-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, K2Q7xVA7/BE6Egrb1+uDMa+cvwXEDi1Rp9RPCa263BIuwYpgc2PF/YzdNKVoTGKi JU1alo7TS4rLsXum1RT5Zg== 0000950124-99-003236.txt : 19990517 0000950124-99-003236.hdr.sgml : 19990517 ACCESSION NUMBER: 0000950124-99-003236 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990514 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NANOPHASE TECHNOLOGIES CORPORATION CENTRAL INDEX KEY: 0000883107 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS PRIMARY METAL PRODUCTS [3390] IRS NUMBER: 363687863 STATE OF INCORPORATION: IL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-22333 FILM NUMBER: 99621458 BUSINESS ADDRESS: STREET 1: 453 COMMERCE ST CITY: BURR RIDGE STATE: IL ZIP: 60521 BUSINESS PHONE: 6303231200 MAIL ADDRESS: STREET 1: 453 COMMERCE STREET CITY: BURR RIDGE STATE: IL ZIP: 60521 10-Q 1 FORM 10-Q 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------- FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended: MARCH 31, 1999 Commission File Number: 0-22333 NANOPHASE TECHNOLOGIES CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 36-3687863 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 453 COMMERCE STREET, BURR RIDGE, ILLINOIS 60521 (Address of principal executive offices, and zip code) Registrant's telephone number, including area code: (630) 323-1200 -------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No As of May 14, 1999, there were outstanding 12,654,577 shares of common stock, par value $.01, of the registrant. 2 NANOPHASE TECHNOLOGIES CORPORATION QUARTER ENDED MARCH 31, 1999 INDEX
PAGE ---- PART I - FINANCIAL INFORMATION...............................................................................3 Item 1. Financial Statements..........................................................................3 Balance Sheets as of March 31, 1999 (unaudited) and December 31, 1998.........................3 Statements of Operations (unaudited) for the three months ended March 31, 1999 and 1998....................................................................................4 Statements of Cash Flows (unaudited) for the three months ended March 31, 1999 and 1998....................................................................................5 Notes to Financial Statements (unaudited).....................................................6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ........8 Item 3. Quantitative and Qualitative Disclosures About Market Risk...................................12 PART II - OTHER INFORMATION.................................................................................13 Item 1. Legal Proceedings............................................................................13 Item 2. Changes in Securities and Use of Proceeds....................................................14 Item 6. Exhibits and Reports on Form 8-K.............................................................14 SIGNATURES..................................................................................................15
2 3 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS NANOPHASE TECHNOLOGIES CORPORATION BALANCE SHEETS
MARCH 31, DECEMBER 31, 1999 1998 ---------------- --------------- (UNAUDITED) ASSETS CURRENT ASSETS: Cash and cash equivalents.................................................. $ 770,621 $ 363,394 Investments................................................................ 25,058,369 26,270,518 Trade accounts receivable, less allowance for doubtful accounts of $75,000 at March 31, 1999 and $85,000 at December 31, 1998........... 183,327 316,328 Other receivable........................................................... 304,032 - Inventories, net........................................................... 765,039 838,825 Prepaid expenses and other current assets.................................. 114,283 92,351 ---------------- --------------- Total current assets..................................................... 27,195,671 27,881,416 Equipment and leasehold improvements, net.................................... 2,346,923 2,383,091 Other assets, net............................................................ 180,096 189,481 ---------------- --------------- $ 29,722,690 $ 30,453,988 ================ =============== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable........................................................... $ 819,177 $ 413,378 Accrued expenses........................................................... 1,342,278 933,020 ---------------- --------------- Total current liabilities................................................ 2,161,455 1,346,398 CONTINGENT LIABILITIES...................................................... - - STOCKHOLDERS' EQUITY: Preferred stock, $.01 par value, 24,088 shares authorized and no shares issued and outstanding........................................... - - Common stock, $.01 par value, 24,930,377 shares authorized; 12,654,577 shares issued and outstanding at March 31, 1999 and 12,568,691 shares issued and outstanding at December 31, 1998.............. 126,546 125,687 Additional paid-in capital................................................... 48,389,142 48,360,454 Accumulated deficit.......................................................... (20,954,453) (19,378,551) ---------------- --------------- Total stockholders' equity................................................. 27,561,235 29,107,590 ---------------- --------------- $ 29,722,690 $ 30,453,988 ================ ===============
See Notes to Financial Statements. 3 4 NANOPHASE TECHNOLOGIES CORPORATION STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, ----------------------------------- 1999 1998 ---------------- ----------------- REVENUE: Product revenue........................................................... $ 266,248 $ 636,734 Other revenue............................................................. 58,750 66,800 ---------------- ----------------- Total revenue........................................................... 324,998 703,534 OPERATING EXPENSE: Cost of revenue........................................................... 781,089 968,712 Research and development expense.......................................... 390,414 189,214 Selling, general and administrative expense............................... 1,018,446 683,299 ---------------- ----------------- Total operating expense................................................. 2,189,949 1,841,225 ---------------- ----------------- Loss from operations........................................................ (1,864,951) (1,137,691) Interest income............................................................. 289,049 406,291 ---------------- ----------------- Loss before provision for income taxes...................................... (1,575,902) (731,400) Provision for income taxes.................................................. - (156,000) ---------------- ----------------- Net loss.................................................................... $ (1,575,902) $ (887,400) ================ ================= Net loss per share.......................................................... $ (0.13) $ (0.07) ================ ================= Weighted average number of common shares outstanding........................ 12,593,718 12,277,467 ================ =================
See Notes to Financial Statements. 4 5 NANOPHASE TECHNOLOGIES CORPORATION STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, ------------------------------------ 1999 1998 ------------------ ---------------- OPERATING ACTIVITIES: Net loss................................................................. $ (1,575,902) $ (887,400) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization........................................ 169,315 111,450 Allowance for excess inventory quantities............................ 50,891 - Changes in assets and liabilities related to operations: Trade accounts receivable............................................ 133,001 824,586 Other receivable..................................................... (304,032) - Inventories.......................................................... 22,895 13,265 Prepaid expense and other assets..................................... (13,912) (39,826) Accounts payable..................................................... 405,799 (424,760) Accrued liabilities.................................................. 409,258 224,856 ------------------ ---------------- Net cash used in operating activities.................................... (702,687) (177,829) INVESTING ACTIVITIES: Acquisition of equipment and leasehold improvements...................... (131,782) (219,522) Purchases of held-to-maturity investments................................ (40,615,640) (65,178,904) Maturities of held-to-maturity investments............................... 41,827,789 62,313,000 ------------------ ---------------- Net cash provided by (used in) investing activities...................... 1,080,367 (3,085,426) FINANCING ACTIVITIES: Proceeds from issuance of stock.......................................... 29,547 - ------------------ ---------------- Net cash provided by financing activities................................ 29,547 - ------------------ ---------------- Increase (decrease) in cash and cash equivalents......................... 407,227 (3,263,255) Cash and cash equivalents at beginning of period......................... 363,394 3,988,368 ------------------ ---------------- Cash and cash equivalents at end of period............................... $ 770,621 $ 725,113 ================== ================
See Notes to Financial Statements. 5 6 NANOPHASE TECHNOLOGIES CORPORATION NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (1) BASIS OF PRESENTATION The accompanying unaudited interim financial statements of Nanophase Technologies Corporation (the "Company") reflect all adjustments (consisting of normal recurring adjustments) which, in the opinion of management, are necessary for a fair presentation of the financial position and operating results of the Company for the interim periods presented. Operating results for the three months ended March 31, 1999 are not necessarily indicative of the results that may be expected for the year ended December 31, 1999. These financial statements should be read in conjunction with the Company's audited financial statements and notes thereto for the year ended December 31, 1998, included in the Company's Annual Report on Form 10-K for the year ended December 31, 1998, as filed with the Securities and Exchange Commission. (2) DESCRIPTION OF BUSINESS The Company was organized for the purpose of developing nanocrystalline materials for commercial production and sale in domestic and international markets. In the course of its corporate development, the Company has experienced net losses and negative cash flows from operations. Historically, the Company has funded its operations primarily through the issuance of equity securities. Revenue from international sources approximated $139,100 and $84,400 for the three months ended March 31, 1999 and 1998, respectively. (3) INVESTMENTS Investments generally consist of certificates of deposit, commercial paper, and corporate notes and have an estimated fair value of $25,054,000 at March 31, 1999 and $26,251,000 at December 31, 1998. All investments have been classified as held-to-maturity and mature within a twelve month period. (4) INVENTORIES Inventories consist of the following:
MARCH 31, 1999 DECEMBER 31, 1998 ------------------- ---------------------- Raw materials............................................ $ 274,917 $ 284,162 Finished goods........................................... 731,646 745,296 ------------------- ---------------------- 1,006,563 1,029,458 Allowance for excess inventory quantities................ (241,524) (190,633) ------------------- ---------------------- $ 765,039 $ 838,825 =================== ======================
(5) STOCK OPTIONS AND WARRANTS During the three months ended March 31, 1999, options to purchase 85,886 shares of Common Stock were exercised for $29,547. 6 7 (6) CONTINGENT LIABILITIES Five separate complaints were filed in the United States District Court for the Northern District of Illinois, Eastern Division, each of which alleged that the Company, certain of its officers and directors, and the underwriters of the Company's initial public offering of Common Stock ("the Offering") are liable under the federal securities laws for making material misstatements of fact and omitting and failing to state material facts necessary to make other statements of fact not misleading in the Registration Statement and Prospectus relating to the Offering. In an order entered by the Court, those cases were consolidated and a consolidated complaint was filed on October 30, 1998. The consolidated complaint alleges that the action should be maintained as (i) a plaintiff class action on behalf of certain persons who purchased the Common Stock from November 26, 1997 through January 8, 1998, excluding the defendants, members of their immediate families, any entity in which a defendant has a controlling interest and certain others related to or affiliated with the foregoing, and (ii) a defendant class action against the underwriters who participated in the Offering. The consolidated complaint seeks unquantified damages as provided for under the federal securities laws, pre- and post-judgment interest, attorneys' fees, expert witness fees, other costs and expenses and such other and further relief as the Court may find proper. In addition, the consolidated complaint seeks rescission and/or rescissory damages relating to purchases of the Common Stock, as provided for under federal securities laws. All defendants have filed motions to dismiss the consolidated complaint that are fully briefed and under advisement by the Court. In August 1998, the Company received a request for indemnification from the underwriters of the Offering pursuant to the underwriting agreement for the Offering. In response to such request, the Company has agreed to be responsible for the underwriters' attorneys' fees with respect to the litigation. On November 20, 1998, a separate complaint was filed in the Northern District of Illinois, Eastern Division, which alleged that the Company, certain of its officers and directors, and the underwriters of the Company's Offering are liable under the federal securities laws for making material misstatements of fact and omitting or failing to state material facts necessary to make other statements of fact not misleading in connection with the solicitation of consents to proceed with the Offering from certain of the Company's preferred stockholders. The complaint alleges that the action should be maintained as a plaintiff class action on behalf of those former preferred stockholders whose shares of preferred stock of the Company were converted into Common Stock on or about the date of the Offering, excluding the defendants, other officers and directors of the Company, members of the immediate families of all individual defendants, any entity in which a defendant has a controlling interest and certain others related to, employed by or affiliated with the foregoing. The complaint seeks unquantified damages as provided for under the federal securities laws, pre- and post-judgment interest, attorneys' fees, expert witness fees, other costs and expenses and such other and further relief as the Court may find proper. On March 24, 1999, the preferred stockholders' complaint was reassigned to the judge hearing the consolidated complaint described above and further consolidated with that litigation. The Company, the defendant directors and the defendant officers have each retained counsel with respect to both of the above-described litigations and intend to defend against both complaints vigorously. Although the Company believes that the allegations of the complaints are without merit, it is unable to predict at this time the outcome of either litigation or whether the resolution of either litigation could have a material adverse effect on the Company's results of operations, cash flows or financial condition. 7 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Since January 1, 1997, Nanophase Technologies Corporation (the "Company") has been engaged in the commercial production and sale of its nanocrystalline materials. All of the Company's revenue since January 1, 1997 has been generated through commercial sources. From its inception in November 1989 through March 31, 1999, the Company was primarily capitalized through the private offering of approximately $19,558,069 of equity securities and its initial public offering of $28,837,936 of the Company's common stock (the "Common Stock"), each net of issuance costs. The Company has incurred cumulative losses of $20,954,453 from inception through March 31, 1999. RESULTS OF OPERATIONS Revenue is recorded when the Company ships products, when specific milestones are met regarding development arrangements or when the Company licenses its technology and transfers proprietary information. Total revenue decreased to $324,998 for the three months ended March 31, 1999, compared to $703,534 for the same period in 1998. The decrease in total revenue was primarily attributed to a reduction in product revenue. Product revenue decreased to $266,248 for the three months ended March 31, 1999, compared to $636,734 for the same period in 1998. Other revenue decreased to $58,750 for the three-month period ended March 31, 1999, compared to $66,800 for the same period in 1998. The majority of the revenue generated during the three months ended March 31, 1999 was from customers in the electronics and cosmetics markets. Cost of revenue generally includes costs associated with commercial production, customer development arrangements and licensing fees. Cost of revenue decreased to $781,089 for the three months ended March 31, 1999, compared to $968,712 for the same period in 1998. The decrease in cost of revenue was generally attributed to reduced product shipments, efficiencies in the manufacture of the Company's products, and reduced ceramic superplastic forming costs, somewhat offset by inefficiencies in the Company's coating operations. Cost of revenue as a percentage of total revenue increased for the three months ended March 31, 1999, compared to the same period in 1998, due primarily to the decrease in total revenue. Research and development expense primarily consists of costs associated with the Company's development or acquisition of new product applications and coating formulations and the cost of enhancing the Company's manufacturing processes. Research and development expense increased to $390,414 for the three months ended March 31, 1999, compared to $189,214 for the same period in 1998. The increase in research and development expense was primarily attributed to increased costs related to ongoing development activities, increased recruiting and relocation activities, additional salaries for newly hired research personnel, and separation costs relating to the termination of a former officer. The Company expects to further increase its research and development expense for the remainder of 1999 in connection with its plans to continue to enhance and expand its product lines, technologies and manufacturing processes. 8 9 Selling, general and administrative expense increased to $1,018,446 for the three-month period ended March 31, 1999, compared to $683,299 for the same period in 1998. The net increase was primarily attributed to increased costs associated with ongoing investor relation programs, additional legal expenses, salaries of additional sales and administrative personnel, increased recruiting and relocation costs, and separation costs associated with the departure of the Company's former chief executive officer. The Company expects to further increase its selling, general and administrative expense during the remainder of 1999 in connection with its plans to refocus its sales effort and restructure the organization. Interest income decreased to $289,049 for the three-month period ended March 31, 1999, compared to $406,291 for the same period in 1998. This decrease was primarily due to a reduction in funds available for investment compounded by a reduction in investment yields. Income tax expense was $0 for the three months ended March 31, 1999, compared to $156,000 for the same period in 1998. The 1998 expense was due to the foreign taxes withheld from license fees received from one of the Company's distribution partners, C. I. Kasei Co., Ltd. RECENT DEVELOPMENTS In connection with the Company's plans to restructure the organization, Nanophase has recently eliminated certain jobs and positions which it felt were not currently necessary. The Company believes that the anticipated cost savings generated by the elimination of these jobs and positions will be offset by increased sales and marketing expenses primarily related to an expanded sales effort. The Company expects to recognize charges related to the restructuring of approximately $125,000 during the second quarter of 1999. LIQUIDITY AND CAPITAL RESOURCES The Company's cash, cash equivalents and investments amounted to $25,828,990 at March 31, 1999, compared to $26,633,912 at December 31, 1998. The net cash used in the Company's operating activities was $702,687 for the three months ended March 31, 1999, compared to $177,829 for the same period in 1998. The net cash used in operating activities for the three-month period ended March 31, 1999 was primarily for the ongoing development of additional product applications, the funding of research and development activities and sales efforts, and the funding of other receivables and inventory levels, which was offset by the collection of accounts receivable and an increase in accounts payable and accrued liabilities. Net cash provided by investing activities, including capital expenditures and purchases of securities in which cash is invested pending its use for operating activities and expansion of the Company's manufacturing facilities offset by maturities of such securities, amounted to $1,080,367 for the three months ended March 31, 1999, compared to $3,085,426 of net cash used in investing activities for the same period in 1998. Capital expenditures, primarily related to the further expansion of the Company's existing manufacturing facility and the purchase of operating equipment, amounted to $131,782 for the three months ended March 31, 1999, compared to $219,522 for the same period in 1998. Net cash provided by financing activities, which related to the exercise of options for 85,886 shares of Common Stock, amounted to $29,547 for the three-month period ended March 31, 1999, compared to $0 for the same period in 1998. The Company believes that cash from operations and cash on hand, together with the remaining net proceeds from the Company's initial public offering of Common Stock ("the Offering") and interest income thereon, will be adequate to fund the Company's current operating plans. The Company's actual future capital requirements will depend, however, on many factors, including customer acceptance of the Company's current and potential nanocrystalline materials and product applications, continued progress in the Company's research and development activities and product testing programs, the magnitude of 9 10 these activities and programs, and the costs necessary to increase and expand the Company's manufacturing capabilities and to market and sell the Company's materials and product applications. Depending on future requirements, the Company may seek additional funding through public or private financing, collaborative relationships, government contracts or additional licensing agreements. Additional financing may not be available on acceptable terms or at all, and any such additional financing could be dilutive to the Company's stockholders. At March 31, 1999, the Company had a net operating loss carryforward of approximately $20 million for income tax purposes. Because the Company may have experienced "ownership changes" within the meaning of the U.S. Internal Revenue Code in connection with its various prior equity offerings, future utilization of this carryforward may be subject to certain limitations as defined by the Internal Revenue Code. If not utilized, the carryforward expires at various dates between 2005 and 2013. As a result of the annual limitation, a portion of this carryforward may expire before ultimately becoming available to reduce income tax liabilities. At March 31, 1999, the Company also had a foreign tax credit carryforward of $156,000, which could be used as an offsetting tax credit to reduce U.S. income taxes. The foreign tax credit will expire in 2013 if not utilized before that date. IMPACT OF YEAR 2000 ISSUE The Year 2000 Issue is the result of computer programs being written using two digits rather than four to define the applicable year. Computer programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices or engage in similar normal business activities. The Company has identified the following areas as possibly being affected by the Year 2000 Issue: (i) IT and non-IT systems, (ii) manufacturing applications, and (iii) third-party relationships. For each of these areas, the Company is in the process of identifying and assessing specific software, equipment, and systems which are potentially susceptible to the Year 2000 Issue. The Company expects to develop and implement corrective actions, if necessary, to ensure that by September 30, 1999 its software, equipment and systems will function properly with respect to dates in the year 2000 and thereafter. The Company believes the total cost of such year 2000 compliance activities will not be material. The Company believes that it has no material exposure to contingencies related to the Year 2000 Issue for the products it has sold to date. The Company processes its transactions and applications utilizing personal computers. In addition, the Company's telephone system, fax machines, payroll, alarm systems and other miscellaneous systems utilize computer equipment and software. The Company is identifying which software and equipment needs to be upgraded. Based on its assessment to date, the Company does not believe that significant modifications or replacements of its software or systems will be required to be year 2000 compliant. As of January 1, 1998, the Company only acquires software and invests in systems which are year 2000 compliant. The Company's manufacturing activities rely on its PVS plasma reactors comprised of modular equipment that contains embedded technology. The Company also relies on a quality control laboratory for production process control. The Company is identifying the particular hardware and software systems used in such manufacturing applications to assess whether they are year 2000 compliant. The Company believes such manufacturing applications are year 2000 compliant. 10 11 To date, the Company does not have any direct interface between its systems and those of any significant supplier or customer. The Company, however, relies on third party suppliers for raw materials, utilities, cash management services and other key supplies and services. The Company, therefore, recognizes that it is vulnerable to third party suppliers that fail to remediate their own Year 2000 Issues. The Company is corresponding with its significant suppliers to determine their year 2000 compliance status. The Company is also dependent upon its customers, product development partners and distributors for sales, cash flow and product development. Although the Company has received some formal information concerning the year 2000 compliance status of certain of its customers, product development partners and distributors, this information is limited and incomplete at this time. The Company has, however, received indications that most of these entities are working on year 2000 compliance. The Company's most reasonably likely worst case scenario with respect to the Year 2000 Issue is that (i) its manufacturing systems may malfunction, and (ii) third party suppliers of ceramic and metallic materials, cash management services and utilities, customers, product development partners and distributors may be unable to remediate their own Year 2000 Issues. In such scenario, the Company could experience manufacturing interruptions, difficulties in accessing its cash and investments, delays in distribution of its products, delays in development of new product applications and reduced shipments. This would have a material adverse effect on the Company's operations. The Company currently has no contingency plan in the event such most reasonably likely worst case scenario occurs. The Company currently believes that the Year 2000 Issue will not pose significant operational problems for the Company. However, if all Year 2000 Issues are not properly identified or remediated on a timely basis, the Company's results of operations or relationships with customers and suppliers may be materially adversely affected. In addition, the systems of other companies on which the Company relies may not be timely converted and any failure by them to do so could have a material adverse effect on the Company's operations. LEGAL PROCEEDINGS As disclosed in Note 6 to the Financial Statements and under "Part II - Other Information - Item 1. Legal Proceedings," five separate complaints were filed in the United States District Court for the Northern District of Illinois, Eastern Division, each of which alleged that the Company, certain of its officers and directors, and the underwriters of the Offering are liable under the federal securities laws for making material misstatements of fact and omitting and failing to state material facts necessary to make other statements of fact not misleading in the Registration Statement and Prospectus relating to the Offering. In an order entered by the Court, those cases were consolidated and a consolidated complaint was filed on October 30, 1998. The consolidated complaint alleges that the action should be maintained as (i) a plaintiff class action on behalf of certain persons who purchased the Common Stock from November 26, 1997 through January 8, 1998, excluding the defendants, members of their immediate families, any entity in which a defendant has a controlling interest and certain others related to or affiliated with the foregoing, and (ii) a defendant class action against the underwriters who participated in the Offering. The consolidated complaint seeks unquantified damages as provided for under the federal securities laws, pre- and post-judgment interest, attorneys' fees, expert witness fees, other costs and expenses and such other and further relief as the Court may find proper. In addition, the consolidated complaint seeks rescission and/or rescissory damages relating to purchases of the Common Stock, as provided for under federal securities laws. All defendants have filed motions to dismiss the consolidated complaint that are fully briefed and under advisement by the Court. On November 20, 1998, a separate complaint was filed in the Northern District of Illinois, Eastern Division, which alleged that the Company, certain of its officers and directors, and the underwriters of the Company's Offering are liable under the federal securities laws for making material 11 12 misstatements of fact and omitting or failing to state material facts necessary to make other statements of fact not misleading in connection with the solicitation of consents to proceed with the Offering from certain of the Company's preferred stockholders. The complaint alleges that the action should be maintained as a plaintiff class action on behalf of those former preferred stockholders whose shares of preferred stock of the Company were converted into Common Stock on or about the date of the Offering, excluding the defendants, other officers and directors of the Company, members of the immediate families of all individual defendants, any entity in which a defendant has a controlling interest and certain others related to, employed by or affiliated with the foregoing. The complaint seeks unquantified damages as provided for under the federal securities laws, pre- and post-judgment interest, attorneys' fees, expert witness fees, other costs and expenses and such other and further relief as the Court may find proper. On March 24, 1999, the preferred stockholders' complaint was reassigned to the judge hearing the consolidated complaint described above and further consolidated with that litigation. The Company, the defendant directors and the defendant officers have each retained counsel with respect to both of the above-described litigations and intend to defend against both complaints vigorously. Although the Company believes that the allegations of the complaints are without merit, it is unable to predict at this time the outcome of either litigation or whether the resolution of either litigation could have a material adverse effect on the Company's results of operations, cash flows or financial condition. SAFE HARBOR PROVISION Because the Company wants to provide investors with more meaningful and useful information, the Quarterly Report on Form 10-Q contains certain "forward-looking statements" (as such term is defined in Section 21E of the Securities Exchange Act of 1934, as amended). Statements contained in this Quarterly Report on Form 10-Q that are not historical facts are forward-looking statements that are made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. These statements reflect the Company's current expectations regarding its future results of operations, performance, and achievements and are based on information currently available to the Company. The Company has tried, wherever possible, to identify these forward-looking statements by using words such as "intends," "believes," "estimates," "expects," "plans," and similar expressions. These statements are subject to certain risks, uncertainties, and factors which could cause the Company's actual results, performance, and achievements in 1999 and beyond to differ materially from those expressed in, or implied by, such statements. These risks, uncertainties, and factors include, without limitation: uncertain demand for, and acceptance of, the Company's nanocrystalline materials; the Company's dependence on a limited number of key customers; the Company's limited manufacturing capacity and experience; the Company's limited marketing experience; changes in development and distribution relationships; the impact of competitive products and technologies; the Company's dependence on patents and protection of proprietary information; the resolution of litigation the Company is involved in; and other risks set forth under "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Risk Factors" in the Company's Annual Report on Form 10-K for the year ended December 31, 1998, as filed with the Securities and Exchange Commission. Readers of this Quarterly Report on Form 10-Q should not place undue reliance on any forward-looking statements. The Company undertakes no obligation to update or revise these forward-looking statements to reflect new events or uncertainties. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to interest rate risk on its investment portfolio. A 1% fluctuation in interest rate would result in a change in the portfolio earnings of approximately $250,000 per year. 12 13 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS As previously disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 1998, five separate complaints were filed in the United States District Court for the Northern District of Illinois, Eastern Division, each of which alleged that the Company, certain of its officers and directors, and the underwriters of the Company's Offering are liable under the federal securities laws for making material misstatements of fact and omitting and failing to state material facts necessary to make other statements of fact not misleading in the Registration Statement and Prospectus relating to the Offering. In an order entered by the Court, those cases were consolidated and a consolidated complaint was filed on October 30, 1998. The consolidated complaint alleges that the action should be maintained as (i) a plaintiff class action on behalf of certain persons who purchased the Common Stock from November 26, 1997 through January 8, 1998, excluding the defendants, members of their immediate families, any entity in which a defendant has a controlling interest and certain others related to or affiliated with the foregoing, and (ii) a defendant class action against the underwriters who participated in the Offering. The consolidated complaint seeks unquantified damages as provided for under the federal securities laws, pre- and post-judgment interest, attorneys' fees, expert witness fees, other costs and expenses and such other and further relief as the Court may find proper. In addition, the consolidated complaint seeks rescission and/or rescissory damages relating to purchases of the Common Stock, as provided for under federal securities laws. All defendants have filed motions to dismiss the consolidated complaint that are fully briefed and under advisement by the Court. On November 20, 1998, a separate complaint was filed in the Northern District of Illinois, Eastern Division, which alleged that the Company, certain of its officers and directors, and the underwriters of the Company's Offering are liable under the federal securities laws for making material misstatements of fact and omitting or failing to state material facts necessary to make other statements of fact not misleading in connection with the solicitation of consents to proceed with the Offering from certain of the Company's preferred stockholders. The complaint alleges that the action should be maintained as a plaintiff class action on behalf of those former preferred stockholders whose shares of preferred stock of the Company were converted into Common Stock on or about the date of the Offering, excluding the defendants, other officers and directors of the Company, members of the immediate families of all individual defendants, any entity in which a defendant has a controlling interest and certain others related to, employed by or affiliated with the foregoing. The complaint seeks unquantified damages as provided for under the federal securities laws, pre- and post-judgment interest, attorneys' fees, expert witness fees, other costs and expenses and such other and further relief as the Court may find proper. On March 24, 1999, the preferred stockholders' complaint was reassigned to the judge hearing the consolidated complaint described above and further consolidated with that litigation. The Company, the defendant directors and the defendant officers have each retained counsel with respect to both of the above-described litigations and intend to defend against both complaints vigorously. 13 14 ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS On November 26, 1997 (the "Effective Date"), the Company's Registration Statement on Form S-1 (File No. 333-36937) relating to the Offering was declared effective by the Securities and Exchange Commission. Since the Effective Date, of its $28,837,936 of net proceeds from the Offering, the Company has used $602,207 for capital expenditures primarily related to the further expansion of the Company's existing manufacturing facility and the purchase of operating equipment and $2,406,739 for working capital and other general corporate purposes. The remainder of the net proceeds has been invested by the Company, pending its use, in short-term, investment grade, interest-bearing obligations. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K A. EXHIBITS. Exhibit 10 - Consulting Agreement entered into March 9, 1999 between the Company, Cross Technologies, Inc., and Robert W. Cross Exhibit 11 - Statement Regarding Computation of Loss per Share Exhibit 27 - Financial Data Schedule B. REPORTS ON FORM 8-K. The Company did not file any Current Reports on Form 8-K during the first quarter of 1999. 14 15 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. NANOPHASE TECHNOLOGIES CORPORATION Date: May 14, 1999 By: /s/ JOSEPH E. CROSS --------------------------------------------- Joseph E. Cross President, Chief Executive Officer (principal executive officer) and a Director Date: May 14, 1999 By: /s/ DENNIS J. NOWAK --------------------------------------------- Dennis J. Nowak Vice President-Finance and Administration, Chief Financial Officer, Treasurer and Secretary (principal financial and chief accounting officer) 15 16 EXHIBIT INDEX Exhibit Number Exhibit Name - ------ ------------ 10 Consulting Agreement entered into March 9, 1999 between the Company, Cross Technologies, Inc., and Robert W. Cross 11 Statement Regarding Computation of Loss per Share 27 Financial Data Schedule EX-10 2 CONSULTING AGREEMENT 1 EXHIBIT 10 CONSULTING AGREEMENT This Consulting Agreement is made between Cross Technologies, Inc. ("CTI"), Robert W. Cross ("Mr. Cross"), and Nanophase Technologies Corporation ("NTC"). WHEREAS, during the period between January 14, 1993 and December 16, 1998, Mr. Cross served as the President and Chief Executive Officer of NTC pursuant to agreements including that certain Employment Agreement between NTC and Mr. Cross dated February 3, 1994 (the "Employment Agreement"); WHEREAS, effective December 17, 1998, Mr. Cross ceased serving as an officer of NTC; WHEREAS, NTC wishes to have periodic future access to Mr. Cross' knowledge and business experience, and Mr. Cross wishes to provide NTC with such access; WHEREAS, Mr. Cross is the sole shareholder and officer of CTI; and WHEREAS, NTC wishes to engage CTI as NTC's consultant and CTI wishes to provide consulting services to NTC upon the terms and conditions stated in this Consulting Agreement. NOW, THEREFORE, in consideration of the parties' mutual promises set forth below, CTI, Mr. Cross and NTC agree as follows. 1. For a period of eighteen months starting on December 17, 1998 and ending on June 17, 2000, CTI shall render reasonable consulting services to NTC, as may be requested by NTC's President from time to time (the "Term"). Such consulting services shall not preclude CTI or Mr. Cross from conducting other business consistent with the respective obligations of CTI and Mr. Cross under this Consulting Agreement. 2. NTC shall pay CTI consulting fees in the aggregate amount of $307,500 (the "Consulting Fees"). CTI acknowledges that NTC previously has paid CTI $8,447.85 of these Consulting Fees. NTC's remaining payments of Consulting Fees, in the aggregate amount of $299,052.15, will be made (a) in an initial installment of $34,177.30, paid within four business days following all parties' execution of this Consulting Agreement, and (b) in thirty-one subsequent equal installments of $8,544.35 each, with each such installment paid on or before the first business day respectively following the first and seventeenth day of each month thereafter. NTC shall tender payments of all Consulting Fees by first-class or overnight mail, addressed to Cross Technologies, Inc., P. O. Box 200, Solebury, PA 18963 or such other address as CTI subsequently may provide to NTC. 3. On or before the first business day of the first month following all parties' execution of this Consulting Agreement, NTC shall provide CTI with a signing bonus consisting of: (a) NTC's payment of $375 to CTI, and (b) NTC's payment of up to $5,375 to 2 Wells Fargo Auto Finance, Inc. ("Wells Fargo") or its designee in connection with the termination of that certain Vehicle Lease No. 500-821-14083973 between Mr. Cross and Wells Fargo (the "Signing Bonus"). 4. The parties to this Consulting Agreement understand and agree that the foregoing Consulting Fees and Signing Bonus shall be paid by NTC solely in exchange for CTI's consulting services to NTC. The Consulting Fees and Signing Bonus are not intended and should not be construed as NTC's payment to CTI of wages, salary or compensation for services of Mr. Cross. Based on NTC's receipt of CTI's Federal Employer Identification Number, and the appropriate regulations of the U.S. Internal Revenue Service and the Illinois Department of Revenue in effect from time to time during the Term, NTC will not forward any statements of earnings or payments of monies (Form 1099 or W-2) to either the U.S. Internal Revenue Service, the Illinois Department of Revenue or any other taxing authority in connection with the Consulting Fees and Signing Bonus paid by NTC under this Consulting Agreement. 5. CTI and Mr. Cross acknowledge that NTC makes no representations or warranties to them concerning the tax consequences, if any, of the Consulting Fees and Signing Bonus paid by NTC under this Consulting Agreement. Each party to this instrument shall bear its own such tax consequences, if any, and any applicable related tax reporting or filing obligations. 6. NTC acknowledges and confirms that under its Amended and Restated 1992 Stock Option Plan, as amended to date (the "Stock Option Plan") and any Stock Option Agreement between NTC and Mr. Cross (the "Stock Option Agreements"): A. Any stock options previously granted to Mr. Cross shall remain in effect and operate solely according to the provisions of the respective Stock Option Agreements and the Stock Option Plan throughout the Term of this Consulting Agreement. B. Throughout the Term of this Consulting Agreement, Mr. Cross shall have "Continuous Status as an Employee, Consultant or Outside Director" within the meaning of Sections 2(e) and 2(f) of the Stock Option Plan, subject to Mr. Cross remaining the sole shareholder and officer of CTI, and Mr. Cross' interests under the Stock Option Agreements shall continue to vest consistent with the provisions of each respective Stock Option Agreement. C. Pursuant to Section 8(b)(ii)(D) of the Stock Option Plan, Mr. Cross may exercise any stock options previously granted to him, subject to the terms of the Stock Option Agreements and the Stock Option Plan, by the delivery of cash to NTC by a broker-dealer to whom Mr. Cross has submitted an irrevocable notice of exercise. 2 3 D. Pursuant to Section 7(d) of the Stock Option Plan and the terms of the Stock Option Agreements, Mr. Cross may exercise any stock options previously granted to him in accord with the provisions of each respective Stock Option Agreement and subject to the withholding and tax payment requirements of the Stock Option Plan, the Stock Option Agreements and applicable law. NTC will report any such exercise of stock options by Mr. Cross to the U.S. Internal Revenue Service on Form W-2. 7. The parties to this instrument understand and agree that NTC's obligations under Paragraphs 2 and 3 of this Consulting Agreement are expressly subject to CTI and Mr. Cross' complying with their respective following obligations: A. CTI shall render such consulting services to NTC as reasonably requested pursuant to Paragraph 1 of this Consulting Agreement. B. Mr. Cross shall provide NTC with written notice of his voluntary resignation from NTC's Board of Directors and as a director of NTC, concurrently with Mr. Cross' executing this Consulting Agreement. C. Mr. Cross hereby waives and releases any claim, action, suit, debt, dues, account, controversy, damages or judgment which Mr. Cross had, has or hereafter may have, whether known or unknown, in any way connected with or arising from (i) any claim for severance benefits or payments from NTC, and (ii) any claim under Section 7 of the Employment Agreement. D. Mr. Cross hereby confirms the continuing existence and enforceability of, and his compliance with: (i) all terms of that certain Confidential Information And Proprietary Rights Agreement between Mr. Cross and NTC dated January 14, 1993, and (ii) the confidentiality and non-competition covenants in Section 8 of the Employment Agreement. E. Mr. Cross and CTI shall maintain the confidentiality of all terms of this Consulting Agreement, and they each warrant that they will not, in any manner or means, by act or omission, disclose the terms of this Consulting Agreement to any person or entity. Mr. Cross and CTI specifically warrant that they will not represent to any person or entity that Mr. Cross is a consultant to, or otherwise affiliated with, NTC. The warranties in this Paragraph 7.E shall not apply to Mr. Cross' disclosures to his spouse, financial advisors or lawyers, to CTI's disclosures to its financial advisors or lawyers, or to disclosures of Mr. Cross or CTI as required by applicable law. 8. The parties to this instrument do not intend that any provisions of this Consulting Agreement shall release or waive any claim, action, suit, debt, dues, account, controversy, damages or judgment that any party had, has or may hereafter have against 3 4 another party or any other person, except as expressly provided in Paragraph 7.C of this instrument. 9. This Consulting Agreement, and all obligations of NTC under Paragraphs 2 and 3 of this instrument, shall end immediately upon the earlier of: (a) Mr. Cross' death; (b) the dissolution, receivership or bankruptcy of CTI, without CTI having previously notified NTC of the identity and address of any successor entity to CTI; (c) the conclusion of the Term; or (d) Mr. Cross or CTI failing to comply with their respective obligations under Paragraph 7 of this Consulting Agreement. 10. Neither CTI nor Mr. Cross shall have any power to assign their respective rights or obligations under this Consulting Agreement. 11. Any dispute or controversy based upon or arising in connection with any party's respective rights or obligations under this Consulting Agreement shall be submitted to arbitration before a single arbitrator in Chicago, Illinois pursuant to the commercial arbitration rules of the American Arbitration Association. An arbitration award rendered pursuant to this Paragraph 11 shall be final, binding on the parties and may be submitted to any court of competent jurisdiction for entry of a judgment thereon, in accord with the Federal Arbitration Act or the Uniform Arbitration Act. 12. Except as otherwise provided in Paragraph 2 of this instrument, any notice to be given under this Consulting Agreement shall be in writing and delivered personally or by overnight courier, addressed to the party concerned at the address stated below or to such other address as such party subsequently may provide in writing: If to CTI: Cross Technologies, Inc. P.O. Box 200 Solebury, Pennsylvania 18963 If to Mr. Cross: Robert W. Cross P.O. Box 200 Solebury, Pennsylvania 18963 If to NTC: Nanophase Technologies Corporation 453 Commerce Street Burr Ridge, Illinois 60521 Attention: President 13. CTI and Mr. Cross acknowledge that the only consideration for this Consulting Agreement is described in this instrument; that no other promise or agreement has been made to or with them by any person or entity whatsoever to cause them to sign this Consulting Agreement; that each party to this instrument is represented by counsel and that counsel has 4 5 explained to the party all the terms of this Consulting Agreement and that each party has voluntarily signed it; and that this instrument constitutes the entire agreement between the parties on all the subjects described herein. 14. This Consulting Agreement shall be construed in accord with, and governed by, the laws of the State of Illinois. 15. This Consulting Agreement may be signed by the parties in multiple counterparts. CROSS TECHNOLOGIES, INC. By: /s/ ROBERT W. CROSS March 8, 1999 ------------------------------ ------------------------ Robert W. Cross Date Chief Executive Officer /s/ ROBERT W. CROSS March 8, 1999 - --------------------------------- ------------------------ ROBERT W. CROSS Date NANOPHSE TECHNOLOGIES CORPORATION By: /s/ JOSEPH CROSS March 9, 1999 ------------------------------ ------------------------ Joseph Cross Date Chief Executive Officer 5 EX-11 3 COMPUTATION OF LOSS PER SHARE 1 EXHIBIT 11 NANOPHASE TECHNOLOGIES CORPORATION STATEMENT REGARDING COMPUTATION OF LOSS PER SHARE (UNAUDITED)
THREE MONTHS ENDED MARCH 31, ---------------------------------------- 1999 1998 ------------------- ------------------ HISTORICAL: Weighted average common shares outstanding 12,593,718 12,277,467 =================== ================== Net loss $ (1,575,902) $ (887,400) =================== ================== Net loss per common share $ (0.13) $ (0.07) =================== ==================
EX-27 4 FINANCIAL DATA SCHEDULE
5 1 U.S. DOLLARS 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 1 770,621 25,058,369 183,327 75,000 765,039 27,195,671 3,882,305 1,535,382 29,722,690 2,161,455 0 0 0 48,515,688 (20,954,453) 29,722,690 266,248 324,998 781,089 2,189,949 0 0 0 (1,575,902) 0 (1,575,902) 0 0 0 (1,575,902) (0.13) (0.13)
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