Firm…………………………………………….…………………………………………..…………………………..
|
F-4
|
|
|
|
|
Consolidated
Balance
Sheets…………………………………..……………………………………………………………......……………………………..…………………..
|
F-5
|
|
|
|
|
Consolidated
Statements of
Operations…………………………………..………………………………………………………………………....……………………..……..
|
F-6
|
|
|
|
|
Consolidated
Statements of Shareholders’ Equity and Comprehensive
Loss…………………………..………………………………………......…………….…………..
|
F-7
|
|
|
|
|
Consolidated
Statements of Cash
Flows…………………………………..…………………………….……………………………………...…………………….…………..
|
F-9
|
|
|
|
|
Notes
to Consolidated Financial
Statements…………………………………..………………………...………………………………………...……………………………..
|
F-10
|
|
(2) Financial
Statement Schedules:
None.
(3) Exhibits:
The
following is a list of the exhibits filed as part of this report. Where so
indicated by footnote, exhibits that were previously filed are incorporated by
reference. For exhibits incorporated by reference, the location of the exhibit
in the previous filing is indicated parenthetically, together with a reference
to the filing indicated by footnote.
Exhibit
Number Description
3.1
|
Amended
and Restated Articles of Incorporation of the registrant(1)
|
3.2
|
Amendment
to Amended and Restated Articles of Incorporation of the registrant(2)
|
3.3
|
Bylaws
of the registrant(1)
|
10.1#
|
Warrant
Agreement between the registrant and Steven V. Abramson, dated as of
April 2, 1998(3)
|
10.2#
|
Warrant
Agreement between the registrant and Sidney D. Rosenblatt, dated as of
April 2, 1998(3)
|
10.3#
|
Warrant
Agreement between the registrant and Julia J. Brown, dated as of
April 18, 2000(4)
|
10.4#
|
Amendment
No. 1 to Warrant Agreement between the registrant and Julia J. Brown,
dated as of April 18, 2000(1)
|
10.5#
|
Change
in Control Agreement between the registrant and Sherwin I. Seligsohn,
dated as of April 28, 2003(5)
|
10.6#
|
Change
in Control Agreement between the registrant and Steven V. Abramson, dated
as of April 28, 2003(5)
|
10.7#
|
Change
in Control Agreement between the registrant and Sidney D. Rosenblatt,
dated as of April 28, 2003(5)
|
10.8#
|
Change
in Control Agreement between the registrant and Julia J. Brown, dated as
of April 28, 2003(5)
|
10.9#
|
Non-Competition
and Non-Solicitation Agreement between the registrant and Sherwin I.
Seligsohn, dated as of February 23, 2007(6)
|
10.10#
|
Non-Competition
and Non-Solicitation Agreement between the registrant and Steven V.
Abramson, dated as of January 26, 2007(6)
|
10.11#
|
Non-Competition
and Non-Solicitation Agreement between the registrant and Sidney D.
Rosenblatt, dated as of February 7, 2007(6)
|
10.12#
|
Non-Competition
and Non-Solicitation Agreement between the registrant and Julia J. Brown,
dated as of February 5, 2007(6)
|
10.13#
|
Executive
Performance Compensation Program, dated as of April 20, 2004(3)
|
10.14
|
Equity
Compensation Plan, dated as of June 29, 2006(7)
|
10.15
|
1997
Research Agreement between the registrant and The Trustees of Princeton
University, dated as of August 1, 1997(8)
|
10.16
|
Amendment
#1 to the 1997 Research Agreement between the registrant and the Trustees
of Princeton University, dated as of November 14, 2000(9)
|
10.17
|
Amendment
#2 to the 1997 Research Agreement between the registrant and the Trustees
of Princeton University, dated as of April 11, 2002(9)
|
10.18
|
Sponsored
Research Agreement between the registrant and the University of Southern
California, dated as of May 1, 2006(10)
|
10.19
|
1997
Amended License Agreement among the registrant, The Trustees of Princeton
University and the University of Southern California, dated as of
October 9, 1997(8)
|
10.20
|
Amendment
#1 to the Amended License Agreement among the registrant, the Trustees of
Princeton University and the University of Southern California, dated as
of August 7, 2003(9)
|
10.21
|
Amendment
#2 to the Amended License Agreement among the registrant, the Trustees of
Princeton University, the University of Southern California and the
Regents of the University of Michigan, dated as of January 1,
2006(10)
|
10.22
|
Termination,
Amendment and License Agreement by and among the registrant, PD-LD, Inc.,
Dr. Vladimir S. Ban, and The Trustees of Princeton University, dated as of
July 19, 2000(11)
|
10.23
|
Letter
of Clarification of UDC/GPEC Research and License Arrangements between the
registrant and Global Photonic Energy Corporation, dated as of
June 4, 2004(6)
|
10.24+
|
License
Agreement between the registrant and Motorola, Inc., dated as of
September 29, 2000(11)
|
10.25+
|
OLED
Materials Supply and Service Agreement between the registrant and PPG
Industries, Inc., dated as of July 29, 2005(12)
|
10.26+
|
OLED
Patent License Agreement between the registrant and Samsung SDI Co., Ltd.,
dated as of April 19, 2005(13)
|
10.27+
|
OLED
Supplemental License Agreement between the registrant and Samsung SDI Co.,
Ltd., dated as of April 19, 2005(13)
|
10.28+
|
Commercial
Supply Agreement between the registrant and AU Optronics Corporation,
dated as of January 1, 2006(14)
|
10.29+
|
Settlement
and License Agreement between the registrant and Seiko Epson Corporation,
dated as of July 31, 2006(15)
|
10.30+
|
Commercial
Supply Agreement between the registrant and Chi Mei EL Corporation, dated
as of April 5, 2007(16)
|
10.31+
|
Commercial
Supply Agreement between the registrant and LG.Philips LCD Co., Ltd. (now
known as LG Display), dated as of May 23, 2007(16)
|
21*
|
Subsidiaries
of the registrant
|
23.1*
|
Consent
of KPMG LLP
|
31.1*
|
Certifications
of Steven V. Abramson, 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 Steven V. Abramson, 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.)
|
Explanation
of footnotes to listing of exhibits:
* Filed
herewith.
** Furnished
herewith.
# Management
contract or compensatory plan or arrangement.
|
+
|
Confidential
treatment has been accorded to certain portions of this exhibit pursuant
to Rule 406 under the Securities Act of 1933, as amended, or Rule 24b-2
under the Securities Exchange Act of 1934, as
amended.
|
(1)
|
Filed
as an Exhibit to the Annual Report on Form 10-K for the year ended
December 31, 2003, filed with the SEC on March 1,
2004.
|
(2)
|
Filed
as an Exhibit to a Current Report on Form 8-K, filed with the SEC on
December 21, 2007.
|
(3)
|
Filed
as an Exhibit to the Annual Report on Form 10-K for the year ended
December 31, 2004, filed with the SEC on March 14,
2001.
|
(4)
|
Filed
as an Exhibit to the Annual Report on Form 10-K for the year ended
December 31, 2000, filed with the SEC on March 29,
2001.
|
(5)
|
Filed
as an Exhibit to the Quarterly Report on Form 10-Q for the quarter ended
March 31, 2003, filed with the SEC on May 13,
2003.
|
(6)
|
Filed
as an Exhibit to the Annual Report on Form 10-K for the year ended
December 31, 2006, filed with the SEC on March 15,
2007.
|
(7)
|
Filed
as an Exhibit to the Definitive Proxy Statement for the 2006 Annual
Meeting of Shareholders, filed with the SEC on April 27,
2006.
|
(8)
|
Filed
as an Exhibit to the Annual Report on Form 10K-SB for the year ended
December 31, 1997, filed with the SEC on March 31,
1998.
|
(9)
|
Filed
as an Exhibit to the Quarterly Report on Form 10-Q for the quarter ended
September 30, 2003, filed with the SEC on November 10,
2003.
|
(10)
|
Filed
as an Exhibit to the Quarterly Report on Form 10-Q for the quarter ended
June 30, 2006, filed with the SEC on August 9,
2006.
|
(11)
|
Filed
as an Exhibit to the amended Quarterly Report on Form 10-Q for the quarter
ended September 30, 2000, filed with the SEC on November 20,
2001.
|
(12)
|
Filed
as an Exhibit to the Quarterly Report on Form 10-Q for the quarter ended
September 30, 2005, filed with the SEC on November 7,
2005.
|
(13)
|
Filed
as an Exhibit to the Quarterly Report on Form 10-Q for the quarter ended
June 30, 2005, filed with the SEC on August 9,
2005.
|
(14)
|
Filed
as an Exhibit to the Quarterly Report on Form 10-Q for the quarter ended
March 31, 2006, filed with the SEC on May 10,
2006.
|
(15)
|
Filed
as an Exhibit to the Quarterly Report on Form 10-Q for the quarter ended
September 30, 2006, filed with the SEC on November 6,
2006.
|
(16)
|
Filed
as an Exhibit to the Quarterly Report on Form 10-Q for the quarter ended
June 30, 2007, filed with the SEC on August 9,
2007.
|
Note: Any
of the exhibits listed in the foregoing index not included with this report may
be obtained, without charge, by writing to Mr. Sidney D. Rosenblatt, Corporate
Secretary, Universal Display Corporation, 375 Phillips Boulevard, Ewing, New
Jersey 08618.
(b) The
exhibits required to be filed by us with this report are listed
above.
(c) The
consolidated financial statement schedules required to be filed by us with this
report are listed above.
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized:
UNIVERSAL
DISPLAY CORPORATION
By: /s/ Sidney D.
Rosenblatt
Sidney D. Rosenblatt
Executive Vice President, Chief
Financial Officer,
Treasurer and Secretary
Date: March
13, 2008
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Name
|
Title
|
Date
|
/s/
Sherwin I. Seligsohn
Sherwin I.
Seligsohn
|
Founder
and Chairman of the Board of Directors
|
March
13, 2008
|
/s/ Steven V.
Abramson
Steven
V. Abramson
|
President,
Chief Executive Officer and Director
|
March
13, 2008
|
/s/ Sidney D.
Rosenblatt
Sidney
D. Rosenblatt
|
Executive
Vice President, Chief Financial Officer, Treasurer, Secretary and
Director
|
March
13, 2008
|
/s/ Leonard
Becker
Leonard
Becker
|
Director
|
March
13, 2008
|
/s/ Elizabeth H.
Gemmill
Elizabeth
H. Gemmill
|
Director
|
March
13, 2008
|
/s/ C. Keith
Hartley
C.
Keith Hartley
|
Director
|
March
13, 2008
|
/s/
Lawrence Lacerte
Lawrence
Lacerte
|
Director
|
March
13, 2008
|
UNIVERSAL
DISPLAY CORPORATION AND SUBSIDIARY
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
Consolidated
Financial Statements:
|
|
|
|
|
Management’s
Report on Internal Control Over Financial Reporting
|
|
|
F-2
|
|
Report
of Independent Registered Public Accounting Firm
|
|
|
F-3
|
|
Report
of Independent Registered Public Accounting Firm
|
|
|
F-4
|
|
Consolidated
Balance Sheets
|
|
|
F-5
|
|
Consolidated
Statements of Operations
|
|
|
F-6
|
|
Consolidated
Statements of Shareholders’ Equity and Comprehensive Loss
|
|
|
F-7
|
|
Consolidated
Statements of Cash Flows
|
|
|
F-9
|
|
Notes
to Consolidated Financial Statements
|
|
|
F-10
|
|
MANAGEMENT’S
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting for the Company. Internal control over
financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles. Our system of internal control over financial reporting
includes those policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the Company; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the Company are
being made only in accordance with authorizations of management and directors of
the Company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or disposition of the
Company’s assets that could have a material effect on the financial
statements.
Management
performed an assessment of the effectiveness of our internal control over
financial reporting as of December 31, 2007 based upon criteria in Internal Control — Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO”). Based on this
assessment, management determined that the Company’s internal control over
financial reporting was effective as of December 31, 2007, based on the
criteria in Internal Control-Integrated Framework issued by
COSO.
The
effectiveness of our internal control over financial reporting as of
December 31, 2007, has been attested to by KPMG LLP, an independent
registered public accounting firm, as stated in its report which appears on the
following page.
|
|
|
Steven
V. Abramson
President
and Chief Executive Officer
|
|
Sidney
D. Rosenblatt
Executive
Vice President and Chief Financial
Officer
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board
of Directors and Shareholders
Universal
Display Corporation:
We have
audited Universal Display Corporation’s internal control over financial
reporting as of December 31, 2007, based on criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).
Universal Display Corporation's management is responsible for maintaining
effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting. Our
responsibility is to express an opinion on the Company’s internal control over
financial reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audit also included performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A
company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal
control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
In our
opinion, Universal Display Corporation maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2007,
based on criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Universal
Display Corporation as of December 31, 2007 and 2006, and the related
consolidated statements of operations, shareholders’ equity and comprehensive
loss and cash flows for each of the years in the three-year period ended
December 31, 2007, and our report dated March 13, 2008 expressed an
unqualified opinion on those consolidated financial statements.
/s/ KPMG
LLP
Philadelphia,
Pennsylvania
March 13,
2008
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board
of Directors and Shareholders
Universal
Display Corporation:
We have
audited the accompanying consolidated balance sheets of Universal Display
Corporation and subsidiary (the Company) as of December 31, 2007 and 2006,
and the related consolidated statements of operations, shareholders’ equity and
comprehensive loss and cash flows for each of the years in the three-year period
ended December 31, 2007. These consolidated financial statements are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Universal Display
Corporation and subsidiary as of December 31, 2007 and 2006, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2007, in conformity with
U.S. generally accepted accounting principles.
As
discussed in Notes 2 and 10 to the consolidated financial statements,
effective January 1, 2006, the Company adopted the fair value method of
accounting for stock-based compensation as required by Statement of Financial
Accounting Standards No. 123(R), Share-Based
Payment.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Universal Display Corporation’s internal
control over financial reporting as of December 31, 2007, based on criteria
established in Internal
Control — Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), and our report dated
March 13, 2008 expressed an unqualified opinion on the effectiveness of the
Company’s internal control over financial reporting.
Philadelphia,
Pennsylvania
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
ASSETS
|
CURRENT
ASSETS:
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
33,870,696
|
|
|
$
|
31,097,533
|
|
Short-term
investments
|
|
|
49,788,961
|
|
|
|
17,957,752
|
|
Accounts
receivable
|
|
|
2,395,416
|
|
|
|
2,113,263
|
|
Inventory
|
|
|
41,165
|
|
|
|
30,598
|
|
Other
current assets
|
|
|
673,931
|
|
|
|
606,267
|
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
86,770,169
|
|
|
|
51,805,413
|
|
PROPERTY
AND EQUIPMENT, net
|
|
|
13,525,714
|
|
|
|
14,074,093
|
|
ACQUIRED
TECHNOLOGY, net
|
|
|
4,624,416
|
|
|
|
6,319,488
|
|
INVESTMENTS
|
|
|
—
|
|
|
|
42,770
|
|
OTHER
ASSETS
|
|
|
79,772
|
|
|
|
89,772
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
105,000,071
|
|
|
$
|
72,331,536
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
861,428
|
|
|
$
|
1,808,869
|
|
Accrued
expenses
|
|
|
4,578,147
|
|
|
|
5,245,536
|
|
Deferred
license fees
|
|
|
7,178,268
|
|
|
|
7,178,268
|
|
Deferred
revenue
|
|
|
172,688
|
|
|
|
150,000
|
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
12,790,531
|
|
|
|
14,382,673
|
|
DEFERRED
LICENSE FEES
|
|
|
2,454,900
|
|
|
|
2,966,500
|
|
DEFERRED
REVENUE
|
|
|
538,683
|
|
|
|
600,000
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
15,784,114
|
|
|
|
17,949,173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS’
EQUITY:
|
|
|
|
|
|
|
|
|
Preferred
Stock, par value $0.01 per share, 5,000,000 shares authorized,
200,000 shares of Series A Nonconvertible Preferred Stock issued
and outstanding (liquidation value of $7.50 per share or
$1,500,000)
|
|
|
2,000
|
|
|
|
2,000
|
|
Common
Stock, par value $0.01 per share, 50,000,000 shares authorized,
35,563,201 and 31,385,408 shares issued and outstanding at
December 31, 2007 and 2006, respectively
|
|
|
355,632
|
|
|
|
313,854
|
|
Additional
paid-in-capital
|
|
|
250,240,994
|
|
|
|
199,505,981
|
|
Unrealized
loss on available for sale securities
|
|
|
(50,202
|
)
|
|
|
(82,846
|
)
|
Accumulated
deficit
|
|
|
(161,332,467
|
)
|
|
|
(145,356,626
|
)
|
|
|
|
|
|
|
|
|
|
Total
shareholders’ equity
|
|
|
89,215,957
|
|
|
|
54,382,363
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
105,000,071
|
|
|
$
|
72,331,536
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
UNIVERSAL
DISPLAY CORPORATION AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
REVENUE:
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract
research revenue
|
|
$
|
4,600,693
|
|
|
$
|
3,821,903
|
|
|
$
|
4,653,981
|
|
Development
chemical revenue
|
|
|
1,049,854
|
|
|
|
1,656,851
|
|
|
|
3,503,685
|
|
Commercial
chemical revenue
|
|
|
3,599,677
|
|
|
|
1,876,071
|
|
|
|
31,395
|
|
Royalty
and license revenue
|
|
|
828,371
|
|
|
|
2,400,179
|
|
|
|
233,555
|
|
Technology
development revenue
|
|
|
1,227,312
|
|
|
|
2,166,288
|
|
|
|
1,725,379
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenue
|
|
|
11,305,907
|
|
|
|
11,921,292
|
|
|
|
10,147,995
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of chemicals sold
|
|
|
893,276
|
|
|
|
659,507
|
|
|
|
495,147
|
|
Research
and development
|
|
|
20,909,262
|
|
|
|
19,562,004
|
|
|
|
18,798,024
|
|
General
and administrative
|
|
|
9,569,381
|
|
|
|
8,902,462
|
|
|
|
7,704,931
|
|
Royalty
and license expense
|
|
|
305,846
|
|
|
|
687,436
|
|
|
|
610,098
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
31,677,765
|
|
|
|
29,811,409
|
|
|
|
27,608,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
|
(20,371,858
|
)
|
|
|
(17,890,117
|
)
|
|
|
(17,460,205
|
)
|
INTEREST
INCOME
|
|
|
3,599,229
|
|
|
|
2,168,933
|
|
|
|
1,419,858
|
|
INTEREST
EXPENSE
|
|
|
(8,192
|
)
|
|
|
(10,187
|
)
|
|
|
(185,472
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS
BEFORE INCOME TAX BENEFIT
|
|
|
(16,780,821
|
)
|
|
|
(15,731,371
|
)
|
|
|
(16,225,819
|
)
|
INCOME
TAX BENEFIT
|
|
|
804,980
|
|
|
|
544,567
|
|
|
|
424,207
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
LOSS
|
|
|
(15,975,841
|
)
|
|
|
(15,186,804
|
)
|
|
|
(15,801,612
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC
AND DILUTED NET LOSS PER COMMON SHARE
|
|
$
|
(0.47
|
)
|
|
$
|
(0.49
|
)
|
|
$
|
(0.56
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE SHARES USED IN COMPUTING BASIC AND DILUTED NET LOSS PER
COMMON SHARE
|
|
|
33,759,581
|
|
|
|
30,855,297
|
|
|
|
28,462,925
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE LOSS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A
|
|
|
|
|
|
|
|
|
Nonconvertible
|
|
|
|
|
Additional
|
|
|
|
Preferred
Stock
|
|
Common
Stock
|
|
|
Paid-in
|
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
|
Capital
|
|
|
|
|
|
|
|
BALANCE,
DECEMBER 31, 2004
|
|
|
200,000
|
|
$
|
2,000
|
|
27,903,385
|
|
$
|
279,034
|
|
$
|
173,372,344
|
|
Exercise
of common stock options and warrants
|
|
|
—
|
|
|
—
|
|
1,029,710
|
|
|
10,297
|
|
|
8,413,361
|
|
Stock-based
employee compensation
|
|
|
—
|
|
|
—
|
|
88,270
|
|
|
883
|
|
|
725,532
|
|
Stock-based
non-employee compensation
|
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
(4,225
|
)
|
Issuance
of common stock to Board of Directors and Scientific Advisory
Board
|
|
|
—
|
|
|
—
|
|
48,000
|
|
|
480
|
|
|
725,524
|
|
Issuance
of common stock, options and warrants in connection with the development
agreements
|
|
|
—
|
|
|
—
|
|
476,106
|
|
|
4,761
|
|
|
4,376,871
|
|
Amortization
of deferred compensation
|
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
Unrealized
loss on available-for-sale securities
|
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
Net
loss
|
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
loss
|
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE,
DECEMBER 31, 2005
|
|
|
200,000
|
|
|
2,000
|
|
29,545,471
|
|
|
295,455
|
|
|
187,609,407
|
|
Exercise
of common stock options and warrants
|
|
|
—
|
|
|
—
|
|
1,432,655
|
|
|
14,326
|
|
|
6,267,442
|
|
Stock-based
employee compensation
|
|
|
—
|
|
|
—
|
|
123,922
|
|
|
1,239
|
|
|
1,720,481
|
|
Stock-based
non-employee compensation
|
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
105,011
|
|
Issuance
of common stock to Board of Directors and Scientific Advisory
Board
|
|
|
—
|
|
|
—
|
|
73,766
|
|
|
738
|
|
|
837,062
|
|
Issuance
of common stock, options and warrants in connection with the development
agreements
|
|
|
—
|
|
|
—
|
|
209,594
|
|
|
2,096
|
|
|
2,966,578
|
|
Unrealized
gain on available-for-sale securities
|
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
Net
loss
|
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
loss
|
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE,
DECEMBER 31, 2006
|
|
|
200,000
|
|
|
2,000
|
|
31,385,408
|
|
|
313,854
|
|
|
199,505,981
|
|
Issuance
of common stock through a public offering, net of expenses of
$2,599,977
|
|
|
—
|
|
|
—
|
|
2,800,000
|
|
|
28,000
|
|
|
37,972,023
|
|
Exercise
of common stock options and warrants
|
|
|
—
|
|
|
—
|
|
1,169,648
|
|
|
11,696
|
|
|
8,528,247
|
|
Stock-based
employee compensation
|
|
|
—
|
|
|
—
|
|
70,238
|
|
|
703
|
|
|
2,049,554
|
|
Stock-based
non-employee compensation
|
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
23,336
|
|
Issuance
of common stock to Board of Directors and Scientific Advisory
Board
|
|
|
—
|
|
|
—
|
|
37,796
|
|
|
378
|
|
|
714,364
|
|
Issuance
of common stock and options in connection with the development
and license agreements
|
|
|
—
|
|
|
—
|
|
100,111
|
|
|
1,001
|
|
|
1,447,489
|
|
Unrealized
gain on available-for-sale securities
|
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
Net
loss
|
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
loss
|
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE,
DECEMBER 31, 2007
|
|
|
200,000
|
|
$
|
2,000
|
|
35,563,201
|
|
$
|
355,632
|
|
$
|
250,240,994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
(Continued)
UNIVERSAL
DISPLAY CORPORATION AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY AND
COMPREHENSIVE
LOSS — (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
Loss on
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
Available
-for-
|
|
|
Accumulated
|
|
|
|
|
|
|
Compensation
|
|
|
Sale
Securities
|
|
|
Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE,
DECEMBER 31, 2004
|
|
$ |
(17,446 |
) |
|
$ |
(79,837 |
) |
|
$ |
(114,368,210 |
) |
|
$ |
59,187,885 |
|
Exercise
of common stock options and warrants
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
8,423,658 |
|
Stock-based
employee compensation
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
726,415 |
|
Stock-based
non-employee compensation
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(4,225 |
)
|
Issuance
of common stock to Board of Directors and Scientific Advisory
Board
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
726,004 |
|
Issuance
of common stock, options and warrants in connection with
the development agreements
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
4,381,632 |
|
Amortization
of deferred compensation
|
|
|
17,446 |
|
|
|
— |
|
|
|
— |
|
|
|
17,446 |
|
Unrealized
loss on available-for-sale securities
|
|
|
— |
|
|
|
(40,740
|
) |
|
|
— |
|
|
|
(40,740 |
) |
Net
loss
|
|
|
— |
|
|
|
— |
|
|
|
(15,801,612
|
) |
|
|
(15,801,612 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
loss
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(15,842,352 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE,
DECEMBER 31, 2005
|
|
|
— |
|
|
|
(120,577
|
) |
|
|
(130,169,822
|
) |
|
|
57,616,463 |
|
Exercise
of common stock options and warrants
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
6,281,768 |
|
Stock-based
employee compensation
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,721,720 |
|
Stock-based
non-employee compensation
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
105,011 |
|
Issuance
of common stock to Board of Directors and Scientific Advisory
Board
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
837,800 |
|
Issuance
of common stock, options and warrants in connection with
the development agreements
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,968,674 |
|
Unrealized
gain on available-for-sale securities
|
|
|
— |
|
|
|
37,731 |
|
|
|
— |
|
|
|
37,731 |
|
Net
loss
|
|
|
— |
|
|
|
— |
|
|
|
(15,186,804
|
) |
|
|
(15,186,804 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
loss
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(15,149,073 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE,
DECEMBER 31, 2006
|
|
|
— |
|
|
|
(82,846
|
) |
|
|
(145,356,626
|
) |
|
|
54,382,363 |
|
Issuance
of common stock through a public offering, net of
expenses
of $2,599,977
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
38,000,023 |
|
Exercise
of common stock options and warrants
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
8,539,943 |
|
Stock-based
employee compensation
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,050,257 |
|
Stock-based
non-employee compensation
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
23,336 |
|
Issuance
of common stock to Board of Directors and Scientific Advisory
Board
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
714,742 |
|
Issuance
of common stock and options in connection with the development
and license agreements
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,448,490 |
|
Unrealized
gain on available-for-sale securities
|
|
|
— |
|
|
|
32,644 |
|
|
|
— |
|
|
|
32,644 |
|
Net
loss
|
|
|
— |
|
|
|
— |
|
|
|
(15,975,841
|
) |
|
|
(15,975,841 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
loss
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(15,943,197 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE,
DECEMBER 31, 2007
|
|
$ |
— |
|
|
$ |
(50,202 |
) |
|
$ |
(161,332,467 |
) |
|
$ |
89,215,957 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(15,975,841
|
)
|
|
$
|
(15,186,804
|
)
|
|
$
|
(15,801,612
|
)
|
Non-cash
charges to statement of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
1,774,236
|
|
|
|
1,828,551
|
|
|
|
1,654,826
|
|
Amortization
of intangibles
|
|
|
1,695,072
|
|
|
|
1,695,072
|
|
|
|
1,695,072
|
|
Amortization
of premium and discount on investments
|
|
|
(311,613
|
)
|
|
|
(158,182
|
)
|
|
|
(112,747
|
)
|
Stock-based
employee compensation
|
|
|
2,733,909
|
|
|
|
2,442,149
|
|
|
|
1,373,196
|
|
Stock-based
non-employee compensation
|
|
|
23,336
|
|
|
|
105,011
|
|
|
|
(4,225
|
)
|
Non-cash
expense under a Development Agreement
|
|
|
926,582
|
|
|
|
2,968,074
|
|
|
|
3,908,666
|
|
Stock-based
compensation to Board of Directors and Scientific Advisory
Board
|
|
|
754,711
|
|
|
|
509,600
|
|
|
|
1,314,202
|
|
(Increase)
decrease in assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(282,153
|
)
|
|
|
(169,164
|
)
|
|
|
644,180
|
|
Inventory
|
|
|
(10,567
|
)
|
|
|
5,833
|
|
|
|
(16,490
|
)
|
Other
current assets
|
|
|
(67,664
|
)
|
|
|
(108,521
|
)
|
|
|
(259,819
|
)
|
Other
assets
|
|
|
10,000
|
|
|
|
10,000
|
|
|
|
5,586
|
|
Increase
(decrease) in liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
|
(1,816,543
|
)
|
|
|
244,976
|
|
|
|
1,252,285
|
|
Deferred
license fees
|
|
|
(511,600
|
)
|
|
|
3,188,401
|
|
|
|
2,089,700
|
|
Deferred
revenue
|
|
|
(38,629
|
)
|
|
|
(2,078,788
|
)
|
|
|
1,912,121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in operating activities
|
|
|
(11,096,764
|
)
|
|
|
(4,703,792
|
)
|
|
|
(345,059
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
of property and equipment
|
|
|
(1,225,857
|
)
|
|
|
(2,349,033
|
)
|
|
|
(5,656,905
|
)
|
Purchases
of investments
|
|
|
(61,336,182
|
)
|
|
|
(24,374,659
|
)
|
|
|
(22,791,027
|
)
|
Proceeds
from sale of investments
|
|
|
29,892,000
|
|
|
|
25,589,000
|
|
|
|
32,393,001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash (used in) provided by investing activities
|
|
|
(32,670,039
|
)
|
|
|
(1,134,692
|
)
|
|
|
3,945,069
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
proceeds from issuance of common stock
|
|
|
38,000,023
|
|
|
|
—
|
|
|
|
—
|
|
Repayment
of loan
|
|
|
—
|
|
|
|
—
|
|
|
|
(4,500,000
|
)
|
Restricted
cash
|
|
|
—
|
|
|
|
—
|
|
|
|
4,200,000
|
|
Proceeds
from the exercise of common stock options and warrants
|
|
|
8,539,943
|
|
|
|
6,281,768
|
|
|
|
8,423,658
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by financing activities
|
|
|
46,539,966
|
|
|
|
6,281,768
|
|
|
|
8,123,658
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCREASE
IN CASH AND CASH EQUIVALENTS
|
|
|
2,773,163
|
|
|
|
443,284
|
|
|
|
11,723,668
|
|
CASH
AND CASH EQUIVALENTS, BEGINNING OF YEAR
|
|
|
31,097,533
|
|
|
|
30,654,249
|
|
|
|
18,930,581
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, END OF YEAR
|
|
$
|
33,870,696
|
|
|
$
|
31,097,533
|
|
|
$
|
30,654,249
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
181,686
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
UNIVERSAL
DISPLAY CORPORATION AND SUBSIDIARY
Universal
Display Corporation (the “Company”) is engaged in the research, development and
commercialization of organic light emitting diode (“OLED”) technologies and
materials for use in flat panel display, solid-state lighting and other product
applications. The Company’s primary business strategy is to develop and license
its proprietary OLED technologies to product manufacturers for use in these
applications. In support of this objective, the Company also develops new OLED
materials and sells those materials to product manufacturers. Through internal
research and development efforts and relationships with entities such as
Princeton University, the University of Southern California (“USC”), the
University of Michigan, Motorola, Inc. and PPG Industries, Inc., the Company has
established a significant portfolio of proprietary OLED technologies and
materials (Notes 3, 5 and 7).
2. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES:
Principles
of Consolidation
The
consolidated financial statements include the accounts of Universal Display
Corporation and its wholly owned subsidiary, UDC, Inc. All intercompany
transactions and accounts have been eliminated.
In
January 2008, the Company also formed a second wholly-owned subsidiary,
Universal Display Corporation Hong Kong, Ltd.
Management’s
Use of Estimates
The
preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
Cash,
Cash Equivalents, Short-Term Investments and Long-Term
Investments
The
Company considers all highly liquid debt instruments purchased with an original
maturity of three months or less to be cash equivalents. The Company classifies
its existing marketable securities as available-for-sale. These securities are
carried at fair market value, with unrealized gains and losses reported in the
consolidated statement of shareholders’ equity and comprehensive loss. Gains or
losses on securities sold are based on the specific identification method.
Investments
at December 31, 2007 and 2006 consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market
Value
|
|
Investment
Classification
|
|
Cost
|
|
|
Gains
|
|
|
(Losses)
|
|
|
Aggregate
Fair
|
|
|
|
December 31,
2007-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
bonds
|
|
$
|
25,486,974
|
|
|
$
|
—
|
|
|
$
|
(22,154
|
)
|
|
$
|
25,464,820
|
|
Certificates
of deposit
|
|
|
14,073,000
|
|
|
|
—
|
|
|
|
(29,108
|
)
|
|
|
14,043,892
|
|
US
Government bonds
|
|
|
9,779,189
|
|
|
|
1,351
|
|
|
|
(291
|
)
|
|
|
9,780,249
|
|
Municipal
bonds
|
|
|
500,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
49,839,163
|
|
|
$
|
1,351
|
|
|
$
|
(51,553
|
)
|
|
$
|
49,788,961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2006-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates
of deposit
|
|
$
|
11,243,000
|
|
|
$
|
—
|
|
|
$
|
(79,070
|
)
|
|
$
|
11,163,930
|
|
US
Government bonds
|
|
|
6,840,368
|
|
|
|
668
|
|
|
|
(4,444
|
)
|
|
|
6,836,592
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
18,083,368
|
|
|
$
|
668
|
|
|
$
|
(83,514
|
)
|
|
$
|
18,000,522
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
Value of Financial Instruments
Cash and
cash equivalents, accounts receivable, other current assets, and accounts
payable are reflected in the accompanying financial statements at fair value due
to the short-term nature of those instruments. Short-term and long-term
investments are recorded at fair market value.
Property
and equipment are stated at cost and depreciated generally on a straight-line
basis over the estimated useful life of 30 years for building,
15 years for building improvements, and three to seven years for office and
lab equipment and furniture and fixtures. Repair and maintenance costs are
charged to expense as incurred. Additions and betterments are
capitalized.
Inventory
consists of chemicals held at the Company’s Ewing, New Jersey facility and is
valued at the lower of cost or market, with cost determined using the specific
identification method.
Acquired
technology consists of license rights and know-how obtained from PD-LD, Inc. and
Motorola, Inc. (Note 5). Acquired technology is amortized on a
straight-line basis over its estimated useful life of
10 years.
Impairment
of Long-Lived Assets
Company
management continually evaluates whether events or changes in circumstances
might indicate that the remaining estimated useful life of long-lived assets may
warrant revision, or that the remaining balance may not be recoverable. When
factors indicate that long-lived assets should be evaluated for possible
impairment, the Company uses an estimate of the related undiscounted cash flows
in measuring whether the long-lived asset should be written down to fair value.
Measurement of the amount of impairment would be based on generally accepted
valuation methodologies, as deemed appropriate. As of December 31, 2007,
Company management believed that no revision to the remaining useful lives or
write-down of the Company’s long-lived assets was required. No such revisions
were required in 2006 or 2005.
Net
Loss Per Common Share
Basic net
loss per common share is computed by dividing the net loss 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 years ended
December 31, 2007, 2006 and 2005, the effects of the combined outstanding
stock options and warrants of 5,172,041, 6,812,601 and 8,395,297, respectively,
were excluded from the calculation of diluted EPS as the impact would have been
anti-dilutive.
Revenue
Recognition and Deferred License Fees
Contract
research revenue represents reimbursements by government entities for all or a
portion of the research and development costs the Company incurs in relation to
its government contracts. Revenues are recognized proportionally as research and
development costs are incurred, or as defined milestones are
achieved.
Development
chemical revenue represents revenues from sales of OLED materials to product
manufacturers for evaluation and development purposes. Revenue is recognized at
the time of shipment and passage of title. The customer does not have the right
to return the materials.
Commercial
chemical revenue represents revenues from sales of OLED materials to
manufacturers for the production of commercial products. This revenue is
recognized at the time of shipment, or at time of delivery and passage of title,
depending upon the contractual agreement between the parties.
The
Company has received non-refundable advance license and royalty payments under
certain development and technology evaluation agreements. Certain of these
payments are creditable against future amounts payable under commercial license
agreements that the parties may subsequently enter into and, as such, are
deferred until such license agreements are executed or negotiations have ceased
and Company management determines that there is no appreciable likelihood of
executing a license agreement with the other party. Revenue would then be
recorded over the expected life of the relevant licensed technology, if there is
an effective license agreement, or at the time Company management determines
that there is no appreciable likelihood of an executable license agreement.
Advanced payments received under technology development and evaluation
agreements that are not creditable against license fees are deferred and
recognized as technology development revenue over the term of the
agreement.
Expenditures
for research and development are charged to operations as incurred. Research and
development expenses consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
Development
and operations in the Company’s facility
|
|
$
|
13,169,527
|
|
|
$
|
11,891,852
|
|
|
$
|
8,967,285
|
|
Patent
application and prosecution expenses
|
|
|
1,932,161
|
|
|
|
1,799,819
|
|
|
|
2,158,598
|
|
Patent
maintenance and defense expenses
|
|
|
616,592
|
|
|
|
611,512
|
|
|
|
171,135
|
|
Costs
incurred to Princeton University and USC under the 2006 and 1997 Research
Agreements (Note 3), net of refunded amounts from Princeton
University
|
|
|
812,221
|
|
|
|
(551,220
|
)
|
|
|
598,796
|
|
PPG
Development and License Agreement (Note 7)
|
|
|
2,181,408
|
|
|
|
3,854,969
|
|
|
|
4,383,935
|
|
Amortization
of intangibles
|
|
|
1,695,072
|
|
|
|
1,695,072
|
|
|
|
1,695,072
|
|
Scientific
Advisory Board compensation
|
|
|
502,281
|
|
|
|
260,000
|
|
|
|
823,203
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
20,909,262
|
|
|
$
|
19,562,004
|
|
|
$
|
18,798,024
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patent
Costs
Costs associated with patent
applications, patent prosecution, patent defense and the maintenance of patents
are charged to expense as incurred. Costs to successfully defend a challenge to
a patent are capitalized to the extent of an evident increase in the value of
the patent. Legal costs which relate to an unsuccessful outcome are charged to
expense.
Statement
of Cash Flow Information
The
following non-cash activities occurred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
Unrealized
gain (loss) on available-for-sale securities
|
|
$
|
32,644
|
|
|
$
|
37,731
|
|
|
$
|
(40,740
|
)
|
Common
stock issued in connection with Development and License Agreements that
were earned in a previous period
|
|
|
521,908
|
|
|
|
22,515
|
|
|
|
495,481
|
|
Common
stock issued to Board of Directors and Scientific Advisory Board that were
earned in a previous period
|
|
|
260,000
|
|
|
|
588,200
|
|
|
|
390,720
|
|
Common
stock issued to employees that were earned in a previous
period
|
|
|
944,115
|
|
|
|
838,854
|
|
|
|
726,414
|
|
Deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax bases of assets and liabilities.
Deferred tax assets or liabilities at the end of each period are determined
using the tax rate expected to be in effect when taxes are actually paid or
recovered. The Company accounts for the sale of its net state operating losses
on a cash basis; therefore, it does not record an income tax benefit until the
cash is received. The Company adopted Financial Accounting Standards Board
(“FASB”) Interpretation No. 48, Accounting for Uncertainty in Income
Taxes, an Interpretation of FASB Statement No. 109 (“FIN 48”) effective
January 1, 2007, and pursuant to its provisions classifies interest and
penalties, if any, as a component of tax expense.
Share-Based
Payment Awards
Effective
January 1, 2006, the Company adopted SFAS No. 123(R) using the
modified prospective method (Note 10). Under this method, share-based
compensation recognized in 2007 and 2006 included: (1) compensation expense
for all share-based payments granted prior to, but not yet vested as of,
January 1, 2006, based on the grant date fair value estimated in accordance
with the original provisions of SFAS 123, and (2) compensation expense for
all share-based payments granted, modified or settled subsequent to
January 1, 2006, based on the grant date fair value.
The
grant-date fair value of stock options are determined using the Black-Scholes
valuation model, which is the same model the Company used previously for valuing
stock options for footnote disclosure purposes. The fair value of share-based
awards is recognized as compensation expense on a straight-line basis over the
requisite service period, net of estimated forfeitures. The Company relies
primarily upon historical experience to estimate expected forfeitures and
recognizes compensation expense on a straight-line basis from the date of the
grant. The Company issues new shares upon exercise or vesting of share-based
awards.
Prior to
the adoption of SFAS No. 123(R), the Company used the intrinsic value
method of accounting for stock-based employee compensation in accordance with
APB Opinion No. 25. Under the intrinsic value method, no compensation
expense was recognized for the Company’s stock options as the exercise price was
equal to the market price of the 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 SFAS No. 123 for the year ended December 31,
2005:
|
|
|
|
|
|
|
Year
Ended
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
|
|
|
|
Net
loss, as reported
|
|
$
|
(15,801,612
|
)
|
Add
stock-based employee compensation expense included in reported net
loss
|
|
|
1,851,296
|
|
Deduct
total stock-based employee compensation expense determined under
fair-value-based method for all awards
|
|
|
(8,459,041
|
)
|
|
|
|
|
|
Pro
forma net loss
|
|
$
|
(22,409,357
|
)
|
|
|
|
|
|
Basic
and diluted net loss per share:
|
|
|
|
|
As
reported
|
|
$
|
(0.56
|
)
|
Pro
forma
|
|
$
|
(0.79
|
)
|
Recent
Accounting Pronouncements
In
June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,
an Interpretation of FASB Statement No. 109 (“FIN 48”).
FIN 48 clarifies the accounting for uncertainty in income taxes by
prescribing a minimum recognition threshold for a tax position taken, or
expected to be taken, in a tax return that is required to be met before being
recognized in the financial statements. FIN 48 also provides guidance on
recognition, measurement, classification, interest and penalties, accounting in
interim periods, disclosure and transition. FIN 48 was adopted by the Company in
2007 and did not have an impact on its consolidated results of
operations and financial position.
In June
2006, the FASB ratified the Emerging Issues Task Force (“EITF”) Issue 06-3,
How Taxes Collected from
Customers and Remitted to Government Authorities Should Be Presented in the
Income Statement (That Is, Gross Versus Net Presentation). This standard
allows companies to present in their statements of operations any taxes assessed
by a governmental authority that are directly imposed on revenue- producing
transactions between a seller and a customer, such as sales, use, value-added
and some excise taxes, on either a gross (included in revenue and costs) or a
net (excluded from revenue) basis. The Company presents these transactions on a
gross basis. The Company adopted EITF 06-3 in 2007 and it did not have an impact
on its consolidated results of operations and financial
position.
In
September 2006, the FASB issued Statement of Financial Accounting Standards
(“SFAS”) No. 157, Fair Value Measurements
(“SFAS 157”). SFAS 157 clarifies the definition of fair value, establishes
a framework for measuring fair value and expands disclosures on fair value
measurement. SFAS 157 is effective for financial statements issued for
fiscal years beginning after November 15, 2007, and will be applied on a
prospective basis. Company management does not expect the adoption of
SFAS 157 to have a material impact on its consolidated financial position,
results of operations and cash flows.
In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities (“SFAS 159”). SFAS 159 permits entities
to measure many financial instruments and certain other items at fair value at
specified election dates. Under SFAS 159, any unrealized holding gains and
losses on items for which the fair value option has been elected are reported in
earnings at each subsequent reporting date. If elected, the fair value option
(1) may be applied instrument by instrument, with a few exceptions, such as
investments otherwise accounted for by the equity method; (2) is
irrevocable (unless a new election date occurs); and (3) is applied only to
entire instruments and not to portions of instruments. SFAS 159 is effective as
of an entity’s first fiscal year that begins after November 15, 2007
(non-financial instruments deferred under SFAS 159 to fiscal years beginning
after November 15, 2008), provided the entity also elects to apply the
provisions of SFAS 157. Company management is currently evaluating the potential
impact of SFAS 159 on its consolidated results of operations and financial
position.
In
June 2007, the FASB issued EITF Issue 07-3, Accounting for Nonrefundable
Advance Payments for Goods or Services Received for Use in Future Research and
Development Activities, which applies to companies involved in research
and development activities that make non-refundable down payments for goods that
will be used or for services that will be performed on future research and
development. EITF Issue 07-3 requires that nonrefundable advance payments for
future research and development activities be deferred and recognized as an
expense as goods are delivered or the related services are performed. EITF Issue
07-3 is effective for financial statements issued for fiscal years beginning
after December 15, 2007, and interim periods within those fiscal years.
Company management does not expect the adoption of EITF Issue 07-3 to have an
impact on its consolidated results of operations and financial
position.
Adjustment
to Prior Year Consolidated Financials Statements
Certain
prior year amounts have been adjusted to conform to the current year
presentation. The adjustment results in an increase in reported cost of
chemicals sold and a reduction in research and development expenses by $302,940
and $385,366 for the years ended December 31, 2006 and 2005,
respectively.
3.
|
RESEARCH
AND LICENSE AGREEMENTS WITH PRINCETON UNIVERSITY, UNIVERSITY OF SOUTHERN
CALIFORNIA AND THE UNIVERSITY OF
MICHIGAN:
|
The
Company has funded OLED technology research at Princeton University
(“Princeton”) and, on a subcontractor basis, at the University of Southern
California (“USC”), under a Research Agreement executed with Princeton in
August 1997 (as amended, the “1997 Research Agreement”). In
April 2002, the 1997 Research Agreement was amended to provide for, among
other things, an additional five-year term, which expired July 31, 2007.
Payments to Princeton under this agreement were charged to research and
development expenses as they became due. The Company paid $3,571,226 to
Princeton under the 1997 Research Agreement. Although the payments were charged
to expense when they became due, the actual work performed by Princeton and USC
did not always equate to the fixed amounts actually paid for each period. In the
third quarter of 2006, Princeton refunded $1,011,358 to the Company for
cumulative amounts overpaid under the 1997 Research Agreement. The Company
recorded the refund as an offset to research and development
expenses.
On
October 9, 1997, the Company, Princeton and USC entered into an Amended
License Agreement under which Princeton and USC granted the Company worldwide,
exclusive license rights, with rights to sublicense, to make, have made, use,
lease and/or sell products and to practice processes based on patent
applications and issued patents arising out of work performed by Princeton and
USC under the 1997 Research Agreement (as amended, the “1997 Amended License
Agreement”). Under this agreement, the Company is required to pay Princeton
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
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 3% of the
revenues received by the Company from these sublicensees. These royalty rates
are subject to renegotiation for products not reasonably conceivable as arising
out of the 1997 Research Agreement if Princeton reasonably determines that the
royalty rates payable with respect to these products are not fair and
competitive. The Company is obligated under the 1997 Amended License Agreement
to pay to Princeton minimum annual royalties. The minimum royalty payment is
$100,000 per year. The Company accrued $163,007, $177,436 and $110,098 of
royalty expense in connection with the agreement for the year ended December 31,
2007, 2006 and 2005, respectively.
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 if 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
January 2006, the Principal Investigator conducting research at Princeton
under the 1997 Research Agreement transferred to the University of Michigan
(“Michigan”). As a result of this transfer, the Company has entered into a new
Sponsored Research Agreement with USC to sponsor OLED technology research at USC
and, on a subcontractor basis, Michigan. This new Research Agreement (the “2006
Research Agreement”) was effective as of May 1, 2006, and has a term of
three years. The 2006 Research Agreement supersedes the 1997 Research Agreement
with respect to all work being performed at USC and Michigan. Under the 2006
Research Agreement, the Company is obligated to pay USC up to $4,936,296 for
work actually performed during the period from May 1, 2006 through
April 30, 2009. Amounts paid to Princeton under the 1997 Research Agreement
offset any amounts the Company was obligated to pay USC under the 2006 Research
Agreement. Payments under the 2006 Research Agreement are made to USC on a
quarterly basis as actual expenses are incurred. For the period from May 1, 2006
through the period ended December 31, 2007, the Company had incurred $1,013,038
in research and development expense under the 2006 Research
Agreement.
In
connection with entering into the 2006 Research Agreement, the Company amended
the 1997 Amended License Agreement to include Michigan as a party to that
agreement effective as of January 1, 2006. Under this amendment, Princeton,
USC and Michigan have 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 patent applications and issued patents arising out
of work performed under the 2006 Research Agreement. The financial terms of the
1997 Amended License Agreement were not impacted by this amendment.
4.
|
PROPERTY
AND EQUIPMENT:
|
Property
and equipment consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Land
|
|
$
|
820,000
|
|
|
$
|
820,000
|
|
Building
and improvements
|
|
|
11,126,189
|
|
|
|
11,087,331
|
|
Office
and lab equipment
|
|
|
11,502,305
|
|
|
|
11,286,548
|
|
Furniture
and fixtures
|
|
|
285,573
|
|
|
|
285,573
|
|
Construction-in-progress
|
|
|
1,784,344
|
|
|
|
827,123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,518,411
|
|
|
|
24,306,575
|
|
Less:
Accumulated depreciation
|
|
|
(11,992,697
|
)
|
|
|
(10,232,482
|
)
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
$
|
13,525,714
|
|
|
$
|
14,074,093
|
|
|
|
|
|
|
|
|
|
|
Construction-in-progress
consists of costs incurred for the acquisition of laboratory equipment for the
Company’s facility. Upon commencement of operation of the lab equipment, the
cost associated with such assets will be depreciated over their estimated useful
lives.
Depreciation
expense was $1,774,236, $1,828,551 and $1,654,826 for the years ended
December 31, 2007, 2006 and 2005, respectively.
Acquired
technology consists of acquired license rights for patents and know-how obtained
from PD-LD, Inc. and Motorola, Inc. These intangible assets consist of the
following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
PD-LD,
Inc.
|
|
$
|
1,481,250
|
|
|
$
|
1,481,250
|
|
Motorola,
Inc.
|
|
|
15,469,468
|
|
|
|
15,469,468
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,950,718
|
|
|
|
16,950,718
|
|
Less:
Accumulated amortization
|
|
|
(12,326,302
|
)
|
|
|
(10,631,230
|
)
|
|
|
|
|
|
|
|
|
|
Acquired
technology, net
|
|
$
|
4,624,416
|
|
|
$
|
6,319,488
|
|
|
|
|
|
|
|
|
|
|
On
July 19, 2000, the Company, PD-LD, Inc. (“PD-LD”), its president
Dr. Vladimir Ban and the Trustees of Princeton 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.
On
September 29, 2000, the Company entered into a License Agreement with
Motorola, Inc. (“Motorola”). Pursuant to this agreement, the Company licensed
from Motorola what are now 74 issued U.S. patents and corresponding 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 product
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 (valued at
$6,618,750) and a warrant to purchase 150,000 shares of the Company’s common
stock at $21.60 per share. The 300,000 shares of the Series B
Convertible Preferred Stock issued were converted into shares
of the Company’s common stock on September 29, 2004. 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 warrant expired on September 29, 2007, without having
been exercised.
The
Company also issued a warrant to an unaffiliated third party to acquire 150,000
shares of the Company’s common stock as a finder’s fee in connection with the
Motorola transaction. The original exercise price of this warrant was $21.60 per
share and the exercise period was seven years. 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. Based on
anti-dilution adjustments, the number of warrant shares was adjusted to 191,028
shares, and the exercise price was adjusted to $16.96 per share. The warrant was
exercised on a cashless basis on August 13, 2007.
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) term of 7 years,
(3) 60% volatility and (4) zero expected dividend yield.
In total,
the Company recorded an intangible asset of $15,469,468 for the technology
acquired from Motorola. This includes $25,750 of direct cash transaction costs.
Amortization expense was $1,695,072 for each of the years ended
December 31, 2007, 2006 and 2005. For each of the two succeeding years,
amortization expense will be $1,695,072 and for the third succeeding year it
will be $1,234,272.
The
Company is required under the License Agreement to pay Motorola royalties on
gross revenues earned by the Company from its sales of OLED products or
components, or from its OLED technology licensees, whether or not these revenues
relate specifically to inventions claimed in the patent rights licensed from
Motorola (Note 12). Moreover, the Company was required to pay Motorola
minimum royalties of $250,000 for the two-year period ended on December 31,
2002, $500,000 for the two-year period ended on December 31, 2004, and
$1,000,000 for the two-year period ended on December 31,
2006. All royalty payments were made, at the Company’s discretion, in 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 was 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.
For the
two-year period ended on December 31, 2006, the Company issued to Motorola
37,075 shares of the Company’s common stock, valued at $499,993, and paid
Motorola $500,007 in cash to satisfy the minimum royalty obligation of
$1,000,000. The Company is no longer subject to a minimum royalty
obligation under this agreement and for the year ended December 31, 2007, the
Company recorded royalty expense of $132,839.
Accrued
expenses consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Compensation
|
|
$
|
3,087,650
|
|
|
$
|
2,876,897
|
|
Minimum
royalties
|
|
|
295,846
|
|
|
|
1,177,436
|
|
Consulting
|
|
|
299,969
|
|
|
|
260,000
|
|
Professional
fees
|
|
|
432,719
|
|
|
|
324,288
|
|
Subcontracts
|
|
|
90,113
|
|
|
|
153,104
|
|
Research
and development agreements
|
|
|
308,497
|
|
|
|
200,658
|
|
Other
|
|
|
63,353
|
|
|
|
253,153
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,578,147
|
|
|
$
|
5,245,536
|
|
|
|
|
|
|
|
|
|
|
|
|
7.
|
EQUITY
AND CASH COMPENSATION UNDER THE PPG
AGREEMENTS:
|
On
October 1, 2000, the Company entered into a five-year Development and
License Agreement (“Development Agreement”) and a seven-year Supply Agreement
(“Supply Agreement”) with PPG Industries, Inc. (“PPG”). Under the Development
Agreement, a team of PPG scientists and engineers assisted the Company in
developing its proprietary OLED materials and supplied the Company with these
materials for evaluation purposes. Under the Supply Agreement, PPG supplied the
Company with its proprietary OLED materials that were intended for resale to
customers for commercial purposes.
For the
period from inception of the Development Agreement through December 2004, the
Company issued shares of its common stock and warrants to acquire its common
stock to PPG on an annual basis in consideration of the services provided under
the agreement. The consideration to PPG for these services was determined by
reference to an agreed-upon annual budget and was subject to adjustment based on
costs actually incurred for work performed during the budget period. The
specific number of shares of common stock and warrants issued to PPG was
determined based on the average closing price of the Company’s common stock
during a specified period prior to the start of the budget period. In January
2003, the Company and PPG amended the Development Agreement, providing for
additional consideration to PPG for additional services to be provided under
that agreement, which services were paid for in cash. All materials provided by
PPG under the Supply Agreement were also paid for in cash.
Under the
amended Supply Agreement, the Company also compensated PPG on a cost-plus basis
for services and materials provided during each calendar quarter of 2005. The
Company was required to pay for all materials and for some of these services in
cash. Payment for up to 50% of the remaining services was able to be paid, at
the Company’s sole discretion, in cash or shares of common stock, with the
balance payable in all cash. Again, the specific number of shares of common
stock issuable to PPG was determined based on the average closing price for the
Company’s common stock during a specified period prior to the end of the
quarter. If, however, this average closing price was less than $6.00, the
Company was required to compensate PPG in cash.
On
July 29, 2005, the Company entered into an OLED Materials Supply and
Service Agreement with PPG. This Agreement superseded and replaced in their
entireties the amended Development and Supply Agreements effective as of
January 1, 2006, and extended the term of the Company’s existing
relationship with PPG through December 31, 2008. Under the new agreement,
PPG has continued to assist the Company in developing its proprietary OLED
materials and supplying the Company with those materials for evaluation purposes
and for resale to its customers. The financial terms of the new agreement are
substantially similar to those of the amended Development and Supply Agreements,
and include a requirement that the Company pay PPG in a combination of cash and
the Company’s common stock. On January 4, 2008, the term of the OLED
Materials Supply and Service Agreement was extended for an additional three
years, through December 31, 2011.
On
April 19, 2006, the Company issued 1,957 shares of common stock to PPG
based on a final accounting for actual costs incurred by PPG under the
Development Agreement for the year ended December 31, 2005. Accordingly,
the Company accrued $22,515 of additional research and development expense as of
December 31, 2005, based on the fair value of these additional shares as of
the end of 2005.
In 2007,
2006 and 2005, the Company issued to PPG 58,930, 210,639 and 413,314 shares of
the Company’s common stock, respectively, as consideration for services provided
by PPG under the applicable agreement(s). For these shares, the Company recorded
charges of $926,582, $2,619,439 and $3,610,229 to research and development
expense for 2007, 2006 and 2005, respectively. The charges were determined based
on the fair value of the Company’s common stock as of the end of each period.
The Company also recorded $936,322, $886,895 and $475,269 to research and
development expense for the cash portion of the work performed by PPG during
2007, 2006 and 2005, respectively.
Also, in
accordance with the agreements with PPG, the Company is required to reimburse
PPG for its raw materials and conversion costs for all development chemicals
produced on behalf of the Company. The Company recorded $318,504, $0 and $0 in
research and development expenses related to these costs during 2007, 2006 and
2005, respectively. The remainder of these costs is included in cost of
chemicals sold.
For work
performed through the end of 2006, the Company was required under its agreements
with PPG to grant options to purchase shares of the Company’s common stock to
PPG employees performing certain development services for the Company, in a
manner consistent with that for issuing options to its own employees. Subject to
certain contingencies, these options were to vest one year following the date of
grant and were to remain exercisable for up to 90 days after the individual
PPG employee ceased performing development services for the Company. However, in
connection with the conclusion of the development program on December 31,
2006, the exercise periods for these options were extended. In the case of
certain PPG employees who were hired by the Company as
full-time employees in April 2006, the exercise period was extended to run for
so long as they remain employees of the Company, plus an additional period of up
to one year thereafter, just as other Company employees are treated under the
Company’s Equity Compensation Plan. For those PPG employees not hired by the
Company, the exercise period was extended for three years through
December 31, 2009.
On
December 30, 2005 and January 18, 2005, the Company granted to PPG
employees performing development services under the Development Agreement
options to purchase 31,500 and 30,500 shares, respectively, of the
Company’s common stock at exercise prices of $10.51 and $8.14, respectively. As
a result of the Company hiring certain of the PPG employees in April 2006, the
Company accelerated the vesting of 18,500 of the options granted on
December 30, 2005. Accordingly, the Company recorded $225,882 in research
and development costs related to these options in the third quarter of 2006. The
Company also recorded $100,838 in research and development costs for the
remaining 13,000 options during 2006. During 2005, the Company recorded
$275,922, in research and development costs related to these options
granted.
The
Company determined the fair value of the options earned during 2006 and 2005
using the Black-Scholes option-pricing model with the following assumptions:
(1) risk free interest rate of 4.4 and 3.7%, respectively, (2) no
expected dividend yield, (3) contractual life of 3.25 and 10 years,
respectively and (4) expected volatility of 51% and 80%,
respectively.
In lieu
of stock options, and consistent with awards made to the Company’s own
employees, shares of stock were granted to certain PPG employees performing
development services on the Company’s behalf during 2006. On January 9,
2007, the Company issued 1,500 shares of its common stock as a bonus to these
PPG research and development team members for the year ended December 31,
2006. Accordingly, the Company accrued $21,915 as of December 31, 2006 in
research and development costs relating to the issuance. The Company has no
obligation to issue options or shares of stock to any PPG employees in 2007 or
thereafter.
8.
|
SERIES A
NONCONVERTIBLE PREFERRED STOCK:
|
In 1995,
the Company issued 200,000 shares of Series A Nonconvertible Preferred
Stock (“Series A”) to American Biomimetics Corporation (“ABC”) pursuant to
a certain Technology Transfer Agreement between the Company and ABC. The
Series A shares have a liquidation value of $7.50 per share.
Series A shareholders, as a single class, have the right to elect two
members of the Company’s Board of Directors. This right has never been
exercised. Holders of the Series A shares are entitled to one vote per
share on matters which shareholders are generally entitled to vote. The
Series A shareholders are not entitled to any dividends. The Series A
shares were valued at $1.75 per share, which was based upon an independent
appraisal.
Effective
as of each of March 31, 2007, June 30, 2007, September 30, 2007 and
December 31, 2007, the Company issued 5,000 shares of fully vested common stock
to members of its Board of Directors as partial payment for services performed
for the three-month periods ended on such dates. The fair value of the shares
issued was $252,430, which was recorded as a compensation charge in general and
administrative expense for the year ended December 31, 2007.
There are
outstanding warrants to purchase 1,945,941 shares of the Company’s common stock
as of December 31, 2007. These warrants are exercisable at a weighted
average price of $14.03 and expire in 2008 through 2012.
In May
2007, the Company sold 2,800,000 shares of common stock through a public
offering at $14.50 per share. The offering resulted in net proceeds to the
Company of $38,000,023, net of $2,599,977 in associated costs.
On
January 9, 2008 and 2007, the Company issued a total of 75,403 and
84,138 shares of fully vested common stock to employees and members of the
Scientific Advisory Board for services performed in 2007 and 2006, respectively.
The fair value of the shares issued of $1,627,767 and $1,559,283 for employees
and $299,969 and $260,000 for members of the Scientific Advisory Board was
accrued at December 31, 2007 and 2006, respectively. The stock awards were
recorded as a compensation charge in general and administrative expense of
$1,143,792 and $1,135,933, respectively, and research and development expense of
$783,944 and $683,350 in 2007 and 2006, respectively. In 2007, the Company
issued 500 shares to an employee and the $8,750 fair value was charged to
research and development expense.
10.
|
STOCK-BASED
COMPENSATION:
|
In 1995,
the Board of Directors of the Company adopted a Stock Option Plan (the “1995
Plan”), under which options to purchase a maximum of 500,000 shares of the
Company’s common stock were authorized to be granted at prices not less than the
fair market value of the common stock on the date of the grant, as determined by
the Compensation Committee of the Board of Directors. Through December 31,
2007, the Company’s shareholders have approved increases in the number of shares
reserved for issuance under the 1995 Plan to 7,000,000, and have extended the
term of the 1995 Plan through 2015. The 1995 Plan was also amended and restated
in 2003, and is now called the Equity Compensation Plan. The Equity Compensation
Plan provides for the granting of incentive and nonqualified stock options,
shares of common stock, stock appreciation rights and performance units to
employees, directors and consultants of the Company. Stock options are
exercisable over periods determined by the Compensation Committee, but for no
longer than 10 years from the grant date. At December 31, 2007, there
are 1,472,295 shares that remain available to be granted under the Equity
Compensation Plan.
The
following table summarizes the stock option activity during the year ended
December 31, 2007 for all grants under the Equity Compensation
Plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Exercise
|
|
|
|
Options
|
|
|
Price
|
|
|
|
Outstanding
at January 1, 2007
|
|
|
3,743,592
|
|
|
$
|
9.51
|
|
Granted
|
|
|
11,750
|
|
|
|
16.32
|
|
Exercised
|
|
|
(506,742
|
)
|
|
|
7.79
|
|
Forfeited
|
|
|
(20,000
|
)
|
|
|
13.85
|
|
Cancelled
|
|
|
(2,500
|
)
|
|
|
24.38
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2007
|
|
|
3,226,100
|
|
|
|
9.77
|
|
Vested
and expected to vest
|
|
|
3,219,587
|
|
|
|
9.76
|
|
Exercisable
at December 31, 2007
|
|
|
3,174,100
|
|
|
|
9.72
|
|
|
|
|
|
|
|
|
|
|
The
weighted average grant date fair value of options granted in 2007, 2006, and
2005 was $8.65, $10.66 and $7.21, respectively. The fair value of the options
granted was estimated using the Black-Scholes option-pricing model. The
Black-Scholes option-pricing model considers assumptions related to volatility,
risk-free interest rate and dividend yield. Expected volatility was based on the
Company’s historical daily stock price volatility. The risk-free rate was based
on the average U.S. Treasury security yields in the quarter of the grant.
The dividend yield was based on historical information. The expected life was
determined from historical information and management’s estimate. The following
table provides the assumptions used in determining the fair value of the stock
options for the years ended December 31, 2007, 2006, and 2005
respectively:
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
Dividend
yield rate
|
|
0%
|
|
0%
|
|
0%
|
Expected
volatility
|
|
48.1
- 52.5%
|
|
73.4
- 79.9%
|
|
80.0
- 86.3%
|
Risk-free
interest rates
|
|
3.8
- 4.8%
|
|
4.6
- 5.0%
|
|
3.8
- 4.5%
|
Expected
life
|
|
5
years
|
|
7 Years
|
|
7 Years
|
The
following table summarizes the status of unvested options at December 31,
2007 and the changes during the year ended December 31,
2007:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Grant
Date
|
|
|
|
Options
|
|
|
Fair
Value
|
|
|
|
Unvested
options at January 1, 2007
|
|
|
135,000
|
|
|
$
|
9.73
|
|
Granted
|
|
|
11,750
|
|
|
|
8.65
|
|
Vested
|
|
|
(74,750
|
)
|
|
|
9.16
|
|
Forfeited
|
|
|
(20,000
|
)
|
|
|
7.70
|
|
|
|
|
|
|
|
|
|
|
Unvested
options at December 31, 2007
|
|
|
52,000
|
|
|
$
|
9.82
|
|
|
|
|
|
|
|
|
|
|
A
summary of options outstanding and exercisable by price range at
December 31, 2007, is as follows:
|
|
|
Outstanding
|
|
|
Exercisable
|
|
|
|
|
Number
of
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
Number
of
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
|
Average
|
|
|
Weighted-
|
|
|
|
|
|
Options
|
|
|
Average
|
|
|
Weighted-
|
|
|
|
|
|
|
|
Outstanding
|
|
|
Remaining
|
|
|
Average
|
|
|
Aggregate
|
|
|
Outstanding
|
|
|
Remaining
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
|
at
December 31,
|
|
|
Contractual
|
|
|
Exercise
|
|
|
Intrinsic
|
|
|
at
December 31,
|
|
|
Contractual
|
|
|
Exercise
|
|
|
Intrinsic
|
|
|
|
|
2007
|
|
|
Life
(Years)
|
|
|
Price
|
|
|
Value
(A)
|
|
|
2007
|
|
|
Life
(Years)
|
|
|
Price
|
|
|
Value
(A)
|
|
|
|
$
|
3.75 -5.45
|
|
|
|
704,249
|
|
|
|
3.01
|
|
|
$
|
4.75
|
|
|
$
|
11,208,406
|
|
|
|
704,249
|
|
|
|
3.01
|
|
|
$
|
4.75
|
|
|
$
|
11,208,406
|
|
|
5.46
– 8.14
|
|
|
|
460,115
|
|
|
|
6.40
|
|
|
|
7.99
|
|
|
|
5,834,543
|
|
|
|
460,115
|
|
|
|
6.40
|
|
|
|
7.99
|
|
|
|
5,834,543
|
|
|
8.15
– 12.04
|
|
|
|
1,397,528
|
|
|
|
5.17
|
|
|
|
9.71
|
|
|
|
15,319,201
|
|
|
|
1,377,528
|
|
|
|
5.14
|
|
|
|
9.71
|
|
|
|
15,099,721
|
|
|
12.05
– 17.64
|
|
|
|
548,208
|
|
|
|
6.12
|
|
|
|
15.38
|
|
|
|
2,900,144
|
|
|
|
516,208
|
|
|
|
6.01
|
|
|
|
15.41
|
|
|
|
2,713,534
|
|
|
17.65
– 24.38
|
|
|
|
116,000
|
|
|
|
2.32
|
|
|
|
21.47
|
|
|
|
137,160
|
|
|
|
116,000
|
|
|
|
2.32
|
|
|
|
21.47
|
|
|
|
137,160
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3.75
– 24.38
|
|
|
|
3,226,100
|
|
|
|
4.93
|
|
|
$
|
9.77
|
|
|
$
|
35,399,454
|
|
|
|
3,174,100
|
|
|
|
4.89
|
|
|
$
|
9.72
|
|
|
$
|
34,993,364
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A)
|
|
The
difference between the stock option’s exercise price and the closing price
of the common stock at December 31,
2007.
|
The total
intrinsic value of stock awards exercised during the years ended
December 31, 2007 and 2006 was $4,607,227 and $2,403,556, respectively. At
December 31, 2007, there was $447,944 of total unrecognized compensation
cost from stock-based compensation arrangements granted under the Equity
Compensation Plan, which is related to non-vested options. The compensation
expense is expected to be recognized over a weighted-average period of
approximately 1.76 years.
The
Company has issued restricted stock to employees and members of the Scientific
Advisory Board with vesting terms of three years. The fair value is equal to the
market price of the Company’s common stock on the date of grant. Expense for
restricted stock is amortized ratably over the vesting period for the awards
issued to employees and using a graded vesting method for the awards issued to
the Scientific Advisory Board. The following table summarizes the restricted
stock activity:
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted-
Average
Grant-Date
Fair
Value
|
|
|
|
|
|
|
|
|
Unvested,
January 1, 2007
|
|
|
15,000 |
|
|
|
12.48 |
|
Granted
|
|
|
116,394 |
|
|
|
14.59 |
|
Vested
|
|
|
(5,000
|
) |
|
|
12.48 |
|
Cancelled
|
|
|
(2,368
|
) |
|
|
13.68 |
|
|
|
|
|
|
|
|
|
|
Unvested,
December 31, 2007
|
|
|
124,026 |
|
|
$ |
14.44 |
|
|
|
|
|
|
|
|
|
|
For the
year ended December 31, 2007 and 2006, the Company recorded as compensation
charges related to all restricted stock awards a general and administrative
expense of $323,377 and $7,090 and a research and development expense of
$387,986 and $25,224, respectively.
In
addition, on January 9, 2008, the Company granted a total of 87,643 shares of
restricted common stock to employees and members of the Scientific Advisory
Board for services to be rendered. The restricted stock had a fair
value of $1,607,373 on the date of grant and vest over three years from the date
of grant.
Contract
research revenue consists of the following:
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
U.S. Army
|
|
$
|
2,150,274
|
|
|
$
|
1,796,338
|
|
|
$
|
897,887
|
|
Army
Research Laboratory (ARL)
|
|
|
457,264
|
|
|
|
239,357
|
|
|
|
865,445
|
|
Department
of Energy (DoE)
|
|
|
1,993,155
|
|
|
|
1,786,208
|
|
|
|
2,409,442
|
|
Air
Force Research Laboratory (AFRL)
|
|
|
—
|
|
|
|
—
|
|
|
|
481,207
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,600,693
|
|
|
$
|
3,821,903
|
|
|
$
|
4,653,981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12.
|
COMMITMENTS
AND CONTINGENCIES:
|
Through
December 31, 2007, the Company had an operating lease arrangement for
850 square feet of office space in Coeur d’Alene, Idaho. Total rent expense
was $3,300, $10,275 and $78,411 for the years ended December 31, 2007, 2006
and 2005, respectively. The lease was assigned to third party effective as of
January 1, 2008.
Under the
terms of the 1997 Amended License Agreement with Princeton (Note 3), the
Company is required to pay Princeton minimum royalty payments of
$100,000 per year. To the extent that the royalties otherwise payable to
Princeton under this agreement are not sufficient to meet the minimums for the
relevant calendar year, the Company is required to pay Princeton the difference
between the royalties paid and the minimum royalty.
The
Company has agreements with four executive officers which provide for certain
cash and other benefits upon termination of employment of the officer in
connection with a change in control of the Company. The executive is entitled to
a lump-sum cash payment equal to two times the sum of the average annual base
salary and bonus of the officer and immediate vesting of all stock options and
other equity awards that may be outstanding at the date of the change in
control, among other items.
In
June 2006, Patent Interference No. 105,461 was declared by the United
States Patent and Trademark Office (the “USPTO”) between Semiconductor Energy
Laboratory Co., Ltd. (“SEL”), and Princeton and USC (the “Universities”). The
dispute concerned U.S. Patent No. 6,734,457, which had been issued to SEL.
The SEL patent claimed aspects of the Company’s phosphorescent OLED technology
that Company management believes were disclosed and claimed in U.S. Application
Serial No.10/913,211, which the Company exclusively licenses from the
Universities. The Universities sought a ruling by the USPTO that they should be
granted a patent to the claimed invention and that the SEL patent is invalid
because the Universities were first-to-invent and their invention was made prior
to that of SEL. Under the Company’s agreement with the Universities, it was
required to pay all legal costs and fees associated with the interference
proceeding.
An oral
hearing in the matter was held before the Board of Patent Appeals and
Interferences (the “BPAI”) of the USPTO on April 25, 2007. The following
day, the BPAI issued a decision in favor of the Universities. The BPAI decision
confirmed that the Universities were first-to-invent the subject matter of the
interference and that the Universities’ invention is prior art to SEL’s patent.
As a result, all claims of the SEL patent were canceled. SEL did not appeal the
BPAI decision and the proceeding is effectively terminated.
Notice of Opposition to European
Patent No. 0946958
On
December 8, 2006, Cambridge Display Technology, Ltd. (“CDT”), which recently was
acquired by Sumitomo Chemical Company (“Sumitomo”), filed a Notice of Opposition
to European Patent No. 0946958 (the “EP ‘958 patent”). The EP ‘958 patent, which
was issued on March 8, 2006, is a European counterpart patent to U.S. patents
5,844,363, 6,602,540, 6,888,306 and 7,247,073. These patents relate to the
Company’s FOLED technology. They are exclusively licensed to the Company by
Princeton, and under the license agreement the Company is required to pay all
legal costs and fees associated with this proceeding.
The
European Patent Office (the “EPO”) set a date of May 12, 2007 for the Company to
file a response to the facts and arguments presented by CDT in its Notice of
Opposition. The response was timely filed. The opponents then filed their reply
to the Company’s response on December 7, 2007. The Company is still considering
whether to file another response before the oral hearing date is set. At this
stage of the proceeding, Company management cannot make any prediction as to the
probable outcome of this opposition. However, based on an analysis of the
evidence presented to date, Company management continues to believe there is a
substantial likelihood that the patent being challenged will be declared valid,
and that all or a significant portion of its claims will be upheld.
Notices
of Opposition to European Patent No. 1449238
On March
8, 2007, Sumation Company Limited (“Sumation”), a joint venture between Sumitomo
and CDT, filed a first Notice of Opposition to European Patent No. 1449238 (the
“EP ‘238 patent”). The EP ‘238 patent, which was issued on November 2, 2006, is
a European counterpart patent, in part, to U.S. patents 6,830,828, 6,902,830,
7,001,536 and 7,291,406, and to pending U.S. patent application 11/879,379,
filed on July 16, 2007. These patents and this patent application relate to the
Company’s PHOLED technology. They are exclusively licensed to the Company by
Princeton, and under the license agreement the Company is required to pay all
legal costs and fees associated with this proceeding.
Two other
parties filed additional oppositions to the EP ‘238 patent just prior to the
August 2, 2007 expiration date for such filings. On July 24, 2007, Merck Patent
GmbH, of Darmstadt, Germany, filed a second Notice of Opposition to the EP ‘238
patent, and on July 27, 2007, BASF Aktiengesellschaft, of Mannheim, Germany,
filed a third Notice of Opposition to the EP ‘238 patent. Since there
is considerable overlap in the prior art evidence relied upon in each of the
filed oppositions, the EPO is handling them as a single opposition.
The EPO
set a January 6, 2008 due date for the Company to file its response to the
opposition. The Company requested a two-month extension to file this response,
and the Company subsequently filed the response in a timely manner. The Company
is waiting to see whether the other parties in the opposition file any
additional documents, to which the Company intends to respond. At this time,
Company management cannot make any prediction as to the probable outcome of the
opposition. However, based on an analysis of the evidence presented to date,
Company management continues to believe there is a substantial likelihood that
the patent being challenged will be declared valid, and that all or a
significant portion of its claims will be upheld.
13.
|
CONCENTRATION
OF RISK
|
Two
non-government customers accounted for approximately 46%, 38% and 24% of
consolidated revenue for the years ended December 31, 2007, 2006 and 2005,
respectively. Accounts receivable from these customers were $692,576 at
December 31, 2007.
Revenues
from outside of North America represented 57%, 65% and 54% of the consolidated
revenue for the years ended December 31, 2007, 2006 and 2005,
respectively.
All
chemical materials were purchased from one supplier. See Note
7.
The components of income taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
Current
|
|
$
|
(804,980
|
)
|
|
$
|
(544,567
|
)
|
|
$
|
(424,207
|
)
|
Deferred
|
|
|
(6,907,000
|
)
|
|
|
(8,092,992
|
)
|
|
|
(6,601,124
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,711,980
|
)
|
|
|
(8,637,559
|
)
|
|
|
(7,025,331
|
)
|
Increase
in valuation allowance
|
|
|
6,907,000
|
|
|
|
8,092,992
|
|
|
|
6,601,124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(804,980
|
)
|
|
$
|
(544,567
|
)
|
|
$
|
(424,207
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The difference between the Company’s federal statutory income tax rate and its
effective income tax rate is due to state income tax benefits, non-deductible
expenses, general business credits and the increase in the valuation
allowance.
As of
December 31, 2007, the Company had tax loss and credit carry forwards. The
Company’s net operating loss carry forwards differ from the accumulated deficit
principally due to the timing of the recognition of certain
expenses. A portion of the Company’s net operating loss carry
forwards relate to tax deductions from stock-based compensation that would be
accounted for as an increase to additional-paid-in-capital for financial
reporting purposes to the extent such future deductions could be utilized by the
Company. In accordance with the Tax Reform Act of 1986, utilization of the
Company’s net operating loss and general business credit carry forwards could be
subject to limitations because of certain ownership changes. The
following table summarizes Company tax loss and tax credit carry forwards at
December 31, 2007:
|
|
Related
Tax
|
|
|
Deferred
Tax
|
|
|
Expiration
|
|
|
|
Deduction
|
|
|
Asset
|
|
|
Date
|
|
|
|
Loss
carry forwards:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
net operating loss
|
|
$
|
120,738,000
|
|
|
$
|
41,051,000
|
|
|
|
2011
to 2027
|
|
State
net operating loss
|
|
|
87,924,000
|
|
|
|
5,219,000
|
|
|
|
2010
to 2027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
loss carry forwards
|
|
$
|
208,662,000
|
|
|
$
|
46,270,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax
credit carry forwards:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
tax credit
|
|
|
n/a
|
|
|
|
3,259,000
|
|
|
|
2018
to 2027
|
|
State
tax credits
|
|
|
n/a
|
|
|
|
1,004,000
|
|
|
|
2014
to 2022
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
credit carry forwards
|
|
|
n/a
|
|
|
$
|
4,263,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant components of the Company’s deferred tax assets are as
follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
Gross
deferred tax assets:
|
|
|
|
|
|
|
|
|
Net
operating loss carry forwards
|
|
$
|
46,270,000
|
|
|
$
|
36,459,000
|
|
Capitalized
start-up costs
|
|
|
1,961,000
|
|
|
|
3,923,000
|
|
Capitalized
technology license
|
|
|
3,318,000
|
|
|
|
3,092,000
|
|
Stock
options and warrants
|
|
|
589,000
|
|
|
|
2,603,000
|
|
Accruals
and reserves
|
|
|
332,000
|
|
|
|
286,000
|
|
Deferred
revenue
|
|
|
4,132,000
|
|
|
|
4,351,000
|
|
Other
|
|
|
466,000
|
|
|
|
430,000
|
|
Tax
credit carry forward
|
|
|
4,263,000
|
|
|
|
3,280,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61,331,000
|
|
|
|
54,424,000
|
|
Valuation
allowance
|
|
|
(61,331,000
|
)
|
|
|
(54,424,000
|
)
|
|
|
|
|
|
|
|
|
|
Net
deferred tax asset
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
During the years ended December 31, 2007, 2006 and 2005, the Company sold
approximately $7.5 million, $7 million and $5 million, respectively,
of its net state operating losses and $263,000, $0 and $0 of its research and
development tax credits under the New Jersey Technology Tax Certificate Transfer
Program, and received net proceeds of $804,980, $544,567 and $424,207,
respectively, during these years. The Company recorded the proceeds
as an income tax benefit.
A
valuation allowance was established for all of the deferred tax assets because
the Company has incurred substantial operating losses since inception and
expects to incur additional losses in 2008. At this time, Company management has
concluded that these deferred tax assets will not be realized.
The Company adopted FIN 48 effective January 1, 2007. No transition adjustment
was recorded as a result of the adoption of FIN 48 and the Company does not have
any liability recorded for uncertain tax positions as of December 31, 2007.
Company management does not anticipate any material change in the Company’s FIN
48 position in the next twelve months. The Company’s federal income tax returns
for 2004 through 2007 are open tax years and are subject to examination by the
Internal Revenue Service. State tax jurisdictions (Pennsylvania, New Jersey,
Idaho and California) that remain open to examination range from 2002 to
2007.
15.
|
DEFINED
CONTRIBUTION PLAN:
|
The
Company maintains the Universal Display Corporation 401(k) Plan (the “Plan”) in
accordance with the provisions of Section 401(k) of the Internal Revenue
Code (the “Code”). The Plan covers substantially all full-time employees of the
Company. Participants may contribute up to 15% of their total compensation to
the Plan, not to exceed the limit as defined in the Code, with the Company
matching 50% of the participant’s contribution, limited to 6% of the
participant’s total compensation. For the years ended December 31, 2007,
2006 and 2005, the Company contributed $195,697, $164,050 and $149,630 to the
Plan, respectively.
16.
|
QUARTERLY
SUPPLEMENTAL FINANCIAL DATA
(UNAUDITED):
|
Year
ended December 31, 2007:
|
|
Three
Months Ended
|
|
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
|
Total
|
|
|
|
Revenue
|
|
$
|
3,014,630
|
|
|
$
|
2,315,170
|
|
|
$
|
3,077,281
|
|
|
$
|
2,898,826
|
|
|
$
|
11,305,907
|
|
Net
loss
|
|
|
(4,583,801
|
)
|
|
|
(5,175,371
|
)
|
|
|
(2,960,565
|
)
|
|
|
(3,256,104
|
)
|
|
|
(15,975,841
|
)
|
Basic
and diluted loss per share
|
|
|
(0.15
|
)
|
|
|
(0.16
|
)
|
|
|
(0.08
|
)
|
|
|
(0.08
|
)
|
|
|
(0.47
|
)
|
Year
ended December 31, 2006:
|
|
Three
Months Ended
|
|
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
|
Total
|
|
|
|
Revenue
|
|
$
|
3,271,406
|
|
|
$
|
3,009,316
|
|
|
$
|
3,096,288
|
|
|
$
|
2,544,282
|
|
|
$
|
11,921,292
|
|
Net
loss
|
|
|
(3,522,040
|
)
|
|
|
(4,312,651
|
)
|
|
|
(2,943,287
|
)
|
|
|
(4,408,826
|
)
|
|
|
(15,186,804
|
)
|
Basic
and diluted loss per share
|
|
|
(0.12
|
)
|
|
|
(0.14
|
)
|
|
|
(0.09
|
)
|
|
|
(0.14
|
)
|
|
|
(0.49
|
)
|