| UNIVERSAL DISPLAY CORP \PA\ ITEM 1A RISK FACTORS The following factors, as well as other factors affecting our operating results and financial condition, could cause our actual future results and financial condition to differ materially from those projected |
| Since inception, we have incurred significant losses and we expect to incur losses until such time, if ever, as we are able to achieve sufficient levels of revenue from the commercial exploitation of our OLED technologies and materials to support our operations |
| This may never occur because: • OLED technologies might not be adopted for broad commercial usage; • markets for flat panel displays utilizing OLED technologies may be limited; and • amounts we can charge for access to our OLED technologies and materials may not be sufficient for us to make a profit |
| 15 ______________________________________________________________________ [15]Back to Contents We may require additional funding in the future in order to continue our business |
| Our capital requirements have been and will continue to be significant |
| We may require additional funding in the future for the research, development and commercialization of our OLED technologies and materials, to obtain and maintain patents and other intellectual property rights in these technologies and materials, and for working capital and other purposes, the timing and amount of which are difficult to ascertain |
| Our cash on hand may not be sufficient to meet all of our future needs |
| When we need additional funds, such funds may not be available on commercially reasonable terms or at all |
| Additionally, if we attempt to raise money in an offering of shares of our common stock, preferred stock, warrants or depositary shares, or if we engage in acquisitions involving the issuance of such securities, the issuance of these shares will dilute our then-existing shareholders |
| If our OLED technologies and materials are not feasible for broad-based product applications, we may never generate revenues sufficient to support ongoing operations |
| Our business strategy is to license our OLED technologies and sell our OLED materials to display manufacturers for incorporation into the flat panel display products that they sell |
| Consequently, our success depends on the ability and willingness of these manufactures to develop, manufacture and sell commercial flat panel display products integrating our technologies and materials |
| Before display manufacturers will agree to utilize our OLED technologies and materials for wide-scale commercial production, they will likely require us to demonstrate to their satisfaction that our OLED technologies and materials are feasible for broad-based product applications |
| This, in turn, may require additional advances in our technologies and materials, as well as those of others, for applications in a number of areas, including, without limitation, advances with respect to: • device reliability; • the development of OLED materials with sufficient lifetimes, brightness and color coordinates for full color OLED displays; and • issues related to scalability and cost-effective fabrication technologies for product applications |
| We cannot be certain that these advances will ever occur, and hence our OLED technologies and materials may never be feasible for broad-based product applications |
| Even if our OLED technologies are technically feasible, they may not be adopted by display manufacturers |
| The potential size, timing and viability of market opportunities targeted by us are uncertain at this time |
| Market acceptance of our OLED technologies will depend, in part, upon these technologies providing benefits comparable or superior to cathode ray tube, or CRT, display and liquid crystal display, or LCD, technologies (the current standard display technologies) at an advantageous cost to manufacturers, and the adoption of products incorporating these technologies by consumers |
| Many potential licensees of our OLED technologies manufacture flat panel displays utilizing competing technologies, and may, therefore, be reluctant to redesign their products or manufacturing processes to incorporate our OLED technologies |
| During the entire product development process for a new flat panel display product, we face the risk that our technology will fail to meet the manufacturer’s technical, performance or cost requirements or will be replaced by a competing product or alternative technology |
| For example, we are aware that some of our licensees and prospective licensees have entered into arrangements with our competitors regarding the development of competing technologies |
| Even if we offer technologies that are satisfactory to a display manufacturer, the manufacturer may choose to delay or terminate its product development efforts for reasons unrelated to our technologies |
| Mass production of OLED displays will require the availability of suitable manufacturing equipment, components and materials, many of which are available only from a limited number of suppliers |
| In addition, there may be a number of other technologies that display manufacturers need to utilize to be used in conjunction with our OLED technologies in order to bring OLED displays and products containing them to the market |
| Thus, even if our OLED technologies are a viable alternative to competing flat panel display technologies, if display 16 ______________________________________________________________________ [16]Back to Contents manufacturers are unable to obtain access to this equipment and these components, materials and other technologies, they may not utilize our OLED technologies |
| There are numerous potential alternatives to OLEDs for flat panel displays, which may limit our ability to commercialize our OLED technologies and materials |
| The flat panel display market is currently, and will likely continue to be for some time, dominated by displays based on LCD technology |
| Numerous companies are making substantial investments in, and conducting research to improve characteristics of, LCDs |
| Plasma and other competing flat panel display technologies have been, or are being, developed |
| Advances in LCD technology or any of these other technologies may overcome their current limitations and permit them to become the leading technologies for flat panel displays, either of which could limit the potential market for flat panel displays utilizing our OLED technologies and materials |
| This, in turn, would cause display manufacturers to avoid entering into commercial relationships with us, or to terminate or not renew their existing relationships with us |
| Other OLED technologies may be more successful or cost-effective than ours, which may limit the commercial adoption of our OLED technologies and materials |
| Our competitors have developed OLED technologies that differ from or compete with our OLED technologies |
| In particular, Eastman Kodak Company’s competing fluorescent OLED technology, which entered the marketplace prior to ours, may become entrenched in the flat panel industry before our OLED technologies have a chance to become widely utilized |
| Moreover, our competitors may succeed in developing new OLED technologies that are more cost-effective or have fewer display limitations than our OLED technologies |
| If our OLED technologies, and particularly our phosphorescent OLED technology, are unable to capture a substantial portion of the OLED display market, our business strategy may fail |
| Many of our competitors have greater resources, which may make it difficult for us to compete successfully against them |
| The flat panel display industry is characterized by intense competition |
| Many of our competitors have better name recognition and greater financial, technical, marketing, personnel and research capabilities than us |
| Because of these differences, we may never be able to compete successfully in the OLED display market |
| The flat panel display industry has historically experienced significant downturns, which may adversely affect the demand for and pricing of our OLED technologies and materials |
| Because we do not sell any display products to consumers, our success depends upon the ability and continuing willingness of our display manufacturer licensees to market commercial products integrating our technologies and materials, and the widespread acceptance of those products |
| Any slowdown in the demand for our licensees’ products would adversely affect our royalty revenues and thus our business |
| The markets for our display manufacturer licensees’ products are highly competitive, with pressure on prices and profit margins due largely to additional and growing capacity from flat panel display industry competitors |
| Success in the market for end-user products that may integrate our OLED technologies and materials also depends on factors beyond the control of our licensees and us, including the cyclical and seasonal nature of the end-user markets that our licensees serve, as well as industry and general economic conditions |
| The flat panel display industry has experienced significant periodic downturns, often in connection with, or in anticipation of, declines in general economic conditions |
| These downturns have been characterized by lower product demand, production overcapacity and erosion of average selling prices |
| Our business strategy is dependent on display manufacturers building and selling displays that incorporate our OLED technologies and materials |
| Industry-wide fluctuations and downturns in the demand for flat panel displays, and OLED displays in particular, could cause significant harm to our business |
| If we fail to make advances in our OLED research and development activities, we might not succeed in commercializing our OLED technologies and materials |
| Further advances in our OLED technologies and materials depend, in part, on the success of the research and development work we conduct, both along and with our research partners |
| We cannot be certain that this work will yield additional advances in the research and development of these technologies and materials |
| 17 ______________________________________________________________________ [17]Back to Contents Our research and development efforts remain subject to all of the risks associated with the development of new products based on emerging and innovative technologies, including, without limitation, unanticipated technical or other problems and the possible insufficiency of funds for completing development of these products |
| Technical problems may result in delays and cause us to incur additional expenses that would increase our losses |
| If we cannot complete research and development of our OLED technologies and materials successfully, or if we experience delays in completing research and development of our OLED technologies and materials for use in potential commercial applications, particularly after incurring significant expenditures, our business may fail |
| If we cannot form and maintain lasting business relationships with OLED display manufacturers, our business strategy will fail |
| Our business strategy ultimately depends upon our development and maintenance of commercial licensing and material supply relationships with high-volume manufacturers of OLED displays |
| As of December 31, 2005, we had entered into only three such relationships, one with Samsung SDI Co, Ltd, one with Dupont Displays, Inc |
| and one with Tohoku Pioneer Corporation |
| In February 2006, we entered into another such relationship with AU Optronics Corporation |
| All of our other relationships with display manufacturers currently are limited to technology development and the evaluation of our OLED technologies and materials for possible use in commercial production |
| Some or all of these relationships may not succeed or, even if they are successful, may not result in the display manufacturers entering into commercial licensing and material supply relationships with us |
| Under our existing technology development and evaluation agreements, we are working with display manufacturers to incorporate our technologies into their products for the commercial production of OLED displays |
| However, these technology development and evaluation agreements typically last for limited periods of time, such that our relationships with the display manufacturers will expire unless they continually are renewed |
| The display manufacturers may not agree to renew their relationships with us on a continuing basis |
| In addition, we regularly continue working with display manufacturers evaluating our OLED technologies and materials after our existing agreements with them have expired while we are attempting to negotiate contract extensions or new agreements with them |
| Should our relationships with the display manufacturers not continue or be renewed, our business would suffer |
| Our ability to enter into additional commercial licensing and material supply relationships, or to maintain our existing technology development and evaluation relationships, may require us to make financial or other commitments |
| We might not be able, for financial or other reasons, to enter into or continue these relationships on commercially acceptable terms, or at all |
| Conflicts may arise with our licensees or joint development partners, resulting in renegotiation or termination of, or litigation related to, our agreements with them |
| This would adversely affect our revenues |
| Conflicts could arise between us and our licensees or joint development partners as to royalty rates, milestone payments or other commercial terms |
| Similarly, we may disagree with our licensees or joint development partners as to which party owns or has the right to commercialize intellectual property that is developed during the course of the relationship or as to other non-commercial terms |
| If such a conflict were to arise, a licensee or joint development partner might attempt to compel renegotiation of certain terms of their agreement or terminate their agreement entirely, and we might lose the royalty revenues and other benefits of the agreement |
| Either we or the licensee or joint development partner might initiate litigation to determine commercial obligations, establish intellectual property rights or resolve other disputes under the agreement |
| Such litigation could be costly to us and require substantial attention of management |
| If we were unsuccessful in such litigation, we could lose the commercial benefits of the agreement, be liable for other financial damages and suffer losses of intellectual property or other rights that are the subject of dispute |
| We rely solely on PPG Industries to manufacture the OLED materials we use and sell to display manufacturers |
| Our business prospects depend significantly on our ability to obtain proprietary OLED materials for our own use and for sale to display manufacturers |
| Our agreements with PPG Industries, Inc |
| provide us with a source for 18 ______________________________________________________________________ [18]Back to Contents these materials for research, development and evaluation purposes, as well as for commercial purposes |
| All of these agreements are, however, currently scheduled to expire on or before December 31, 2008 |
| Our inability to continue obtaining these OLED materials from PPG Industries or another source would have a material adverse effect on our revenues from sales of these materials, as well as on our ability to perform research and development work and to support those display manufacturers currently evaluating our OLED technologies and materials for possible commercial use |
| If we cannot obtain and maintain appropriate patent and other intellectual property rights protection for our OLED technologies and materials, our business will suffer |
| The value of our OLED technologies and materials is dependent on our ability to secure and maintain appropriate patent and other intellectual property rights protection |
| Although we own or license many patents respecting our OLED technologies and materials that have already been issued, there can be no assurance that additional patents applied for will be obtained, or that any of these patents, once issued, will afford commercially significant protection for our OLED technologies and materials, or will be found valid if challenged |
| Moreover, we have not obtained patent protection for some of our OLED technologies and materials in all foreign countries in which OLED displays or materials might be manufactured or sold |
| In any event, the patent laws of other countries may differ from those of the United States as to the patentability of our OLED technologies and materials and the degree of protection afforded |
| The strength of our current intellectual property position results primarily from the essential nature of our fundamental patents covering phosphorescent OLED devices and certain materials utilized in these devices |
| These patents begin expiring in 2017 |
| While we hold a wide range of additional patents and patent applications whose expiration dates extend (and in the case of patent applications, will extend) beyond 2017, many of which are also of key importance in the OLED industry, none are of an equally essential nature as our fundamental patents, and therefore our competitive position after 2017 may be less certain |
| We may become engaged in litigation to protect or enforce our patent and other intellectual property rights, or in International Trade Commission proceedings to abate the importation of goods that would compete unfairly with those of our licensees |
| In addition, we may have to participate in interference or reexamination proceedings before the US Patent and Trademark Office, or in opposition, nullity or other proceedings before foreign patent offices, with respect to our patents or patent applications |
| All of these actions would place our patents and other intellectual property rights at risk and may result in substantial costs to us as well as a diversion of management attention |
| Moreover, if successful, these actions could result in the loss of patent or other intellectual property rights protection for the key OLED technologies and materials on which our business depends |
| In addition, we rely in part on unpatented proprietary technology, and others may independently develop the same or similar technology or otherwise obtain access to our unpatented technology |
| To protect our trade secrets, know-how and other proprietary information, we require employees, consultants, financial advisors and strategic partners to enter into confidentiality agreements |
| These agreements may not ultimately provide meaningful protection for our trade secrets, know-how or other proprietary information in the event of any unauthorized use, misappropriation or disclosure of those trade secrets, know-how or other proprietary information |
| In particular, we may not be able to fully or adequately protect our proprietary information as we conduct discussions with potential strategic partners |
| If we are unable to protect the proprietary nature of our technology, it will harm our business |
| We or our licensees may incur substantial costs or lose important rights as a result of litigation or other proceedings relating to our patent and other intellectual property rights |
| There are a number of other companies and organizations that have been issued patents and are filing patent applications relating to OLED technologies and materials, including, without limitation, Eastman Kodak Company, Cambridge Display Technology, Fuji Film Co, Ltd, Canon, Inc, Pioneer Corporation, Semiconductor Energy Laboratories Co |
| As a result, there may be issued patents or pending patent applications of third parties that would be infringed by the use of our OLED technologies or materials, thus subjecting our licensees to possible suits for patent infringement in the future |
| Such lawsuits could result in our licensees being liable for damages or require our licensees to obtain additional licenses that could 19 ______________________________________________________________________ [19]Back to Contents increase the cost of their products, which might have an adverse affect on their sales and thus our royalties or cause them to seek to renegotiate our royalty rates |
| In addition, in the future we may assert our intellectual property rights by instituting legal proceedings against others |
| We cannot assure you that we will be successful in enforcing our patents in any lawsuits we may commence |
| Defendants in any litigation we may commence to enforce our patents may attempt to establish that our patents are invalid or are unenforceable |
| Thus, any patent litigation we commence could lead to a determination that one or more of our patents are invalid or unenforceable |
| If a third party succeeds in invalidating one or more of our patents, that party and others could compete more effectively against us |
| Our ability to derive licensing revenues from products or technologies covered by these patents could also be adversely affected |
| Whether our licensees are defending the assertion of third-party intellectual property rights against their businesses arising as a result of the use of our technology, or we are asserting our own intellectual property rights against others, such litigation can be complex, costly, protracted and highly disruptive to our or our licensees’ business operations by diverting the attention and energies of management and key technical personnel |
| As a result, the pendency or adverse outcome of any intellectual property litigation to which we or our licensees are subject could disrupt business operations, require the incurrence of substantial costs and subject us or our licensees to significant liabilities, each of which could severely harm our business |
| Plaintiffs in intellectual property cases often seek injunctive relief in addition to money damages |
| Any intellectual property litigation commenced against our licensees could force them to take actions that could be harmful to their business and thus to our royalties, including the following: • stop selling their products that incorporate or otherwise use technology that contains our allegedly infringing intellectual property; • attempt to obtain a license to the relevant third-party intellectual property, which may not be available on reasonable terms or at all; or • attempt to redesign their products to remove our allegedly infringing intellectual property to avoid infringement of the third-party intellectual property |
| If our licensees are forced to take any of the foregoing actions, they may be unable to manufacture and sell their products that incorporate our technology at a profit or at all |
| Furthermore, the measure of damages in intellectual property litigation can be complex, and is often subjective or uncertain |
| If our licensees were to be found liable for infringement of proprietary rights of a third party, the amount of damages they might have to pay could be substantial and is difficult to predict |
| Decreased sales of our licensees’ products incorporating our technology would have an adverse effect on our royalty revenues under existing licenses |
| Any necessity to procure rights to the third-party technology might cause our existing licensees to renegotiate the royalty terms of their license with us to compensate for this increase in their cost of production or, in certain cases, to terminate their license with us entirely |
| Were this renegotiation to occur, it would likely harm our ability to compete for new licensees and have an adverse effect on the terms of the royalty arrangements we could enter into with any new licensees |
| As is commonplace in technology companies, we employ individuals who were previously employed at other technology companies |
| To the extent our employees are involved in research areas that are similar to those areas in which they were involved at their former employers, we may be subject to claims that such employees or we have, inadvertently or otherwise, used or disclosed the alleged trade secrets or other proprietary information of the former employers |
| Litigation may be necessary to defend against such claims |
| The costs associated with these actions or the loss of rights critical to our or our licensees’ business could negatively impact our revenues or cause our business to fail |
| The US government has rights to our OLED technologies that might prevent us from realizing the benefits of these technologies |
| The US government, through various government agencies, has provided and continues to provide funding to us, Princeton University and the University of Southern California for research activities related to certain aspects of our OLED technologies |
| Because we have been provided with this funding, the government has rights 20 ______________________________________________________________________ [20]Back to Contents to these OLED technologies that could restrict our ability to market them to the government for military and other applications, or to third parties for commercial applications |
| Moreover, if the government determines that we have not taken effective steps to achieve practical application of these OLED technologies in any field of use in a reasonable time, the government could require us to grant licenses to other parties in that field of use |
| Any of these occurrences would limit our ability to obtain the full benefits of our OLED technologies |
| If we cannot keep our key employees or hire other talented persons as we grow, our business might not succeed |
| Our performance is substantially dependent on the continued services of senior management and other key personnel, and on our ability to offer competitive salaries and benefits to our employees |
| We do not have employment agreements with any of our management or other key personnel |
| Additionally, competition for highly skilled technical, managerial and other personnel is intense |
| We might not be able to attract, hire, train, retain and motivate the highly skilled managers and employees we need to be successful |
| If we fail to attract and retain the necessary technical and managerial personnel, our business will suffer and might fail |
| We can issue shares of preferred stock that may adversely affect the rights of shareholders of our common stock |
| Our Articles of Incorporation authorize us to issue up to 5cmam000cmam000 shares of preferred stock with designations, rights and preferences determined from time-to-time by our Board of Directors |
| Accordingly, our Board of Directors is empowered, without shareholder approval, to issue preferred stock with dividend, liquidation, conversion, voting or other rights superior to those of shareholders of our common stock |
| For example, an issuance of shares of preferred stock could: • adversely affect the voting power of the shareholders of our common stock; • make it more difficult for a third party to gain control of us; • discourage bids for our common stock at a premium; or • otherwise adversely affect the market price of our common stock |
| As of December 31, 2005, we have issued and outstanding 200cmam000 shares of Series A Nonconvertible Preferred Stock, all of which are held by an entity controlled by members of the family of Sherwin I Seligsohn, our Chairman of the Board and Chief Executive Officer |
| Our Board of Directors has authorized and issued other shares of preferred stock in the past, none of which are currently outstanding, and may do so again at any time in the future |
| If the price of our common stock goes down, we may have to issue more shares than are presently anticipated to be issued under our agreement with PPG Industries |
| Under our agreements with PPG Industries, we are required to issue to PPG Industries shares of our common stock as partial payment for services rendered by it, though under limited circumstances we are required to compensate PPG Industries fully in cash in lieu of common stock |
| The number of shares of common stock that we are required to deliver to PPG is determined based on a formula requiring that the lower the price of our common stock at and around the time of issuance, the greater the number of shares that we would be required to issue to PPG Industries |
| Lower than anticipated market prices for our common stock, and correspondingly greater numbers of shares issuable to PPG Industries, with a resulting increase in the number of shares available for public sale, could cause people to sell our common stock, including in short sales, which could drive down the price of our common stock, thus reducing its value and perhaps hindering our ability to raise additional funds in the future |
| In addition, such an increase in the number of outstanding shares of our common stock would further dilute existing holders of this stock |
| Our executive officers and directors own a large percentage of our common stock and could exert significant influence over matters requiring shareholder approval, including takeover attempts |
| Our executive officers and directors, their respective affiliates and the adult children of Sherwin Seligsohn, our Chairman of the Board and Chief Executive Officer, beneficially own, as of March 6, 2006, approximately 16dtta3prca of the outstanding shares of our common stock |
| Accordingly, these individuals may, as a practical matter, 21 ______________________________________________________________________ [21]Back to Contents be able to exert significant influence over matters requiring approval by our shareholders, including the election of directors and the approval of mergers or other business combinations |
| This concentration also could have the effect of delaying or preventing a change in control of us |
| Because the vast majority of OLED display manufacturers are located in the Asia-Pacific region, we are subject to international operational, financial, legal and political risks which may negatively impact our operations |
| Many of our licensees and prospective licensees have a majority of their operations in countries other than the United States, particularly in the Asia-Pacific region |
| Risks associated with our doing business outside of the United States include, without limitation: • compliance with a wide variety of foreign laws and regulations; • legal uncertainties regarding taxes, tariffs, quotas, export controls, export licenses and other trade barriers; • economic instability in the countries of our licensees, causing delays or reductions in orders for their products and therefore our royalties; • political instability in the countries in which our licensees operate, particularly in South Korea relating to its disputes with North Korea and in Taiwan relating to its disputes with China; • difficulties in collecting accounts receivable and longer accounts receivable payment cycles; and • potentially adverse tax consequences |
| Any of these factors could impair our ability to license our OLED technologies and sell our OLED materials, thereby harming our business |
| The market price of our common stock might be highly volatile |
| The market price of our common stock might be highly volatile, as has been the case with our common stock in the past as well as the securities of many companies, particularly other small and emerging-growth companies |
| We have included a section in this report entitled “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” that contains a table indicating the high and low closing prices of our common stock as reported on the Nasdaq National Market for the periods indicated |
| Factors such as the following may have a significant impact on the market price of our common stock in the future: • our expenses and operating results; • announcements by us or our competitors of technological developments, new product applications or license arrangements; and • other factors affecting the flat panel display and related industries in general |
| Our operating results may have significant period-to-period fluctuations, which would make it difficult to predict our future performance |
| Due to the current stage of commercialization of our OLED technologies and the significant development and manufacturing objectives that we and our licensees must achieve to be successful, our quarterly operating results will be difficult to predict and may vary significantly from quarter to quarter |
| We believe that period-to-period comparisons of our operating results are not a reliable indicator of our future performance at this time |
| Among other factors affecting our period-to-period results, our license and technology development fees often consist of large one-time or annual payments, resulting in significant fluctuations in our revenues |
| If, in some future period, our operating results or business outlook fall below the expectations of securities analysts or investors, our stock price would be likely to decline and investors in our common stock may not be able to resell their shares at or above their purchase price |
| Broad market, industry and global economic factors may also materially reduce the market price of our common stock, regardless of our operating performance |
| 22 ______________________________________________________________________ [22]Back to Contents The issuance of additional shares of our common stock could drive down the price of our stock |
| The price of our common stock can be expected to decrease if: • other shares of our common stock that are currently subject to restriction on sale become freely salable, whether through an effective registration statement or based on Rule 144 under the Securities Act of 1933, as amended; or • we issue additional shares of our common stock that might be or become freely salable, including shares that would be issued upon conversion of our preferred stock or the exercise of outstanding warrants and options |
| Because we do not intend to pay dividends, shareholders will benefit from an investment in our common stock only if it appreciates in value |
| We have never declared or paid any cash dividends on our common stock |
| We currently intend to retain our future earnings, if any, to finance further research and development and do not expect to pay any cash dividends in the foreseeable future |
| As a result, the success of an investment in our common stock will depend upon any future appreciation in its value |
| There is no guarantee that our common stock will appreciate in value or even maintain the price at which shareholders have purchased their shares |