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UNIVERSAL DISPLAY CORPORATION

(Exact name of registrant as specified in its charter)

Pennsylvania		23-2372688
(State or other jurisdiction of		(I.R.S. Employer Identification No.)
incorporation or organization)
375 Phillips Boulevard
Ewing, New Jersey		08618
(Address of principal executive offices)		(Zip Code)

 

Registrant’s telephone number, including area code: (609) 671-0980

 

     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 þ No o

 

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer o           Accelerated filer þ           Non-accelerated filer o

 

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

 

     As of August 3, 2007, the registrant had outstanding 34,910,246 shares of common stock.

 

 

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UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARY

 

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UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARY

 

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

		Six Months Ended June 30,
		2007				2006
REVENUE:
Contract research revenue		$	2,419,770			$	1,437,590
Development chemical revenue			576,204				972,530
Commercial chemical revenue			1,542,631				734,844
Royalty and license revenue			291,195				1,738,031
Technology development revenue			500,000				1,397,727
Total revenue			5,329,800				6,280,722
OPERATING EXPENSES:
Cost of chemicals sold			446,588				308,810
Research and development			10,997,153				10,231,862
General and administrative			4,921,731				4,232,227
Royalty and license expense			131,593				353,319
Total operating expenses			16,497,065				15,126,218
Operating loss			(11,167,265	)			(8,845,496	)
INTEREST INCOME			1,408,698				1,019,016
INTEREST EXPENSE			(605	)			(8,211	)
NET LOSS		$	(9,759,172	)		$	(7,834,691	)
BASIC AND DILUTED NET LOSS PER COMMON SHARE		$	(0.30	)		$	(0.26	)
WEIGHTED AVERAGE SHARES USED IN COMPUTING BASIC AND DILUTED NET LOSS PER COMMON SHARE			32,338,358				30,508,972

 

The accompanying notes are an integral part of these statements.

 

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UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARY

 

						Unrealized								Market Value
Investment Classification		Cost				Gains				(Losses)				Aggregate Fair
June 30, 2007-
Certificates of deposit		$	12,376,000			$	—			$	(31,847	)		$	12,344,153
US Government bonds			10,512,081				1,073				(13,837	)			10,499,317
		$	22,888,081			$	1,073			$	(45,684	)		$	22,843,470
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

 

4. RESEARCH AND LICENSE AGREEMENTS WITH PRINCETON, USC AND MICHIGAN

 

The Company has funded OLED technology research at Princeton and, on a subcontractor basis, at 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 are charged to research and development expenses as they become due. The Company has 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 $71,581 of royalty expense in connection with the agreement for the six months ended June 30, 2007.

 

The Company also is required under the 1997 Amended License Agreement to use commercially reasonable efforts to bring the licensed OLED technology to market. However, this requirement is deemed satisfied provided the Company performs its obligations under the 1997 Research Agreement and, when that agreement ends, the Company invests a minimum of $800,000 per year in research, development, commercialization or patenting efforts respecting the patent rights licensed to the Company.

 

		June 30,				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			(11,478,766	)			(10,631,230	)
Acquired technology, net		$	5,471,952			$	6,319,488

 

On July 19, 2000, the Company, PD-LD, its president Dr. Vladimir Ban and 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 by Princeton 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. 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. This warrant became exercisable on September 29, 2001, and will remain exercisable until September 29, 2008. The warrant was recorded at a fair market value of $2,206,234 based on the Black-Scholes option-pricing model, and was recorded as a component of the cost of the acquired technology.

 

The Company also issued a warrant to an unaffiliated third party to acquire 150,000 shares of the Company’s common stock as a finder’s fee in connection with the Motorola transaction. This warrant was granted with an exercise price of $21.60 per share, was exercisable immediately and will remain exercisable until September 29, 2007. This warrant was accounted for at its fair value based on the Black-Scholes option pricing model and $2,206,234 was recorded as a component of the cost of the acquired technology. The Company used the following assumptions in the Black-Scholes option pricing model for the 300,000 warrants issued in connection with this transaction: (1) 6.3% risk-free interest rate, (2) expected life of 7 years, (3) 60% volatility and (4) zero expected dividend yield. In addition, the Company incurred $25,750 of direct cash transaction costs that have been included in the cost of the acquired technology. In total, the Company recorded an intangible asset of $15,469,468 for the technology acquired from Motorola.

 

Amortization expense was $847,536 for the six months ended June 30, 2007 and $847,535 for the same period in 2006. For each of the years 2007 through 2009, amortization expense will be $1,695,072 and for 2010 amortization expense will be $1,234,272.

 

 

The Company was required to pay Motorola minimum royalties of $1,000,000 for the two-year period ended on December 31, 2006. In satisfaction of this obligation, 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. For the six months ended June 30, 2007, the Company accrued $55,012 of royalty expense in connection with the Motorola License Agreement.  The Company is no longer subject to a minimum royalty obligation under this agreement.

 

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6. 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. 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.

 

In December 2004 and again in March 2005, the Company and PPG amended both the Development Agreement and the Supply Agreement to alter the charges and method of payment for services and materials provided by PPG under both agreements during 2005. Under the amended Development Agreement, the Company compensated PPG on a cost-plus basis for the services provided during each calendar quarter. The Company was required to pay for some of these services in cash and for other of the services in common stock. 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. The actual 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 that quarter. If, however, this average closing price was less than $6.00, the Company was required to compensate PPG in all cash. The Company recorded these expenses to research and development as they were incurred. Under the amended Development Agreement, the Company was no longer required to issue warrants to PPG.

 

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 that quarter. If, however, this average closing price was less than $6.00, the Company was required to compensate PPG in all 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.

 

The Company issued to PPG 37,694 and 122,844 shares of the Company’s common stock as consideration for services provided by PPG under the OLED Materials Supply and Service Agreement during the six months ended June 30, 2007 and 2006, respectively. Of these shares, 35,091 shares were issued on April 16, 2007, 3,660 shares were issued on October 19, 2006 and 119,184 shares were issued on April 19, 2006. For these shares, the Company recorded a charge of $536,102 and $1,707,669 to research and development expense for the six months ended June 30, 2007 and 2006, respectively. The Company also recorded $539,350 and $727,496 to research and development expense for the cash portion of the work performed by PPG during the six months ended June 30, 2007 and 2006, respectively.

 

Also, in accordance with the OLED Materials Supply and Service Agreement, 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 $265,726 and $98,516 to research and development expense for this activity during the six months ended June 30, 2007 and 2006, respectively.

 

 

 

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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.

 

																						Unrealized
		Preferred Stock,																Additional				Loss on
		Series A								Common Stock								Paid-In				Available for				Accumulated				Total
		Shares				Amount				Shares				Amount				Capital				Sale Securities				Deficit				Equity
BALANCE, JANUARY 1, 2007			200,000			$	2,000				31,385,408			$	313,854			$	199,505,981			$	(82,846	)		$	(145,356,626	)		$	54,382,363
Issuance of common stock through public offering, net of expenses of $2,570,977(A)			—				—				2,800,000				28,000				38,001,023				—				—				38,029,023
Exercise of common stock options and warrants(B)			—				—				518,415				5,184				4,246,896				—				—				4,252,080
Stock-based employee compensation (C)			—				—				68,074				681				1,512,000				—				—				1,512,681
Stock-based non-employee compensation																			9,497												9,497
Issuance of common stock to Board of Directors and Scientific Advisory Board (D)			—				—				27,796				278				488,633				—				—				488,911
Issuance of common stock in connection with Development and License Agreements (E)			—				—				76,269				763				1,057,247				—				—				1,058,010
Unrealized gain on available-for-sales securities			—				—				—				—				—				38,235				—				38,235
Net loss			—				—				—				—				—				—				(9,759,172	)			(9,759,172	)
Comprehensive loss			—				—				—				—				—				—				—				(9,720,937	)
BALANCE, JUNE 30, 2007			200,000			$	2,000				34,875,962			$	348,760			$	244,821,277			$	(44,611	)		$	(155,115,798	)		$	90,011,628

 

(A)	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 $38,029,023, net of $2,570,977 in associated costs.
(B)	During the six months ended June 30, 2007, the Company issued 518,415 shares of common stock upon the exercise of common stock options and warrants, resulting in cash proceeds of $4,252,080.
(C)	Includes $956,994 that was earned in a previous period and charged to expense when earned, but issued in 2007.
(D)	Includes $260,000 that was earned in a previous period and charged to expense when earned, but issued in 2007.
(E)	Includes $521,908 that was earned in a previous period and charged to expense when earned, but issued in 2007 (see Notes 5 and 6).

8. STOCK-BASED COMPENSATION

 

On January 1, 2006, the Company adopted SFAS No. 123R utilizing the modified prospective transition method. SFAS No. 123R requires employee stock options to be valued at fair value on the date of grant and charged to expense over the applicable vesting period. Under the modified prospective method, compensation expense is recognized for all share based payments issued on or after January 1, 2006, and for all share payments issued to employees prior to January 1, 2006 that remain unvested. In accordance with the modified prospective method, the consolidated financial statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS No. 123R. The adoption of SFAS No. 123R did not change the Company’s accounting for stock-based payments issued to non-employees.

 

Equity Compensation Plan

 

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 June 30, 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 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, 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.

 

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During the six months ended June 30, 2007, the Company granted 4,750 common stock options to employees. These stock options vested immediately and had exercise prices equal to 100% of the market price of the Company’s common stock on the date of grant. The fair value of the options granted during the six months ended June 30, 2007 was $35,650. For the six months ended June 30, 2007, compensation expense related to all outstanding common stock options was $312,848.

 

 

Two other parties also filed oppositions to the EP ‘238 patent just prior to the August 2, 2007 filing deadline.  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.

 

The next step is for the EPO to set a due date for us to file our responses to the oppositions. We anticipate that this due date will be in late 2007 or early 2008. We are in the process of reviewing each Notice of Opposition and preparing our response to each. There appears to be considerable overlap in the prior art evidence relied upon in each Opposition. It is our understanding that the three Oppositions will likely be combined by the EPO and then handled in a single proceeding.  At this time, we cannot make any prediction as to the probable outcome of these oppositions to the EP ‘238 patent. However, based on our preliminary analysis of the evidence presented, we 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 1A. RISK FACTORS

 

There have been no material changes to the risk factors previously discussed in Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2006, as supplemented by our Quarterly Report on Form 10-Q for the quarter ended March 31, 2007.

 

Exhibit
Number		Description
10.1+*			Commercial Supply Agreement between the registrant and Chi Mei EL Corporation, entered into on April 24, 2007.
10.2+*			Commercial Supply Agreement between the registrant and LG.Philips LCD Co., Ltd., entered into on May 23, 2007.
31.1*		Certifications of Sherwin I. Seligsohn, Chief Executive Officer, as required by Rule 13a-14(a) or Rule 15d-14(a)
31.2*		Certifications of Sidney D. Rosenblatt, Chief Financial Officer, as required by Rule 13a-14(a) or Rule 15d-14(a)
32.1**		Certifications of Sherwin I. Seligsohn, Chief Executive Officer, as required by Rule 13a-14(b) or Rule 15d-14(b), and by 18 U.S.C. Section 1350. (This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section. Further, this exhibit shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.)
32.2**		Certifications of Sidney D. Rosenblatt, Chief Financial Officer, as required by Rule 13a-14(b) or Rule 15d-14(b), and by 18 U.S.C. Section 1350. (This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section. Further, this exhibit shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.)

 

+		Confidential treatment has been requested as to certain portions of this exhibit pursuant to Rule 24b-2 under the Securities Act of 1934, as amended.
*		Filed herewith.
**		Furnished herewith.

 

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.

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