10-Q 1 ten-q.htm FORM 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)  
     
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2005
     
OR
   
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  For the transition period from ____________to ______________________

Commission File Number 1-12031

UNIVERSAL DISPLAY CORPORATION
(Exact name of registrant as specified in its charter)

Pennsylvania   23-2372688

 
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)

375 Phillips Boulevard
Ewing, New Jersey
  08618

 
(Address of principal executive offices)   (Zip Code)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes   No

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes   No

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)

Yes   No

As of November 3, 2005, the registrant had outstanding 28,925,359 shares of common stock.

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TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements  
  Consolidated Balance Sheets – September 30, 2005 (unaudited) and December 31, 2004 3
     
  Consolidated Statements of Operations – Three months ended September 30, 2005 and 2004 (unaudited) 4
     
  Consolidated Statements of Operations – Nine months ended September 30, 2005 and 2004 (unaudited) 5
     
  Consolidated Statements of Cash Flows – Nine months ended September 30, 2005 and 2004 (unaudited) 6
     
  Notes to Consolidated Financial Statements (unaudited) Notes to Consolidated Financial Statements 7
  (unaudited)  
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 14
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
     
Item 4. Controls and Procedures 18

PART II – OTHER INFORMATION

Item 1. Legal Proceedings 18
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 18
     
Item 3. Defaults Upon Senior Securities 19
     
Item 4. Submission of Matters to a Vote of Security Holders 19
     
Item 5. Other Information 19
     
Item 6. Exhibits 19

 


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PART I – FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS

UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

    September 30, 2005
(unaudited)
  December 31,
2004
 
   
 
 
ASSETS
             
CURRENT ASSETS:              
     Cash and cash equivalents   $ 31,139,911   $ 18,930,581  
      Short-term investments     12,473,736     26,258,463  
      Accounts receivable     2,282,602     2,588,279  
       Inventory     38,222     19,941  
      Other current assets     427,035     237,927  
   
 
 
            Total current assets     46,361,506     48,035,191  
               
PROPERTY AND EQUIPMENT, net     11,772,332     9,551,532  
ACQUIRED TECHNOLOGY, net     8,438,327     9,709,631  
INVESTMENTS     1,953,560     2,290,451  
RESTRICTED CASH     3,975,000     4,200,000  
OTHER ASSETS     109,772     105,358  
   
 
 
TOTAL ASSETS   $ 72,610,497   $ 73,892,163  
   
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
             
CURRENT LIABILITIES:              
      Current portion of long-term debt   $ 300,000   $ 300,000  
      Accounts payable     699,481     723,512  
      Accrued expenses     4,306,446     3,697,432  
      Deferred license fees     2,918,267     1,766,667  
      Deferred revenue     1,672,538     916,667  
   
 
 
            Total current liabilities     9,896,732     7,404,278  
               
DEFERRED LICENSE FEES     3,856,000     3,100,000  
DEFERRED REVENUE     811,364     --  
LONG-TERM DEBT, less current portion     3,975,000     4,200,000  
   
 
 
      Total liabilities     18,539,096     14,704,278  
               
COMMITMENTS AND CONTINGENCIES (Note 8)              
SHAREHOLDERS’ EQUITY:              
     Preferred Stock, par value $0.01 per share, 5,000,000 shares authorized,              
          200,000 shares of Series A Nonconvertible Preferred Stock issued              
          and outstanding (liquidation value of $7.50 per share or $1,500,000)     2,000     2,000  
     Common Stock, par value $0.01 per share, 50,000,000 shares authorized,              
          28,752,855 and 27,903,385 shares issued and outstanding     287,529     279,034  
     Additional paid-in-capital     179,396,198     173,372,344  
     Deferred compensation         (17,446 )
     Accumulated other comprehensive loss     (86,095 )   (79,837 )
     Accumulated deficit     (125,528,231 )   (114,368,210 )
   
 
 
      Total shareholders’ equity     54,071,401     59,187,885  
   
 
 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY   $ 72,610,497   $ 73,892,163  
   
 
 

The accompanying notes are an integral part of these statements.

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UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

  Three Months Ended September 30,  
 
 
  2005   2004  
 
 
 
REVENUE:            
   Contract research $ 1,556,095   $ 614,066  
   Development chemical   1,340,428     736,963  
   Commercial chemical       18,180  
   Royalty and license fees   50,400     92,420  
   Technology development fees   425,947     250,000  
 
 
 
      Total revenue   3,372,870     1,711,629  
 
 
 
OPERATING EXPENSES:            
   Cost of chemicals sold   44,777     18,121  
   Research and development   4,734,554     3,952,649  
   General and administrative   1,739,166     1,544,649  
   Royalty expense   162,269     87,500  
 
 
 
      Total operating expenses   6,680,766     5,602,919  
 
 
 
      Operating loss   (3,307,896 )   (3,891,290 )
 
 
 
INTEREST INCOME   382,024     222,097  
INTEREST EXPENSE   (53,268 )   (21 )
 
 
 
NET LOSS   (2,979,140 )   (3,669,214 )
             
DEEMED DIVIDEND       (83,448 )
 
 
 
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS $ (2,979,140 ) $ (3,752,662 )
 
 
 
BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (0.10 ) $ (0.14 )
 
 
 
WEIGHTED AVERAGE SHARES USED IN COMPUTING BASIC            
   AND DILUTED NET LOSS PER COMMON SHARE   28,617,601     27,366,453  
 
 
 

The accompanying notes are an integral part of these statements.

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UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

  Nine Months Ended September 30,  
 
 
  2005   2004  
 
 
 
REVENUE:            
   Contract research $ 3,769,475   $ 1,911,240  
   Development chemical   2,877,642     1,792,402  
   Commercial chemical   31,395     108,000  
   Royalty and license fees   165,655     302,000  
   Technology development fees   1,007,765     1,200,000  
 
 
 
      Total revenue   7,851,932     5,313,642  
 
 
 
OPERATING EXPENSES:            
   Cost of chemicals sold   83,947     135,667  
   Research and development   13,891,104     12,597,592  
   General and administrative   5,395,253     5,152,841  
   Royalty expense   462,269     262,500  
 
 
 
      Total operating expenses   19,832,573     18,148,600  
 
 
 
      Operating loss   (11,980,641 )   (12,834,958 )
 
 
 
             
INTEREST INCOME   965,296     584,226  
INTEREST EXPENSE   (144,676 )   (179 )
 
 
 
NET LOSS   (11,160,021 )   (12,250,911 )
             
DEEMED DIVIDEND       (129,624 )
 
 
 
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS $ (11,160,021 ) $ (12,380,535 )
 
 
 
BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (0.39 ) $ (0.47 )
 
 
 
WEIGHTED AVERAGE SHARES USED IN COMPUTING BASIC            
   AND DILUTED NET LOSS PER COMMON SHARE   28,298,728     26,450,235  
 
 
 

The accompanying notes are an integral part of these statements.

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UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

  Nine Months Ended
September 30,
 
 
 
  2005   2004  
 
 
 
CASH FLOWS FROM OPERATING ACTIVITIES:            
Net loss $ (11,160,021 ) $ (12,250,911 )
Non-cash charges to statement of operations:            
   Depreciation   1,192,326     1,048,988  
   Amortization of intangibles   1,271,304     1,271,304  
   Amortization of premium and discount on investments   (91,253 )   23,657  
   Common stock, options and warrants in connection with Development Agreement   2,922,253     2,603,963  
   Common stock to employees   1,121,202     251,592  
   Common stock and options to Board of Directors and Scientific Advisory Board   526,551     643,720  
   Common stock options and warrants for services   (6,713 )   (9,946 )
(Increase) decrease in assets:            
   Accounts receivable   305,677     (148,111 )
   Inventory   (18,281 )   (660 )
   Other current assets   (189,108 )   (209,109 )
   Other assets   (4,414 )   (18,436 )
Increase (decrease) in liabilities:            
   Accounts payable and accrued expenses   (241,633 )   1,427,523  
   Deferred license fees   1,907,600     250,000  
   Deferred revenue   1,567,235     (400,000 )
 
 
 
Net cash used in operating activities   (897,275 )   (5,516,426 )
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:            
   Purchases of property and equipment   (3,413,126 )   (832,866 )
   Purchases of investments   (14,506,386 )   (42,998,872 )
   Proceeds from sale of investments   28,713,001     18,335,547  
 
 
 
Net cash provided by (used in) investing activities   10,793,489     (25,496,191 )
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:            
   Net proceeds from issuance of common stock       28,522,249  
   Payment of loan   (225,000 )    
   Restricted cash   225,000      
   Proceeds from the exercise of common stock options and warrants   2,313,116     2,923,640  
   Principal payments on capital lease       (3,886 )
 
 
 
Net cash provided by financing activities   2,313,116     31,442,003  
 
 
 
INCREASE IN CASH AND CASH EQUIVALENTS   12,209,330     429,386  
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD   18,930,581     14,070,207  
 
 
 
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 31,139,911   $ 14,499,593  
 
 
 
Cash paid for interest $ 140,890   $  
 
 
 

The accompanying notes are an integral part of these statements.

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UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1.    BACKGROUND

Universal Display Corporation (the “Company”) is engaged in the research, development and commercialization of organic light emitting diode (“OLED”) technologies for use in a variety of flat panel display and other applications.

The Company conducts a substantial portion of its OLED technology development activities at its technology development and transfer facility in Ewing, New Jersey. The Company moved its operations to this facility in the fourth quarter of 1999 and expanded the facility from 11,000 square feet to 21,000 square feet in 2001. In December 2004, the Company acquired the entire 41,000 square foot building at which the facility is located. The Company is in the process of expanding its operations into the remainder of the building.

The Company leases approximately 1,600 square feet of laboratory space in South Brunswick, New Jersey, and 850 square feet of office space in Coeur d’Alene, Idaho.

The Company sponsors substantial OLED technology research being conducted at Princeton University and at the University of Southern California (“USC”) (on a subcontract basis with Princeton University), pursuant to a Research Agreement between the Company and the Trustees of Princeton University dated October 9, 1997 (as amended, the “1997 Research Agreement”) (Note 3).

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

INTERIM FINANCIAL INFORMATION

In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the financial position as of September 30, 2005, and the results of operations for the three and nine months ended September 30, 2005 and 2004, and cash flows for the nine months ended September 30, 2005 and 2004. While management believes that the disclosures presented are adequate to make the information not misleading, these unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto in the Company’s latest year-end financial statements, which were included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.

MANAGEMENT’S USE OF ESTIMATES

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS

The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. The Company classifies its existing marketable securities as available-for-sale in accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 115, “Accounting for Certain Investments in Debt and Equity Securities.”

These securities are carried at fair market value, with unrealized gains and losses reported in shareholders’ equity as a component of other comprehensive loss. Gains or losses on securities sold are based on the specific identification method. The Company reported accumulated unrealized holding losses of $86,095 and $79,837 at September 30, 2005 and December 31, 2004, respectively.

RESTRICTED CASH

At September 30, 2005, the Company had $4,275,000 of restricted cash, of which $3,975,000 was classified as a noncurrent asset. The restricted cash serves as collateral for a note payable in connection with the purchase of building and property at which our main facility is located. The cash is held by the issuing bank, is restricted, as to withdrawal or use, up to the outstanding balance of the note, and is currently invested in corporate bonds. Income from these investments is paid to the Company. The current portion of restricted cash of $300,000 is classified as cash and cash equivalents and represents the amount of the current liability due under the note.

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INVENTORY

Inventory is valued at the lower of cost or market, with the cost determined using the specific identification method.

ACQUIRED TECHNOLOGY

Acquired technology consists of acquired license rights for patents and know-how obtained from PD-LD, Inc. and Motorola, Inc. (Note 4). These intangible assets consist of the following:

  September 30,
2005
  December 31,
2004
 
 
 
 
PD-LD, Inc. $ 1,481,250   $ 1,481,250  
Motorola, Inc.   15,469,468     15,469,468  
 
 
 
    16,950,718     16,950,718  
Less: Accumulated amortization   ( 8,512,391 )   (7,241,087 )
 
 
 
Acquired Technology, net $ 8,438,327   $ 9,709,631  
 
 
 

Acquired technology is amortized on a straight-line basis over its estimated useful life of ten years.

NET LOSS PER COMMON SHARE

Basic net loss per common share is computed by dividing the net loss attributable to common shareholders by the weighted-average number of shares of common stock outstanding for the period. Diluted net loss per common share reflects the potential dilution from the exercise or conversion of securities into common stock. For the three and nine months ended September 30, 2005 and 2004, the effects of the exercise of outstanding stock options and warrants of 8,635,786 and 8,415,697, respectively, were excluded from the calculation of diluted EPS as the impact would be antidilutive.

RESEARCH AND DEVELOPMENT

Expenditures for research and development are charged to operations as incurred.

STATEMENT OF CASH FLOW INFORMATION

The following non-cash investing and financing activities occurred:

  Three Months Ended September 30,  
 
 
  2005   2004  
 
 
 
Unrealized gain (loss) on available-for-sale securities $ (6,084 ) $ 58,966  

  Nine Months Ended September 30,  
 
 
  2005   2004  
 
 
 
Unrealized gain (loss) on available-for-sale securities $ (6,258 ) $ 16,015  

STOCK OPTIONS

The Company accounts for its stock option plans under Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” under which no compensation cost is recognized for options issued to employees when the option price is equal to or greater than the fair market value of the Company’s stock price on the date of grant. In 1995, the Financial Accounting Standards Board issued SFAS No. 123, “Accounting for Stock-Based Compensation.” SFAS No. 123 established a fair value based method of accounting for stock-based compensation plans. SFAS No. 123 requires that a company’s financial statements include certain disclosures about stock-based employee compensation arrangements regardless of the method used to account for the plan.

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As allowed by SFAS No. 123, the Company has elected to continue to account for its employee stock-based compensation plans under APB Opinion No. 25, and adopted only the disclosure requirements of SFAS No. 123 as amended by SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure.” SFAS No. 148 amended SFAS No. 123 to provide alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation and amended the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements. Had the Company recognized compensation cost for its stock based compensation plans consistent with the provisions of SFAS No. 123, the Company’s net loss and net loss per share would have been increased to the following pro forma amounts:

  Three Months Ended September 30,  
 
 
  2005   2004  
 
 
 
Net loss attributable to common shareholders:            
   As reported $ (2,979,140 ) $ (3,752,662 )
   Add stock-based employee compensation expense            
      included in reported net income, net of tax   370,712     389,946  
   Deduct total stock-based employee compensation            
      expense determined under fair-value-based method            
      for all rewards, net of tax   (533,711 )   (631,962 )
 
 
 
Pro forma $ (3,142,139 ) $ (3,994,678 )
             
Basic and diluted net loss per share:            
As reported $ (0.10 ) $ (0.14 )
Pro forma   (0.11 )   (0.15 )

  Nine Months Ended September 30,  
 
 
  2005   2004  
 
 
 
Net loss attributable to common shareholders:            
   As reported $ (11,160,021 ) $ (12,380,535 )
   Add stock-based employee compensation expense            
      included in reported net income, net of tax   1,283,981     1,506,802  
   Deduct total stock-based employee compensation            
      expense determined under fair-value-based method            
      for all rewards, net of tax   (4,011,212 )   (6,081,647 )
 
 
 
Pro forma $ (13,887,252 ) $ (16,955,380 )
             
Basic and diluted net loss per share:            
As reported $ (0.39 ) $ (0.47 )
Pro forma   (0.49 )   (0.64 )

The Company accounts for its stock option and warrant grants to non-employees in exchange for goods or services in accordance with SFAS No. 123 and Emerging Issues Task Force No. 96-18 (“EITF 96-18”). SFAS No. 123 and EITF 96-18 require that the Company account for its option and warrant grants to non-employees based on the fair value of the options and warrants granted.

RECENT ACCOUNTING PRONOUNCEMENTS

In November 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 151, Inventory Costs, which amends the guidance in Accounting Research Bulletin (“ARB”) No. 43, Chapter 4, Inventory Pricing, to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material. SFAS No. 151 requires that those items be recognized as current-period charges regardless of whether they meet the criterion of “so abnormal.” In addition, SFAS No. 151 requires allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company believes the adoption of SFAS No. 151 will not have an impact on its financial statements.

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In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets. SFAS No. 153 is an amendment to APB Opinion No. 29, Accounting for Nonmonetary Transactions. SFAS No. 153 eliminates the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. SFAS No. 153 is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005.

In December 2004, the FASB issued SFAS No. 123R, Share-Based Compensation, which supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. SFAS No. 123R focuses primarily on accounting for transactions in which an entity obtains employee services through share-based payment transactions. SFAS No. 123R requires a company to measure the cost of employee services received in exchange for the award of equity investments based on the fair value of the award at the date of grant. The cost will be recognized over the period during which an employee is required to provide services in exchange for the award. SFAS No. 123R is effective as of the beginning of the first fiscal year that begins after June 15, 2005. The impact on net earnings as a result of the adoption of SFAS No. 123R, from a historical perspective, is set forth above. The Company is currently evaluating the provisions of SFAS No. 123R and will adopt it in 2006, as required. The Company believes that the adoption of SFAS No. 123R will have a significant impact on its financial statements.

In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections. SFAS No. 154 replaces APB Opinion No. 20, Accounting Changes, and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements, and changes the requirements for the accounting for and reporting of a change in accounting principle. This Statement applies to all voluntary changes in accounting principle. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. When a pronouncement includes specific transition provisions, those provisions should be followed.

3.    RESEARCH AND LICENSE AGREEMENTS WITH PRINCETON UNIVERSITY

The Company previously sponsored OLED technology research conducted at Princeton University under a Sponsored Research Agreement between the Trustees of Princeton University and American Biomimetics Corporation (“ABC”) dated August 1, 1994 (as amended, the “1994 Sponsored Research Agreement”). ABC, a privately held Pennsylvania corporation that is affiliated with the Company, assigned its rights and obligations under the 1994 Sponsored Research Agreement to the Company in October 1995.

In April 2002, the Company amended the 1997 Research Agreement (Note 1) with Princeton University providing, among other things, for an additional five-year term. The Company is obligated to pay Princeton University up to $7,477,993 under the 1997 Research Agreement from July 31, 2002 through July 31, 2007. Payments to Princeton University under this agreement are charged to research and development expenses when they become due.

Pursuant to a License Agreement between the Trustees of Princeton University and ABC dated August 1, 1994 (as amended, the “1994 License Agreement”), Princeton University granted the Company a worldwide exclusive license, with rights to sublicense, to make, have made, use, lease and/or sell products and to practice processes based on a pending patent application of Princeton University relating to OLED technology. Under the 1994 License Agreement, Princeton University further granted ABC similar license rights with respect to patent applications and issued patents arising out of work performed by Princeton University under the 1994 Sponsored Research Agreement. ABC assigned its rights and obligations under the 1994 License Agreement to the Company in June 1995. On October 9, 1997, the Company and Princeton University entered into an Amended License Agreement that amended and restated the 1994 License Agreement (as amended, the “1997 Amended License Agreement”). Under the 1997 Amended License Agreement, Princeton University granted the Company corresponding license rights with respect to patent applications and issued patents arising out of work performed by Princeton University and USC under the 1997 Research Agreement.

Under the 1997 Amended License Agreement with Princeton University and the University of Southern California (“USC”), the Company is required to pay Princeton University royalties for licensed products sold by the Company or its sublicensees. For licensed products sold by the Company, the Company is required to pay Princeton University 3% of the net sales price of these products. For licensed products sold by the Company’s sublicensees, the Company is required to pay Princeton University 3% of the revenues received by the Company from these sublicensees. These royalty rates are subject to renegotiation for products not reasonably conceivable as arising out of the Research Agreement if Princeton University reasonably determines that the royalty rates payable with respect to these products are not fair and competitive.

The Company is obligated under the 1997 Amended License Agreement to pay to Princeton University minimum annual royalties. The minimum royalty payment is $100,000 per year. The Company accrued $87,269 of royalty expense for the nine months ended September 30, 2005.

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

4.    ACQUIRED TECHNOLOGY

On July 19, 2000, the Company, PD-LD, Inc. (“PD-LD”), its president Dr. Vladimir Ban and the Trustees of Princeton University entered into a Termination, Amendment and License Agreement whereby the Company acquired all PD-LD’s rights to certain issued and pending OLED technology patents in exchange for 50,000 shares of the Company’s common stock. Pursuant to this transaction, these patents were included in the patent rights exclusively licensed to the Company under the 1997 Amended License Agreement. The acquisition of these patents had a fair value of $1,481,250 (Note 2).

On September 29, 2000, the Company entered into a License Agreement with Motorola, Inc. (“Motorola”). Pursuant to this agreement, the Company licensed from Motorola what are now 74 issued U.S. patents and corresponding foreign patents relating to OLED technologies. These patents expire between 2012 and 2018. The Company has the sole right to sublicense these patents to OLED display manufacturers. As consideration for this license, the Company issued to Motorola 200,000 shares of the Company’s common stock (valued at $4,412,500) and 300,000 shares of the Company’s Series B Convertible Preferred Stock (valued at $6,618,750). On October 6, 2004, all 300,000 shares of the Series B Convertible Preferred Stock were converted into 418,916 shares of the Company’s common stock based on a specified conversion formula. As part of the original licensing transaction, the Company also issued to Motorola a warrant to purchase 150,000 shares of the Company’s common stock at $21.60 per share. This warrant became exercisable on September 29, 2001, and will remain exercisable until September 29, 2008. The warrant was recorded at a fair market value of $2,206,234 based on the Black- Scholes option-pricing model, and was recorded as a component of the cost of the acquired technology.

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

The Company is required under the License Agreement to pay Motorola on gross revenues earned by the Company for its sales of OLED products or components, or from its sublicensees for their sales of OLED products or components, whether or not these products or components are based on inventions claimed in the patent rights licensed from Motorola. Moreover, the Company was required to pay Motorola minimum royalties of $150,000 for the two-year period ending on December 31, 2002, and $500,000 for the two-year period ending on December 31, 2004. The Company is also required to pay Motorola minimum royalties of $1,000,000 for the two-year period ending on December 31, 2006. All minimum royalties are payable, at the Company’s discretion, in either all cash or up to 50% in shares of the Company’s common stock and the remainder in cash. The number of shares of common stock used to pay the stock portion of the royalty payment is equal to the amount to be paid in stock divided by the average daily closing price per share of the Company’s common stock over the 10 trading days ending two business days prior to the date the stock is issued.

For the two-year period ending on December 31, 2004, the Company issued to Motorola 35,516 shares of the Company’s common stock, valued at $249,997, and paid Motorola $250,003 in cash to satisfy the minimum royalty obligation of $500,000. Since the minimum royalty obligation exceeded actual royalties for the nine months ended September 30, 2005, the Company accrued $375,000 in royalty expense.

5.    LONG-TERM DEBT

  September 30,   December 31,  
 
 
 
  2005   2004  
 
 
 
Note payable to bank in monthly installments of $25,000,            
   plus interest at LIBOR plus 1.25% (5.11% at September 30,            
   2005), due in December 2009, secured by restricted cash $ 4,275,000   $ 4,500,000  
Less: current portion   300,000     300,000  
 
 
 
Long-term debt $ 3,975,000   $ 4,200,000  
 
 
 

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6.     EQUITY AND CASH COMPENSATION UNDER THE PPG AGREEMENTS

On October 1, 2000, the Company entered into a five-year Development and License Agreement (“Development Agreement”) and a seven-year Supply Agreement (“Supply Agreement”) with PPG Industries, Inc. (“PPG”). Under the Development Agreement, a team of PPG scientists and engineers assists the Company in developing its proprietary OLED materials and supplies the Company with these materials for evaluation purposes. Under the Supply Agreement, PPG supplies the Company with its proprietary OLED materials that are intended for resale to customers for commercial purposes.

For the period from inception of the Development Agreement through December 2004, the Company issued shares of its common stock and warrants to acquire its common stock to PPG on an annual basis in consideration of the services provided under the agreement. The consideration to PPG for these services was determined by reference to an agreed-upon annual budget and was subject to adjustment based on costs actually incurred for work performed during the budget period. The specific number of shares of common stock and warrants issued to PPG was determined based on the average closing price of the Company’s common stock during a specified period prior to the start of the budget period. In January 2003, the Company and PPG amended the Development Agreement, providing for additional consideration to PPG for additional services to be provided under that agreement, which services were paid for in cash. All materials provided by PPG under the Supply Agreement were also paid for in cash.

In December 2004 and again in March 2005, the Company and PPG amended both the Development Agreement and the Supply Agreement to alter the charges and method of payment for services and materials provided by PPG under both agreements. Under the amended Development Agreement, the Company compensates PPG on a cost-plus basis for the services provided during each calendar quarter. The Company is required to pay for some of these services in cash and for other of the services in common stock. Payment for up to 50% of the remaining services may be paid, at the Company’s sole discretion, in cash or shares of common stock, with the balance payable in all cash. The specific number of shares of common stock issuable to PPG is determined based on the average closing price for the Company’s common stock during a specified period prior to the end of that quarter. If, however, this average closing price is less than $6.00, the Company is required to compensate PPG in all cash. The Company records these expenses to research and development as they are incurred. Under the amended agreement, the Company is no longer required to issue warrants to PPG.

Under the amended Supply Agreement, the Company also compensates PPG on a cost-plus basis for services and materials provided during each calendar quarter. The Company is required to pay for all materials and for some of these services in cash. Payment for up to 50% of the remaining services may be paid, at the Company’s sole discretion, in cash or shares of common stock, with the balance payable in all cash. As under the Development Agreement, the specific number of shares of common stock issuable to PPG is determined based on the average closing price for the Company’s common stock during a specified period prior to the end of that quarter. If, however, this average closing price is less than $6.00, the Company is required to compensate PPG in cash.

On January 1, 2004, the Company issued to PPG 157,609 shares of the Company’s common stock as consideration, determined by reference to the agreed-upon budget, for services to be provided by PPG under the Development Agreement during 2004. For the nine months ended September 30, 2004, the Company recorded a charge of $1,451,889 to research and development expense for the portion of these shares that was attributable to services provided during such period. The charge was determined based on the fair value of the Company’s common stock as of the end of the period.

On February 15, 2005, the Company issued 27,276 shares of common stock to PPG based on a final accounting for actual costs incurred by PPG under the Development Agreement for the year ended December 31, 2004. Accordingly, the Company accrued $245,484 of additional research and development expense as of December 31, 2004, based on the fair value of these additional shares as of the end of 2004.

In further consideration of the services performed by PPG under the Development Agreement in 2004, the Company issued warrants to PPG to acquire 184,885 additional shares of the Company’s common stock. The number of warrants earned and issued was based on the total number of shares of common stock that the Company issued to PPG for services provided during 2004. The warrants were earned and charged to research and development expenses during 2004, but were not issued until February 15, 2005. The Company is not required to issue any warrants to PPG for services performed in 2005.

On April 20, 2005 and October 17, 2005, the Company issued to PPG 252,778 and 82,117 shares of the Company’s common stock, respectively, as consideration for services provided by PPG under the Development Agreement and the Supply Agreement during the nine months ended September 30, 2005. The Company recorded a charge of $2,708,018 to research and development expense for these shares. The charge was determined based on the fair value of the Company’s common stock as of the end of the period. The Company also recorded $426,964 to research and development for the cash portion of the work performed by PPG during the nine months ended September 30, 2005.

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Also, in accordance with the development agreement, the Company is required to reimburse PPG for its raw materials and conversion costs for all development chemicals produced on behalf of the Company. The Company recorded $162,886 and $515,557 in research and development expenses related to these costs during the nine months ended September 30, 2005 and 2004, respectively.

The Company is required to grant options to purchase the Company’s common stock to PPG employees performing development services for the Company under the Development Agreement, in a manner consistent with that for issuing options to its own employees. Subject to certain contingencies, these options vest one year following the date of grant and expire 10 years from the date of grant.

On April 20, 2004 and December 23, 2003, the Company granted to PPG employees performing development services under the agreement options to purchase 4,000 and 21,000 shares, respectively, of the Company’s common stock at an exercise price of $13.28 and $13.92, respectively. During the nine months ended September 30, 2004, the Company recorded $126,791 in research and development costs related to these options.

On January 18, 2005, the Company granted to PPG employees performing development services under the agreement options to purchase 30,500 shares of the Company’s common stock at an exercise price of $8.14. During the nine months ended September 30, 2005, the Company recorded $214,235 in research and development costs related to these options.

The Company determined the fair value of the options earned during the nine months ended September 30, 2005 and 2004, using the Black-Scholes option-pricing model with the following assumptions: (1) risk free interest rate of 4.21% and 4.28%, respectively, (2) no expected dividend yield, (3) expected life of 10 years and (4) expected volatility of 79.95% and 94%, respectively.

On July 29, 2005, the Company entered into an OLED Materials Supply and Service Agreement with PPG Industries, Inc. This Agreement supersedes and replaces in their entireties the Development Agreement and Supply Agreement effective as of January 1, 2006, and extends the term of the Company’s existing relationship with PPG Industries through December 31, 2008. Under the new agreement, PPG Industries will continue to assist the Company in developing its proprietary OLED materials and supplying the Company with those materials for evaluation purposes and for resale to its customers. The financial terms of the new agreement are substantially similar to those of the amended Development Agreement and Supply Agreement, and include a requirement that the Company pay PPG Industries in a combination of cash and the Company’s common stock.

7.    SHAREHOLDERS’ EQUITY

  Preferred Stock,
Series A
  Common Stock                      
 
 
                       
  Shares   Amount   Shares   Amount     Additional
Paid-In
Capital
  Deferred
Compensation
  Other
Comprehensive
Loss
  Accumulated
Deficit
  Total
Equity
 
 
 
 
 
 
 
 
 
 
 
BALANCE, JANUARY 1, 2005 200,000   $ 2,000   27,903,385   $ 279,034   $ 173,372,344   $ (17,446 ) $ (79,837 ) $ (114,368,210 ) $ 59,187,885  
                                                   
Exercise of Common Stock options and warrants       397,630     3,976     2,309,240                 2,313,116  
Issuance of Common Stock to Employees       88,270     883     725,532                 726,415  
Issuance of Common Stock and options to Board
   of Directors And Scientific Advisory Board
      48,000     480     526,071                 526,551  
Issuance of Common Stock in Connection with
   License Agreement (A)
      35,516     355     249,642                 249,997  
Issuance of Common Stock and options in
   connection with Development Agreement (B)
      280,054     2,801     2,220,182                 2,222,983  
Issuance of Common Stock options to non-employees               (6,713 )               (6,713 )
Amortization of Deferred Compensation                   17,446             17,446  
Unrealized loss on available-for-sales securities                       (6,258 )       (6,258 )
Net loss                           (11,160,021 )   (11,160,021 )
 
 
 
 
 
 
 
 

 
 
BALANCE, SEPTEMBER 30, 2005 200,000   $ 2,000   28,752,855   $ 287,529   $ 179,396,198   $   $ (86,095 ) $ (125,528,231 ) $ 54,071,401  
 
 
 
 
 
 
 
 
 
 

(A) In accordance with the Motorola License Agreement (Note 4), the Company issued shares to Motorola to satisfy part of the minimum royalty due for the two year period ended on December 31, 2004.

(B) In accordance with the PPG Development Agreement (Note 6), the Company issued shares to PPG based on a final accounting for actual costs incurred by PPG under the agreement for the year ended December 31, 2004. The Company also issued shares to PPG as consideration for services performed in the nine months ended September 30, 2005 and the pro-rata portion of the options to purchase shares of the Company’s common stock that were granted to certain PPG employees for the nine months ended September 30, 2005.

8.    COMMITMENTS AND CONTINGENCIES

Under the terms of the Company’s License Agreement with Motorola (Note 4), the Company agreed to make minimum royalty payments. To the extent that the royalties otherwise payable to Motorola under this agreement are not sufficient to meet the minimums, the Company is required to pay the shortfall, at its discretion, in all cash or in 50% cash and 50% common stock within 90 days after the end of each two-year period specified below in which the shortfall occurs.

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For the two-year period ending on December 31, 2004, the Company issued to Motorola 35,516 shares of the Company’s common stock, valued at $249,997, and paid Motorola $250,003 in cash as a result of the minimum royalty due of $500,000. For the two-year period ending December 31, 2006, the Company will be required to make a minimum royalty payment of $1,000,000. Since the minimum royalty obligation exceeded actual royalties for the nine months ended September 30, 2005, the Company accrued $375,000 in royalty expense.

In accordance with the April 2002 amendment to the 1997 Research Agreement with the Princeton University, the Company is required to pay annually to Princeton University up to $1,495,999 for the period from July 31, 2002 through July 31, 2007.

Under the terms of the 1997 Amended License Agreement (Note 3), the Company is required to pay Princeton University minimum royalty payments. To the extent that the royalties otherwise payable to Princeton University under this agreement are not sufficient to meet the minimums, the Company is required to pay Princeton University the difference between the royalties paid and the minimum royalty. The minimum royalty is $100,000 per year. The Company accrued $87,269 of royalty expense for the nine months ended September 30, 2005.

ITEM 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes above.

CAUTIONARY STATEMENT
CONCERNING FORWARD-LOOKING STATEMENTS

This discussion and analysis contains some “forward-looking statements.” Forward-looking statements concern our possible or assumed future results of operations, including descriptions of our business strategies. These statements often include words such as “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate,” “seek,” “will,” “may” or similar expressions. These statements are based on assumptions that we have made in light of our experience in the industry, as well as our perceptions of historical trends, current conditions, expected future developments and other factors we believe are appropriate in these circumstances.

As you read and consider this discussion and analysis, you should not place undue reliance on any forward-looking statements. You should understand that these statements involve substantial risk and uncertainty and are not guarantees of future performance or results. They depend on many factors including, but not limited to: the success of alternatives to OLEDs for flat panel displays; the success of competing OLED technologies, or of other flat panel display technologies; potential lack of demand for OLED displays or downturns in demand for flat panel displays in general; we and our partners failing to make sufficient advances in OLED technology and materials research; our being unable to form or maintain lasting business relationships with display manufacturers and others; and our being unable to obtain and maintain appropriate intellectual property protection for our OLED technologies and materials, or being required to incur excessive expenditures to enforce our intellectual property rights. These and other similar factors are discussed in greater detail in the section entitled “Factors that May Affect Future Results and Financial Condition” in our Annual Report on Form 10-K for the year ended December 31, 2004. Changes or developments in any of these areas could affect our financial results or results of operations, and could cause actual results to differ materially from those contemplated in the forward-looking statements.

All forward-looking statements speak only as of the date of this report. Except for special circumstances in which a duty to update arises when prior disclosure becomes materially misleading in light of subsequent events, we do not intend to update any of these forward-looking statements to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events.

OVERVIEW

We are a leader in the research, development and commercialization of organic light emitting diode, or OLED, technologies for use in a variety of flat panel display and other applications. Since 1994, we have been exclusively engaged, and expect to continue to be exclusively engaged, in funding and performing research and development activities relating to OLED technologies and materials, and in attempting to commercialize these technologies and materials. Our revenues are generated through contract research, sales of development and commercial chemicals, technology development and evaluation agreements and license fees. In the future, we anticipate that the revenues from licensing our intellectual property will become a more significant part of our revenue stream.

While we have made significant progress over the past few years developing and commercializing our family of OLED technologies (PHOLED™, TOLED™, FOLED™, etc.) we have incurred significant losses and will continue to do so until our OLED technologies become more widely adopted by flat panel display manufacturers. We have incurred losses since our inception, resulting in an accumulated deficit of $125,528,231 as of September 30, 2005.

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     We anticipate fluctuations in our annual and quarterly results of operations due to uncertainty regarding:
     
  the timing of our receipt of license fees and fees for future technology development and evaluation;
     
  the timing and volume of sales of our OLED materials for both commercial usage and evaluation purposes;
     
  the timing and magnitude of expenditures we may incur in connection with our ongoing research and development activities; and
     
  the timing and financial consequences of our formation of new business relationships and alliances.

RESULTS OF OPERATIONS

Three Months Ended September 30, 2005 Compared to Three Months Ended September 30, 2004

We had a net loss attributable to common shareholders of $2,979,140 (or $0.10 per diluted share) for the quarter ended September 30, 2005, compared to a net loss attributable to common shareholders of $3,752,662 (or $0.14 per diluted share) for the same period in 2004. The decreased loss was primarily due to an increase in total revenue of $1,661,241, offset to some extent by an increase in total operating expenses of $1,077,847.

Our revenues were $3,372,870 for the quarter ended September 30, 2005, compared to $1,711,629 for the same period in 2004. The increase in revenue is primarily due to increased contract research revenue and sales of developmental chemicals. We earned $1,556,095 in contract research revenue from the U.S. government for the quarter ended September 30, 2005, compared to $614,066 for the same period in 2004. The increase during 2005 was primarily due to the commencement of and continuation of work on new government contracts, including one Department of Energy (DoE) award, one U.S. Army Research Laboratory (ARL) award and four Phase II Small Business Innovation Research contracts (SBIRs), offset by the completion of one Phase II contract.

We earned $1,340,428 from sales of developmental chemicals in the quarter ended September 30, 2005, compared to $736,963 for the same period in 2004. The increase was mainly due to the timing of purchases of materials in connection with the development efforts of our customers. We cannot accurately predict the timing of such purchases from customers due to the early stage of the OLED industry.

Our commercial chemical revenue and royalty and license fees for the quarter ended September 30, 2005 were $0 and $50,400, respectively, compared to $18,180 and $92,420, respectively, for the corresponding period in 2004. The decrease was due to the timing of purchases of our proprietary PHOLED materials by a customer for use in the exterior sub-display of a mobile phone for sale in Japan. All commercial chemical revenue and $42,420 of royalty and license fees for the quarter ended September 30, 2004 were from one customer. There were no sales of commercial chemicals or royalty and license fees from that customer during the quarter ended September 30, 2005.

The royalty and license fees for the period ended September 30, 2005 were fees recorded as a result of the signing of a patent license agreement with Samsung SDI in April 2005. In connection with that agreement, we received upfront payments of license fees and royalties, both of which have been deferred. The deferred license fees are being recognized as license fee revenue over the life of the agreement. The deferred royalties will be recognized as products are sold and royalties are earned. Royalties and license fees for the three months ended September 30, 2004 also included $50,000 of royalty revenue from the sale of organic vapor phase deposition ("OVPD") equipment by Aixtron AG. We have granted Aixtron an exclusive license to produce and sell equipment used to manufacture OLEDs and other devices using the OVPD process. No such equipment was sold in 2005.

We recognized $425,947 in technology development revenue for the quarter ended September 30, 2005 in connection with three technology development and evaluation agreements entered into in September 2005, March 2005 and September 2003, compared to $250,000 for the same period in 2004 in connection with one such agreement. The increase is due to the signing of new technology development agreements in September and March 2005. The amount and timing of our receipt of fees for technology development and evaluation services is difficult to predict due to the early stage of the OLED industry.

We incurred research and development expenses of $4,734,554 for the quarter ended September 30, 2005, compared to $3,952,649 for the same period in 2004. The increase was due to an increase in costs for the further development and operation of our facility in Ewing, New Jersey, an increase in costs associated with our arrangement with PPG Industries, and an increase in costs associated with patent filings.

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General and administrative expenses were $1,739,166 for the quarter ended September 30, 2005, compared to $1,544,649 for the same period in 2004. The increase was due mainly to an increase in costs relating to the purchase and expansion of our facility, international consulting costs and costs associated with Sarbanes-Oxley compliance.

Interest income increased to $382,024 for the quarter ended September 30, 2005, compared to $222,097 for the same period in 2004. This was the result of higher rates of return on our invested cash during the quarter compared to the same period in the prior year.

Interest expense increased to $53,268 for the quarter ended September 30, 2005, compared to $21 for the same period in 2004. The increase was the result of a debt agreement entered into in December 2004 in connection with the acquisition of our Ewing, New Jersey facility.

There were no deemed dividends for the three months ended September 30, 2005, compared to $83,448 in deemed dividends for the same period in 2004. In accordance with the terms of our Series B Convertible Preferred Stock, in September 2004, we elected to make a cash payment of $83,448 to the holder of that stock in lieu of adjusting the conversion price of the stock. We treated this occurrence as a deemed dividend. On October 6, 2004, all shares of the Series B Convertible Preferred Stock were converted into shares our common stock.

Nine Months Ended September 30, 2005 Compared to Nine Months Ended September 30, 2004

We had a net loss attributable to common shareholders of $11,160,021 (or $0.39 per diluted share) for the nine months ended September 30, 2005, compared to a net loss attributable to common shareholders of $12,380,535 (or $0.47 per diluted share) for the same period in 2004. The decreased loss was primarily due to an increase in total revenue of $2,538,290 and increased interest income of $381,070, offset in part by an increase in total operating expenses of $1,683,973.

Our revenues were $7,851,932 for the nine months ended September 30, 2005, compared to $5,313,642 for the same period in 2004. The increase in revenues was primarily due to increased sales of developmental chemicals and increased contract research revenue.

We earned $3,769,475 in contract research revenue from the U.S. government in the nine months ended September 30, 2005, compared to $1,911,240 for the same period in 2004. The increase was primarily due to the commencement of work on new government contracts in 2005, including four Phase II SBIRs, two Phase I SBIR, one Phase III SBIR, one DOE award, one ARL award and three subcontracts. The increase was offset, to some extent, by our completion of four government contracts during the same period.

We earned $2,877,642 from our sales of developmental chemicals during the nine months ended September 30, 2005, compared to $1,792,402 for the same period in 2004. The increase was mainly due to the timing of purchases of materials in connection with the development efforts of our customers. We cannot accurately predict the timing of such purchases from our customers due to the early stage of the OLED industry.

Our commercial chemical revenue and royalty and license fees for the nine months ended September 30, 2005 were $31,395 and $165,655, respectively, compared to $108,000 and $302,000, respectively, for the corresponding period in 2004. The decrease was due to the timing of purchases of our proprietary PHOLED materials by a customer for use in the exterior sub-display of a mobile phone for sale in Japan. The amount and timing of the sale of our commercial chemicals is difficult to predict due to the early stage of the OLED industry. All commercial chemical revenue and a substantial portion of royalty and license fees for the nine months ended September 30, 2005 and 2004 were from one customer.

During the nine months ended September 30, 2005, royalty and license fees also included fees recorded as a result of our signing a patent license agreement with Samsung SDI in April 2005. In connection with this agreement, we received an upfront payment of license fees and of royalties, both of which have been deferred. The deferred license fees are being recognized as license fee revenue over the life of the agreement. The deferred royalties will be recognized as products are sold and royalties are earned. Royalty and license fees for the nine months ended September 30, 2004 also included $50,000 of royalty revenue from the sale of organic vapor phase deposition ("OVPD") equipment by Aixtron AG. We have granted Aixtron an exclusive license to produce and sell equipment used to manufacture OLEDs and other devices using the OVPD process. No such equipment was sold in 2005.

We recognized $1,007,765 in technology development revenue in the nine months ended September 30, 2005 in connection with three technology development and evaluation agreements, entered into in September 2005, March 2005 and September 2003, compared to $1,200,000 for the same period in 2004. The decrease is due to the fact that one agreement from 2004 expired in accordance with its terms at the end of March 2004, offset, to some extent, by the signing of technology development and evaluation agreements in March and September 2005. The amount and timing of our receipt of fees for technology development and evaluation services is difficult to predict due to the early stage of the OLED industry.

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We incurred research and development expenses of $13,891,104 for the nine months ended September 30, 2005, compared to $12,597,592 for the same period in 2004. The increase was due to increased costs of operations due to our facility expansion, increased amounts payable to PPG Industries for additional work under our Development Agreement and Supply Agreement, and increased patent costs.

General and administrative expenses were $5,395,253 for the nine months ended September 30, 2005, compared to $5,152,841 for the same period in 2004. General and administrative expenses have remained relatively consistent from 2004 to 2005.

Interest income increased to $965,296 for the nine months ended September 30, 2005, compared to $584,226 for the same period in 2004. This was the result of higher rates of returns on our invested cash during the nine month period compared to same period last year.

Interest expense increased to $144,676 for the nine months ended September 30, 2005, compared to $179 for the same period in 2004. The increase was the result of a debt agreement we entered into in December 2004 in connection with the acquisition of our Ewing, New Jersey facility.

There were no deemed dividends for the nine months ended September 30, 2005, compared to $129,624 in deemed dividends for the same period in 2004. In accordance with the terms of our Series B Convertible Preferred Stock, in September 2004, we elected to make a cash payment to Motorola in the amount of $83,448 in lieu of adjusting the conversion price of this stock. We treated this occurrence as a deemed dividend. On October 6, 2004, all shares of the Series B Convertible Preferred Stock were converted into shares our common stock. Also, in 2004, we completed an offering that was deemed dilutive under the terms of a warrant we had previously issued and resulted in the reduction of the exercise price of that warrant and an increase in the number of shares issuable under that warrant. We treated this occurrence as a deemed dividend of $46,176.

LIQUIDITY AND CAPITAL RESOURCES

As of September 30, 2005, we had cash and cash equivalents of $31,139,911, short-term investments of $12,473,736 and investments in certificates of deposit and other liquid instruments with an original maturity of more than one year of $1,953,560. This compares to cash and cash equivalents of $18,930,581, short-term investments of $26,258,463 and investments in certificates of deposit and other liquid instruments with an original maturity of more than one year of $2,290,451 as of December 31, 2004. The overall decrease in cash and cash equivalents and short-term and long-term investments of $1,912,288 was primarily due to cash used for the expansion of our facility and the purchase of new equipment, as well as cash used in operating activities during the nine months ended September 30, 2005.

Cash used in operating activities was $897,275 for the nine months ended September 30, 2005, as compared to $5,516,426 for the same period in 2004. The decrease in cash used in operations was mainly due to increased revenues, deferred license fees and deferred revenue, offset to some extent by increased total operating costs. Deferred license fees and deferred revenue increased by $3,474,835 for the nine months ended September 30, 2005 compared to a decrease of $150,000 for the same period in 2004. The increase is due mainly to cash receipts from five customers in connection with technology development and evaluation and license agreements. Total operating costs increased mainly due to increased general operating costs, including costs associated with personnel and the expansion of our facility, as well as increased patent costs.

Cash provided by operating activities was $1,087,311 for the quarter ended September 30, 2005, as compared to cash used in operating activities in the amount of $1,653,539 for the same period in 2004. The cash provided for the quarter was a result of increasing revenues, decreasing operating losses and receipt of $2,125,000 representing payments for technology development and evaluation and license agreements, all of which are included in total deferred license fees and deferred revenue.

In March and April 2004, we completed a public offering of 2,550,000 shares of our common stock at a price of $12.00 per share. The offering resulted in proceeds to us of $28,522,249, net of $2,077,750 in costs associated with completion of the offering.

Working capital decreased to $36,464,774 as of September 30, 2005, from working capital of $40,630,913 as of December 31, 2004. The net decrease was due primarily to a decrease in cash and cash equivalents and short-term investments used for the purchase of equipment and the costs associated with the expansion of our facility and in operating activities.

We anticipate, based on our internal forecasts and assumptions relating to our operations (including, among others, assumptions regarding our working capital requirements, the progress of our research and development efforts, the availability of sources of funding for our research and development work, and the timing and costs associated with the preparation, filing, prosecution, maintenance and enforcement of our patents and patent applications), that we have sufficient cash, cash equivalents and short-term investments to meet our obligations for at least the next twelve months. We believe that potential additional financing sources for us include long-term and short-term borrowings, public and private sales of our equity and debt securities and the receipt of cash upon the exercise of warrants and options. We have an effective shelf registration statement that would enable us to offer, from time to time, up to $44,725,524 of our common stock, preferred stock, debt securities and other securities, subject to market conditions and other factors. It should be noted, however, that additional funding may be required in the future for research, development and commercialization of our OLED technologies and materials, to obtain and maintain patents respecting these technologies and materials, and for working capital and other purposes, the timing and amount of which are difficult to ascertain. There can be no assurance that additional funds will be available to us when needed, on commercially reasonable terms or at all.

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CRITICAL ACCOUNTING POLICIES

Refer to our Annual Report on Form 10-K for the year ended December 31, 2004 for a discussion of our critical accounting policies.

CONTRACTUAL OBLIGATIONS

Refer to our Annual Report on Form 10-K for the year ended December 31, 2004 for a discussion of our contractual obligations.

OFF-BALANCE SHEET ARRANGEMENTS

Refer to our Annual Report on Form 10-K for the year ended December 31, 2004 for a discussion of off-balance sheet arrangements. As of September 30, 2005, we had no off-balance sheet arrangements.

ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We do not utilize financial instruments for trading purposes and hold no derivative financial instruments, other financial instruments or derivative commodity instruments that could expose us to significant market risk. Our primary market risk exposure with regard to financial instruments is to changes in interest rates, which would impact interest income earned on investments.

ITEM 4.    CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) as of September 30, 2005. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures, as of the end of the period covered by this report, are functioning effectively to provide reasonable assurance that the information required to be disclosed by us in reports filed or submitted under the Securities Exchange Act of 1934, as amended, is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (ii) accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

During our most recent fiscal quarter, there was no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1.    LEGAL PROCEEDINGS

We are not currently a party to any legal proceedings of a material nature.

ITEM 2.    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Pursuant to our existing Development Agreement and Supply Agreement with PPG Industries, Inc., we are required to issue shares of our common stock to PPG Industries in return for services performed by PPG Industries under those agreements. On April 20, 2005, we issued 252,778 shares of our common stock to PPG Industries as consideration for the actual services provided by PPG Industries under the agreements during the first quarter of 2005, and for the estimated services to be provided by PPG Industries under the agreements during the second quarter of 2005. On October 17, 2005, we issued 160,536 shares of our common stock to PPG Industries as consideration for the actual services provided by PPG Industries under the agreements during the third quarter of 2005, and for the estimated services to be provided by PPG Industries under the agreements during the fourth quarter of 2005. As of September 30, 2005 we recorded a charge of $2,708,018 to research and development expense for the issuance of the shares for actual services provided during the first three quarters of 2005.

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The securities issued to PPG Industries under the Development Agreement and Supply Agreement were not registered under the Securities Act of 1933, as amended. The issuances were exempt from registration under Section 4(2) of the Securities Act, as not involving any public offering.

ITEM 3.    DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

ITEM 5.    OTHER INFORMATION

None.

ITEM 6.    EXHIBITS

The following is a list of the exhibits filed as part of this report. Where so indicated by footnote, exhibits that were previously filed are incorporated by reference. For exhibits incorporated by reference, the location of the exhibit in the previous filing is indicated parenthetically, together with a reference to the filing indicated by footnote.

Exhibit   Description
Number    
  10.1+*   OLED Material Supply and Service Agreement between the registrant and PPG Industries, Inc., entered into on July 29, 2005.
31.1*   Certifications of Sherwin I. Seligsohn, Chief Executive Officer, as required by Rule 13a-14(a) or Rule 15d-14(a)
31.2*   Certifications of Sidney D. Rosenblatt, Chief Financial Officer, as required by Rule 13a-14(a) or Rule 15d-14(a)
  32.1**   Certifications of Sherwin I. Seligsohn, Chief Executive Officer, as required by Rule 13a-14(b) or Rule 15d-14(b), and by 18 U.S.C. Section 1350. (This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section. Further, this exhibit shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.)
  32.2**   Certifications of Sidney D. Rosenblatt, Chief Financial Officer, as required by Rule 13a-14(b) or Rule 15d-14(b), and by 18 U.S.C. Section 1350. (This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section. Further, this exhibit shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.)

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

Note: Any of the exhibits listed in the foregoing index not included with this report may be obtained, without charge, by writing to Mr. Sidney D. Rosenblatt, Corporate Secretary, Universal Display Corporation, 375 Phillips Boulevard, Ewing, New Jersey 08618.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized:

  UNIVERSAL DISPLAY CORPORATION
     
Date:     November 7, 2005 By: /s/ Sidney D. Rosenblatt
    Sidney D. Rosenblatt
    Executive Vice President and Chief Financial Officer

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