-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Sz5Fu6XI/kiUMiro/rjumqb3HWh0+gWdy0cf+Z+JlCSQNqM/0en2V79KowaU4+kj YwIexMcRxbH4KuYPO1wczg== 0000950115-98-000617.txt : 19980402 0000950115-98-000617.hdr.sgml : 19980402 ACCESSION NUMBER: 0000950115-98-000617 CONFORMED SUBMISSION TYPE: 10KSB40 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNIVERSAL DISPLAY CORP \PA\ CENTRAL INDEX KEY: 0001005284 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER TERMINALS [3575] IRS NUMBER: 232372688 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB40 SEC ACT: SEC FILE NUMBER: 001-12031 FILM NUMBER: 98584554 BUSINESS ADDRESS: STREET 1: THREE BALA PLAZA, SUITE 104E CITY: BALA CYNWYD STATE: PA ZIP: 19004 BUSINESS PHONE: 6106174010 MAIL ADDRESS: STREET 1: THREE BALA PLAZA EAST STREET 2: SUITE 104 CITY: BALA CYNWYD STATE: PA ZIP: 19004 10KSB40 1 FORM 10KSB UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-KSB [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIE EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to ____________________ Commission File Number 1-12031 ------- UNIVERSAL DISPLAY CORPORATION ------------------------------------------------------ (Exact name of registrant as specified in its charter) Pennsylvania 23-2372688 ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) Three Bala Plaza East Suite 104 Bala Cynwyd, Pennsylvania 19004 ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (610) 617-4010 -------------- Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock (par value $0.01 per share) ---------------------------------------- (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and 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 --- --- Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will 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-KSB or any amendment of this Form 10-KSB [X] The aggregate market value of the voting stock held by non-affiliates of the Registrant, based upon the closing sale price of Common Stock reported by The Nasdaq Stock Market on March 3, 1998, was approximately $28,829,896. For the purposes of calculation, all executive officers and directors of the Company and all beneficial owners of more than 10% of the Company's stock (and their affiliates) were considered affiliates. As of March 17, 1998, the Registrant had outstanding 10,302,268 shares of Common Stock. Documents Incorporated by Reference Portions of the Company's Proxy Statement to be filed with the Securities and Exchange Commission for the Annual Meeting of Shareholders to be held on June 11, 1998, are incorporated by reference into Part III of this report. TABLE OF CONTENTS PART 1 Page ---- ITEM 1. BUSINESS 3 ITEM 2. PROPERTIES 8 ITEM 3. LEGAL PROCEEDINGS 8 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 8 EXECUTIVE OFFICERS OF THE REGISTRANT 8 PART II ITEM 5. MARKET FOR THE REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 9 ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 9 ITEM 7. FINANCIAL STATEMENTS 11 ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 11 PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT 11 ITEM 10. EXECUTIVE COMPENSATION 11 ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 11 ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 11 PART IV ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K 11 2 This document contains certain forward-looking statements that are subject to risks and uncertainties. Forward-looking statements include certain information relating to the flat panel display industry, OLED technology, strategy, markets, research, development, manufacturing, intellectual property, competition, and properties, as well as information contained elsewhere in this Report where statements are preceded by, followed by or include the words "believes," "expects", "anticipates", "potential" or similar expressions. For such statements, the Company claims the protection of the safe harbor for forward-looking statements contained in the private Securities Litigation Reform Act of 1995. Actual events or results may differ materially from those discussed in forward-looking statements as a result of various factors, including without limitation, those discussed elsewhere in this Report and in the documents incorporated herein by reference. PART I ITEM 1. BUSINESS General Universal Display Corporation (the "Company") is engaged in the research, development and commercialization of Organic Light Emitting Diode ("OLED") technology for use in flat panel displays and other applications. The research is being performed by Princeton University and the University of Southern California ("USC") (collectively "Research Partners") pursuant to a certain Sponsored Research Agreement funded by the Company (See: Business- "Research"). The Company has the exclusive right to commercialize the technology being developed pursuant to a certain License Agreement (See: Business- "Intellectual Property"). The Company's present commercialization strategy is to enter into licensing arrangements, joint ventures, and other strategic alliances for the volume manufacturing of products utilizing this technology, the Company does not presently intend to become a volume manufacturer. The Company anticipates that its OLED technology, if successfully developed, may have a variety of applications, including full color, large area, high resolution, high information content displays, such as laptop and notebook computer screens, computer monitors and televisions. Potential applications also include multi-color, and monochrome small area, low information content displays, such as consumer electronic equipment, vehicular dashboard displays, cellular phones and other telecommunication displays, computer games, and personal digital assistants, as well as transparent applications such as head up displays for automobile windshields. The Company was incorporated under the laws of the Commonwealth of Pennsylvania in April 1985 under the name Enzymatics, Inc. ("Enzymatics"). Another corporation named "Universal Display Corporation" ("UDC") was incorporated under the laws of the State of New Jersey in June 1994. On June 22, 1995, a wholly-owned subsidiary of Enzymatics merged with and into UDC. UDC, the surviving corporation in the Merger, became a wholly-owned subsidiary of Enzymatics and changed its name to "UDC, Inc." Simultaneously with the consummation of the Merger, Enzymatics changed its name to "Universal Display Corporation." Flat Panel Display Industry The market for flat panel displays has been driven by a number of market forces, including, but not limited to, the increasing popularity of portable computers and other consumer electronic devices, the increasing availability of information and visual content of electronic formats, the proliferation of graphical interfaces and emerging multimedia applications and the conversion of traditional analog displays to digital or graphical displays. Existing products that use flat panel displays include notebook and laptop computers, portable televisions, video cameras, cellular phones, pagers, portable electronic devices, digital watches, calculators, 3 electronic games and audiovisual equipment, copiers, fax machines, telephones and answering machines. In addition, flat panel displays have been utilized in military applications, including missile controls, ground support and communications equipment and avionics. The Company believes that competition in this market, particularly for full color, large area, high resolution, high information content displays is based upon image and color quality, viewing angle, power requirements, cost and manufacturability. The dominant technology for displays today is the cathode ray tube ("CRT"), the type of technology in most televisions and computer monitors. The dominant technology today for flat panel displays is liquid crystal display ("LCD") technology, the type of technology in most laptop computers. The Company believes LCD technology has certain limitations, such as a limited viewing angle, limited scalability, narrow temperature ranges, low contrast and inferior image and color quality when compared to CRT displays. The Company believes that flat panel displays utilizing its OLED technology, if successfully developed, will provide image and color quality, brightness, contrast, scalability and viewing angles comparable to CRT displays, and be manufacturable from light weight, low cost materials and require a relatively low power source. The Company's OLED Technology OLED technology is an emerging innovative technology and the Company is not aware of any full color, flat panel displays utilizing OLED technology currently being marketed and sold, although there are numerous companies engaged in research and development efforts respecting OLED technology. Pioneer Corporation of Japan is currently marketing and selling a monochrome OLED device for automotive applications. The Company believes that its OLED technology, if fully developed, will have the capability to address many of the limitations of LCD and other developing technologies. Light emitting diodes ("LED's") are solid-state semiconductor devices that emit light when electrical current passes through them. The color of light emitted depends on the bandgap of the semiconductor material; narrow bandgap materials emit light in the red/orange range and wide bandgap materials emit green or blue light. Traditional LEDs are created from inorganic semiconductors. The OLED technology currently under development by the Company and its research partners at Princeton University and USC utilizes a new type of LED created from organic materials. Presently, the Company's OLED technology is designed around four technology platforms: transparency, flexibility, vertically stacked pixels, and lasing. The Company believes that flat panel displays utilizing its OLED technology, if successfully developed, will provide image and color quality, brightness, contrast and viewing angles comparable or superior to CRT displays and superior to LCD; will be manufacturable from light weight, low cost materials; will demonstrate efficiency in converting electrical power into light and require very low voltage for operation, which will make the OLED technology compatible for a variety of flat panel display applications which require light weight and portability; and will be scaleable for use in large area, high resolution, high information, full color, flat panel displays. One technology platform being researched by the Company and its Research Partners is based upon the ability to create a transparent organic display. In the March 7, 1996 issue of the scientific journal Nature, the researchers at Princeton University and USC announced the laboratory demonstration of the first transparent, thin film organic light emitting device, ("TOLED") which is believed to be the crucial first step toward realizing high-definition, full-color organic displays. In addition, it provides the ability to develop head up, transparent 4 and high contrast displays using organic materials. In December 1997, a patent was issued respecting aspects of the TOLED technology. See "Business--Intellectual Property" A second technology platform being researched by the Company and its Research Partners is based upon the vertically stacked pixel structure. In the June 27, 1997 issue of the scientific journal Science, the researchers at Princeton University and USC announced the laboratory demonstration of an independently controlled, tunable three color organic light emitting device employing a novel vertically stacked pixel architecture ("SOLED") which stacks the red, green and blue pixels on top of each other, rather than side by side as in CRTs and LCD's, theoretically providing for very high image resolution, since one pixel can occupy the same space as three or more pixels would in a side by side architecture. The SOLED, which was made possible by the creation of the TOLED, permits the independent tuning of color, greyscale and intensity and is expected to allow an individual pixel to emit red, blue and green, either at the same time or separately. Combinations of such colors create additional colors so that each individual pixel will be capable of producing a full range of colors. In January and February 1998, two patents were issued respecting aspects of the SOLED technology. See: "Business--Intellectual Property" A third technology platform being researched by the Company and its Research Partners is the ability to fabricate organic displays on flexible substrates. In the February 1, 1997 issue of the scientific journal, Optics Letters, the researchers at Princeton University and USC announced the laboratory demonstration of an OLED deposited on a flexible plastic film (FOLED). Flat panel displays are commonly built on glass. The Company believes that this is the first time that small molecule organic layers have been deposited on a flexible plastic substrate, flexibility being a property that was previously believed to be unique to polymer materials. This development may also allow the potential for fabricating FOLED products using low cost "roll to roll" processing methods. A fourth technology platform being researched by the Company and its Research Partners is based upon the ability to fabricate an optically pumped organic laser. In the September 25, 1997 issue of the scientific journal Nature, the researchers at Princeton University and USC announced what they believed to be the first evidence of lasing from vacuum deposited thin films of organic molecules. The Company believes this is a significant first step towards the realization of a electrically pumped solid state lasers based on organic thin films While significant advances have been made in the research on OLEDs being sponsored by the Company, substantial additional research and development work needs to be performed before products utilizing this technology are manufactured and sold, including issues of operating life, reliability, the development of more fully saturated colors, integration with drive electronics and issues related to scalability into a production environment and cost effective fabrication technologies for monochrome, transparent, flexible and full color, large area and small area applications. The development of an electrically pumped laser is also necessary before products based on the organic laser are manufactured and sold. There can be no assurance that the necessary research and development work will be successfully completed and that the Company or its Licensees will successfully commercialize any products based upon its proprietary technology. 5 Commercialization Strategy and Markets The Company's present commercialization strategy is to continue the research and development of OLED technology and to license the technology or enter into joint ventures or other strategic relationships with experienced manufacturers (who may have much of the needed infrastructure already in place) for the manufacture, distribution and sale of OLED display products or laser products. The Company believes that an initial market may be for low information content applications using segmented or character displays such as for cellular phones, instrumentation displays, or consumer electronics. These applications may be multicolor or monochrome. There are also potential markets for a transparent device, for example, as head-up displays on vehicle windshields. The Company also believes that the OLED technology under development could also have significant applicability for small, full color displays, such as for personal digital assistants, projection displays, viewfinders in camcorders, video phones, hand held computers and numerous industrial, medical and military uses. The Company also believes that the technology has potential application in large area, full color displays such as laptop computers, desktop computers and televisions and in numerous defense-related markets. The Company believes that an electrically pumped organic semiconductor laser could have applications in a number of markets, including fiber-optic communications, audio compact discs (CDs), CD-ROM drives, DVD Discs, DVD-ROM's, laser printers, rewritable optical storage drives, bar code scanners and digital printing presses. There can be no assurance that the Company will be able to enter into appropriate licensing, joint ventures or other strategic relationships, or that the terms of such relationships, if entered into, would be favorable to the Company. The Company is part of a team that includes Princeton University, the University of Southern California, and Hughes Research Laboratories that was awarded a $3 million research contract from the U.S.Department of Defense Advanced Research Projects Agency ("DARPA") to fund the development of "Multi-Color Ultralightweight Organic Light Emitting Diode (OLED) Displays." The three year contract commenced September 1, 1997 and the Company expects to receive approximately $700,000 for its part of the project relating principally to the fabrication of prototypes and reliability improvements. In September 1997, the Company and Princeton University were jointly awarded a $100,000 Phase I grant by the National Science Foundation ("NSF") under the Small Business Technology Transfer Program for further development of its OLED technology principally related to more fully saturated colors. The grant is expected to be completed within one year, and if successful can possibly lead to a Phase II proposal for additional funding from the NSF. In September 1997, the Company and Princeton University received a $100,000 contract award from the New Jersey Commission on Science and Technology for further development of its OLED technology and to study the feasibility of manufacturing OLED displays in New Jersey. In September 1997 the Company joined the United States Display Consortium ("USDC"), a cooperative industry/government effort aimed at developing an infrastructure to support a North American flat panel display infrastructure. The USDC's role is to provide a common platform for flat panel display manufacturers, developers, users and the manufacturing equipment and supplier base. It has more than 130 members, as well as support from DARPA. The Company is one of 14 members on the Governing Board of USDC. 6 Research Research relating to the OLED technology is being conducted at Princeton University's Advanced Technology Center for Photonics and Optoelectronics Materials and at the USC Synthetic Materials Laboratories (on a subcontract basis with Princeton University). In October 1997, the Company entered into a new five year Sponsored Research Agreement (the "1997 Sponsored Research Agreement") for research activities related to Organic Light Emitters, which continues and expands the scope of the Sponsored Research Agreement dated August 1, 1994 (the "1994 Sponsored Research Agreement"). In October 1997, the Company, Princeton University and USC also entered into an Amended License Agreement (the "1997 License Agreement). See "Business--Intellectual Property". The development of commercially viable applications for the OLED technology is principally dependent on the success of the research efforts of Dr. Stephen Forrest and Dr. Mark Thompson (the "Principal Investigators") conducted pursuant to such agreements. The scope and technical aspects of the research and the resources and efforts directed to such research is subject to the control of Princeton University and the Principal Investigators. The Company paid Princeton University $347,374 in 1997 pursuant to the Sponsored Research Agreement. The 1997 Sponsored Research Agreement requires the Company to pay up to $4.4 million to Princeton University from July 1998 thorough July 2002, which period is subject to extension. The 1997 Sponsored Research Agreement provides that if Dr. Forrest is unavailable to continue to serve as a Principal Investigator, either because he is no longer associated with Princeton University or otherwise, and a successor acceptable to both the Company and Princeton University is not available, Princeton University has the right to terminate the 1997 Sponsored Research Agreement. The Company believes that additional research and development efforts are required for the development of products based upon the OLED technology. See "Business--The Company's OLED Technology". Loss to the Company of the Principal Investigators' services or termination of the 1997 Sponsored Research Agreement would have a material adverse effect on the Company. Intellectual Property The Company's rights to the OLED technology are governed by the 1997 Sponsored Research Agreement and the 1997 License Agreement. Pursuant to such agreements, all patents and other intellectual property rights relating to the OLED technology are the property of Princeton University, or USC, as applicable, and the Company is the worldwide exclusive licensee. In December 1997, the first patent, titled "Transparent Contacts for Organic Light Emitters", was issued to Princeton University by the U.S. Patent and Trademark Office in connection with the Sponsored Research. In January and February, 1998, two additional patents relating to Multicolor Organic Light Emitting Devices were issued to Princeton University. Princeton University and USC have filed approximately 30 additional patent applications relating to the OLED technology in the United States, and have filed for intellectual property protection internationally. In addition, the Company has obtained an exclusive worldwide royalty-free license from USC (the "USC License") to manufacture and market products based on inventions claimed in a patent issued to USC in May 1994, relating to, among other things, a method of depositing ultra-thin, very smooth, ordered organic layers using vacuum deposition. Under an Interinstitutional Agreement between Princeton University and USC, Princeton University manages the intellectual property rights being developed pursuant to the 1994 and 1997 Sponsored Research Agreement 7 and licensed to the Company pursuant to the License Agreement, and the Company is required to reimburse Princeton University for all costs incurred in filing, prosecuting and maintaining patent applications and patents. The Company has the worldwide exclusive license to manufacture and market products based on such patents, pending patent applications and any future patent applications and inventions conceived or discovered under the 1997 Sponsored Research Agreement, and to sublicense those rights. In circumstances where the Company sublicenses the OLED technology (except to affiliates), or sells products utilizing the OLED technology, the Company is required to pay to Princeton University a royalty in the amount of 3% of the Company's net sublicense fees or net sales of products utilizing the OLED technology. There can be no assurance that patents applied for will be obtained or that any such patents will afford the Company and Princeton University commercially significant protection of its OLED technology. In addition, the patent laws of other countries may differ from those of the United States as to the patentability of the OLED technology and the degree of protection afforded. Other companies and institutions may independently develop equivalent or superior technologies and may obtain patent or similar rights with respect thereto. There are a number of other companies and organizations that have been issued patents and are filing additional patent applications relating to OLED technology and there can be no assurance that the exercise of the Company's licensing rights respecting its OLED technology being developed by Princeton University and USC will not infringe on the patents of others. In the event of infringement, the Company and Princeton University could, under certain circumstances, be required to obtain a license or modify its methods or other aspects of the OLED technology. Under the 1997 License Agreement, the Company has the right to prosecute at it's own expense any infringement of the patent rights. Princeton is entitled to 23% of the net proceeds, if any, received from final judgments in infringement actions respecting the patent rights. In connection with the 1997 License Agreement and the 1997 Sponsored Research Agreement, the Company issued to Princeton University 140,000 shares of Common Stock and 10 year warrants to purchase 175,000 shares of common stock at an exercise price of $7.25 per share, and the Company issued to USC 60,000 shares of common stock and 10 year warrants to purchase 75,000 shares of common stock at an exercise price of $7.25 per share. Under the 1997 License Agreement, the Company is required to use commercially reasonable efforts to bring the OLED technology to market. This requirement is deemed satisfied provided the Company performs its obligations under the 1997 Sponsored Research Agreement, and, upon expiration or termination thereof, the Company invests a minimum of $800,000 per year in research, development, commercialization or patenting efforts respecting the OLED technology. Princeton University has the right to terminate the 1997 License Agreement in certain specified circumstances, and prior to any termination, all disputes under the 1997 License Agreement and the 1997 Sponsored Research Agreement are subject to mediation and arbitration, except those relating to the validity, construction or effect of patents. The United States government, through the Defense Advanced Research Projects Agency ("DARPA"), has provided funding to Princeton University for research activities related to certain aspects of its OLED technology. In the event that all or certain aspects of its OLED technology developed (if any) from the Company's funding to Princeton University is deemed to fall within the planned and committed activities of DARPA's funding, the federal government, pursuant to federal law, could have certain rights relating to the OLED technology, including a license to practice or have practiced on its behalf any such technology and, if the federal government determines that the Company has not taken effective steps to achieve practical application of such technology in a field of use in a reasonable time, require the Company to grant licenses to other parties in any such field of use. In addition, the federal government's rights could restrict the Company's ability to market the OLED technology to the federal government for military and other applications which could have a material adverse 8 effect on the Company. There can be no assurance as to which aspects of the OLED technology the federal government has any rights and the extent of such rights. Continued funding of Princeton University's research activities by the federal government, which is anticipated, may give the federal government rights to aspects of the OLED technology developed in the future. In order to protect Princeton University's tax exempt status, the 1994 License Agreement provides that Princeton University may, in its sole discretion, determine whether, pursuant to the provisions of the Tax Reform Act of 1986, it is required to negotiate the royalties and other considerations payable to Princeton University on products not reasonably conceivable by the parties at the time of execution of the 1994 License Agreement. If Princeton University reasonably concludes that the consideration payable by the Company for any such product is not fair and competitive, Princeton University may exercise its right to renegotiate the royalties and other consideration payable by the Company for any such product prior to the expiration of 180 days after the first patent is filed or other intellectual property protection is sought. The Company has the right to commence arbitration proceedings to challenge Princeton University's exercise of such renegotiation rights. If the parties are unable to agree to royalties and other consideration for such products within a specified period of time, then Princeton University is free to license third parties without repayment of any funds provided under the 1994 Sponsored Research Agreement. The Company and Princeton University may also rely on proprietary know-how and trade secrets and employ various methods to protect concepts, ideas and documentation of their technology. However, such methods may not afford complete protection, and there can be no assurance that others will not independently develop similar know-how or obtain access to the Company's or Princeton University's know-how, trade secrets, concepts, ideas and documentation. Competition The display industry is characterized by intense competition. CRTs currently dominate the television and desktop computer monitor market and improvements in CRTs have further increased display quality. Flat panel displays have been developed and are in commercial use in certain applications where the weight, power requirements, and bulky size of the CRT inhibit its use. CRT displays are not currently available for flat panel display applications. Flat panel displays have been available for a significant period of time and a variety of advancements in flat panel displays have been made over the last several years. However, flat panel displays with the capabilities necessary to replace CRTs in all applications have not been developed. The flat panel display market is currently dominated by products utilizing LCD technology and is expected to be dominated by LCD technology for the foreseeable future. The Company believes that LCDs have certain limitations, such as a limited viewing angle, limited scalability, low response rate, low contrast and inferior image and color quality when compared to CRT displays (the current standard for display quality). LCDs are also more expensive to produce than CRTs. However, compared to CRTs, LCD displays are smaller, have lower power requirements (leading to longer battery life), emit no measurable radiation, are not affected by magnetic fields generated by speakers or VCRs and have uniform brightness throughout the screen. Numerous companies, however, are making substantial investments in, and conducting research to improve these characteristics of LCD technology. Several other flat panel display technologies have recently been developed or are being developed, such as field emissive, inorganic electroluminescent, polymeric light emitting diode, gas plasma, and vacuum fluorescent displays. Field emissive displays essentially employ an array of miniature CRTs, may be efficient in converting 9 electrical power into light at a relatively low cost, but high voltage power sources and high temperature fabrication equipment may be required. Inorganic electroluminescent displays offer better contrast and broader viewing angles than LCDs and gas plasma displays, but also use more power than LCDs and are difficult to view in bright ambient light. Displays utilizing polymeric light emitting diodes may, if successfully developed, offer better image and color quality and broader viewing angles than LCDs, but require improvements in operating life, saturated colors and manufacturing technologies. Gas plasma displays, used in outdoor signs, some laptop computers and recently introduced for large screen televisions are durable and reliable, have long lives and superior video speed (useful in video applications) but have high power requirements; dot matrix display panels on copiers, microwave ovens and video cassette recorders, have superior brightness, are inexpensive and are capable of providing full color, but are difficult to manufacture and have high power requirements, making them unsuitable for portable products. The Company believes that each of these developing technologies may have one or more of the limitations associated with LCD technology or other limitations, such as lack of reliability, high power requirements (restricting portability), high production cost and/or difficulty of manufacture. The Company believes that flat panel displays utilizing its OLED technology, if successfully developed, will provide image and color quality, brightness, contrast, scalability and viewing angles comparable to CRT displays, be manufacturable from light weight, low cost materials and require a relatively low power source. Numerous domestic and foreign companies have developed or are developing CRT, LCD, gas plasma and other display technologies. Substantially all of these competitors, including Sony Corporation, NEC Corporation, Fujitsu Corporation, Hitachi Corporation, Toshiba Corporation and Samsung Corporation have greater name recognition and financial, technical, marketing, personnel and research capabilities than the Company. There can be no assurance that the Company's competitors will not succeed in developing technologies and applications that are more cost effective, have fewer display limitations than or have other advantages as compared to its OLED technology. In addition, a number of companies, including those mentioned above, and Eastman Kodak Company, Pioneer Electronic Corporation, Sharp Corporation, Sanyo Corporation, TDK Corporation, Mitsubishi Chemical Corporation, Seiko-Epson Corporation and Idemitsu Corporation are engaged in research and development activities with respect to technology using OLEDs. There can be no assurance that the Company will be able to compete successfully or develop commercial applications for its OLED technology. Employees The Company has thirteen employees, six of whom are full-time employees. Facilities The Company's corporate offices are located at Three Bala Plaza East, Suite 104, Bala Cynwyd, Pennsylvania. ITEM 2. PROPERTIES The Company currently leases approximately 2,700 square feet of office space in Bala Cynwyd, Pennsylvania. The Company also leases approximately 900 square feet in Princeton, New Jersey, and certain of its employees are guest researchers at the Princeton University Center for Photonic and Optoelectronic Materials, ("POEM") 10 where they are entitled to use the laboratories and facilities. The Company also leases approximately 620 square feet in Coeur D'Alene, Idaho. ITEM 3. LEGAL PROCEEDINGS None. ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders in the fourth quarter of 1997. EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth certain information with respect to the Company's executive officers:
Name Age Position - ---- --- -------- Sherwin I. Seligsohn 62 Chairman, Chief Executive Officer and Director Steven V. Abramson 46 President, Chief Operating Officer and Director Sidney D. Rosenblatt 50 Executive Vice President, Chief Financial Officer, Treasurer and Secretary and Director
Executive Officers are elected annually and hold office until their successors are elected and qualified. Sherwin I. Seligsohn has been Chairman and Chief Executive Officer of the Company since the Company's inception. He was President of the Company until May 1996. Mr. Seligsohn founded, and since August 1991 has served as sole Director, Chairman, President and Secretary of, American Biomimetics Corporation ("ABC"), International Multi-Media Corporation ("IMMC"), and Wireless Unified Network Systems Corporation ("WUNSC") . He is also Chairman and Chief Executive Officer of Global Photonic Energy Corporation ("Global"). From June 1990 to October 1991, Mr. Seligsohn was Chairman Emeritus of InterDigital Communications, Inc. ("InterDigital"), formerly International Mobile Machines Corporation. Mr. Seligsohn was the founder of InterDigital and from August 1972 to June 1990 served as its Chairman. Mr. Seligsohn is a member of the Advisory Board of the Advanced Technology Center for Photonics and Optoelectronic Materials (POEM) at Princeton University. Steven V. Abramson joined Universal Display Corporation as President and Chief Operating Officer in May 1996. He is also a member of the Board of Directors. Mr. Abramson is also President and Chief Operating Officer of Global and a member of its Board of Directors. From March, 1992-- May, 1996 he was Vice President, General Counsel, Secretary and Treasurer of Roy F. Weston, Inc. a worldwide environmental consulting and engineering firm. From 1982-1991 he was with InterDigital, where he held various positions, including General Counsel, Executive Vice President and General Manager of the Technology Licensing Division. Mr. Abramson is a member of the Advisory Board of the Advanced Technology Center for Photonics and Optoelectronic Materials (POEM) at Princeton University and a member of the Board of Governors of the USDC. Sidney D. Rosenblatt has been Executive Vice President, Chief Financial Officer, Treasurer and Secretary of the Company since June 1995. He has been a member of the Board of Directors since May 1996. 11 Mr. Rosenblatt is also Executive Vice President, Chief Financial Officer, Secretary and Treasurer of Global, and a member of its Board of Directors. Mr. Rosenblatt is the owner of and has served as the President and Chief Executive Officer of S. Zitner Company since August 1990. From May 1982 to August 1990, Mr. Rosenblatt served as the Senior Vice President, Chief Financial Officer and Treasurer of InterDigital. Mr. Rosenblatt sits on the Board of Directors and Executive Committee for the Greater Philadelphia Chamber of Commerce, Chairman of the Board for the Small Business Division of the Greater Philadelphia Chamber of Commerce and sits on various Boards for non-profit organizations. PART II ITEM 5. MARKET FOR THE REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The following table sets forth the high and low sales prices of the Company's Common Stock as reported by the The Nasdaq Stock Market for the period indicated. The Company completed its initial public offering of Common Stock on April 11, 1996, at $5.00 per share. High Low Close Close ------ ----- 1996 Second Quarter (from April 11, 1996) 10 1/2 4 Third Quarter 8 4 5/8 Fourth Quarter 6 5/8 4 3/4 1997 First Quarter 7 3/8 3 5/8 Second Quarter 5 3/4 3 7/8 Third Quarter 6 4 Fourth Quarter 7 7/8 4 1/4 As of March 20, 1998, there were approximately 199 holders of record of the Company's Common Stock. The Company's Common Stock is listed on the small cap segment of The Nasdaq Stock Market under the symbol PANL. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General Since inception, the Company has engaged, and for the foreseeable future expects to continue to be engaged, exclusively in the research and development and commercialization of its OLED for use in flat panel displays and other applications. To date, the Company has generated minimal revenues and does not expect to generate any meaningful revenues for the foreseeable future and until such time, if ever, it successfully demonstrates that its OLED technology is commercially viable for one or more flat panel display and other applications and enters into license agreements, joint ventures or strategic alliances with third parties with respect to the technology. The Company has incurred significant losses since its inception, resulting in an accumulated deficit of $10,780,495 at December 31, 1997. 12 Results of Operations Year Ended December 31, 1997 Compared to Year Ended December 31, 1996 The Company had a net loss of $5,927,718 (or $.64 per share) for the year ended December 31, 1997 compared to a net loss of $1,768,995 (or $.21 per share) for the year ended December 31, 1996. The increase in the net loss was primarily attributable to increased research and development expenses of which $3,120,329 was a non-cash expense related to the issuance of Common Stock and warrants to Princeton University and USC, and increased general and administrative expenses in 1997 compared to 1996. Exclusive of the non-cash expenses, the Company's net loss was $2,807,389 (or $.30 per share) in 1997. The Company earned $93,605 from contract research revenue in 1997 compared to no revenue in 1996. The revenue was derived primarily from a subcontract with Princeton University pursuant to a 3-year, $3 million contract Princeton University received from the Defense Advanced Research Projects Administration. Research and development expenses were $4,207,898 for the year ended December 31, 1997 compared to $948,568 for the year ended December 31, 1996. For the year ended December 31, 1997, research and development expenses consisted of (i) the issuance of common stock and warrants in connection with the Company's 1997 Sponsored Research Agreement, which resulted in a non-cash charge of $3,120,329; (ii) payments in the amount of $347,374 to Princeton University under the 1994 Sponsored Research Agreement; and (iii) payments in the amount of $740,195 for patent applications, prosecution, and other intellectual property rights expenses. Research and development expenses for the same period in 1996 consisted primarily of payments to Princeton University under the 1994 Sponsored Research Agreement. General and administrative expenses were $1,986,628 for the year ended December 31, 1997 compared to $938,741 for the year ended December 31, 1996. The increased general and administrative expenses in 1997 compared to 1996 were primarily related to the increased general and administrative expenses associated with the hiring of executives, technical personnel, and support staff and leasing of office space for the Company's headquarters and a non-cash charge in the amount of $100,000 relating to a Consulting Agreement with the Underwriter of the Company's 1996 Public Offering. Year Ended December 31, 1996 Compared to Year Ended December 31, 1995 The Company had a net loss of $1,768,995 (or $.21 per share) for the year ended December 31, 1996 compared to a net loss of $3,072,661 (or $.45 per share) for the year ended December 31, 1995. The reduction in the net loss was primarily attributable to research and development expenses for 1994 and 1995 being expensed and paid in 1995, and a non-recurring payment for the sublicense of certain technologies in 1995. Research and development costs were $948,568 for the year ended December 31, 1996 compared to $2,073,739 for the year ended December 31, 1995. In 1996, the research and development expenses were attributed to payments under the 1994 Sponsored Research Agreement with Princeton University and patent expenses. For the year ended December 31, 1995, the Company incurred $2,073,739 in research and development expenses. Such expenses consisted of (i) repayment of $674,000 to ABC for amounts previously paid to Princeton University by ABC under the 1994 Sponsored Research Agreement; (ii) payment of $500,000 to ABC to acquire the sublicense under the 1993 Sponsored Research Agreement; (iii) payments in the aggregate amount of $549,739 made to Princeton University under the 1994 Sponsored Research Agreement; and (iv) a nonrecurring, non-cash expense of $350,000 representing the fair market value of 200,000 shares of Series A Preferred Stock issued to ABC in connection with the Technology Transfer Agreement. 13 General and administrative costs were $938,741 for the year ended December 31, 1996 compared to $998,922 for the year ended December 31, 1995. The 1996 expenses were primarily associated with the hiring of executives, support staff and leasing of office space for the Company's headquarters compared to 1995 general and administrative expenses which were primarily professional fees and fees associated with financing activities. Liquidity and Capital Resources As of December 31, 1997, the Company had cash of $85,470 and short-term investments of $4,539,570 compared to cash of $638,225 and short-term investments of $2,430,000 at December 31, 1996. During 1997, private placement warrants to purchase 1,124,000 shares of the Company's Common Stock were exercised, resulting in net cash proceeds of $3,940,800 to the Company. On April 11, 1996, the Company completed a public offering of 1,300,000 shares of Common Stock at a price of $5.00 per share and redeemable warrants to purchase 1,495,000 shares of Common Stock at an exercise price of $3.50 per share, at a price of $.10 per warrant. The Company received net cash proceeds of $5,282,665 from the public offering (excluding $223,263 representing a portion of the offering expenses previously charged to general and administrative expenses). Net working capital increased to $5,003,863 at December 31, 1997 from working capital of $3,023,010 at December 31, 1996, as a result of the exercise of the warrants. The Company's net cash used in operating activities was $2,441,698; $2,370,449; and $1,921,787 in 1997, 1996 and 1995 respectively. Non-cash expenses related to the issuance of Common Stock, warrants and options were $3,436,329; $25,000; and $9,950 in 1997, 1996, and 1995 respectively. The Company anticipates, based on management's internal forecasts and assumptions relating to its operations (including assumptions regarding working capital requirements of the Company, the progress of research and development, the availability and amount of other sources of funding available to Princeton University for research relating to the OLED technology and the timing and costs associated with the preparation, filing and prosecution of patent applications and the enforcement of intellectual property rights) that it has sufficient cash to meet its obligations for at least the current fiscal year. The 1997 Sponsored Research Agreement requires the Company to pay up to $4.4 million to Princeton University from July 1998 through July 2002, which period is subject to extension. The 1997 Sponsored Research Agreement requires the Company to pay up to $4.4 million to Princeton University from July 1998 thorough July 2002, which period is subject to extension. Substantial additional funds will be required thereafter for the research, development and commercialization of OLED technology, obtaining and maintaining intellectual property rights, working capital and other purposes, the timing and amount of which is difficult to ascertain. There can be no assurance that additional funds will be available when needed, or if available, on commercially reasonable terms. The Company is currently in the process of evaluating its information technology infrastructure for Year 2000 compliance. The Company does not expect that the cost to modify such infrastructure to Year 2000 compliance will be material to its financial condition or results of operations. The Company does not anticipate any material disruption in its operations as a result of any failure by the Company to be in compliance. ITEM 7. FINANCIAL STATEMENTS WITHIN THE 10-KSB The financial statements and notes thereto of the Company are attached hereto beginning on page F-1. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 14 PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT Information with respect to this item is set forth in the Company's definitive Proxy Statement (the "Proxy Statement") to be filed with the Securities and Exchange Commission for the Annual Meeting of Shareholders to be held on June 11, 1998, under the headings "Nominees for Election as Directors" and "Compliance with Section 16(a) of the Exchange Act" and is incorporated herein by reference. Information regarding the Company's executive officers is included in Part I on page 8 herein. ITEM 10. EXECUTIVE COMPENSATION Information with respect to this item is set forth in the Proxy Statement under the heading "Executive Management Compensation" and is incorporated herein by reference. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information with respect to the ownership of securities of the Company by certain persons is set forth in the Proxy Statement under the heading "Principal Shareholders" and is incorporated herein by reference. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information with respect to transactions with management and others is set forth in the Proxy Statement under the heading "Certain Transactions," and is incorporated herein by reference. ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report: 15 The following is a list of exhibits filed as part of this Annual Report on Form 10-K. Where so indicated by footnote, exhibits which 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 INDEX Exhibit Page Number Description Number - ------- ----------- ------ 3.1 Articles of Incorporation of the Company. (Exhibit 3.1)(1) 3.2 Bylaws of the Company. (Exhibit 3.1)(1) 4.1 Specimen stock certificate representing the Common Stock. (Exhibit 4.1)(3) 4.2 Specimen warrant certificate representing the Warrants. (Exhibit 4.2)(3) 4.3 Form of Public Warrant Agreement. (Exhibit 4.3)(1) 4.4 Form of Underwriter's Warrant Agreement. (Exhibit 4.4)(1) 4.5 Statement of Designations and Preferences of Series A Non-Convertible Preferred Stock. (Exhibit 4.5)(2) 10.1 License Agreement dated August 1, 1994 between The Trustees of Princeton University and American Biomimetics Corporation. (Exhibit 10.1)(3) 10.2 Amendment to License Agreement (August 1, 1994) dated April 11, 1995 between the Trustees of Princeton University and American Biomimetics Corporation. (Exhibit 10.2)(2) 10.3 Sponsored Research Agreement dated August 1, 1994 between the Trustees of Princeton University and American Biomimetics Corporation. (Exhibit 10.3)(3) 10.4 Letter Amendment dated May 5, 1995, between the Trustees of Princeton University and American Biomimetics Corporation. (Exhibit 10.4)(3) 10.5 Amendment to Sponsored Research Agreement (August 1, 1994) dated April 18, 1995 between the Trustees of Princeton University and American Biomimetics Corporation. (Exhibit 10.5)(2) 10.6 Technology Transfer Agreement dated June 22, 1995 between American Biomimetics Corporation and Universal Display Corporation. (Exhibit 10.6)(2) 16 10.7 Assignment and Assumption of License dated June 22, 1995 between American Biomimetics Corporation and Universal Display Corporation. (Exhibit 10.7)(3) 10.8 Sublicense Agreement and Option dated June 22, 1995 between American Biomimetics Corporation and Universal Display Corporation. (Exhibit 10.8)(3) 10.9 Assignment and Assumption of Agreement dated August 1, 1995 between the Trustees of Princeton University and the University of Southern California. (Exhibit 10.9)(2) 10.10 Subcontract No. 341-4014-1 dated August 16, 1995 between the Trustees of Princeton University and the University of Southern California. (Exhibit 10.10)(3) 10.11 Assignment of 1994 Sponsored Research Agreement dated November 1, 1995 between American Biomimetics Corporation and Universal Display Corporation. (Exhibit 10.11)(2) 10.12# Stock Option Agreement dated as of June 23, 1995 between Universal Display Corporation and Thomas D. Hays, III. (Exhibit 10.12)(2) 10.13# Stock Option Agreement dated as of June 23, 1995 between Universal Display Corporation and Harvey Nachman. (Exhibit 10.13)(2) 10.14 Registration Rights Agreement dated as of June 23, 1995 between Universal Display Corporation and Thomas D. Hays, III. (Exhibit 10.14)(2) 10.15 Registration Rights Agreement dated as of June 23, 1995 between Universal Display Corporation and Harvey Nachman. (Exhibit 10.15)(2) 10.16 Form of Registration Rights Agreement between Universal Display Corporation and Certain Subscribers to Purchase Common Stock of Universal Display Corporation. (Exhibit 10.16)(2) 10.17# Form of Stock Option Agreement dated as of June 23, 1995 between Universal Display Corporation and Sidney D. Rosenblatt. (Exhibit 10.17)(2) 10.18# 1992 Stock Option Plan. (Exhibit 10.18)(2) 10.19# 1995 Stock Option Plan. (Exhibit 10.19)(2) 10.20# Employment Agreement dated as of November 1, 1995 between Universal Display Corporation and Sherwin I. Seligsohn. (Exhibit 10.20)(2) 10.21 Form of Services Agreement dated as of December 1, 1995 between Universal Display Corporation and Dean L. Ledger. (Exhibit 10.21)(2) 17 10.22# Form of Stock Option Agreement dated as of June 23, 1995 between Universal Display Corporation and Sidney D. Rosenblatt. (Exhibit 10.22)(2) 10.23# Form of Stock Option Agreement dated as of September 1, 1995 between Universal Display Corporation and Stephen R. Forrest. (Exhibit 10.23)(2) 10.24# Form of Stock Option Agreement dated as of September 1, 1995 between Universal Display Corporation and Mark E. Thompson. (Exhibit 10.24)(2) 10.25# Form of Stock Option Agreement dated as of September 1, 1995 between Universal Display Corporation and Paul E. Burrows. (Exhibit 10.25)(2) 10.26 License Agreement dated January 26, 1996 between Universal Display Corporation and University of Southern California. (Exhibit 10.26)(2) 10.27 Letter Agreement dated September 20, 1995 Agreeing to a Royalty Rate between the Trustees of Princeton University and Universal Display Corporation. (Exhibit 10.27)(2) 10.28 Agreement and Plan of Reorganization dated as of April 6, 1995 between Enzymatics, Inc., Enzymatics Merger Subsidiary, Inc. and Universal Display Corporation. (Exhibit 10.28)(2) 10.29 Form of Consulting Agreement between the Universal Display Corporation and Whale Securities Co., L.P. (Exhibit 10.29)(2) 10.30# Warrant Agreement dated April 25, 1996 between the Company and Steven V. Abramson (Exhibit 10.30)(4) 10.31# Warrant Agreement dated April 25, 1996 between the Company and Sherwin I. Seligsohn (Exhibit 10.31)(4) 10.32# Warrant Agreement dated April 25, 1996 between the Company and Dean L. Ledger (Exhibit 10.32)(4) 10.33# Warrant Agreement dated April 25, 1996 between the Company and Sidney D. Rosenblatt (Exhibit 10.33)(4) 10.34* 1997 Sponsored Research Agreement between the Company and Princeton University 10.35* 1997 Amended License Agreement between the Company, Princeton University and the University of Southern California 21 Subsidiaries of the Registrant. 23 Consent of Arthur Andersen LLP 18 Note: Any of the exhibits listed in the foregoing index not included with this Annual Report on Form 10-K may be obtained without charge by writing to Mr. Sidney D. Rosenblatt, Corporate Secretary, Universal Display Corporation, Three Bala Plaza, Suite 104 East, Bala Cynwyd, Pennsylvania 19004. (b) No reports were filed on Form 8-K. Explanation of Footnotes to Listing of Exhibits * Filed herewith # Compensation Plan or Agreement (1) Filed as an Exhibit to Registered Statement (No. 33-80703) on Form SB-2 filed with the Securities and Exchange Commisson on December 21, 1995 (2) Filed as an Exhibit to Amendment No. 1 to Registration Statement (No. 33-80703) on Form SB-2 filed with the Securities and Exchange Commission on March 20, 1996 (3) Filed as an Exhibit to Amendment No. 1 to Registration Statement (No. 33-80703) on Form SB-2 filed with the Securities and Exchange Commission on March 20, 1996 (4) Filed as an Exhibit to the Annual Report on Form 10K-SB for the year ended December 31, 1996 filed with the Securities and Exchange Commission on March 31, 1996 19 UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARY (a development-stage company) INDEX TO FINANCIAL STATEMENTS Consolidated Financial Statements of the Company: Report of Independent Public Accountants F-2 Consolidated Balance Sheets F-3 Consolidated Statements of Operations F-4 Consolidated Statements of Shareholders' Equity (Deficit) F-5 and F-6 Consolidated Statements of Cash Flows F-7 Notes to Consolidated Financial Statements F-8 F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Universal Display Corporation: We have audited the accompanying consolidated balance sheets of Universal Display Corporation (a Pennsylvania corporation in the development-stage) and subsidiary as of December 31, 1997 and 1996, and the related consolidated statements of operations, shareholders' equity (deficit) and cash flows for each of the three years in the period ended December 31, 1997 and the period from inception (June 17, 1994) to December 31, 1997. These 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 generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the 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 consolidated financial position of Universal Display Corporation and subsidiary as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997 and the period from inception (June 17, 1994) to December 31, 1997, in conformity with generally accepted accounting principles. Philadelphia, PA ARTHUR ANDERSEN LLP March 3, 1998 F-2 UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARY (a development-stage company) CONSOLIDATED BALANCE SHEETS
ASSETS December 31, December 31, 1997 1996 ------------ ------------ CURRENT ASSETS: Cash and cash equivalents (See Note 3) $ 85,470 $ 638,225 Short-term investments (See Note 3) 4,539,570 2,430,000 Contract research receivables 88,366 -- Receivable from related party 51,906 -- Prepaid consulting fee 428,985 -- Other current assets 89,806 59,091 ------------ ------------ Total current assets 5,284,103 3,127,316 ------------ ------------ PROPERTY AND EQUIPMENT, net of accumulated depreciation of $39,353 and $11,955 57,401 61,512 DEPOSITS 76,073 93,419 ------------ ------------ Total assets $ 5,417,577 $ 3,282,247 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable and accrued expenses $ 280,240 $ 104,306 ------------ ------------ SHAREHOLDERS' EQUITY Preferred Stock, par value $0.01 per share, 5,000,000 shares authorized, 200,000 shares designated Series A Nonconvertible Preferred Stock, par value $.01 per share, 200,000 issued and outstanding (liquidation value of $7.50 per share or $1,500,000) 2,000 2,000 Common Stock, par value $.01 per share, 25,000,000 shares authorized, 10,302,268 and 8,937,268 shares issued and outstanding, respectively (see Note 2) 103,023 89,373 Additional paid-in capital 15,812,809 7,939,345 Deficit accumulated during development-stage (10,780,495) (4,852,777) ------------ ------------ Total shareholders' equity 5,137,337 3,177,941 ------------ ------------ Total liabilities and shareholders' equity $ 5,417,577 $ 3,282,247 ============ ============
The accompanying notes are an integral part of these statements. F-3 UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARY (a development-stage company) CONSOLIDATED STATEMENTS OF OPERATIONS
Period from Inception Year Ended Year Ended Year Ended (June 17, 1994) to December 31, 1997 December 31, 1996 December 31, 1995 December 31, 1997 ----------------- ----------------- ----------------- --------------------- REVENUE: Contract research revenue $ 93,605 $ -- $ -- $ 93,605 ----------- ----------- ----------- ------------ OPERATING EXPENSES: Research and development (See Note 3) 4,207,898 948,568 2,073,739 7,230,205 General and administrative 1,986,628 938,741 998,922 3,935,412 ----------- ----------- ----------- ------------ Total operating expenses 6,194,526 1,887,309 3,072,661 11,165,617 ----------- ----------- ----------- ------------ Operating loss (6,100,921) (1,887,309) (3,072,661) (11,072,012) INTEREST INCOME 173,203 118,314 -- 291,517 ----------- ----------- ----------- ------------ NET LOSS $(5,927,718) $(1,768,995) $(3,072,661) $(10,780,495) ----------- ----------- ----------- ------------ BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (0.64) $ (0.21) $ (0.45) ----------- ----------- ----------- WEIGHTED AVERAGE SHARES USED IN COMPUTING BASIC AND DILUTED NET LOSS PER COMMON SHARE 9,327,521 8,287,268 6,847,305 ----------- ----------- -----------
The accompanying notes are an integral part of these statements. F-4 UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARY (a development-stage company) CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
Series A Nonconvertible Preferred Stock Additional ----------------------- Common Stock Paid-In Shares Amount Shares Amount Capital ------- ------ ---------- -------- ----------- BALANCE, INCEPTION - (JUNE 17, 1994) -- $ -- 6,000,000 $ 6,000 $ -- Net Loss -- -- -- -- -- ------- ------ ---------- -------- ----------- BALANCE, DECEMBER 31, 1994 -- -- 6,000,000 6,000 -- Recapitalization by issuance of Common Stock to Enzymatics, Inc. (Note 2) -- -- 523,268 59,233 (243,393) Issuance of Common Stock options to former sole director of Enzymatics, Inc. to satisfy an Enzymatics, Inc. liability (Note 2) -- -- -- -- 140,000 Issuance of Series A Nonconvertible Preferred Stock in connection with assignment of research and license agreements (Note 2) 200,000 2,000 -- -- 348,000 Issuance of Common Stock through private placements, net of issuance expenses of $50,000 (Note 2) -- -- 1,114,000 11,140 2,166,860 Issuance of Common Stock options (Note 2) -- -- -- -- 9,950 Net loss -- -- -- -- -- ------- ------ ---------- -------- ----------- BALANCE, DECEMBER 31, 1995 200,000 2,000 7,637,268 76,373 2,421,417 Issuance of Common Stock in Initial Public Offering on April 11, 1996 (Note 2) -- -- 1,300,000 13,000 5,492,928 Issuance of Common Stock warrants (Note 6) -- -- -- -- 25,000 Net loss -- -- -- -- -- ------- ------ ---------- -------- ----------- BALANCE, DECEMBER 31, 1996 200,000 2,000 8,937,268 89,373 7,939,345 Exercise of private placement warrants -- -- 1,124,000 11,240 3,929,560 Issuance of Common Stock warrants -- -- -- -- 528,985 Issuance of Common Stock options -- -- -- -- 216,000 Issuance of Common Stock and warrants in connection with 1997 Sponsored Research Agreement (Note 4) -- -- 200,000 2,000 3,118,329 Exercise of Common Stock options and warrants -- -- 41,000 410 80,590 Net loss -- -- -- -- -- ------- ------ ---------- -------- ----------- BALANCE, DECEMBER 31, 1997 200,000 $2,000 10,302,268 $103,023 $15,812,809 ======= ====== ========== ======== ===========
F-5
Deficit Accumulated During Total Development Shareholders' Stage (Equity/Deficit) ------------ ---------------- BALANCE, INCEPTION - (JUNE 17, 1994) $ -- $ 6,000 Net Loss (11,121) (11,121) ----------- ---------- BALANCE, DECEMBER 31, 1994 (11,121) (5,121) Recapitalization by issuance of Common Stock to Enzymatics, Inc. (Note 2) -- (184,160) Issuance of Common Stock options to former sole director of Enzymatics, Inc. to satisfy an Enzymatics, Inc. liability (Note 2) -- 140,000 Issuance of Series A Nonconvertible Preferred Stock in connection with assignment of research and license agreements (Note 2) -- 350,000 Issuance of Common Stock through private placements, net of issuance expenses of $50,000 (Note 2) -- 2,178,000 Issuance of Common Stock options (Note 2) -- 9,950 Net loss (3,072,661) (3,072,661) ----------- ---------- BALANCE, DECEMBER 31, 1995 (3,083,782) (583,992) Issuance of Common Stock in Initial Public Offering on April 11, 1996 (Note 6) -- 5,505,928 Issuance of Common Stock warrants (Note 6) -- 25,000 Net loss (1,768,995) (1,768,995) ----------- ---------- BALANCE, DECEMBER 31, 1996 (4,852,777) 3,177,941 Exercise of private placement warrants -- 3,940,800 Issuance of Common Stock warrants -- 528,985 Issuance of Common Stock options -- 216,000 Issuance of Common Stock and warrants in connection with 1997 Sponsored Research Agreement (Note 4) -- 3,120,329 Exercise of Common Stock options and warrants -- 81,000 Net loss (5,927,718) (5,927,718) ----------- ---------- BALANCE, DECEMBER 31, 1997 $(10,780,495) $5,137,337 ============ ==========
The accompanying notes are an integral part of these statements. F-6 UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARY (a development-stage company) CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended Year Ended Year Ended December 31,1997 December 31,1996 December 31,1995 ---------------- ---------------- ---------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(5,927,718) $(1,768,995) $(3,072,661) Depreciation 27,398 10,926 1,029 Issuance of Common Stock options and warrants 316,000 25,000 9,950 Issuance of Common Stock and warrants in connection with amended research and license agreements 3,120,329 -- -- Acquired in-process technology -- -- 350,000 Adjustments to reconcile net loss to net cash used in operating activities: (Increase) decrease in assets: Contract research receivables (88,366) -- -- Receivable from related party (51,906) -- -- Other current assets (30,715) (59,091) -- Deposits 17,346 (93,419) -- Increase (decrease) in liabilities: Accounts payable and accrued expenses 175,934 (379,394) 439,540 Payable to related parties -- (105,476) 350,355 ----------- ----------- ----------- Net cash used in operating activities (2,441,698) (2,370,449) (1,921,787) ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of equipment (23,287) (67,294) (6,173) Purchases of short-term investments (5,019,570) (2,430,000) -- Proceeds from sale of short-term investments 2,910,000 -- -- ----------- ----------- ----------- Net cash used in investing activities (2,132,857) (2,497,294) (6,173) ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of Common Stock 4,021,800 5,505,928 1,928,000 ----------- ----------- ----------- (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (552,755) 638,185 40 CASH AND CASH EQUIVALENT, BEGINNING OF PERIOD 638,225 40 -- CASH AND CASH EQUIVALENTS, END OF PERIOD: $ 85,470 $ 638,225 $ 40 =========== =========== =========== Period from Inception (June 17, 1994) to December 31, 1997 ------------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(10,780,495) Depreciation 39,353 Issuance of Common Stock options and warrants 350,950 Issuance of Common Stock and warrants in connection with amended research and license agreements 3,120,329 Acquired in-process technology 350,000 Adjustments to reconcile net loss to net cash used in operating activities: (Increase) decrease in assets: Contract research receivables (88,366) Receivable from related party (51,906) Other current assets (89,806) Deposits (76,073) Increase (decrease) in liabilities: Accounts payable and accrued expenses 236,080 Payable to related parties 250,000 ------------ Net cash used in operating activities (6,739,934) ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of equipment (96,754) Purchases of short-term investments (7,449,570) Proceeds from sale of short-term investments 2,910,000 ------------ Net cash used in investing activities (4,636,324) ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of Common Stock 11,461,728 ------------ (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS 85,470 CASH AND CASH EQUIVALENT, BEGINNING OF PERIOD -- CASH AND CASH EQUIVALENTS, END OF PERIOD: 85,470 ============
The accompanying notes are an integral part of these statements. F-7 UNIVERSAL DISPLAY CORPORATION (a development-stage company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BACKGROUND Universal Display Corporation (the "Company"), a development-stage company, is engaged in the research and development and commercialization of organic light emitting diode ("OLED") technology for potential flat panel display applications. The Company, formerly known as Enzymatics, Inc. ("Enzymatics"), was incorporated under the laws of the Commonwealth of Pennsylvania on April 24, 1985 and commenced its current business activities on August 1, 1994. The New Jersey corporation formerly known as Universal Display Corporation ("UDC") was incorporated under the laws of the State of New Jersey on June 17, 1994. See Note 2. Research and development of the OLED technology is being conducted at the Advanced Technology Center for Photonics and Optoelectronic Materials at Princeton University and at the University of Southern California ("USC") (on a subcontract basis with Princeton University), pursuant to a Sponsored Research Agreement dated August 1, 1994, as amended (the "1994 Sponsored Research Agreement"), originally between the Trustees of Princeton University ("Princeton University") and American Biomimetics Corporation ("ABC"), a privately held Pennsylvania corporation and affiliate of the Company. In October 1997, the Company entered into a new 5-year Sponsored Research Agreement with Princeton University and USC (the "1997 Sponsored Research Agreement") for research and development of the OLED technology. (See Note 4). Pursuant to a license agreement dated August 1, 1994 (the "1994 License Agreement") between Princeton University and ABC, assigned to the Company by ABC in June 1995, the Company has a worldwide exclusive license to manufacture and market products based on Princeton University's patents and pending patent applications relating to the OLED technology and the right to obtain a similar license to inventions conceived or discovered under the 1994 Sponsored Research Agreement and to sublicense such rights. In October 1997, the Company amended the 1994 License Agreement (the "1997 Amended License Agreement") to modify certain terms of the license (See Note 4). The Company's Chairman and Chief Executive Officer holds similar positions in ABC, a company which is controlled by members of his family. See Notes 2 and 8. The Company is a development-stage entity with no significant operating activity to date. Expenses incurred have primarily been in connection with research and development funding, obtaining financing and administrative activities. The developmental nature of the activities is such that significant inherent risks exist in the Company's operations. To the extent that Princeton University's research efforts do not result in the development of commercially viable applications for the OLED technology, the Company will not have any meaningful operations. Even if a product incorporating the OLED technology is developed and introduced into the marketplace, additional time and funding may be necessary before significant revenues are realized. Completion of the commercialization of the Company's technology will require funds substantially greater than the Company currently has available. Notwithstanding the risks discussed above, the Company anticipates, based on management's internal forecasts and assumptions relating to its operations, that it has sufficient cash to meet its obligations for at least the current fiscal year. There is no assurance that such financing will be available to the Company when needed, on commercially reasonable terms or at all. Also, while the Company funds the OLED technology research, the scope of and technical aspects of the research and the resources and efforts directed to such research is subject to the control of Princeton University and the principal investigators. Accordingly, the Company's success is dependent on the efforts of Princeton University and the principal investigators. The 1997 Sponsored Research Agreement provides that if certain of the principal investigators are unavailable to continue to serve as principal investigators, because such persons are no longer associated with Princeton University or otherwise, and successors acceptable to both the Company and Princeton University are not available, the 1997 Sponsored Research Agreement will terminate. 2. STOCK TRANSACTIONS, MERGER, RECAPITALIZATION AND PUBLIC OFFERING On June 22, 1995, a wholly-owned subsidiary of the Company consummated an Agreement and Plan of Reorganization ("Merger Agreement") with a New Jersey corporation formerly known as Universal Display Corporation (herein referred to as "UDC"). At the time of the merger, UDC was engaged in the business which is currently being conducted by the Company. Prior to the merger, the Company was known as Enzymatics, an inactive Pennsylvania corporation, and was engaged in a business separate from and unrelated to that of UDC. Enzymatics had incurred significant losses since its inception in 1985 and, notwithstanding a public offering, failed to find significant alternative sources of financing to enable it to continue its operations on any scale. In June 1994, the shareholders of Enzymatics approved the sale of substantially all of its assets to a third party. Management of UDC concluded that merging with a former publicly traded company, and acquiring access to its shareholder base, would facilitate its ability to raise additional capital in the private or public markets. Management of UDC determined that such additional capital would be necessary to fulfill its financial obligations under the Transfer Agreement (as herein defined) pursuant to which it obtained certain rights and obligations related to the OLED technology, obtain funds to commercialize the OLED technology, fund the acquisition of additional intellectual property rights useful to the OLED technology and to fund working capital. As of June 22, 1995, Enzymatics had 523,268 shares issued and F-8 UNIVERSAL DISPLAY CORPORATION (a development-stage company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS outstanding (after giving effect to a reverse stock split of 10.9672) which were not actively traded. Pursuant to the Merger Agreement, the former Enzymatics shareholders received 523,268 shares of the merged entity's Common Stock. Additionally, Nachman, Hays & Associates (NHA), a consulting firm, received options to purchase 84,234 shares of the merged entity's Common Stock at an exercise price of $.29 per share (see Note 6) as payment of NHA's consulting services in connection with the wind-down of Enzymatics. These options were issued to satisfy a liability which was reflected on the balance sheet of Enzymatics on the date of the merger. The sole director of Enzymatics, is also a principal of NHA. The merger was treated, for accounting purposes, as a recapitalization of UDC whereby UDC issued 523,268 shares of Common Stock to the Enzymatics shareholders and assumed Enzymatics shareholders' deficit of $184,160. The assets and liabilities of both companies have been recorded at their historical book values in these financial statements. The assets of Enzymatics consisted of cash and its liabilities consisted of payables related to the merger and other professional fees. Upon consummation of the merger, UDC's shareholders collectively owned approximately 92% of the outstanding shares of the merged entity, with the former Enzymatics shareholders retaining the balance of approximately 8%. UDC was the surviving corporation in the merger, changed its name to UDC, Inc., and, as a result of the merger, became a wholly-owned subsidiary of Enzymatics. At the effective time of the merger, Enzymatics changed its name to Universal Display Corporation. Universal Display Corporation and its wholly owned subsidiary, UDC, Inc., are herein referred to collectively as the "Company." Contemporaneous with the merger, the Company and ABC entered into a Technology Transfer Agreement dated June 22, 1995 (the "Transfer Agreement") pursuant to which, among other things, ABC assigned the 1994 License Agreement to the Company, and granted to the Company an exclusive worldwide sublicense to patents and other intellectual property rights to display technology developed under a Sponsored Research Agreement dated October 22, 1993 between ABC and Princeton University (the "1993 Sponsored Research Agreement") in exchange of (i) reimbursement of ABC's scheduled payments and expenses previously made to Princeton University under the 1994 Sponsored Research Agreement in the amount of $674,000 and a payment of $500,000 for the sublicense under the 1993 Sponsored Research Agreement which were charged to research and development expense (see Notes 3 and 4); (ii) the Company's assumption of ABC's obligation to pay all future scheduled payments under the 1994 Sponsored Research Agreement, which were approximately $1,610,000, plus expenses related thereto estimated to be $500,000 for a total of $2,110,000; and (iii) 200,000 shares of the Company's Series A Nonconvertible Preferred Stock (see Notes 3 and 6) with a fair value of $350,000. Also, contemporaneous with the merger, the Company sold 781,500 units ("Units") at a price of $2.00 per Unit, in a private placement, which generated proceeds of $1,513,000, net of offering expenses in the amount of $50,000. Each Unit consisted of one share of Common Stock and one warrant to purchase one share of Common Stock at an exercise price of $3.50 per share. Additionally, 125,000 Units with a fair value of $250,000, based upon the price of the Units, were transferred to a non-affiliate debt holder of ABC to satisfy $250,000 of ABC's outstanding debt. Therefore, the Company had a receivable of this amount from ABC. Accordingly, ABC netted this $250,000 receivable against the Company's payable to related parties account as shown on the accompanying Consolidated Balance Sheets (see Note 8). In addition, on July 17, 1995, the Company sold an additional 207,500 Units which generated gross proceeds of $415,000. On April 11, 1996, the Company consummated a public offering of 1,300,000 shares of Common Stock at a price of $5.00 per share and redeemable warrants to purchase 1,495,000 shares of Common Stock at an exercise price of $3.50 per share, at a price of $.10 per warrant. The Company received net cash proceeds of $5,282,665 from the public offering (excluding $223,263 representing a portion of the offering expenses previously charged to general and administration expenses). 3. 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. (see Note 2). All significant intercompany transactions and accounts have been eliminated. F-9 UNIVERSAL DISPLAY CORPORATION (a development-stage company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Management's Use of Estimates The preparation of financial statements in conformity with 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 and Short-Term Investments The Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. Investments are carried at market value, and at December 31, 1997, are classified as short-term investments. At December 31, 1997, all of the Company's investments are classified as available for sale pursuant to Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities," (SFAS 115). Therefore, any unrealized holding gains or losses should be presented as a separate component of shareholders' equity. At December 31, 1997, unrealized holding gains or losses were not material. The gross proceeds from sales and maturities of investments were $2,910,000 for the year ended December 31, 1997. Gross realized gains and losses for the year ended December 31, 1997, were not material. For the purpose of determining gross realized gains and losses, the cost of securities sold is based upon specific identification. Cash, cash equivalents and short-term investments consisted of the following: December 31 -------------------------- 1997 1996 ---------- --------- Cash and cash equivalents: Money market funds and demand accounts $ 85,470 $ 638,225 ========== ========= Short-term investments: Certificates of deposit 2,622,014 1,830,000 Corporate bonds 1,917,556 600,000 ---------- ---------- $4,539,570 $2,430,000 ========== ========== Property and Equipment Property and equipment are stated at cost and depreciated on a straight-line basis over 3 years. Net Loss Per Common Share The Company has adopted Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings per Share", which supersedes APB Opinion No. 15 ("APB No. 15"), "Earnings per Share", and which is effective for all periods ending after December 15, 1997. SFAS 128 requires dual presentation of basic and diluted earnings per share ("EPS") for complex capital structures on the face of the Statements of Operations. Basic EPS is computed by dividing net income by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution from the exercise of conversion of securities into common stock. For the years ended December 31, 1997, 1996, and 1995, the effects of the exercise of outstanding stock options and warrants were excluded from the calculation of diluted EPS because their effect was antidilutive. As a result of the Company's adoption of SFAS 128, the Company's reported loss per share for 1996 and 1995 was restated. The effect of this accounting change on previously reported loss per share data was as follows: 1996 1995 ------ ------ Loss per share as reported - primary and fully diluted $(0.20) $(0.38) Effect of SFAS 128 (0.01) (0.07) ------ ------ Loss per share as restated - basic and diluted $(0.21) $(0.45) ====== ====== F-10 UNIVERSAL DISPLAY CORPORATION (a development-stage company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Contract Research Revenue Contract research revenues are recognized as the related expenses are incurred. Research and Development Expenditures for research and development are charged to operations as incurred. Research and development expenses consist of the following:
Year Ended Year Ended Year Ended December 31, 1997 December 31, 1996 December 31, 1995 ----------------- ----------------- ----------------- Payments made to Princeton University under the 1994 Sponsored Research Agreement (See Note 2) $ 347,374 $713,815 $549,739 Patent application and prosecution expenses 715,406 234,753 -- Issuance of 200,000 shares of the Company's Common Stock and warrants to purchase 250,000 shares of Common Stock under the 1997 Sponsored Research Agreement (See Note 4) 3,120,329 -- -- Reimbursement of ABC payments made to Princeton University under the 1994 Sponsored Research Agreement (See Note 2) -- -- 674,000 Payment made to ABC for sublicense under the 1993 Sponsored Research Agreement (See Note 2) accounted for as acquired in-process technology -- -- 500,000 Issuance of 200,000 shares of the Company's Series A Nonconvertible Preferred Stock to ABC in connection with the Transfer Agreement (See Notes 2 and 6) accounted for as in-process technology -- -- 350,000 ---------- -------- ---------- Other Expenses 24,789 -- -- ---------- -------- ---------- $4,207,898 $948,568 $2,073,739 ========== ======== ==========
The 200,000 shares of the Company's Series A Nonconvertible Preferred Stock were valued at $1.75 per share which was based upon an independent appraisal. Income Taxes The Company accounts for income taxes under the provisions of Statement of Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes." SFAS No. 109 requires the liability method of accounting for deferred income taxes. 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. 4. SPONSORED RESEARCH AGREEMENT WITH PRINCETON UNIVERSITY On October 9, 1997, the Company entered into a new 5-year Sponsored Research Agreement (the "1997 Sponsored Research Agreement"), with Princeton University and entered into an Amended License Agreement with Princeton University and USC amending its 1994 License Agreement with Princeton University (the "1997 Amended License Agreement"). The 1997 Sponsored Research Agreement continues and expands the sponsored research which commenced in 1994 underwhich the Company funds additional research and development work at Princeton University (and at USC under a subcontract with Princeton University) in OLED technology. The 1997 Sponsored Research Agreement requires the Company to pay up to $4.4 million commencing on July 31, 1998 through July 31, 2002, which period is subject to extension. The amounts due to Princeton University will be expensed when paid by the Company. In addition, Princeton has acknowledged that approximately $1 million of amounts paid under the 1994 Sponsored Research Agreement were not expended and are expected to be used through July 31, 1998. Under the 1997 License Agreement, the Company has the exclusive worldwide license to manufacture and market products, and to sublicense those rights, based on Princeton University's and USC's pending patent applications relating to the OLED technology and conceived under the 1994 and 1997 Sponsored Research Agreements. The Company is required to pay Princeton F-11 UNIVERSAL DISPLAY CORPORATION (a development-stage company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS University a royalty in the amount of 3% of the Company's net sales of products utilizing the OLED technology. In circumstances where the Company sublicenses the OLED technology (except to affilates), the royalty required to be paid by the Company was reduced in the 1997 License Agreement from 50% to 3%. These royalty rates are subject to upward adjustments under certain conditions. The Company is required to pay minimum royalties to Princeton of $25,000 in 1999, $50,000 in 2000, $75,000 in 2001, and $100,000 in 2002 and thereafter while the 1997 License Agreement is in effect. In connection with the 1997 License Agreement and Sponsored Research Agreement, in October 1997, the Company has issued 140,000 common shares and 175,000 warrants to purchase Common Stock to Princeton University as well as 60,000 common shares and 75,000 warrants to purchase Common Stock to the University of Southern California. The Company recorded a charge of $3,120,329 related to the issuance of the Common Stock and warrants to purchase Common Stock. The value of the warrants was determined in accordance with Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation." This charge is included in research and development expenses in the accompanying Consolidated Statement of Operations. 5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued expenses consist of the following: December 31, 1997 December 31, 1996 ----------------- ----------------- Accrued professional fees $156,857 $ 65,076 Other 123,383 39,230 -------- -------- $280,240 $104,306 ======== ======== 6. SERIES A NONCONVERTIBLE PREFERRED STOCK, STOCK OPTIONS AND WARRANTS Series A Nonconvertible Preferred Stock In 1995, the Company issued 200,000 shares of Series A Nonconvertible Preferred Stock ("Series A") to ABC (See Notes 2 and 3), which has a liquidation value of $7.50 per share. Series A holders, as a single class, have the right to elect two of the Company's Board of Directors. The holders of Series A shares are entitled to one vote per share on matters which shareholders are generally entitled to vote. The Series A holders are not entitled to any dividends. Stock Options Enzymatics 1992 Stock Option Plan The stock options granted prior to the merger by Enzymatics under the 1992 Stock Option Plan and which have been assumed by the Company and after giving effect to the reverse stock split, were converted into options to purchase 20,538 shares of Common Stock of the Company at exercise prices ranging from $11.74 to $29.61 per share. All of such options are currently exercisable and expire on December 31, 1998. 1995 Stock Option Plan In 1995, the directors of the Company adopted the 1995 Stock Option Plan (the "1995 Plan"), under which a maximum of 500,000 options may be granted at prices not less than 100% of the fair market value of the Common Stock on the date of grant as determined by the Board of Directors. In 1997, the Shareholders approved the Plan to increase the number of Common shares reserved for the 1995 Plan to 800,000 options. The 1995 Plan provides for the granting of both incentive and nonqualified stock options to employees, officers, directors and consultants of the Company. The stock options are exercisable over a period determined by the Board of Directors, but no longer than ten years after the grant date. In June 1995, the Company granted options to purchase 70,000 shares of Common Stock to an officer of the Company at an exercise prices of $2.00 per share, which approximated the fair market value of the Common Stock at the grant date. These options vest as follows: 20,000 options vested immediately upon grant with the remaining 50,000 options vesting in equal amounts over three years. Accordingly, as of December 31, 1997, 53,333 options were exercisable. These options expire in 2005. In addition, in June 1995, the Company granted options to purchase 5,000 shares of Common Stock to the same officer of the Company at an exercise price of $.01 per share, all of which were exercised in October 1997. These options vested on the grant date. The Company recorded a charge of $9,950, which represents the difference between the deemed value of the Common Stock for accounting purposes and the exercise price of the options at the grant date. This charge is included in general and administrative expenses in the accompanying Consolidated Statements of Operations. F-12 UNIVERSAL DISPLAY CORPORATION (a development-stage company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In 1995, the Company granted nonqualified stock options to three principal investigators who are conducting research under the 1994 Sponsored Research Agreement and the 1993 Sponsored Research Agreement. The Company granted options to purchase an aggregate of 240,000 shares of Common Stock to the three principal investigators at an exercise price of $4.00 per share, which approximated the fair market value of the Common Stock at the grant date. These options vest as follows: 33% at the grant date with the remaining 67% vesting over two years. Accordingly, as of December 31, 1997, options to purchase 240,000 shares of Common Stock were exercisable. These options expire in 2005. In 1996, the Company granted nonqualified stock options to two employees and one consultant. The Company granted options to purchase an aggregate of 30,000 shares of Common Stock at an exercise price of $4.12 per share, which approximated the fair market value of the Common Stock at the date of grant. These options vest as follows: 10,000 shares at the grant date with the remaining 20,000 shares vesting over 5 years. During 1997, 6,000 of these options were forfeited when an employee left the company. As of December 31, 1997, options to purchase 16,000 shares of Common Stock were exercisable. These options expire in 2006. In 1997, the Company granted incentive and nonqualfied stock options to several employees, officers, and principal investigators. The Company granted options to purchase an aggregate of 271,500 shares of Common Stock at exercise prices ranging from $4.06 to $5.25 per share, which approximated the fair market value of the Common Stock at the date of grant. These options vest either immediately upon grant or over a five year period. As 55,000 of these options were granted to non-employee principal investigators, the Company recorded a charge of $216,000, which represents the value of the options as determined in accordance with SFAS 123. This charge is included in general and administrative expenses in the accompanying Consolidated Statement of Operations. As of December 31, 1997, options to purchase 220,900 shares of Common Stock were exercisable. These options expire in 2007. Other Options In connection with NHA's services relative to consummation of the merger discussed in Note 2, in June 1995, the Company granted options to purchase 84,234 shares of Common Stock at an exercise price of $.29 per share to NHA. These options were used to satisfy a liability reflected on the balance sheet of Enzymatics on the date of the merger. These options vested 100% upon grant and 15,000 were exercised in 1997. Accordingly, as of December 31, 1997, 69,234 options were exercisable. These options expire in 2005. The following table summarizes all stock option activity:
1997 1996 ---------------------------- ---------------------------- Weighted Average Weighted Average Shares Exercise Price Shares Exercise Price ------- ---------------- ------- ---------------- Outstanding at beginning of year 449,772 $3.72 419,772 $3.69 Granted 271,500 $4.99 30,000 $4.12 Exercised (25,000) $1.00 -- -- Forfieted (6,000) $4.12 -- -- ------- ----- ------- ------ Outstanding at end of year 690,272 $4.17 449,772 $3.72 ------- ----- ------- ----- Exercisable at end of year 604,006 $4.16 316,439 $3.80 ------- ----- ------- ----- Available for future grant 189,500 155,000 ------- ------- Weighted average fair value of options granted $3.85 $3.18 ===== ===== 1995 ---------------------------- Weighted Average Shares Exercise Price ------- ---------------- Outstanding at beginning of year 20,538 $20.67 Granted 399,234 $2.82 Exercised -- -- Forfieted -- -- ------- ----- Outstanding at end of year 419,772 $3.69 ------- ----- Exercisable at end of year 208,772 $3.86 ------- ----- Available for future grant 185,000 ------- Weighted average fair value of options granted $2.54 =====
The weighted average remaining contractual life for options outstanding at December 31, 1997, 1996 and 1995 was 8 years, 8 years and 9 years, respectively. Common Stock Warrants In connection with the June 22, 1995 private placement and the July 17, 1995 private placement (See Note 2), the Company issued 906,500 warrants and 207,500 warrants, respectively each warrant entitled the holder to purchase one share of Common Stock at an exercise price of $3.50 per share. In 1997, all of these outstanding warrants were exercised. F-13 UNIVERSAL DISPLAY CORPORATION (a development-stage company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS On April 11, 1996, the Company consummated a public offering of 1,300,000 shares of Common Stock at a price of $5.00 per share and redeemable warrants to purchase 1,495,000 shares of Common Stock at an exercise price of $3.50 per share. In connection with the public offering, the Company issued warrants to its underwriter to purchase up to 130,000 shares of Common Stock at an exercise price of $8.25 per share and warrants to purchase an additional 130,000 shares of Common Stock at an exercise price of $3.675 per share. In April 1996, the Company issued warrants to third parties to purchase up to 578,000 shares of Common Stock at an exercise price of $4.125 per share. These warrants expire in 2006. In August 1996, the Company granted warrants to purchase 20,000 shares of Common Stock to an individual in exchange for consulting services. These warrants have an exercise price of $6.00 per share, vest immediately, and expire in August 2006. The Company recorded a charge of $25,000, which represents the value of the warrant as determined in accordance with SFAS 123. This charge is included in general and administrative expenses in the accompanying Consolidated Statements of Operations. In April 1996, the Company granted warrants to four employees and one consultant to purchase 925,000 shares of the Company's Common Stock at an exercise price of $4.125 per share, which approximated the fair market value of the Common Stock at the date of grant. These warrants vest at 25% at the date of grant and the remaining 75% vest over 5 years, provided these employees are employed by the Company on the vesting date. These warrants expire in 2006. In 1997, the Company granted warrants to Princeton University and the University of Southern California under the 1997 Sponsored Research Agreement (see Note 4) to purchase an aggregate of 250,000 shares of Common Stock at an exercise price of $7.25 per share, which approximated the fair market value of the Common Stock at the date of grant. These warrants vest immediately upon grant and expire in 2007. Also in 1997, the Company granted warrants to consultants to purchase 200,000 shares of Common Stock at an exercise price of $4.80 per share. These warrants vest immediately upon grant and expire in 2002. The Company valued the warrants in accordance with SFAS 123. The warrants will be expensed over the three year consulting period. In 1997, the Company recorded a charge of $100,000, which is included in general and administrative expenses in the accompanying Consolidated Statement of Operations. The unamortized portion of this charge is recorded as prepaid consulting fee on the accompanying Consolidated Balance Sheet. Pro Forma Disclosure for Stock-Based Compensation The Company accounts for its employee stock-based compensation plans under APB Opinion No. 25, "Accounting for Stock Issued to Employees." Accordingly, no compensation expense has been recognized other than the $9,950 charge relating to 5,000 options granted to an officer in the Company in 1995. In 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS 123 establishes a fair value based method of accounting for stock-based compensation plans. SFAS 123 requires that an employer's financial statements include certain disclosures about stock-based employee compensation arrangements regardless of the method used to account for the plan. Had the Company recognized compensation cost for its stock based compensation plans consistent with the provisions of SFAS 123, the Company's net loss and net loss per share would have been increased to the following pro forma amounts: F-14 UNIVERSAL DISPLAY CORPORATION (a development-stage company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1997 1996 1995 ----------- ----------- ------------ Net Loss: As Reported $(5,927,718) $(1,768,995) $(3,072,661) Pro Forma (6,985,174) (2,432,979) (3,373,918) Net Loss per Share: As Reported $(.64) $(.21) $(.45) Pro Forma $(.75) (.29) (.49) The fair value of each option or warrant granted is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions used for grants in 1997, 1996 and 1995, respectively: risk-free interest rates of 5.9% to 6.7%, 6.6% and 5.9% to 6.1%, expected dividend yields of zero for each year, expected volatility of 81%, 80% and 80% and expected lives of 7 years for each year. Because the SFAS 123 method of accounting has not been applied to options and warrants granted prior to January 1, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years. 7. RESEARCH CONTRACTS Contract research revenue consists of the following:
Year Ended December 31, 1997 ----------------- Department of Defense Advanced Research Projects Agency (DARPA) $72,630 New Jersey Commission on Science and Technology (NJCST) 15,736 National Science Foundation (NSF) 5,239 ------- $93,605 =======
8. RELATED PARTY TRANSACTIONS ABC paid professional fees of $16,154, as well as certain other administrative expenses of $138,019 on behalf of the Company from November 1994 through December 1995. As of December 31, 1995, the Company had reimbursed ABC for $63,245 of such expenses. ABC provided the Company with certain administrative services, however there was no charge from ABC to the Company for these services for the period from inception (June 17, 1994) to December 31, 1994 and for the year ended December 31, 1995. As discussed in Note 2, the Company had a payable to ABC of $1,174,000 (due to the Transfer Agreement) and a receivable from ABC of $250,000 (see Note 2). As of December 31, 1995, the Company had reimbursed ABC the net amount due of $924,000. In 1997, the Company shared certain administrative support and office space with Global Photonic Energy Corporation managed by certain officers of the Company and in which certain shareholders have a significant minority interest. The officers of the Company are also the officers of this related company. The Company charged Global Photonic Energy Corporation $51,906 in 1997 for these services. This amount is included in receivable from related party on the accompanying consolidated balance sheet. F-15 UNIVERSAL DISPLAY CORPORATION (a development-stage company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9. COMMITMENTS Lease Commitments The Company has several operating lease arrangements for office space and office equipment. Total rent expense was $78,078 for the year ended December 31, 1997. Minimum future rental payments for operating leases as of December 31, 1997 are as follows: Year Amount ---- -------- 1998 $ 91,467 1999 $ 88,089 2000 $ 84,698 2001 $ 35,049 -------- $299,303 ======== 10. INCOME TAXES The components of income taxes are as follows:
December 31, 1997 December 31, 1996 December 31, 1995 ----------------- ----------------- ----------------- Current $ -- $ -- $ -- Deferred (2,015,424) (601,344) (966,152) ----------- --------- --------- (2,015,424) (601,344) (966,152) Increase in valuation allowance provision 2,015,424 601,344 966,152 ----------- --------- --------- $ -- $ -- $ -- =========== ========= =========
The difference between the Company's federal statutory income tax rate and its effective income tax rate is primarily due to non-deductible expenses and the valuation allowance. As of December 31, 1997, the Company had net operating loss carryforwards of approximately $5,500,000, which will begin to expire in 2010. The net operating loss carryforwards differ from the accumulated deficit principally due to the timing of the recognition of certain expenses. In accordance with the Tax Reform Act of 1986, the net operating loss carryforwards could be subject to certain limitations. Significant components of the Company's deferred tax assets and liabilities as of December 31, 1997 and 1996 are as follows: December 31, 1997 December 31, 1996 ----------------- ----------------- Gross deferred tax assets Net operating loss carryforwards $2,051,418 $ 747,961 Capitalized start-up costs 1,192,472 590,458 Capitalized technology license 170,000 170,000 Other 169,030 59,077 ----------- ----------- 3,582,920 1,567,496 Valuation allowance (3,582,920) (1,567,496) Net deferred tax assets $ -- $ -- =========== =========== A valuation allowance was established for 100% of the net deferred tax asset, since the Company has incurred substantial operating losses and expects additional losses in 1998. The Company's management has concluded that the realizability of the deferred tax assets is uncertain. F-16 UNIVERSAL DISPLAY CORPORATION SIGNATURES Pursuant to the requirements of Section 13 and 15(d) of the Securities Exchange Act of 1934, Universal Display Corporation has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized: UNIVERSAL DISPLAY CORPORATION By: /s/ SHERWIN I. SELIGSOHN ----------------------------------------- Sherwin I. Seligsohn Chairman of the Board and Chief Executive Officer Date: March 31, 1998 -------------- 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 indicated on the dates indicated.
Name Title Date ---- ----- ---- /s/ SHERWIN I. SELIGSOHN Chairman of Board and Chief March 31, 1998 - ------------------------ Executive Officer Sherwin I. Seligsohn /s/ STEVEN V. ABRAMSON President, Chief Operating Officer March 31, 1998 - ------------------------ and Director Steven V. Abramson /s/ SIDNEY D. ROSENBLATT Executive Vice President, Chief March 31, 1998 - ------------------------ Financial Officer, Treasurer, Sidney D. Rosenblatt Secretary and Director /s/ DEAN L. LEDGER Executive Vice President and Director March 31, 1998 - ------------------------ Dean L. Ledger /s/ ELIZABETH H. GEMMILL Director March 31, 1998 - ------------------------ Elizebeth H. Gemmill /s/ CAMILLE NAFFAH Director March 31, 1998 - ------------------------ Camille Naffah
EX-10.34 2 RESEARCH AGREEMENT PRINCETON UNIVERSITY RESEARCH AGREEMENT This Research Agreement, effective August 1, 1997 between the Trustees of Princeton University, a not-for-profit, private educational institution existing in the State of New Jersey, hereinafter referred to as "Princeton" and UDC Inc., a New Jersey Corporation and a wholly owned subsidiary of Universal Display Corporation, hereinafter referred to as "Sponsor" or "UDC." 1. Statement of Work Princeton, through its Advanced Technology Center for Photonics and Optoelectronic Materials, has valuable experience, skill and ability in full color flat panel emissive display technology employing crystalline organic and metal/organic semiconductor light emitting diodes, organic semiconductor lasers or other organic technologies. Sponsor desires to have Princeton continue to undertake a research project in the above-named area in accordance with the scope of work outlined in Exhibit A, Research Proposal entitled Organic Light Emitters: Research and Engineering submitted May 31, 1997. Princeton agrees to use reasonable effort to perform the research project described therein and hereafter referred to as the "Research." Sponsor acknowledges that Princeton makes no expressed or implied warranties for the research. 2. Principal Investigator The Research will be supervised by Professor Stephen Forrest at Princeton and Professor Mark Thompson at the University of Southern California (USC). If for any reason Professor Forrest is unable to continue to serve as Principal Investigator and a successor acceptable to both Princeton and Sponsor is not available, this Agreement shall be terminated as provided in Article 6. The technical point of contact will be Professor Forrest. 3. Period of Performance This research will be conducted during the period August 1, 1997 through July 30, 2002, but may be extended for an additional two years at Princeton's discretion. Further extensions can be made by mutual written agreement of the Parties. 4. Reimbursement of Costs Princeton shall be reimbursed by Sponsor for all costs incurred in connection with the research at a maximum level of $4,400,000 plus any remaining funds from phase one. While it is estimated that this amount is sufficient to conduct the research, Princeton may submit to Sponsor a revised budget requesting additional funds. Sponsor is not liable for any cost in excess of the amount specified herein unless this Agreement is modified in writing. Any funds paid to Princeton and not expended upon expiration or termination of this Agreement (including all extensions thereof) shall be paid to UDC. 1 5. Payment Schedule Payments shall be made to Princeton by Sponsor in accordance with Exhibit B, appended herein. Checks shall be made payable to Princeton University, referencing Account Number 341-4046, and sent to: Raymond J. Clark, Treasurer P.O. Box 35 Princeton University Princeton, New Jersey 08544 6. Termination This Agreement and the License Agreement of even date herewith between Princeton, USC and UDC are integral parts of the relationship between the parties. The parties intend that termination of both Agreements are to occur only under extreme situations, and in the absence of any reasonable alternatives, as described herein. This Agreement is designed to provide maximum flexibility to perform the Research. Therefore, not achieving the desired objective is not a ground for termination of this Agreement. Princeton may terminate this Agreement if circumstances beyond its control preclude continuation of the research. Princeton or UDC can terminate this agreement only if a) the Principal Investigator leaves Princeton; b) both parties agree that the Research is not progressing in a satisfactory manner; or c) both parties agree on any material breach or default of this Agreement. In such cases, both parties will take reasonable steps to cure such breach or default. If such measures fail, the parties will settle the dispute in accordance with Article 21 "Arbitration". Upon termination, Princeton will be reimbursed for all costs and non-cancelable commitments incurred in the performance of the research and not yet paid for, such reimbursement together with other payments not to exceed the total estimated project costs specified in Article 4. 7. Intellectual Property Title to any inventions first conceived by Princeton personnel in the performance of the work funded under this Agreement shall vest in Princeton University. Princeton hereby grants to Sponsor the exclusive license to any and all such inventions on terms and conditions of a certain License Agreement of even date herewith. Title to any inventions first conceived by USC personnel in the performance of the work funded under this Agreement shall vest in USC, and shall be managed by Princeton in accordance with the Management Agreement between Princeton and USC, provided that USC notifies Princeton of such inventions. Sponsor shall have the exclusive license to any and all such inventions on terms and conditions of a certain License Agreement of even date herewith. 2 Princeton shall promptly provide a complete written disclosure for each and every invention first conceived or discovered in the performance of the work funded under this Agreement, including USC technologies, provided that USC notifies Princeton of such inventions. All such inventions shall automatically become subject to the License Agreement. Subject to the provisions of Exhibit C, title to any inventions first conceived jointly by personnel from Princeton, USC provided that USC notifies Princeton of such inventions, or UDC shall vest jointly in the names of Princeton, USC, or UDC as appropriate, and shall be subject to the License agreement. 8. Publication Princeton shall have the right, at its discretion, to release information or to publish any material resulting from the Research. Princeton shall furnish Sponsor with a copy of any proposed publication thirty (30) days in advance of the proposed publication date, to allow Sponsor to take appropriate steps to protect the patentability of any potential Invention described therein. Such delay shall not, however, be imposed on the filing of any student thesis or dissertation. Princeton shall give Sponsor the option of receiving an acknowledgment in any publication for its sponsorship of the Research. Sponsor understands that the basic objective of research activities at Princeton is the generation of new knowledge and its expeditious dissemination. Therefore, in review of any publication, Sponsor shall provide all reasonable cooperation in meeting this objective. 9. Consultation Selected personnel of Sponsor, designated by Sponsor to Princeton, shall have the right to confer with the Principal Investigator and his or her associates for such reasonable periods and at such times as are mutually agreeable. 10. Visiting Personnel Princeton and Sponsor agree that Sponsor can have visiting collaborators on the Princeton campus for agreed upon terms to engage in collaborative, non-commercial research and technology transfer with the Principal Investigator and his team, subject to the discretion of the Principal Investigator and Princeton. The terms outlined in Exhibit C shall apply to all Visiting Personnel. 11. Publicity and Use of Names Neither party shall use the name of the other in connection with any products, promotional literature, or advertising material without the prior consent of the other party, which shall not be unreasonably withheld, or except to the extent required by law. This shall not include internal documents available to the public that identify the existence of the Agreement. 3 Princeton shall use reasonable efforts to acknowledge UDC as the exclusive licensee of organic LED technologies in any press releases. 12. Reports Princeton shall furnish Sponsor calendar year quarterly reports during the term of this Agreement summarizing the research conducted. A final report setting forth the accomplishments and significant research findings shall be prepared by Princeton and submitted to Sponsor within ninety (90) days of the expiration of the Agreement. Princeton shall also furnish to Sponsor an annual expenditure report, outlining spending by major budget categories listed in the proposal budget. 13. Proprietary/Confidential Information All written information marked or designated in writing as confidential given to Sponsor by Princeton or by Sponsor to Princeton designated recipients under this Agreement shall be used only for the purposes given and shall be held in confidence by the receiving party so long as such information (i) remains unpublished by the giving party or does not otherwise become in the public domain, (ii) is not lawfully received by the receiving party from a third party, or (iii) is independently developed by the receiving party without the benefit of such information. Princeton and Sponsor agree to use all reasonable efforts to maintain the confidentiality of the information provided to it by the other party. Princeton designated recipients shall only be Professor Stephen Forrest, Professor Paul Burrows, and Joseph Montemarano. Princeton retains the right to refuse to accept any such information which it does not consider to be essential to the completion of the Research. 14. Indemnification Sponsor agrees to indemnify and hold Princeton harmless from any loss, claim, damage, or liability of any kind involving an employee of Sponsor arising out of or in connection with this Agreement, except to the extent that such loss, claim, damage, or liability arises in whole or in part from the gross negligence or willful misconduct of Princeton. 15. Warranties Princeton makes no warranties, express or implied, as to any matter whatsoever, including, without limitation, the condition of the research or any inventions(s) or product(s), whether tangible or intangible, conceived, discovered, or developed under this Agreement; or the ownership, merchantability, or fitness for a particular purpose of the research or any such invention or product. Princeton shall not be liable for any direct, consequential, or other damages suffered by any licensee or any others resulting from the use of the research or any such invention or product. 4 16. Equipment Title to any equipment purchased or manufactured in the performance of the work funded under the Agreement shall vest in Princeton. 17. Assignment Neither party shall assign this Agreement to another without the prior written consent of the other party; provided, however, that Sponsor may assign this Agreement to a successor in ownership of all or substantially all its business assets. Such successor shall expressly assume in writing the obligation to perform in accordance with the terms and conditions of this Agreement. Any other purported assignment shall be void. 18. Independent Inquiry Nothing in this Agreement shall be construed to limit the freedom of researchers who are not participants in this Agreement from engaging in similar research inquiries made independently under other grants, contracts or agreements with parties other than Sponsor. 19. Governing Law This Agreement shall be governed by the laws of the State of New Jersey. 20. Subcontract to USC This research collaboration includes a subcontract with USC, which Princeton will execute and manage. The terms of that research agreement will be substantially the same as their current arrangement, and Princeton agrees to disclose those terms to Sponsor at Sponsor's request. 21. Arbitration Any and all claims, disputes or controversies arising under, out of, or in connection with this Agreement, which have not been resolved by good faith negotiations between the parties, shall be resolved by mediation. Such mediation shall occur as soon as reasonable practicable and no later than 30 days from the effective date one party requests mediation of a dispute. If such dispute is not resolved by mediation, then it will be resolved by final and binding arbitration in Princeton, New Jersey under any rules of the American Arbitration Association then obtaining. The arbitrators shall have no power to add to, or subtract from or modify any of the terms or conditions of this Agreement. The arbitrators shall have the option of future specific performance or monetary compensation in lieu of termination. Any award rendered in such arbitration may be enforced by either party in either the courts of the State of New Jersey or in the United States to whose jurisdiction of such purposes Princeton and Sponsor each hereby irrevocable consent and submit. 5 IN WITNESS WHEREOF, the parties hereto have executed this Agreement in duplicate by proper persons thereunto duly authorized. UDC Inc., a wholly owned subsidiary of The Trustees of Princeton University Universal Display Corporation By: /s/ Steven Abramson By: /s/ Allen J. Sinisgalli ----------------------------- ---------------------------- Steven Abramson Allen J. Sinisgalli President Associate Provost for Research & Project Administration Date: Date: 10/9/97 --------------------------- -------------------------- Professor Stephen Forrest Principal Investigator /s/ Stephen Forrest Date: 10/9/97 ------------------- ---------------- EX-10.35 3 AMENDED LICENSE AGREEMENT PRINCETON UNIVERSITY The UNIVERSITY OF SOUTHERN CALIFORNIA UNIVERSAL DISPLAY CORPORATION AMENDED LICENSE AGREEMENT This Agreement, made and entered into this ________ day of ________, 1997, (the Effective Date) by and between The Trustees of PRINCETON UNIVERSITY a not for profit educational institution duly organized and existing under the laws of the STATE OF NEW JERSEY, USA (hereinafter referred to as "PRINCETON"), the UNIVERSITY OF SOUTHERN CALIFORNIA, a California nonprofit corporation with its principal place of business at University Park, Los Angeles, California 90089 and UNIVERSAL DISPLAY CORPORATION, a corporation duly organized under the laws of Pennsylvania and having its principal office at Three Bala Plaza, East, Suite 104, Bala Cynwyd, PA 19004 (hereinafter referred to as "LICENSEE"). WITNESSETH WHEREAS, PRINCETON and USC are the owner of certain "Patent Rights" (as later defined herein) relating to technical information and inventions made by PRINCETON and USC faculty and staff, have the right to grant licenses under said Patent Rights, subject only to a royalty-free, nonexclusive license heretofore granted to the United States Government; and have granted LICENSEE the exclusive license to such Patent Rights pursuant to a certain License Agreement dated August 1, 1994 (the "August 1994 License Agreement"). WHEREAS, PRINCETON and USC have filed a number of patent applications relating to full color flat panel emissive display technology employing crystalline organic and metal/organic semiconductor light emitting diodes, organic semiconductor lasers and other organic technologies (the "Technology") which inventions arose out of research conducted in the Princeton Advanced Technology Center for Photonics and Optoelectronic Materials, and USC under the direction of Professor(s) Stephen Forrest and Mark Thompson WHEREAS, PRINCETON, USC and LICENSEE have entered into a continuation of a Sponsored Research Agreement, effective August 1, 1997 (hereinafter the "Sponsored Research Agreement" and attached hereto as Appendix A), to continue to support basic research in the field of the Technology under the supervision of Professor(s) Forrest at PRINCETON and Professor Thompson at USC in the amount of four million dollars ($4,000,000) over five (5) years, granting LICENSEE the exclusive worldwide license, with the right to sublicense, under any inventions and confidential information, including any Patent Rights which may be obtained thereon, arising out of said Sponsored Research Agreement, said license to be exclusive to LICENSEE subject only to any license heretofore granted to the United States Government; 1 WHEREAS, PRINCETON, USC and LICENSEE contemplate that additional patent applications based on inventions and information arising out of the Research Program will be filed in the future; and, LICENSEE shall be the exclusive licensee of any and all such applications and all existing Patent Rights on the terms and conditions set forth herein, and that this Amended License Agreement shall supersede the August 1994 License Agreement. WHEREAS, LICENSEE has represented to PRINCETON, to induce PRINCETON to enter into this Agreement, that Licensee is experienced in the development, production, manufacture, marketing and sale of products similar to the "Licensed Product(s)" (as later defined herein) and/or the use of the "Licensed Processes" (as later defined herein) and that it shall commit itself to a thorough, vigorous and diligent program of exploiting the Patent Rights so that public utilization shall result therefrom; and WHEREAS, LICENSEE acknowledges that if funds obtained from the U.S. Government are commingled with funds obtained from LICENSEE in support of the Sponsored Research under the Sponsored Research Agreement, then any license granted would be subject to rights in the U.S. Government under 37 CFR part 401; WHEREAS, Professor Thompson transferred to USC in August, 1995; USC is a subcontractor to PRINCETON under the Sponsored Research Agreement; has entered into an Interinstitutional Agreement with PRINCETON that provides for PRINCETON to manage the Sponsored Research Agreement and this License Agreement; and intends that any inventions under the Sponsored Research Agreement be subject to this License Agreement. NOW, THEREFORE, in consideration of the premises and the mutual covenants contained herein, the parties hereto agree as follows: ARTICLE I - DEFINITIONS For the purposes of this Agreement, the following words and phrases shall have the following meanings: 1.1 "LICENSEE" shall mean Universal Display Corporation and any Subsidiary or Affiliate of Universal Display Corporation; 1.2 "Subsidiary" shall mean any corporation, company, or other entity more than fifty percent (50) of whose voting stock is owned or controlled directly or directly by Universal Display Corporation; 2 1.3 "Affiliates" shall mean any entity respecting which a majority of the voting stock, or an otherwise effective controlling interest, is owned by the Shareholders of Universal Display Corporation. 1.4 "Patent Rights" shall mean the United States and foreign patent applications set forth in Appendix B attached hereto and made a part hereof (hereinafter referred to as the "Patent Rights Patent Application(s)", and the United States patents and Foreign patents, including utility models and patents of importation and additions, issuing from said United States and Foreign patent applications or later-filed foreign applications based upon any of said United States patents and applications (hereinafter referred to as the "Patent Rights Patent(s)") and any continuations, continuations-in-part, divisions, reissues or extensions of any of the foregoing arising out of the Research Program as set forth in the Research Agreement, and any new inventions arising out of the Research Program. 1.5 "Licensed Product(s)" shall mean any product which: (a) is covered in whole or in part by (i) a pending claim contained in a Patent Rights Patent Application in the country in which the Licensed Product(s) is made, used or sold, (ii) a valid and unexpired claim contained in a Patent Rights Patent in the country in which the Licensed Product(s) is made, used or sold. (b) is manufactured by using a process which is covered in whole or in part by (i) a pending claim contained in a Patent Rights Patent Application in the country in which the Licensed Process(es) is used or (ii) a valid and unexpired claim contained in a Patent Rights Patent in the country in which the Licensed Process(es) is used. (c) is used according to a method which is covered in whole or in part by a valid and unexpired claim contained in the Patent Rights in the country in which the method is used. 1.6 "Licensed Process(es)" shall mean a process or method which is covered in whole or in part by (i) a pending claim contained in a Patent Rights Patent Application or (ii) a valid and unexpired claim contained in a Patent Rights Patent in the country in which the process or method is used. 1.7 "Net Sales Price" shall mean LICENSEE'S billings for the Licensed Product(s) produced hereunder less the sum of the following: (a) trade, cash and quantity discounts or rebates actually allowed or taken; (b) credits or allowances given or made for rejection or return of, and for uncollectible amounts on, previously sold Licensed Products or for 3 retroactive price reductions; (c) any separately invoiced tax or government charge, (other than an income tax) levied on the sale, transportation or delivery of a Licensed Product and borne by the seller thereof; and (d) any separately invoiced charges for freight or insurance. No deductions shall be made for commissions paid to individuals whether they be with independent sales agencies or regularly employed by LICENSEE and on its payroll, or for cost of collections. Licensed Product(s) shall be considered "sold" when billed out or invoiced. New Sales Price shall not include sales or transfers between LICENSEE and its subsidiaries, or sublicensees, except that where such subsidiary or sublicensee utilizes the Licensed Products or Licensed processes for the performance of commercial services for third party customers, Net Sales Price shall be based on subsequent final sales of such Licensed Products to third parties by such Sublicensees, unless the intermediate sales price to intermediate Sales Price shall control. ARTICLE II - GRANT 2.1 Subject only to the prevailing rights of and obligations to the U.S. Government with respect to Patent Rights derived in the course of federally sponsored research, including without limitation, any such rights and obligations set forth in 37 CFR Part 401, should they exist, PRINCETON and USC hereby grant to LICENSEE a worldwide exclusive right and license under the Patent Rights, to make, have made, use, lease and/or sell the Licensed Product(s) under the Patent Rights and Copyrights rights, and to practice the Licensed Process(es) to the full end of the term for which the Patent Rights and copyright Rights are granted unless sooner terminated as hereinafter provided. 2.2 LICENSEE shall have the right to sublicense worldwide any of the rights, privileges and license granted hereunder during the term of this Agreement. 2.3 LICENSEE hereby agrees that every sublicensing agreement to which it shall be a party and which shall relate to the rights, privileges and license granted hereunder shall include, to the extent applicable, all the rights of and obligations due to PRINCETON and USC, (and, if applicable, to the United States Government), that are contained in this Agreement. 2.4 LICENSEE agrees to forward to PRINCETON a copy of any and all fully executed sublicense agreements, and further agrees to forward to PRINCETON annually a copy of such reports received by LICENSEE from its sublicensees during the preceding twelve (12) month period under the sublicenses as shall be pertinent to a royalty accounting under said sublicense agreements. 4 ARTICLE III - DUE DILIGENCE 3.1 LICENSEE shall use commercially reasonable efforts to bring the Licensed Product(s) and/or Licensed Process(es) to market through a thorough, vigorous and diligent program for exploitation of the Patent Rights. 3.2 In addition, LICENSEE shall adhere to the following milestones: (a) LICENSEE shall perform the Sponsored Research Agreement in accordance with its terms. (b) LICENSEE shall send copies of all press releases and publicly filed documents to PRINCETON, relating to its progress in commercializing the Patent Rights. (c) LICENSEE shall meet with PRINCETON annually to discuss its commercialization plans for the next ensuing year. 3.3 LICENSEE'S failure to perform in accordance with Paragraphs 3.1 and 3.2 above shall be grounds for PRINCETON to terminate this Agreement pursuant to Paragraph 7.3 hereof. 3.4 Notwithstanding anything to the contrary contained herein, provided that LICENSEE performs the Sponsored Research Agreement, and upon termination or expiration of the Sponsored Research Agreement, LICENSEE invests a minimum of $800,000 per year in research, development, patenting or commercialization efforts respecting the Patent Rights, this Article III shall be deemed to be satisfied. ARTICLE IV - ROYALTIES 4.1 Because the Tax Reform Act of 1986, Public Law 99-514, may require PRINCETON to cause a research sponsor to pay a competitive price for its use of the technology, and further requires that the prices paid by the sponsoring party be determined at the time the technology is available for use rather than at an earlier time, the parties agree that the licensing terms and conditions set forth in this Agreement shall be as good as or better than could be obtained from an unrelated party, if applied to Licensed Products and Licensed Processes. Therefore, subject to right to require negotiations on any Licensed Products/Licensed Processes, if in PRINCETON'S sole opinion the resulting technology is the subject of an agreement covered by Public Law 99-514 and the price or other terms of this Agreement are not competitive for the resulting technology at the time the technology is first reduced to practice, it is agreed as follows: 5 4.2 For the rights, privileges and license granted hereunder, LICENSEE shall pay to PRINCETON (except for the Common Stock and Warrants which shall be distributed in accordance with Article 4), in the manner hereinafter provided to the end of the term of the Patent Rights or until this Agreement shall be terminated as hereinafter provided: (a) (i) 3% of the Net Sales Price of the Licensed Product (s) and/or Licensed Processes used, leased or sold by LICENSEE; (ii) 3% of revenues received by LICENSEE from sublicensing the patent rights; and (iii) 23% of revenues received by LICENSEE from final judgments in infringement actions respecting the Patent Rights (after deducting costs and expenses, including attorneys fees); and (b) 200,000 shares of Common Stock of Universal Display Corporation; and (c) Warrants to purchase 250,000 shares of Common Stock in Universal Display Corporation at a per share purchase price equal to the closing sale price of Universal Display Corporation Common Stock on the date of execution of this Agreement, such Warrants expiring ten (10) years from such date. (d) Minimum royalties shall be payable as follows: 1997--$0. 1998--$0. 1999--$25,000. 2000--$50,000. 2001--$75,000. 2002 and thereafter--$100,000./yr In the event that Princeton has not received at least the above referenced amount in royalty payments in any calendar year, LICENSEE shall pay Princeton the difference between the royalties paid and the Minimum royalty for such calendar year on December 31. 4.3 No multiple royalties shall be payable because the Licensed Product(s), its manufacture, lease or sale are or shall be covered by more than one patent application or patent licensed under this Agreement. 4.4 Royalty payments shall be paid in United States dollars in Princeton, New Jersey, or at such other place as PRINCETON may reasonably designate consistent with the laws and regulations controlling in any foreign country. Any withholding taxes which LICENSEE or any sublicensee shall be required by law to withhold on remittance of the royalty payments shall be deducted from royalty paid to PRINCETON. LICENSEE shall furnish PRINCETON the original copies of all official receipts for such taxes. If any currency conversion shall be required in connection with the payment of royalties 6 hereunder, such conversion shall be made by using the exchange rate prevailing at a first-class foreign exchange bank on the last business day of the calendar quarterly reporting period to which such royalty payments relate. 4.5 With respect to the possible renegotiation of royalty rates, if required, under the Tax Reform Act of 1986; (a) Fair Consideration. PRINCETON and LICENSEE have determined that the consideration payable to PRINCETON pursuant to this Agreement is fair and competitive with respect to all Licensed Products, including most particularly the technologies and their applications which represent the prime focus of the Sponsored Research Agreement. (b) Limited Renegotiation Events. If, notwithstanding the above, Licensed Products are developed during the term of this Agreement which were not reasonable conceivable as arising out of or resulting from the Sponsored Research as of the date hereof, and with respect to which the consideration payable to PRINCETON is not reasonably believed by PRINCETON to be competitive, PRINCETON shall notify LICENSEE in writing of such determination; provided, however, that any such renegotiation right of PRINCETON shall cease with respect to any Licensed Product 180 days after the first Patent Rights Patent Application is filed or other intellectual property protection is first sought (or, in the case of a Biological Material, after the time such Biological Material is first indicated as a possible Licensed Product by LICENSEE). In the event LICENSEE disputes such determination of PRINCETON and the request for renegotiation, LICENSEE shall have a right to submit the issue to arbitration pursuant to Article VIII hereunder. (c) Renegotiation Process. If LICENSEE agrees to renegotiate the consideration payable without arbitration or if the arbitrator determines the issues in favor of PRINCETON, LICENSEE shall have an exclusive right for 60 days to negotiate with PRINCETON on a royalty arrangement acceptable to PRINCETON, which shall use reasonable efforts to reach satisfactory agreement with LICENSEE. (d) Failure to Agree. In the event that PRINCETON and LICENSEE are unable to reach agreement with such 60 day period despite their best efforts to do so, or in the event that LICENSEE does not elect to enter into an agreement with PRINCETON by exercise of its right of first refusal, PRINCETON shall then have the right to negotiate with third parties other than LICENSEE with respect to the exclusive licensing of the Licensed Products, and LICENSEE shall relinquish its exclusive right to license said Licensed Product. 7 4.6 Securities Law Representations. PRINCETON and USC are obtaining the Common Stock and Warrants as principal and not with a view towards resale or distribution. PRINCETON and USC are aware that the securities have not been registered under the Securities Act of 1933, as amended (the "Act"), or the securities laws of any state or jurisdiction, and are being obtained in reliance on the exemptions from the registration requirements of such Acts. PRINCETON and USC agree not to sell or otherwise dispose of the Securities acquired hereunder unless such Securities are subsequently registered under the Act and such state securities laws as are applicable, or unless there are available exemptions from such registration that are supported by an opinion of counsel for PRINCETON or USC, as applicable, which opinion is satisfactory in form and substance to Universal Display Corporation. 4.7 The Common Stock and Warrants shall be issued directly to Princeton University and the University of Southern California, respectively, in the amounts set forth in the Interinstitutional Agreement. ARTICLE V - REPORTS AND RECORDS 5.1 LICENSEE shall keep full, true and accurate books of account containing all particulars that may be necessary for the purpose of showing the amount payable to PRINCETON by way of royalty as aforesaid. Said books of account shall be kept at LICENSEE'S principal place of business or the principal place of business of the appropriate Division of LICENSEE to which this Agreement relates. Said books and the supporting data shall be open at all reasonable times, but not more often than once each year, for five (5) years following the end of the calendar year to which they pertain, to the inspection of the PRINCETON Internal Audit Division and/or an independent certified public accountant employed by PRINCETON for the purpose of verifying LICENSEE'S royalty statement or compliance in other respects with this Agreement. 5.2 LICENSEE, within sixty (60) days after each calendar quarter of the License Year shall deliver a report in writing setting forth sales of Licensed Products (including a negative report, if appropriate) and will accompany such report with such particulars of the business conducted by LICENSEE during the preceding three-month period under this Agreement as shall be pertinent to a royalty accounting hereunder. These shall include at least the following: (a) All Licensed Products manufactured and sold. (b) Total billings for Licensed Product sold. (c) Accounting for all the Licensed Process(es) used or sold. (d) Deductions applicable as provided in Paragraph 4.2. 8 (e) Total Royalties due. (f) Names and addresses of all sublicensees of LICENSEE. (g) Licensed Products manufactured and sold to the United States Government. (No royalty obligations shall arise due to use for or on behalf of the United States Government in view of the royalty-free, non-exclusive license heretofore granted to the United States government. (h) Annually, the LICENSEE'S certified financial statements for the preceding twelve (12) months including, at a minimum, a Balance Sheet and an Operating Statement. 5.3 With each such report submitted, LICENSEE shall pay to PRINCETON the royalties due and payable under this Agreement. If no royalties shall be due, LICENSEE shall so report. 5.4 Any payments due hereunder on sales outside of the United States shall be payable in U.S. Dollars at the rate of exchange of the currency of the country in which the sales are made at the average of the following: the exchange rate as reported in the Wall Street Journal for the first business day of the calendar quarter for which royalties are payable plus the exchange rate as reported in the Wall Street Journal for the last business day of the calendar quarter for which royalties are payable, divided by two (2). 5.5 Payments which are delayed beyond the sixty (60) days after the end of the quarter in which they become due shall be subject to an interest charge equal to 8% per annum in excess of the "Prime Rate" as published in The Wall Street Journal, provided however that if royalty payments are withheld due to a good faith dispute, then the interest charge shall be five percent (5) per annum in excess of the Prime Rate. Whenever such Prime Rate, as so published, changes, the interest rate described above shall correspondingly change, effective upon the opening of business on the date of publication of such change. ARTICLE VI - PATENT PROSECUTION 6.1 LICENSEE may designate by notice to PRINCETON or to the Patent Attorneys, after consultation with PRINCETON, countries where Licensed Patent Applications shall be filed, which may include the United States or any other country. LICENSEE agrees to pay for all reasonable and necessary out-of-pocket expenses incurred in the preparation, filing, prosecution, maintenance, renewal and continuation of Patent Applications in said designated countries, including all taxes, official fees and attorneys' fees. The patent law firm selected shall be mutually acceptable to PRINCETON and LICENSEE. PRINCETON shall be the client in the attorney-client relationship with such law firm and may provide instructions to such law firm regarding 9 the scope and content of Patent Applications to be filed and prosecuted, subject to the right of LICENSEE to request PRINCETON to instruct such law firm, or instruct the law firm directly after consultation with PRINCETON, to cover any additional matters as LICENSEE may desire to assure that such Application covers all items of commercial interest and importance. PRINCETON will not unreasonably refuse requests of LICENSEE. PRINCETON and LICENSEE each shall receive copies of all correspondence with respect to such preparation, filing, prosecution, renewal and continuation of Patent Rights Patent Applications, and shall consult with each other regarding all such matters and the costs associated therewith. 6.2 LICENSEE may elect in writing to be released from its License in any of the Patent Rights Patents and Patent Rights Patent Applications in a particular country at any time after initial filing costs have been paid, in which event it shall thereafter, upon notice of such election being given to PRINCETON shall have no obligation to reimburse Princeton for any subsequent expenses relating to such patent, or application in such country, nor any other right thereto. 6.3 All inventions conceived or discovered under the Sponsored Research Agreement, by PRINCETON, USC, or jointly, shall automatically become subject to this License Agreement. PRINCETON shall use reasonable efforts to ensure that Patent Rights Applications are promptly filed and prosecuted. 6.4 LICENSEE has the right to file of record in the Patent Office for each Patent Rights Application that it is the exclusive licensee of the Patent Rights. ARTICLE VII - TERMINATION 7.1 If LICENSEE shall become bankrupt or insolvent, or shall file a petition in bankruptcy, or if the business of LICENSEE shall be placed in the hands of a receiver, assignee or trustee for the benefit of creditors, whether by the voluntary act of LICENSEE or otherwise, this Agreement shall be terminable by PRINCETON. Provided, however, in the event of an involuntary action, if LICENSEE arranges for the dismissal of such action within 90 days of the date thereof, such right to terminate shall cease. 7.2 Should LICENSEE fail in its payment to PRINCETON of royalties due in accordance with the terms of this Agreement, PRINCETON shall have the right to serve notice of default upon LICENSEE by certified mail at the address designated in Article XIV hereof. If LICENSEE shall not have paid all such royalties due and payable, within forty five (45) days of the delivery of such Notice, the rights, privileges and license granted hereunder shall be terminable by PRINCETON delivering a Notice of Termination, unless LICENSEE disputes that such royalties are due and payable, in which event the dispute shall be settled in accordance with Article VIII "Arbitration", and this Agreement will not then be terminated. 10 7.3 Upon any material breach or default of this Agreement by LICENSEE, other than those occurrences set out in Paragraphs 7.1 and 7.2 hereinabove, which shall always take precedence in that order over any material breach or default referred to in this Paragraph 7.3, Princeton shall have the right to give written notice of such default to LICENSEE. If LICENSEE shall fail to cure such default, or fail to have taken reasonable steps to cure such default, within forty five (45) days of the effective date of such notice, PRINCETON shall have the right to terminate this Agreement by a second written Notice of Termination to Licensee, specifying the effective date of termination. Provided, however, if LICENSEE disputes the existence of such material breach or default, or the failure to cure or take reasonable steps to cure, than the dispute will be settled in accordance with Article VIII "Arbitration", and the Agreement will not then be terminated. 7.4 LICENSEE shall have the right to terminate this Agreement at any time on six (6) months' notice by certified mail to PRINCETON. 7.5 Upon termination of this Agreement for any reason, nothing herein shall be construed to release either party from any obligation that matured prior to the effective date of such termination. LICENSEE and/or any sublicensee thereof may however, after the effective date of such termination, sell all Licensed Products, and complete Licensed Products in the process of manufacture at the time of such termination and sell the same, provided that LICENSEE shall pay to PRINCETON the royalties thereon as required by Article IV of this Agreement and shall submit the reports required by Article V hereof on the sales of Licensed Products. 7.6 Upon any such termination of this Agreement PRINCETON, if LICENSEE shall have granted a sublicense hereunder, any such sublicensee shall become a direct licensee of PRINCETON, but only if such sublicensee is then in full compliance with its sublicense and all payments owed to PRINCETON with respect to that sublicense have been paid and the sublicensee agrees to assume all obligations of LICENSEE hereunder, provided that such sublicensee shall remain obligated to the terms and conditions of this Agreement protective of PRINCETON. ARTICLE VIII - ARBITRATION 8.1 Except as to issues relating to the validity, construction or effect of any patent licensed hereunder, any and all claims, disputes or controversies arising under, out of, or in connection with this Agreement, which have not been resolved by good faith negotiations between the parties, shall be resolved by mediation. Such mediation shall occur as soon as reasonably practicable and no later than 30 days from the effective date one party requests mediation of a dispute. If such dispute is not resolved by mediation then it will be resolved by final and binding arbitration in Princeton, New Jersey under the rules of the American Arbitration Association then obtaining. The arbitrators shall have no power to add to, subtract from or modify any of the terms or conditions of this 11 Agreement. The arbitrators shall have the option of specific future performance or monetary compensation in lieu of termination. Any award rendered in such arbitration may be enforced by either party in either the courts of the State of New Jersey or in the United States to whose jurisdiction of such purposes PRINCETON and LICENSEE each hereby irrevocably consents and submits. 8.2 Claims, disputes or controversies concerning the validity, construction or effect of any patent licensed hereunder shall be resolved in any court having jurisdiction thereof. 8.3 In the event that, in any arbitration proceeding, any issue shall arise concerning the validity, construction or effect of any patent licensed hereunder, the arbitrators shall assume the validity of all claims as set forth in such patent; in any event the arbitrators shall not delay the arbitration proceeding for the purpose of obtaining or permitting either party to obtain judicial resolution of such issue, unless an order staying such arbitration proceeding shall be entered by a court of competent jurisdiction. Neither party shall raise any issue concerning the validity, construction or effect of any patent licensed hereunder in any proceeding to enforce any arbitration award hereunder or in any proceeding otherwise arising out of any such arbitration award. ARTICLE IX - INFRINGEMENT 9.1 LICENSEE and PRINCETON shall promptly inform the other in writing of any alleged infringement of which it shall have notice by a third party or any patents within the Patent Rights and provide such other with any available evidence of infringement. 9.2 During the term of this Agreement, LICENSEE shall have the right, but shall not be obligated, to prosecute at its own expense any such infringements of the Patent Rights and, in furtherance of such rights, PRINCETON hereby agrees that LICENSEE may join PRINCETON as a party plaintiff in any such suit, without expense to PRINCETON. The total cost of any such infringement action commenced or defended solely by LICENSEE shall be borne by LICENSEE, and LICENSEE shall keep any recovery or damages for past infringement derived therefrom, except for that portion to be paid to PRINCETON pursuant to Article IV hereof. Princeton shall make the inventors available and cooperate in the litigation. No settlement, consent judgment or other voluntary final disposition of the suit may be entered into without the consent of PRINCETON, which consent shall not unreasonably be withheld. LICENSEE shall indemnify PRINCETON against any order for costs that may be made against PRINCETON in such proceedings. 9.3 If within eighteen (18) months after having been notified of any alleged infringement, LICENSEE shall have been unsuccessful in persuading the alleged infringer 12 to desist and shall not have brought and shall not be diligently prosecuting an infringement action, or if LICENSEE shall notify PRINCETON at any time prior thereto of its intention not to bring suit against any alleged infringer, then, and in those events only, PRINCETON shall have the right, but shall not be obligated, to prosecute at its own expense any infringement of the Patent Rights, and PRINCETON may, for such purposes, use the name of LICENSEE as party plaintiff. 9.4 In the event that LICENSEE shall undertake the enforcement and/or defense of the Patent Rights by litigation, LICENSEE may withhold up to fifty percent (50%) of the royalties otherwise thereafter due PRINCETON hereunder and apply the same toward reimbursement of its expenses, including reasonable attorneys' fees, in connection therewith. Any recovery of damages by LICENSEE for any such suit shall be applied first in satisfaction with any unreimbursed expenses and legal fees of LICENSEE relating to the suit, and next toward reimbursement of PRINCETON for any royalties past due or withheld and applied pursuant to this Article IX. 9.5 In any infringement suit that either party may institute to enforce the Patent Rights pursuant to this Agreement, the other party shall, at the request and expense of the party initiating such suit, cooperate in all respects and, to the extent possible, have its employees testify when requested and make available relevant records, papers, information, samples, specimens, and the like. 9.6 LICENSEE, during the exclusive period of this Agreement, shall have the sole right in accordance with the terms and conditions herein to sublicense any alleged infringer under the Patent Rights. ARTICLE X - PRODUCT LIABILITY 10.1 PRINCETON and USC by this Agreement makes no representation as to the patentability and/or discoveries involved in a Licensed Patent. PRINCETON and USC by this Agreement makes no representation as to patents now held or which will be held by others in the field of the Licensed Products for a particular purpose. PRINCETON AND USC MAKE NO EXPRESS OR IMPLIED WARRANTIES OR MERCHANTABILITY OF FITNESS FOR A PARTICULAR PURPOSE. 10.2 LICENSEE agrees to defend, indemnify and hold PRINCETON and USC harmless from and against all liability, demands, damages, expense or losses for death, personal injury, illness or property damage arising (a) out of use by LICENSEE or its transferees of inventions licensed or information furnished under this Agreement, or (b) out of any use, sale or other disposition by LICENSEE or its transferees or products made by use of such inventions or information. As used in this clause, PRINCETON and USC includes its Trustees, Officers, agents, Employees and Students and "LICENSEE" includes its Affiliates, Subsidiaries, Contractors and Sub-Contractors. 13 10.3 In discharge of the above LICENSEE will maintain general liability insurance in the amount of at least One Million Dollars ($1,000,000) per occurrence with a deductible of not more than $10,000 per occurrence with such insurers and on such terms as PRINCETON approves in writing against damage to or destruction of property and injury to or death of individuals and against such other risks as PRINCETON may reasonable request arising out of or in connection with any of the Licensed Products. "PRINCETON" and its respective officers, trustees, and insurance will also provide that PRINCETON will be given notice of any modification thereof and at least ten (10) days prior written notice of cancellation or termination and the reason therefore. LICENSEE will furnish PRINCETON upon request and in any event on execution of this Agreement and on each anniversary of the effective date of this Agreement, written confirmation issued by the issuer or an independent insurance agent confirming that insurance is maintained in accordance with the above requirements. ARTICLE XI - ASSIGNMENT 11.1 In addition to assignment permitted under Section 2.2 hereof, LICENSEE may assign or otherwise transfer this Agreement and the license granted hereby and the rights acquired by it hereunder so long as such assignment or transfer shall be accompanied by a sale or other transfer of LICENSEE's entire business or of that part of LICENSEE's business to which the license granted hereby relates. LICENSEE shall give PRINCETON thirty (30) days prior notice of such assignment and transfer and if PRINCETON raises no reasonable objection to such assignment or transfer, in writing within thirty (30) days after the giving of such notice and stating the reasons for such objection, then PRINCETON shall be deemed to have approved such assignment or transfer; provided, however, PRINCETON shall not be deemed to have approved such assignment and transfer unless such assignee or transferee shall have agreed in writing to be bound by the terms and conditions of this Agreement. Upon such assignment or transfer and agreement by such assignee or transferee, the term LICENSEE as used herein shall include such assignee or transferee. If LICENSEE shall sell or otherwise transfer its entire business or that part of its business to which the license granted hereby relates and the transferee shall not have agreed in writing to be bound by the terms and conditions of this Agreement, or new terms and conditions shall not have been agreed upon within sixty (60) days of such sale or transfer, PRINCETON shall have the right to terminate this Agreement. ARTICLE XII - NON-USE OF NAMES 12.1 Neither party shall use the names of the others in connection with any products, promotion or advertising without the prior consent of the other party, which consent shall not be unreasonably withheld, or to the extent reasonably required by law. LICENSEE may state that it is licensed by PRINCETON and USC under one or more of the patents and/or applications comprising the Patent Rights. 14 ARTICLE XIII - EXPORT CONTROLS 13.1 It is understood that PRINCETON and USC are subject to United States laws and regulations controlling the export of technical data, computer software, laboratory prototypes and other commodities (including the Arms Export Control Act, as amended, and the Export Administration Act of 1979), and its obligations hereunder are contingent on compliance with applicable United States export laws and regulations. The transfer of certain technical data and commodities may require a license from the cognizant agency of the United States Government and/or written assurances by LICENSEE that LICENSEE shall not export data or commodities to certain foreign countries without prior approval of such agency. PRINCETON and USC neither represent that a license shall not be required nor that, if required, it shall be issued. ARTICLE XIV - PAYMENTS, NOTICES, AND OTHER COMMUNICATIONS 14.1 Any payment, notice or other communication, pursuant to this Agreement shall be sufficiently made or given on the date of mailing if sent to such party by certified first class mail, postage prepaid, addressed to it at its address below or as it shall designate by written notice given to the other party; In the case of PRINCETON UNIVERSITY: Office of Technology and Trademark Licensing Princeton University 5 New South Building, P. O. Box 36 Princeton, New Jersey 08544 Attention: John F. Ritter Associate Director of Technology Transfer In the case of THE UNIVERSITY OF SOUTHERN CALIFORNIA: Office of Patent and Copyright Administration University of Southern California 3716 South Hope Street, Suite 313 Los Angeles, CA 90007-4344 In the case of LICENSEE: Universal Display Corporation 3 Bala Plaza East, Suite 104 Bala Cynwyd, PA 19004 Attention: Steven V. Abramson President and Chief Operating Officer 15 ARTICLE XV - INTERINSTITUTIONAL AGREEMENT 15.1 PRINCETON and USC have entered into an Interinstitutional Agreement, attached hereto as Appendix C and incorporated herein, whereby, inter-alia, PRINCETON shall be the manager of this License Agreement and the Sponsored Research Agreement, and LICENSEE shall interact with PRINCETON, on behalf of itself as well as USC, on all matters respecting those agreements. ARTICLE XVI - MISCELLANEOUS PROVISIONS 16.1 This Agreement shall be construed, governed, interpreted and applied in accordance with the laws of the State of New Jersey, except that questions affecting the construction and effect of any patent shall be determined by the law of the country in which the patent was granted. 16.2 The parties hereto acknowledge that this Agreement sets forth the entire Agreement and understanding of the parties hereto as to the subject matter hereof, and shall not be subject to any change of modification except by the execution of a written instrument subscribed to by the parties hereto. 16.3 The provisions of this Agreement are severable, and in the event that any provision of this Agreement shall be determined to be invalid or unenforceable under any controlling body of law, such invalidity or unenforceability shall not in any way affect the validity or enforceability of the remaining provisions hereof. 16.4 LICENSEE agrees to mark the Licensed Products sold in the United States with all applicable United States patent numbers. All Licensed Products shipped to or sold in other countries shall be marked in such a manner as to confirm with the patent laws and practice of the country of manufacture or sale. 16.5 The failure of either party to assert a right hereunder or to insist upon compliance with any term or condition of this Agreement shall not constitute a waiver of that right or excuse a similar subsequent failure to perform any such term or condition by the other party. 16 IN WITNESS WHEREOF, the parties hereto have hereunto set their hands and seals and duly executed this License Agreement the day and year set forth below. Attest: The Trustees of Princeton University By: - ------------------------------- -------------------------------- Title: Title: - ------------------------------- ----------------------------- Date: ------------------------------ Attest: The UNIVERSITY OF SOUTHERN CALIFORNIA By: - ------------------------------- -------------------------------- Title: Title: - ------------------------------- ----------------------------- Attest: UNIVERSAL DISPLAY CORPORATION By: - ------------------------------- -------------------------------- Title: Title: - ------------------------------- ----------------------------- 17 EX-23 4 CONSENT OF ARTHUR ANDERSEN EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports included in this Form 10-KSB into Universal Display's previously filed Registration Statement File No. 333-27901 and File No. 33-80703. Arthur Andersen LLP Philadelphia, PA March 31, 1998 EX-27 5 FINANCIAL DATA SCHEDULE
5 1000 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 85,470 4,539,570 88,366 0 0 5,284,103 96,754 39,353 5,417,577 280,240 0 0 2,000 103,023 5,032,314 5,417,577 0 93,605 0 0 6,194,526 0 (173,203) (5,927,718) 0 (5,927,718) 0 0 0 (5,927,718) (0.64) (0.64)
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