-----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, N3SoLG4cGoY0Qq8qZVugPofb9sjGuUK+VSeFe5qX7iDAxCjgBs5vEhJkiI5WUJIP eJZQoCTB2+YZ0r4H5QTYKg== 0000950124-97-005666.txt : 19971105 0000950124-97-005666.hdr.sgml : 19971105 ACCESSION NUMBER: 0000950124-97-005666 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 16 FILED AS OF DATE: 19971104 SROS: NONE 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: S-1/A SEC ACT: SEC FILE NUMBER: 333-36937 FILM NUMBER: 97707046 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 S-1/A 1 AMEND. NO. 1 TO FORM S-1 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 4, 1997 REGISTRATION NO. 333-36937 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------- AMENDMENT NO. 1 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------- NANOPHASE TECHNOLOGIES CORPORATION (Exact name of registrant as specified in its charter) ILLINOIS 3399 36-3687863 (State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer of Classification Code No.) Identification No.) incorporation or organization)
453 COMMERCE STREET, BURR RIDGE, ILLINOIS 60521, (630) 323-1200 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) ROBERT W. CROSS PRESIDENT AND CHIEF EXECUTIVE OFFICER NANOPHASE TECHNOLOGIES CORPORATION 453 COMMERCE STREET, BURR RIDGE, ILLINOIS 60521, (630) 323-1200 (Name, address, including zip code, and telephone number, including area code, of agent for service) ------------------------- Copies to: MATTHEW S. BROWN, ESQ. LAWRENCE D. LEVIN, ESQ. KATTEN MUCHIN & ZAVIS 525 WEST MONROE STREET CHICAGO, ILLINOIS 60661 (312) 902-5200 CHRISTOPHER L. KAUFMAN, ESQ. CLIFFORD MENTRUP, ESQ. LATHAM & WATKINS SEARS TOWER, SUITE 5800 CHICAGO, ILLINOIS 60606 (312) 876-7700 APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box: [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box: [ ] ------------------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY DETERMINE. ================================================================================ 2 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED NOVEMBER 4, 1997 PROSPECTUS , 1997 5,000,000 SHARES NANOPHASE LOGO COMMON STOCK All of the 5,000,000 shares of Common Stock (the "Common Stock") of Nanophase Technologies Corporation ("Nanophase" or the "Company") offered hereby are being sold by the Company. Prior to this offering, there has been no public market for the Common Stock of the Company. It is currently estimated that the initial public offering price will be between $9.00 and $11.00 per share. See "Underwriting" for information relating to the factors considered in determining the initial public offering price. The Common Stock has been approved for quotation on the Nasdaq National Market, subject to notice of issuance, under the symbol "NANX." AN INVESTMENT IN THE SHARES OF COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK AND SUBSTANTIAL DILUTION AND SHOULD ONLY BE MADE BY PERSONS WHO CAN AFFORD AN ENTIRE LOSS OF THEIR INVESTMENT. SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF COMMON STOCK OFFERED HEREBY. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- ----------------------------------------------------------------------------------------------------------- PRICE UNDERWRITING PROCEEDS TO THE DISCOUNTS AND TO THE PUBLIC COMMISSIONS(1) COMPANY(2) - ----------------------------------------------------------------------------------------------------------- Per Share.......................... $ $ $ Total(3)........................... $ $ $ - -----------------------------------------------------------------------------------------------------------
(1) The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended (the "Securities Act"). See "Underwriting." (2) Before deducting expenses estimated at $400,000, which will be paid by the Company. (3) The Company has granted to the Underwriters a 30-day option to purchase up to 750,000 additional shares at the Price to the Public less Underwriting Discounts and Commissions, solely to cover over-allotments, if any. If such option is exercised in full, the total Price to the Public, Underwriting Discounts and Commissions, and Proceeds to the Company will be $ , $ and $ , respectively. See "Underwriting." The shares are being offered by the several Underwriters when, as and if delivered to and accepted by the Underwriters and subject to various prior conditions, including their right to reject orders in whole or in part. It is expected that delivery of shares will be made in New York, New York on or about , 1997. DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION FURMAN SELZ CIBC OPPENHEIMER 3 TARGETED MARKETS FOR THE COMPANY'S NANOCRYSTALLINE MATERIALS ELECTRONICS [Picture of semiconductor wafer being polished by a CMP slurry] Slurries formulated with the Company's nanocrystalline materials for use in polishing semiconductor wafers. STRUCTURAL CERAMICS AND COMPOSITES [Picture of ceramic rings, valve inserts and armor tiles] Structural ceramics fabricated by the Company's net-shaping process. COSMETICS AND SKIN-CARE [Picture of cosmetics and skin-care products] Cosmetics and skin-care products formulated with the Company's nanocrystalline materials. INDUSTRIAL CATALYSTS [Picture of catalytic cracking tower in an oil refinery] Catalysts fabricated with the Company's nanocrystalline materials for use in chemical process industry. ------------------------ The Company's corporate logo and design is a registered trademark of the Company. All other trade names and trademarks appearing in this Prospectus are the property of their respective holders. ------------------------- CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK. SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH THE OFFERING AND MAY BID FOR AND PURCHASE SHARES OF COMMON STOCK IN THE OPEN MARKET. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." 2 4 PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements (and related notes thereto) included elsewhere in this Prospectus. Unless otherwise indicated, all information in this Prospectus (i) reflects a 0.579-for-one stock split to be effected prior to the consummation of this offering, (ii) reflects the conversion of all outstanding shares of all series of Convertible Preferred Stock, no par value, of the Company (collectively, the "Preferred Stock") into 8,156,443 shares of Common Stock upon the consummation of this offering (the "Preferred Stock Conversion"), (iii) reflects the reincorporation of the Company in Delaware to be effected prior to the consummation of this offering and (iv) assumes no exercise of the Underwriters' over-allotment option. THE COMPANY Nanophase Technologies Corporation ("Nanophase" or the "Company") develops and markets nanocrystalline materials for use as ingredients and components in a wide range of commercial applications. The Company began manufacturing nanocrystalline materials in commercial quantities in the fourth quarter of 1996. Nanocrystalline materials are metallic and ceramic materials that generally consist of particles that are less than 100 nanometers (billionths of a meter) in diameter and contain only a few thousand or tens of thousands of atoms, rather than the millions or billions of atoms in particles of most conventional materials. By processing materials in this near-atomic size range, the Company is able to engineer the structure of particles and exploit the properties of their surface atoms to enhance the performance of basic raw materials such as aluminum, iron, titanium and zinc, as well as to molecularly engineer new composite materials. Compared to conventional materials, the Company believes its nanocrystalline materials generally exhibit superior chemical, mechanical, electronic, magnetic and optical properties. The Company believes that through its extensive proprietary research and development programs, combined with its proprietary and patented production processes, it has established new standards for high-performance commercially produced nanocrystalline materials. The Company is in the advanced materials industry and has identified initial commercial applications for its nanocrystalline materials in four primary markets: electronics, structural ceramics and composites, cosmetics and skin-care, and industrial catalysts. The Company believes each of these markets provides numerous commercial applications in which its nanocrystalline materials will have significant competitive advantages based on product performance. Commercial applications currently being developed in these markets include the following: - Electronics. Abrasives for chemical/mechanical polishing of semiconductor wafers (CMP), anti-radiation coatings for cathode ray tubes ("CRTs"), thin-film materials for semiconductor manufacturing, high-performance electrodes and photonic materials for flat-panel displays. - Structural Ceramics and Composites. Ceramic mechanical seals, components for continuous steel casting, abrasion-resistant polymers for oil drilling sensors, ceramic armor and remotely monitored medical implants. - Cosmetics and Skin-Care. Topical health-care products, transparent ultraviolet ("UV") blockers and colorants for cosmetics. - Industrial Catalysts. Chemical-process catalysts. In each of these markets, the Company's strategy is to establish collaborative relationships with industry leaders in order to validate the capabilities of its materials and coordinate the development and commercial introduction of product applications. These relationships generally include specific milestones and a development path that is intended to lead to significant commercial product revenues. The Company is currently collaborating with, among others, AG Industries ("Acutus Gladwin"), The Dow Chemical Company ("Dow"), E.I. DuPont de Nemours & Co. ("DuPont"), Medtronic, Inc. ("Medtronic"), Pacific Safety, Inc. ("Pacific Safety") and Philips Electronics N.V. ("Philips"). As a result of its collaborative relationships, the Company entered into commercial supply contracts with Moyco Technologies, Inc. ("Moyco"), a manufacturer of semiconductor polishing slurries for use by semiconductor manufacturers, including Hyundai 3 5 Corporation ("Hyundai"), Samsung Group ("Samsung"), International Business Machines Corporation ("IBM"), Lucent Technologies, Inc. ("Lucent") and Motorola, Inc. ("Motorola"); with Schering-Plough Corporation ("Schering-Plough") pursuant to which the Company will supply its nanocrystalline zinc oxide to Schering-Plough for use in topical health-care products; and with LWT Instruments, Inc. ("LWT") for anti-abrasive polymers used in oil drilling applications. To gain access to foreign markets, Nanophase has entered into an agreement with a subsidiary of Itochu Corporation ("Itochu"), formerly C. Itoh, for the distribution of the Company's materials in broad-based industrial markets throughout Asia. To gain world-wide access to the cosmetics and skin-care market, the Company has a global distribution agreement with Whittaker, Clark & Daniels, Inc. ("WCD"), a leading distributor of cosmetic and skin-care ingredients. The Company believes that its nanocrystalline materials have broad and enabling potential beyond the product applications it is currently developing with its customers. In 1995, the Battelle Memorial Institute, a leading contract research organization, identified "molecularly engineered" materials (i.e., nanocrystalline materials) as "super materials" which represent one of the ten most important technologies for the coming decade. Nanophase was organized in 1989 to commercialize technologies that are based on principles developed at Argonne National Laboratory ("Argonne"), and believes that it is the only company to successfully transition the production of high-performance nanocrystalline materials from laboratory to commercial scale. In contrast to particles of conventional materials, including other commercially produced nanocrystalline materials, the particles of the Company's nanocrystalline materials are (i) nearly spherical, (ii) virtually free of chemical residues, (iii) uniformly small, (iv) not strongly agglomerated, and (v) easily engineered. As a result, the Company is able to engineer the attributes, including strength, flexibility, color and electronic conductivity, of materials to yield products that are superior to conventional materials and to establish new standards for a range of high-performance commercial applications. At the core of the Company's technologies is its proprietary and patented physical-vapor-synthesis ("PVS") process, which enables the Company to produce significant quantities of high-quality nanocrystalline materials. The Company also has developed related technologies to further enhance the materials produced by its PVS process. The Company's proprietary discrete-particle-encapsulation ("DPE") process, which completely coats each individual nanocrystalline particle and for which a patent is pending, can alter or enhance the optical, chemical and electronic behavior of particles and prevent agglomeration. The Company also has developed a proprietary net-shaping technology which enables the rapid fabrication of dimensionally-precise, high-tolerance structural ceramic components without costly machining. Nanophase's principal production and research facility is located in Burr Ridge, Illinois, a suburb of Chicago. The Company's operations in Burr Ridge are registered under ISO 9001 standards, and the Company believes its manufacturing operations are compliant with the current Good Manufacturing Practices ("cGMP") requirements of the U.S. Food and Drug Administration ("FDA"). Nanophase was incorporated in Illinois on November 30, 1989, and will be reincorporated in Delaware not later than the effective date of this offering. As of September 30, 1997, the Company had an accumulated deficit of $13,976,617. Nanophase's principal executive offices are located at 453 Commerce Street, Burr Ridge, Illinois 60521 and its telephone number is (630) 323-1200. 4 6 THE OFFERING Common Stock offered by the Company......... 5,000,000 shares Common Stock to be outstanding after the offering.................................. 13,234,029 shares(1) Use of proceeds............................. To expand the Company's manufacturing facilities and for working capital and other general corporate purposes. See "Use of Proceeds." Proposed Nasdaq National Market symbol...... NANX
- ------------------------------ (1) Does not include (i) 662,287 shares of Common Stock issuable upon the exercise of outstanding warrants at an exercise price of $1.123 per share, (ii) 1,557,684 shares of Common Stock issuable upon the exercise of outstanding options at a weighted average exercise price of $2.474 per share and (iii) 1,200,348 shares of Common Stock reserved for issuance upon the exercise of options that may be granted in the future under the Nanophase Technologies Corporation Amended and Restated 1992 Stock Option Plan, as amended (the "Stock Option Plan"). See "Management--Stock Option Plan" and "Description of Capital Stock." 5 7 SUMMARY FINANCIAL DATA
NINE MONTHS YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30, --------------------------------------------------------------- ------------------------- 1992 1993 1994 1995 1996 1996 1997 STATEMENT OF OPERATIONS DATA: Commercial revenue... $ 20,006 $ 25,265 $ 31,144 $ 93,591 $ 485,036 $ 261,013 $ 2,245,415 Government research contracts.......... 212,183 -- 64,015 27,995 110,770 26,207 -- --------- --------- ----------- ----------- ----------- ----------- ----------- Total revenue...... 232,189 25,265 95,159 121,586 595,806 287,220 2,245,415 Cost of revenue...... 202,215 61,978 164,746 532,124 4,019,484 2,925,560 3,321,288 Research and development expense............ 29,638 143,362 456,162 485,059 677,284 515,675 571,210 Selling, general and administrative expense............ 366,378 556,616 799,558 1,150,853 1,661,504 1,209,823 1,714,725(2) Interest income...... 10,191 7,022 37,535 86,576 184,778 145,746 57,392 --------- --------- ----------- ----------- ----------- ----------- ----------- Net loss............. $(355,851) $(729,669) $(1,287,772) $(1,959,874) $(5,577,688) $(4,218,092) $(3,304,416) ========= ========= =========== =========== =========== =========== =========== Pro forma net loss per share(1)............. $ (0.76) $ (0.41) =========== =========== Shares used in computing the pro forma net loss per share(1)............. 7,312,392 8,139,812
AS OF SEPTEMBER 30, 1997 ---------------------------- ACTUAL AS ADJUSTED(3) BALANCE SHEET DATA: Cash and cash equivalents................................. $ 770,704 $46,870,704 Working capital........................................... 3,059,060 49,159,060 Total assets.............................................. 7,286,071 53,260,398 Total stockholders' equity................................ 5,576,916 51,676,916
- ------------------------------ (1) Includes the anti-dilutive effect (equivalent to 476,712 shares) of options issued to employees, a consultant and members of the Advisory Board (as defined herein) since October 1996. Does not include as of September 30, 1997 (i) 662,287 shares of Common Stock issuable upon the exercise of outstanding warrants at an exercise price of $1.123 per share, (ii) 803,247 shares of Common Stock issuable upon the exercise of outstanding options at a weighted average exercise price of $1.119 per share and (iii) 476,598 shares of Common Stock reserved for issuance upon the exercise of options that may be granted in the future under the Stock Option Plan. Also does not include 694,800 additional shares of Common Stock which were made subject to the Stock Option Plan after September 30, 1997. See "Management--Stock Option Plan" and "Description of Capital Stock." (2) Includes $375,103 of costs related to a proposed public offering withdrawn in May 1997. (3) As adjusted to give effect to the sale of 5,000,000 shares of Common Stock offered hereby at an assumed initial public offering price of $10.00 per share, after deducting estimated underwriting discounts and commissions and offering expenses as described in "Use of Proceeds." 6 8 RISK FACTORS An investment in the shares of Common Stock offered hereby involves a high degree of risk and immediate and substantial dilution and should only be made by persons who can afford a loss of their entire investment. In evaluating an investment in the Common Stock being offered hereby, investors should consider carefully, among other matters, the following risk factors, as well as the other information contained in this Prospectus. LIMITED HISTORY OF COMMERCIAL SALES; UNCERTAIN MARKET ACCEPTANCE OF THE COMPANY'S NANOCRYSTALLINE MATERIALS The Company was founded in November 1989 and through December 31, 1996 was engaged principally in research and development activities. While the Company recently commenced marketing certain nanocrystalline materials, it is in the early stage of commercialization and its potential product applications are in various stages of development or under evaluation. As a result, the Company's nanocrystalline materials have been sold only in limited quantities, generally for testing and evaluation purposes, and there can be no assurance that a significant market will develop for such materials. Because virtually all of the product applications for the Company's materials are new, in order to penetrate its targeted markets, the Company must participate in a multi-step process that includes initial discussions of the product application which highlight the advantages of the Company's nanocrystalline materials, proof of concept, proof of feasibility within the specific application, and evaluations of cost and manufacturability. Completion of this evaluation process usually takes at least 18 months, and may take several years. The Company's current and potential commercial customers establish demanding specifications for performance and reliability. Although the products incorporating the Company's nanocrystalline materials have passed certain product performance and reliability testing by certain current and potential customers, there can be no assurance that the Company's nanocrystalline materials will continue to pass such tests in the future, meet future customer performance standards, or offer sufficient price or performance advantages as required to achieve commercial success. The Company's failure to develop, manufacture and commercialize nanocrystalline materials on a timely and cost-effective basis or successfully complete its customers' multi-step evaluation processes would have a material adverse effect on the Company's business, results of operations and financial condition. Because the Company's materials are used as ingredients in, or components of, other companies' products, the inability of the Company's customers to achieve market acceptance with respect to end-users of their products or successfully to manufacture their products could also have a material adverse effect on the Company's business, results of operations and financial condition. See "Business." LIMITED OPERATING HISTORY; HISTORY OF LOSSES; UNCERTAINTY OF FUTURE PROFITABILITY Substantially all of the Company's revenues through December 31, 1996 were derived from government research contracts, commercial development contracts and sales of nanocrystalline products for customer evaluation. The Company has only recently begun shipping significant amounts of its materials for commercial use and there can be no assurance that the Company's nanocrystalline materials will generate significant revenues from commercial applications. Accordingly, the Company has only a limited operating history upon which an evaluation of the Company and its prospects can be based. An investment in the Company must be considered in light of the risks, expenses and difficulties frequently encountered by companies in the early stages of development. The Company has incurred net losses in each year since its inception, and as of September 30, 1997, had an accumulated deficit of $13,976,617. The Company may continue to incur operating losses and there can be no assurance that the Company will become profitable. Commercial development of the Company's nanocrystalline materials will require the commitment of substantial resources to continuing research and development, establishment of additional commercial-scale manufacturing facilities, and further development of quality control, marketing, sales, service and administrative capabilities. The Company's ability to achieve profitability will depend on many factors, including the Company's ability to enter into collaborative customer relationships and the Company's ability, alone or with its customers, to develop, manufacture, introduce and market commercially acceptable products based on the Company's nanocrystalline materials and proprietary 7 9 processes. There can be no assurance that significant quantities of the Company's nanocrystalline materials or their product applications will be manufactured, introduced or marketed successfully, or that the Company will ever achieve a profitable level of operations or, if profitability is achieved, that it can be sustained. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business." DEPENDENCE ON A LIMITED NUMBER OF KEY CUSTOMERS A limited number of key customers have initially accounted for a substantial portion of the Company's commercial revenue. The Company's customers are significantly larger than, and are able to exert a high degree of influence over, the Company. The loss of one or more of the Company's customers or failure to attract new customers would have a material adverse effect on the Company's business, results of operations and financial condition. In February 1997, the Company entered into a five-year requirements contract with Moyco, one of its key customers, pursuant to which the Company will supply its nanocrystalline materials to Moyco for use in Moyco's semiconductor polishing slurries. In August 1997, Moyco and Ashland Chemical Company ("Ashland") signed a non-binding letter of intent pertaining to the potential purchase by Ashland of Moyco's intellectual properties, technologies and certain other intangible assets for the chemical/ mechanical polishing of semiconductor wafers. There can be no assurance that Moyco will sell such assets to Ashland or any other entity or if it does or does not sell such assets what the impact on the Company will be. Sales to Moyco or Ashland, as the case may be, are currently expected to constitute a significant portion of the Company's revenues over the next three years. In March 1997, Cabot Corporation ("Cabot") filed a claim against Moyco which alleges that the slurries manufactured by Moyco, which contain the Company's nanocrystalline materials, infringe a patent owned by Cabot. Moyco has denied Cabot's allegations of patent infringement. In April 1997, Moyco filed a civil action against Cabot alleging that Cabot's patent is invalid and that Cabot improperly interfered with contractual relationships between Moyco and third parties. If Cabot prevails in its patent infringement claim against Moyco or Moyco is otherwise prevented from manufacturing slurries which contain the Company's materials, then Moyco's purchase of the Company's materials may be significantly reduced which would have a material adverse effect on the Company's business, results of operations and financial condition. See "Business--Customers and Applications--Electronics--Semiconductor Polishing." RELIANCE ON COLLABORATIVE DEVELOPMENT RELATIONSHIPS The Company has established, and will continue to pursue, collaborative relationships with a variety of corporate customers. Through such relationships, the Company seeks to develop applications for the Company's nanocrystalline materials, share development and manufacturing resources and coordinate the development, manufacturing, commercialization and marketing of nanocrystalline product applications. The Company's future success will depend, in part, on its continued relationships with these customers, its ability to enter into similar collaborative relationships, the commitment of the Company's customers to the potential product applications under development and, eventually, the customers' success in marketing, or willingness to purchase the Company's nanocrystalline materials for, such product applications. There can be no assurance that the Company's customers will not seek to manufacture jointly developed products internally or obtain them from alternative sources. These customers may require the Company to share control of its development, manufacturing and marketing programs, limit its ability to license its technology to others, or restrict its ability to engage in certain product development, manufacturing and marketing activities. These relationships may also be subject to unilateral termination by the Company's customers. If the Company is unable to initiate or sustain such collaborative relationships, there can be no assurance that the Company will be able independently to develop, manufacture, market or sell its current and future nanocrystalline materials or their product applications. The failure of the Company to initiate or sustain such collaborative relationships would have a material adverse effect on the Company's business, results of operations and financial condition. See "Business--Customers and Applications." LIMITED MANUFACTURING CAPACITY AND EXPERIENCE The Company's success will depend, in part, on its ability to manufacture its nanocrystalline materials in significant quantities, with consistent quality, at acceptable cost and on a timely basis. The Company has limited experience in high-volume manufacturing, may incur significant start-up costs and unforeseen 8 10 expenses in connection with attempts to manufacture substantial quantities of nanocrystalline materials, and will need to increase the efficiency of its manufacturing operations significantly to reach its production goals. In addition, the Company will need to expand its current facilities or obtain additional facilities in the near future in order to manufacture substantial quantities of its products. No assurance can be given that the Company will be able to make the transition to high-volume production successfully. The Company's primary operations, including research, engineering, manufacturing, marketing, distribution and general administration, are housed in a single facility in Burr Ridge, Illinois. Any material disruption in the Company's operations, whether due to fire, natural disaster, power loss or otherwise, could have a material adverse effect on the Company's business, results of operations and financial condition. While the Company maintains property and business interruption insurance, such insurance may not adequately compensate the Company for all losses that it may incur. See "Business--Manufacturing and Facilities." While most of the Company's product applications involve the Company producing materials which are to be used as ingredients in other companies' products, the Company's net-shaping applications require the Company to produce finished components. The Company currently is not capable of producing ceramic finished components in commercial volume and plans to develop an in-house capability to fabricate net-shaped components or establish manufacturing arrangements with third parties. There can be no assurance that the Company will be able to fabricate its net-shaped components internally or that it will be able to enter into third-party arrangements on satisfactory terms. See "Business--Manufacturing and Facilities." DEPENDENCE ON PATENTS AND PROTECTION OF PROPRIETARY INFORMATION The Company's success will depend, in part, on its ability to obtain patent protection for its nanocrystalline materials and processes, to preserve its trade secrets, and to operate without infringing the patent or other proprietary rights of others and without breaching or otherwise losing rights in the technology licenses upon which any of the Company's products are based. The Company has been granted two United States patents which expire in July 2013, has filed three applications for other United States patents and licenses eleven patents held by others, which licenses generally last the life of their respective patents. No assurance can be given that the patent applications filed by the Company will result in issued patents or that the scope and breadth of any claims allowed in any patents issued to the Company or its licensors will exclude competitors or provide competitive advantages to the Company. In addition, there can be no assurance that any patents issued to the Company or its licensors will be held valid if subsequently challenged or that others will not claim rights in the patents and other proprietary technology owned or licensed by the Company, or that others have not developed or will not develop similar products or technologies without violating any of the Company's proprietary rights. The Company's inability to obtain patent protection, preserve its trade secrets or operate without infringing the proprietary rights of others, as well as the Company's loss of any license to technology that it now has or acquires in the future, would have a material adverse effect on the Company's business, results of operations and financial condition. Patent applications in the United States are currently maintained in secrecy until patents issue, and patent applications in foreign countries are maintained in secrecy for a period of time after filing. Accordingly, publication of discoveries in the scientific literature or of patents themselves or laying open of patent applications in foreign countries tends to lag behind actual discoveries and filings of related patent applications. Due to this factor and the large number of patents and patent applications related to nanocrystalline materials, comprehensive patent searches and analysis associated with nanocrystalline materials are often impractical or not cost-effective. Therefore, there can be no assurance that the Company's patent and publication searches have been comprehensive, or that materials or processes used by the Company for its planned products do not or will not infringe upon existing technology described in United States patents or will not infringe upon claims of patent applications of others in the future. Because of the volume of patents issued and patent applications filed relating to nanocrystalline materials, there is a significant risk that current and potential competitors and other third parties have filed or will file patent applications for, or have obtained or will obtain patents or other proprietary rights relating to, materials or processes used or proposed to be used by the Company. In any such case, to avoid an infringement, the Company would have to either license such technology or design around any such patents. There can be no assurance that the Company will be able either 9 11 to successfully design around these third-party patents or obtain licenses to such technology or that, if obtainable, such licenses would be available on terms acceptable to the Company. Litigation, which could result in substantial cost to, and diversion of effort by, the Company, may be necessary to enforce patents issued or licensed to the Company, to defend the Company against infringement claims made by others, or to determine the ownership, scope or validity of the proprietary rights of the Company and others. An adverse outcome in any such litigation could subject the Company to significant liabilities to third parties, require the Company to seek licenses from third parties, and/or require the Company to cease using certain technology, any of which could have a material adverse effect on the Company's business, results of operations and financial condition. The Company may also become involved in interference proceedings declared by the United States Patent and Trademark Office ("PTO") in connection with one or more of the Company's owned or licensed patents or patent applications to determine priority of invention. Any such proceeding could result in substantial cost to the Company, as well as a possible adverse decision as to priority of invention of the patent or patent application involved. In addition, the Company may become involved in reissue or reexamination proceedings in the PTO in connection with the scope or validity of the Company's owned or licensed patents. Any such proceeding could have a material adverse effect on the Company's business, results of operations and financial condition, and an adverse outcome in such proceeding could result in a reduction of the scope of the claims of any such patents or such patents being declared invalid. In addition, from time to time, to protect its competitive position, the Company may initiate reexamination proceedings in the PTO with respect to patents owned by others. Such proceedings could result in substantial cost to, and diversion of effort by, the Company, and an adverse decision in such proceedings could have a material adverse effect on the Company's business, results of operations and financial condition. The Company also relies on trade secrets and proprietary know-how in the conduct of its business and uses employee and third-party confidentiality and non-disclosure agreements to protect such trade secrets and know-how. There can be no assurance that the obligation to maintain the confidentiality of such trade secrets or proprietary information will not wrongfully be breached by employees, consultants, advisors or others, that the Company will have adequate remedies for any breach, or that the Company's trade secrets or proprietary know-how will not otherwise become known or be independently developed or discovered by third parties. In addition, because the Company's employees have not entered into noncompetition agreements with the Company, they may become competitors of the Company upon termination of employment. See "Business--Intellectual Property and Proprietary Rights." RAPID TECHNOLOGICAL CHANGE Rapid changes have occurred, and are likely to continue to occur, in the development of advanced materials and processes. The future success of the Company will depend, in large part, upon its ability to keep pace with advanced materials technologies, industry standards and market trends and to develop and introduce new and improved products on a timely basis. The Company will require substantial resources to expand its commercial manufacturing capacity, further develop its technologies and develop and introduce innovative product applications. There can be no assurance that the Company's development efforts will not be rendered obsolete by the research efforts and technological advances of others or that other advanced materials will not prove more advantageous than those produced by the Company. LIMITED MARKETING EXPERIENCE; RELIANCE ON DISTRIBUTION AGREEMENTS The Company has limited experience marketing and selling its products. To market its nanocrystalline materials directly, the Company will be required to develop a marketing and sales force that can effectively demonstrate the advantages of its nanocrystalline product applications compared to competitive products containing conventional or advanced materials. The Company currently has arrangements for distribution of certain of its nanocrystalline materials and expects to enter into additional distribution or other arrangements with third parties regarding the commercialization or marketing of its materials. The Company's future success will depend in part on its continued relationships with distributors, its ability to enter into other similar distribution arrangements, the continuing interest of the Company's distributors in current and potential product applications and, eventually, the distributors' success in marketing, or willingness to purchase, any of the Company's nanocrystalline materials. There can be no assurance that the Company will be successful in its marketing efforts, that it will be able to establish adequate sales and distribution capabilities, that it will be 10 12 able to enter into or maintain marketing and distribution arrangements with third parties on financially acceptable terms, or that any third parties with whom it enters into such arrangements will be successful in marketing the Company's products. See "Business--Customers and Applications" and "--Marketing." COMPETITION The advanced materials industry is highly competitive. The market for materials having the characteristics and potential uses of the Company's nanocrystalline materials is the subject of intensive research and development efforts by both governmental entities and private enterprises around the world. The Company believes that the level of competition will increase further as more product applications with significant commercial potential are developed. The nanocrystalline product applications being developed by the Company will compete directly with products incorporating conventional and advanced materials and technologies. While the Company is not currently aware of the existence of commercially available competitive products with the same attributes as those offered by the Company, there can be no assurance that such competitive products will not be introduced by third parties, or that competing materials based on different or new technologies may not become commercially available. There can be no assurance that the Company's competitors will not succeed in developing or marketing materials, technologies and products that exhibit superior performance, are more commercially desirable or are more cost effective than those developed or marketed by the Company. In addition, many potential competitors of the Company have substantially greater financial and technical resources, larger research and development staffs, and greater manufacturing and marketing capabilities than the Company. Failure of the Company's current and potential nanocrystalline product applications to improve performance sufficiently at an acceptable price, achieve commercial acceptance or otherwise compete with conventional materials would have a material adverse effect on the Company's business, results of operations and financial condition. See "Business--Competition." FUTURE CAPITAL NEEDS The Company believes that its future capital requirements will depend, on many factors, including continued progress in its research and development and product testing programs, the magnitude of these programs, the costs necessary to increase the Company's manufacturing capabilities and to market any resulting materials and product applications, and customer acceptance of the Company's current and potential materials and product applications. Additional factors that may affect the Company's future capital requirements are the costs involved in preparing, filing, prosecuting, maintaining and enforcing patents and other proprietary rights or in obtaining licenses, the ability of the Company to establish collaborative relationships, and the amount and timing of future revenues. Depending on its requirements, the Company may seek additional funding through public or private financing, collaborative relationships, government contracts or licensing agreements. There can be no assurance that such additional financing will be available on acceptable terms or at all. If adequate funds are not available on acceptable terms, the Company may be required to delay, scale-back or eliminate manufacturing and marketing of one or more of its materials or product applications or research and development programs, or to obtain funds through arrangements with customers or others that may require the Company to relinquish rights to certain of its technologies or nanocrystalline materials that the Company would not otherwise relinquish. Inadequate funding also could impair the Company's ability to compete in the marketplace. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." RISK OF RESCISSION OF SERIES F OFFERING In June, August and September 1997, the Company issued shares of Series F Convertible Preferred Stock (the "Series F Preferred") for an aggregate of $3,876,108 to approximately 60 investors, all of whom are "accredited investors" within the meaning of rules promulgated under the Securities Act. The offering and sale of the Series F Preferred was not registered under the Securities Act, but may not have qualified for an exemption from the registration requirements of the Securities Act. If the sale of the Series F Preferred was not consummated in accordance with a valid exemption under the registration requirements of Section 5 of the Securities Act, purchasers of Series F Preferred may have a right to rescind their purchases of the Series F Preferred (which will convert into 748,089 shares of Common Stock upon consummation of this offering) pursuant to Section 12(a)(1) of the Securities Act, and there may be a risk of enforcement action by the 11 13 Commission or state securities regulators. Under Section 13 of the Securities Act, a rescission right, which is the effective equivalent of a put right, can be maintained to enforce liability under Section 12(a)(1) of the Securities Act at any time within one year after the violation on which it is based, but in no event more than three years after the relevant securities were bona fide offered to the public. A rescission right would entitle the holders of the Series F Preferred to receive a return of the consideration paid for their shares of Series F Preferred ($5.18 per share), together with interest from the date of purchase. The Company does not currently intend to offer rescission to the holders of the Series F Preferred. Even if the holders of Series F Preferred are entitled to rescind their purchases, the Company does not believe that any rescission would adversely affect its financial condition following consummation of this offering. DEPENDENCE ON KEY PERSONNEL The Company's success will depend, in large part, upon its ability to attract and retain highly qualified research and development, management, manufacturing and marketing and sales personnel. Due to the specialized nature of the Company's business, it may be difficult to locate and hire qualified personnel, and to retain such personnel once hired. The loss of the services of any of the Company's executive officers or other key personnel, or the failure of the Company to attract and retain other skilled and experienced personnel on acceptable terms, could have a material adverse effect on the Company's business, results of operations and financial condition. The Company does not have "key-man" life insurance policies covering any of its executive officers or key employees. See "Management." PRODUCT LIABILITY RISKS The Company may be subject to product liability claims in the event that any of its nanocrystalline product applications are alleged to be defective or cause harmful effects. Because the Company's nanocrystalline materials are used as ingredients in, or components of, other companies' products, to the extent certain of the Company's customers become subject to claims, suits or complaints relating to their products, such as medical implants and cosmetic and skin-care products, there can be no assurance that such claims will not be asserted against the Company. The Company currently maintains separate insurance coverage in the amount of $1 million for product liability claims. The cost of defending or settling product liability claims may be substantial and there can be no assurance that the Company could do so on acceptable terms or that such claims, if successful or settled, would not have a material adverse effect on the Company's business, results of operations and financial condition. INTERNATIONAL SALES For the nine months ended September 30, 1997, 12% of the Company's total revenues were derived from product sales and development agreements with international customers, and the Company expects that it will continue to derive a substantial percentage of revenues from international customers in the future. There can be no assurance that the Company will be able successfully to market, sell and deliver its nanocrystalline materials in international markets. In addition, there are certain risks inherent in conducting international business, including exposure to currency fluctuations, longer payment cycles, greater difficulties in accounts receivable collection, political instability, difficulties in complying with a variety of foreign laws and unexpected changes in regulatory requirements. There can be no assurance that one or more of such factors will not have a material adverse effect on the Company's business, results of operations and financial condition. GOVERNMENTAL REGULATIONS The Company's coating facility, which is located in Chicago, is a "small quantity generator" of hazardous materials, including ethanol, under the Federal Resource Conservation and Recovery Act ("RCRA") and, as a result, is subject to stringent federal, state and local regulations governing the handling, storage and disposal of such materials. It is possible that current or future laws and regulations could require the Company to make substantial expenditures for preventive or remedial action, reduction of chemical exposure or waste treatment or disposal. There can be no assurance that the Company's operations, business or assets will not be materially and adversely affected by the interpretation and enforcement of current or future environmental laws and regulations. The Company believes it has complied in all material respects with regard to environmental regulations applicable to it and does not anticipate generating substantially increased amounts of such 12 14 materials because its coating process has been modified to significantly reduce the generation of ethanol. In addition, although management believes that its safety procedures for handling and disposing of such materials comply with the standards prescribed by state and federal regulations, the Company's coating operations do pose a risk of accidental contamination or injury. To date, the Company has not been required to make substantial expenditures for preventive or remedial action with respect to the hazardous materials it generates. The damages in the event of an accident or the costs of such preventive or remedial actions could exceed the Company's resources or otherwise have a material adverse effect on the Company's business, results of operations and financial condition. In addition, both of the Company's facilities and all of its operations are subject to the plant and laboratory safety requirements of various occupational safety and health laws. The Company believes it has complied in all material respects with regard to governmental regulations applicable to it. There can be no assurance, however, that the Company will continue to comply with applicable government regulations or that such regulations will not materially restrict or impede the Company's operations in the future. The manufacture and use of certain products which contain the Company's nanocrystalline materials are subject to governmental regulation. As a result, the Company is required to adhere to the cGMP requirements of the FDA and similar regulations in other countries which include testing, control and documentation requirements enforced by periodic inspections. Such regulations can increase the Company's cost of doing business and/or render certain potential markets prohibitively expensive. See "Business--Governmental Regulations." QUARTERLY FLUCTUATIONS IN OPERATING RESULTS The Company has experienced, and expects to continue to experience, quarterly fluctuations in its results of operations as a result of a variety of factors, including the timing and amount of expenses associated with expansion of the Company's operations, the timing of collaborative relationships with, and performance of, customers, the timing of new product application offerings, changes in the Company's revenue mix among its product application offerings, and changes in the mix between pilot production of new nanocrystalline materials and full-scale manufacturing of existing nanocrystalline materials. The Company does not currently have any significant backlog of orders and the timing of revenues will therefore depend upon the amount and timing of new orders received for its nanocrystalline materials. SIGNIFICANT UNALLOCATED NET PROCEEDS A significant portion of the anticipated net proceeds of this offering has been designated for general corporate purposes rather than specific uses. Therefore, the Company's management and Board of Directors will have broad discretion with respect to the use of a significant portion of the net proceeds of this offering. See "Use of Proceeds." NO PRIOR PUBLIC MARKET FOR COMMON STOCK; DETERMINATION OF OFFERING PRICE; POSSIBLE VOLATILITY OF COMMON STOCK PRICE Prior to this offering, there has been no public market for the Common Stock and there can be no assurance that an active trading market will develop or be sustained after this offering. The initial public offering price for the Common Stock will be determined by negotiations between the Company and the Underwriters based upon several factors and may not be indicative of the price that may prevail in the public market. The stock market has from time to time experienced significant price and volume fluctuations that may be unrelated to the operating performance of any particular company. In particular, there has been significant volatility in the market price of securities of other technology companies, particularly those that, like the Company, are still primarily engaged in product development activities. Factors such as announcements of technology innovations and new product applications by the Company or its competitors, disputes relating to patents and proprietary rights, changes in financial estimates by securities analysts, failure to meet earnings expectations of the market or of analysts, general market conditions and fluctuations in quarterly operating results may have a significant impact on the market price of the Common Stock. In the past, following periods of volatility in the market price of a company's securities, securities class action litigation has often been instituted against such a company. Any such litigation initiated against the Company could result 13 15 in substantial costs and a diversion of management's attention and resources, which could have a material adverse effect on the Company's business, results of operations and financial condition. See "Underwriting." ANTI-TAKEOVER PROVISIONS Upon consummation of this offering, the Company's Board of Directors will have the authority to issue up to 17,000,000 shares of undesignated preferred stock and to determine the price, rights, preferences, privileges and restrictions, including voting rights, of those shares without any further vote or action by the Company's stockholders. The rights of the holders of Common Stock will be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. The issuance of preferred stock, while providing desirable flexibility in connection with possible financings, acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire a majority of the outstanding voting stock of the Company. The Company has no present plans to issue such shares of preferred stock. Further, certain provisions of the Company's Certificate of Incorporation and Bylaws and of Delaware law could delay or make more difficult a merger, tender offer or proxy contest involving the Company. See "Description of Capital Stock--Preferred Stock" and "--Certain Corporate Provisions." SHARES ELIGIBLE FOR FUTURE SALE Upon consummation of this offering, the Company will have a total of 13,234,029 shares of Common Stock outstanding (13,984,029 if the Underwriters exercise in full their over-allotment option), of which the 5,000,000 (5,750,000 if the Underwriters exercise in full their over-allotment option) shares offered hereby will be eligible for immediate sale in the public market without restriction unless they are held by "affiliates" of the Company within the meaning of Rule 144 ("Rule 144") under the Securities Act of 1933, as amended (the "Securities Act"), in which case they will be subject to the volume and other limitations of such rule. The sale of a substantial number of shares of Common Stock, or the perception that such sales could occur, could adversely affect prevailing market prices for the Common Stock. The remaining 8,234,029 shares of Common Stock outstanding upon completion of this offering will be "restricted securities" within the meaning of Rule 144 (the "Restricted Shares") and all of such Restricted Shares are subject to the lock-up provisions of stock purchase agreements entered into with the Company pursuant to which the holders of such Restricted Shares have agreed that they will not, directly or indirectly, sell or otherwise dispose of any shares of Common Stock for a period of 180 days after the date of this Prospectus without the prior written consent of Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"). Upon expiration of the lock-up provisions of the stock purchase agreements (or earlier upon the consent of DLJ), 7,485,940 of the Restricted Shares outstanding upon completion of this offering will be eligible for sale under Rule 144, subject to, in some cases, the volume and other limitations of such rule. An additional 662,287 Restricted Shares are issuable upon exercise of currently exercisable warrants issued to certain of the Company's existing stockholders and an additional 1,557,684 Restricted Shares are issuable at various dates upon exercise of options heretofore granted to certain employees, consultants and members of the Advisory Board of the Company pursuant to stock option agreements. Optionholders, upon the exercise of such options, must enter into agreements with the Company pursuant to which they will also agree not to sell, offer for sale or otherwise dispose of any shares of Common Stock for a period of 180 days after the date of this Prospectus without the prior written consent of DLJ. Subject to the lock-up provisions of the stock-purchase agreements, the holders of all of the Restricted Shares that will be outstanding upon consummation of this offering and all of the Restricted Shares issuable upon exercise of the warrants have been accorded registration rights under the Securities Act. No prediction can be made as to the effect, if any, that future sales of shares, or the availability of shares for future sales, will have on the market price of the Common Stock from time to time or the Company's ability to raise capital through an offering of its equity securities. See "Description of Capital Stock--Registration Rights," "Shares Eligible for Future Sale" and "Underwriting." DILUTION AND DIVIDEND POLICY The initial public offering price of the Common Stock offered hereby is substantially higher than the net book value of the currently outstanding Common Stock. Therefore, purchasers of the Common Stock offered hereby will experience immediate and substantial dilution in the net tangible book value of the Common Stock. The Company has never paid a cash dividend on its Common Stock and does not expect to pay dividends in the foreseeable future. See "Dilution" and "Dividend Policy." 14 16 USE OF PROCEEDS The net proceeds to the Company from the sale of the shares of Common Stock being offered hereby, at an assumed initial public offering price of $10.00 per share, are estimated to be approximately $46,100,000 ($53,075,000 if the Underwriters' over-allotment option is exercised in full), after deducting estimated underwriting discounts and commissions and offering expenses payable by the Company. The Company currently intends to use approximately $35 to $40 million of the net proceeds for the expansion of its manufacturing facilities over the next 24 months, including approximately $31 to $35 million for installing additional PVS plasma reactors and making leasehold improvements and approximately $4 to $5 million for purchasing additional equipment. The remaining net proceeds will be used for working capital and other general corporate purposes. The Company may from time to time seek to acquire complementary businesses, products, services or technologies. The Company may use a portion of the net proceeds for one or more of such transactions, although the Company has no current plans or agreements with respect to any such transaction. The exact cost, timing and amount of funds required for specific uses by the Company cannot be precisely determined at this time. The Company could also potentially use a portion of the net proceeds to fund a rescission of shares of Series F Preferred. See "Risk Factors--Risk of Rescission of Series F Offering" and "--Significant Unallocated Net Proceeds." Pending such uses, the Company intends to invest the net proceeds of this offering in short-term, investment grade, interest-bearing obligations. DIVIDEND POLICY The Company has never declared or paid any cash dividends on its Common Stock and does not anticipate paying cash dividends or other distributions on its Common Stock in the foreseeable future, but intends instead to retain any future earnings for reinvestment in its business. Any future determination to pay cash dividends will be at the discretion of the Company's Board of Directors and will be dependent upon the Company's financial condition, results of operations, capital requirements and such other factors as the Company's Board of Directors deems relevant. 15 17 CAPITALIZATION The following table sets forth as of September 30, 1997, the Company's actual capitalization and capitalization on an as adjusted basis to reflect the Preferred Stock Conversion and the sale by the Company of 5,000,000 shares of Common Stock offered hereby at an assumed initial public offering price of $10.00 per share after deducting estimated underwriting discounts and commissions and expenses of this offering and the application of the net proceeds therefrom as described under "Use of Proceeds." The information set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements and the related notes thereto included elsewhere in this Prospectus.
AS OF SEPTEMBER 30, 1997 ------------------------------- ACTUAL AS ADJUSTED Stockholders' equity: Preferred Stock, no par value, 9,829,054 shares authorized, 8,156,443 shares issued and outstanding, actual; $.01 par value, 17,000,000 shares authorized, no shares issued and outstanding, as adjusted.......... $ 19,553,083 $ -- Common Stock, no par value, 12,632,158 shares authorized; 77,586 shares issued and outstanding, actual; $.01 par value, 25,000,000 shares authorized, 13,234,029 shares issued and outstanding, as adjusted(1)......................................... 450 132,340 Additional paid-in capital................................ -- 65,521,193 Accumulated deficit.................................... (13,976,617) (13,976,617) ------------ ------------ Total stockholders' equity and capitalization..... $ 5,576,916 $ 51,676,916 ============ ============
- ------------------------------ (1) Does not include as of September 30, 1997 (i) 662,287 shares of Common Stock issuable upon the exercise of outstanding warrants at an exercise price of $1.123 per share, (ii) 1,586,634 shares of Common Stock issuable upon the exercise of outstanding options at a weighted average exercise price of $2.499 per share and (iii) 476,598 shares of Common Stock reserved for issuance upon the exercise of options that may be granted in the future under the Stock Option Plan. Also does not include an additional 694,800 shares of Common Stock which were made subject to the Stock Option Plan after September 30, 1997. See "Management--Stock Option Plan," "Description of Capital Stock" and Note 12 of Notes to the Financial Statements. 16 18 DILUTION The pro forma net tangible book value of the Company as of September 30, 1997 was $5,352,020 or $0.65 per share of Common Stock. Pro forma net tangible book value per share represents the amount of total tangible assets of the Company reduced by the amount of its total liabilities and divided by the total number of shares of Common Stock outstanding after the Preferred Stock Conversion. After giving effect to the sale of the 5,000,000 shares of Common Stock being offered by the Company at an assumed initial public offering price of $10.00 per share, and after deducting estimated underwriting discounts and commissions and offering expenses payable by the Company, the pro forma net tangible book value of the Company as of September 30, 1997 would have been approximately $51,577,693, or $3.90 per share of Common Stock. This represents an immediate increase in pro forma net tangible book value of $3.25 per share to existing stockholders and an immediate dilution of $6.10 per share to new investors. The following table illustrates this per share dilution: Assumed initial public offering price per share............. $10.00 Pro forma net tangible book value per share before this offering............................................... $0.65 Increase in pro forma net tangible book value per share attributable to new investors.......................... 3.25 ----- Pro forma net tangible book value per share after this offering.................................................. 3.90 ------ Dilution per share to new investors......................... $ 6.10 ======
The following table summarizes, on a pro forma basis as of September 30, 1997, the difference between the existing stockholders and new investors with respect to the number of shares of Common Stock purchased from the Company, the total consideration paid to the Company and the average price per share paid (before deducting estimated underwriting discounts and commissions and offering expenses payable by the Company):
SHARES PURCHASED TOTAL CONSIDERATION --------------------- ---------------------- AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE Existing stockholders.................... 10,482,950 67.7% $24,262,279 32.7% $ 2.31 New investors............................ 5,000,000 32.3 50,000,000 67.3 10.00 ---------- ----- ----------- ----- Total............................... 15,482,950 100.0% $74,262,279 100.0% ========== ===== =========== =====
The foregoing calculations give effect to, as of September 30, 1997, (i) 662,287 shares of Common Stock issuable upon the exercise of outstanding warrants at an exercise price of $1.123 per share and (ii) 1,586,634 shares of Common Stock issuable upon the exercise of outstanding options at a weighted average exercise price of $2.499 per share. Does not give effect to, as of September 30, 1997, 476,598 shares of Common Stock reserved for issuance upon the exercise of options that may be granted in the future under the Stock Option Plan. Also does not include an additional 694,800 shares of Common Stock which were made subject to the Stock Option Plan after September 30, 1997. See "Capitalization," "Management--Stock Option Plan," "Description of Capital Stock" and Note 12 of Notes to the Financial Statements. 17 19 SELECTED FINANCIAL DATA The following selected financial data is qualified by reference to, and should be read in conjunction with, the financial statements and related notes thereto appearing elsewhere in this Prospectus and "Management's Discussion and Analysis of Financial Condition and Results of Operations." The selected statement of operations data set forth below for the years ended December 31, 1994, 1995 and 1996 and the nine months ended September 30, 1997 and the balance sheet data as of December 31, 1995 and 1996 and September 30, 1997 are derived from the audited financial statements of the Company, which are included elsewhere in this Prospectus. The selected statement of operations data for the years ended December 31, 1992 and 1993 and the balance sheet data as of December 31, 1992, 1993 and 1994 are derived from audited financial statements of the Company which are not included in this Prospectus. The selected financial data for the nine months ended September 30, 1996 have been derived from unaudited financial statements of the Company which, in the opinion of management, include all adjustments that are necessary for a fair statement of the results of the interim period, and all adjustments of a recurring nature. Results for the nine months ended September 30, 1997 are not necessarily indicative of results to be expected during the remainder of the current fiscal year or for any future period.
NINE MONTHS ENDED YEARS ENDED DECEMBER 31, SEPTEMBER 30, --------------------------------------------------------------- ------------------------- 1992 1993 1994 1995 1996 1996 1997 STATEMENT OF OPERATIONS DATA: Commercial revenue........... $ 20,006 $ 25,265 $ 31,144 $ 93,591 $ 485,036 $ 261,013 $ 2,245,415 Government research contracts.................. 212,183 -- 64,015 27,995 110,770 26,207 -- --------- --------- ----------- ----------- ----------- ----------- ----------- Total revenue............ 232,189 25,265 95,159 121,586 595,806 287,220 2,245,415 Cost of revenue.............. 202,215 61,978 164,746 532,124 4,019,484 2,925,560 3,321,288 Research and development expense.................... 29,638 143,362 456,162 485,059 677,284 515,675 571,210 Selling, general and administrative expense..... 366,378 556,616 799,558 1,150,853 1,661,504 1,209,823 1,714,725(2) --------- --------- ----------- ----------- ----------- ----------- ----------- Total operating expense................ 598,231 761,956 1,420,466 2,168,036 6,358,272 4,651,058 5,607,223 --------- --------- ----------- ----------- ----------- ----------- ----------- Operating expense in excess of revenue................. (366,042) (736,691) (1,325,307) (2,046,450) (5,762,466) (4,363,838) (3,361,808) Interest income.............. 10,191 7,022 37,535 86,576 184,778 145,746 57,392 --------- --------- ----------- ----------- ----------- ----------- ----------- Net loss................. $(355,851) $(729,669) $(1,287,772) $(1,959,874) $(5,577,688) $(4,218,092) $(3,304,416) ========= ========= =========== =========== =========== =========== =========== Pro forma net loss per share(1)................... $ (0.76) $ (0.41) =========== =========== Shares used in computing the pro forma net loss per share(1)............... 7,312,392 8,139,812
AS OF DECEMBER 31, AS OF SEPTEMBER 30, ---------------------------------------------------------- ----------------------- 1992 1993 1994 1995 1996 1996 1997 BALANCE SHEET DATA: Cash and cash equivalents.......... $ 70,652 $225,230 $ 18,462 $ 261,902 $ 617,204 $ 72,519 $ 770,704 Working capital.................... 184,881 225,988 2,226,184 2,451,627 3,070,789 4,432,816 3,059,060 Total assets....................... 377,042 406,238 2,568,691 3,741,128 5,539,634 6,955,669 7,286,071 Total stockholders' equity......... 334,603 348,434 2,456,516 3,506,050 5,110,450 6,470,046 5,576,916
- ------------------------------ (1) Includes the anti-dilutive effect (equivalent to 476,412 shares) of options issued to employees, a consultant and members of the Advisory Board since October 1996. Does not include as of September 30, 1997 (i) 662,287 shares of Common Stock issuable upon the exercise of outstanding warrants at an exercise price of $1.123 per share, (ii) 803,247 shares of Common Stock issuable upon the exercise of outstanding options at a weighted average exercise price of $1.119 per share and (iii) 476,598 shares of Common Stock reserved for issuance upon the exercise of options that may be granted in the future under the Stock Option Plan. Also does not include an additional 694,800 shares of Common Stock which were made subject to the Stock Option Plan after September 30, 1997. See "Management--Stock Option Plan" and "Description of Capital Stock." (2) Includes $375,103 of costs related to a proposed public offering withdrawn in May 1997. 18 20 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the Selected Financial Data and financial statements and related notes thereto appearing elsewhere in this Prospectus. When used in the following discussions, the words "believes," "anticipates," "intends," "expects" and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties, including, but not limited to, those set forth in "Risk Factors," which could cause actual results to differ materially from those projected. OVERVIEW From its inception in November 1989 through December 31, 1996, Nanophase was in the development stage. During that period, the Company primarily focused on the development of its manufacturing processes in order to transition from laboratory-scale to commercial-scale production. As a result, the Company developed an operating capacity to produce significant quantities of its nanocrystalline materials for commercial sale. The Company was also engaged in developing commercial applications and formulations and recruiting marketing, technical and administrative personnel. From inception through September 30, 1997, the Company was primarily capitalized through the private placement of approximately $19,554,000 of equity securities, net of issuance costs. Through 1995, the majority of the Company's revenues resulted from government contracts to perform research and development activities. During that period, the Company also entered into cost-sharing agreements with the U.S. government and offset amounts received against the related costs. During 1996, the Company began emerging from the development stage and significantly increased its commercial revenue. Commercial revenue is recorded when products are shipped by the Company or when specific milestones are met regarding development arrangements. Cost of revenue generally includes costs associated with commercial production and customer development agreements, and costs of material production and development related to government research contracts. In 1996, the Company also began to scale-up operations in its Burr Ridge manufacturing facility. The Company incurred substantial operating expenses as a result of certain one-time costs associated with the scale-up of operations. Since January 1, 1997, the Company has been engaged in commercial production and sales of its nanocrystalline materials, and the Company no longer considers itself in the development stage. RESULTS OF OPERATIONS NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 Total revenue increased to $2,245,415 for the nine months ended September 30, 1997, compared to $287,220 for the same period in 1996. Commercial revenue increased to $2,245,415 for the nine months ended September 30, 1997, compared to $261,013 for the same period in 1996. This increase in commercial revenue was due primarily to increased product sales volume, increased acceptance of the commercial potential of the Company's products, customer development agreements and a one-time fee of $160,000 paid by the Company's Asian distributor for training such distributor how to operate a PVS plasma reactor in order to manufacture samples of the Company's nanocrystalline materials. Revenue from government research contracts decreased to zero for the nine months ended September 30, 1997, compared to $26,207 for the same period in 1996, because the Company did not pursue any further U.S. government contracts for such nine month period. Cost of revenue as a percentage of revenue decreased significantly for the nine months ended September 30, 1997, compared to the same period in 1996 primarily because of increased efficiencies in the Company's manufacturing process and greater production volume. Cost of revenue increased to $3,321,288 for the nine months ended September 30, 1997, compared to $2,925,560 for the same period in 1996. This increase in cost of revenue was generally attributed to a further expansion of the production infrastructure to support anticipated revenue growth and increased costs which 19 21 are commensurate with the increased sales volume and customer development programs. The Company also incurred development costs to expand its quality assurance programs and obtain its ISO certification. Research and development expense consists of costs associated with the Company's development of new product applications and coating formulations and the cost of enhancing the Company's manufacturing processes. Research and development expense increased to $571,210 for the nine months ended September 30, 1997, compared to $515,675 for the same period in 1996. The increase in research and development expense was attributable primarily to the costs of developing new coating formulations and product applications, increased usage of research supplies, and ongoing experimentation expenses associated with technological enhancements and product improvements. The Company expects to increase its research and development expenditures during the remainder of 1997 in connection with its plans to continue to enhance and expand its product lines and manufacturing processes. Selling, general and administrative expense increased to $1,714,725 for the nine months ended September 30, 1997, compared to $1,209,823 for the same period in 1996. This increase was attributable primarily to increased selling and advertising expense, outside consulting fees, corporate salaries and expensing costs aggregating $375,103 related to a proposed public offering withdrawn in May 1997. Selling, general and administrative expense for the third quarter of 1997 also includes certain one-time costs associated with the Company's Asian distribution agreement. Selling, general and administrative expense is expected to increase significantly in the next several years to support the Company's business development efforts. Interest income decreased to $57,392 for the nine months ended September 30, 1997, compared to $145,746 for the same period in 1996. This decrease was primarily due to a lower outstanding cash balance. YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 Total revenue increased to $595,806 in 1996, compared to $121,586 in 1995 and $95,159 in 1994. Commercial revenue increased to $485,036 in 1996, compared to $93,591 in 1995 and $31,144 in 1994. This increase in commercial revenue was due primarily to increased commercial acceptance and availability of the Company's products. Revenue from government research contracts increased to $110,770 in 1996, compared to $27,995 in 1995 and $64,015 in 1994, as the Company completed certain development agreements with U.S. governmental agencies. Cost of revenue increased to $4,019,484 in 1996, compared to $532,124 in 1995 and $164,746 in 1994. The increase in cost of revenue for 1996 was generally a result of the scale-up of the Company's operations in anticipation of increased commercial sales and development. Specifically, the Company increased expenditures relating to product and process improvement activities. The Company also incurred one-time costs in connection with the establishment of its Chicago coating facility, extensive product development activities, the scale-up of manufacturing operations, and the certification of its Burr Ridge facility under ISO standards. Research and development expense increased to $677,284 in 1996, compared to $485,059 in 1995 and $456,162 in 1994. The increase in research and development expense was attributable primarily to the hiring of additional research and development personnel, costs associated with the development and evaluation of new product applications, and increased purchases and use of research supplies. Selling, general and administrative expense increased to $1,661,504 in 1996, compared to $1,150,853 in 1995 and $799,558 in 1994. This increase was attributable primarily to the hiring of additional marketing and administrative personnel, an increase in selling expenses, and the increase in costs associated with the establishment of the Company's corporate headquarters. Interest income was $184,778 in 1996, compared to $86,576 in 1995 and $37,535 in 1994. The increases resulted from the Company's investment of net proceeds from its sales of equity securities pending use of such proceeds for the Company's operations. 20 22 LIQUIDITY AND CAPITAL RESOURCES The Company's cash and cash equivalents were $770,704 at September 30, 1997, compared to $617,204 at December 31, 1996 and $261,902 at December 31, 1995. The Company's net cash used in operating activities was $2,740,641 for the nine months ended September 30, 1997, compared to $4,399,928 for the same period in 1996. The net cash used in operating activities for the nine months ended September 30, 1997 was primarily for the further expansion of the production infrastructure to support anticipated growth, the further development of products, the funding of research and development activities, and the funding of trade accounts receivable and inventory levels, which was offset by an increase in accounts payable and accrued liabilities. Net cash used in investing activities, including capital expenditures and purchases and sales of securities in which cash is invested pending its use for the Company's operations, amounted to $751,068 for the nine months ended September 30, 1997, compared to net cash used of $2,894,150 for the same period in 1996. Capital expenditures amounted to $763,276 for the nine months ended September 30, 1997, compared to $1,084,697 for the same period in 1996 and were primarily for leasehold improvements and equipment purchases. Net cash provided by private placements of equity securities was $3,770,882 during the nine month period ended September 30, 1997, compared to $7,182,088 during the same period for the prior year. The Company's net cash used in operating activities was $5,795,858 in 1996, compared to $1,860,353 in 1995 and $1,206,497 in 1994. The net cash used in 1996 operating activities was primarily for the scale-up of manufacturing operations, for development of products, and to fund research and development expenses. Net cash used in investing activities, including capital expenditures and purchases and sales of securities in which cash is invested pending its use for the Company's operations, amounted to $951,806 in 1996, $905,615 in 1995 and $2,396,125 in 1994. Capital expenditures amounted to $1,173,437 in 1996, $937,956 in 1995 and $66,303 in 1994 and were primarily for leasehold improvements and equipment purchases. Net cash provided by private placements of equity securities was $7,182,088 in 1996, compared to $3,009,408 in 1995 and $3,395,854 in 1994. The Company believes that funds from operations and cash on hand, together with the net proceeds of this offering, will be adequate to fund the Company's current operating plans for the foreseeable future. The Company expects capital expenditures of approximately $2 million in 1997 and approximately $20 million to $25 million in 1998, which expenditures will be funded in part by the net proceeds from this offering. The Company's actual future capital requirements will depend, however, on many factors, including continued progress in its research and development and product testing programs, the magnitude of these programs, the costs necessary to increase the Company's manufacturing capabilities and to market any resulting materials and product applications, and customer acceptance of the Company's current and potential materials and product applications. In addition, the Company could potentially be required to fund a rescission of shares of Series F Preferred. Depending on future requirements, the Company may seek additional funding through public or private financing, collaborative relationships, government contracts or licensing agreements. There can be no assurance that such additional financing will be available on acceptable terms or at all, and any such additional financing could be dilutive to the Company's stockholders. See "Use of Proceeds," "Risk Factors--Future Capital Needs" and "--Risk of Rescission of Series F Offering." At September 30, 1997, the Company had a net operating loss carryforward of approximately $13.9 million for income tax purposes. Because the Company may have experienced "ownership changes" within the meaning of the U.S. Internal Revenue Code (the "Internal Revenue Code") related to prior issuance of its preferred stock and may experience ownership changes due to this offering, 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 2012. As a result of the annual limitation, a portion of this carryforward may expire before ultimately becoming available to reduce income tax liabilities. 21 23 QUARTERLY INFORMATION The following table presents selected unaudited quarterly results of the Company for each quarter of 1996 and the first three quarters of 1997. The financial data is derived from the unaudited quarterly financial statements of the Company which have been prepared by the Company on a basis consistent with the Company's audited financial statements included elsewhere in this Prospectus and, in the opinion of management, include all adjustments, including normal recurring adjustments, that are necessary for a fair statement of the Company's results of operations for such periods. These operating results are not necessarily indicative of future performance.
THREE MONTHS ENDED ---------------------------------------------------------------------------------------------------- 1996 1997 ------------------------------------------------------ ------------------------------------------- MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 30 STATEMENT OF OPERATIONS DATA: Commercial revenue..... $ 43,223 $ 63,809 $ 153,981 $ 224,023 $ 429,464 $ 603,003 $ 1,212,948 Government research contracts............ 13,532 6,780 5,895 84,563 -- -- -- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Total revenue...... 56,755 70,589 159,876 308,586 429,464 603,003 1,212,948 Cost of revenue........ (743,651) (1,224,895) (957,014) (1,093,924) (1,102,877) (1,059,204) (1,159,207) Research and development expense.............. (150,483) (177,137) (188,055) (161,609) (161,198) (215,334) (194,678) Selling, general and administrative expense.............. (315,885) (507,254) (386,684) (451,681) (425,497) (765,995)(1) (523,233) Interest income........ 24,302 55,384 66,060 39,032 21,917 9,830 25,645 ----------- ----------- ----------- ----------- ----------- ----------- ----------- Net loss............... $(1,128,962) $(1,783,313) $(1,305,817) $(1,359,596) $(1,238,191) $(1,427,700) $ (638,525) =========== =========== =========== =========== =========== =========== ===========
- ------------------------------ (1) Includes $375,103 of costs related to a proposed public offering withdrawn in May 1997. 22 24 BUSINESS Nanophase develops and markets nanocrystalline materials for use as ingredients and components in a wide range of commercial applications. The Company began manufacturing nanocrystalline materials in commercial quantities in the fourth quarter of 1996. Nanocrystalline materials are metallic and ceramic materials that generally consist of particles that are less than 100 nanometers (billionths of a meter) in diameter and contain only a few thousand or tens of thousands of atoms, rather than the millions or billions of atoms in particles of most conventional materials. By processing materials in this near-atomic size range, the Company is able to engineer the structure of particles and exploit the properties of their surface atoms to enhance the performance of basic raw materials such as aluminum, iron, titanium and zinc, as well as to molecularly engineer new composite materials. Compared to conventional materials, the Company believes its nanocrystalline materials generally exhibit superior chemical, mechanical, electronic, magnetic and optical properties. The Company believes that through its extensive proprietary research and development programs, combined with its proprietary and patented production processes, it has established new standards for high-performance commercially produced nanocrystalline materials. The Company is in the advanced materials industry and has identified initial commercial applications for its nanocrystalline materials in four primary markets: electronics, structural ceramics and composites, cosmetics and skin-care, and industrial catalysts. The Company believes each of these markets provides numerous commercial applications in which its nanocrystalline materials will have significant competitive advantages based on product performance. Commercial applications currently being developed in these markets include the following: - Electronics. Abrasives for chemical/mechanical polishing of semiconductor wafers (CMP), anti-radiation coatings for CRTs, thin-film materials for semiconductor manufacturing, high-performance electrodes and photonic materials for flat-panel displays. - Structural Ceramics and Composites. Ceramic mechanical seals, components for continuous steel casting, abrasion-resistant polymers for oil drilling sensors, ceramic armor and remotely monitored medical implants. - Cosmetics and Skin-Care. Topical health-care products, transparent UV blockers and colorants for cosmetics. - Industrial Catalysts. Chemical-process catalysts. In each of these markets, the Company's strategy is to establish collaborative relationships with industry leaders in order to validate the capabilities of its materials and coordinate the development and commercial introduction of product applications. These relationships generally include specific milestones and a development path that is intended to lead to significant commercial product revenues. The Company is currently collaborating with, among others, Acutus Gladwin, Dow, DuPont, Medtronic, Pacific Safety and Philips. As a result of its collaborative relationships, the Company entered into commercial supply contracts with Moyco, a manufacturer of semiconductor polishing slurries for use by semiconductor manufacturers, including Hyundai, Samsung, IBM, Lucent and Motorola; with Schering-Plough pursuant to which the Company will supply its nanocrystalline zinc oxide to Schering-Plough for use in topical health-care products; and with LWT for anti-abrasive polymers used in oil drilling applications. To gain access to foreign markets, Nanophase has entered into an agreement with a subsidiary of Itochu, formerly C. Itoh, for the distribution of the Company's materials in broad-based industrial markets throughout Asia. To gain world-wide access to the cosmetics and skin-care market, the Company has a global distribution agreement with WCD, a leading distributor of cosmetic and skin-care ingredients. The Company believes that its nanocrystalline materials have broad and enabling potential beyond the product applications it is currently developing with its customers. In 1995, the Battelle Memorial Institute, a leading contract research organization, identified "molecularly engineered" materials (i.e., nanocrystalline materials) as "super materials" which represent one of the ten most important technologies for the coming decade. Nanophase was organized in 1989 to commercialize technologies that are based on principles developed at Argonne National Laboratories, and believes that it is the only company to successfully transition 23 25 the production of high-performance nanocrystalline materials from laboratory to commercial scale. In 1995, the Company's patented PVS process for producing these materials received the R&D 100 Award, given each year by R&D Magazine to recognize the 100 most technologically significant new products and processes in the world. NANOCRYSTALLINE MATERIALS All matter is composed of atoms, or molecules which are combinations of atoms. Most solid materials, such as ceramics and metals, are crystalline in nature, i.e., they consist of microscopic particles, or crystals, the atoms or molecules of which are stacked in orderly patterns. The attributes of a crystalline material, including strength, flexibility, color and electronic conductivity, depend upon the shape and size of the material's individual crystals, the organization of atoms in the individual crystals, and the relationships and interactions among the crystals. The particles of conventional crystalline materials generally have irregular shapes and sizes. The organization of a crystalline material's atoms or molecules, however, can be manipulated to form particles that are much smaller and more uniform. Particles that are less than 100 nanometers (billionths of a meter) in diameter are generally called nanocrystals and contain only a few thousand or tens of thousands of atoms, rather than the millions or billions of atoms in particles of most conventional materials. Through molecular engineering, the shape and size of such particles in nanocrystalline materials can be manipulated to produce materials with superior properties. These nanocrystalline materials behave in enhanced and novel ways because the properties of, and interactions among, their ultra-small particles have been significantly altered. The potential of nanocrystalline materials has been known for decades and such materials have been produced by a variety of other processes. However, these other processes are more limited in their ability to engineer the materials for high-performance applications. Mechanical and chemical processes are the two most common methods for producing nanocrystalline materials. In mechanical processes, fine powders are commonly made from large particles through the use of crushing techniques such as a high-speed ball mill. The resulting fragmented powders contain particles of inconsistent shapes and sizes, are relatively coarse, and are not adequate for many high-performance commercial applications. Nanocrystalline materials can also be made through chemical processes which utilize chemicals to create a reaction that precipitates particles of varying size and shape. Chemical processes, like mechanical processes, often produce nanometric particles of inconsistent shapes and sizes that are difficult to engineer for high-performance applications. Chemical processes also tend to leave chemical residues on the particle surfaces, making it difficult to precisely engineer the mechanical, chemical and electronic properties of the materials. Historically, high-quality nanocrystalline materials have been difficult to consistently produce in other than laboratory-scale quantities and have not been produced at commercially affordable costs. The Company believes that these traditional methods of producing nanocrystalline materials do not provide the means to realize the full potential of such nanocrystalline materials. ADVANTAGES OF THE COMPANY'S NANOCRYSTALLINE MATERIALS The Company has developed new technologies for the engineering and high-volume production of high-quality nanocrystalline materials which it believes cannot be accomplished by the traditional methods described above. At the core of the Company's technologies is its patented PVS process, whereby metallic or ceramic materials are vaporized into atoms that are mixed with a gas to form nanometric particles. The following attributes of the particles produced by the Company's PVS process enable it to produce significant quantities of nanocrystalline materials which it believes to be superior, for a range of high-performance applications, to both conventional materials and nanocrystalline materials produced by other means: SPHERICAL SHAPES AND SMALL SIZES enable particles to slide over each other, which allows the Company's ceramic materials to become more ductile and more easily formed. This enables the Company to rapidly mold variously shaped ceramic components without the costly and time-consuming 24 26 machining which is typically used for conventional ceramics (e.g., 15 to 30 minutes for the Company's process as opposed to 4 to 8 hours for conventional machining). CLEAN SURFACES enable particles to flow freely and be dispersed easily. For example, the Company produces iron oxides that make cosmetics feel smoother on the skin and blend easily. NARROW SIZE DISTRIBUTION of nanometric particles ensures that nanocrystalline materials are virtually free of large particles, which facilitates engineering of the chemical, mechanical, optical and electronic properties of the material because these properties vary according to particle size. For example, the Company produces titanium dioxide with particles that are large enough to block ultraviolet rays but are consistently smaller than the wave length of visible light, which enables sunscreens formulated with these particles to provide an unprecedented combination of high SPF protection and transparency. AGGREGATION CONTROL results in loosely agglomerated and uniformly small particles that can be readily and uniformly dispersed in a variety of media. For example, the Company produces ultra-fine abrasives for slurries used to polish the surfaces of semiconductors, which results in significantly smoother surfaces and faster and more selective removal of material. DIALABLE CONTROL OF PARTICLE SIZE enables precise engineering of particles through subtle modifications of the Company's PVS process. By controlling the evaporation rate of a material's atoms or the type or pressure of gas used in the production process, the Company can alter, enhance and tailor the performance of its basic raw materials for specific product applications. For example, further decreasing the particle size of a metal oxide increases its number of surface atoms, which enables the Company to produce metal oxides with enhanced catalytic performance. The Company has developed related technologies to further enhance the materials produced by its PVS process. Because the PVS process produces particles that, in contrast to particles of conventional materials, are (i) nearly spherical, (ii) virtually free of chemical residues, (iii) uniformly small, (iv) not strongly agglomerated, and (v) easily engineered, the Company can apply its other proprietary technologies to further process these particles to set new standards for a range of additional high-performance commercial applications. For example, certain product applications require surface treatments for nanocrystalline particles so they can be dispersed in a variety of media. To enable the incorporation of its materials in dispersions, the Company developed its proprietary DPE process which prevents particles from agglomerating by completely coating each individual particle. The coating process also enables the Company to alter the optical, chemical and electronic behavior of particles to meet the requirements of particular applications. In addition, certain product applications require nanocrystalline materials to be formed into structural ceramics of a precise shape and tolerance. As part of its strategy to enter markets for structural ceramics, the Company developed its net-shaping technology which enables the rapid fabrication of dimensionally-precise, high tolerance structural ceramic components without costly machining. COMPANY STRATEGY To take advantage of the broad potential applicability of nanocrystalline materials, the Company has adopted a strategy to develop a variety of value-added applications in targeted industries where the potential for future growth is substantial. The Company intends to establish itself as the leading manufacturer of nanocrystalline materials for these targeted application areas by continuously enhancing its technologies, product applications and customer base. Specific elements of the Company's business strategy include the following: Target Innovative Commercial Applications The Company identifies and pursues commercial applications where the value-added benefits of its nanocrystalline materials and technologies (i) represent breakthrough capabilities, (ii) are substantial and demonstrable, (iii) are not achievable with conventional materials, and (iv) offer the Company the potential for long-term market leadership and sustainable revenues. 25 27 Establish Collaborative Relationships with Marquee Customers To facilitate the development of product applications that meet market needs and create markets for its nanocrystalline materials, the Company establishes collaborative relationships with customers who are leaders in their industries. The Company targets such customers because it believes that these customers (i) are technologically innovative, (ii) will support product development and (iii) require a long-term supply of superior products in order to maintain their competitive advantages. The collaborative relationships pursued by the Company include agreed-upon developmental milestones and a development path that is intended to lead to significant commercial revenues from the customer. Expand Product Applications and Broaden the Customer Base After developing nanocrystalline materials and product applications for a customer, the Company seeks to broaden its relationship with that customer by identifying additional opportunities for the Company's nanocrystalline materials and technologies, and seeks to identify other potential customers in that market that can benefit from derivative materials and technologies. The Company also seeks to have the nanocrystalline materials and technologies that it successfully develops for customers in one market meet the application requirements of customers in other markets without significant process or material re-engineering. Maintain Technical and Commercial Leadership The Company is committed to maintaining its status as a leader in the field of nanocrystalline-based materials through ongoing research and development activities, collaborations with industrial, university and government entities, and efforts to continuously attract top scientists and engineers. The Company concentrates its research and development efforts on the key technological issues that affect the production and engineering of nanocrystalline materials that have new and superior capabilities tailored for specific commercial applications. This focus has resulted in the Company's development of its proprietary core technologies, including the PVS process, DPE process and net-shaping. To protect its proprietary core technologies, the Company has been issued patents with respect to its PVS process and the related apparatus, applied for patents with respect to its DPE process and licenses patents related to the synthesis of nanocrystalline materials and net-shaping. CUSTOMERS AND APPLICATIONS The Company is in the advanced materials industry and has identified four primary markets--electronics, structural ceramics and composites, cosmetics and skin-care, and industrial catalysts--each of which offers the Company significant potential for revenue growth. In addition, the Company believes these markets provide opportunities to achieve competitive advantages based on product performance. The Company's strategy is to collaborate with industry leaders in these markets in order to validate the capabilities of its materials and coordinate the development and commercial introduction of product applications. The collaborative relationships pursued by the Company include (i) agreed-upon specifications for the proposed commercial application of the Company's materials; (ii) confirmation by the customer that the proposed application appears to be commercially viable and valuable; (iii) a significant commitment of developmental resources; (iv) agreed-upon developmental milestones, and (v) a development path that is intended to lead to 26 28 significant commercial revenues from the customer. Certain details of the Company's significant customer and product development relationships are contained in the table below. [CAPTION]
CUSTOMER/PRODUCT NANOPHASE DEVELOPMENT PARTNER MATERIAL/TECHNOLOGY PRODUCT APPLICATION STATUS ELECTRONICS Moyco Technologies, Inc. Aluminum oxide; Abrasives for semiconductor Shipping products pursuant to cerium oxide polishing five- year requirements contract; customer evaluations underway at Hyundai, IBM, Motorola, Lucent and Samsung Philips Electronics N.V. Metal oxide Anti-radiation coatings for Development agreement CRTs Medtronic, Inc. Precious metal High-performance electrodes Samples purchased; tests and evaluations ongoing A leading electronic Metal oxides Thin-film materials for Samples purchased; tests and materials company semiconductor manufacturing evaluations ongoing A Fortune 50 Metal oxides Photonic materials for Joint application for U.S. communications company flat-panel displays Department of Defense contract STRUCTURAL CERAMICS AND COMPOSITES LWT Instruments, Inc. Aluminum oxide Abrasion-resistant polymers for Shipping product pursuant to oil drilling sensors requirements contract AG Industries Net-shaped ceramics Components for continuous steel Development agreement; field casting tests scheduled A Fortune 100 Net-shaped ceramics Ceramic mechanical seals Prototypes purchased; tests and manufacturer of heavy evaluations ongoing equipment Pacific Safety, Inc. Net-shaped ceramics Ceramic armor Development agreement; tests and evaluations ongoing Medtronic, Inc. Metal oxides Remotely monitored medical Samples purchased; tests and implants evaluations ongoing COSMETICS AND SKIN-CARE Schering-Plough Zinc oxide Topical health-care products Shipping product pursuant to Corporation(1) four- year requirements contract A Fortune 500 cosmetics Titanium dioxide; Transparent UV blockers and Shipping product company(1) iron oxide colorants for cosmetics INDUSTRIAL CATALYSTS E.I. DuPont de Nemours & Precious metal Chemical-process catalysts Samples purchased; tests and Co. evaluations ongoing A Fortune 50 chemical Metal oxides Chemical-process catalysts Samples purchased; tests and company evaluations ongoing
- ------------------------------ (1) These relationships are through the Company's distribution arrangement with WCD, which is distributing the Company's nanocrystalline materials to a number of cosmetics and skin-care formulators. See "--Cosmetics and Skin-Care" and "--Marketing." Following is a more detailed description of the Company's targeted markets and its activities in specific product applications. ELECTRONICS Electronics is one of the world's largest and fastest growing markets, fueled in part by rising demand for increased computing power and information storage requirements and the rapid growth of communications technologies. The new levels of performance in electronics that are necessary to meet these requirements depend, in large part, on advanced materials, especially advanced ceramics, that enable higher performance and further miniaturization. Increasingly, critical dimensions and performance criteria for high-speed electronic pathways and dense platforms are measured in nanometers and angstroms (tenths of nanometers). 27 29 It is at this level of performance that Nanophase believes its engineered nanocrystalline materials have advantages that can be converted into immediate opportunities. Nanophase's initial focus in this market has primarily been on three product applications: (i) semiconductor polishing, (ii) coatings for electromagnetic radiation protection and (iii) high-performance electrodes. The Company believes that the uniformly small particle size, nearly spherical particle morphology and clean particle surface of the Company's materials allow such materials to provide innovative, value-added benefits for these and other product applications in the electronics market. Semiconductor Polishing Increases in computing power require increased memory capacity, which is achieved by fabricating smaller circuits on smoother semiconductor wafer surfaces. These smoother surfaces are obtained by a technique called chemical/mechanical polishing (CMP), in which an abrasive slurry is used to polish semiconductor surfaces to a very fine finish. Polishing slurries utilizing the Company's nanometer-sized aluminum dioxide ("alumina") and cerium oxide ("ceria"), with their nearly spherical particle shapes and uniformly small particle sizes, provide semiconductor polishing that results in (i) significantly smoother surfaces, (ii) a faster rate of material removal, (iii) more selective removal of material, and (iv) easier cleaning during the manufacturing process, compared to slurries utilizing conventional materials. The Company believes that these attributes will be an important element in the production of semiconductor wafers with smaller geometries that will result in increased memory capacity, faster processing speeds and lower production costs. Nanophase has entered into a five-year requirements contract with Moyco, a manufacturer of semiconductor polishing slurries, pursuant to which the Company will supply its nanocrystalline alumina and ceria to Moyco. Moyco markets its slurries to Hyundai, Samsung, IBM, Lucent and Motorola, all of which are currently evaluating slurries containing the Company's nanocrystalline materials for use in their next generation semiconductor manufacturing processes. The Company has agreed to sell the materials to Moyco for this market on an exclusive basis so long as Moyco purchases the following annual minimums specified in the contract: 23, 50, 80, 140 and 200 tons of alumina and 4, 8, 16, 20 and 30 tons of ceria in 1997, 1998, 1999, 2000 and 2001, respectively. If Moyco purchases the aggregate minimum quantities specified in the contract, it will purchase approximately $30 million of the Company's materials through the end of 2001. If Moyco fails to purchase such minimum quantities, the Company may terminate Moyco's exclusivity, or the Company may terminate the entire contract. In August 1997, Moyco and Ashland signed a non-binding letter of intent pertaining to the potential purchase by Ashland of Moyco's intellectual properties, technologies and certain other intangible assets for the chemical/mechanical polishing of semiconductor wafers. See "Risk Factors--Dependence on a Limited Number of Key Customers." Electromagnetic Radiation Protection Cathode ray tubes ("CRTs") utilized in television and computer monitors emit electromagnetic radiation due to the high voltages used to generate light. In the past, little attention was paid to the potential harmful effects of this radiation. Recent European Economic Community regulations scheduled to go into effect over the next several years, however, place more stringent limits on the quantity of radiation that can be emitted by television and computer monitors. In response to such regulations, CRT manufacturers require transparent, conductive coatings that meet the new electromagnetic radiation standards. The materials currently used for conductive coating of CRTs have not been proven to meet all of the new radiation requirements. Nanophase can produce a proprietary metal oxide mixture which has a narrower particle-size distribution and cleaner particle surfaces than currently used materials. The Company's nanocrystalline metal oxide mixture is highly conductive and easily dispersed and, when applied as a coating to CRTs, is expected by the Company to meet the increased radiation shielding regulatory requirements, while maintaining the transparency required for quality video images. The Company is actively working with Philips pursuant to an agreement to develop a specific coating for CRTs manufactured by Philips. This agreement 28 30 includes an expression of intention by Philips to purchase the Company's coating materials if developmental milestones are met. High-Performance Electrodes Electronic medical devices require new high-performance electrodes which deliver more precise voltages. In order to achieve such precision, the surface area of the electrode needs to be increased substantially. As the surface area of an electrode increases, transient signals caused by polarization at the electrode surface are reduced. In a development program with Medtronic, a leading manufacturer of medical devices, the Company is developing nanocrystalline precious metals that can be directly deposited on medical-device electrodes to create the additional surface area required to decrease polarization. The Company believes that its material provides higher surface area than the conventional technology currently used. The Company is working with Medtronic to meet specific performance requirements and establish developmental milestones. Thin-Film Materials for Semiconductor Manufacturing Nanophase has begun an early stage development program with a leading electronic materials company for developing advanced materials for use in semiconductor manufacturing. The objective is to develop advanced materials which can be used to fabricate thin-films on the surfaces of semiconductors to enable the production of semiconductor wafers with increased memory capacity, faster processing speeds and lower production costs. Nanocrystalline materials are used because the products require a uniform and fine-grained structure. This product application is in an early stage of development and investigation. Flat-Panel Displays Nanophase and a Fortune 50 communications company have submitted a joint proposal to the U.S. Department of Defense for funding to develop photonic materials and manufacturing technology for a new generation of electronic displays for a broad range of light-weight, low-power multi-purpose communication devices. If funded, the two companies will work jointly to develop the products. STRUCTURAL CERAMICS AND COMPOSITES Structural ceramics are advanced compounds that offer hardness, high strength and inertness for a broad range of industrial applications involving harsh chemical and thermal environments. The free-flowing nature and weak agglomeration of the Company's nearly spherical nanocrystalline particles enable the Company to rapidly fabricate high-tolerance, dimensionally precise structural ceramic parts without costly machining. Because the conventional methods for forming structural ceramics involve the use of high temperatures, high pressures or lengthy machining operations, the high costs of fabrication have limited the usage of dimensionally-precise ceramics to only the most critical applications. Through its net-shaping process, the Company can mold nanocrystalline ceramic materials into fully-dense ceramic parts with little or no machining. This process makes it possible to fabricate a variety of dimensionally precise structural ceramic components in a short period of time (e.g., 15 to 30 minutes for the Company's process as opposed to 4 to 8 hours for conventional machining), at significantly lower temperatures and pressures, and at substantially lower costs, than conventional fabrication methods. Composites, like structural ceramics, are engineered structures that consist of diverse elements and are geared toward high-stress product applications that require durable, resistant materials. Composites combine the advantageous qualities of their constituent materials. The properties of these composites depend heavily on the nature and amount of the materials that are incorporated into the composites. For example, incorporating a hard material like alumina into a flexible and light-weight plastic can increase the plastic's resistance to abrasion and wear. Such an increase is related to the number of particles of the constituent alumina. Because there are more particles in one pound of nanocrystalline materials than in one pound of more commonly used micron-sized particles, properties such as abrasion resistance are enhanced by substituting nanocrystalline materials for conventionally used materials. 29 31 Composite Polymer for Oil Drilling Machinery Nanophase has entered into a one-year requirements contract with LWT, a supplier of instrumentation to the oil drilling industry, for the supply of abrasion-resistant composite polymers to protect down-hole data logging equipment. The contract requires LWT to purchase a minimum of $375,000 of materials from the Company. In this application, instrumentation is lowered into a drilled shaft in order to provide information to the drill operator on a continuous basis. Because drilled shafts often pass through hard rock formations, or very abrasive layers of sandstone, the data logging instruments must be protected from potential wear. A protective housing, or collar, is used to protect the data logging equipment. These collars are conventionally coated with a commercially available ceramic-filled polymer. Conventional fabrication of these collars is difficult because the polymer is thick and must be applied by hand. LWT requires a polymer which can be applied by automatic machinery, has a long service life and is abrasion-resistant. Tests performed by LWT using the Company's composite materials indicate that such materials meet these requirements. Ceramic Components for Continuous Steel Casting The Company is collaborating with Acutus Gladwin, a leading supplier of services and products in the steel industry, to produce a ceramic component for use in continuous steel casting. Continuous steel casting is performed by pouring molten steel from a ladle through a funnel-shaped nozzle into a mold which is several hundred feet long. Current nozzles are made of a porous alumina/graphite material and require frequent replacement due to wear. During replacement, steel-casting lines using these nozzles must be shut down for 15 to 45 minutes while new components are installed, resulting in down-time costs of up to approximately $25,000/hour and several tons of second-quality steel which must be remelted or downgraded for use in lower-quality products. Nanophase believes that its denser net-shaped ceramics in this application will substantially increase wear resistance, resulting in significant cost savings due to decreased downtime and less wasted or sub-standard steel. Under a development agreement with Acutus Gladwin, the Company has successfully completed laboratory testing of its material and prototypes are scheduled to be field tested by the end of 1997. Ceramic Mechanical Seals Nanophase is currently fabricating prototype ceramic mechanical seals for a Fortune 100 manufacturer of heavy equipment. The ceramic seals are designed for use in harsh applications to prevent abrasive particles from entering mechanical joints and to prevent oil from leaking from the joints. Conventional seals used in these applications are commonly made of plastic composite materials and either wear or corrode, requiring replacement after only a few thousand hours of operation. Ceramic seals, because of their improved abrasion and corrosion resistance, are believed by the Company to be more reliable and durable than conventional seals. Customer-laboratory tests of prototype seal designs have shown that Nanophase's ceramic seals can increase the service life of a seal up to ten-fold compared to currently-used seal materials, resulting in a reduction of equipment downtime and associated costs. In addition, Nanophase's net-shaping process reduces or eliminates the costly diamond grinding that normally would be required to fabricate these ceramic seals. The Company believes that reduced manufacturing costs make these ceramic seals cost-effective for a number of high-volume mechanical-seal applications. The Company expects field testing of its ceramic seals to begin by the end of 1997. Ceramic Armor The Company is currently fabricating net-shaped alumina armor plates under a development agreement with Pacific Safety, a leading Canadian armor producer. Ceramic based armor is highly desirable because of its strength and weight advantage over steel. It can provide the same protection at a significantly reduced weight. However, current ceramic armor materials, made from hot-pressed alumina or boron carbide, are either not durable enough or very costly to fabricate, and thus have limited markets. Based on preliminary studies, the Company believes that it will be able to produce denser, fine-grained alumina armor tiles which will have greater durability and impact resistance than hotpressed alumina tiles and offer a significant economic advantage over boron carbide. 30 32 Remotely Monitored Medical Implants In collaboration with Medtronic, Nanophase is developing a net-shaped ceramic housing for an electronic medical device. Current housings for this application are fabricated from metal, and while medically proven and in daily use, they do not allow the transmission of Radio Frequency ("RF") signals. A ceramic housing would allow the passage of RF signals and, hence, remote wireless monitoring. Nanophase is also developing materials for medical implants for Medtronic which can be viewed without using X-rays. Both medical devices, if successfully developed, will require the customer to undertake long-term clinical testing and seek FDA approval. See "Risk Factors--Governmental Regulations." COSMETICS AND SKIN-CARE The cosmetics and skin-care market is a substantial consumer of particulate materials as active ingredients and pigments. The Company has targeted three of its nanocrystalline materials, titanium dioxide ("titania"), iron oxide and zinc oxide, for applications in the cosmetics and skin-care market, including sunscreens, cosmetic colorants and topical health-care applications. Nanophase has entered into a global distribution agreement with WCD for exclusive distribution of its nanocrystalline materials to cosmetic and skin-care companies. Through this distribution arrangement, the Company (i) has recently begun commercial sales of its titania to several small cosmetics companies, including Geurlain, the Jafra division of Gillette, Inc., Medicia Pharmaceutical Corporation and Sunny World Co., Ltd (of Thailand), for use in sunscreens, (ii) is shipping its iron oxides to a Fortune 500 cosmetics company for use as cosmetic colorants, (iii) is shipping titania dispersions to that same customer for use in a product with SPF protection, which is presently scheduled for market introduction in the fourth quarter of 1997, and (iv) has entered into a commercial supply contract with Schering-Plough for its nanocrystalline zinc oxide. Topical Health-Care Applications The Company has recently entered into a four-year requirements contract with Schering-Plough pursuant to which the Company will supply its nanocrystalline zinc oxide to Schering-Plough for certain topical health-care products. For example, the Company's nanocrystalline materials are being supplied for use in new anti-fungal sprays and powders presently scheduled for initial market introduction in the fourth quarter of 1997. Several skin-care companies are currently evaluating Nanophase's nanocrystalline zinc oxide for use in other topical health-care products. The Company's zinc oxide contains uniformly small particles which contain a large number of surface area atoms. Initial testing by the Company's customers indicates that this attribute provides enhanced anti-fungal activity compared to conventional materials because a lower amount of the Company's zinc oxide is needed to achieve the desired level of activity. In addition, the Company's zinc oxide, because of its weakly agglomerated particles, is better suited than conventional materials for aerosol applicators. Sunscreens The market for titania-based sunscreens has rapidly expanded due to (i) increasing consumer awareness of the harmful effects of ultraviolet ("UV") rays and (ii) a desire to replace conventional chemical sun-block ingredients, which can cause irritation, with "chemical-free" ingredients, such as titania. Because the Company's nanocrystalline titania is comprised of particles that are large enough to block UV rays, but are consistently smaller than the wave length of visible light, it enables "chemical-free" sunscreen products to provide an unprecedented combination of high SPF protection and transparency. In this regard, sunscreens using Nanophase's titania provide SPF protection of 17+ with transparency, at only 3% weight loading, whereas, based upon independent performance results, competitive products made with conventional titania are able to achieve SPF protection of no better than 12, require a weight loading of 5% or more and often exhibit a whitening effect on the skin. The weight loading percentage is a measure of the amount of material in a product, by weight, in relation to the weight of all of the materials in the product. The relationship between SPF and weight-loading is only roughly linear; however, at these performance points, sunscreens using the Company's titania provide 5.6 SPF points for each percent of weight loading versus 2.4 SPF points for the best-performing current competitive products. Nanophase's total-encapsulation coating, based on its DPE 31 33 process, also makes Nanophase's titania compatible with certain skin-product ingredients, like self-tanning ingredients, with which competitive titania is not compatible. This compatibility enables cosmetics formulators to develop self-tanning products which offer chemical-free protection from excessive exposure to UV rays. Cosmetic Colorants Through its PVS and DPE processes, the Company has engineered nanocrystalline brown, red and black iron oxides for use as coloring agents in cosmetics. Because of their visible transparency, these iron oxides can intensely color the skin without the caking or streaking effects caused by conventional opaque coloring agents. This is due to the nanometer-sized particles of Nanophase's iron oxides which absorb light without significant visible scattering, thereby providing color without opacity. In addition, the nearly spherical particles of Nanophase's iron oxides enable them to be discretely encapsulated and readily dispersed to create smooth, free-flowing cosmetic foundations which cosmetics formulators can blend to more closely match varying skin tones. INDUSTRIAL CATALYSTS Catalysts are materials that help convert, or accelerate the conversion of, one chemical into another. The Company's PVS process allows for the fabrication of two distinct types of solid catalysts: (i) a single pure material, such as iron oxide, which is a widely used chemical-process catalyst for the synthesis of hydrogen, ammonia and other bulk chemicals, and (ii) composite materials in which a nanocrystalline metal, such as palladium, is deposited on a larger substrate. This latter catalyst has a broad range of applications, including polymer synthesis, hydrogen peroxide production and the conversion of petroleum feedstock to higher value chemicals. The activity of a catalyst (i.e., the amount of desired product that can be produced per unit weight of catalytic material) is an important measure of its efficacy, and is related to a number of physical properties of the catalyst, including surface area, particle size and the reactivity of atoms on the surface of the catalytic material. Nanocrystalline materials offer better performance as catalysts because they have a higher proportion of catalytically active surface atoms than conventional materials. In addition to enhanced reactivity, the Company's materials can potentially reduce costs because less catalyst is needed to achieve a desired level of activity. Nanophase is developing a process to directly deposit nanocrystalline metals on a substrate for use by DuPont as a catalyst in large-scale chemical production. Early measurements have shown a two to fourfold increase in catalytic activity over the current, chemically produced DuPont catalyst. The Company is working with DuPont to meet specific performance requirements for this catalyst. The Company has also begun an early-stage development program with a Fortune 50 chemical company to produce catalysts comprised of nanocrystalline metal oxides on larger substrates. Based on the Company's discussions, both internally and with potential customers, additional potential applications for PVS-produced heterogeneous catalysts include wash coats for automotive catalysts and surface-enhanced catalysts for the chemical-process industry. TECHNOLOGICALLY-SIMILAR APPLICATIONS Although the Company focuses its efforts on product applications in the above-mentioned markets, the Company believes there is a broad range of technologically-similar applications, the performances of which could be substantially improved by utilizing the Company's materials and technologies without extensive additional engineering. Based on the Company's discussions, both internally and with potential customers, these include applications for fibers, textiles, plastics, paper, optical polymers, pigments and other specialty products. These applications are primarily based on the coating or dispersion of nanocrystalline materials produced by the PVS process. The Company only pursues those specialty applications which fit into its business strategy and which receive substantial support from a significant prospective customer. 32 34 THE COMPANY'S TECHNOLOGIES Nanophase has developed and employs several related technologies for the engineering and production of nanocrystalline materials and product applications, including technologies for the synthesis, surface-treatment and dispersion of nanocrystalline materials and the fabrication of structural ceramic components. The Company also is engaged in ongoing research and technology-licensing activities as part of its strategy to maintain a technical and commercial leadership position in the field of nanocrystalline materials. The PVS Process The Company uses its patented PVS process to produce nanocrystalline powders. The PVS process is based on the formation of a physical vapor from a selected metallic or ceramic material which is fed through a plasma reactor and heated to a temperature above its melting point. As the temperature rises, the atoms of this material evaporate from its surface into a stream of flowing vapor. These evaporated atoms are then mixed with selected gases which chemically react with the atoms. Additional gases then cool the atoms sufficiently to condense the vapor into solid, nearly spherical clusters of molecules. The flowing gas transports the resulting clusters to a collection vessel. The rapid transport and cooling of the nanometric particles produce a weakly agglomerated powder. - ------------------------------------------------------------------------------- THE PVS PROCESS - ------------------------------------------------------------------------------- [CHART] The Company holds two patents relating to its PVS process which expire in 2013; one covers the process itself, while the other covers the apparatus used in the process. The Company's plasma reactor embodies proprietary features which enable the production of high-quality materials at high-volume and competitive cost. Nanophase utilizes its PVS process to exploit the relative advantages of physical versus chemical synthesis of nanocrystalline materials. These advantages include the production of nanocrystalline materials with particles that are nearly spherical, virtually free of chemical residue, uniformly small, not strongly agglomerated, and easily engineered. The Company believes that the PVS process is a superior commercial process in the degree of control that can be exercised over particle size and particle size distribution. By means of controlled and subtle modifications to the PVS process (e.g., the evaporation rate, the type or pressure of the gas, or how quickly the 33 35 flow of gas carries the clusters to the collection vessel), the Company can control the size of a material's particles, thereby altering the traits of a substance. The Company is thus able to engineer and produce a wide range of materials and products without substantial process and product re-engineering. In 1995, the Company's PVS process received the R&D 100 Award given each year by R&D Magazine to recognize the 100 most technologically significant new products and processes in the world. Surface Treatments (The DPE Process) Many of the applications that the Company is pursuing require further engineering of the particles produced in the PVS process in order to meet specific application requirements. To satisfy these requirements, the Company has developed a variety of surface-treatment technologies to stabilize, alter or enhance the performance of nanocrystalline particles, together with technologies to enable the particles to be dispersed in fluids or polymers. At the core of these surface-treatment and dispersion technologies is Nanophase's proprietary DPE process, which enables Nanophase to completely surround each nanocrystalline particle with a durable coating. The Company has applied for a patent for its DPE process. The DPE process can coat the surface of each nanometer-sized particle produced by the PVS process with a proprietary polymer that is not removed by subsequent processing. Traditional coating technologies employ strand-like polymers that cannot completely cover the surfaces of nanometric particles. The Company's DPE process uses polymers that are shaped like hands. When the nanometer-sized particles are coated, the fingers of the hand collapse and completely encapsulate each particle with a thin polymeric shell. This shell also can be engineered to contain covalently bound spacer groups of controllable size that function to prevent particles from sticking to each other. The coatings enable the particles to be uniformly dispersed in a wide range of media, including water, cosmetic emollients, plastics and polymers, thus enabling these materials to be used in applications ranging from highly transparent sunscreens to dense opaque coatings. Net-Shaping Nanophase has developed a proprietary process whereby it net-shapes its nanocrystalline ceramic materials produced by the PVS process to rapidly fabricate precise, high-tolerance industrial ceramic parts without costly machining. This net-shaping technology was developed in collaboration with the Company's subcontractors, Lockheed Missiles & Space Co., Inc. ("LMSC") and Caterpillar, Inc., under an Advanced Technology Program ("ATP") contract funded by the U.S. Department of Commerce. The Nanophase technologies relevant to net-shaping involve (i) the production of nanocrystalline ceramic materials in commercial quantities, (ii) the consolidation of Nanophase's ceramic materials into dense nanocrystalline preforms without exaggerated particle growth, and (iii) net-shape forming of fully-dense, precisely-shaped ceramic parts. 34 36 - ------------------------------------------------------------------------------- NET SHAPING PROCESS - ------------------------------------------------------------------------------- [CHART] The conventional fabrication of structural ceramics involves machining that uses diamond tools. This process is costly, time consuming and often produces highly stressed ceramic parts and components with structural flaws. Nanophase's process enables fabrication of ceramic parts and components using significantly lower temperatures and pressures than used by conventional fabrication methods (e.g., 1300-1500 degreesC and 2000-4000 psi, as compared to up to 1700 degreesC and 100,000 psi). This technology enables the Company to fabricate dimensionally precise ceramic components in a short period of time without costly machining (e.g., 15 to 30 minutes for the Company's process as opposed to 4 to 8 hours for conventional machining). This rapid deformation processing is made possible by the consistent ultrafine particle size of the Company's nanocrystalline ceramic materials, the Company's ability to control the consolidation of such particles into preforms of high and uniform density, and the ability of the ultrafine particles to easily slide over one another in the forming process. The Company's net-shaping technology produces ceramic products with a variety of detailed shapes, high tolerances and smooth surface finishes that can be tailored to a customer's needs. Following the successful completion of the ATP program, the Company entered into a research, development and prototyping agreement with LMSC whereby the Company funds LMSC to perform design, prototyping and research and development tasks related to net-shaping using technology developed during the ATP project. LMSC currently designs, engineers and fabricates prototypes to the Company's specifications for the Company's commercial customers. Technology developed during the ATP project is jointly owned by the Company and LMSC. New technology developed under the current arrangement between LMSC and the Company is wholly-owned by the Company and, under the terms of the arrangement, LMSC can use the newly-developed technology only for its internal research. Other Technologies The Company constantly seeks to develop new technologies relating to nanocrystalline-based materials through ongoing research and development activities and collaborations with industrial, university and government research programs. For example, the Company is developing a new generation of metallic and ceramic precursors to be processed into nanocrystalline materials. Such activities are intended to enable the Company to develop new product applications and offer more materials with enhanced capabilities. 35 37 MANUFACTURING AND FACILITIES Nanophase operates a 20,000 square-foot production and research facility in Burr Ridge, Illinois, a suburb of Chicago, which also serves as the Company's administrative headquarters. The Company also operates a smaller facility in Chicago, Illinois, for coating nanocrystalline materials using its DPE process. The Company believes its Burr Ridge facility is the first in the world that is dedicated to the commercial-scale development and production of physically synthesized nanocrystalline materials. The Company's operations in Burr Ridge are registered under ISO 9001 standards, and the Company believes its manufacturing operations are in compliance with the cGMP requirements of the FDA. Through the first three quarters of 1997, 15 PVS plasma reactors were operational and producing various nanocrystalline materials at the Burr Ridge facility. The throughput of each reactor depends on many factors, including the mix of products produced, the commencement, expiration or termination of development programs, the status of tests and evaluations of samples and prototypes and production yields. In the third quarter of 1997, the Burr Ridge facility operated 24 hours a day, seven days a week. Each PVS plasma reactor is comprised of modular equipment which is designed and assembled to the Company's proprietary specifications. These modular reactors provide flexibility in the expansion of the Company's manufacturing capability. In the third quarter of 1997, the Company began the installation of eight additional PVS plasma reactors in the Burr Ridge facility. The Company expects that such PVS plasma reactors will be operational by the end of 1997. In addition, the Company expects to increase the throughput per reactor as it increases the efficiency and yields of its PVS process and decreases the amount of downtime for each reactor. The Company believes that additional manufacturing capacity will be required in 1998 and intends to use a portion of the net proceeds from this offering for the expansion of its manufacturing facilities. See "Use of Proceeds." Also operational within the Burr Ridge facility is a quality control laboratory designed for the dual purpose of validating operations to cGMP and ISO standards, and production process control. This laboratory is equipped to handle all routine analytical and in-process techniques that are currently required by the Company. In addition, capability for specialized analytical and physical measurements currently is available at Argonne upon terms which the Company believes are reasonable and adequate. The Company leases its Burr Ridge facility pursuant to an agreement which expires in September 1999. The Company has options to extend the lease for up to five additional years. Based on the Company's current product mix, the Company's coating facility has the capacity to coat those nanocrystalline materials which it desires to coat. The Company believes that its coating capacity is adequate to support the Company's anticipated 1998 production plans. The Company subleases its Chicago facility pursuant to a one-year agreement which automatically renews unless terminated by either party upon proper notice. MARKETING The Company believes that one of its principal strengths is its marketing department, the members of which have experience in each of the Company's targeted markets. These individuals are often teamed with the Company's scientists and researchers to demonstrate the advantages of the Company's materials and product applications to potential customers. The Company's scientists, engineers and marketing personnel attend and speak at advanced materials symposia, publish articles in scientific journals and participate in selected industry trade shows. In addition, the Company uses a web page on the internet, advertisements in selected industry and trade journals, and specification sheets and corporate brochures. The Company also markets its materials through distributors in certain application areas where the requirements for ongoing development and technical support by Nanophase are not substantial, or where the distributor has existing customer relationships, marketing or post-processing infrastructure, or companion products or services that may enable Nanophase to enter the market more quickly. For example, pursuant to a global distribution agreement, WCD exclusively distributes Nanophase's nanocrystalline titania, iron oxides and zinc oxide to the cosmetics and skin-care market. See "--Customers and Applications--Cosmetics and Skin-Care." 36 38 As part of its strategy to gain access to foreign markets, Nanophase has entered into an agreement with a subsidiary of Itochu, formerly C. Itoh, for the distribution of Nanophase's materials in broad-based industrial markets throughout Asia. The agreement is intended to enable Nanophase to quickly establish foothold positions in Asian markets by utilizing the technology and market-support capabilities of Itochu. The agreement does not target specific materials or applications; however, Itochu is pursuing high-volume industrial applications in electronics, industrial ceramics and catalysts. Because virtually all of the product applications for the Company's materials are new and innovative, in order for the Company to penetrate its targeted markets, it must participate in a multi-step process that includes initial discussions of the product application which highlight the advantages of the Company's nanocrystalline materials, proof of concept, proof of feasibility within the specific application, and evaluations of cost and manufacturability. Completion of this evaluation process usually takes at least 18 months, and may take several years. RESEARCH AND DEVELOPMENT The near-term objective of the Company's research and process-development activities is to develop and consistently produce sufficient commercial quantities of application-specific nanocrystalline materials to meet the Company's near-term requirements. Although the Company has de-emphasized the pursuit of revenue from government research contracts, a key component of the Company's long-term research and development strategy is to identify and develop relationships with leading industrial, university and government research programs across the United States and internationally to leverage the Company's technological and scientific capabilities. The Company believes that these research relationships may provide accelerated introduction of new technologies into its product applications, early indications of new technology developments which could enhance or compete with the Company's nanocrystalline materials, and high-value improvements in its current key technologies. The Company will also continue its efforts to attract and retain top scientists and engineers, which management believes will enable the Company to maintain a long-term leadership position in the nanocrystalline materials field. The Company's total research and development expenses during the nine months ended September 30, 1997 and fiscal years 1996, 1995 and 1994 were $571,210 and $677,284, $485,059 and $456,162, respectively. The future success of the Company will depend in large part upon its ability to keep pace with evolving advanced materials technologies and industry standards, and there can be no assurance it will be able to do so. See "Risk Factors--Rapid Technological Change" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS The objective of Nanophase's intellectual property activities is to implement ongoing strategies that maximize and protect the proprietary rights of the Company. These strategies encompass (i) obtaining patents and trademarks based on Nanophase inventions and products, and (ii) licensing third-party patents to expand the Company's technology base and prevent Nanophase from being blocked should future developments require use of technology covered by those patents. To date, the Company has not been required to license technologies or design around other parties' patents in order to avoid claims of patent infringement. Nanophase currently owns or licenses an aggregate of 16 United States patents and patent applications: two issued patents owned directly by Nanophase; three pending patent applications owned directly by Nanophase; and eleven patents licensed from third parties. Two United States patents have been issued to Nanophase: one covering its PVS process for the synthesis of nanocrystalline materials, and the other covering the related apparatus. The patents expire in July 2013. Additional United States patent applications filed by the Company include applications relating to nanocrystalline materials, plasma sensors and the coating of metal oxides. Foreign patent applications owned directly by Nanophase are pending in Australia, Europe and Japan for the PVS process and apparatus. An international patent application owned by the Company for the coating of ceramic powders is also pending 37 39 under the Patent Cooperation Treaty, with Australia, Canada, Europe and Japan designated for the national phase of the application. The Company holds the following licenses of United States patents: an exclusive worldwide license of two patents owned by ARCH Development Corporation which embody a laboratory-scale method and apparatus for making nanocrystalline materials; a non-exclusive license from Research Development Corporation of Japan of four patents which embody early laboratory-scale work in the physical synthesis of nanocrystalline materials; a non-exclusive license of two patents owned by Hitachi, Ltd. which are related to the synthesis of nanocrystalline materials; and a remainder-exclusive license of three patents held by Cornell University relating to a laboratory-scale process for net-shaping of a limited range of materials. Other than the license from Research Development Corporation of Japan, which remains in force until May 2006 and is extendable upon further agreement, each of the licenses lasts for the life of their respective patents. Under each of the licenses, the Company is obligated to pay the licensor royalties equal to a percentage of net sales of products which embody the licensed technology. The Company requires its employees, consultants, outside scientific collaborators and other advisors to execute confidentiality and proprietary rights agreements upon the commencement of employment or consulting relationships with the Company. These agreements generally provide that all confidential information developed or made known to the individual during the course of the individual's relationship with the Company will be kept confidential and will not be disclosed to third parties except in specific circumstances. In the case of research employees, the agreements also provide that all inventions made by the individual shall be the exclusive property of the Company. There can be no assurance, however, that these agreements will provide meaningful protection for the Company's trade secrets, know-how or patent rights or will provide the Company with adequate remedies in the event of unauthorized use or disclosure of such information. In addition, because none of the Company's employees have entered into noncompetition agreements with the Company, they may become competitors of the Company upon termination of employment. See "Risk Factors--Dependence on Patents and Protection of Proprietary Information." COMPETITION Within each of its targeted markets and product applications, Nanophase faces current and potential competition from numerous chemical companies, as well as the in-house capabilities of several of its current and potential customers. For example, with regard to semiconductor wafer polishing, Cabot, Rodel Incorporated, Fujimi Corporation (of Japan) and Solution Technology Incorporated, all market polishing slurries for CMP. In addition, Cabot, Baikowski International Corporation and Norton Company (a unit of Compagnie De Saint-Gobain) all manufacture their own ultrafine alumina. In the cosmetics and skin-care market, various companies manufacture their own sub-micron titania (Tioxide Specialties Limited, Tayca Corporation (of Japan), Ishihara Sangyo Kaisha, Ltd., Kemira Oy, Degussa AG and DuPont), iron oxide (Sun Chemical Corporation, Harcros Pigments Incorporated) and zinc oxide (Zinc Corporation of America) by chemical or other means. In structural ceramics, the Company competes against manufacturers of ceramic composites who machine such composites for specific product applications. In the catalysts market, the Company faces competition from companies that chemically deposit metal oxides onto substrates. Although Nanophase believes that its materials and technologies are superior to the competitive materials and technologies that are utilized by these companies, such companies represent significant competitive risks to Nanophase because they have substantially greater financial and technical resources, larger research and development staffs, and greater manufacturing and marketing capabilities than the Company. See "Risk Factors--Competition." The Company also faces potential competition from Vacuum Metallurgical Co., Ltd. of Japan ("Vacuum Metallurgical"), which manufactures nanocrystalline materials and equipment. Currently, the Company does not compete with Vacuum Metallurgical, but there can be no assurance that Vacuum Metallurgical will not develop products or manufacturing capabilities to compete with the Company in the future. Potential competitive risks are also represented by numerous small development companies engaged in the development of nanocrystalline materials, such as Plasma Quench Technologies, Inc. and Nanopowder Enterprises, Inc. Most of these companies are associated with university or national laboratories and use chemical and physical methods to produce nanocrystalline materials. Nanophase believes that most of such companies are engaged 38 40 primarily in funded research, and is not aware of any such company with commercial production capability. However, there can be no assurance that such companies will not represent significant competitive risks in the future. See "Risk Factors--Competition." GOVERNMENTAL REGULATIONS The Company's Chicago facility, which houses its coating operations, is a "small quantity generator" of hazardous materials, including ethanol, under RCRA and, as a result, is subject to stringent federal, state and local regulations governing the handling, storage and disposal of such materials. To date, the Company has not been required to make substantial expenditures for preventive or remedial action with respect to the hazardous materials it uses. The manufacture and use of certain of the products which contain the Company's nanocrystalline materials are also subject to governmental regulation. As a result, the Company is required to adhere to the FDA's cGMP requirements and similar regulations in other countries which include testing, control and documentation requirements enforced by periodic inspections. In addition, both of the Company's facilities and all of its operations are subject to the plant and laboratory safety requirements of various occupational safety and health laws. To date, those regulations have not materially restricted or impeded the Company's operations. See "Risk Factors--Governmental Regulations." EMPLOYEES On September 30, 1997, the Company had a total of 61 full-time employees, 11 of whom hold advanced degrees. Of the full-time employees, 9 are engaged in research, development and engineering, 32 are engaged in manufacturing, 4 are engaged in quality control, 7 are engaged in marketing and sales, and 9 are engaged in general management, finance and administration. The Company also currently engages two scientists as consultants on a regular basis, one of whom is Dr. Richard W. Siegel, a co-founder and director of the Company. None of the Company's employees is covered by a collective bargaining agreement. The Company considers its relations with its employees to be good. LEGAL PROCEEDINGS The Company is not a party to any litigation and is not aware of any pending or threatened litigation against the Company that could have a material adverse effect on the Company's business, results of operations or financial condition. 39 41 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The following table sets forth certain information with respect to the executive officers and directors of the Company:
NAME AGE POSITION Robert W. Cross........................... 60 President, Chief Executive Officer and Director Dennis J. Nowak........................... 47 Vice President--Finance and Administration, Chief Financial Officer, Treasurer and Secretary Richard W. Brotzman, Ph.D................. 44 Vice President--Research Donald J. Freed, Ph.D..................... 55 Vice President--Marketing Robert M. Kelly........................... 51 Vice President--Cosmetic Products Dennis J. Nagle........................... 45 Vice President--Manufacturing John C. Parker, Ph.D...................... 36 Vice President--Technology Leonard A. Batterson(1)(2)................ 53 Chairman of the Board of Directors Steven Lazarus(1)(2)...................... 66 Director Robert W. Shaw, Jr., Ph.D.(1)(2).......... 56 Director Richard W. Siegel, Ph.D................... 60 Director
- ------------------------------ (1) Member of Compensation Committee. (2) Member of Audit Committee. Robert W. Cross has served as President and Chief Executive Officer of Nanophase since February 1993. He has extensive experience as an entrepreneurial chief executive officer in developmental companies and in the commercialization of complex technologies. He has also served as chief executive officer of Cross Technologies, Inc. ("CTI") since 1990. CTI is a holding company that previously developed secure information systems for U.S. Government and North American Treaty Organization intelligence agencies. For the 20 years prior, Mr. Cross served primarily as chief executive officer or interim management for developmental high-technology venture-backed companies. Mr. Cross' previous positions included Chairman and Chief Executive Officer, Delta Data Systems Corp.; President and Chief Executive Officer, Columbia Data Products, Inc.; and Special Counsel, Control Video Corp. (predecessor to America Online). In 1968 and 1969, Mr. Cross was General Counsel to Electronic Data Systems Corp., Dallas. From 1964 to 1968, he was a corporate finance attorney with Winthrop, Stimson, Putnam & Roberts in New York. He holds BSBA and J.D. degrees from Washington University in St. Louis. In 1995, Mr. Cross served as chairman of the Gorham/Intertech International Conference on Nanostructured Materials and Coatings. Dennis J. Nowak has served as Vice President--Finance and Administration, Chief Financial Officer, Treasurer and Secretary of Nanophase since joining the Company in September 1996. From October 1991 to September 1996, Mr. Nowak was a partner in the accounting firm of Ernst & Young LLP, where he specialized in financial management and audit services for emerging high-technology companies. Mr. Nowak has more than 20 years experience as a public accountant. He holds a B.S. degree from Indiana University. Richard W. Brotzman joined the Company in July 1994 and has served as Vice President--Research of Nanophase since July 1996. He is the inventor of the Company's coating technology. Dr. Brotzman has 15 years experience in research and development of advanced materials leading to new products. His technical areas of expertise include interfacial adhesion and chemistry, self-assembled polymeric coatings, nanosized inorganic powders, powder processing, reactive coupling agents, solgel derived protective coatings, non-destructive evaluation of composites, neo-debye relaxation in green inorganic gels, asymmetric membranes and plasma processing. From January 1991 to July 1994, Dr. Brotzman served as Director of Research at TPL, Inc., an advanced materials company. He holds a B.S. degree in chemical engineering from Lafayette 40 42 College, an M.S. degree in engineering and applied science from the University of California, Davis and a Ph.D. in chemistry from the University of Washington. Donald J. Freed has served as Vice President--Marketing of Nanophase since April 1995. He has extensive experience in the commercial development of new technology products, and has been responsible for the successful startup of advanced-materials initiatives in three Fortune 50 companies. From 1985 to April 1995, Dr. Freed held senior marketing, strategic planning and product-development positions with AMP, Inc., and certain of its subsidiaries, primarily in the development and marketing of advanced materials for microelectronics and photonics. From 1980 to 1985, he held similar positions with GTE Corp. and Imperial Chemical Industries, PLC. Previously, Dr. Freed held various scientific and managerial positions at AT&T Bell Laboratories. He holds a B.A. degree in chemistry from Queens College and an A.M. degree and Ph.D. in chemistry from Harvard University. Dr. Freed is a member of The Illinois Coalition and is past chairman of the International Standards Council for Electronic Interconnection and Packaging Technologies. Robert M. Kelly has served as Vice President--Cosmetic Products of Nanophase since joining the Company in March 1996. He has more than 20 years experience in the marketing of cosmetic, food and pharmaceutical ingredients. From July 1994 to January 1996, Mr. Kelly was Vice President of Sales and Marketing at Crompton & Knowles Corporation, a cosmetic, food and pharmaceutical ingredients company. From January 1992 to July 1994, he was the director of marketing at Milwaukee Seasonings, Inc., a subsidiary of CPC International, Inc. Prior to 1992, he held senior marketing management positions with Warner Jenkinson and Johnson & Johnson. He holds a B.A. degree in business from Parsons College and an M.B.A from the University of Chicago. Dennis J. Nagle has served as Vice President--Manufacturing of Nanophase since joining the Company in July 1996. From March 1991 to March 1996, Mr. Nagle was Manufacturing Manager of the Electronic Chemicals Division of Ashland Chemical. From April 1977 to March 1991, he held positions of progressively increasing responsibility in manufacturing management with the Chemical Division of Olin Corporation. Mr. Nagle holds combined bachelors degrees in chemical engineering and engineering administration from Michigan Technological University. John C. Parker has served as Vice President--Technology of Nanophase since 1993 and has been a principal scientist with the Company since June 1990. Dr. Parker was the principal developer of the Company's PVS production system. He has a broad range of experience in the synthesis, processing and characterization of semiconductor and ceramic materials. Prior to joining Nanophase, Dr. Parker was a research associate at Argonne where he participated in the development and characterization of chemical vapor deposition-grown thin films and nanocrystalline ceramics. Dr. Parker holds a B.S. degree in physics from Northeastern Illinois University and an M.S. degree and Ph.D. in physics from Purdue University. He has published 37 refereed papers and given numerous scientific and technical presentations at national and international conferences and private institutions. Dr. Parker co-chaired the symposium on Nanophase and Nanocomposite Materials at the 1992 and 1996 Materials Research Society fall meetings. Leonard A. Batterson has served as a director and as Chairman of the Board of Nanophase since 1991. He is Chairman and Chief Executive Officer of Batterson Venture Partners L.L.C., a venture capital investment firm which he founded in 1995. In 1988, he co-founded and continues as Managing General Partner of Batterson Johnson and Wang L.P., a venture capital fund. The Batterson Johnson & Wang L.P. fund, a stockholder of the Company, invest in the following industries: publishing, communications, telecommunications, medical, biotechnology, materials, retailing, consumer products, manufacturing, computers and software. As Managing General Partner, Mr. Batterson manages its daily operations, investor relationships, reporting and investment strategy. Prior to 1988, he was Director of the Venture Capital Division of the Allstate Insurance Company. Mr. Batterson is Chairman of the Board of LinksCorp, Inc., a golf course management company, and previously served as Chairman and Chief Executive Officer of the Dytel Corporation and Receptor Laboratories, and as Chief Executive Officer of Lamb Enterprises. He holds a B.A. degree from Washington University, a J.D. degree from Washington University Law School and an M.B.A. degree from the Harvard Graduate School of Business Administration. 41 43 Steven Lazarus has served as a director of Nanophase since 1991. Mr. Lazarus is Managing Director of ARCH Venture Partners L.P. From 1986 to 1994, he served concurrently as President and Chief Executive Officer of ARCH Development Corporation and Associate Dean of the Graduate School of Business of the University of Chicago. Prior to joining ARCH Development Corporation, Mr. Lazarus held a variety of positions at Baxter Travenol Laboratories, Inc., the predecessor of Baxter Healthcare Corporation, including Group Vice President of the Health Care Services Group and Senior Vice President for Technology. From 1972 to 1974, Mr. Lazarus served in Washington, D.C. as Deputy Assistant Secretary of Commerce for East-West Trade and was founder and first Director of the Bureau of East-West Trade. He is a 21-year veteran of the U.S. Navy, retiring in 1973 with the rank of captain. He holds a bachelors degree with honors from Dartmouth College and an M.B.A. degree with high distinction from the Harvard Graduate School of Business Administration, where he was also a Baker Scholar. Mr. Lazarus is a director of Amgen Corporation, Primark Corporation, Illinois Superconductor Corporation and New Era of Networks, Inc., all of which are public companies. Robert W. Shaw, Jr. has served as a director of Nanophase since 1991. He is the founder of Arete Ventures, Inc., President of Arete Corporation and Managing Partner for the Utech Funds. Dr. Shaw is experienced in both venture capital and consulting for the electric utility industry. Prior to forming Arete Ventures, Inc. in 1983, Dr. Shaw was Senior Vice President of Booz, Allen & Hamilton's Energy Division and a member of the firm's board of directors. Earlier in his career, he conducted materials and electronics research at Bell Laboratories and at the Cavendish Laboratory in the U.K. He serves as a director and Chairman of Proton Energy Systems, Inc. and Evergreen Solar, Inc. He holds a Ph.D. in applied physics from Stanford University, an M.P.A. from American University and M.S. and B.E.P. degrees from Cornell University. Richard W. Siegel is a co-founder of Nanophase and has served as a director of Nanophase since 1989. Dr. Siegel is an internationally renowned scientist in the field of nanocrystalline materials. During his tenure on the research staff at Argonne from July 1974 to May 1995, he was the principal scientist engaged in research with the laboratory-scale synthesis process that was the progenitor of Nanophase's PVS production system. He currently is the Robert W. Hunt Professor and Head of the Materials Science and Engineering Department of Rensselaer Polytechnic Institute, a position he has held since June 1995. During 1995, he was also a visiting professor at the Max Planck Institute for Microstructure Physics in Germany on an Alexander von Humboldt Research Prize. He has served on the Council of the Materials Research Society and as Chairman of the International Committee on Nanostructured Materials. He also served on the Committee on Materials with Sub-Micron Sized Microstructures of the National Materials Advisory Board and was the co-chairman of the Study Panel on Clusters and Cluster-Assembled Materials for the U.S. Department of Energy. Dr. Siegel holds an A.B. degree in physics from Williams College and an M.S. degree and Ph.D. from the University of Illinois at Urbana/Champaign. ADVISORY BOARD The Company recently formed an advisory board (the "Advisory Board") to assist the Company in analyzing, developing and implementing its long-term business growth strategies. The Advisory Board will advise and consult with management and the Board of Directors of the Company as needed. Though the members of the Advisory Board have outside commitments that may limit their availability to the Company, each member has agreed to devote at least a certain number of hours to the Company over the term of their service. The Company has entered into a one-year consulting agreement with each of the members of the Advisory Board, pursuant to which each member has been granted stock options to purchase 10,000 shares of Common Stock as compensation for his services on the Advisory Board. Members of the Advisory Board will also be reimbursed for reasonable out-of-pocket expenses incurred in connection with their services to the Company. The members of the Advisory Board are Casey Cowell, James V. Kimsey and Jonathan N. Zakin. Casey Cowell is Vice Chairman of 3Com Corporation ("3Com") and is the founder of U.S. Robotics Corporation ("U.S. Robotics"). Prior to the combination of U.S. Robotics with 3Com in June 1997, 42 44 Mr. Cowell was Chairman and Chief Executive Officer of U.S. Robotics. Mr. Cowell also serves as a director of Eagle River Interactive, Inc., May & Speh, Inc., and Northwestern Memorial Corp., the parent company of Northwestern Memorial Hospital, and is a trustee of the Illinois Institute of Technology. Mr. Cowell holds a bachelors degree in economics from the University of Chicago. James V. Kimsey is the founder and Chairman Emeritus of America Online, Inc. ("AOL"). He was formerly Chairman and Chief Executive Officer of AOL, and continues to serve AOL as a member of its board of directors. Mr. Kimsey also serves as a director of Capital One Financial Corporation, Capital One Bank, EduCap, Inc. and BTG Incorporated, and is an advisory director of Batterson Venture Partners and Carousel Capital. Mr. Kimsey is a graduate of the United States Military Academy at West Point. Jonathan N. Zakin was Executive Vice President, Business Development and Corporate Strategy, of U.S. Robotics prior to its combination with 3Com in June 1997. Currently, Mr. Zakin is a private investor. He holds a bachelors degree in management from New York University and an M.B.A. degree from the Harvard Graduate School of Business Administration. BOARD OF DIRECTORS The Company's Board of Directors is divided into three classes with staggered three-year terms. The terms of Mr. Cross and Dr. Shaw expire at the annual meeting of the Company's stockholders in 1998, the terms of Mr. Lazarus and Dr. Siegel expire at the annual meeting of the Company's stockholders in 1999, and Mr. Batterson's term expires at the annual meeting of the Company's stockholders in 2000. At each annual meeting of the Company's stockholders, the successors to the class of directors whose term expires at such annual meeting are elected for a three-year term. ARRANGEMENTS FOR NOMINATION AS DIRECTOR In connection with the sale of its Preferred Stock, the Company and certain of its stockholders entered into the Amended and Restated Shareholders' Agreement, dated as of March 16, 1994, as amended (the "Shareholders' Agreement"), pursuant to which they agreed that the Company's Board of Directors shall consist of (i) up to two individuals designated jointly by the holders of Common Stock, one of whom shall be the President of the Company, (ii) up to three individuals designated jointly by holders of the Company's Series C Convertible Preferred Stock ("Series C Preferred"), (iii) one individual designated jointly by certain holders of the Company's Series D Convertible Preferred Stock ("Series D Preferred") and (iv) one individual unrelated to any holder of Preferred Stock designated jointly by the members of the Company's Board of Directors who were elected pursuant to (i) and (ii). The Company's stockholders also agreed that as long as Batterson Johnson & Wang L.P. ("BJ&W") continues to own shares of Series D Preferred, they shall use their best efforts to elect Mr. Batterson as Chairman of the Company's Board of Directors. Of the current directors of the Company, Messrs. Cross and Lazarus were elected as nominees of the holders of Common Stock and Mr. Batterson and Drs. Shaw and Siegel were elected as nominees of the holders of the Series C Preferred. Substantially all of the material provisions of the Shareholders' Agreement, including the rights and obligations of the aforementioned parties to elect directors, will terminate upon the consummation of this offering. COMMITTEES OF THE BOARD OF DIRECTORS The Company's Board of Directors has appointed an Audit Committee and a Compensation Committee. The members of the Audit Committee are Messrs. Lazarus (Chairman) and Batterson and Dr. Shaw. The Audit Committee makes recommendations concerning the Company's engagement of independent public accountants, reviews the Company's annual audit, and reviews with the Company's independent public accountants the Company's internal controls and financial management policies. The members of the Compensation Committee are Messrs. Batterson (Chairman) and Lazarus and Dr. Shaw. The Compensation Committee establishes the Company's general compensation policy and recommends to the Company's Board of Directors compensation for the Company's officers and key employees. 43 45 COMPENSATION OF DIRECTORS Each director of the Company who is not an employee or consultant of the Company (the "Outside Directors") and is first elected to the Board of Directors after adoption of the Stock Option Plan will be granted stock options to purchase 10,000 shares of Common Stock at the fair market value of the Common Stock as determined by a committee appointed by the Company's Board of Directors (the "Committee") as of the date of issuance of each stock option. On the date of the annual meeting of the stockholders of the Company, commencing with the 1998 annual meeting, each Outside Director who is elected, re-elected or continues to serve as a director because his or her term has not expired, shall be granted stock options to purchase 2,000 shares of Common Stock; provided that no such automatic grant shall be made to an Outside Director who is first elected to the Board of Directors at the first such meeting or was first elected to the Board of Directors within three months prior to such annual meeting. One-third of the options granted to Outside Directors under the Stock Option Plan vest each year on the first three anniversaries of the grant date. All options granted under the Stock Option Plan to Outside Directors will be exercisable for a period of ten years. The Company does not pay cash compensation to its directors or Advisors for serving in such capacity. All Outside Directors, however, are reimbursed for their reasonable out-of-pocket expenses incurred in attending board and committee meetings. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Mr. Batterson, who is Chairman of the Compensation Committee, is the managing general partner of BJ&W. On the following dates, the Company issued to BJ&W the following number of shares of Series D Preferred at the following prices per share: 202,496 shares at $1.382 per share in March 1994; 163,904 shares at $1.727 per share in October 1994; 38,911 shares at $1.727 per share in April 1995; and 173,700 shares at $1.727 per share in November 1995. Mr. Lazarus, who is a member of the Compensation Committee, is the managing director of ARCH Venture Fund II, L.P. ("AVF II"). On the following dates, the Company issued to AVF II the following number of shares of Series D Preferred at the following prices per share: 294,971 shares at $1.382 per share in March 1994; 251,639 shares at $1.727 per share in October 1994; and 159,225 shares at $1.727 per share in November 1995. Dr. Shaw, who is a member of the Compensation Committee, is the managing general partner of (i) Arete Ventures Management Associates II, L.P., which is the managing general partner of UVCC Fund II ("UVCC II") and (ii) Arete Ventures Limited Partnership III, which is the managing general partner of UVCC II Parallel Fund, L.P. ("UVCC Parallel"). On the following dates, the Company issued to each of UVCC II and UVCC II Parallel the following number of shares of Series D Preferred at the following prices per share: 94,088 shares at $1.382 per share in March 1994; 83,955 shares at $1.727 per share in October 1994; 5,790 shares at $1.727 per share in April 1995; and 66,585 shares at $1.727 per share in November 1995. All of the above described shares of Series D Preferred will be converted into shares of Common Stock on a one-for-one basis upon the consummation of this offering. Pursuant to the Amended and Restated Registration Rights Agreement, dated as of March 16, 1994, as amended (the "Registration Rights Agreement"), BJ&W, AVF II, UVCC II and UVCC Parallel, as holders of shares of Common Stock issuable upon conversion of the shares of Series D Preferred, are entitled to certain demand registration rights. In addition, whenever the Company proposes to register any of its securities under the Securities Act, BJ&W, AVF II, UVCC II and UVCC Parallel may also, subject to certain restrictions, include their shares of Common Stock issuable upon conversion of the shares of Series D Preferred in such registration. See "Description of Capital Stock--Registration Rights." 44 46 EXECUTIVE COMPENSATION The following table sets forth information with respect to all compensation paid by the Company for services rendered during the fiscal year ended December 31, 1996, to its Chief Executive Officer and the other executive officers of the Company whose total annual salary and bonus exceeded $100,000 during the fiscal year ended December 31, 1996 (each, a "Named Executive Officer"). SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION ANNUAL COMPENSATION ------------ -------------------------------------- SECURITIES OTHER ANNUAL UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION OPTIONS COMPENSATION Robert W. Cross,.................. $151,800(1) $10,000(1) $-- 199,755 $4,685(2) President and Chief Executive Officer Donald J. Freed, Ph.D.,........... 105,625 -- -- 104,220 -- Vice President -- Marketing Richard W. Brotzman, Ph.D.,....... 102,615 -- -- 118,695 -- Vice President -- Research
- ------------------------- (1) The salary and bonus were paid to Cross Technologies, Inc., of which Mr. Cross is chief executive officer and the sole employee. (2) Represents the full dollar value of premiums paid by the Company with respect to life insurance for the benefit of Mr. Cross and his beneficiary. EMPLOYMENT AGREEMENTS The Company has entered into an employment agreement dated February 1994 with Robert W. Cross which continues his employment as President and Chief Executive Officer of the Company, which began in February 1993. Mr. Cross' employment agreement provides for an annual base salary of not less than $130,000. The agreement further provides that Mr. Cross is entitled to the reimbursement of expenses relating to commuting between the Company and his out-of-state residence and his lodging expenses in the Chicago area incurred as a result of his employment with the Company. Mr. Cross' employment agreement is automatically renewed for successive one year periods unless 90-day prior written notice of termination is given by the Company or Mr. Cross. If Mr. Cross' employment is terminated other than for "cause" (as such term is defined in Mr. Cross' employment agreement), Mr. Cross will receive severance benefits in an amount equal to Mr. Cross' base salary for 26 weeks. The Company has also entered into an employment agreement with Dennis J. Nowak, pursuant to which Mr. Nowak became Vice President -- Finance and Administration, Chief Financial Officer, Treasurer and Secretary of the Company effective September 1996. Mr. Nowak's employment agreement provides for an annual base salary of $140,000, with increases to be determined by the Company's Board of Directors, at its discretion. In addition, Mr. Nowak was granted options to purchase 57,900 shares of Common Stock at an exercise price of $3.886 per share, with options for one-fifth of such shares becoming exercisable on each of the first five anniversaries of Mr. Nowak's employment. If employed by the Company at such time, the agreement further provides that Mr. Nowak will be entitled to a bonus of $35,000 upon the Company's successful completion of an initial public offering and a bonus of $35,000 which was paid on the first anniversary of his employment. No term has been assigned to Mr. Nowak's employment agreement. If Mr. Nowak's employment is terminated other than for "cause" (as such term is defined in Mr. Nowak's employment agreement), Mr. Nowak will receive severance benefits in an amount equal to Mr. Nowak's base salary for 26 weeks. 45 47 OPTION GRANTS IN LAST FISCAL YEAR The following table contains information regarding the grant of stock options by the Company to the Named Executive Officers during 1996.
PERCENTAGE POTENTIAL REALIZABLE NUMBER OF OF TOTAL VALUE AT ASSUMED SHARES OPTIONS ANNUAL RATES OF STOCK UNDERLYING GRANTED TO PRICE APPRECIATION FOR OPTIONS EMPLOYEES IN EXERCISE OR EXPIRATION OPTION TERM(2) GRANTED FISCAL YEAR BASE PRICE DATE(1) 5% 10% Robert W. Cross................... 69,480 6.5% $1.727 03/01/06(3) $195,454 $ 311,228 130,275 12.2 3.886 11/07/06(4) 824,626 1,313,079 Donald J. Freed, Ph.D............. 46,320 4.3 1.727 03/01/06(3) 130,303 207,485 57,900 5.4 3.886 11/07/06(4) 366,500 583,590 Richard W. Brotzman, Ph.D. ....... 49,215 4.6 1.727 03/01/06(3) 138,447 220,453 69,480 6.5 3.886 11/07/06(4) 439,800 700,309
- ------------------------------ (1) The grant dates are ten years prior to the respective expiration dates. (2) Potential realizable value is calculated assuming that the fair market value on the date of the grant, which equals the exercise price, appreciates at the indicated annual rate (set by the Securities and Exchange Commission (the "Commission")), compounded annually, for the term of the option. Using the assumed initial public offering price of $10.00 for purposes of this calculation (pursuant to the rules of the Commission), the potential realizable values of the options granted in 1996 to Mr. Cross and Drs. Freed and Brotzman is approximately $3,253,798, $1,697,634 and $1,933,416, respectively, at a 5% assumed annual appreciation rate, and approximately $5,181,130, $2,703,199 and $3,078,642, respectively, at a 10% assumed annual appreciation rate. The 5% and 10% assumed rates of appreciation are mandated by the rules of the Commission and do not represent the Company's estimate or projection of future increases in the price of its Common Stock. (3) Subject to certain restrictions, these options vest pro rata over a five-year period on each of the first five anniversaries of the date of grant. (4) Subject to certain restrictions, these options vest eight years from the date of grant, subject to an earlier five-year period if specified performance targets for 1997 are met. FISCAL YEAR-END OPTION VALUES The following table contains information regarding the Named Executive Officers' unexercised options as of December 31, 1996. None of the Named Executive Officers exercised any options during 1996.
NUMBER OF SHARES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-THE-MONEY OPTIONS AS OF DECEMBER 31, 1996 OPTIONS AS OF DECEMBER 31, 1996(1) NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE Robert W. Cross................. 65,330/256,015 $243,406/$349,733 Donald J. Freed, Ph.D. ......... --/104,220 --/ 100,005 Richard W. Brotzman, Ph.D. ..... 5,790/141,855 19,999/ 186,250
- ------------------------------ (1) The value per option is calculated by subtracting the exercise price of the option from the fair market value of the option shares at December 31, 1996 of $3.886 per share, as determined by the Company's Board of Directors based on the most recent price prior to December 31, 1996 at which the Company had issued or agreed to issue Preferred Stock. 46 48 STOCK OPTION PLAN Effective January 13, 1992 and as amended and restated on April 6, 1997, the Company's Board of Directors adopted the Stock Option Plan, pursuant to which options to acquire up to 2,758,032 shares of Common Stock (2,671,182 of which are reserved for issuance to employees and consultants and 86,850 of which are reserved for issuance to Outside Directors) may be granted to the Company's employees, consultants or Outside Directors, as the Committee may from time to time designate. During any calendar year, stock options for no more than 100,000 shares of Common Stock may be granted to any individual. The stock options expire no more than ten years from the date of grant; provided, however, that in the case of stock options granted to individuals who at the time of such grant own more than 10% of the voting power of the Company's stock, the options shall expire no more than five years from the date of grant. 737,067 of the 1,557,684 currently outstanding options vest eight years following the grant date, subject to accelerated vesting if specified performance targets are met. Of the remaining 820,617 outstanding options, 803,247 vest over a five-year period and 17,370 vest over a three-year period. Exercise prices are determined by the Committee, but may not be less than the fair market value of the Common Stock as determined by the Committee as of the date of issuance of each stock option; provided, however, that exercise prices for options granted to employees who own more than 10% of the Company's Common Stock may not be less than 110% of the fair market value of the Common Stock as determined by the Committee as of the date of issuance of each such stock option. 401(K) PLAN Effective June 30, 1995, the Company adopted the Nanophase Technologies Corporation 401(k) and Profit Sharing Plan (the "401(k) Plan") covering all of the Company's employees who meet prescribed service requirements. Pursuant to the 401(k) Plan, employees may elect to reduce their current compensation by up to fifteen percent, but not to exceed the statutorily prescribed annual limit ($9,500 in 1997), and have the amount of such reduction contributed to the 401(k) Plan. The 401(k) Plan is intended to qualify under Section 401 of the Internal Revenue Code so that employee contributions to the 401(k) Plan, and income earned on such contributions, are not taxable to employees until withdrawn from the 401(k) Plan. Each participant's contributions are fully vested. The Company, at the sole discretion of the Company's Board of Directors, may make additional or "matching" contributions under the 401(k) Plan, which contributions are not to exceed statutorily prescribed limits. The Company has not made any such contributions to the 401(k) Plan since its inception. LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS Pursuant to the provisions of the Delaware General Corporation Law ("DGCL"), the Company, upon its reincorporation in Delaware, will adopt provisions in its Certificate of Incorporation which eliminate the personal liability of its directors to the Company or its stockholders for monetary damages for breach of their fiduciary duty as a director to the fullest extent permitted by the DGCL except for liability (i) for any breach of their duty of loyalty to the Company or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) for unlawful payments of dividends or unlawful stock repurchases or redemptions, or (iv) for any transaction from which the director derived an improper personal benefit. The provisions of the Company's Certificate of Incorporation do not affect a director's responsibilities under any other laws, such as the federal securities laws or state or federal environmental laws. The Certificate of Incorporation will also contain provisions which require the Company to indemnify its directors, and permit the Company to indemnify its officers and employees, to the fullest extent permitted by Delaware law, including those circumstances in which indemnification would otherwise be discretionary, except that the Company shall not be obligated to indemnify any such person (i) with respect to proceedings, claims or actions initiated or brought voluntarily by any such person and not by way of defense, or (ii) for any amounts paid in settlement of an action indemnified against by the Company without the prior written consent of the Company. Prior to consummation of this offering, the Company intends to (a) enter into indemnity agreements with each of its directors providing for such indemnification and (b) obtain directors' and officers' liability insurance. 47 49 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS In addition to transactions described under "Management--Compensation Committee Interlocks and Insider Participation," the following relationships and transactions have been effected involving the Company and its directors, executive officers and principal stockholders. The Company leased its original office space from ARCH Development Corporation, formerly an affiliate of Mr. Lazarus, a director of the Company, under a sublease agreement which expired in November 1996. Monthly lease payments amounted to $3,600. When the Company moved to its Burr Ridge facility in 1995, it entered into a sublease of this office space and received monthly rental payments under the sublease of $2,200 per month through November 1996. The Company entered into a consulting agreement with Dr. Richard W. Siegel, a co-founder and director of the Company, in May 1990. Pursuant to this agreement, Dr. Siegel renders consulting services to the Company with respect to applications for, and commercialization of, nanocrystalline materials. The original term of the agreement was for 5 years, and the agreement is renewable for successive one-year terms unless terminated by Dr. Siegel or the Company. Payment to Dr. Siegel under this agreement currently amounts to $2,500 per month. Prior to joining the Company in September 1996, Dennis J. Nowak, the Company's Vice President--Finance and Administration, Chief Financial Officer, Treasurer and Secretary, was a partner of Ernst & Young LLP, where he was responsible for overseeing the audit of the Company's financial statements. Ernst & Young LLP has been the Company's financial accountants since 1993. Pursuant to a severance benefit agreement with Dr. John C. Parker, the Company's Vice President--Technology, the Company has established a trust in the amount of $80,000. Interest was credited to the trust until the funds held in trust became equal to $80,000. Payments from the trust to Dr. Parker will be required in the event the Company terminates his employment, as defined in Dr. Parker's agreement, before November 15, 1999. Upon consummation of this offering, the funds in the trust will revert to the Company. The Company intends that any future transactions between the Company and its officers, directors and affiliates will be on terms no less favorable to the Company than can be obtained from unaffiliated third parties, and any transactions with such persons will be approved by a majority of the Company's outside directors or will be consistent with policies approved by such outside directors. 48 50 PRINCIPAL STOCKHOLDERS The following table sets forth certain information with respect to beneficial ownership of the Common Stock, as of October 31, 1997, assuming consummation of the Preferred Stock Conversion, and as adjusted to reflect the sale of Common Stock offered hereby, by (i) each person who is known by the Company to be the beneficial owner of more than 5% of the outstanding shares of Common Stock, (ii) each director of the Company, (iii) each Named Executive Officer and (iv) all directors and executive officers of the Company as a group.
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP PRIOR TO OFFERING(1) AFTER OFFERING(1) ----------------------- ----------------------- NUMBER OF NUMBER OF NAME SHARES PERCENT SHARES PERCENT Batterson Johnson & Wang L.P.................. 1,068,935(2) 12.7% 1,068,935(2) 8.0% Grace Investments, Ltd.(3).................... 1,042,200 12.7 1,042,200 7.9 ARCH Venture Fund Limited Partnership......... 768,088(4) 9.1 768,088(4) 5.7 ARCH Venture Fund II Limited Partnership(5)... 705,835 8.6 705,835 5.3 Harris & Harris Group, Inc.(6)................ 672,916 8.2 672,916 5.1 UVCC Fund II.................................. 450,842(7) 5.4 450,842(7) 3.4 UVCC II Parallel Fund, L.P.................... 450,842(7) 5.4 450,842(7) 3.4 AMT Associates Ltd. .......................... 450,058(8) 5.4 450,058(8) 3.4 Richard W. Siegel, Ph.D....................... 219,729(9) 2.7 219,729(9) 1.7 Robert W. Cross............................... 103,544(10) 1.2 103,544(10) * Richard W. Brotzman, Ph.D..................... 21,423(10) * 21,423(10) * Donald J. Freed, Ph.D......................... 9,264(10) * 9,264(10) * Leonard A. Batterson.......................... --(11) -- --(11) -- Steven Lazarus................................ --(12) -- --(12) -- Robert W. Shaw, Jr., Ph.D..................... --(13) -- --(13) -- All directors and executive officers as a group (11 persons).......................... 445,442(14) 5.4 445,442(14) 3.4
- ------------------------------ * Less than 1% (1) Beneficial ownership is determined in accordance with the rules of the Commission. Unless otherwise indicated below, the persons in the above table have sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned by them. (2) Includes 178,154 shares of Common Stock issuable upon exercise of warrants presently exercisable. Don Johnson and Sona Wang share voting and investment power with Mr. Batterson with respect to the shares of Common Stock beneficially held by BJ&W and, therefore, may be deemed to be beneficial owners of such shares. Mr. Johnson and Ms. Wang each disclaim this beneficial ownership. The address of the stockholder is 303 West Madison Street, Suite 1110, Chicago, Illinois 60606. (3) Bradford T. Whitmore has sole voting and investment power with respect to the shares of Common Stock beneficially held by Grace Investments, Ltd. and, therefore, may be deemed to be the beneficial owner of such shares. Mr. Whitmore disclaims this beneficial ownership. The address of the stockholder is 1560 Sherman Avenue, Suite 900, Evanston, Illinois 60201. (4) Includes 232,491 shares of Common Stock issuable upon exercise of warrants presently exercisable. The address of the stockholder is 135 South LaSalle Street, Suite 3702, Chicago, Illinois 60603. (5) The address of the stockholder is 135 South LaSalle Street, Suite 3702, Chicago, Illinois 60603. (6) Charles Harris, Mel Melsheimer and David Johnson share voting and investment power with respect to the shares of Common Stock beneficially held by Harris & Harris Group, Inc. and, therefore, may be deemed to be beneficial owners of such shares. Messrs. Harris, Melsheimer and Johnson each disclaim this beneficial ownership. The address of the stockholder is One Rockefeller Plaza, New York, New York 10020. (footnotes continued on following page) 49 51 (footnotes continued from previous page) (7) Includes 66,808 shares of Common Stock issuable upon exercise of warrants presently exercisable. The address of the stockholder is 6110 Executive Boulevard, Suite 1040, Rockville, Maryland 20852. (8) Consists of 142,497 shares of Common Stock and 43,981 shares of Common Stock issuable upon exercise of warrants presently exercisable, all of which are beneficially held by Advanced Material Technologies Venture Partner Limited ("AMT Venture"); 197,284 shares of Common Stock and 38,553 shares of Common Stock issuable upon exercise of warrants presently exercisable, all of which are beneficially held by AMT Capital, Ltd. ("AMT Capital"); and 21,200 shares of Common Stock and 6,543 shares of Common Stock issuable upon exercise of warrants presently exercisable, all of which are beneficially held by JHAM Limited Partnership ("JHAM"). AMT Associates Ltd. is general partner of AMT Venture, AMT Capital and JHAM. In such capacity, it shares voting and investment power with respect to the shares of Common Stock held by AMT Venture, AMT Capital and JHAM and, therefore, may be deemed to be the beneficial owner of the shares of Common Stock directly owned by AMT Venture, AMT Capital and JHAM. Tom Delimitros and Peter Walmsley share voting and investment power with respect to the shares of Common Stock beneficially held by AMT Associates Ltd. and, therefore, may be deemed to be beneficial owners of such shares. Messrs. Delimitros and Walmsley each disclaim such beneficial ownership. The address of AMT Associates Ltd. is 8204 Elmbrook, Suite 101, Dallas, Texas 75247. (9) Includes 28,950 shares of Common Stock issuable upon exercise of warrants presently exercisable and 38,098 shares of Common Stock issuable upon exercise of options exercisable currently or within 60 days of October 31, 1997. (10) Consists of shares of Common Stock issuable upon exercise of options exercisable currently or within 60 days of October 31, 1997. (11) Excludes 890,781 shares of Common Stock and 178,154 shares of Common Stock issuable upon exercise of warrants presently exercisable, all of which are beneficially held by BJ&W. Mr. Batterson is the managing general partner of BJ&W and in such capacity he shares voting and investment power with respect to the shares of Common Stock held by BJ&W and, therefore, may be deemed to be the beneficial owner of the shares of Common Stock directly owned by BJ&W. Mr. Batterson disclaims this beneficial ownership. (12) Excludes 535,597 shares of Common Stock and 232,491 shares of Common Stock issuable upon exercise of warrants presently exercisable, all of which are beneficially held by ARCH Venture Fund Limited Partnership ("AVFLP"); 705,835 shares of Common Stock held by ARCH Venture Fund II Limited Partnership ("AVF II"); and 14,034 shares of Common Stock held by ARCH Fund II Parallel, L.P. ("AFP"). Mr. Lazarus serves as the managing director of ARCH Venture Partners L.P. and has been granted power of attorney to act in the name of and for ARCH Development Corporation ("ADC") with respect to ADC's role as general partner of AVFLP. Mr. Lazarus also serves as managing director of AVF II and AFP. In such capacities, Mr. Lazarus has sole voting and investment power with respect to the shares of Common Stock held by AVFLP, AVF II and AFP and, therefore, may be deemed to be the beneficial owner of the shares of Common Stock directly owned by AVFLP, AVF II and AFP. Mr. Lazarus disclaims this beneficial ownership. (13) Excludes 384,034 shares of Common Stock and 66,808 shares of Common Stock issuable upon exercise of warrants presently exercisable, all of which are beneficially held by UVCC Fund II ("UVCC II"), and 384,034 shares of Common Stock and 66,808 shares of Common Stock issuable upon exercise of warrants presently exercisable, all of which are beneficially held by UVCC II Parallel Fund, L.P. ("UVCC Parallel"). Dr. Shaw serves as the managing general partner of (i) Arete Ventures Management Associates II, L.P., which is the managing general partner of UVCC II and (ii) Arete Ventures Limited Partnership III, which is the managing general partner of UVCC Parallel. In such capacities, he has sole voting power and shares investment power with respect to shares of Common Stock held by UVCC II and UVCC Parallel and, therefore, may be deemed to be the beneficial owner of the shares of Common Stock directly owned by UVCC II and UVCC Parallel. Dr. Shaw disclaims this beneficial ownership. (14) Includes 28,950 shares of Common Stock issuable upon exercise of warrants presently exercisable and 263,811 shares of Common Stock issuable upon exercise of options exercisable currently or within 60 days of October 31, 1997. 50 52 DESCRIPTION OF CAPITAL STOCK The authorized capital stock of the Company consists of 25,000,000 shares of Common Stock, $.01 par value per share, and 17,000,000 shares of preferred stock, $.01 par value per share. The following summary of certain provisions relating to the Common Stock and preferred stock does not purport to be complete and is subject to, and qualified in its entirety by, provisions of applicable law, and by the provisions of the Company's Certificate of Incorporation and Bylaws that are included as exhibits to the Registration Statement of which this Prospectus is a part. COMMON STOCK The Company currently has 77,586 shares of Common Stock outstanding and held by two holders of record. 13,234,029 shares of Common Stock will be outstanding upon consummation of the Preferred Stock Conversion and this offering. Subject to the rights of holders of preferred stock, the holders of outstanding shares of Common Stock are entitled to share ratably in dividends declared out of assets legally available therefor at such time and in such amounts as the Board of Directors may from time to time lawfully determine. Each holder of Common Stock is entitled to one vote for each share held. Subject to the rights of holders of any outstanding preferred stock, upon liquidation, dissolution or winding up of the Company, any assets legally available for distribution to stockholders as such are to be distributed ratably among the holders of the Common Stock at that time outstanding. All shares of Common Stock currently outstanding are, and all shares of Common Stock offered by the Company hereby when duly issued and paid for will be, fully paid and nonassessable, not subject to redemption and assessment and without conversion, preemptive or other rights to subscribe for or purchase any proportionate part of any new or additional issues of any class or of securities convertible into stock of any class. PREFERRED STOCK The Company currently has 8,156,443 shares of Preferred Stock outstanding and held by 176 holders of record. Pursuant to the Preferred Stock Conversion, all of the issued and outstanding shares of Preferred Stock will convert, upon the consummation of this offering, into 8,156,443 shares of Common Stock. Thus, the following information does not pertain to the currently outstanding Preferred Stock, but rather the preferred stock that may be issued in the future as provided in the Company's Certificate of Incorporation. Preferred stock may be issued by the Company in series from time to time with such designations, relative rights, priorities, preferences, qualifications, limitations and restrictions thereof, to the extent that such are not fixed in the Company's Certificate of Incorporation, as the Board of Directors determines. The rights, preferences, limitations and restrictions of different series of preferred stock may differ with respect to dividend rates, amounts payable on liquidation, voting rights, conversion rights, redemption provisions, sinking fund provisions and other matters. The Board of Directors may authorize the issuance of preferred stock which ranks senior to the Common Stock with respect to the payment of dividends and the distribution of assets on liquidation. In addition, the Board of Directors is authorized to fix the limitations and restrictions, if any, upon the payment of dividends on Common Stock to be effective while any shares of preferred stock are outstanding. The Board of Directors, without stockholder approval, may issue preferred stock with voting and conversion rights which could adversely affect the voting power of the holders of Common Stock. The issuance of preferred stock may have the effect of delaying, deferring or preventing a change in control of the Company. The Company has no present intention to issue shares of preferred stock. WARRANTS The Company currently has warrants to purchase a total of 662,287 shares of Common Stock outstanding at an exercise price of $1.123 per share. The warrants expire February 8, 2003 or one year later if at such time the shares of Common Stock underlying the warrants are required to be or are in the process of being registered under the Securities Act. The number of shares issuable upon exercise of the warrants is subject to proportionate adjustment in the event of stock splits, stock dividends and similar events. 51 53 CERTAIN CORPORATE PROVISIONS Upon the consummation of this offering, the Company will be subject to the provisions of Section 203 of the DGCL. In general, this statute prohibits a publicly held Delaware corporation from engaging, under certain circumstances, in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person becomes an interested stockholder, unless either (i) prior to the date at which the stockholder became an interested stockholder the board of directors approved either the business combination or the transaction in which the person becomes an interested stockholder, (ii) the stockholder acquires more than 85% of the outstanding voting stock of the corporation (excluding shares held by directors who are officers or held in certain employee stock plans) upon consummation of the transaction in which the stockholder becomes an interested stockholder or (iii) the business combination is approved by the board of directors and by two-thirds of the outstanding voting stock of the corporation (excluding shares held by the interested stockholder) at a meeting of the stockholders (and not by written consent) held on or subsequent to the date of the business combination. An "interested stockholder" is a person who, together with affiliates and associates, owns (or at any time within the prior three years did own) 15% or more of the corporation's voting stock. Section 203 defines a "business combination" to include, without limitation, mergers, consolidations, stock sales and asset based transactions and other transactions resulting in a financial benefit to the interested stockholder. Upon reincorporation in Delaware, the Company's Certificate of Incorporation and Bylaws will contain a number of provisions relating to corporate governance and to the rights of stockholders. Certain of these provisions may be deemed to have a potential "anti-takeover" effect in that such provisions may delay, defer or prevent a change of control of the Company. These provisions include (i) a requirement that stockholder action may be taken only at stockholder meetings; (ii) the authority of the Board of Directors to issue series of preferred stock with such voting rights and other powers as the Board of Directors may determine; (iii) notice requirements in the Bylaws relating to nominations to the Board of Directors and to the raising of business matters at stockholders meetings; and (iv) the classification of the Board of Directors into three classes, each serving for staggered three year terms. See "Management - -- Executive Officers and Directors." REGISTRATION RIGHTS Pursuant to the Registration Rights Agreement, the holders of shares of Common Stock (including the shares of Common Stock issued pursuant to consummation of the Preferred Stock Conversion) and additional shares of Common Stock issuable upon the exercise of outstanding warrants (collectively, the "Registrable Securities") are entitled to certain demand registration rights. Under the Registration Rights Agreement, subject to certain exceptions, the holders of at least 60% of the Registrable Securities may require the Company to use its best efforts to register such Registrable Securities on one occasion for public resale. If the Company is entitled to register the Registrable Securities on a Form S-2 or Form S-3, one or more holders of the Registrable Securities may request the Company to register such Registrable Securities on one of such forms. In addition, whenever the Company proposes to register any of its securities under the Securities Act, the holders of Registrable Securities are entitled, subject to certain restrictions, to include their Registrable Securities in such registration. Except for a limited circumstance, the Company is required to bear all registration expenses in connection with the registration of Registrable Securities (other than underwriting discounts and commissions). See "Underwriting." TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the Common Stock is LaSalle National Bank, Chicago, Illinois. 52 54 SHARES ELIGIBLE FOR FUTURE SALE Prior to this offering, there has been no public market for the Common Stock. Sales of substantial amounts of Common Stock in the public market, or the availability of such shares for sale, could adversely affect the market price of the Common Stock. Upon completion of this offering, the Company will have an aggregate of 13,234,029 shares of Common Stock outstanding, assuming no exercise of the Underwriters' over-allotment option and no exercise of outstanding options or warrants after the date hereof. Of these shares, the 5,000,000 shares sold in this offering will be freely tradable without restriction or further registration under the Securities Act, unless held by "affiliates" of the Company, as that term is defined in Rule 144 promulgated under the Securities Act. The remaining 8,234,029 shares of Common Stock outstanding upon completion of this offering will be Restricted Shares. All directors and executive officers of the Company have agreed with the Underwriters that, for a period of 180 days from the date of this Prospectus, they will not offer to sell or otherwise sell, dispose of or grant rights with respect to any shares of Common Stock, now owned or hereafter acquired directly by such holders or with respect to which they have the power of disposition, otherwise than with the prior written consent of DLJ. The stockholders of the Company, pursuant to the lock-up provisions of stock purchase agreements to which they and the Company are a party, and the optionholders of the Company, pursuant to agreements with the Company which they must sign upon exercise of their options, have agreed or will agree, as the case may be not to sell, make any short sale of, loan, grant any option for the purchase of, or otherwise dispose of their shares of Common Stock for a period of 180 days from the date of this Prospectus, without the prior written consent of DLJ. As a result of these contractual restrictions, notwithstanding possible earlier eligibility for sale under the provisions of Rules 144, 144(k) and 701 of the Securities Act, shares subject to lock-up provisions or agreements will not be salable until the 180-day lock-up periods expire unless prior written consent is received from DLJ. Any early waiver of the lock-up period by DLJ, which, if granted, could permit sales of a substantial number of shares and could adversely affect the trading price of the Company's shares, may not be accompanied by an advance public announcement by the Company. See "Underwriting." Taking into account the lock-up provisions and agreements, the number of shares that will be available for sale in the public market under the provisions of Rules 144 and 144(k), will be as follows: (i) approximately 7,485,940 Restricted Shares will be eligible for sale 180 days from the date of this Prospectus, subject in some cases to the volume limitations and other restrictions of Rule 144, and (ii) the remaining 748,089 Restricted Shares will become eligible for sale under Rule 144 in June, August or September 1998, as the case may be. Beginning 90 days after the effective date of the Registration Statement, certain shares issued or issuable upon exercise of options granted by the Company prior to the effective date of the Registration Statement will also be eligible for sale in the public market pursuant to Rule 701 under the Securities Act, subject to pre-existing lockup agreements. In general, Rule 701 permits resales of shares issued pursuant to certain compensatory benefit plans and contracts commencing 90 days after the issuer becomes subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, in reliance upon Rule 144 but without compliance with certain restrictions, including the holding period requirements, contained in Rule 144. In general, under Rule 144 a person (or persons whose shares are aggregated) who has beneficially owned Restricted Shares for at least one year, including persons who may be deemed "affiliates" of the Company, would be entitled to sell within any three-month period a number of shares that does not exceed the greater of one percent of the number of shares of Common Stock then outstanding or the average weekly trading volume of the Common Stock during the four calendar weeks preceding the filing of a Form 144 with respect to such sale. Sales under Rule 144 are also subject to certain manner of sale provisions and notice requirements and to the availability of current public information about the Company. In addition, a person who is not deemed to have been an affiliate of the Company at any time during the 90 days preceding a sale, and who has beneficially owned for at least two years the shares proposed to be sold, would be entitled to sell such shares under Rule 144(k) without regard to the requirements described above. The Company is unable to estimate 53 55 accurately the number of Restricted Shares that will be sold under Rule 144 because this will depend in part on the market price for the Common Stock, the personal circumstances of the seller and other factors. Pursuant to Rule 144 and upon expiration of the one-year holding period, an additional 662,287 shares of Common Stock will be available for sale upon the exercise of outstanding warrants. Options to purchase 1,557,684 shares are currently issued and outstanding under the Stock Option Plan (of which 377,792 are currently vested). See "Management--Stock Option Plan." All of these shares issuable upon exercise of the warrants or the options are or will be subject to lock-up provisions discussed herein. 54 56 UNDERWRITING Subject to the terms and conditions of an Underwriting Agreement dated , 1997 (the "Underwriting Agreement"), the Underwriters named below, who are represented by Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"), Furman Selz LLC and CIBC Oppenheimer Corp. (the "Representatives"), have severally agreed to purchase from the Company the respective number of shares of Common Stock set forth opposite their names below.
NUMBER UNDERWRITER OF SHARES Donaldson, Lufkin & Jenrette Securities Corporation......... Furman Selz LLC............................................. CIBC Oppenheimer Corp. ..................................... --------- Total.................................................. 5,000,000 =========
The Underwriting Agreement provides that the obligations of the several Underwriters to purchase and accept delivery of the shares of Common Stock offered hereby are subject to the approval by their counsel of certain legal matters and to certain other conditions. The Underwriters are obligated to purchase and accept delivery all the shares of Common Stock offered hereby (other that those shares covered by the over-allotment describe below) if any are purchased. The Underwriters initially propose to offer the shares of Common Stock in party directly to the public at the initial public offering price set forth on the cover of this Prospectus and in part to certain dealers (including the Underwriters) at such price less a concession of not in excess of $ per share. The Underwriters may allow, and such selected dealers may reallow to certain other dealers, a concession not in excess of $ per share. After the initial offering of the Common Stock, the public offering price and other selling terms may be changed by the Representatives at any time without notice. The Underwriters do not intend to confirm sales to any accounts over which they exercise discretionary authority. The Company has granted to the Underwriters an option, exercisable within 30 days after the date of this Prospectus, to purchase up to 750,000 additional shares of Common Stock at the initial public offering price less underwriting discounts and commissions. The Underwriters may exercise such option solely to cover overallotments, if any, made in connection with this offering. To the extent that the Underwriters exercise such option, each Underwriter will become obligated, subject to certain conditions, to purchase its pro rata portion of such additional shares based on such Underwriter's percentage underwriting commitment as indicated in the preceding table. The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act, or to contribute to payments that the Underwriters may be required to make in respect thereof. The Company and its executive officers and directors have agreed not to offer, pledge, sell, offer to sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase or otherwise dispose of, directly or indirectly, any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock, or enter into any similar agreement that transfers, in whole or in part, the economic risk of ownership of the Common Stock, for a period of 180 days from the date of this Prospectus, without the prior written consent of DLJ. In addition, during such period, the Company has also agreed not to file any registration agreement with respect to the registration of any shares of Common Stock or any securities convertible into or exchangeable for Common Stock without DLJ's prior written consent. The stockholders of the Company, pursuant to the lock-up provisions of stock purchase agreements to which they and the Company are a party, and the optionholders of 55 57 the Company, pursuant to agreements with the Company which they must sign upon exercise of their options, have also agreed or will agree, as the case may be, not to sell, make any short sale of, loan, grant any option for the purchase of, or otherwise dispose of their shares of Common Stock for a period of 180 days from the date of this Prospectus, without the prior written consent of DLJ. Prior to this offering, there has been no established trading market for the Common Stock. The initial public offering price for the shares of Common Stock will be determined by negotiations among the Company and the Representatives. The factors to be considered in determining the initial public offering price include the history of and the prospects for the industry in which the Company competes, the past and present operations of the Company, the historical results of operations of the Company, the prospects for future earnings of the Company, the recent market prices of securities of generally comparable companies and the general condition of the securities markets at the time of the offering. The Common Stock has been approved for quotation on the Nasdaq National Market, subject to notice of issuance, under the symbol "NANX." Other than in the United States, no action has been taken by the Company or the Underwriters that would permit a public offering of the shares of Common Stock offered hereby in any jurisdiction where action for that purpose is required. The shares of Common Stock offered hereby may not be offered or sold, directly or indirectly, nor may this Prospectus or any other offering material or advertisements in connection with the offer and sale of any such shares of Common Stock be distributed or published, in any jurisdiction, except under circumstances that will result in compliance with the applicable rules and regulations of such jurisdiction. Persons into whose possession this Prospectus comes are advised to inform themselves about and to observe any restrictions relating to the offering of the Common Stock and the distribution of this Prospectus. This Prospectus does not constitute an offer to sell or a solicitation of an offer to buy any shares of Common Stock offered hereby in any jurisdiction in which such an offer or a solicitation is unlawful. In connection with this offering, the Underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of the Common Stock. Specifically, the Underwriters may overallot the offering, creating a syndicate short position. The Underwriters may bid for and purchase shares of Common Stock in the open market to cover such syndicate short position or to stabilize the price of the Common Stock. In addition, the underwriting syndicate may reclaim selling concessions from syndicate members and selected dealers if they repurchase previously distributed Common Stock in syndicate covering transactions, in stabilizing transactions or otherwise. These activities may stabilize or maintain the market price of the Common Stock above independent market levels. The Underwriters are not required to engage in these activities, and may end any of these activities at any time. Certain employees of DLJ own an aggregate of 97,272 shares of the Series F Preferred, which shares will be converted into shares of Common Stock upon consummation of this offering. None of the shares of Common Stock held by the DLJ employees are being offered hereby. LEGAL MATTERS Certain legal matters with respect to the validity of the Common Stock offered hereby will be passed upon for the Company by Katten Muchin & Zavis, Chicago, Illinois, a partnership including professional corporations. Upon consummation of the Preferred Stock Conversion and this offering, a current partner of Katten Muchin & Zavis will own less than 1% of the outstanding shares of Common Stock. Certain legal matters in connection with United States patents will be passed upon for the Company by McAndrews, Held & Malloy, Ltd. Certain legal matters in connection with this offering will be passed upon for the Underwriters by Latham & Watkins, Chicago, Illinois. 56 58 EXPERTS The financial statements of the Company at December 31, 1995 and 1996 and September 30, 1997 and for each of the three years in the period ended December 31, 1996 and for the nine month period ended September 30, 1997 appearing in this Prospectus and the Registration Statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon appearing elsewhere herein and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. Certain matters dealing with patents and proprietary rights set forth under "Risk Factors--Dependence on Patents and Protection of Proprietary Information" and "Business--Intellectual Property and Proprietary Rights" have been included in this Prospectus in reliance upon the status of McAndrews, Held & Malloy, Ltd. as experts in such matters. See "Legal Matters." ADDITIONAL INFORMATION The Company has filed with the Commission in Washington, D.C., a Registration Statement on Form S-1 (of which this Prospectus is a part) under the Securities Act with respect to the Common Stock offered hereby. This Prospectus does not contain all the information set forth in the Registration Statement and the exhibits and schedules thereto, certain portions of which have been omitted as permitted by the rules and regulations of the Commission. For further information with respect to the Company and the Common Stock offered hereby, reference is made to the Registration Statement and such exhibits and schedules. Statements contained in this Prospectus regarding the contents of any agreement or other document referred to are not necessarily complete, and in each instance, reference is made to a copy of such agreement or other document filed as an exhibit to the Registration Statement. Each such statement is qualified in all respects by such reference. The Registration Statement and the exhibits and schedules thereto may be inspected without charge at the public reference facilities maintained by the Commission, including at the Commission's Public Reference Room, 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549 and at the Commission's Regional Offices at 7 World Trade Center, Suite 1300, New York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies may be obtained at prescribed rates from the Public Reference Section of the Commission at its principal office in Washington, D.C. Such materials also may be accessed electronically by means of the Commission's home page on the Internet at http://www.sec.gov.com. 57 59 NANOPHASE TECHNOLOGIES CORPORATION INDEX TO FINANCIAL STATEMENTS
PAGE ---- Report of Ernst & Young LLP, Independent Auditors........... F-2 Balance Sheets as of December 31, 1995 and 1996 and September 30, 1997........................................ F-3 Statements of Operations for the years ended December 31, 1994, 1995 and 1996 and the nine months ended September 30, 1996 (unaudited) and 1997............................. F-4 Statements of Stockholders' Equity.......................... F-5 Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996 and the nine months ended September 30, 1996 (unaudited) and 1997............................. F-6 Notes to the Financial Statements........................... F-7
F-1 60 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Stockholders Nanophase Technologies Corporation We have audited the accompanying balance sheets of Nanophase Technologies Corporation as of December 31, 1995 and 1996 and September 30, 1997, and the related statements of operations, stockholders' equity, and cash flows for the each of the three years in the period ended December 31, 1996 and for the nine month period ended September 30, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Nanophase Technologies Corporation at December 31, 1995 and 1996 and September 30, 1997, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996 and for the nine month period ended September 30, 1997, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Chicago, Illinois Ernst & Young LLP October 24, 1997 F-2 61 NANOPHASE TECHNOLOGIES CORPORATION BALANCE SHEETS
AS OF PRO FORMA AS OF DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30, -------------------------- ------------- ------------- 1995 1996 1997 1997 (UNAUDITED) ASSETS CURRENT ASSETS: Cash and cash equivalents....................... $ 261,902 $ 617,204 $ 770,704 $ 770,704 Investments..................................... 2,221,401 1,997,788 2,001,429 2,001,429 Trade accounts receivable, less allowance for doubtful accounts of $0 in 1995 and 1996 and $46,976 in 1997............................... 70,845 389,501 1,441,206 1,441,206 Inventories..................................... 65,280 445,205 503,815 503,815 Prepaid expenses and other current assets....... 67,277 50,275 51,061 51,061 ----------- ------------ ------------ ------------ Total current assets.......................... 2,686,705 3,499,973 4,768,215 4,768,215 Equipment and leasehold improvements, net......... 924,814 1,794,798 2,212,960 2,212,960 OTHER ASSETS: Deferred offering costs......................... -- 79,122 125,673 125,673 Patent costs, less accumulated amortization of $5,156 in 1995, $6,732 in 1996 and $9,844 in 1997.......................................... 52,742 86,892 99,223 99,223 Cash held in trust.............................. 76,867 78,849 80,000 80,000 ----------- ------------ ------------ ------------ $ 3,741,128 $ 5,539,634 $ 7,286,071 $ 7,286,071 =========== ============ ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable................................ $ 219,411 $ 221,936 $ 756,889 $ 756,889 Accrued expenses................................ 15,667 207,248 952,266 952,266 ----------- ------------ ------------ ------------ Total current liabilities..................... 235,078 429,184 1,709,155 1,709,155 STOCKHOLDERS' EQUITY: Series A convertible preferred stock, no par value; 169,490 shares authorized, issued, and outstanding................................... 600,000 600,000 600,000 -- Series B convertible preferred stock, no par value; 758,358 shares authorized, issued, and outstanding................................... 851,351 851,351 851,351 -- Series C convertible preferred stock, no par value; 662,287 shares authorized, issued, and outstanding................................... 743,500 743,500 743,500 -- Series D convertible preferred stock, no par value; 3,896,419 shares authorized; 3,882,385 issued and outstanding at December 31, 1995; 3,896,419 issued and outstanding at December 31, 1996 and September 30, 1997............... 6,405,262 6,429,500 6,429,500 -- Series E convertible preferred stock, no par value; 2,026,500 shares authorized, no shares authorized, issued and outstanding at December 31, 1995; 1,921,800 shares issued and outstanding at December 31, 1996 and September 30, 1997...................................... -- 7,157,850 7,157,850 -- Series F convertible preferred stock, no par value; no shares authorized, issued and outstanding at December 31, 1995 and December 31, 1996; 2,316,000 shares authorized and 748,089 shares issued and outstanding at September 30, 1997............................ -- -- 3,770,882 -- Common stock, no par value at December 31, 1995 and 1996 and September 30, 1997 and $.01 par value at pro forma September 30, 1997; 8,088,544 shares authorized at December 31, 1995, 10,316,158 shares authorized at December 31, 1996, and 12,632,158 shares authorized at September 30, 1997; 77,586 shares issued and outstanding at December 31, 1995 and 1996 and September 30, 1997 and 8,234,029 shares issued and outstanding at pro forma September 30, 1997.......................................... 450 450 450 82,340 Additional paid-in capital...................... -- -- 19,471,193 Accumulated deficit............................. (5,094,513) (10,672,201) (13,976,617) (13,976,617) ----------- ------------ ------------ ------------ Total stockholders' equity.................... 3,506,050 5,110,450 5,576,916 5,576,916 ----------- ------------ ------------ ------------ $ 3,741,128 $ 5,539,634 $ 7,286,071 $ 7,286,071 =========== ============ ============ ============
See Notes to Financial Statements. F-3 62 NANOPHASE TECHNOLOGIES CORPORATION STATEMENTS OF OPERATIONS
NINE MONTHS ENDED YEARS ENDED DECEMBER 31, SEPTEMBER 30, --------------------------------------- ------------------------- 1994 1995 1996 1996 (UNAUDITED) 1997 REVENUE: Commercial revenue............. $ 31,144 $ 93,591 $ 485,036 $ 261,013 $ 2,245,415 Government research contracts................... 64,015 27,995 110,770 26,207 -- ----------- ----------- ----------- ----------- ----------- Total revenue............. 95,159 121,586 595,806 287,220 2,245,415 OPERATING EXPENSES: Cost of revenue................ 164,746 532,124 4,019,484 2,925,560 3,321,288 Research and development expense..................... 456,162 485,059 677,284 515,675 571,210 Selling, general and administrative expense...... 799,558 1,150,853 1,661,504 1,209,823 1,714,725 ----------- ----------- ----------- ----------- ----------- Total operating expenses............... 1,420,466 2,168,036 6,358,272 4,651,058 5,607,223 ----------- ----------- ----------- ----------- ----------- Operating expenses in excess of revenue........................ (1,325,307) (2,046,450) (5,762,466) (4,363,838) (3,361,808) Interest income.................. 37,535 86,576 184,778 145,746 57,392 ----------- ----------- ----------- ----------- ----------- Net loss......................... $(1,287,772) $(1,959,874) $(5,577,688) $(4,218,092) $(3,304,416) =========== =========== =========== =========== =========== Pro forma net loss per share (unaudited).................... $ (0.76) $ (0.41) =========== =========== Pro forma weighted average number of common shares outstanding (unaudited).................... 7,312,392 8,139,812 =========== ===========
See Notes to Financial Statements. F-4 63 NANOPHASE TECHNOLOGIES CORPORATION STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK PREFERRED STOCK --------------- ----------------------- ACCUMULATED DESCRIPTION SHARES AMOUNT SHARES AMOUNT DEFICIT TOTAL Balance as of January 1, 1994... 77,586 $450 1,590,135 $ 2,194,851 $ (1,846,867) $ 348,434 Issuance of Series D shares..... -- -- 868,690 1,200,262 -- 1,200,262 Issuance of Series D shares..... -- -- 1,271,248 2,195,592 -- 2,195,592 Net loss for the year ended December 31, 1994............. -- -- -- -- (1,287,772) (1,287,772) ------ ---- --------- ----------- ------------ ----------- Balance as of December 31, 1994.......................... 77,586 450 3,730,073 5,590,705 (3,134,639) 2,456,516 Issuance of Series D shares..... -- -- 1,742,447 3,009,408 -- 3,009,408 Net loss for the year ended December 31, 1995............. -- -- -- -- (1,959,874) (1,959,874) ------ ---- --------- ----------- ------------ ----------- Balance as of December 31, 1995.......................... 77,586 450 5,472,520 8,600,113 (5,094,513) 3,506,050 Issuance of Series D shares..... -- -- 14,034 24,238 -- 24,238 Issuance of Series E shares, net of offering costs............. -- -- 1,921,800 7,157,850 -- 7,157,850 Net loss for the year ended December 31, 1996............. -- -- -- -- (5,577,688) (5,577,688) ------ ---- --------- ----------- ------------ ----------- Balance as of December 31, 1996.......................... 77,586 450 7,408,354 15,782,201 (10,672,201) 5,110,450 Issuance of Series F shares, net of offering costs............. -- -- 748,089 3,770,882 -- 3,770,882 Net loss for the nine months ended September 30, 1997...... -- -- -- -- (3,304,416) (3,304,416) ------ ---- --------- ----------- ------------ ----------- Balance as of September 30, 1997.......................... 77,586 $450 8,156,443 $19,553,083 $(13,976,617) $ 5,576,916 ====== ==== ========= =========== ============ ===========
See Notes to Financial Statements. F-5 64 NANOPHASE TECHNOLOGIES CORPORATION STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED YEARS ENDED DECEMBER 31, SEPTEMBER 30, ---------------------------------------- -------------------------- 1994 1995 1996 1996 (UNAUDITED) 1997 OPERATING ACTIVITIES: Net loss...................... $(1,287,772) $(1,959,874) $ (5,577,688) $ (4,218,092) $(3,304,416) Adjustments to reconcile net loss to net cash used in operating activities..... Depreciation................ 45,334 126,612 303,453 215,682 298,833 Amortization................ 855 335 6,397 5,389 3,112 Loss on sale of equipment... -- -- -- -- 29,281 Write off of patents........ -- 19,857 -- -- -- Changes in assets and liabilities related to operations: Trade accounts receivable............. 6,974 (23,573) (318,656) (182,722) (1,051,705) Inventories.............. -- (65,280) (379,924) (419,118) (58,610) Prepaid expenses and other current assets... (12,700) (50,261) 17,002 (11,165) (786) Patent costs............. (13,559) (31,072) (40,548) (40,447) (15,443) Accounts payable......... 249 168,643 2,525 92,653 534,953 Accrued liabilities...... 54,122 (45,740) 191,581 157,892 870,691 ----------- ----------- ------------ ------------ ----------- Net cash used in operating activities.................. (1,206,497) (1,860,353) (5,795,858) (4,399,928) (2,740,641) INVESTING ACTIVITIES: Acquisition of equipment and leasehold improvements...... (66,303) (937,956) (1,173,437) (1,084,697) (763,276) Purchases of held-to-maturity investments................. (2,255,609) (8,512,957) (15,486,131) (13,571,571) (7,960,981) Maturities of held-to-maturity investments................. -- 8,547,165 15,709,744 11,763,459 7,957,340 Increase in asset held in trust....................... (75,000) (1,867) (1,982) (1,341) (1,151) Proceeds from sale of equipment................... 787 -- -- -- 17,000 ----------- ----------- ------------ ------------ ----------- Net cash used in investing activities.................. (2,396,125) (905,615) (951,806) (2,894,150) (751,068) FINANCING ACTIVITIES: Proceeds from issuance of preferred stock, net of offering costs.............. 3,395,854 3,009,408 7,182,088 7,182,088 3,770,882 Deferred offering costs....... -- -- (79,122) (77,393) (125,673) ----------- ----------- ------------ ------------ ----------- Net cash provided by financing activities.................. 3,395,854 3,009,408 7,102,966 7,104,695 3,645,209 ----------- ----------- ------------ ------------ ----------- Increase (decrease) in cash and cash equivalents........ (206,768) 243,440 355,302 (189,383) 153,500 Cash and cash equivalents at beginning of period......... 225,230 18,462 261,902 261,902 617,204 ----------- ----------- ------------ ------------ ----------- Cash and cash equivalents at end of period............... $ 18,462 $ 261,902 $ 617,204 $ 72,519 $ 770,704 =========== =========== ============ ============ ===========
See Notes to Financial Statements. F-6 65 NANOPHASE TECHNOLOGIES CORPORATION NOTES TO FINANCIAL STATEMENTS (INFORMATION WITH RESPECT TO THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1996 AND ALL PRO FORMA DATA ARE UNAUDITED) (1) DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION Nanophase Technologies Corporation (the "Company") was incorporated on November 30, 1989, for the purpose of developing nanocrystalline materials for commercial production and sale in domestic and international markets. The Company was in its development stage for the period from inception through December 31, 1996, primarily engaged in research and development activities, the recruiting of technical, marketing and administrative personnel, and the development of its manufacturing facility. These activities have been funded through the issuance of preferred stock and through cooperative development agreements and government contracts and grants. Although commercial shipments began in late 1995 and continued in 1996, these shipments were limited and primarily related to cooperative development agreements. The Company began full-scale production in early 1997 at which time it no longer was a development stage company. 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. Export sales approximated $10,300, $51,400 and $256,500 for the years ended December 31, 1994, 1995 and 1996, respectively and $68,600 and $277,400 for the nine months ended September 30, 1996 and 1997, respectively. Basis of Presentation The financial statements of the Company as of September 30, 1996 and for the nine month period ended September 30, 1996 contain all adjustments and accruals (consisting only 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 period presented. Pro Forma Presentation (Unaudited) The pro forma balance sheet at September 30, 1997 gives effect to conversion of the convertible preferred stock into common stock which will take place upon the closing of the proposed public offering of common stock and the change in the par value of the common stock, both as described in Note 11. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Cash Equivalents Cash equivalents primarily consist of money market accounts which have a maturity of three months or less from the date of purchase. Investments Investments are classified by the Company at the time of purchase for appropriate designation and such designation is reevaluated as of each balance sheet date. Investments are classified as held-to-maturity when the Company has the positive intent and ability to hold the securities to maturity. Held-to-maturity securities are stated at amortized cost and are adjusted to maturity for the amortization of premiums and accretion of discounts. Such adjustments for amortization and accretion are included in interest income. Inventory Inventory is stated at the lower of cost, maintained on a first in, first out basis, or market. F-7 66 NANOPHASE TECHNOLOGIES CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Equipment and Leasehold Improvements Equipment is stated at cost and is being depreciated over its estimated useful life (5-7 years) using the straight-line method. Leasehold improvements are stated at cost and are being amortized using the straight-line method over the shorter of the useful life of the asset or the term of the lease. Deferred Offering Costs Deferred costs related to the Company's proposed public offering totaled $79,122 and $125,673 at December 31, 1996 and September 30, 1997, respectively. In May 1997, the Company withdrew its March 1997 filing made with the Securities and Exchange Commission. Costs incurred relating to that filing aggregating $375,103 were expensed by the Company and included in selling, general and administrative expense. Costs deferred at September 30, 1997 relate to the current filing. Upon successful completion of the Company's proposed public offering, the deferred costs will be offset against the proceeds received and charged to stockholders' equity. Patent Costs Patent costs are being amortized over the life of the respective patent using the straight-line method. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires the Company to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Commercial Revenue Commercial revenue consists of sales of product and revenue from research and development arrangements with non-governmental entities. Sales of product are recorded as shipments are made by the Company. Research and development arrangements include both cost-plus and fixed fee agreements and such revenue is recognized when specific milestones are met under the arrangements. Government Research Contracts The Company accounts for contracts with governmental entities to complete research and development activities using the percentage of completion method measured by the relationship of costs incurred to total estimated costs. Amounts paid to the Company under its cooperative cost-sharing agreement with the U.S. government are accounted for as offsets against cost of revenues. See Note 8. All payments to the Company for work performed on contracts and agreements with agencies of the U.S. government are subject to adjustment upon audit by agencies of the U.S. government. The Company believes that such audits, if any, will not have a significant effect on the financial position or results of operation of the Company. Research and Development Expenses Expenditures for research and development activities are charged to operations as incurred by the Company. Income Taxes The Company accounts for income taxes using the liability method. As such, deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for F-8 67 NANOPHASE TECHNOLOGIES CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) financial reporting purposes and the amounts used for income tax purposes. Deferred tax assets and liabilities are calculated using the enacted tax rates and laws that are expected to be in effect when the anticipated reversal of these differences is scheduled to occur. Employee Stock Options The Company accounts for stock options granted to employees in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees" (APB No. 25). The exercise price of the options granted equals the estimated fair value of the underlying stock on the date of grant. As such, no compensation expense has been recognized by the Company for these options. In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (FASB No. 123). FASB No. 123, which was adopted by the Company in 1996, establishes an alternative method of accounting for stock-based compensation plans. In 1996, the Company adopted the disclosure alternative for stock-based compensation (Note 12) which provides for the use of APB No. 25 for financial statement purposes with pro forma disclosure of the impact of FASB No. 123. Fair Value of Financial Instruments The Company's financial instruments include investments, accounts receivable, accounts payable and accrued liabilities. The fair values of all financial instruments were not materially different from their carrying values. Net Loss and Pro Forma Net Loss Per Common Share Pro forma net loss per common share and historical net loss per common share are computed based upon the weighted average number of common shares outstanding. Common equivalent shares are not included in the pro forma and historical per share calculations since the effect of their inclusion would be anti-dilutive, except that common and common equivalent shares issued during the twelve month period prior to the proposed public offering have been included in the pro forma calculation as if they were outstanding for all periods presented using the treasury stock method. In addition, for the pro forma calculation, all convertible preferred stock is treated as if converted into common shares at date of issuance. Net loss per common share computed on a historical basis is as follows: $2.32, $3.54 and $10.06 for the years ended December 31, 1994, 1995 and 1996, respectively, and $7.61 and $5.96 for the nine month periods ended September 30, 1996 and 1997, respectively. The weighted average number of common shares outstanding used to calculate these net loss per common share amounts are 554,298 for all periods. (3) INVESTMENTS Investments consist of U.S. Treasury bills with an estimated fair value of $2,221,000, $1,998,000 and $2,001,000 at December 31, 1995 and 1996 and September 30, 1997, respectively. All investments have been classified as held-to-maturity and mature in subsequent year. (4) INVENTORIES Inventories consist of the following:
AS OF AS OF DECEMBER 31, SEPTEMBER 30, --------------------- ------------- 1995 1996 1997 Raw materials............................................. $47,617 $332,167 $307,593 Finished goods............................................ 17,663 113,038 196,222 ------- -------- -------- $65,280 $445,205 $503,815 ======= ======== ========
F-9 68 NANOPHASE TECHNOLOGIES CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (5) EQUIPMENT AND LEASEHOLD IMPROVEMENTS Equipment and leasehold improvements consist of the following:
AS OF AS OF DECEMBER 31, SEPTEMBER 30, ------------------------ ------------- 1995 1996 1997 Machinery and equipment.................................. $ 787,916 $1,662,721 $1,788,010 Office equipment......................................... 101,749 113,959 116,307 Office furniture......................................... 60,020 49,864 49,864 Leasehold improvements................................... 261,915 447,465 454,932 ---------- ---------- ---------- 1,211,600 2,274,009 2,409,113 Less: Accumulated depreciation and amortization.......... (286,786) (479,211) (767,924) ---------- ---------- ---------- 924,814 1,794,798 1,641,189 Construction in progress................................. -- -- 571,771 ========== ========== ========== $ 924,814 $1,794,798 $2,212,960 ========== ========== ==========
(6) LEASE COMMITMENTS The Company leases manufacturing and office space under an agreement that will expire in September 1999. Monthly minimum lease payments amount to $7,900 for this facility. The Company also leased its original office space from a stockholder under a sublease agreement which expired in November 1996. The Company entered into a sublease of this office space and received monthly rental payments under the sublease through November 1996. Rent expense, net of sublease income, under this lease amounted to $35,903, $26,668 and $19,072 for the years ended December 31, 1994, 1995 and 1996, respectively, and $13,023 for the nine month period ended September 30, 1996. Total rent expense, net of sublease income, under these leases amounted to $65,903, $122,422, and $175,538 for the years ended December 31, 1994, 1995, and 1996, respectively, and $130,503 and $119,049 for the nine month periods ended September 30, 1996 and 1997, respectively. (7) ACCRUED EXPENSES Accrued expenses consist of the following:
AS OF AS OF DECEMBER 31, SEPTEMBER 30, ------------------- ------------- 1995 1996 1997 Accrued subcontract costs................................... $ -- $ 40,000 $250,000 Accrued costs for goods received but not invoiced........... -- 24,332 184,341 Accrued offering costs...................................... -- 7,862 181,338 Other....................................................... 15,667 135,054 336,587 ------- -------- -------- $15,667 $207,248 $952,266 ======= ======== ========
(8) RESEARCH AND DEVELOPMENT AGREEMENTS In July 1992, the Company entered into a cooperative cost-sharing agreement with the U.S. Government under the Department of Commerce Advanced Technology Program. The three-year agreement ended in 1995. Under the terms of the agreement, the U.S. Government agreed to share costs of the Company's research efforts up to an aggregate of $944,259, including subcontractor costs. The net costs associated with F-10 69 NANOPHASE TECHNOLOGIES CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) the total research effort amounted to $2,992,130. The difference between these amounts represented indirect costs of $2,047,871 which were absorbed as operating expenses by the Company. For the years ended December 31, 1994 and 1995, the Company offset amounts received from the U.S. government of $224,256 and $154,710, respectively, against cost of revenues in the statement of operations. The Company is party to a number of other research and development arrangements with both governmental and commercial entities. These arrangements are generally short-term in nature and provided $31,144, $54,680 and $236,019 of revenues for the years ended December 31, 1994, 1995, and 1996, respectively, and $148,927 and $1,395,077 of revenues for the nine month periods ended September 30, 1996 and 1997, respectively. These arrangements include both cost-plus and fixed-price agreements. (9) PATENT LICENSE AGREEMENT In 1991, the Company was granted an exclusive license by a third party to make, have made, use and sell products of the type claimed in a U.S. patent. In consideration for this license, the Company agreed to pay royalties of 1/2% of net sales of licensed products, as defined. As of September 30, 1997, no royalty payments were due under this agreement. In 1994, the Company was granted a non-exclusive license by a third party to make, use, and sell products of the type claimed in two U.S. patents. In consideration for this license, the Company agreed to pay royalties of 1% of net sales, as defined, and made an advance royalty payment of $17,500. As of September 30, 1997, royalties under this agreement amounting to $11,289 have been offset against the royalty advance. In 1996, the Company was granted a non-exclusive license by a third party to produce and sell ultrafine powders of metal and ceramics claimed in four U.S. patents. In consideration for this license, the Company agreed to pay $14,000 as an initial payment, and pay royalties of 3% of net proceeds of sales of the product, as defined. As of September 30, 1997, royalties under this agreement approximated $8,000. The Company was also granted a remainder-exclusive license by a third party to make, have made, use, import, sell or have sold products of the type claimed in three U.S. patents. In consideration for this license, the Company agreed to pay $5,000 as an initial payment, $5,000 upon reaching the earlier of either defined profitability or the second anniversary of the agreement, and royalties at the rate of 4% of the defined net sales of the related products. As of September 30, 1997, no royalty payments were due to this party under this agreement. (10) INCOME TAXES The Company has net operating loss carryforwards for tax purposes of approximately $13,875,000 at September 30, 1997, which expire between 2005 and 2012. The Company has not paid income taxes since inception. F-11 70 NANOPHASE TECHNOLOGIES CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred income taxes consist of the following:
AS OF AS OF DECEMBER 31, SEPTEMBER 30, -------------------------- ------------- 1995 1996 1997 Deferred tax assets: Net operating loss carryforward..................... $ 2,288,000 $ 4,212,000 $ 5,411,000 Start-up costs capitalized for income tax purposes......................................... -- 162,000 132,000 Other accrued costs................................. 2,000 29,000 118,000 ----------- ----------- ----------- Total deferred tax assets........................ 2,290,000 4,403,000 5,661,000 Deferred tax liability: Accelerated tax depreciation........................ (21,000) (53,000) (62,000) ----------- ----------- ----------- Net deferred tax asset................................ 2,269,000 4,350,000 5,599,000 Less: Valuation allowance........................... (2,269,000) (4,350,000) (5,599,000) ----------- ----------- ----------- Deferred income taxes................................. $ -- $ -- $ -- =========== =========== ===========
The valuation allowance increased $2,081,000 and $1,249,000 for the year ended December 31, 1996 and nine months ended September 30, 1997, respectively, due principally to the increase in the net operating loss carryforward and uncertainty as to whether future taxable income will be generated prior to the expiration of the carryforward period. Under the Internal Revenue Code, certain ownership changes, including the prior issuance of preferred stock and this proposed public offering, may subject the Company to annual limitations on the utilization of its net operating loss carryforward. (11) CAPITAL STOCK All capital share and per share amounts in the financial statements and notes to financial statements have been restated to reflect a .579-for-1 reverse stock split effective prior to consummation of this proposed public offering. Additionally, the par value has been restated to $0.01 for all common stock. The Board of Directors has approved a migratory merger of the Company from Illinois to Delaware, pursuant to which the stock split and restated par value will occur. In 1997, a total of 748,089 shares of Series F convertible preferred stock were issued for cash amounting to $3,770,882 which is net of financing costs of $105,226. At September 30, 1997, authorized but unissued shares of common stock have been reserved for future issuance as follows: Series A convertible preferred stock........................ 169,490 Series B convertible preferred stock........................ 758,358 Series C convertible preferred stock........................ 662,287 Series D convertible preferred stock........................ 3,896,419 Series E convertible preferred stock........................ 2,026,500 Series F convertible preferred stock........................ 2,316,000 Warrants.................................................... 662,287 Options..................................................... 2,063,232 ---------- 12,554,573 ==========
All series of convertible preferred stock have the same voting rights as the common stock. The Series A, C, D, E and F convertible preferred stock have the same dividend rights as the common stock. At the holder's F-12 71 NANOPHASE TECHNOLOGIES CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) option, the preferred stock may be converted into common stock at the conversion ratio, which is one common share for each preferred share. Mandatory conversion occurs upon the occurrence of a Qualified Initial Public Offering, as defined, at the conversion ratio. The holders of Series B convertible preferred stock are entitled to receive cumulative cash dividends in the amount of $.090 per share per annum. Dividends began to accumulate on the date of issuance of the first shares of Series B and will be paid to Series B shareholders of record only upon the liquidation of the Company. Accumulated dividends total $397,289 at September 30, 1997. Upon liquidation or dissolution of the Company, the Series F stockholders will be entitled to be paid $5.181 per share, plus all declared but unpaid dividends thereon before any distribution to the Series E, Series D, Series C, Series B, Series A, or common stockholders. The Series E stockholders will be entitled to be paid $3.886 per share, plus all declared but unpaid dividends thereon before any distribution to the Series D, Series C, Series B, Series A, or common stockholders. The Series D and Series C stockholders will be entitled to be paid $1.382 per share (with respect to the Series D purchased prior to October 1, 1994), $1.727 per share (with respect to the Series D purchased on or after October 1, 1994), and $3.368 per share (with respect to the Series C), plus all declared but unpaid dividends thereon before any distribution to the Series B, Series A, or common stockholders. Series B preferred stockholders will be entitled to be paid, before any payment or declaration and setting apart for payment of any amount with respect to the Series A or common stockholders, an amount equal to $1.123 per share, plus all accumulated but unpaid dividends thereon. The Series A preferred stockholders will be entitled to be paid an amount equal to $3.541 per share, after payment to the Series F, Series E, Series D, Series C, and Series B stockholders but before any distribution is made to the common stockholders. (12) STOCK OPTIONS AND WARRANTS The Company has entered into stock option agreements with certain employees, a board member who is also a service provider and three Advisory Board members. At September 30, 1997, the Company had granted options to purchase 1,586,634 shares of common stock. The stock options generally expire ten years from the date of grant. Of the total number of options granted, 766,017 of the outstanding options vest on the eighth anniversary following their grant date, subject to an earlier five-year vesting period if specified performance targets for 1997 are met. Of the remaining 820,617 outstanding options, 803,247 vest over a five-year period and 17,370 vest over a three-year period from their respective grant dates. F-13 72 NANOPHASE TECHNOLOGIES CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Exercise prices are determined by the Board of Directors and equal the estimated fair values of the Company's common stock at the grant date. The table below summarizes all option activity through September 30, 1997:
WEIGHTED- NUMBER AVERAGE EXERCISE OF OPTIONS EXERCISE PRICE PRICE Outstanding at December 31, 1993.................... 182,035 $ .112 $ .112 Options granted during 1994......................... 100,746 .112 .112 Options canceled during 1994........................ (27,442) .112 .112 --------- Outstanding at December 31, 1994.................... 255,339 .112 .112 Options granted during 1995......................... 186,728 .432 .432 Options canceled during 1995........................ (6,948) .112 -- .432 .180 --------- Outstanding at December 31, 1995.................... 435,119 .112 -- .432 .249 Options granted during 1996......................... 1,192,508 1.727 -- 3.886 3.309 Options canceled during 1996........................ (12,101) .112 -- 1.727 1.549 --------- Outstanding at December 31, 1996.................... 1,615,526 .112 -- 3.886 2.499 Options granted during 1997......................... 17,370 5.181 5.181 Options canceled during 1997........................ (46,262) .112 -- 3.886 3.475 --------- Outstanding at September 30, 1997................... 1,586,634 .112 -- 5.181 2.499 =========
At September 30, 1997, options for 209,183, 75,270, 62,903 and 13,896 shares of common stock were exercisable at $.112, $.432, $1.727 and $3.886 per share, respectively. No options have been exercised or have expired to date. In connection with the issuance of Series C convertible preferred stock in 1993, the Company issued common stock purchase warrants for 662,287 shares at no additional cost to the Series C convertible preferred stockholders. These warrants have an exercise price of $1.123 per share and expire upon the tenth anniversary of issuance. All warrants were outstanding at September 30, 1997. The Company has elected to follow APB No. 25 and related interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under FASB No. 123 requires use of option valuation models that were not developed for the use in valuing employee stock options. Pro forma information regarding net income is required by FASB No. 123, which also requires that the information be determined as if the Company had accounted for the employee stock options granted subsequent to December 31, 1994 under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for the years ended December 31, 1995 and 1996 and the nine month periods ended September 30, 1996 and 1997, respectively: risk-free interest rates of 4.5%, 4.0%, 4.5% and 4.4%; a dividend yield of zero percent; and a weighted-average expected life of the option of 7 years. The volatility factor was assumed to be zero as the Company is privately held and no market existed for its stock in 1995 or 1996. The Black-Scholes option valuation model was developed for the use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's option, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. F-14 73 NANOPHASE TECHNOLOGIES CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) For purposes of the pro forma disclosures, the estimated fair value of the options is amortized to expense over the vesting period of the respective option. Because FASB No. 123 is applicable only to options granted subsequent to December 31, 1994, its pro forma impact will not be fully reflected until 2002. The Company's pro forma net loss and pro forma net loss per share on a historical basis would be $1,963,974 and $5,607,688 and $3.54 and $10.12 for the years ended December 31, 1995 and 1996 and would be $4,237,286 and $3,401,643 and $7.64 and $6.14 for the nine months ended September 30, 1996 and 1997, respectively. (13) 401(K) PROFIT-SHARING PLAN Effective June 30, 1995, the Company implemented a 401(k) profit-sharing plan covering substantially all employees who meet defined service requirements. The plan provides for deferred salary contributions by the plan participants and a Company contribution. Company contributions, if any, are at the discretion of the Board of Directors and are not to exceed the amount deductible under applicable income tax laws. No Company contributions have been made since inception of the plan. (14) SEVERANCE BENEFITS AGREEMENT Pursuant to an agreement entered into in 1994, the Company has established a trust for the benefit of an employee. Interest earned was credited to the trust until the funds held in trust equaled $80,000. Payments will be required in the event the Company terminates the employment of the individual, as defined, before November 15, 1999. Upon the occurrence of an initial public offering, the funds held in trust will revert to the Company. (15) RELATED PARTY TRANSACTIONS The Company has an ongoing consulting agreement with a director/stockholder. The agreement is on a month-to-month basis. Payments under this agreement amount to $2,500 per month. F-15 74 [INSIDE BACK COVER PAGE] [Picture of the Company's nanocrystalline materials compared to conventional nanocrystalline materials] In contrast to nanocrystalline materials produced by conventional processes, nanocrystalline materials produced by the Company's patented PVS process are nearly spherical and uniformly small. As a result of these and other properties, the Company is able to engineer the attributes, including strength, flexibility, color and electronic conductivity, of materials to yield products that are superior to conventional materials and to establish new standards for a range of high-performance commercial applications. [Picture of equipment inside the Company's manufacturing facility in Burr Ridge, Illinois] PVS plasma reactors in the Company's production and research facility in Burr Ridge, Illinois. 75 ====================================================== NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE SHARES BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING THE OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. ------------------------ TABLE OF CONTENTS
PAGE Prospectus Summary......................... 3 Risk Factors............................... 7 Use of Proceeds............................ 15 Dividend Policy............................ 15 Capitalization............................. 16 Dilution................................... 17 Selected Financial Data.................... 18 Management's Discussion And Analysis of Financial Condition and Results of Operations............................... 19 Business................................... 23 Management................................. 40 Certain Relationships and Related Transactions............................. 48 Principal Stockholders..................... 49 Description of Capital Stock............... 51 Shares Eligible for Future Sale............ 53 Underwriting............................... 55 Legal Matters.............................. 56 Experts.................................... 57 Additional Information..................... 57 Index to Financial Statements.............. F-1
------------------------ UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. ====================================================== ====================================================== 5,000,000 SHARES NANOPHASE LOGO COMMON STOCK ------------------------ PROSPECTUS ------------------------ DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION FURMAN SELZ CIBC OPPENHEIMER , 1997 ====================================================== 76 PART II INFORMATION NOT REQUIRED IN THE PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION Set forth below is an estimate of the approximate amount of fees and expenses (other than underwriting commissions and discounts) payable by the Registrant in connection with the issuance and distribution of the Common Stock pursuant to the Prospectus contained in this Registration Statement. The Registrant will pay all of these expenses.
APPROXIMATE AMOUNT Securities and Exchange Commission registration fee......... $ 17,425 NASD filing fee............................................. 6,250 Nasdaq National Market application fee...................... 50,000 Accountants' fees and expenses.............................. 70,000 Blue Sky fees and expenses.................................. 10,000 Legal fees and expenses..................................... 150,000 Transfer Agent and Registrar fees and expenses.............. 10,000 Printing and engraving...................................... 70,000 Miscellaneous expenses...................................... 16,325 -------- Total.................................................. $400,000 ========
All expenses other than the Securities and Exchange Commission registration fee and NASD filing fee are estimated. ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Upon the Registrant's reincorporation in Delaware, Article VII of the Registrant's Certificate of Incorporation will provide that the Registrant shall indemnify its directors to the full extent permitted by the General Corporation Law of the State of Delaware and may indemnify its officers and employees to such extent, except that the Registrant shall not be obligated to indemnify any such person (i) with respect to proceedings, claims or actions initiated or brought voluntarily by any such person and not by way of defense, or (ii) for any amounts paid in settlement of an action indemnified against by the Registrant without the prior written consent of the Registrant. Prior to consummation of this offering, the Registrant will enter into indemnity agreements with each of its directors. These agreements may require the Registrant, among other things, to indemnify such directors against certain liabilities that may arise by reason of their status or service as directors, to advance expenses to them as they are incurred, provided that they undertake to repay the amount advanced if it is ultimately determined by a court that they are not entitled to indemnification, and to obtain directors' liability insurance if available on reasonable terms. In addition, Article VII of the Registrant's Certificate of Incorporation will also provide that a director of the Registrant shall not be personally liable to the Registrant or its stockholders for monetary damages for breach of his or her fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Registrant or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) for willful or negligent conduct in paying dividends or repurchasing stock out of other than lawfully available funds or (iv) for any transaction from which the director derives an improper personal benefit. Reference is made to Section 145 of the General Corporation Law of the State of Delaware which provides for indemnification of directors and officers in certain circumstances. II-1 77 Prior to the consummation of this offering, the Registrant intends to purchase a directors' and officers' liability insurance policy. Under the terms of the Underwriting Agreement, the Underwriters have agreed to indemnify, under certain conditions, the Registrant, its directors, certain of its officers and persons who control the Company within the meaning of the Securities Act of 1933, as amended (the "Securities Act"), against certain liabilities. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES The following information reflects a 0.579-for-one stock split which will be effected prior to the date of the Prospectus. In March 1994, the Registrant issued an aggregate of 868,690 shares of Series D Convertible Preferred Stock (the "Series D Preferred") at $1.382 per share to nine investors, which included eight venture capital funds and Richard Siegel, a director and consultant of the Company, in exchange for cash in the aggregate amount of $1,200,262. In October 1994, the Registrant issued 1,271,248 shares of Series D Preferred at $1.727 per share to eight investors which are venture capital funds in exchange for cash in the aggregate amount of $2,195,592. In April 1995, the Registrant issued 89,402 shares of Series D Preferred at $1.727 per share to four investors which are venture capital funds in exchange for cash in the aggregate amount of $154,408. In November 1995, the Registrant issued 1,653,045 shares of Series D Preferred at $1.727 per share to nine investors, which included eight venture capital funds and Richard Siegel, a director and consultant of the Company, in exchange for cash in the aggregate amount of $2,855,000. In April 1996, the Registrant issued 14,034 shares of Series D Preferred at $1.727 per share to one investor which is a venture capital fund in exchange for cash in the amount of $24,238. In May 1996, the Registrant issued 1,921,800 shares of Series E Convertible Preferred Stock (the "Series E Preferred") at $3.886 per share to 122 investors, which included various individuals, trusts, partnerships and retirement plans, in exchange for cash in the aggregate amount of $7,468,135. In June 1997, the Registrant issued 421,992 shares of Series F Convertible Preferred Stock at (the "Series F Preferred") at $5.181 per share to 39 investors, which included various individuals, trust partnerships and retirement plans, in exchange for cash in the aggregate amount of $2,186,487. In August 1997, the Registrant issued 183,468 shares of Series F Preferred at $5.181 per share to 10 investors, which included various individuals, trusts, partnerships and retirement plans, in exchange for cash in the aggregate amount of $950,613. In September 1997, the Registrant issued 142,629 shares of Preferred Stock at $5.181 per share to 15 investors, which included employees of DLJ, various individuals and a trust, in exchange for cash in the aggregate amount of $739,008. Each share of Series D Preferred, Series E Preferred and Series F Preferred will be converted into one share of Common Stock upon consummation of this offering. The sales of shares of Series D Preferred, Series E Preferred and Series F Preferred are claimed to be exempt from registration with the Securities and Exchange Commission pursuant to Section 4(2) of the Securities Act, and/or Regulation D promulgated thereunder as transactions by an issuer not involving any public offering, in that the transactions involved the issuance and sale by the Company of its securities to financially sophisticated institutions or individuals who represented that they were aware of the Company's activities as well as its business and financial condition, and who took such securities for investment purposes and understood the ramifications of the same. Each security holder represented that they acquired such securities for investment for their own account and not for distribution. All certificates representing the securities issued in these transactions have been legended. II-2 78 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Exhibits. 1 Form of Underwriting Agreement. 3.1 Form of Certificate of Incorporation of the Registrant. 3.2 Form of Bylaws of the Registrant. 4.1 Specimen stock certificate representing Common Stock. 4.2* Form of Warrants. 5 Opinion of Katten Muchin & Zavis as to the legality of the securities being registered (including consent). 10.1 The Nanophase Technologies Corporation Amended and Restated 1992 Stock Option Plan, as amended. 10.2 Form of Directors Indemnification Agreement. 10.3 Amended and Restated Registration Rights Agreements dated as of March 16, 1994, as amended. 10.4* Employment Agreement dated February 3, 1994 between the Registrant and Robert W. Cross. 10.5* Employment Agreement dated as of September 3, 1996 between the Registrant and Dennis J. Nowak. 10.6* Severance Benefits Agreement dated as of November 15, 1994 between the Registrant, Steven Lazarus and John C. Parker. 10.7* License Agreement dated June 1, 1990 between the Registrant and ARCH Development Corporation, as amended. 10.8* License Agreement dated October 12, 1994 between the Registrant and Hitachi. 10.9* License Agreement dated May 31, 1996 between the Registrant and Research Development Corporation of Japan. 10.10* License Agreement dated April 1, 1996 between the Registrant and Cornell Research Foundation. 10.11* Consulting and Stock Purchase Agreement between Richard W. Siegel and the Registrant dated as of May 9, 1990, as amended February 13, 1991, November 21, 1991 and January 1, 1992. 10.12* Lease Agreement between the Village of Burr Ridge and the Registrant, dated September 15, 1994. 10.13 Purchase Order and Purchase and Distribution Agreement dated February 27, 1997 between the Registrant and Moyco Technologies, Incorporated, as amended. 10.14* Marketing and Distribution Agreement between the Registrant and Whittaker, Clark & Daniels, Inc., dated as of November 22, 1995. 10.15* Distribution Agreement between the Registrant and C.I. Kasei, Ltd., (a subsidiary of Itochu) dated as of October 30, 1996. 10.16* Purchase Agreement between Nanophase Technologies Corporation and LWT Instruments, Inc., dated February 1, 1997. 10.17 Supply Agreement between the Registrant and Schering-Plough HealthCare Products, Inc. dated as of March 15, 1997. 10.18 Amended and Restated Shareholders' Agreement dated as of March 16, 1994, as amended. 11 Statement regarding computation of per share earnings. 23.1 Consent of Ernst & Young LLP. 23.2 Consent of Katten Muchin & Zavis (contained in its opinion filed as Exhibit 5 hereto). 23.3 Consent of McAndrews, Held & Malloy, Ltd. 24* Power of Attorney (included on signature page of the Registration Statement). 27 Financial Data Schedule.
- ------------------------------ * Previously filed with this Registration Statement. II-3 79 (b) Financial Statement Schedules.
PAGE Schedule II -- Report of Independent Auditors S-1 Valuation and Qualifying Accounts S-2
ITEM 17. UNDERTAKINGS The Registrant hereby undertakes: (1) To provide to the Underwriters at the closing specified in the underwriting agreement, certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. (2) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that, in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. (3) For purposes of determining any liability under the Securities Act, (i) the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective and (ii) each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-4 80 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Amendment to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Chicago, and State of Illinois on the 3rd day of November, 1997. NANOPHASE TECHNOLOGIES CORPORATION By: /s/ ROBERT W. CROSS ------------------------------------ Robert W. Cross, President and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, this Amendment to the Registration Statement has been signed below by the following persons on November 3, 1997 in the capacities indicated.
SIGNATURE TITLE /s/ ROBERT W. CROSS President, Chief Executive Officer (Principal Executive - ------------------------------------------ Officer) and a Director Robert W. Cross /s/ DENNIS J. NOWAK Vice President--Finance and Administration, Chief - ------------------------------------------ Financial Officer, Treasurer and Secretary (Principal Dennis J. Nowak Financial and Accounting Officer) * Chairman of the Board and Director - ------------------------------------------ Leonard A. Batterson * Director - ------------------------------------------ Steven Lazarus * Director - ------------------------------------------ Richard W. Siegel * Director - ------------------------------------------ Robert W. Shaw. Jr. * /s/ DENNIS J. NOWAK - ------------------------------------------ Dennis J. Nowak As Attorney-in-fact
II-5 81 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Stockholders Nanophase Technologies Corporation We have audited the financial statements of Nanophase Technologies Corporation as of December 31, 1995 and 1996 and September 30, 1997, and for each of the three years in the period ended December 31, 1996 and for the nine month period ended September 30, 1997, and have issued our report thereon dated October 24, 1997. Our audits also included the financial statement schedule listed in Item 16(b) of this Registration Statement. This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ ERNST & YOUNG LLP Chicago, Illinois Ernst & Young LLP October 24, 1997 S-1 82 SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS BALANCE AT ---------------------- BALANCE AT BEGINNING OF COSTS AND OTHER END DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD Year ended December 31, 1994: Deferred tax asset valuation account... $ 744,300 $ 509,700 $-- $-- $1,254,000 ========== ========== === === ========== Year ended December 31, 1995: Deferred tax asset valuation account... $1,254,000 $1,015,000 $-- $-- $2,269,000 ========== ========== === === ========== Year ended December 31, 1996: Deferred tax asset valuation account... $2,269,000 $2,081,000 $-- $-- $4,350,000 ========== ========== === === ========== Nine months ended September 30, 1997: Allowance for doubtful accounts........ $ -- $ 46,976 $-- $-- $ 46,976 ========== ========== === === ========== Deferred tax asset valuation account... $4,350,000 $1,249,000 $-- $-- $5,599,000 ========== ========== === === ==========
S-2 83 EXHIBIT INDEX
EXHIBIT NUMBER EXHIBIT - ------- ------- 1 Form of Underwriting Agreement. 3.1 Form of Certificate of Incorporation of the Registrant. 3.2 Form of Bylaws of the Registrant. 4.1 Specimen stock certificate representing Common Stock. 5 Opinion of Katten Muchin & Zavis as to the legality of the securities being registered (including consent). 10.1 The Nanophase Technologies Corporation Amended and Restated 1992 Stock Option Plan, as amended. 10.2 Form of Directors Indemnification Agreement. 10.3 Amended and Restated Registration Rights Agreements dated as of March 16, 1994, as amended. 10.13 Purchase Order and Purchase and Distribution Agreement dated February 27, 1997 between the Registrant and Moyco Technologies, Incorporated, as amended. 10.17 Supply Agreement between the Registrant and Schering-Plough HealthCare Products, Inc. dated as of March 15, 1997. 10.18 Amended and Restated Shareholders' Agreement dated as of March 16, 1994, as amended 11 Statement regarding computation of per share earnings. 23.1 Consent of Ernst & Young LLP. 23.3 Consent of McAndrews, Held & Malloy, Ltd. 27 Financial Data Schedule.
EX-1 2 FORM OF UNDERWRITING AGREEMENT 1 EXHIBIT 1 5,000,000 Shares NANOPHASE TECHNOLOGIES CORPORATION Common Stock UNDERWRITING AGREEMENT __________, 1997 DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION FURMAN SELZ LLC CIBC OPPENHEIMER CORP. As representatives of the several Underwriters named in Schedule I hereto c/o Donaldson, Lufkin & Jenrette Securities Corporation 277 Park Avenue New York, New York 10172 Dear Sirs: Nanophase Technologies Corporation, a Delaware corporation (the "COMPANY"), proposes to issue and sell 5,000,000 shares of its Common Stock, $.01 par value (the "FIRM SHARES"), to the several underwriters named in Schedule I hereto (the "UNDERWRITERS"). The Company also proposes to issue and sell to the several Underwriters not more than an additional 750,000 shares of its Common Stock, $.01 par value (the "ADDITIONAL SHARES"), if requested by the Underwriters as provided in Section 2 hereof. The Firm Shares and the Additional Shares are hereinafter referred to collectively as the "SHARES". The 2 shares of common stock of the Company to be outstanding after giving effect to the sales contemplated hereby are hereinafter referred to as the "COMMON STOCK". SECTION 1. Registration Statement and Prospectus. The Company has prepared and filed with the Securities and Exchange Commission (the "COMMISSION") in accordance with the provisions of the Securities Act of 1933, as amended, and the rules and regulations of the Commission thereunder (collectively, the "ACT"), a registration statement on Form S-1 (File No. 333-36937), including a form of prospectus subject to completion, relating to the Shares. The registration statement, as amended at the time it became effective, including the information (if any) deemed to be part of the registration statement at the time of effectiveness pursuant to Rule 430A under the Act, is hereinafter referred to as the "REGISTRATION STATEMENT"; and the prospectus in the form first used to confirm sales of Shares is hereinafter referred to as the "PROSPECTUS". If the Company has filed or is required pursuant to the terms hereof to file a registration statement pursuant to Rule 462(b) under the Act registering additional shares of Common Stock (a "RULE 462(b) REGISTRATION STATEMENT"), then, unless otherwise specified, any reference herein to the term "Registration Statement" shall be deemed to include such Rule 462(b) Registration Statement. SECTION 2. Agreements to Sell and Purchase and Lock-Up Agreements. On the basis of the representations and warranties contained in this Agreement, and subject to its terms and conditions, the Company agrees to issue and sell to each Underwriter, and each Underwriter agrees, severally and not jointly, to purchase from the Company at a price per Share of $______ (the "PURCHASE PRICE") the number of Firm Shares set forth opposite the name of such Underwriter in Schedule I hereto. On the basis of the representations and warranties contained in this Agreement, and subject to its terms and conditions, the Company agrees to issue and sell to the Underwriters the Additional Shares and the Underwriters shall have the right to purchase, severally and not jointly, up to 750,000 Additional Shares from the Company at the Purchase Price. Additional Shares may be purchased solely for the purpose of covering over-allotments made in connection with the offering of the Firm Shares. The Underwriters may exercise their right to purchase Additional Shares in whole or in part from time to time by giving written notice thereof to the Company within 30 days after the date of this Agreement. You shall give any such notice on behalf of the Underwriters and such notice shall specify the aggregate number of Additional Shares to be purchased pursuant to such exercise and the date for payment and delivery thereof, which date shall be a business day (i) no earlier than two business days after such notice has been given (and, in any event, no earlier than the Closing Date (as hereinafter defined)) and (ii) no later than ten business days after such 2 3 notice has been given. If any Additional Shares are to be purchased, each Underwriter, severally and not jointly, agrees to purchase from the Company the number of Additional Shares (subject to such adjustments to eliminate fractional shares as you may determine) which bears the same proportion to the total number of Additional Shares to be purchased from the Company as the number of Firm Shares set forth opposite the name of such Underwriter in Schedule I bears to the total number of Firm Shares. The Company hereby agrees not to (i) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock or (ii) enter into any swap or other arrangement that transfers all or a portion of the economic consequences associated with the ownership of any Common Stock (regardless of whether any of the transactions described in clause (i) or (ii) is to be settled by the delivery of Common Stock, or such other securities, in cash or otherwise) for a period of 180 days after the date of the Prospectus without the prior written consent of Donaldson, Lufkin & Jenrette Securities Corporation, except (a) pursuant to this Agreement, (b) pursuant to the preferred stock conversion to be completed upon the Closing Date, (c) for the Company's grant of stock options or issuance of Common Stock pursuant to the exercise of stock options outstanding on the date of the Prospectus, pursuant to the Company's 1992 Amended and Restated Stock Option Plan, as amended and as described in the Prospectus, or (d) for the Company's issuance of Common Stock pursuant to the exercise of warrants outstanding as of the date of the Prospectus. Notwithstanding the foregoing, during such period (i) the Company may grant stock options pursuant to the Company's existing stock option plan and (ii) the Company may issue shares of Common Stock upon the exercise of an option or warrant or the conversion of a security outstanding on the date hereof. The Company also agrees not to file any registration statement with respect to any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock for a period of 180 days after the date of the Prospectus without the prior written consent of Donaldson, Lufkin & Jenrette Securities Corporation. The Company shall, prior to or concurrently with the execution of this Agreement, deliver an agreement executed by each of the directors and officers of the Company substantially in the form of Annex I attached hereto. SECTION 3. Terms of Public Offering. The Company is advised by you that the Underwriters propose (i) to make a public offering of their respective portions of the Shares as soon after the execution and delivery of this Agreement as in your judgment is advisable and (ii) initially to offer the Shares upon the terms set forth in the Prospectus. 3 4 SECTION 4. Delivery and Payment. Delivery to the Underwriters of and payment for the Firm Shares shall be made at 9:00 A.M., New York City time, on __________ , 1997 (the "CLOSING DATE") at such place as you shall designate. The Closing Date and the location of delivery of and payment for the Firm Shares may be varied by agreement between you and the Company. Delivery to the Underwriters of and payment for any Additional Shares to be purchased by the Underwriters shall be made at such place as you shall designate at 9:00 A.M., New York City time, on the date specified in the applicable exercise notice given by you pursuant to Section 2 (an "OPTION CLOSING DATE"). Any such Option Closing Date and the location of delivery of and payment for such Additional Shares may be varied by agreement between you and the Company. Certificates for the Shares shall be registered in such names and issued in such denominations as you shall request in writing not later than two full business days prior to the Closing Date or an Option Closing Date, as the case may be. Such certificates shall be made available to you for inspection not later than 9:30 A.M., New York City time, on the business day prior to the Closing Date or the applicable Option Closing Date, as the case may be. Certificates in definitive form evidencing the Shares shall be delivered to you on the Closing Date or the applicable Option Closing Date, as the case may be, with any transfer taxes thereon duly paid by the Company, for the respective accounts of the several Underwriters, against payment to the Company of the Purchase Price therefor by wire transfer of Federal or other funds immediately available in New York City. SECTION 5. Agreements of the Company. The Company agrees with you: (a) To advise you promptly and, if requested by you, to confirm such advice in writing, (i) of any request by the Commission for amendments to the Registration Statement or amendments or supplements to the Prospectus or for additional information, (ii) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or of the suspension of qualification of the Shares for offering or sale in any jurisdiction, or the initiation of any proceeding for such purposes, (iii) when any amendment to the Registration Statement becomes effective, (iv) if the Company is required to file a Rule 462(b) Registration Statement after the effectiveness of this Agreement, when the Rule 462(b) Registration Statement has become effective and (v) of the happening of any event during the period referred to in Section 5(d) below which makes any statement of a material fact made in the Registration Statement or the Prospectus untrue or which requires any additions to or changes in the Registration Statement or the Prospectus in order to make the statements therein not misleading. If at any time the Commission shall issue any stop order 4 5 suspending the effectiveness of the Registration Statement, the Company will use its best efforts to obtain the withdrawal or lifting of such order at the earliest possible time. (b) To furnish to you four (4) signed copies of the Registration Statement as first filed with the Commission and of each amendment to it, including all exhibits, and to furnish to you and each Underwriter designated by you such number of conformed copies of the Registration Statement as so filed and of each amendment to it, without exhibits, as you may reasonably request. (c) To prepare the Prospectus, the form and substance of which shall be satisfactory to you, and to file the Prospectus in such form with the Commission within the applicable period specified in Rule 424(b) under the Act; during the period specified in Section 5(d) below, not to file any further amendment to the Registration Statement and not to make any amendment or supplement to the Prospectus of which you shall not previously have been advised or to which you shall reasonably object after being so advised; and, during such period, to prepare and file with the Commission, promptly upon your reasonable request, any amendment to the Registration Statement or amendment or supplement to the Prospectus which may be necessary or advisable in connection with the distribution of the Shares by you, and to use its best efforts to cause any such amendment to the Registration Statement to become promptly effective. (d) Prior to 10:00 A.M., New York City time, on the first business day after the date of this Agreement and from time to time thereafter for such period as in the opinion of counsel for the Underwriters a prospectus is required by law to be delivered in connection with sales by an Underwriter or a dealer, to furnish in New York City to each Underwriter and any dealer as many copies of the Prospectus (and of any amendment or supplement to the Prospectus) as such Underwriter or dealer may reasonably request. (e) If during the period specified in Section 5(d), any event shall occur or condition shall exist as a result of which, in the opinion of counsel for the Underwriters, it becomes necessary to amend or supplement the Prospectus in order to make the statements therein, in the light of the circumstances when the Prospectus is delivered to a purchaser, not misleading, or if, in the opinion of counsel for the Underwriters, it is necessary to amend or supplement the Prospectus to comply with applicable law, forthwith to prepare and file with the Commission an appropriate amendment or supplement to the Prospectus so that the statements in the Prospectus, as so amended or supplemented, will not, in the light of the circumstances when it is so delivered, be misleading, or so that the Prospectus will comply with applicable law, and to furnish to each Underwriter 5 6 and to any dealer as many copies thereof as such Underwriter or dealer may reasonably request. (f) Prior to any public offering of the Shares, to cooperate with you and counsel for the Underwriters in connection with the registration or qualification of the Shares for offer and sale by the several Underwriters and by dealers under the state securities or Blue Sky laws of such jurisdictions as you may request, to continue such registration or qualification in effect so long as required for distribution of the Shares and to file such consents to service of process or other documents as may be necessary in order to effect such registration or qualification; provided, however, that the Company shall not be required in connection therewith to qualify as a foreign corporation in any jurisdiction in which it is not now so qualified or to take any action that would subject it to general consent to service of process or taxation other than as to matters and transactions relating to the Prospectus, the Registration Statement, any preliminary prospectus or the offering or sale of the Shares, in any jurisdiction in which it is not now so subject. (g) To mail and make generally available to its stockholders as soon as practicable an earnings statement covering the twelve-month period ending December 31, 1998 that shall satisfy the provisions of Section 11(a) of the Act, and to advise you in writing when such statement has been so made available. (h) During the period of three years after the date of this Agreement, to furnish to you as soon as available copies of all reports or other communications furnished to the record holders of Common Stock or furnished to or filed with the Commission or any national securities exchange or market on which any class of securities of the Company is listed and such other publicly available information concerning the Company as you may reasonably request. (i) Whether or not the transactions contemplated in this Agreement are consummated or this Agreement is terminated, to pay or cause to be paid all expenses incident to the performance of its obligations under this Agreement, including: (i) the fees, disbursements and expenses of the Company's counsel and the Company's accountants in connection with the registration and delivery of the Shares under the Act and all other fees and expenses in connection with the preparation, printing, filing and distribution of the Registration Statement (including financial statements and exhibits), any preliminary prospectus, the Prospectus and all amendments and supplements to any of the foregoing, including the mailing and delivering of copies thereof to the Underwriters and dealers in the quantities specified herein, (ii) all costs and expenses related to the transfer and delivery of the Shares to the Underwriters, including any transfer or 6 7 other taxes payable thereon, (iii) all costs of printing or producing this Agreement and any other agreements or documents in connection with the offering, purchase, sale or delivery of the Shares, (iv) all expenses in connection with the registration or qualification of the Shares for offer and sale under the securities or Blue Sky laws of the several states and all costs of printing or producing any Preliminary and Supplemental Blue Sky Memoranda in connection therewith (including the filing fees and fees and disbursements of counsel for the Underwriters in connection with such registration or qualification and memoranda relating thereto), (v) the filing fees and disbursements of counsel for the Underwriters in connection with the review and clearance of the offering of the Shares by the National Association of Securities Dealers, Inc., (vi) all fees and expenses in connection with the preparation and filing of the registration statement on Form 8-A relating to the Common Stock and all costs and expenses incident to the listing of the Shares on the Nasdaq National Market, (vii) the cost of printing certificates representing the Shares, (viii) the costs and charges of any transfer agent, registrar and/or depositary, and (ix) all other costs and expenses incident to the performance of the obligations of the Company hereunder for which provision is not otherwise made in this Section. It is understood, however, that, except as otherwise provided in this Agreement, the Underwriters will pay all of their costs and expenses, including fees and disbursements of their counsel, stock transfer taxes payable on the resale of any of the Shares by them and any advertising expenses connected with any offers they make. (j) To use its best efforts to list for quotation the Shares on the Nasdaq National Market and to maintain the listing of the Shares on the Nasdaq National Market or the New York Stock Exchange, with your approval, for a period of three years after the date of this Agreement. (k) To use its best efforts to do and perform all things required or necessary to be done and performed under this Agreement by the Company prior to the Closing Date or any Option Closing Date, as the case may be, and to satisfy all conditions precedent to the delivery of the Shares. (l) If the Registration Statement at the time of the effectiveness of this Agreement does not cover all of the Shares, to file a Rule 462(b) Registration Statement with the Commission registering the Shares not so covered in compliance with Rule 462(b) by 10:00 P.M., New York City time, on the date of this Agreement and to pay to the Commission the filing fee for such Rule 462(b) Registration Statement at the time of the filing thereof or to give irrevocable instructions for the payment of such fee pursuant to Rule 111(b) under the Act. 7 8 SECTION 6. Representations and Warranties of the Company. The Company represents and warrants to each Underwriter that: (a) The Registration Statement has become effective (other than any Rule 462(b) Registration Statement to be filed by the Company after the effectiveness of this Agreement); any Rule 462(b) Registration Statement filed after the effectiveness of this Agreement will become effective no later than 10:00 P.M., New York City time, on the date of this Agreement; and no stop order suspending the effectiveness of the Registration Statement is in effect, and no proceedings for such purpose are pending before or threatened by the Commission. (b) (i) The Registration Statement (other than any Rule 462(b) Registration Statement to be filed by the Company after the effectiveness of this Agreement), when it became effective, did not contain and, as amended, if applicable, will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, (ii) the Registration Statement (other than any Rule 462(b) Registration Statement to be filed by the Company after the effectiveness of this Agreement) and the Prospectus comply and, as amended or supplemented, if applicable, will comply in all material respects with the Act, (iii) if the Company is required to file a Rule 462(b) Registration Statement after the effectiveness of this Agreement, such Rule 462(b) Registration Statement and any amendments thereto, when they become effective (A) will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading and (B) will comply in all material respects with the Act and (iv) the Prospectus does not contain and, as amended or supplemented, if applicable, will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, except that the representations and warranties set forth in this paragraph do not apply to statements or omissions in the Registration Statement or the Prospectus based upon information relating to any Underwriter furnished to the Company in writing by such Underwriter through you expressly for use therein. (c) Each preliminary prospectus filed as part of the registration statement as originally filed or as part of any amendment thereto, or filed pursuant to Rule 424 under the Act, complied when so filed in all material respects with the Act, and did not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, except that the representations and warranties set forth in this paragraph do not apply to statements or omissions in any preliminary prospectus 8 9 based upon information relating to any Underwriter furnished to the Company in writing by such Underwriter through you expressly for use therein. (d) The Company has been duly incorporated, is validly existing as a corporation in good standing under the laws of its jurisdiction of incorporation and has the corporate power and authority to carry on its business as described in the Prospectus and to own, lease and operate its properties, and is duly qualified and is in good standing as a foreign corporation authorized to do business in each jurisdiction in which the nature of its business or its ownership or leasing of property requires such qualification, except where the failure to be so qualified would not have a material adverse effect on the business, prospects, financial condition or results of operations of the Company. (e) There are no outstanding subscriptions, rights, warrants, options, calls, convertible securities, commitments of sale or liens granted or issued by the Company relating to or entitling any person to purchase or otherwise to acquire any shares of the capital stock of the Company, except as otherwise disclosed in the Prospectus. (f) All the outstanding shares of capital stock of the Company have been duly authorized and validly issued and are fully paid, non-assessable and upon the occurrence of the Closing will not be subject to any preemptive or similar rights; and the Shares have been duly authorized and, when issued and delivered to the Underwriters against payment therefor as provided by this Agreement, will be validly issued, fully paid and non-assessable, and the issuance of such Shares will not be subject to any preemptive or similar rights. (g) The Company has no direct or indirect subsidiaries. (h) The authorized capital stock of the Company conforms as to legal matters to the description thereof contained in the Prospectus. (i) The Company is not now and will not be in violation of its charter or by-laws or in default in the performance of any obligation, agreement, covenant or condition contained in any indenture, loan agreement, mortgage, lease or other agreement or instrument that is material to the Company to which the Company is a party or by which the Company or its property is bound. (j) The execution, delivery and performance of this Agreement by the Company, the compliance by the Company with all the provisions hereof and the consummation of the transactions contemplated hereby will not (i) require any consent, approval, authorization or other order of, or qualification with, any court 9 10 or governmental body or agency (except such as may be required under the securities or Blue Sky laws of the various states, the Nasdaq National Market, the National Association of Securities Dealers, Inc. or Delaware or Illinois law in connection with the Company's reincorporation in Delaware), (ii) conflict with or constitute a breach of any of the terms or provisions of, or a default under, the charter or by-laws of the Company in effect at such time or any indenture, loan agreement, mortgage, lease or other agreement or instrument that is material to the Company to which the Company is a party or by which the Company or its property is bound, (iii) violate or conflict with any applicable law or any rule, regulation, judgment, order or decree of any court or any governmental body or agency having jurisdiction over the Company or its property or (iv) result in the suspension, termination or revocation of any Authorization (as defined below) of the Company or any other impairment of the rights of the holder of any such Authorization. (k) There are no legal or governmental proceedings pending or threatened to which the Company is or could be a party or to which any of its property is or could be subject that are required to be described in the Registration Statement or the Prospectus and are not so described; nor are there any statutes, regulations, contracts or other documents that are required by the Act to be described in the Registration Statement or the Prospectus or to be filed as exhibits to the Registration Statement that are not so described or filed as required. (l) The Company has not violated any foreign, federal, state or local law or regulation relating to the protection of human health and safety, the environment or hazardous or toxic substances or wastes, pollutants or contaminants ("ENVIRONMENTAL LAWS") or any provisions of the Employee Retirement Income Security Act of 1974, as amended, or the rules and regulations promulgated thereunder, except for such violations which, singly or in the aggregate, would not have a material adverse effect on the business, prospects, financial condition or results of operation of the Company. (m) The Company has such permits, licenses, consents, exemptions, franchises, authorizations and other approvals (each, an "AUTHORIZATION") of, and has made all filings with and notices to, all governmental or regulatory authorities and self-regulatory organizations and all courts and other tribunals, including, without limitation, under any applicable Environmental Laws, as are necessary to own, lease, license and operate its properties and to conduct its business, except where the failure to have any such Authorization or to make any such filing or notice would not, singly or in the aggregate, have a material adverse effect on the business, prospects, financial condition or results of operations of the Company. Each such Authorization is valid and in full force and effect and the Company is in compliance with all the terms and conditions thereof and with the rules and 10 11 regulations of the authorities and governing bodies having jurisdiction with respect thereto; and no event has occurred (including, without limitation, the receipt of any notice from any authority or governing body) which allows or, after notice or lapse of time or both, would allow, revocation, suspension or termination of any such Authorization or results or, after notice or lapse of time or both, would result in any other impairment of the rights of the holder of any such Authorization; and such Authorizations contain no restrictions that are burdensome to the Company; except where such failure to be valid and in full force and effect or to be in compliance, the occurrence of any such event or the presence of any such restriction would not, singly or in the aggregate, have a material adverse effect on the business, prospects, financial condition or results of operations of the Company. (n) There are no costs or liabilities associated with Environmental Laws (including, without limitation, any capital or operating expenditures required for clean-up, closure of properties or compliance with Environmental Laws or any Authorization, any related constraints on operating activities and any potential liabilities to third parties) which would, singly or in the aggregate, have a material adverse effect on the business, prospects, financial condition or results of operations of the Company. (o) This Agreement has been duly authorized, executed and delivered by the Company. (p) Ernst & Young LLP are independent public accountants with respect to the Company as required by the Act. (q) The financial statements included in the Registration Statement and the Prospectus (and any amendment or supplement thereto), together with related schedules and notes, present fairly the financial position, statements of operations, stockholders' equity and cash flows of the Company on the basis stated therein at the respective dates or for the respective periods to which they apply; such financial statements and related schedules and notes have been prepared in accordance with generally accepted accounting principles consistently applied throughout the periods involved, except as disclosed therein; the supporting schedules, if any, included in the Registration Statement present fairly in accordance with generally accepted accounting principles the information required to be stated therein; and the other financial and statistical information and data set forth in the Registration Statement and the Prospectus (and any amendment or supplement thereto) are, in all material respects, accurately presented and prepared on a basis consistent with such financial statements and the books and records of the Company. 11 12 (r) The Company is not and, after giving effect to the offering and sale of the Shares and the application of the proceeds thereof as described in the Prospectus, will not be, an "investment company" as such term is defined in the Investment Company Act of 1940, as amended. (s) Except as otherwise disclosed in the Prospectus, there are no contracts, agreements or understandings between the Company and any person granting such person the right to require the Company to file a registration statement under the Act with respect to any securities of the Company or to require the Company to include such securities with the Shares registered pursuant to the Registration Statement. (t) Since the respective dates as of which information is given in the Prospectus, other than as set forth in the Prospectus (exclusive of any amendments or supplements thereto subsequent to the date of this Agreement), (i) there has not occurred any material adverse change or any development involving a prospective material adverse change in the condition, financial or otherwise, or the earnings, business, management or operations of the Company, (ii) there has not been any material adverse change or any development involving a prospective material adverse change in the capital stock or in the long-term debt of the Company and (iii) the Company has not incurred any material liability or obligation, direct or contingent. (u) Each certificate signed by any officer of the Company and delivered to the Underwriters or counsel for the Underwriters shall be deemed to be a representation and warranty by the Company to the Underwriters as to the matters covered thereby. (v) The Company owns or possesses, or can acquire on reasonable terms, all patents, patent rights, licenses, inventions, copyrights, know-how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures), trademarks, service marks and trade names ("intellectual property") currently employed by it in connection with the business now operated by it except where the failure to own or possess or otherwise be able to acquire such intellectual property would not, singly or in the aggregate, have a material adverse effect on the business, prospects, financial condition or results of operation of the Company; and the Company has not received any notice of infringement of or conflict with asserted rights of others with respect to any of such intellectual property which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would have a material adverse effect on the business, prospects, financial condition or results of operations of the Company. 12 13 (w) The Company has good and marketable title in fee simple to all real property and good and marketable title to all personal property owned by it which is material to the business of the Company, in each case free and clear of all liens, encumbrances and defects except such as are described in the Prospectus or such as do not materially affect the value of such property and do not interfere with the use made and proposed to be made of such property by the Company; and any real property and buildings held under lease by the Company are held by it under valid, subsisting and enforceable leases with such exceptions as are not material and do not interfere with the use made and proposed to be made of such property and buildings by the Company, in each case except as described in the Prospectus. SECTION 7. Indemnification. (a) The Company agrees to indemnify and hold harmless each Underwriter, its directors, its officers and each person, if any, who controls any Underwriter within the meaning of Section 15 of the Act or Section 20 of the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"), from and against any and all losses, claims, damages, liabilities and judgments (including, without limitation, any legal or other expenses incurred in connection with investigating or defending any matter, including any action, that could give rise to any such losses, claims, damages, liabilities or judgments) caused by any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (or any amendment thereto), the Prospectus (or any amendment or supplement thereto) or any preliminary prospectus, or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as such losses, claims, damages, liabilities or judgments are caused by any such untrue statement or omission or alleged untrue statement or omission based upon information relating to any Underwriter furnished in writing to the Company by such Underwriter through you expressly for use therein; provided, however, that, with respect to any untrue statement or alleged untrue statement or omission or alleged omission made in any preliminary prospectus, the foregoing indemnity agreement shall not inure to the benefit of any Underwriter from whom the person asserting any such losses, claims, damages or liabilities purchased the Shares concerned, or any person controlling such Underwriter, to the extent that any such loss, claim, damage or liability of such Underwriter results from the fact that a copy of the Prospectus (or Prospectus as amended or supplemented) was not sent or given to such person, if required by the Securities Act so to have been delivered, at or prior to the written confirmation of the sale of such Shares to such person and the untrue statement or alleged untrue statement or omission or alleged omission was corrected in such Prospectus (or Prospectus as amended or supplemented), if the Company had 13 14 previously furnished copies of such Prospectus (or Prospectus as amended or supplemented) to such Underwriter. (b) Each Underwriter agrees, severally and not jointly, to indemnify and hold harmless the Company, its directors, its officers who signed the Registration Statement and each person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, to the same extent as the foregoing indemnity from the Company to such Underwriter but only with reference to information relating to such Underwriter furnished in writing to the Company by such Underwriter through you expressly for use in the Registration Statement (or any amendment thereto), the Prospectus (or any amendment or supplement thereto) or any preliminary prospectus. (c) In case any action shall be commenced involving any person in respect of which indemnity may be sought pursuant to Section 7(a) or 7(b) (the "indemnified party"), the indemnified party shall promptly notify the person against whom such indemnity may be sought (the "indemnifying party") in writing and the indemnifying party shall assume the defense of such action, including the employment of counsel reasonably satisfactory to the indemnified party and the payment of all fees and expenses of such counsel, as incurred (except that in the case of any action in respect of which indemnity may be sought pursuant to both Sections 7(a) and 7(b), the Underwriter shall not be required to assume the defense of such action pursuant to this Section 7(c), but may employ separate counsel and participate in the defense thereof, but the fees and expenses of such counsel, except as provided below, shall be at the expense of such Underwriter). Any indemnified party shall have the right to employ separate counsel in any such action and participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of the indemnified party unless (i) the employment of such counsel shall have been specifically authorized in writing by the indemnifying party, (ii) the indemnifying party shall have failed to assume the defense of such action or employ counsel reasonably satisfactory to the indemnified party or (iii) the named parties to any such action (including any impleaded parties) include both the indemnified party and the indemnifying party, and the indemnified party shall have been advised by such counsel that there may be one or more legal defenses available to it which are different from or additional to those available to the indemnifying party (in which case the indemnifying party shall not have the right to assume the defense of such action on behalf of the indemnified party). In any such case, the indemnifying party shall not, in connection with any one action or separate but substantially similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances, be liable for the fees and expenses of more than one separate firm of attorneys (in addition to any local counsel) for all indemnified parties and all such fees and expenses shall be reimbursed as they are incurred. Such firm shall 14 15 be designated in writing by Donaldson, Lufkin & Jenrette Securities Corporation, in the case of parties indemnified pursuant to Section 7(a), and by the Company, in the case of parties indemnified pursuant to Section 7(b). The indemnifying party shall indemnify and hold harmless the indemnified party from and against any and all losses, claims, damages, liabilities and judgments by reason of any settlement of any action (i) effected with its written consent or (ii) effected without its written consent if the settlement is entered into more than twenty business days after the indemnifying party shall have received a request from the indemnified party for reimbursement for the fees and expenses of counsel (in any case where such fees and expenses are at the expense of the indemnifying party) and, prior to the date of such settlement, the indemnifying party shall have failed to comply with such reimbursement request. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement or compromise of, or consent to the entry of judgment with respect to, any pending or threatened action in respect of which the indemnified party is or could have been a party and indemnity or contribution may be or could have been sought hereunder by the indemnified party, unless such settlement, compromise or judgment (i) includes an unconditional release of the indemnified party from all liability on claims that are or could have been the subject matter of such action and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act, by or on behalf of the indemnified party. (d) To the extent the indemnification provided for in this Section 7 is unavailable to an indemnified party or insufficient in respect of any losses, claims, damages, liabilities or judgments referred to therein, then each indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, liabilities and judgments (i) in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and the Underwriters on the other hand from the offering of the Shares or (ii) if the allocation provided by clause 7(d)(i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause 7(d)(i) above but also the relative fault of the Company on the one hand and the Underwriters on the other hand in connection with the statements or omissions which resulted in such losses, claims, damages, liabilities or judgments, as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the Underwriters on the other hand shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Company, and the total underwriting discounts and commissions received by the Underwriters, bear to the total price to the public of the Shares, in each case as set forth in the table on the cover page of the Prospectus. The relative fault of the Company on the one hand and the Underwriters on the other hand shall be determined by reference to, 15 16 among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or the Underwriters and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Underwriters agree that it would not be just and equitable if contribution pursuant to this Section 7(d) were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. The amount paid or payable by an indemnified party as a result of the losses, claims, damages, liabilities or judgments referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any legal or other expenses incurred by such indemnified party in connection with investigating or defending any matter, including any action, that could have given rise to such losses, claims, damages, liabilities or judgments. Notwithstanding the provisions of this Section 7, no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Shares underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations to contribute pursuant to this Section 7(d) are several in proportion to the respective number of Shares purchased by each of the Underwriters hereunder and not joint. (e) The remedies provided for in this Section 7 are not exclusive and shall not limit any rights or remedies which may otherwise be available to any indemnified party at law or in equity. SECTION 8. Conditions of Underwriters' Obligations. The several obligations of the Underwriters to purchase the Firm Shares under this Agreement are subject to the satisfaction of each of the following conditions: (a) All the representations and warranties of the Company contained in this Agreement shall be true and correct on the Closing Date with the same force and effect as if made on and as of the Closing Date. (b) If the Company is required to file a Rule 462(b) Registration Statement after the effectiveness of this Agreement, such Rule 462(b) Registration Statement shall have become effective by 10:00 P.M., New York City time, on the 16 17 date of this Agreement; and no stop order suspending the effectiveness of the Registration Statement shall have been issued and no proceedings for that purpose shall have been commenced or shall be pending before or contemplated by the Commission. (c) You shall have received on the Closing Date a certificate dated the Closing Date, signed by Robert W. Cross and Dennis J. Nowak, in their respective capacities as the President and Chief Executive Officer and Chief Financial Officer and Vice President of Finance and Administration of the Company, confirming the matters set forth in Sections 6(t), 8(a) and 8(b) and that the Company has complied with all of the agreements and satisfied all of the conditions herein contained and required to be complied with or satisfied by the Company on or prior to the Closing Date. (d) Since the respective dates as of which information is given in the Prospectus other than as set forth in the Prospectus (exclusive of any amendments or supplements thereto subsequent to the date of this Agreement), (i) there shall not have occurred any change or any development involving a prospective change in the condition, financial or otherwise, or the earnings, business, management or operations of the Company, (ii) there shall not have been any change or any development involving a prospective change in the capital stock or in the long-term debt of the Company and (iii) the Company shall not have incurred any liability or obligation, direct or contingent, the effect of which, in any such case described in clause 8(d)(i), 8(d)(ii) or 8(d)(iii), in your judgment, is material and adverse and, in your judgment, makes it impracticable to market the Shares on the terms and in the manner contemplated in the Prospectus. (e) You shall have received on the Closing Date an opinion (satisfactory to you and counsel for the Underwriters), dated the Closing Date, of Katten Muchin & Zavis, counsel for the Company, to the effect that: (i) the Company has been duly incorporated, is validly existing as a corporation in good standing under the laws of its jurisdiction of incorporation and has the corporate power and authority to carry on its business as described in the Prospectus and to own, lease and operate its properties; (ii) to such counsel's knowledge, the Company is duly qualified and is in good standing as a foreign corporation authorized to do business in each jurisdiction in which the nature of its business or its ownership or leasing of property requires such qualification, except where the failure to be so qualified would not have a material adverse effect on 17 18 the business, prospects, financial condition or results of operations of the Company; (iii) all the outstanding shares of capital stock of the Company have been duly authorized and validly issued and are fully paid, non-assessable and not subject to any statutory preemptive rights, or to such counsel's knowledge, any contractual rights to subscribe for more shares; (iv) the Shares have been duly authorized and, when issued and delivered to the Underwriters against payment therefor as provided by this Agreement, will be validly issued, fully paid and non-assessable, and the issuance of such Shares will not be subject to any statutory preemptive rights, or to such counsel's knowledge, any contractual rights to subscribe for more shares; (v) this Agreement has been duly authorized, executed and delivered by the Company; (vi) the authorized capital stock of the Company conforms as to legal matters to the description thereof contained in the Prospectus; (vii) the Registration Statement has become effective under the Act, no stop order suspending its effectiveness has been issued and no proceedings for that purpose are, to such counsel's knowledge, pending before or contemplated by the Commission; (viii) the statements under the captions "Business--Government Regulations", "Management--Executive Compensation", "--Compensation Committee Interlocks and Insider Participation", "--Employment Agreements", "--Stock Option Plan", "--401k Plan", "--Limitation of Liability and Indemnification Matters", "--Certain Relationships and Related Transactions", "Description of Capital Stock--Certain Corporate Provisions", "Registration Rights" and "Underwriting" in the Prospectus and Items 14 and 15 of Part II of the Registration Statement, insofar as such statements constitute a summary of the legal matters, documents or proceedings referred to therein, fairly present the information called for with respect to such legal matters, documents and proceedings; (ix) the Company is not in violation of its charter or by-laws and, to such counsel's knowledge, the Company is not in default in the 18 19 performance of any obligation, agreement, covenant or condition contained in any indenture, loan agreement, mortgage, lease or other agreement or instrument that is material to the Company to which the Company is a party or by which the Company or its property is bound; (x) the execution, delivery and performance of this Agreement by the Company, the compliance by the Company with all the provisions hereof and the consummation of the transactions contemplated hereby will not (A) require any consent, approval, authorization or other order of, or qualification with, any court or governmental body or agency (except such as may be required under the securities or Blue Sky laws of the various states, the Nasdaq National Market, the National Association of Securities Dealers, Inc. or Delaware or Illinois Law in connection with the Company's reincorporation in Delaware), (B) conflict with or constitute a breach of any of the terms or, to such counsel's knowledge, provisions of, or a default under, the charter or by-laws of the Company or any indenture, loan agreement, mortgage, lease or other agreement or instrument that is material to the Company to which the Company is a party or by which the Company or its property is bound, (C) violate or conflict with any applicable law or any rule, regulation, judgment, order or decree of any court or any governmental body or agency having jurisdiction over the Company or its property or (D) result in the suspension, termination or revocation of any Authorization of the Company or any other impairment of the rights of the holder of any such Authorization; (xi) such counsel does not know of any legal or governmental proceedings pending or threatened to which the Company is or could be a party or to which any of their property is or could be subject that are required to be described in the Registration Statement or the Prospectus and are not so described, or of any statutes, regulations, contracts or other documents that are required to be described in the Registration Statement or the Prospectus or to be filed as exhibits to the Registration Statement that are not so described or filed as required by the Act; (xii) to such counsel's knowledge, the Company has not violated any Environmental Law or any provisions of the Employee Retirement Income Security Act of 1974, as amended, or the rules and regulations promulgated thereunder, except for such violations which, singly or in the aggregate, would not have a material adverse effect on the business, prospects, financial condition or results of operation of the Company; (xiii) to such counsel's knowledge, (A) the Company has such Authorizations of, and has made filings with and notices to, governmental or regulatory authorities and self-regulatory organizations and courts and 19 20 other tribunals, including, without limitation, under any applicable Environmental Laws, as are necessary to own, lease, license and operate its respective properties and to conduct its business as presently conducted and as contemplated by the Prospectus, except where the failure to have any such Authorization or to make any such filing or notice would not, singly or in the aggregate, have a material adverse effect on the business, prospects, financial condition or results of operations of the Company; (B) each such Authorization is valid and in full force and effect and the Company is in compliance with all the terms and conditions thereof and with the rules and regulations of the authorities and governing bodies having jurisdiction with respect thereto; (C) no event has occurred (including, without limitation, the receipt of any notice from any authority or governing body) which allows or, after notice or lapse of time or both, would allow, revocation, suspension or termination of any such Authorization or results or, after notice or lapse of time or both, would result in any other impairment of the rights of the holder of any such Authorization; and (D) such Authorizations contain no restrictions that are burdensome to the Company; except where such failure to be valid and in full force and effect or to be in compliance, the occurrence of any such event or the presence of any such restriction would not, singly or in the aggregate, have a material adverse effect on the business, prospects, financial condition or results of operations of the Company; (xiv) the Company is not and, after giving effect to the offering and sale of the Shares and the application of the proceeds thereof as described in the Prospectus, will not be, an "investment company" as such term is defined in the Investment Company Act of 1940, as amended; and (xv) to such counsel's knowledge, there are no written contracts, agreements or understandings between the Company and any person granting such person the right to require the Company to file a registration statement under the Act with respect to any securities of the Company or to require the Company to include such securities with the Shares registered pursuant to the Registration Statement, except as set forth in the Prospectus; In addition, such counsel shall state that such counsel has participated in conferences with officers and representatives of the Company, the Company's independent public accountants and you and your counsel, at which the contents of the Registration Statement and the Prospectus were discussed and (A) the Registration Statement and the Prospectus and any supplement or amendment thereto (except for the financial statements, including the notes thereto, schedules and other financial data included therein as to which no opinion 20 21 need be expressed) comply as to form with the Act, and (B) (without taking any further action to verify independently the statements made in the Registration Statement and the Prospectus and, except as stated in the foregoing opinion, without assuming responsibility for the accuracy, completeness or fairness of such statements) (i) such counsel has no reason to believe that at the time the Registration Statement became effective or on the date of this Agreement, the Registration Statement and the form of prospectus subject to completion included therein (except for the financial statements, including the notes thereto, schedules and other financial data as to which such counsel need not express any belief) contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading and (ii) such counsel has no reason to believe that the Prospectus, as amended or supplemented, if applicable (except for the financial statements, including the notes thereto, schedules and other financial data, as aforesaid) contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. (f) You shall have received on the Closing Date an opinion (satisfactory to you and counsel for the Underwriters), dated the Closing Date, of McAndrews, Held & Malloy, Ltd., counsel for the Company, to the effect that: (i) To such counsel's knowledge, the Company owns or possesses, or can acquire on reasonable terms, all patents, patent rights, licenses, inventions, copyrights, know-how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures), trademarks, service marks and trade names ("intellectual property") currently employed by them in connection with the business now operated by them except where the failure to own or possess or otherwise be able to acquire such intellectual property would not, singly or in the aggregate, have a material adverse effect on the business, prospects, financial condition or results of operation of the Company; and, to the best of such counsel's knowledge after due inquiry, the Company has not received any notice of infringement of or conflict with asserted rights of others with respect to any of such intellectual property which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would have a material adverse effect on the business, prospects, financial condition or results of operations of the Company. (ii) The statements under the captions "Risk Factors--Dependence on Patents and Protection of Proprietary Information" and "Business--Intellectual Property and Proprietary Rights in the Prospectus", 21 22 insofar as such statements constitute a summary of the legal matters, documents or proceedings referred to therein, fairly present the information called for with respect to such legal matters, documents and proceedings. The opinion of Katten Muchin & Zavis described in Section 8(e) above and the opinion of McAndrews, Held & Malloy, Ltd. described in Section 8(f) above shall be rendered to you at the request of the Company and shall so state therein. (g) You shall have received on the Closing Date an opinion, dated the Closing Date, of Latham & Watkins, counsel for the Underwriters, as to the matters referred to in Sections 8(e)(iv), 8(e)(v), 8(e)(viii) (but only with respect to the statements under the caption "Description of Capital Stock--Certain Corporate Provisions" and "Underwriting") and the last paragraph in Section 8(e). (h) You shall have received, on each of the date hereof and the Closing Date, a letter dated the date hereof or the Closing Date, as the case may be, in form and substance satisfactory to you, from Ernst & Young, LLP, independent public accountants, containing the information and statements of the type ordinarily included in accountants' "comfort letters" to Underwriters with respect to the financial statements and certain financial information contained in the Registration Statement and the Prospectus. (i) The Company shall have delivered to you the agreements specified in Section 2 hereof which agreements shall be in full force and effect on the Closing Date. (j) The Shares shall have been duly listed for quotation on the Nasdaq National Market. (k) The Company shall not have failed on or prior to the Closing Date to perform or comply with any of the agreements herein contained and required to be performed or complied with by the Company on or prior to the Closing Date. The several obligations of the Underwriters to purchase any Additional Shares hereunder are subject to the delivery to you on the applicable Option Closing Date of such documents as you may reasonably request with respect to the good standing of the Company, the due authorization and issuance of such Additional Shares and other matters related to the issuance of such Additional Shares. 22 23 SECTION 9. Effectiveness of Agreement and Termination. This Agreement shall become effective upon the execution and delivery of this Agreement by the parties hereto. This Agreement may be terminated at any time on or prior to the Closing Date by you by written notice to the Company if any of the following has occurred: (i) any outbreak or escalation of hostilities or other national or international calamity or crisis or change in economic conditions or in the financial markets of the United States or elsewhere that, in your judgment, is material and adverse and, in your judgment, makes it impracticable to market the Shares on the terms and in the manner contemplated in the Prospectus, (ii) the suspension or material limitation of trading in securities or other instruments on the New York Stock Exchange, the American Stock Exchange, the Chicago Board of Options Exchange, the Chicago Mercantile Exchange, the Chicago Board of Trade or the Nasdaq National Market or limitation on prices for securities or other instruments on any such exchange or the Nasdaq National Market, (iii) the suspension of trading of any securities of the Company on any exchange or in the over-the-counter market, (iv) the enactment, publication, decree or other promulgation of any federal or state statute, regulation, rule or order of any court or other governmental authority which in your opinion materially and adversely affects, or will materially and adversely affect, the business, prospects, financial condition or results of operations of the Company and its subsidiaries, taken as a whole, (v) the declaration of a banking moratorium by either federal or New York State authorities or (vi) the taking of any action by any federal, state or local government or agency in respect of its monetary or fiscal affairs which in your opinion has a material adverse effect on the financial markets in the United States. If on the Closing Date or on an Option Closing Date, as the case may be, any one or more of the Underwriters shall fail or refuse to purchase the Firm Shares or Additional Shares, as the case may be, which it has or they have agreed to purchase hereunder on such date and the aggregate number of Firm Shares or Additional Shares, as the case may be, which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase is not more than one-tenth of the total number of Firm Shares or Additional Shares, as the case may be, to be purchased on such date by all Underwriters, each non-defaulting Underwriter shall be obligated severally, in the proportion which the number of Firm Shares set forth opposite its name in Schedule I bears to the total number of Firm Shares which all the non-defaulting Underwriters have agreed to purchase, or in such other proportion as you may specify, to purchase the Firm Shares or Additional Shares, as the case may be, which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase on such date; provided that in no event shall the number of Firm Shares or Additional Shares, as the case may be, which any Underwriter has agreed to purchase pursuant to Section 2 hereof be increased 23 24 pursuant to this Section 9 by an amount in excess of one-ninth of such number of Firm Shares or Additional Shares, as the case may be, without the written consent of such Underwriter. If on the Closing Date any Underwriter or Underwriters shall fail or refuse to purchase Firm Shares and the aggregate number of Firm Shares with respect to which such default occurs is more than one-tenth of the aggregate number of Firm Shares to be purchased by all Underwriters and arrangements satisfactory to you and the Company for purchase of such Firm Shares are not made within 48 hours after such default, this Agreement will terminate without liability on the part of any non-defaulting Underwriter and the Company. In any such case which does not result in termination of this Agreement, either you or the Company shall have the right to postpone the Closing Date, but in no event for longer than seven days, in order that the required changes, if any, in the Registration Statement and the Prospectus or any other documents or arrangements may be effected. If, on an Option Closing Date, any Underwriter or Underwriters shall fail or refuse to purchase Additional Shares and the aggregate number of Additional Shares with respect to which such default occurs is more than one-tenth of the aggregate number of Additional Shares to be purchased on such date, the non-defaulting Underwriters shall have the option to (i) terminate their obligation hereunder to purchase such Additional Shares or (ii) purchase not less than the number of Additional Shares that such non-defaulting Underwriters would have been obligated to purchase on such date in the absence of such default. Any action taken under this paragraph shall not relieve any defaulting Underwriter from liability in respect of any default of any such Underwriter under this Agreement. SECTION 10. Miscellaneous. Notices given pursuant to any provision of this Agreement shall be in writing via mail, overnight courier, hand delivery or facsimile addressed as follows: (i) if to the Company, to Nanophase Technologies Corporation, 453 Commerce Street, Burr Ridge, Illinois 60521, Attention: Robert W. Cross, with a copy to Katten Muchin & Zavis, 525 West Monroe Street, Suite 1600, Chicago, Illinois 60661, Attention: Lawrence D. Levin and (ii) if to any Underwriter, c/o Donaldson, Lufkin & Jenrette Securities Corporation, 277 Park Avenue, New York, New York 10172, Attention: Syndicate Department, or in any case to such other address as the person to be notified may have requested in writing. The respective indemnities, contribution agreements, representations, warranties and other statements of the Company and the several Underwriters set forth in or made pursuant to this Agreement shall remain operative and in full force and effect, and will survive delivery of and payment for the Shares, regardless of (i) any investigation, or statement as to the results thereof, made by or on behalf of any Underwriter, the officers or directors of any Underwriter, any person controlling any Underwriter, the Company, the officers or directors of the 24 25 Company or any person controlling the Company, (ii) acceptance of the Shares and payment for them hereunder and (iii) termination of this Agreement. If for any reason the Shares are not delivered by or on behalf of the Company as provided herein (other than as a result of any termination of this Agreement pursuant to Section 9), the Company agrees to reimburse the several Underwriters for all reasonable out-of-pocket expenses (including the reasonable fees and disbursements of counsel) incurred by them. Notwithstanding any termination of this Agreement, the Company shall be liable for all expenses which it has agreed to pay pursuant to Section 5(i) hereof. The Company also agrees to reimburse the several Underwriters, their directors and officers and any persons controlling any of the Underwriters for any and all reasonable fees and expenses (including, without limitation, the reasonable fees and disbursements of counsel) incurred by them in connection with enforcing their rights hereunder (including, without limitation, pursuant to Section 7 hereof). Except as otherwise provided, this Agreement has been and is made solely for the benefit of and shall be binding upon the Company, the Underwriters, the Underwriters' directors and officers, any controlling persons referred to herein, the Company's directors and the Company's officers who signed the Registration Statement and their respective successors and assigns, all as and to the extent provided in this Agreement, and no other person shall acquire or have any right under or by virtue of this Agreement. The term "successors and assigns" shall not include a purchaser of any of the Shares from any of the several Underwriters merely because of such purchase. This Agreement shall be governed and construed in accordance with the laws of the State of New York. This Agreement may be signed in various counterparts which together shall constitute one and the same instrument. 25 26 Please confirm that the foregoing correctly sets forth the agreement between the Company and the several Underwriters. Very truly yours, NANOPHASE TECHNOLOGIES CORPORATION By:________________________________ Title: DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION FURMAN SELZ LLC CIBC OPPENHEIMER CORP. Acting severally on behalf of themselves and the several Underwriters named in Schedule I hereto By DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION By___________________________ 26 27 SCHEDULE I Number of Firm Shares Underwriters to be Purchased Donaldson, Lufkin & Jenrette Securities Corporation Furman Selz LLC CIBC Oppenheimer Corp. --------- Total 5,000,000 ========= 28 Annex I 2 EX-3.1 3 CERTIFICATE OF INCORPORATION 1 Exhibit 3.1 CERTIFICATE OF INCORPORATION OF NANOPHASE TECHNOLOGIES CORPORATION OF DELAWARE The Nanophase Technologies Corporation of Delaware (the "Corporation"), a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware (the "DGCL"), does hereby certify: A. That the Board of Directors of the Corporation adopted a resolution setting forth the Certificate of Incorporation set forth below, declaring it advisable and submitting it to the stockholders entitled to vote in respect thereof for their consideration of such Certificate of Incorporation. B. That by written consent executed in accordance with Section 228 of the DGCL, the holders of a majority of the outstanding stock has voted in favor of the adoption of the Certificate of Incorporation set forth below. C. That the Certificate of Incorporation set forth below has been duly adopted in accordance with Sections 242 and 245 of the DGCL: ARTICLE I The name of the corporation is Nanophase Technologies Corporation of Delaware. ARTICLE II The address of the Corporation's registered office in the State of Delaware is Corporation Service Company, 1013 Centre Road, Wilmington, Delaware 19805. The name of its registered agent at such address is Corporation Service Company. ARTICLE III The nature of the business to be conducted or promoted is to engage in any lawful act or activity for which corporations may be organized under the DGCL. 2 ARTICLE IV A. The Corporation shall have authority to issue the following classes of stock, in the number of shares and at the par value as indicated opposite the name of the class:
NUMBER OF SHARES PER VALUE CLASS AUTHORIZED PER SHARE - --------------------------------------- ---------- --------------- Common Stock (the"Common Stock") 25,000,000 $.01 Preferred Stock (the "Preferred Stock") 17,000,000 $.01
B. The designations and the powers, preferences and relative, participating, optional or other rights of the Common Stock and the Preferred Stock, in general, and the qualifications, limitations or restrictions thereof are as follows: 1. Common Stock. a. Voting Rights: Except as otherwise required by law or expressly provided herein, the holders of shares of Common Stock shall be entitled to one vote per share on each matter submitted to a vote of the stockholders of the Corporation, and the holders of shares of Common Stock and "Old Preferred" (as defined below) shall vote together and not as separate classes. b. Dividends: Subject to the rights of the holders, if any, of Preferred Stock, the holders of Common Stock shall be entitled to receive cash dividends as, when and if declared, and at such times and in such amounts as may be determined, by the Board of Directors of the Corporation, but only out of funds legally available therefor. c. Liquidation Rights: In the event of any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, after payment or provision for payment of the debts and other liabilities of the Corporation and the preferential amounts to which the holders of any outstanding shares of Preferred Stock or Old Preferred shall be entitled upon dissolution, liquidation or winding up, the holders of the Common Stock shall be entitled to share ratably in the remaining assets of the Corporation with the holders of any outstanding shares of Old Preferred (with each share of Old Preferred being treated for such purpose as equal to the number of shares of Common Stock into which each such share of Old Preferred is convertible on the date of such distribution), or, if no shares of Old Preferred are outstanding, such assets available for distribution to -2- 3 stockholders shall be distributed ratably among the holders of the shares of Common Stock. 2. Preferred Stock. Preferred Stock may be issued from time to time in one or more series. One series consists of 292,728 shares and is designated Series A Convertible Preferred Stock, no par value (herein designated "Series A Preferred"). A second series consists of 1,309,772 shares and is designated Series B Convertible Preferred Stock, no par value (herein called "Series B Preferred"). A third series consists of 1,143,846 shares designated as Series C Convertible Preferred Stock, no par value (herein called "Series C Preferred"), and 1,143,846 shares designated as Series C-1 Convertible Preferred Stock, no par value (herein called "Series C-1 Preferred"). A fourth series consists of 6,729,566 shares designated as Series D Convertible Preferred Stock, no par value (herein called "Series D Preferred"), and 6,729,566 shares designated as Series D-1 Convertible Preferred Stock, no par value (herein called "Series D-1 Preferred"). A fifth series consists of 3,500,000 shares and is designated as Series E Convertible Preferred Stock, no par value (herein called "Series E Preferred"). A fifth series consists of 4,000,000 shares designated as Series F Convertible Preferred Stock, no par value (herein called "Series F Preferred"). Subject to the other provisions of this Certificate of Incorporation, the Board of Directors is authorized, subject to any limitations prescribed by law, to provide for the issuance of and to issue shares of the Preferred Stock in one or more series, and by filing a certificate pursuant to the laws of the State of Delaware, to establish from time to time the number of shares to be included in each such series, and to fix the designation, powers, preferences and rights of the shares of each such series and any qualifications, limitations or restrictions thereof. The number of authorized shares of Preferred Stock may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of the holders of a majority of the Common Stock, without a vote of the holders of any Preferred Stock, or of any series thereof, unless a vote of any such holders is required pursuant to the certificate or certificates establishing such series of Preferred Stock. C. The designations and the powers, preferences and relative, participating, optional or other rights of the Series A Preferred, Series B Preferred, Series C Preferred, Series C-1 Preferred, Series D Preferred, Series D-1 Preferred, Series E Preferred and Series F Preferred (hereinafter referred to collectively and individually as the "Old Preferred") and the qualifications, limitations or restrictions thereof are as follows: 1. Voting Rights. Except as otherwise required by law, each share of outstanding Old Preferred shall entitle the holder thereof to vote on each matter submitted to a vote of the stockholders of the Corporation and to have the number of votes equal to the number (including any fraction) of shares of Common Stock into which such share of Old Preferred is then convertible pursuant to the provisions hereof at the record date for the determination of stockholders entitled to vote on such matters or, if no such record date is established, at the date -3- 4 such vote is taken or any written consent of stockholders becomes effective. Except as otherwise required by law, the holders of shares of Common Stock and Old Preferred shall vote together and not as separate classes, and the holders of Series A Preferred, Series B Preferred, Series C Preferred, Series C-1 Preferred, Series D Preferred, Series D-1 Preferred, Series E Preferred and Series F Preferred shall vote together as a single class of Preferred Stock and not as separate series. 2. Dividends. (a) The holders of the Series B Preferred shall be entitled to receive, out of funds legally available therefor, and without declaration by the Board of Directors, cumulative cash dividends in the amount of $0.052 per share per annum (such amount to be adjusted proportionally in the event the shares of Series B Preferred are subdivided into a greater number or combined into a lesser number of shares). Dividends on the Series B Preferred shall accrue and be cumulative commencing on the date of issuance of the first shares of Series B Preferred and will be payable to Series B Preferred stockholders of record only upon the liquidation of the Corporation, and then only upon the prior satisfaction by the Corporation of the liquidation preference attaching to any share of Preferred Stock senior in liquidation preference to the Series B Preferred pursuant to this Certificate of Incorporation. The amount of dividends paid on shares of Series B Preferred shall be calculated on the basis of a 360 day year consisting of 12 thirty day months. Dividends paid on shares of Series B Preferred in an amount less than the total amount of such dividends at the time accumulated and payable shall be allocated ratably among all shares of Series B Preferred then outstanding. (b) The holders of Old Preferred shall be entitled to receive, as, when and if declared by the Board of Directors, but only out of funds legally available therefor, cash dividends in such amounts as the Board of Directors may determine. (c) Other than with respect to dividends paid on the Series B Preferred which represent payment of accumulated but unpaid dividends thereon payable pursuant to and at the time stated in Section C.2(a) above, no dividends shall be declared or paid on the shares of any series of Old Preferred for any dividend period unless at the same time such dividend shall be declared or paid on all shares of Old Preferred equally. (d) If any dividend or other distribution payable in cash, securities or other property (other than securities of the Corporation the issuance of which gives rise to adjustment of the Conversion Price pursuant to Section C.4(c) of this Article IV) is declared on the Common Stock, each holder of shares of Old Preferred on the record date for such dividend or distribution shall be entitled to receive on the date of payment or distribution of such dividend or other distribution the same cash, securities or other property which such holder would have received on such record date if such holder was the holder of record of the number (including any fraction) of shares of Common Stock into which the shares of Old Preferred then held by such holder are then convertible. No dividend which has been previously declared but unpaid -4- 5 shall be paid prior to the voluntary or involuntary liquidation, dissolution or winding up of the Corporation pursuant to Section C.3 of this Article IV. 3. Liquidation Rights. If the Corporation shall be voluntarily or involuntarily liquidated, dissolved or wound up: (a) The holder of each then outstanding share of Series F Preferred, Series E Preferred, Series D Preferred, Series D-1 Preferred, Series C Preferred and Series C-1 Preferred shall be entitled to receive out of the assets of the Corporation available for distribution to stockholders, and before any payment or declaration and setting apart for payment of any amount or dividend with respect to the Series B Preferred, Series A Preferred, Common Stock or any other equity security, the amount of $3.00 per share (with respect to the Series F Preferred), the amount of $2.25 per share (with respect to the Series E Preferred), the amount of $.80 per share (with respect to the Series D Preferred and Series D-1 Preferred purchased prior to October 1, 1994), $1.00 per share (with respect to the Series D Preferred and Series D-1 Preferred purchased on or after October 1, 1994) and $0.65 per share (with respect to the Series C Preferred and Series C-1 Preferred) (such amounts to be adjusted proportionally in the event the shares of Series F Preferred, Series E Preferred, Series D Preferred, Series D-1 Preferred, Series C Preferred or Series C-1 Preferred are subdivided into a greater number or combined into a lesser number of shares), plus all declared but unpaid dividends on such share for each share of Series F Preferred, Series E Preferred, Series D Preferred, Series D-1 Preferred, Series C Preferred and Series C-1 Preferred then held by them. The Series F Preferred, Series E Preferred, Series D Preferred, Series D-1 Preferred, Series C Preferred and Series C-1 Preferred shall rank on a parity with each other as to the receipt of the respective preferential amounts for each such series upon the occurrence of such event. If the Corporation shall have insufficient assets and funds to pay such amounts in full to the holders of the Series F Preferred, Series E Preferred, Series D Preferred, Series D-1 Preferred, Series C Preferred and Series C-1 Preferred, then all assets and funds of the Corporation legally available for distribution shall be distributed ratably among the holders of the Series F Preferred, Series E Preferred, Series D Preferred, Series D-1 Preferred, Series C Preferred and Series C-1 Preferred in proportion to the preferential amount each such holder is otherwise entitled to receive pursuant to this subsection (a). (b) Subject to the liquidation rights of the holders of the Series F Preferred, Series E Preferred, Series D Preferred, Series D-1 Preferred, Series C Preferred and Series C-1 Preferred set forth in Section C.3(a) above, the holder of each then outstanding share of Series C Preferred and Series C-1 Preferred shall be entitled to receive out of the assets of the Corporation available for distribution to stockholders, and before any payment or declaration and setting apart for payment of any amount or dividend with respect to the Series B Preferred, Series A Preferred, Common Stock or any other equity security, an amount equal to $1.30 per share (such amount to be adjusted proportionally in the event the shares of Series C Preferred and Series C-1 Preferred are subdivided into a greater number or combined into a lesser number of shares), plus all declared but unpaid dividends thereon. If the Corporation shall have -5- 6 insufficient assets and funds to pay such amounts in full to the holders of the Series C Preferred and Series C-1 Preferred, then all assets and funds of the Corporation legally available for distribution shall be distributed ratably among the holders of the Series C Preferred and Series C-1 Preferred in accordance with the number of shares of Series C Preferred and Series C-1 Preferred held by each such holder. (c) Subject to the liquidation rights of the holders of the Series F Preferred, Series E Preferred, Series D Preferred, Series D-1 Preferred, Series C Preferred and Series C-1 Preferred set forth in Sections C.3(a) and (b) above, the holder of each then outstanding share of Series B Preferred shall be entitled to receive out of the assets of the Corporation available for distribution to stockholders, and before any payment or declaration and setting apart for payment of any amount or dividend with respect to the Series A Preferred, Common Stock or any other equity security, an amount equal to $.65 per share (such amount to be adjusted proportionally in the event the shares of Series B Preferred are subdivided into a greater number or combined into a lesser number of shares), plus all accrued or declared but unpaid dividends thereon. If the Corporation shall have insufficient assets and funds to pay such amounts in full to the holders of the Series B Preferred, then all assets and funds of the Corporation legally available for distribution shall be distributed ratably among the holders of the Series B Preferred in accordance with the number of shares of Series B Preferred held by each such holder. (d) Subject to the liquidation rights of the holders of the Series F Preferred, Series E Preferred, Series D Preferred, Series D-1 Preferred, Series C Preferred, Series C-1 Preferred and Series B Preferred set forth in Sections C.3(a), (b) and (c) above, the holder of each then outstanding share of Series A Preferred shall be entitled to receive out of the assets of the Corporation available for distribution to stockholders, and before any payment or declaration and setting apart for payment of any amount or dividend with respect to the Common Stock or any other equity security, an amount equal to $2.05 per share (such amount to be adjusted proportionally in the event the shares of Series A Preferred are subdivided into a greater number or combined into a lesser number of shares), plus all declared but unpaid dividends thereon. If the Corporation shall have insufficient assets and funds to pay such amounts in full to the holders of the Series A Preferred, then all assets and funds of the Corporation legally available for distribution shall be distributed ratably among the holders of the Series A Preferred in accordance with the number of shares of Series A Preferred held by each such holder. (e) After payment in full of the amounts payable pursuant to Sections C.3(a), (b), (c) and (d) above to the holders of Old Preferred, the holder of each then outstanding share of Series F Preferred, Series E Preferred, Series D Preferred, Series D-1 Preferred, Series C Preferred and Series C-1 Preferred shall be entitled to share ratably in the remaining assets of the Corporation with the holders of Common Stock (with each share of Series F Preferred, Series E Preferred, Series D Preferred, Series D-1 Preferred, Series C Preferred and Series C-1 Preferred being treated, for such purpose, as equal to the number of shares of Common Stock into which such share of Series F Preferred, Series E Preferred, Series D Preferred, Series D-1 Preferred, Series C Preferred and Series C-1 Preferred is convertible on the date of such distribution). -6- 7 (f) For purposes of this Section C.3, (i) any acquisition of the Corporation by means of a merger or other form of corporate reorganization in which outstanding shares of the Corporation are exchanged for securities or other consideration issued, or caused to be issued, by the acquiring corporation or its subsidiary (other than a mere reincorporation transaction), or (ii) a sale of all or substantially all of the assets of the Corporation, shall (for purposes of the distribution of such securities or other consideration to the holders of Common Stock and Old Preferred) be treated as a liquidation, dissolution or winding up of the Corporation and shall entitle the holders of Common Stock and Old Preferred to receive at closing in cash, securities or other property (valued as provided in Section C.3(g) below) amounts as specified and otherwise in the order of preference as set forth in Sections C.3(a), (b), (c), (d) and (e) above. (g) Whenever the distribution provided in this Section C.3 shall be payable in securities or property other than cash, the value of such distribution shall be the fair market value of such securities or other property as determined in good faith by the Board of Directors. 4. Conversion. (a) Terms of Conversion. (i) Optional Conversion. The holder of each share of Old Preferred shall have the right (the "Conversion Right"), at such holder's option, to convert such share at any time, without cost and otherwise on the terms of this Section C.4, into the number of fully paid and non-assessable shares of Common Stock that results from dividing the Conversion Price of the applicable series of Old Preferred that is in effect at the time of conversion (the "Conversion Price") into the Original Issue Price for such series of Old Preferred. The initial Conversion Price for the Series F Preferred is $3.00 per share, for the Series E Preferred $2.25 per share, for the Series D Preferred $.80 per share (for shares of Series D Preferred issued prior to October 1, 1994) and $1.00 per share (for shares of Series D Preferred issued on or after October 1, 1994), for the Series C Preferred $.65 per share, for the Series B Preferred $.65 per share, and for the Series A Preferred $2.05 per share. The initial conversion price for each share of the Series D-1 Preferred shall equal the Conversion Price of the Series D Preferred from which such share of Series D-1 Preferred is converted at the time of such conversion. The initial conversion price for each share of the Series C-1 Preferred shall equal the Conversion Price of the Series C Preferred from which such share of Series C-1 Preferred is converted at the time of such conversion. The "Original Issue Price" for each of the Series F Preferred, Series E Preferred, Series D Preferred (for shares of Series D Preferred issued prior to October 1, 1994), Series D-1 Preferred (issued with respect to shares of Series D Preferred issued prior to October 1, 1994), Series D Preferred (for shares of Series D Preferred issued on or after October 1, 1994), Series D-1 Preferred (issued with respect to shares of Series D Preferred issued on or after October 1, 1994), Series C, Series C-1, Series B and Series A Preferred are, respectively, $3.00, $2.25, $1.00, $1.00, $.80, $.80, $.65, $.65, $.65 and $2.05. The Conversion Price of each share of each series of Old Preferred shall be subject to adjustment from time to time as provided in this Section C.4 entitled "Conversion". -7- 8 (ii) Mandatory Conversion. Upon the occurrence of a Qualified Initial Public Offering (as hereinafter defined), each share of Old Preferred shall be automatically converted, without cost and on the terms of this Section C.4 entitled "Conversion", into the number of shares of Common Stock into which such share of Old Preferred would be convertible under clause B.4(a)(i) above immediately prior to such Qualified Initial Public Offering. (b) Mechanics of Conversion. (i) Optional Conversion. A holder of any share of Old Preferred may exercise the Conversion Right of such share by surrendering the certificate therefor, duly endorsed, at the office of the Corporation or of any transfer agent for the Old Preferred, together with a written notice to the Corporation which shall state: (A) that such holder elects to convert the same, and; (B) the number of shares of Old Preferred being converted. Thereupon the Corporation shall promptly issue and deliver to the holder of such shares a certificate or certificates for the number of shares of Common Stock to which such holder shall be entitled. If the certificate evidencing the Old Preferred being converted shall also evidence shares of Old Preferred not being converted, then the Corporation shall also deliver to the holder of such certificate a new stock certificate evidencing the Old Preferred not converted. The conversion of any shares of Old Preferred shall be deemed to have been made immediately prior to the close of business on the date that the shares of Old Preferred to be converted are surrendered to the Corporation, and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock on such date. Any dividends or distributions declared but unpaid at the time of conversion with respect to the Old Preferred so converted shall be paid to the Holder of such Common Stock. The Corporation shall give written notice to each holder of a share of Old Preferred promptly upon the liquidation, dissolution or winding up of the Corporation, and not more than forty (40) nor less than twenty (20) days before the anticipated date of consummation of any acquisition of the Corporation or any sale of all or substantially all of the assets of the Corporation referred to in Section C.3(g) and no such acquisition of the Corporation or sale of assets shall be effective until such notice shall have been given. (ii) Mandatory Conversion. The Corporation shall give written notice to each holder of a share of Old Preferred not more than forty (40) nor less than ten (10) days before the anticipated effective date of the registration statement with respect to any Qualified Initial Public Offering, and shall also give written notice to each such holder upon the actual occurrence of any Qualified Initial Public Offering. Following the conversion of such shares, each holder of shares so converted may surrender the certificate therefor at the office of the Corporation or any transfer agent for the Old Preferred. Upon such surrender, the Corporation -8- 9 shall issue and deliver to each holder a certificate or certificates for the number of shares of Common Stock to which such holder is entitled. The conversion of shares of Old Preferred shall take place upon the occurrence of the Qualified Initial Public Offering, whether or not the certificates representing such shares of Old Preferred shall have been surrendered or new certificates representing the shares of Common Stock into which such shares have been converted shall have been issued. (c) Adjustment of Conversion Price. The Conversion Price for each share of Old Preferred and the kind of securities issuable upon the conversion of any share of Old Preferred shall be adjusted from time to time as follows: (i) Subdivision or Combination of Shares. If the Corporation at any time effects a subdivision or combination of the outstanding Common Stock, each Conversion Price shall be decreased, in the case of a subdivision, or increased, in the case of a combination, in the same proportions as the Common Stock is subdivided or combined, in each case effective automatically upon, and simultaneously with, the effectiveness of the subdivision or combination which gives rise to the adjustment. (ii) Stock Dividends. If the Corporation at any time pays a dividend, or makes any other distribution, to holders of Common Stock payable in shares of Common Stock, or fixes a record date for the determination of holders of Common Stock entitled to receive a dividend or other distribution payable in shares of Common Stock, each Conversion Price shall be decreased by multiplying it by a fraction: (A) the numerator of which shall be the total number of shares of Common Stock outstanding immediately prior to such dividend or distribution, and (B) the denominator of which shall be the total number of shares of Common Stock outstanding immediately after such dividend or distribution (plus, if the Corporation paid cash instead of fractional shares otherwise issuable in such dividend or distribution, the number of additional shares which would have been outstanding had the Corporation issued fractional shares instead of cash), in each case effective automatically as of the date the Corporation shall take a record of the holders of its Common Stock for the purpose of receiving such dividend or distribution (or if no such record is taken, as of the effectiveness of such dividend or distribution). (iii) Reclassification, Consolidation or Merger. If at any time, as a result of: (A) a capital reorganization or reclassification (other than a subdivision, combination or dividend which gives rise to an adjustment of each Conversion -9- 10 Price pursuant to clauses (i) or (ii) of this Section C.4(c) entitled "Adjustment of Conversion Price"); or (B) a merger or consolidation of the Corporation with another corporation (whether or not the Corporation is the surviving corporation), the Common Stock issuable upon the conversion of the Old Preferred shall be changed into or exchanged for the same or a different number of shares of any class or classes of stock of the Corporation or any other corporation, or other securities convertible into such shares, then, as a part of such reorganization, reclassification, merger or consolidation, appropriate adjustments shall be made in the terms of the Old Preferred (or of any securities into which the Old Preferred is changed or for which the Old Preferred is exchanged), so that: (Y) the holders of Old Preferred or of such substitute securities shall thereafter be entitled to receive, upon conversion of the Old Preferred or of such substitute securities, the kind and amount of shares of stock, other securities, money and property which such holders would have received at the time of such capital reorganization, reclassification, merger, or consolidation, if such holders had converted their Old Preferred immediately prior to such capital reorganization, reclassification, merger, or consolidation, and (Z) the Old Preferred or such substitute securities shall thereafter be adjusted on terms as nearly equivalent as may be practicable to the adjustments theretofore provided in this Section C.4(c) entitled "Adjustment of Conversion Price". No consolidation or merger in which the Corporation is not the surviving corporation shall be consummated unless the surviving corporation shall agree, in writing, to the provisions of this Section C.4(c)(iii). The provisions of this Section C.4(c)(iii) shall similarly apply to successive capital reorganizations, reclassifications, mergers, and consolidations. (iv) Ratchet. (A) For purposes of this Section C.4(c)(iv) entitled "Ratchet", "Additional Shares of Common Stock" means all shares of Common Stock sold by the Corporation after the date on which Series F Preferred has been last issued and sold, whether or not subsequently reacquired or retired by the Corporation, other than: (1) shares of Common Stock issued in transactions giving rise to adjustments under Sections C.4(c)(i), (ii), or (iii) above; (2) shares of Common Stock issued upon conversion of shares of Old Preferred; and (3) up to 4,763,440 shares of Common Stock which may be issued in the discretion of the Board of Directors to employees or directors of, or consultants -10- 11 or advisors to, the Corporation or any wholly-owned subsidiary of the Corporation, and options for the purchase of such shares. (B) Except as otherwise provided in Section C.4(c)(v) below entitled "Convertible Securities", if at any time the Corporation issues or is deemed to issue Additional Shares of Common Stock for a consideration per share less than the Conversion Price in effect with respect to any shares of the Series F Preferred, Series E Preferred, Series D Preferred or the Series C Preferred, respectively, at such issuance or deemed issuance, (1) the Conversion Price with respect to such shares of the Series F Preferred or Series E Preferred, as applicable, shall be reduced to a price per share equal to a price determined by dividing: (y) the sum of (1) the product derived by multiplying the Conversion Price with respect to the Series F Preferred or the Series E Preferred, as applicable, in effect immediately prior to such issue times the number of shares of Common Stock (including shares of Common Stock deemed to have been issued upon conversion of the outstanding Old Preferred) outstanding immediately prior to such issue, plus (2) the consideration, if any, received by or deemed to have been received by the Corporation upon such issue, by: (z) the sum of (3) the number of shares of Common Stock (including shares of Common Stock deemed to have been issued upon conversion of the outstanding Old Preferred) outstanding immediately prior to such issue, plus (4) the number of shares of Common Stock issued or deemed to have been issued in such issue, and (2) the Conversion Price with respect to such shares of the Series D Preferred or the Series C Preferred, as applicable, shall be reduced to a price per share equal to the consideration per share, if any, for which such Additional Shares of Common Stock are issued or deemed to be issued. (v) Convertible Securities. (A) "Convertible Securities" means all rights or options for the purchase of, or stock or other securities convertible into, Additional Shares of Common Stock or other Convertible Securities, whenever and each time issued. (B) The "Effective Price" with respect to any Convertible Securities means the result of dividing: -11- 12 (1) the sum of (a) the total consideration, if any, received by the Corporation for the issuance of such Convertible Securities, plus (b) the minimum consideration, if any, payable to the Corporation upon exercise or conversion of such Convertible Securities, plus (c) the minimum consideration, if any, payable to the Corporation upon exercise or conversion of any Convertible Securities issuable upon exercise or conversion of such Convertible Securities, by: (2) the maximum number of Additional Shares of Common Stock issuable upon exercise or conversion of such Convertible Securities or of any Convertible Securities issuable upon exercise or conversion of such Convertible Securities. (C) If at any time the Corporation issues or is deemed to issue a Convertible Security with respect to which the Effective Price is less than the Conversion Price in effect with respect to any shares of the Series F Preferred, Series E Preferred, Series D Preferred or the Series C Preferred, respectively, at such issuance or deemed issuance, (1) the Conversion Price with respect to such shares of the Series F Preferred or the Series E Preferred, as applicable, shall be reduced to a price per share determined by dividing: (y) the sum of (1) the product derived by multiplying the Conversion Price with respect to the Series F Preferred or the Series E Preferred, as applicable, in effect immediately prior to such issue times the number of shares of Common Stock (including shares of Common Stock deemed to have been issued upon conversion of the outstanding Old Preferred) outstanding immediately prior to such issue, plus (2) the consideration, if any, received by or deemed to have been received by the Corporation upon such issue, by: (z) the sum of (3) the number of shares of Common Stock (including shares of Common Stock deemed to have been issued upon conversion of the outstanding Old Preferred) outstanding immediately prior to such issue, plus (4) the number of shares of Common Stock issued or deemed to have been issued in such issue, and (2) the Conversion Price with respect to such shares of the Series D Preferred or the Series C Preferred, as applicable, shall be reduced to a price per share equal to the Effective Price with respect to such Convertible Security, effective automatically as of the effectiveness of the issuance of such Convertible Security. -12- 13 (D) If an adjustment has been made under this Section C.4(c)(v) entitled "Convertible Securities" as a consequence of any issuance of a Convertible Security, then no further adjustment shall be made under Section C.4(c)(iv) entitled "Ratchet" upon the actual issuance of Additional Shares of Common Stock upon the exercise or conversion of such Convertible Securities, or upon the issuance of Convertible Securities issuable upon exercise or conversion of the original Convertible Security. (E) If an adjustment has been made under this Section C.4(c)(v) entitled "Convertible Securities" as a consequence of any issuance of any Convertible Security and the conversion rights, options or privileges represented by such Convertible Security (or by any Convertible Security issued upon exercise or conversion of the original Convertible Security) shall expire without having been exercised, the Conversion Price with respect to the previously affected shares of the Series F Preferred, Series E Preferred, Series D Preferred or the Series C Preferred shall be re-adjusted as applicable, effective upon such expiration, to eliminate the effect of the adjustments previously made as a result of the issuance of the conversion rights, options or privileges which shall have expired (without affecting shares of Common Stock already issued upon the conversion of any shares of Series F Preferred, Series E Preferred, Series D Preferred or Series C Preferred already converted, and without affecting any other adjustments made under this Section C.4(c)). (vi) Valuation of Consideration. For purposes of the operation of Sections C.4(c)(iv) and (v) entitled "Ratchet" and "Convertible Securities", respectively, the consideration received by the Corporation for any issue or sale of securities shall: (A) to the extent it consists of cash, be computed as the aggregate amount of cash received by the Corporation; (B) to the extent it consists of property other than cash, be computed at the fair value of that property as determined in good faith by the Board of Directors; and (C) to the extent Additional Shares of Common Stock or Convertible Securities are issued or sold together with other stock or securities or other assets of the Corporation for a consideration that covers both, be such portion of the consideration so received that may be reasonably determined in good faith by the Board of Directors to be allocable to such Additional Shares of Common Stock or Convertible Securities. (vii) Special Mandatory Conversion. (A) If (1) a holder of shares of Series D Preferred or Series C Preferred (for purposes of this Section C.4(c)(vii) only being treated as separate series, regardless of whether a holder holds shares of one or both of the Series D Preferred and the Series C Preferred) is entitled to exercise the "Right Of First Refusal" set forth in Section 6 of the Amended and Restated Shareholders' Agreement dated as of March 16, 1994, as subsequently amended, with respect to the issuance of "New Securities" (as defined in said Agreement) by the Corporation -13- 14 at a price per share which is less than the Conversion Price then in effect for all or any portion of such holder's Series D Preferred and/or Series C Preferred as applicable (the "Equity Financing"), (2) the Corporation has complied with its obligations under the Right of First Refusal with respect to such Equity Financing (each such Equity Financing being referred to in this Section C.4(c)(vii) as a "Mandatory Offering"), and (c) such holder (a "Non-Participating Holder") does not exercise such holder's Right of First Refusal to acquire at least his "Pro Rata Share" (as defined in said Shareholders' Agreement) offered in such Mandatory Offering, then each of such Non-Participating Holder's shares of Series D Preferred and/or Series C Preferred as to which the Conversion Price is greater than the price per share paid in such Equity Financing shall automatically and without further action on the part of such holder be converted into a share of Series D-1 Preferred or Series C-1 Preferred respectively (a "Special Mandatory Conversion") effective upon, subject to and concurrently with the consummation of the Mandatory Offering (the "Mandatory Offering Date"); provided, however, that if pursuant to the request of the Corporation the holders of Series D Preferred and Series C Preferred are requested to purchase on a pro rata basis less than their Pro Rata Share in connection with a particular Equity Financing, the Pro Rata Share of each holder of Series D Preferred and Series C Preferred shall for purposes of the application of this subsection (A) be deemed reduced to such lesser number as the Corporation shall have requested. Upon conversion pursuant to this subsection (A), the shares of Series D Preferred and Series C Preferred so converted shall be canceled and not subject to reissuance. (B) The holder of any shares of Series D Preferred or Series C Preferred converted pursuant to this Section C.4(c)(vii) shall deliver to the Corporation during regular business hours at the office of the Corporation or of any transfer agent for the Series D Preferred and Series C Preferred a certificate or certificates for the shares of Series D Preferred and Series C Preferred so converted, duly endorsed or assigned in blank to the Company. Thereafter, the Corporation shall promptly deliver to such holder a certificate or certificates for the number of shares of Series D-1 Preferred and Series C-1 Preferred to be issued as appropriate, and such holder shall be deemed to have become a stockholder of record on the Mandatory Offering Date, or on the next succeeding date on which the transfer books are open. (C) If any shares of Series D-1 Preferred or Series C-1 Preferred are issued, the Corporation shall use its best efforts to take all action with respect to such shares as may be required, including amending its Articles of Incorporation, (1) to cancel all authorized shares of Series D-1 Preferred or Series C-1 Preferred, as appropriate, that remain after such issuance, (2) to create and reserve for issuance upon a subsequent Special Mandatory Conversion of the Series D Preferred or Series C Preferred a new series of Preferred equal in number to the number of shares of Series D-1 or Series C-1 Preferred so canceled and designated Series D-2 Preferred or Series C-2 Preferred, with the powers, preferences and rights and the qualifications, limitations and restrictions identical respectively to those then applicable to the Series D-1 or Series C-1 Preferred, except that the Conversion Price for such shares of Series D-1 Preferred or Series C-1 Preferred once initially issued shall respectively be the Conversion Price with respect to the Series D Preferred and Series C Preferred in effect immediately prior to such issuance, and (3) to amend the provisions of this Section C.4(c)(vii) to provide that any -14- 15 subsequent Special Mandatory Conversion will be into shares of Series D-2 Preferred or Series C-2 Preferred, as appropriate. The Corporation shall take the same actions with respect to the Series D-2 Preferred and Series C-2 Preferred and each subsequently authorized series of Preferred upon initial issuance of shares of the last such series to be authorized. (viii) Other Action Affecting Common Stock. If at any time the Corporation takes any action affecting its Common Stock which, in the opinion of the Board of Directors of Directors of the Corporation, would have an adverse effect upon the Conversion Rights of the Old Preferred, the Conversion Price and the kind of Securities issuable upon the conversion of Old Preferred shall be adjusted in such manner and at such time as the Board of Directors of the Corporation may in good faith determine to be equitable in the circumstances. (ix) Notice of Adjustment Events. Whenever the Corporation contemplates the occurrence of an event which would give rise to adjustments under Sections C.4(c)(i) - (v) or (viii) above, the Corporation shall mail to each holder of Old Preferred, at least 30 days prior to the record date with respect to such event or, if no record date shall be established, at least 30 days prior to such event, a notice specifying (A) the nature of the contemplated event, (B) the date on which any such record is to be taken for the purpose of such event, (C) the date on which such event is expected to become effective, and (D) the time, if any is to be fixed, when the holders of record of Common Stock (or other securities) shall be entitled to exchange their shares of Common Stock (or other securities) for securities or other property deliverable in connection with such event. (x) Notice of Adjustments. Whenever the Conversion Price or the kind of securities issuable upon the conversion of any one of or all of the Old Preferred shall be adjusted pursuant to Section C.4(c)(i) - (v), (vii) or (viii) above, the Corporation shall make a certificate signed by its President or a Vice President and by its Chief Financial Officer, Secretary or Assistant Secretary, setting forth, in reasonable detail, the event requiring the adjustment, the amount of the adjustment, the method by which such adjustment was calculated (including a description of the basis on which the Board of Directors made any determination hereunder), and the Conversion Price and the kind of securities issuable upon the conversion of any one of or all of the Series A Preferred, Series B Preferred, Series C Preferred or Series C-1 Preferred after giving effect to such adjustment, and shall cause copies of such certificate to be mailed (by first class mail postage prepaid) to each holder of Preferred promptly after each adjustment. (d) Reservation of Shares. The Corporation will take such corporate action as may be necessary from time to time so that at all times it will have authorized, and reserved out of its authorized but unissued Common Stock for the sole purpose of issuance upon conversion of shares of Old Preferred, a sufficient number of shares of Common Stock to permit the conversion in full of all outstanding shares of Old Preferred. (e) Full Consideration. All shares of Common Stock which shall be issued upon the conversion of any Old Preferred (which is itself fully paid and non-assessable) will, upon issuance, be fully paid and non-assessable. The Corporation will pay such amounts and will take -15- 16 such other action as may be necessary from time to time so that all shares of Common Stock which shall be issued upon the conversion of any Old Preferred will, upon issuance and without cost to the recipient, be free from all pre-emptive rights, taxes, liens and charges with respect to the issue thereof. (f) Definitions. For the purpose of this Article IV, the following term shall have the meaning ascribed below: "Qualified Initial Public Offering" means the consummation of the first issuance and sale to the public of Common Stock pursuant to an effective registration statement under the Securities Act of 1933 in connection with which (a) the price per share to the public of such securities immediately before such sale is not less than $3.00, as adjusted for stock splits, stock dividends and other similar events, (b) the price to the public of such securities is not less than the minimum share price necessary to obtain a National Market Systems listing from The Nasdaq Stock Market, Inc., and (c) the aggregate price to the public of the securities actually sold to the public in such first sale, before brokers' commissions and expense allowances paid by the Corporation in connection with the original sale of such securities, is not less than $10,000,000. 5. Residual Rights. All rights accruing to the outstanding shares of the Corporation not otherwise expressly provided for herein shall be vested in the Common Stock. ARTICLE V The business and affairs of the Corporation shall be managed by or under the direction of a board of directors consisting of not less than five (5) nor more than nine (9) directors. The number of directors shall be determined from time to time by resolution adopted by the affirmative vote of a majority of the directors in office at the time of adoption of such resolution. Initially, the number of directors shall be five (5) and shall consist of the following persons: Leonard A. Batterson, Robert W. Cross, Steven Lazarus, Robert W. Shaw, Jr. and Richard W. Siegel. Such directors shall be divided into three classes, Class I, Class II and Class III; with Class I having two members, Class II having two members and Class III having one member. Class I shall initially consist of the following directors: Robert W. Cross and Robert W. Shaw, Jr. Class II shall initially consist of the following directors: Steven Lazarus and Richard W. Siegel. Class III shall initially consist of Leonard A. Batterson. The initial term of office of the Class I, Class II and Class III directors shall expire at the annual meeting of stockholders in 1998, 1999 and 2000, respectively. Beginning in 1998, at each annual meeting of stockholders, successors to the class of directors whose term expires at that annual meeting shall be elected for a three-year term. If the number of directors is changed, any increase or decrease shall be apportioned among the classes by the Board of Directors so as to maintain the number of directors in each class as nearly equal as is reasonably possible, and any additional director -16- 17 of any class elected to fill a vacancy resulting from an increase in such class shall hold office for a term that shall coincide with the remaining term of that class. In no case will a decrease in the number of directors shorten the term of any incumbent director even though such decrease may result in an inequality of the classes until the expiration of such term. A director shall hold office until the annual meeting of stockholders in the year in which such director's term expires and until such director's successor shall be elected and shall qualify, subject, however, to such director's prior death, resignation, retirement or removal from office. Directors may only be removed for cause, except as otherwise provided by law, by the holders of at least sixty-six and two-thirds percent (66 2/3%) of the shares entitled to vote at an election of directors. Except as required by law or the provisions of this Certificate of Incorporation, all vacancies on the Board of Directors and newly-created directorships shall be filled by the Board of Directors. Any director elected to fill a vacancy not resulting from an increase in the number of directors shall have the same remaining term as that of his or her predecessor. Notwithstanding the foregoing, whenever the holders of any one or more classes or series of Preferred Stock issued by the Corporation shall have the right, voting separately by class or series, to elect directors at an annual or special meeting of stockholders, the election, term of office, filling of vacancies and other features of such directorships shall be governed by the terms of this Certificate of Incorporation and any resolutions of the Board of Directors applicable thereto, and such directors so elected shall not be divided into classes pursuant to this Article V. Notwithstanding anything to the contrary contained in this Certificate of Incorporation, the affirmative vote of the holders of at least eighty percent (80%) of the voting power of the shares entitled to vote generally in the election of directors shall be required to amend, alter or repeal, or to adopt any provision inconsistent with, this Article V. ARTICLE VI The Board of Directors of the Corporation may adopt a resolution proposing to amend, alter or repeal any provision contained in this Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon the stockholders herein are granted subject to this reservation. ARTICLE VII A. Indemnification of Officers and Directors: The Corporation shall: 1. indemnify, to the fullest extent permitted by the DGCL, any director and any officer, employee or agent of the Corporation selected by the Board of Directors for indemnification, such selection to be evidenced by an indemnification agreement, who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation) by reason of the -17- 18 fact that such person is or was a director, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, or if such person has previously been designated for indemnification by a resolution of the Board of Directors, an officer, employee or agent of the Corporation, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding if such person acted in good faith and in a manner such person reasonably believed to be in, or not opposed to, the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe such person's conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which such person reasonably believed to be in, or not opposed to, the best interests of the Corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that such person's conduct was unlawful; and 2. indemnify any director and any officer, employee or agent of the Corporation selected by the Board of Directors for indemnification, such selection to be evidenced by an indemnification agreement, who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that such person is or was a director, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, or if such person has previously been designated for indemnification by a resolution of the Board of Directors, an officer, employee or agent of the Corporation, against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the Corporation and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the Corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper; and 3. indemnify any director, officer, employee or agent against expenses (including attorneys' fees) actually and reasonably incurred by such person in connection therewith, to the extent that such director, officer, employee or agent of the Corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Article VII.A.1. and 2., or in defense of any claim, issue or matter therein; and -18- 19 4. make any indemnification under Article VII.A.1. and 2. (unless ordered by a court) only as authorized in the specific case upon a determination that indemnification of the director, officer, employee or agent is proper in the circumstances because such director, officer, employee or agent has met the applicable standard of conduct set forth in Article VII.A.1. and 2. Such determination shall be made (1) by the Board of Directors by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding, or (2) if such a quorum is not obtainable, or, even if obtainable a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, or (3) by the stockholders of the Corporation; and 5. pay expenses incurred by a director or officer in defending a civil or criminal action, suit or proceeding in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that such director or officer is not entitled to be indemnified by the Corporation as authorized in this Article VII. Notwithstanding anything to the contrary in this Article VII.A, (i) the Corporation shall not be obligated to indemnify a director, officer or employee or pay expenses incurred by a director, officer or employee with respect to any threatened, pending, or completed claim, suit or action, whether civil, criminal, administrative, investigative or otherwise ("Proceedings") initiated or brought voluntarily by a director, officer or employee and not by way of defense (other than Proceedings brought to establish or enforce a right to indemnification under the provisions of this Article VII unless a court of competent jurisdiction determines that each of the material assertions made by the director, officer or employee in such Proceedings were not made in good faith or were frivolous) and (ii) the Corporation shall not be obligated to indemnify a director, officer or employee for any amount paid in settlement of a Proceeding covered hereby without the prior written consent of the Corporation to such settlement; and 6. not deem the indemnification and advancement of expenses provided by, or granted pursuant to, the other subsections of this Article VII as exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any By-law, agreement, or vote of stockholders or disinterested directors or otherwise, both as to action in such director's or officer's official capacity and as to action in another capacity while holding such office; and 7. have the right, authority and power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against such person and incurred by such person in any such capacity, or arising out of such person's status as such, whether or not the Corporation would have the power to indemnify such person against such liability under the provisions of this Article VII; and -19- 20 8. deem the provisions of this Article VII to be a contract between the Corporation and each director, or appropriately designated officer, employee or agent who serves in such capacity at any time while this Article VII is in effect and any repeal or modification of this Article VII shall not affect any rights or obligations then existing with respect to any state of facts then or theretofore existing or any action, suit or proceeding theretofore or thereafter brought or threatened based in whole or in part upon such state of facts. The provisions of this Article VII shall not be deemed to be a contract between the Corporation and any directors, officers, employees or agents of any other corporation (the "Second Corporation") which shall merge into or consolidate with this Corporation when this Corporation shall be the surviving or resulting Corporation, and any such directors, officers, employees or agents of the Second Corporation shall be indemnified to the extent required under the DGCL only at the discretion of the board of directors of this Corporation; and 9. continue the indemnification and advancement of expenses provided by, or granted pursuant to, this Article VII, unless otherwise provided when authorized or ratified, as to a person who has ceased to be a director, officer, employee or agent of the Corporation and shall inure to the benefit of the heirs, executors and administrators of such a person. B. Elimination of Certain Liability of Directors: No director of the Corporation shall be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, provided, however, that this provision shall not eliminate or limit the liability of a director (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the DGCL, as the same exists or may hereafter be amended, or (iv) for any transaction from which the director derived an improper personal benefit. If the DGCL is amended to authorize the further elimination or limitation of liability of directors, then the liability of a director of the Corporation existing at the time of such elimination or limitation, in addition to the limitation on personal liability provided herein, shall be limited to the fullest extent permitted by the amended DGCL. Any repeal or modification of this Article VII by the stockholders of the Corporation shall be prospective only, and shall not adversely affect any limitation on the personal property of a director of the Corporation existing at the time of such repeal or modification. ARTICLE VIII A director of the Corporation shall not, in the absence of fraud, be disqualified by his office from dealing or contracting with the Corporation either as a vendor, purchaser or otherwise, nor in the absence of fraud shall a director of the Corporation be liable to account to the Corporation for any profit realized by him from or through any transaction or contract of the Corporation by reason of the fact that such director, or any firm of which such director is -20- 21 a member or any corporation of which such director is an officer, director or stockholder, was interested in such transaction or contract if such transaction or contract has been authorized, approved or ratified in a manner provided in the DGCL for authorization, approval or ratification of transactions or contracts between the Corporation and one or more of its directors or officers or between the Corporation and any other corporation, partnership, association or other organization in which one or more of its directors or officers are directors or officers or have a financial interest. ARTICLE IX A. Written Consent. At any time after the closing of a public offering of the Corporation's Common Stock, any action required or permitted to be taken by the stockholders of the Corporation shall be effected at a duly called annual or special meeting of stockholders of the Corporation and shall not be effected by any consent in writing by such stockholders pursuant to Section 228 of the DGCL or any other provision of the DGCL. B. Special Meetings. Special meetings of stockholders of the Corporation may be called upon not less than ten (10) nor more than sixty (60) days' written notice only by the Board of Directors pursuant to a resolution approved by a majority of the Board of Directors. C. Amendment. Notwithstanding anything contained in this Certificate of Incorporation to the contrary, the affirmative vote of the holders of at least eighty percent (80%) of the shares entitled to vote generally in the election of directors shall be required to amend, alter or repeal, or to adopt any provision inconsistent with, this Article IX. ARTICLE X Meetings of stockholders may be held within or without the State of Delaware as the By-laws of the Corporation may provide. The books of the Corporation may be kept outside the State of Delaware at such place or places as may be designated from time to time by the Board of Directors of the Corporation or in the By-laws of the Corporation. Election of directors need not be by written ballot unless the By-laws of the Corporation so provide. ARTICLE XI Whenever a compromise or arrangement is proposed between the Corporation and its creditors or any class of them and/or between the Corporation and its stockholders or any class of them, any court of equitable jurisdiction within the State of Delaware may, on the application in a summary way of the Corporation or of any creditor or stockholder thereof or on the application of any receiver or receivers appointed for the Corporation under the provisions of Section 291 of the DGCL or on the application of trustees in dissolution or of any receiver or -21- 22 receivers appointed for the Corporation under the provisions of Section 279 of the DGCL, order a meeting of the creditors or class of creditors and/or the stockholders or class of stock of the Corporation, as the case may be, to be summoned in such manner as the said court directs. If a majority in number representing two-thirds of the value of the creditors or class of creditors and/or the stockholders or class of stockholders of the Corporation, as the case may be, agree to any compromise or arrangement or to any reorganization of the Corporation as a consequence of such compromise or arrangement, said compromise or arrangement of said reorganization shall, if sanctioned by the Court to which said application has been made, be binding on all the creditors or class of creditors and/or on all the stockholders or class of stockholders, of the Corporation, as the case may be, and also on the Corporation. ARTICLE XII In furtherance and not in limitation of the powers conferred by statute, the Board of Directors is expressly authorized to adopt, alter amend or repeal the By-laws of the Corporation. The By-laws of the Corporation may be altered, amended, or repealed or new By-laws may be adopted, by the Board of Directors in accordance with the preceding sentence or by the vote of the holders of at least sixty-six and two-thirds percent (66 2/3%) of the voting power of the shares of the Corporation entitled to vote generally in the election of directors at an annual or special meeting of stockholders, provided that if such alteration, amendment, repeal or adoption of new By-laws is effected at a duly called special meeting, notice of such alteration, amendment, repeal or adoption of new By-laws is contained in the notice of such special meeting. -22- 23 IN WITNESS WHEREOF, the Corporation has caused this Certificate of Incorporation to be signed by its Chief Executive Officer on _____________, 1997. NANOPHASE TECHNOLOGIES CORPORATION OF DELAWARE By: _____________________________________ Robert W. Cross Chief Executive Officer -23- EX-3.2 4 BY-LAWS OF NANOPHASE 1 Exhibit 3.2 BY-LAWS OF NANOPHASE TECHNOLOGIES CORPORATION OF DELAWARE ARTICLE I OFFICES Section 1.1. Registered Office. The registered office of Nanophase Technologies Corporation of Delaware (the "Corporation") shall be in the City of Wilmington, County of New Castle, State of Delaware. Section 1.2. Other Offices. The Corporation may also have offices at such other places both within and without the State of Delaware as the Board of Directors may from time to time determine or the business of the Corporation may require. ARTICLE II MEETINGS OF STOCKHOLDERS Section 2.1. Place of Meeting. All meetings of the stockholders for the election of directors shall be held at such place either within or without the State of Delaware as shall be designated from time to time by the Board of Directors and stated in the notice of the meeting. Meetings of stockholders for any other purpose may be held at such time and place, within or without the State of Delaware, as shall be stated by the Board of Directors in its notice of the meeting or in a duly executed waiver of notice thereof. Section 2.2. Time of Annual Meeting. Annual meetings of stockholders shall be held on the third Thursday in June, if not a legal holiday, and if a legal holiday, then on the next secular day following, at 10:00 A.M., or at such other date and time as shall be designated from time to time by the Board of Directors and stated in the notice of the meeting, at which stockholders shall elect directors to hold office for the term provided in Section 3.2 of these By-laws and conduct such other business as shall be considered. Section 2.3. Notice of Annual Meetings. Except as otherwise required by law, written notice of the annual meeting stating the place, date and hour of the meeting shall be given to each stockholder entitled to vote at such meeting not fewer than ten (10) nor more than sixty (60) days before the date of the meeting. 2 Section 2.4. Director Nominations. Only persons who are nominated in accordance with the following procedures shall be eligible to serve as directors. Nominations of persons for election to the Board of Directors of the Corporation at a meeting of stockholders may be made (i) by or at the direction of the Board of Directors, or (ii) by any stockholder of the Corporation entitled to vote in the election of directors at the meeting who complies with the notice procedures set forth in this Article II, Section 2.4. Such nominations, other than those made by or at the direction of the Board of Directors, shall be made pursuant to timely notice in writing to the Secretary of the Corporation. To be timely, a stockholder's notice must be delivered to, or mailed and received by, the Secretary of the Corporation at the principal executive offices of the Corporation not less than sixty (60) nor more than ninety (90) days prior to the meeting; provided, however, that if the Corporation has not "publicly disclosed" (in the manner provided in the last sentence of this Article II, Section 2.4) the date of the meeting at least seventy (70) days prior to the meeting date, notice may be timely made by a stockholder under this Section if received by the Secretary of the Corporation not later than the close of business on the tenth day following the day on which the Corporation publicly disclosed the meeting date. Such stockholder's notice shall set forth (i) as to each person whom the stockholder proposes to nominate for election or re-election as a director, all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (including such person's written consent to being named in the proxy statement as a nominee and to serving as director if elected); and (ii) as to the stockholder giving notice (A) the name and address, as they appear on the Corporation's books, of such stockholder and (B) the class and number of shares of the Corporation which are beneficially owned by such stockholder. At the request of the Board of Directors, any person nominated by the Board of Directors for election as a director shall furnish to the Secretary of the Corporation that information required to be set forth in a stockholder's notice of nomination which pertains to the nominee. No person shall be eligible to serve as a director of the Corporation unless nominated in accordance with the procedures set forth herein. The presiding officer shall, if the facts so warrant, determine and declare to the meeting that a nomination was not made in accordance with the procedures prescribed by the By-laws, and if such officer should so determine, such officer shall so declare to the meeting and the defective nomination shall be disregarded. For purposes of these By-laws, "publicly disclosed" or "public disclosure" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or a comparable national news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission. Section 2.5. Annual Meeting Agenda Items. At an annual meeting of the stockholders, only such business shall be conducted as shall have been brought before the meeting (i) by or at the direction of the Board of Directors, or (ii) by any stockholder of the Corporation who complies with the notice procedures set forth in this Article II, Section 2.5, in the time herein provided. For business to be properly brought before an annual meeting by a stockholder, the stockholder must deliver written notice to, or mail such written notice so that it is received by, the Secretary of the Corporation, at the principal executive offices of the Corporation, not less than one hundred twenty (120) days prior to the first anniversary of the date of the Corporation's proxy statement released to stockholders in connection with the previous year's annual meeting of stockholders, except that if no annual meeting of stockholders was held in the previous year or if the date of the annual meeting has been changed by more than thirty (30) days from the -2- 3 previous year's meeting, a proposal shall be received by the Corporation within ten (10) days after the Corporation has "publicly disclosed" the date of the meeting in the manner provided in Article II, Section 2.4 above. The stockholder's notice to the Secretary shall set forth as to each matter the stockholder proposes to bring before the annual meeting (A) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (B) the name and address, as they appear on the Corporation's books, of the stockholder proposing such business, (C) the class and number of shares of the Corporation which are beneficially owned by the stockholder and (D) any material interest of the stockholder in such business. At an annual meeting, the presiding officer shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting in accordance with the provisions of this Article, Section 2.5, and if such officer should so determine, such officer shall so declare to the meeting, and any such business not properly brought before the meeting shall not be transacted. Whether or not the foregoing procedures are followed, no matter which is not a proper matter for stockholder consideration shall be brought before the meeting. Section 2.6. Special Meetings of the Stockholders. Special meetings of the stockholders of the Corporation may be called only by the Board of Directors pursuant to a resolution approved by a majority of the Board of Directors. The business transacted at any special meeting of the stockholders shall be limited to the purposes stated in the notice for the meeting transmitted to stockholders. Section 2.7. Notice of Special Meetings. Written notice of a special meeting stating the place, date and hour of the meeting and the purpose or purposes for which the meeting is called, shall be given by the Secretary of the Corporation not fewer than ten (10) nor more than sixty (60) days before the date of the meeting, to each stockholder entitled to vote at such meeting. Section 2.8. Fixing of Record Date. In order that the Corporation may determine the stockholders entitled to vote at any meeting of stockholders or any adjournment thereof, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix a record date, which shall not precede the date upon which the resolution fixing the record date is adopted, and which shall be (i) not more than sixty (60) nor less than ten (10) days before the date of a meeting, and (ii) not more than sixty (60) days prior to any other action. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for any adjourned meeting. Section 2.9. Voting Lists. The officer who has charge of the stock ledger of the Corporation shall prepare and make, at least ten (10) days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, either at a place within the city where -3- 4 the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. Section 2.10. Quorum and Adjournments. The holders of a majority of the voting power of the stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business, except as otherwise provided by statute or by the Corporation's Certificate of Incorporation. If, however, such quorum shall not be present or represented at any such meeting of the stockholders, the stockholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented; provided that if the adjournment is for more than thirty (30) days, or if after the adjournment a new record date is fixed by the directors for the adjourned meeting, a new notice shall be transmitted to the stockholders of record entitled to vote at the adjourned meeting. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally notified. Section 2.11. Vote Required. When a quorum is present at any meeting of all stockholders, the affirmative vote of the holders of a majority of the voting power of the stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall decide any question brought before such meeting, unless the question is one upon which by express provision of statute or of the Corporation's Certificate of Incorporation, a different vote is required in which case such express provision shall govern and control the decision of such question; provided, however, all elections of directors shall be determined by a plurality of the votes cast. Section 2.12. Voting Rights. Unless otherwise provided in the Corporation's Certificate of Incorporation, each stockholder having voting power shall at every meeting of the stockholders be entitled to one (1) vote in person or by proxy for each share of the capital stock having voting power held by such stockholder, but no proxy shall be voted on after three (3) years from its date, unless the proxy provides for a longer period. At any meeting of the stockholders, every stockholder entitled to vote may vote in person or by proxy authorized by an instrument in writing or by a transmission permitted by law filed in accordance with the procedure established for the meeting. Any copy, facsimile telecommunication or other reliable reproduction of the writing or transmission created pursuant to this paragraph may be substituted or used in lieu of the original writing or transmission for any and all purposes for which the original writing or transmission could be used; provided that such copy, facsimile telecommunication or other reproduction shall be a complete reproduction of the entire original writing or transmission. All voting, including on the election of directors may (except where otherwise required by law) be by a voice vote; provided, however, that upon demand therefor by a stockholder entitled to vote or by his or her proxy, a stock vote shall be taken. Every stock vote shall be taken by ballots, each of which shall state the name of the stockholder or proxy voting and such other information as may be required under the procedure established for the meeting. The Corporation may, and to the extent required by law shall, in advance of any meeting of stockholders, appoint one or more inspectors to act at the meeting and make a written report thereof. The Corporation may designate one or more persons as alternate inspectors to replace any inspector who fails to act. If no inspector or alternate is able to act at a meeting of -4- 5 stockholders, the person presiding at the meeting may, and to the extent required by law shall, appoint one or more inspectors to act at the meeting. Each inspector, before entering upon the discharge of his or her duties, shall take and sign an oath to faithfully execute the duties of inspector with strict impartiality and according to the best of his or her ability. Every vote taken by ballots shall be counted by an inspector or inspectors appointed by the chairman of the meeting. Section 2.13. Presiding Over Meetings. The Chairman of the Board of Directors shall preside at all meetings of the stockholders. In the absence or inability to act of the Chairman, the Vice Chairman, the President or a Vice President (in that order) shall preside, and in their absence or inability to act another person designated by one of them shall preside. The Secretary of the Corporation shall act as Secretary of each meeting of the stockholders. In the event of his or her absence or inability to act, the chairman of the meeting shall appoint a person who need not be a stockholder to act as Secretary of the meeting. Section 2.14. Conducting Meetings. Meetings of the stockholders shall be conducted in a fair manner but need not be governed by any prescribed rules of order. The presiding officer of the meeting shall establish an agenda for the meeting. The presiding officer's rulings on procedural matters shall be final. The presiding officer is authorized to impose reasonable time limits on the remarks of individual stockholders and may take such steps as such officer may deem necessary or appropriate to assure that the business of the meeting is conducted in a fair and orderly manner. ARTICLE III DIRECTORS Section 3.1. General Powers. The business and affairs of the Corporation shall be under the direction of and managed by, a board comprised of directors, which may exercise all such powers of the Corporation and do all such lawful acts and things as are not required by statute, by the Corporation's Certificate of Incorporation or by these By-laws to be done by the stockholders. Directors need not be residents of the State of Delaware or stockholders of the Corporation. The number of directors shall be determined in the manner provided in the Corporation's Certificate of Incorporation. Section 3.2. Election. Directors shall be elected by class for three (3) year or other terms as specified in the Corporation's Certificate of Incorporation, and each director elected shall hold office during the term for which he or she is elected and until his or her successor is elected and qualified, subject, however, to his or her prior death, resignation, retirement or removal from office. Section 3.3. Removal. Directors may only be removed for cause, except as otherwise provided by law, by the holders of at least 66- % of the voting power of the shares entitled to vote at an election of directors. -5- 6 Section 3.4. Vacancies. Any vacancies occurring in the Board of Directors and newly created directorships shall be filled in the manner provided in the Corporation's Certificate of Incorporation. Section 3.5. Place of Meetings. The Board of Directors of the Corporation may hold meetings, both regular and special, either within or without the State of Delaware. The first meeting of each newly elected Board of Directors shall be held immediately following the adjournment of the annual meeting of the stockholders at the same place as such annual meeting and no notice of such meeting shall be necessary to the newly elected directors in order to legally constitute the meeting, provided a quorum shall be present. In the event such meeting is not held at such time and place, the meeting may be held at such time and place as shall be specified in a notice given as hereinafter provided for special meetings of the Board of Directors, or as shall be specified in a written waiver signed by all of the directors. Section 3.6 Participation by Conference Telephone. Unless otherwise restricted by the Corporation's Certificate of Incorporation or these By-laws, members of the Board of Directors, or any committee designated by the Board of Directors, may participate in a meeting of the Board of Directors, or committee, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation by such means shall constitute presence in person at such meeting. Section 3.7. Regular Meetings. Regular meetings of the Board of Directors may be held without notice at such time and at such place as shall from time to time be determined by the Board of Directors. Section 3.8. Special Meetings. Special meetings of the Board of Directors may be called by the Chairman of the Board, the Chief Executive Officer or the President on at least one day's notice to each director, either personally, or by courier, telephone, telefax, mail or telegram. Special meetings shall be called by the Chairman of the Board, the Chief Executive Officer or the President in like manner and on like notice at the written request of one-half or more of the directors comprising the Board of Directors stating the purpose or purposes for which such meeting is requested. Notice of any meeting of the Board of Directors for which a notice is required may be waived in writing signed by the person or persons entitled to such notice, whether before or after the time of such meeting, and such waiver shall be equivalent to the giving of such notice. Attendance of a director at any such meeting shall constitute a waiver of notice thereof, except where a director attends a meeting for the express purpose of objecting to the transaction of any business because such meeting is not lawfully convened. Neither the business to be transacted at nor the purpose of any meeting of the Board of Directors for which a notice is required need be specified in the notice, or waiver of notice, of such meeting. The Chairman of the Board shall preside at all meetings of the Board of Directors. In the absence or inability to act of the Chairman of the Board, the Vice Chairman of the Board, the Chief Executive Officer, the President or the Chief Financial Officer (in that order) shall preside, and in their absence or inability to act another director designated by one of them shall preside. -6- 7 Section 3.9. Quorum; No Action on Certain Matters. At all meetings of the Board of Directors, a majority of the then duly elected directors shall constitute a quorum for the transaction of business and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the Board of Directors, except as may be otherwise specifically provided by statute or by the Certificate of Incorporation. If a quorum shall not be present at any meeting of the Board of Directors, the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. Section 3.10. Resignations. Any director of the Corporation may resign at any time by giving written notice to the Board of Directors, the Chairman of the Board or the President. Such resignation shall take effect at the time specified therein and, unless tendered to take effect upon acceptance thereof, the acceptance of such resignation shall not be necessary to make it effective. Section 3.11. Informal Action. Unless otherwise restricted by the Corporation's Certificate of Incorporation or these By-laws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if all members of the Board of Directors or committee consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board of Directors or committee. Section 3.12. Presumption of Assent. A director of the Corporation who is present at a meeting of the Board of Directors at which action on any corporate matter is taken shall be conclusively presumed to have assented to the action taken unless his or her dissent shall be entered in the minutes of the meeting or unless he or she shall file his or her written dissent to such action with the person acting as the Secretary of the meeting before the adjournment thereof or shall forward such dissent by registered mail to the secretary of the Corporation immediately after the adjournment of the meeting. Such right to dissent shall not apply to a director who voted in favor of such action. Section 3.13. Compensation of Directors. In the discretion of the Board of Directors, the directors may be paid their expenses, if any, of attendance at each meeting of the Board of Directors or a committee thereof, may be paid a fixed sum for attendance at each meeting of the Board of Directors or a committee thereof, and may be awarded other compensation for their services as directors. No such payment or award shall preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for attending committee meetings. ARTICLE IV COMMITTEES OF DIRECTORS Section 4.1. Appointment and Powers. The Board of Directors may, by resolution passed by a majority of the whole Board of Directors, designate one or more committees, each committee to consist of one or more of the directors of the Corporation. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or -7- 8 disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not such member or members constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the Board of Directors, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation, and may authorize the seal of the Corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to amending the Certificate of Incorporation (except that a committee may, to the extent authorized in the resolution or resolutions providing for the issuance of shares of stock adopted by the Board of Directors as provided in subsection (a) of Section 151 of the Delaware General Corporation Law, fix the designations and any of the preferences or rights of such shares relating to dividends, redemption, dissolution, any distribution of assets of the Corporation or the conversion into, or the exchange of such shares for, shares of any other class or classes or any other series of the same or any other class or classes of stock of the Corporation or fix the number of shares of any series of stock or authorize the increase or decrease of the number of shares of any series), and if the resolution which designates the committee or a supplemental resolution of the Board of Directors shall so provide, such other items or tasks as may be determined from time to time by resolution adopted by the Board of Directors. Section 4.2. Committee Minutes. Each committee shall keep regular minutes of its meetings and shall file such minutes and all written consents executed by its members with the Secretary of the Corporation. Each committee may determine the procedural rules for meeting and conducting its business and shall act in accordance therewith, except as otherwise provided herein or required by law. Adequate provision shall be made for notice to members of all meetings; one-third of the members shall constitute a quorum unless the committee shall consist of one or two members, in which event one member shall constitute a quorum; and all matters shall be determined by a majority vote of the members present. Action may be taken by any committee without a meeting if all members thereof consent thereto in writing, and the writing or writings are filed with the minutes of the proceedings of such committee. ARTICLE V NOTICES Section 5.1. Manner of Notice. Whenever, under applicable law or the Corporation's Certificate of Incorporation or these By-laws, notice is required to be given to any director or stockholder, unless otherwise provided in the Corporation's Certificate of Incorporation or these By-laws, such notice may be given in writing, by courier or mail, addressed to such director or stockholder, at such director's or stockholder's address as it appears on the records of the Corporation, with freight or postage thereon prepaid, and such notice shall be deemed to be given at the time when the same shall have been deposited with such courier or in the United States mail. Notice may be given orally if such notice is confirmed in writing in a manner provided therein. Notice to directors may also be given by telegram, mailgram, telex or telecopier. -8- 9 Section 5.2. Waiver. Whenever any notice is required to be given under applicable law or the provisions of the Corporation's Certificate of Incorporation or these By-laws, a waiver thereof in writing, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto. ARTICLE VI OFFICERS Section 6.1. Number and Qualifications. The officers of the Corporation shall be chosen by the Board of Directors and shall be a Chairman of the Board, a Chief Executive Officer, a President, a Chief Financial Officer, one or more Vice Presidents, a Secretary and a Treasurer. The Board of Directors may also choose a Vice Chairman of the Board (or Vice Chairmen), one or more Assistant Secretaries and Assistant Treasurers and such additional officers as the Board of Directors may deem necessary or appropriate from time to time. Membership on the Board of Directors shall not be a prerequisite to the holding of any other office. Any number of offices may be held by the same person, unless the Corporation's Certificate of Incorporation or these By-laws otherwise provide. Section 6.2. Election. The Board of Directors at its first meeting after each annual meeting of stockholders shall elect a Chairman of the Board, a Chief Executive Officer, a President, a Chief Financial Officer, one or more Vice-Presidents, a Secretary and a Treasurer, and may choose a Vice Chairman of the Board, one or more Assistant Secretaries and Assistant Treasurers and such other officers as the Board of Directors shall deem desirable. Section 6.3. Other Officers and Agents. The Board of Directors may choose such other officers and agents as it shall deem necessary who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the Board of Directors. Section 6.4. Salaries. The salaries or other compensation of the officers and agents of the Corporation shall be fixed from time to time by the Board of Directors, and no officer shall be prevented from receiving such salary or other compensation by reason of the fact that such officer is also a director of the Corporation. Section 6.5. Term of Office. The officers of the Corporation shall hold office until their successors are chosen and qualify or until their earlier resignation or removal. Any officer elected or appointed by the Board of Directors may be removed at any time, either with or without cause, by the affirmative vote of a majority of the directors then in office at any meeting of the Board of Directors. If a vacancy shall exist in the office of the Corporation, the Board of Directors may elect any person to fill such vacancy, such person to hold office as provided in Section 6.1 of this Article VI. Section 6.6. The Chairman of the Board. The Chairman of the Board shall preside at all meetings of the stockholders and of the Board of Directors and shall see that orders and -9- 10 resolutions of the Board of Directors are carried into effect. The Chairman of the Board shall perform such duties as may be assigned to him by the Board of Directors. Section 6.7. The Chief Executive Officer. The Chief Executive Officer shall be the principal executive officer of the Corporation and shall, in general, supervise and control all of the business and affairs of the Corporation, unless otherwise provided by the Board of Directors. In the absence of the Chairman of the Board, the Chief Executive Officer shall preside at all meetings of the stockholders and of the Board of Directors and shall see that orders and resolutions of the Board of Directors are carried into effect. The Chief Executive Officer may sign bonds, mortgages, certificates for shares and all other contracts and documents whether or not under the seal of the Corporation except in cases where the signing and execution thereof shall be expressly delegated by law, by the Board of Directors or by these By-laws to some other officer or agent of the Corporation. The Chief Executive Officer shall have general powers of supervision and shall be the final arbiter of all differences between officers of the Corporation and the Chief Executive Officer's decision as to any matter affecting the Corporation shall be final and binding as between the officers of the Corporation subject only to its Board of Directors. Section 6.8. The President. Unless another party has been designated as Chief Operating Officer, the President shall be the Chief Operating Officer of the Corporation responsible for the day-to-day active management of the business of the Corporation, under the general supervision of the Chief Executive Officer. In the absence of the Chief Executive Officer, the President shall perform the duties of the Chief Executive Officer, and when so acting, shall have all the powers of and be subject to all the restrictions upon the Chief Executive Officer. The President shall have concurrent power with the Chief Executive Officer to sign bonds, mortgages, certificates for shares and other contracts and documents, whether or not under the seal of the Corporation except in cases where the signing and execution thereof shall be expressly delegated by law, by the Board of Directors, or by these By-laws to some other officer or agent of the Corporation. In general, the President shall perform all duties incident to the office of the President and such other duties as the Chief Executive Officer or the Board of Directors may from time to time prescribe. Section 6.9. The Chief Financial Officer. The Chief Financial Officer shall be the principal financial and accounting officer of the Corporation. The Chief Financial Officer shall: (a) have charge of and be responsible for the maintenance of adequate books of account for the Corporation; (b) have charge and custody of all funds and securities of the Corporation, and be responsible therefor and for the receipt and disbursement thereof; and (c) perform all the duties incident to the office of the Chief Financial Officer and such other duties as from time to time may be assigned to him by the President or by the Board of Directors. If required by the Board of Directors, the Chief Financial Officer shall give a bond for the faithful discharge of the Chief Financial Officer's duties in such sum and with such surety or sureties as the Board of Directors may determine. Section 6.10. The Vice-Presidents. In the absence of the President or in the event of the President's inability or refusal to act, the Vice-Presidents (in the order designated, or in the absence of any designation, then in the order of their election) shall perform the duties of the President, and when so acting, shall have all the powers of and be subject to all the restrictions -10- 11 upon the President. The Vice-Presidents shall perform such other duties and have such other powers as the Chief Executive Officer or the Board of Directors may from time to time prescribe. Section 6.11. The Secretary. The Secretary shall attend all meetings of the Board of Directors and all meetings of the stockholders and record all the proceedings of the meetings of the Corporation and of the Board of Directors in a book to be kept for that purpose and shall perform like duties for the standing committees when required. The Secretary shall give, or cause to be given, or cause to be given notice of all meetings of the stockholders and special meetings of the Board of Directors, and shall perform such other duties as may be prescribed by the Board of Directors or the Chief Executive Officer, under whose supervision the Secretary shall be. The Secretary shall have custody of the corporate seal of the Corporation and the Secretary or an Assistant Secretary, shall have authority to affix the same to any instrument requiring it and when so affixed, it may be attested by the Secretary's signature or by the signature of such Assistant Secretary. The Board of Directors may give general authority to any other officer to affix the seal of the Corporation and to attest the affixing by such officer's signature. Section 6.12. The Treasurer. In the absence of the Chief Financial Officer or in the event of the Chief Financial Officer's inability or refusal to act, the Treasurer shall perform the duties of the Chief Financial Officer, and when so acting, shall have all the powers of and be subject to all the restrictions upon the Chief Financial Officer. The Treasurer shall perform such other duties and have such other powers as the Chief Executive Officer or the Board of Directors may from time to time prescribe. Section 6.13. The Assistant Secretary. The Assistant Secretary, or if there be more than one, the Assistant Secretaries in the order determined by the Board of Directors (or if there be no such determination, then in the order of their election), shall, in the absence of the Secretary or in the event of the Secretary's inability or refusal to act, perform the duties and exercise the powers of the Secretary and shall perform such other duties and have such other powers as the Chief Executive Officer or the Board of Directors may from time to time prescribe. Section 6.14. The Assistant Treasurer. The Assistant Treasurer, or if there shall be more than one, the Assistant Treasurers in the order determined by the Board of Directors (or if there be no such determination, then in the order of their election), shall, in the absence of the Treasurer or in the event of the Treasurer's inability or refusal to act, perform the duties and exercise the powers of the Treasurer and shall perform such other duties and have such other powers as the Chief Executive Officer or the Board of Directors may from time to time prescribe. -11- 12 ARTICLE VII CERTIFICATES OF STOCK, TRANSFERS AND RECORD DATES Section 7.1. Form of Certificates. Every holder of stock in the Corporation shall be entitled to have a certificate, signed by, or in the name of the Corporation by (a) the Chairman of the Board, the President or the Chief Executive Officer, and (b) the Chief Financial Officer, Treasurer, Secretary, an Assistant Secretary or an Assistant Treasurer of the Corporation; certifying the number of shares owned by such holder in the Corporation. If the Corporation shall be authorized to issue more than one class of stock or more than one series of any class, the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificate which the Corporation shall issue to represent such class or series of stock; provided that, except as otherwise provided in Section 202 of the General Corporation Law of Delaware, in lieu of the foregoing requirements, there may be set forth on the face or back of the certificate which the Corporation shall issue to represent such class or series of stock, a statement that the Corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. Subject to the foregoing, certificates of stock of the Corporation shall be in such form as the Board of Directors may from time to time prescribe. Section 7.2. Facsimile Signatures. Where a certificate is countersigned (1) by a transfer agent other than the Corporation or its employee, or (2) by a registrar other than the Corporation or its employee, any other signatures on the certificate may be facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if such person were such officer, transfer agent or registrar at the date of issue. Section 7.3. Lost Certificates. The Board of Directors may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the Corporation alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen or destroyed. When authorizing such issue of a new certificate or certificates, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate or certificates, or such owner's legal representative, to advertise the same in such manner as the Corporation shall require and/or give the Corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the Corporation or its transfer agent or registrar with respect to the certificate alleged to have been lost, stolen or destroyed. Section 7.4. Transfers of Stock. Upon surrender to the Corporation or the transfer agent of the Corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, it shall be the duty of the -12- 13 Corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. Section 7.5. Registered Stockholders. The Corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends and to vote as such owner and to hold liable for calls and assessments a person registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not the Corporation shall have express or other notice thereof, except as otherwise provided by the laws of Delaware. ARTICLE VIII CONFLICT OF INTERESTS Section 8.1. Contract or Relationship Not Void. No contract or transaction between the Corporation and one or more of its directors or officers, or between the Corporation and any other corporation, partnership, association, or other organization in which one or more of its directors or officers are directors or officers, or have a financial interest, shall be void or voidable solely for this reason, or solely because such director or officer is present at or participates in the meeting of the Board of Directors or committee thereof which authorizes the contract or transaction, or solely because such director's or officer's vote is counted for such purpose, if: (i) The material facts as to such director's or officer's relationship or interest and as to the contract or transaction are disclosed or are known to the Board of Directors or the committee, and the board or committee in good faith authorizes the contract or transaction by the affirmative vote of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; or (ii) The material facts as to such director's or officer's relationship or interest and as to the contract or transaction are disclosed or are known to the stockholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the stockholders; or (iii) The contract or transaction is fair as to the Corporation as of the time it is authorized, approved or ratified, by the Board of Directors, a committee thereof, or the stockholders. Section 8.2. Quorum. Common or interested directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors or of a committee which authorizes the contract or transaction. -13- 14 ARTICLE IX GENERAL PROVISIONS Section 9.1. Dividends. Dividends upon the capital stock of the Corporation, subject to the provisions of the Certificate of Incorporation, if any, may be declared by the Board of Directors at any regular or special meeting, pursuant to law. Dividends may be paid in cash, in property, or in shares of the capital stock or rights to acquire same, subject to the provisions of the Corporation's Certificate of Incorporation. Before payment of any dividend, there may be set aside out of any funds of the Corporation available for dividends such sum or sums as the directors from time to time, in their absolute discretion, think proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the Corporation, or for such other purpose as the directors shall think conducive to the interest of the Corporation, and the directors may modify or abolish any such reserve in the manner in which it was created. Section 9.2. Checks. All checks or demands for money and notes of the Corporation shall be signed by such officer or officers or such other person or persons as the Board of Directors may from time to time designate. Section 9.3. Fiscal Year. The fiscal year of the Corporation shall be fixed by resolution of the Board of Directors. Section 9.4. Seal. The corporate seal shall have inscribed thereon the name of the Corporation and the words "Corporate Seal, Delaware." The seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise. Section 9.5. Stock in Other Corporations. Shares of any other corporation which may from time to time be held by this Corporation may be represented and voted at any meeting of stockholders of such corporation by the Chairman of the Board, the Chief Executive Officer, the President, the Chief Financial Officer or a Vice President of the Corporation, or by any proxy appointed in writing by the Chairman of the Board, the Chief Executive Officer, the President, the Chief Financial Officer or a Vice President of the Corporation, or by any other person or persons thereunto authorized by the Board of Directors. Shares represented by certificates standing in the name of the Corporation may be endorsed for sale or transfer in the name of the Corporation by the Chairman of the Board, the Chief Executive Officer, the President, the Chief Financial Officer or any Vice President of the Corporation or by any other officer of officers thereunto authorized by the Board of Directors. Shares belonging to the Corporation need not stand in the name of the Corporation, but may be held for the benefit of the Corporation in the individual name of the Chief Financial Officer or of any other nominee designated for the purpose of the Board of Directors. -14- 15 ARTICLE X AMENDMENTS These By-laws may be altered, amended, or repealed or new by-laws may be adopted only in the manner provided in the Corporation's Certificate of Incorporation. 15 EX-4.1 5 DESCRIPTION OF COMMON STOCK CERT. 1 EXHIBIT 4.1 DESCRIPTION OF SPECIMEN STOCK CERTIFICATE FOR COMMON STOCK Face of Certificate: The front of the specimen stock certificate for the Company's Common Stock (the "Certificate") contains the logo of the Company above the name of the Company and the Common Stock's CUSIP number (630079 10 1). The Certificate is signed by Dennis J. Nowak, Secretary of the Company, and Robert W. Cross, President and Chief Executive Officer of the Company. The Company's corporate seal appears in the middle of the lower edge of the Certificate. The face of the Certificate also contains the following language: This certifies that ____________________ is the owner of ____________ fully-paid and non-assessable shares of Common Stock, par value $.01 per share, of NANOPHASE TECHNOLOGIES CORPORATION (the "Corporation"), a Delaware corporation. The shares represented by this certificate are transferable on the books of the Corporation by the holder of record hereof in person, or by duly authorized attorney, upon surrender of this certificate properly endorsed. This certificate is not valid unless countersigned and registered by the Corporation's transfer agent and registrar. In witness whereof, the Corporation has caused the facsimile signatures of its duly authorized officers and its facsimile seal to be affixed hereto. Reverse of Certificate: The back of the certificate contains the following language: The Corporation will furnish without charge to each stockholder who so requests, the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof of the Corporation and the qualifications, limitations or restrictions of such preferences and/or rights. Any such request is to be addressed to the Secretary of the Corporation at its principal office or to the transfer agent named on the face of this certificate. The reverse of the Certificate also contains standard stock transfer instructions. EX-5 6 OPINION OF KATTEN MUCHIN 1 EXHIBIT 5 November 3, 1997 Nanophase Technologies Corporation 453 Commerce Street Burr Ridge, Illinois 60521 RE: REGISTRATION STATEMENT ON FORM S-1 Ladies and Gentlemen: We have acted as counsel for Nanophase Technologies Corporation, an Illinois corporation which prior to consummation of the Offering (as defined herein) will be reincorporated in Delaware (the "Company"), in connection with the preparation and filing of a registration statement on Form S-1 (the "Registration Statement") with the Securities and Exchange Commission under the Securities Act of 1933, as amended. The Registration Statement relates to the Company's initial public offering (the "Offering") of up to 5,750,000 shares of the Company's common stock, $.001 par value per share (the "Common Stock"), including the 750,000 shares of Common Stock issuable upon exercise in full of the Underwriters' (as defined herein) over-allotment option (collectively, the "Shares"). In connection with this opinion, we have relied as to matters of fact, without investigation, upon certificates of public officials and others and upon affidavits, certificates and written statements of directors, officers and employees of, and the accountants and transfer agent for, the Company. We have also examined originals or copies, certified or otherwise identified to our satisfaction, of such instruments, documents and records as we have deemed relevant and necessary to examine for the purpose of this opinion, including (a) the Registration Statement, as amended, (b) the Certificate of Incorporation of the Company, (c) the By-Laws of the Company, (d) resolutions adopted by the Board of Directors of the Company in connection with the Offering and (e) the form of Underwriting Agreement (the "Underwriting Agreement") between the Company and Donaldson, Lufkin & Jenrette Securities Corporation, Furman Selz LLC and Oppenheimer & Co., Inc., as representatives of the several underwriters (collectively, the "Underwriters"). In connection with this opinion, we have assumed the accuracy and completeness of all documents and records that we have reviewed, the genuineness of all signatures, the authenticity of the documents submitted to us as originals and the conformity to authentic original documents of all documents submitted to us as certified, conformed or reproduced copies. We have further 2 Nanophase Technologies Corporation November 3, 1997 Page 2 assumed that all natural persons involved in the Offering as contemplated by the Registration Statement, as amended, have sufficient legal capacity to enter into and perform their respective obligations and to carry out their roles in the Offering. Based upon and subject to the foregoing, it is our opinion that the 5,750,000 Shares covered by the Registration Statement (including the 750,000 Shares issuable upon exercise in full of the Underwriters' over-allotment option), when issued by the Company pursuant to the Underwriting Agreement, will be validly issued, fully paid and non-assessable. Our opinion expressed above is limited to the General Corporation Law of the State of Delaware and the laws of the State of New York, and we do not express any opinion concerning any other laws. This opinion is given as of the date hereof and we assume no obligation to advise you of changes that may hereafter be brought to our attention. We hereby consent to use of our name under the heading "Legal Matters" in the Prospectus forming a part of the Registration Statement and to use of this opinion for filing as Exhibit 5 to the Registration Statement. Very truly yours, /s/ KATTEN MUCHIN & ZAVIS KATTEN MUCHIN & ZAVIS EX-10.1 7 AMENDED AND RESTATED STOCK OPTION PLAN 1 EXHIBIT 10.1 NANOPHASE TECHNOLOGIES CORPORATION an Illinois corporation Amended and Restated 1992 Stock Option Plan 1. Purpose. The purposes of this Amended and Restated 1992 Stock Option Plan are to attract and retain the best available personnel, to provide additional incentive to the Employees, Consultants and Outside Directors of Nanophase Technologies Corporation, an Illinois corporation (the "Company"), and to promote the success of the Company's business. Options granted hereunder may, consistent with the terms of this Plan, be either Incentive Stock Options or Nonstatutory Stock Options, at the discretion of the Board or the Committee and as reflected in the terms of a written option agreement. 2. Definitions. As used in this Plan, the following definitions shall apply: (a) "Board" means the Board of Directors of the Company. (b) "Code" means the Internal Revenue Code of 1986, as amended from time to time, and the rules and regulations promulgated thereunder. (c) "Committee" means the Committee appointed by the Board or otherwise determined in accordance with Section 4(a) of this Plan. (d) "Common Stock" means the common stock of the Company, no par value per share. (e) "Consultant" means any person who is engaged by the Company or any Parent or Subsidiary to render consulting services and is compensated for such consulting services; provided that the term Consultant excludes directors who are not compensated for their services or are paid only a director's fee by the Company. (f) "Continuous Status as an Employee, Consultant or Outside Director" means the absence of any interruption or termination of service as an Employee, Consultant or Outside Director, as applicable. Continuous Status as an Employee, Consultant or Outside Director shall not be considered interrupted in the case of sick leave or military leave, any other leave provided pursuant to a written policy of the Company in effect at the time of determination, or any other leave of absence approved by the Board or the Committee; provided that such leave is for a period of not more than the greatest of (i) 90 days, (ii) the date of the resumption of such service upon the expiration of such leave which is guaranteed by contract or statute or is provided in a written policy of the Company which was in effect upon the commencement of such leave, or (iii) such period of leave as may be determined by the Board or the Committee in its sole discretion. (g) "Employee" means any person employed by the Company or any Parent or Subsidiary of the Company, including employees who are also officers or directors or both of the Company or any Parent or Subsidiary of the Company. The payment of a director's fee by the Company shall not be sufficient to constitute "employment" by the Company. 2 (h) "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time, and the rules and regulations promulgated thereunder. (i) "Incentive Stock Option" means an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code, and the rules and regulations promulgated thereunder. (j) "Non-Employee Director" shall have the meaning set forth in Rule 16b-3(b)(3)(i), or any successor definition adopted by the Commission, provided the person is also an "outside director" under Section 162(m) of the Code. (k) "Nonstatutory Stock Option" means an Option not intended to qualify as an Incentive Stock Option. (l) "Option" means a stock option granted pursuant to this Plan. (m) "Optioned Stock" means the Common Stock subject to an Option. (n) "Optionee" means an Employee, Consultant or Outside Director who receives an Option. (o) "Outside Director" means any member of the Board of Directors of the Company who is not an Employee or Consultant. (p) "Parent" means a "parent corporation," whether now or hereafter existing, as defined in Section 424(e) of the Code. (q) "Plan" means this Nanophase Technologies Corporation Amended and Restated 1992 Stock Option Plan, as amended from time to time. (r) "Rule 16b-3" means Rule 16b-3, as promulgated by the Securities and Exchange Commission under Section 16(b) of the Exchange Act, as such rule is amended from time to time and as interpreted by the Securities and Exchange Commission. (s) "Share" means a share of the Common Stock, as adjusted in accordance with Section of this Plan. (t) "Subsidiary" means a "subsidiary corporation," whether now or hereafter existing, as defined in Section 424(f) of the Code. 3. Scope of Plan. Subject to Section 10 of this Plan, and unless otherwise amended by the Board and approved by the stockholders of the Company as required by law, the maximum aggregate number of Shares issuable under this Plan is 3,563,440, 3,413,440 of which shall be reserved for issuance to Employees and Consultants and 150,000 of which shall be reserved for issuance to Outside Directors, and such Shares are hereby made available and shall be reserved for issuance under this Plan. The Shares may be authorized but unissued, or reacquired, Common Stock. 2 3 If an Option expires or becomes unexercisable for any reason without having been exercised in full, the unpurchased Shares subject thereto shall (unless this Plan shall have terminated) become available for grants of other Options under this Plan. 4. Administration of Plan. (a) Procedure. Except as otherwise determined by the Board, this Plan shall be administered by the Committee. The Committee shall consist of two or more Outside Directors appointed by the Board, but all Committee members must be Non-Employee Directors. If the Board fails to appoint such persons, the Committee shall consist of all Outside Directors who are Non-Employee Directors. (b) Powers of Committee. Subject to Section 5(b) below and otherwise subject to the provisions of this Plan, the Committee shall have full and final authority in its discretion to: (i) grant Incentive Stock Options and Nonstatutory Stock Options, (ii) determine, upon review of relevant information and in accordance with Section below, the Fair Market Value of the Common Stock; (iii) determine the exercise price per share of Options to be granted, in accordance with this Plan, (iv) determine the Employees and Consultants to whom, and the time or times at which, Options shall be granted, and the number of shares to be represented by each Option; (v) cancel, with the consent of the Optionee, outstanding Options and grant new Options in substitution therefor; (vi) interpret this Plan; (vii) accelerate or defer (with the consent of Optionee) the exercise date of any Option; (viii) prescribe, amend and rescind rules and regulations relating to this Plan; (ix) determine the terms and provisions of each Option granted (which need not be identical) by which Options shall be evidenced and, with the consent of the holder thereof, modify or amend any provisions (including without limitation provisions relating to the exercise price and the obligation of any Optionee to sell purchased Shares to the Company upon specified terms and conditions) of any Option; (x) require withholding from or payment by an Optionee of any federal, state or local taxes; (xi) appoint and compensate agents, counsel, auditors or other specialists as the Committee deems necessary or advisable; (xii) correct any defect or supply any omission or reconcile any inconsistency in this Plan and any agreement relating to any Option, in such manner and to such extent the Committee determines to carry out the purposes of this Plan, and; (xiii) construe and interpret this Plan, any agreement relating to any Option, and make all other determinations deemed by the Committee to be necessary or advisable for the administration of this Plan. A majority of the Committee shall constitute a quorum at any meeting, and the acts of a majority of the members present, or acts unanimously approved in writing by the entire Committee without a meeting, shall be the acts of the Committee. A member of the Committee shall not participate in any decisions with respect to himself under this Plan. (c) Effect of Committee's Decision. All decisions, determinations and interpretations of the Committee shall be final and binding on all Optionees and any other holders of any Options granted under this Plan. 3 4 5. Eligibility. (a) Options may be granted to any Employee, Consultant or Outside Director as the Committee may from time to time designate, provided that (i) Incentive Stock Options may be granted only to Employees, and (ii) Options may be granted to Outside Directors only in accordance with the provisions of Section 5(b) below. In selecting the individuals to whom Options shall be granted, as well as in determining the number of Options granted, the Committee shall take into consideration such factors as it deems relevant in connection with accomplishing the purpose of this Plan. Subject to the provisions of Section above, an Optionee may, if he or she is otherwise eligible, be granted an additional Option or Options if the Committee shall so determine. During any calendar year, Options for no more than 100,000 shares of Common Stock shall be granted to any individual Employee, Consultant or Outside Director. (b) All grants of Options to Outside Directors under this Plan shall be automatic and non-discretionary and shall be made strictly in accordance with the following provisions: (i) No person shall have any discretion to select which Outside Directors shall be granted options or to determine the number of Shares to be covered by options granted to Outside Directors; provided, that nothing in this Plan shall be construed to prevent an Outside Director from declining to receive an Option under this Plan. (ii) Each Outside Director who is first elected to the Board after the adoption of this Plan shall be automatically granted on the date of such election (whether by the stockholders or by the Board of Directors) an Option to purchase 10,000 Shares (subject to adjustment as provided in Section 10 below, following consummation of an initial public offering of the Company's securities). On the date of the Annual Meeting of Stockholders of the Company in each calendar year commencing with the first Annual Meeting of the Stockholders of the Company held after the adoption of this Plan, each Outside Director who is elected or reelected at that meeting, or whose term of office does not expire at that meeting, shall be automatically granted an option to purchase 2,000 Shares (subject to adjustment as provided in Section 10 below, following consummation of an initial public offering of the Company's securities); provided that no such automatic annual grant shall be made to an Outside Director (i) who is first elected to the Board at such Annual Meeting or was first elected to the Board within three months prior to such Annual Meeting, or (ii) if there are not sufficient shares remaining and available to all Outside Directors eligible for an automatic annual grant at the time at which an automatic annual grant would otherwise be made under this Section 5(b). (iii) The terms of each Option granted under this Section 5(b) shall be as follows: (A) the term of the option shall be ten (10) years; (B) the Option shall become exercisable cumulatively with respect to one-third of the Shares on each of the first, second and third anniversaries of the date of grant; provided, however, that in no 4 5 event shall any option be exercisable prior to obtaining stockholder approval of this Plan; and (C) the exercise price per share of Common Stock shall be 100% of the "Fair Market Value" (as defined in Section 7(b) below) on the date of grant of the Option. (c) Each Option granted under Section 5(b) above shall be a Nonstatutory Stock Option. Each other Option shall be designated in the written option agreement as either an Incentive Stock Option or a Nonstatutory Stock Option. Notwithstanding such designations, if and to the extent that the aggregate Fair Market Value of the Shares with respect to which Options designated as Incentive Stock Options are exercisable for the first time by any Optionee during any calendar year (under all plans of the Company) exceeds $100,000, such options shall be treated as Nonstatutory Stock Options. For purposes of this Section 5(c), Options shall be taken into account in the order in which they are granted, and the Fair Market Value of the Shares shall be determined as of the time the Option with respect to such Shares is granted. (d) This Plan shall not confer upon any Optionee any right with respect to continuation of employment by or the rendition of services to the Company or any Parent or Subsidiary, nor shall it interfere in any way with his or her right or the right of the Company or any Parent or Subsidiary to terminate his or her employment or services at any time, with or without cause. The terms of this Plan or any Options granted hereunder shall not be construed to give any Optionee the right to any benefits not specifically provided by this Plan or in any manner modify the Company's right to modify, amend or terminate any of its pension or retirement plans. 6. Term of Plan. This Plan shall become effective upon the later to occur of its adoption by the Board of Directors of the Company (such adoption to include the approval of at least two Outside Directors) or its approval by vote of the holders of a majority of the outstanding shares of the Company entitled to vote on the adoption of this Plan, and shall terminate no later than December 31, 2007. No grants shall be made under this Plan after the date of termination of this Plan. Any termination, either partially or wholly, shall not affect any Options then outstanding under this Plan. 7. Exercise Price and Consideration. (a) Exercise Price. The per Share exercise price for the Shares to be issued pursuant to exercise of an Option shall be determined by the Committee as follows: (i) In the case of an Incentive Stock Option granted to any Employee, the per Share exercise price shall be no less than 100% of the Fair Market Value per Share on the date of grant, but if granted to an Employee who, at the time of the grant of such Incentive Stock Option, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the per Share exercise price shall be no less than 110% of the Fair Market Value per Share on the date of grant. 5 6 (ii) In the case of an Incentive Stock Option granted to any person other than an Outside Director, the per Share exercise price shall be no less than 100% of the Fair Market Value per Share on the date of grant, but if granted to an Employee who, at the time of the grant of such Incentive Stock Option, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the per Share exercise price shall be no less than 110% of the Fair Market Value per Share on the date of grant. The exercise price of Options granted pursuant to Section 5(b) above shall be 100% of the Fair Market Value on the date of grant of the Option. For purposes of this Section 7(a), if an Option is amended to reduce the exercise price, the date of grant of such option shall thereafter be considered to be the date of such amendment. (iii) With respect to (i) or (ii) above, the per Share exercise price is subject to adjustment as provided in Section 10 below. (b) Fair Market Value. The "Fair Market Value" of the Common Stock shall be determined by the Committee in its discretion; provided, that if the Common Stock is listed on a stock exchange, the Fair Market Value per Share shall be the closing price on such exchange on the date of grant of the Option as reported in the Wall Street Journal (or, (i) if not so reported, as otherwise reported by the exchange, and (ii) if not reported on the date of grant, then on the last prior date on which a sale of the Common Stock was reported); or if not listed on an exchange but traded on the National Association of Securities Dealers Automated Quotation National Market System ("NASDAQ"), the Fair Market Value per Share shall be the closing price per share of the Common Stock for the date of grant, as reported in the Wall Street Journal (or, (i) if not so reported, as otherwise reported by NASDAQ, and (ii) if not reported on the date of grant, then on the last prior date on which a sale of the Common Stock was reported); or, if the Common Stock is otherwise publicly traded, the mean of the closing bid price and asked price for the last known sale. (c) Consideration. The consideration to be paid for the Shares to be issued upon exercise of an Option, including the methods of payment described in Section 8(b)(ii) below, shall be determined by the Committee (and in the case of an Incentive Stock Option, shall be determined at the time of grant) to the extent permitted under applicable laws. (d) Withholding. No later than the date as of which an amount first becomes includable in the gross income of the Optionee for Federal income tax purposes with respect to an option, the Optionee shall pay to the Company (or other entity identified by the Committee), or make arrangements satisfactory to the Company or other entity identified by the Committee regarding the payment of, any Federal, state, local or foreign taxes of any kind required by law to be withheld with respect to such amount. Unless otherwise determined by the Committee, withholding obligations may be settled with Common Stock, including Common Stock underlying the subject option, provided that any applicable requirements under Section 16 of the Exchange Act are satisfied so as to avoid 6 7 liability thereunder. The obligations of the Company under this Plan shall be conditional upon such payment or arrangements, and the Company shall, to the extent permitted by law, have the right to deduct any such taxes from any payment otherwise due to the Optionee. 8. Options. (a) Term of Option. The term of each Option granted (other than an Option granted under Section 5(b) above) shall be for a period of no more than ten (10) years from the date of grant thereof or such shorter term as may be provided in the Option agreement. However, in the case of an Option granted to an Optionee who, at the time the Option is granted, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the term of the Option shall be five (5) years from the date of grant thereof or such shorter time as may be provided in the Option Agreement. (b) Exercise of Options. (i) Procedure for Exercise; Rights as a Shareholder. Any Option granted under this Plan (other than an Option granted pursuant to Section 5(b) above) shall be exercisable at such times and under such conditions as determined by the Committee, including performance criteria with respect to the Company and/or the Optionee, and as shall otherwise be permissible under the terms of this Plan. An Option may not be exercised for a fraction of a Share. An Option shall be deemed to be exercised when written notice of such exercise has been given to the Company in accordance with the terms of the Option by the person entitled to exercise the Option and full payment for the Shares with respect to which the Option is exercised has been received by the Company. Full payment may, as authorized by the Committee, consist of any consideration and method of payment allowable under Section 7 of this Plan. Until the issuance (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company) of the stock certificate evidencing such Shares, no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. The Company shall issue (or cause to be issued) such stock certificate promptly upon exercise of the Option. If the exercise of an Option is treated in part as the exercise of an Incentive Stock Option and in part as the exercise of a Nonstatutory Stock Option pursuant to Section 5(b) above, the Company shall issue a separate stock certificate evidencing the Shares treated as acquired upon exercise of an Incentive Stock Option and a separate stock certificate evidencing the Shares treated as acquired upon exercise of a Nonstatutory Stock Option and shall identify each such certificate accordingly in its stock transfer records. No adjustment will be made for a dividend or other right for which the record date is prior to the date the stock certificate is issued, except as provided in Section of this Plan. 7 8 Exercise of an Option in any manner shall result in a decrease in the number of Shares which thereafter may be available, both for purposes of this Plan and for sale under the Option, by the number of Shares as to which the Option is exercised. (ii) Method of Exercise. An Optionee may exercise an Option, in whole or in part, at any time during the option period by the Optionee's giving written notice of exercise on a form provided by the Committee (if available) to the Company specifying the number of shares of Common Stock subject to the Option to be purchased. Such notice shall be accompanied by payment in full of the purchase price by cash or check or such other form of payment as the Company may accept. If approved by the Committee, payment in full or in part may also be made (A) by delivering other Shares of Common Stock which (I) either have been owned by the Optionee for more than six (6) months on the date of surrender or were not acquired directly or indirectly from the Company, and (II) have a Fair Market Value on the date of surrender (determined without regard to any limitations on transferability imposed by securities laws) equal to the aggregate exercise price of the Shares as to which said Option shall be exercised; (B) by the execution and delivery of a note or other evidence of indebtedness (and any security agreement thereunder) satisfactory to the Committee; (C) by authorizing the Company to retain shares of Common Stock which would otherwise be issuable upon exercise of the Option having a total Fair Market Value on the date of delivery equal to the exercise price of the subject Option; (D) by the delivery of cash by a broker-dealer to whom the Optionee has submitted an irrevocable notice of exercise (in accordance with Part 220, Chapter II, Title 12 of the Code of Federal Regulations, so-called "cashless" exercise); or (E) by any combination of the foregoing. In the case of an Incentive Stock Option, the right to make a payment in the form of already owned shares of Common Stock of the same class as the Common Stock subject to the Option may be authorized only at the time the Option is granted. No shares of Common Stock shall be issued until full payment therefor has been made. An Optionee shall have all of the rights of a shareholder of the Company holding the class of Common Stock that is subject to such Option (including, if applicable, the right to vote the shares and the right to receive dividends), when the Optionee has given written notice of exercise, has paid in full for such shares and such shares have been recorded on the Company's official shareholder records as having been issued or transferred. (iii) Termination of Status as an Employee, Consultant or Outside Director. If an Optionee's Continuous Status as an Employee, Consultant or Outside Director (as the case may be) is terminated for any reason whatever, such Optionee may, but only within such period of time as provided in the Option agreement, after the date of such termination (but in no event later than the date of expiration of the term of such Option as set forth in the Option agreement), exercise the Option to the extent that such Employee, Consultant or Outside Director was entitled to exercise it at the date of such termination pursuant to the terms of the Option agreement. To the extent that such Employee, Consultant or Outside Director was not entitled to exercise the Option at the date of such termination, or if such Employee, Consultant or Outside Director does not exercise such Option (which such Employee, Consultant or Outside Director was entitled to exercise) within the time specified in the Option agreement, the Option shall terminate. 8 9 (iv) Company Loan or Guarantee. Upon the exercise of any Option and subject to the pertinent Option agreement and the discretion of the Committee, the Company may at the request of the Optionee; (A) lend to the Optionee, with recourse, an amount equal to such portion of the option exercise price as the Committee may determine; or (B) guarantee a loan obtained by the Optionee from a third-party for the purpose of tendering the option exercise price. 9. Non-transferability of Options. Except as otherwise provided in an Option agreement, an Option granted hereunder shall by its terms not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or the laws of descent and distribution. Except as otherwise provided in an Option agreement, an Option may be exercised during the Optionee's lifetime only by the Optionee. 10. Adjustments Upon Changes in Capitalization or Merger. (a) Capitalization. Subject to any required action by the stockholders of the Company, the number of shares of Common Stock which have been authorized for issuance under this Plan but as to which no Options have yet been granted or which have been returned to this Plan upon cancellation or expiration of an Option, and the number of shares of Common Stock subject to each outstanding Option, as well as the price per share of Common Stock covered by each such outstanding Option, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock of the Company or the payment of a stock dividend with respect to the Common Stock. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an Option. (b) Dissolution or Liquidation. In the event of the proposed dissolution or liquidation of the Company, each Option will terminate immediately prior to the consummation of such proposed action, unless otherwise provided by the Committee. The Committee may, in the exercise of its sole discretion in such instances, declare that any Option shall terminate as of a date fixed by the Committee and give each Optionee the right to exercise his or her Option as to all or any part of the Optioned Stock, including Shares as to which the Option would not otherwise be exercisable. (c) Sale or Merger. "Sale" means: (i) sale (other than a sale by the Company) of securities entitled to more than 75% of the voting power of the Company in a single transaction or a related series of transactions; or (ii) sale of substantially all of the assets of the Company; or (iii) approval by the stockholders of the Company of a reorganization, merger or consolidation of the Company, as a result of which the persons who were the stockholders of the Company immediately prior to such reorganization, merger or consolidation do not own securities immediately after the reorganization, merger or consolidation entitled to more than 25% of the voting power of the reorganized, merged or consolidated company. Immediately prior to a Sale, each Optionee may exercise his or her Option as to all Shares then subject to the Option, regardless of any vesting conditions 9 10 otherwise expressed in the Option. Voting power, as used in this Section 10(c), shall refer to those securities entitled to vote generally in the election of directors, and securities of the Company not entitled to vote but which are convertible into, or exercisable for, securities of the Company entitled to vote generally in the election of directors shall be counted as if converted or exercised, and each unit of voting securities shall be counted in proportion to the number of votes such unit is entitled to cast. (d) Purchased Shares. No adjustment under this Section 10 shall apply to any purchased Shares already deemed issued at the time any adjustment would occur. (e) Notice of Adjustments. Whenever the purchase price or the number or kind of securities issuable upon the exercise of the Option shall be adjusted pursuant to Section 10, the Company shall give each Optionee written notice setting forth, in reasonable detail, the event requiring the adjustment, the amount of the adjustment, and the method by which such adjustment was calculated. (f) Certain Cash Payments. If an Optionee would not be permitted to exercise an Option or any portion thereof (for purposes of this subsection (f) only, each such Option being referred to as a "Subject Option") or dispose of the Shares received upon the exercise thereof without loss or liability (other than a loss or liability for the exercise price, applicable withholding or any associated transactional cost), or if the Board determines that the Optionee may not be permitted to exercise the same rights or receive the same consideration with respect to the Sale of the Company as a shareholder of the Company with respect to any Subject Options or portion thereof or the Shares received upon the exercise thereof, then notwithstanding any other provision of this Plan and unless the Committee shall provide otherwise in an agreement with such Optionee with respect to any Subject Options, such Optionee shall have the right, whether or not the Subject Option is fully exercisable or may be otherwise realized by the Optionee, by giving notice during the 60-day period from and after a Sale to the Company, to elect to surrender all or part of any Subject Options to the Company and to receive cash, within 30 days of such notice, in an amount equal to the amount by which the "Sale Price" (as defined herein) per share of Common Stock on the date of such election shall exceed the amount which the Optionee must pay to exercise the Subject Options per share of Common Stock under such Subject Options (the "Spread") multiplied by the number of shares of Common Stock granted under the Subject Options as to which the right granted hereunder shall be applicable and shall have been exercised; provided, however, that if the end of such 60- day period from and after a Sale is within six months of the date of grant of a Subject Option held by an Optionee (except an Optionee who has deceased during such six month period) who is an officer or director of the Company (within the meaning of Section 16(b) of the Exchange Act), such Subject Option shall be canceled in exchange for a payment to the Optionee, effective on the day which is six months and one day after the date of grant of such Subject Option, equal to the Spread multiplied by the number of shares of Common Stock granted under the Subject Option. With respect to any Optionee who is an officer or director of the Company (within the meaning of Section 16(b) of the Exchange Act), the 60-day period shall be extended, if necessary, to include the "window period" of Rule 16(b)-3 which first commences on or after the date of the Sale, and the Committee shall have sole discretion, if necessary, to approve the Optionee's exercise 10 11 hereunder and the date on which the Spread is calculated may be adjusted, if necessary, to a later date if necessary to avoid liability to such Optionee under Section 16(b). For purposes of the Plan, "Sale Price" means the higher of (a) the highest reported sales price of a share of Common Stock in any transaction reported on the principal exchange on which such shares are listed or on NASDAQ during the 60-day period prior to and including the date of a Sale or (b) if the Sale is the result of a tender or exchange offer or a corporate transaction, the highest price per share of Common Stock paid in such tender or exchange offer or a corporate transaction, except that, in the case of Incentive Stock Options, such price shall be based only on the Fair Market Value of the Common Stock on the date such Incentive Stock Option is exercised. To the extent that the consideration paid in any such transaction described above consists all or in part of securities or other non-cash consideration, the value of such securities or other non-cash consideration shall be determined in the sole discretion of the Committee. (g) Mitigation of Excise Tax. If any payment or right accruing to an Optionee under this Plan (without the application of this Section), either alone or together with other payments or rights accruing to the Optionee from the Company or an affiliate ("Total Payments") would constitute a "parachute payment" (as defined in Section 280G of the Code and regulations thereunder), the Committee may in each particular instance determine to (a) reduce such payment or right to the largest amount or greatest right that will result in no portion of the amount payable or right accruing under the Plan being subject to an excise tax under Section 4999 of the Code or being disallowed as a deduction under Section 280G of the Code, or (b) take such other actions, or make such other arrangements or payments with respect to any such payment or right as the Committee may determine in the circumstances. Any such determination shall be made by the Committee in the exercise of its sole discretion, and such determination shall be conclusive and binding on the Optionee. The Optionee shall cooperate as may be requested by the Committee in connection with the Committee's determination, including providing the Committee with such information concerning such Optionee as the Committee may deem relevant to its determination. 11. Time of Granting Options. The date of grant of an Option shall, for all purposes, be the date on which the Committee makes the determination granting such Option. Notice of the determination shall be given to each Employee, Consultant or Outside Director to whom an Option is so granted within a reasonable time after the date of such grant. If the Committee cancels, with the consent of Optionee, any Option granted under this Plan, and a new Option is substituted therefor, the date that the canceled Option was originally granted shall be the date used to determine the earliest date for exercising the new substituted Option under Section 7 of this Plan so that the Optionee may exercise the substituted Option at the same time as if the Optionee had held the substituted Option since the date the canceled Option was granted. 11 12 12. Amendment and Termination of Plan. (a) Amendment and Termination. The Board or the Committee may amend, waive or terminate this Plan from time to time in such respects as it shall deem advisable; provided that, to the extent necessary to comply with Rule 16b-3 or with Section 422 of the Code (or any other successor or applicable law or regulation), the Company shall obtain shareholder approval of any Plan amendment in such a manner and to such a degree as is required by the applicable law, rule or regulation. (b) Effect of Amendment or Termination. Any such amendment or termination of this Plan shall not affect Options already granted and such Options shall remain in full force and effect as if this Plan had not been amended or terminated, unless mutually agreed otherwise between the Optionee and the Committee, which agreement must be in writing and signed by the Optionee and the Company. 13. Conditions Upon Issuance of Shares. Shares shall not be issued pursuant to the exercise of an Option unless the exercise of such Option and the issuance and delivery of such Shares pursuant thereto shall comply with all relevant provisions of law, including, without limitation, the Securities Act of 1933, as amended, the Exchange Act, and the rules and regulations promulgated thereunder, and the requirements of any stock exchange upon which the Shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. As a condition to the exercise of an Option, the Company may require the person exercising such Option to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required by any of the aforementioned relevant provisions of law. 14. Restrictions on Shares. Shares of Common Stock issued upon exercise of an Option shall be subject to the terms and conditions specified herein and to such other terms, conditions and restrictions as the Committee in its discretion may determine or provide in the grant. The Company shall not be required to issue or deliver any certificates for shares of Common Stock, cash or other property prior to (i) the listing of such shares on any stock exchange (or other public market) on which the Common Stock may then be listed (or regularly traded), (ii) the completion of any registration or qualification of such shares under federal or state law, or any ruling or regulation of any government body which the Committee determines to be necessary or advisable, and (iii) the satisfaction of any applicable withholding obligation in order for the Company or an affiliate to obtain a deduction with respect to the exercise of an Option. The Company may cause any certificate for any share of Common Stock to be delivered to be properly marked with a legend or other notation reflecting the limitations on transfer of such Common Stock as provided in this Plan or as the Committee may otherwise require. The Committee may require any person exercising an Option to make such representations and furnish such information as it may consider appropriate in connection with the issuance or delivery of the shares of Common Stock in compliance with applicable law or otherwise. 12 13 Fractional shares shall not be delivered, but shall be rounded to the next lower whole number of shares. 15. Shareholder Rights. No person shall have any rights of a shareholder as to shares of Common Stock subject to an Option until, after proper exercise of the Option or other action required, such shares shall have been recorded on the Company's official shareholder records as having been issued or transferred. Subject to the preceding Section and upon exercise of the Option or any portion thereof, the Company will have thirty (30) days in which to issue the shares, and the Optionee will not be treated as a shareholder for any purpose whatsoever prior to such issuance. No adjustment shall be made for cash dividends or other rights for which the record date is prior to the date such shares are recorded as issued or transferred in the Company's official shareholder records, except as provided herein or in an agreement. 16. Registration. If there has been a public offering of the Company's Common Stock, the Company may register under the Securities Act the Common Stock delivered or deliverable pursuant to Options on Commission Form S-8 if available to the Company for this purpose (or any successor or alternate form that is substantially similar to that form to the extent available to effect such registration), in accordance with the rules and regulations governing such forms, as soon as such forms are available for registration to the Company for this purpose. The Company will, if it so determines, use its good faith efforts to cause the registration statement to become effective as soon as possible and will file such supplements and amendments to the registration statement as may be necessary to keep the registration statement in effect until the earliest of (a) one year following the expiration of the option period of the last Option outstanding, (b) the date the Company is no longer a reporting company under the Exchange Act and (c) the date all Optionees have disposed of all shares delivered pursuant to any Option. The Company may delay the foregoing actions at any time and from time to time if the Committee determines in its discretion that any such registration would materially and adversely affect the Company's interests or if there is no material benefit to Optionees. 17. Reservation of Shares. The Company, during the term of this Plan, will at all times reserve and keep available such number of Shares as shall be sufficient to permit the exercise of all Options outstanding under this Plan. The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company's counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained for any reason. 18. Option Agreements. Options shall be evidenced by written Option agreements in such form as the Committee shall approve. 19. Information to Optionees. To the extent required by applicable law, the Company shall provide to each Optionee, during the period for which such Optionee has one or more Options outstanding, copies of all annual reports and other information which are provided to all stockholders of the Company. Except as otherwise noted in the 13 14 foregoing sentence, the Company shall have no obligation or duty to affirmatively disclose to any Optionee, and no Optionee shall have any right to be advised of, any material information regarding the Company or any Parent or Subsidiary at any time prior to, upon or otherwise in connection with, the exercise of an Option. 20. Funding. Benefits payable under this Plan to any person shall be paid directly by the Company. The Company shall not be required to fund or otherwise segregate assets to be used for payment of benefits under this Plan. 21. Controlling Law. This Plan shall be governed by the laws of the state of incorporation of the Company at the time of determination of any issues raised with respect to the interpretation or enforcement of this Plan, without application of any conflict of laws principles. 14 15 FIRST AMENDMENT TO THE NANOPHASE TECHNOLOGIES CORPORATION AMENDED AND RESTATED 1992 STOCK OPTION PLAN RESOLVED, that the Nanophase Technologies Corporation Amended and Restated 1992 Stock Option Plan (the "Plan") be and hereby is amended, subject to shareholder approval, as follows: I Section 3 (which describes the maximum aggregate number of shares of Common Stock issuable under the Plan) hereby is amended by deleting the first sentence of the first paragraph and inserting in its place the following sentence: "Subject to Section 10 of this Plan, and unless otherwise amended by the Board and approved by the stockholders of the Company as required by law, the maximum aggregate number of Shares issuable under this Plan is 4,763,440, 4,613,440 of which shall be reserved for issuance to Employees and Consultants and 150,000 of which shall be reserved for issuance to Outside Directors, and such Shares are hereby made available and shall be reserved for issuance under this Plan." II In all other respects, the Plan shall continue in full force and effect. EX-10.2 8 INDEMNIFICATION AGREEMENT 1 EXHIBIT 10.2 FORM OF INDEMNIFICATION AGREEMENT THIS INDEMNIFICATION AGREEMENT (the "AGREEMENT") is entered into as of this ___ day of _______________, 1997, by and between NANOPHASE TECHNOLOGIES CORPORATION, an Illinois corporation (the "CORPORATION"), and _____________ ("INDEMNITEE"). RECITALS A. The Corporation is aware that because of the increased exposure to litigation costs and risks resulting from service to corporations, talented and experienced persons are increasingly reluctant to serve or continue serving as directors or executive officers of corporations unless they are protected by comprehensive liability insurance and indemnification; B. Plaintiffs often seek damages in such large amounts, and the costs of litigation may be so great (whether or not the case is meritorious), that the defense and/or settlement of such litigation is usually beyond the personal resources of directors and executive officers; C. Based upon their experience as business managers, the Board of Directors of the Corporation (the "BOARD") has concluded that, to retain and attract talented and experienced individuals to serve as directors and executive officers of the Corporation, it is appropriate for the Corporation to contractually indemnify its directors and certain of its executive officers, and to assume for itself liability for expenses and damages in connection with claims against such directors and executive officers in connection with their service to the Corporation; and D. The Corporation believes that it is fair and proper to protect its directors and certain executive officers of the Corporation from the risk of judgments, settlements and other expenses which may occur as a result of their service to the Corporation. NOW, THEREFORE, the parties, intending to be legally bound, for good and valuable consideration, hereby agree as follows: 1. DEFINITIONS. (a) AGENT. "AGENT" means a director or executive officer of the Corporation or a director or executive officer of another foreign or domestic corporation, partnership, joint venture, trust or other enterprise serving at the request, for the convenience, or to represent the interests of the Corporation. (b) CORPORATION. "CORPORATION" means Nanophase Technologies Corporation, an Illinois corporation, its successors or assigns, or any Subsidiary of the Corporation. "SUBSIDIARY" means, and "SUBSIDIARIES" include, (i) any company of which more than fifty percent (50%) of the outstanding voting securities are owned 2 directly or indirectly by the Corporation, or which is otherwise controlled by the Corporation, and (ii) any partnership, joint venture, trust, or other entity of which more than fifty percent (50%) of the equity interest is owned directly or indirectly by the Corporation, or which is otherwise controlled by the Corporation. (c) LIABILITIES. "LIABILITIES" means losses, claims, damages, liabilities, obligations, penalties, judgments, fines, settlement payments, awards, costs, expenses and disbursements (and any and all costs, expenses or disbursements in giving testimony or furnishing documents in response to a subpoena or otherwise), including, without limitation, all reasonable attorneys' fees, costs, expenses and disbursements, as and when incurred. (d) PROCEEDING. "PROCEEDING" means any threatened, pending, or completed action, suit or other proceeding whether civil, criminal, administrative, investigative or any other type whatsoever. (e) CONTROL. "CONTROL" means, with respect to any person or entity, the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of such person or entity, whether through the ownership of voting securities, by contract or otherwise. 2. MAINTENANCE OF LIABILITY INSURANCE. The Corporation hereby covenants and agrees to and with Indemnitee that, so long as Indemnitee shall continue to serve as an Agent and thereafter so long as Indemnitee shall be subject to any claim or Proceeding by reason of the fact that Indemnitee was an Agent or in connection with Indemnitee's acts as such an Agent, the Corporation shall obtain and maintain in full force and effect directors' and officers' liability insurance ("D&O INSURANCE") in reasonable amounts from established and reputable insurers. In all policies of D&O Insurance, Indemnitee shall be named as an insured. 3. INDEMNIFICATION OF AGENT. (a) THIRD PARTY ACTIONS. If Indemnitee is a person who was or is a party or is threatened to be made a party to any Proceeding (other than an action by or in the right of the Corporation) by reason of the fact that Indemnitee is or was an Agent of the Corporation, or by reason of anything done or not done by Indemnitee in any such capacity or otherwise at the request of the Corporation or of its officers, directors or shareholder, the Corporation shall indemnify, defend and hold harmless Indemnitee against any and all Liabilities actually and reasonably incurred by Indemnitee in connection with the investigation, defense, settlement or appeal of such Proceeding, so long as Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in, or not opposed to, the best interests of the Corporation, and, with respect to any criminal action or Proceeding, if Indemnitee had no reasonable cause to believe his conduct was unlawful. -2- 3 (b) DERIVATIVE ACTIONS. If Indemnitee is a person who was, or is a party or is threatened to be made a party, to any Proceeding by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that Indemnitee is or was an Agent of the Corporation, or by reason of anything done or not done by Indemnitee in any such capacity or otherwise at the request of the Corporation or of its officers, directors or shareholders, the Corporation shall indemnify, defend and hold harmless Indemnitee against all Liabilities actually and reasonably incurred by Indemnitee in connection with the investigation, defense, settlement or appeal of such Proceeding, if Indemnitee acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation; provided, however, that no indemnification under this SECTION 3(B) shall be made in respect of any claim, issue or matter for which such person is adjudged to be liable for gross negligence or willful misconduct in the performance of Indemnitee's duties to the Corporation, unless, and only to the extent that, the court in which such Proceeding was brought shall determine upon application that, despite the adjudication of liability, but in view of all the circumstances of the case, Indemnitee is fairly and reasonably entitled to indemnity for such Liabilities as the court shall deem proper. (c) ACTIONS WHERE INDEMNITEE IS DECEASED. If Indemnitee is a person who was or is a party or is threatened to be made a party to any Proceeding by reason of the fact that he is or was an Agent of the Corporation, or by reason of anything done or not done by Indemnitee in any such capacity, and prior to, during the pendency of, or after completion of, such Proceeding, Indemnitee shall die, then the Corporation shall indemnify, defend and hold harmless the estate, heirs and legatees of Indemnitee against any and all Liabilities incurred by such estate, heirs or legatees in connection with the investigation, defense, settlement or appeal of such Proceeding on the same basis as provided for Indemnitee in SECTIONS 3(a) AND 3(b) above. (d) REDUCTION OF LIABILITIES. The Liabilities covered hereby shall be net of any payments to or on behalf of Indemnitee by D&O Insurance carriers or others with respect to the subject Proceeding. 4. INDEMNIFICATION AS WITNESS. Notwithstanding any other provision of this Agreement, to the extent Indemnitee is, by reason of the fact that Indemnitee is or was an Agent of the Corporation, involved in any investigative Proceeding, including but not limited to testifying as a witness or furnishing documents in response to a subpoena or otherwise, Indemnitee shall be indemnified against any and all Liabilities actually and reasonably incurred by or for Indemnitee in connection therewith. 5. ADVANCEMENT OF LIABILITIES. Subject to the provisions of SECTION 6(c), until a determination that Indemnitee is not entitled to be indemnified by the Corporation under the terms hereof, and unless the provisions of SECTION 9 apply, the Corporation shall reimburse Indemnitee for Liabilities previously paid by Indemnitee and may advance Liabilities which the Corporation reasonably determines will be due and payable by Indemnitee within a reasonable time after a request for advancement is made by Indemnitee. The execution and delivery of this Agreement by the Corporation evidences the specific approval by the Board of the reimbursement and advancement of Liabilities -3- 4 as provided for in this SECTION 5. As a condition to such reimbursement and/or advancement, Indemnitee shall, at the request of the Corporation, undertake in a manner satisfactory to the Corporation to repay such amounts reimbursed and/or advanced, without interest, if it shall ultimately be determined pursuant to SECTION 7 OR 9 below that Indemnitee is not entitled to be indemnified by the Corporation under the terms of this Agreement. Subject to the foregoing, the reimbursement and/or advances to be made hereunder shall be paid by the Corporation to Indemnitee within twenty (20) business days following delivery of a written request by Indemnitee to the Corporation, which request shall be accompanied by vouchers, invoices and similar evidence documenting the amounts incurred or to be incurred by Indemnitee. 6. INDEMNIFICATION PROCEDURES. (a) NOTICE BY INDEMNITEE. Promptly after receipt by Indemnitee of notice of the commencement or threat of commencement of any Proceeding, Indemnitee shall, if Indemnitee believes that indemnification with respect thereto may be sought from the Corporation under this Agreement, notify the Corporation of the commencement or threat of commencement thereof, provided that any failure to so notify the Corporation shall not relieve the Corporation of its obligations hereunder, except to the extent that such failure or delay increases the liability of the Corporation hereunder. (b) D & O INSURANCE. If, at the time of receipt of a notice pursuant to SECTION 6(a) above, the Corporation has D&O Insurance in effect, the Corporation shall give prompt notice of the Proceeding or claim to its insurers in accordance with the procedures set forth in the applicable policies. The Corporation shall thereafter take all necessary or desirable action to cause such insurers to pay all amounts payable as a result of such Proceeding in accordance with the terms of such policies, and Indemnitee shall not take any action (by waiver, settlement or otherwise) which would adversely affect the ability of the Corporation to obtain payment from its insurers. (c) ASSUMPTION OF DEFENSE. In the event the Corporation shall be obligated under this Agreement to pay the Liabilities of Indemnitee, the Corporation shall be entitled to assume the defense (with counsel reasonably acceptable to Indemnitee, approval thereof not to be unreasonably withheld) of the Proceeding to which the Liabilities relate. The Corporation agrees to promptly notify Indemnitee upon its election to assume such defense. Once the Corporation (i) provides Indemnitee with notice of its election to assume such defense and (ii) obtains approval from Indemnitee of the counsel retained, the Corporation will not be liable to Indemnitee under this Agreement for any attorney's fees or other Liabilities subsequently incurred by the Indemnitee with respect to such Proceeding, unless (x) the Liabilities incurred by the Indemnitee were previously authorized by the Corporation or (y) counsel for the Indemnitee shall have provided the Corporation with an opinion of counsel stating that there is a likelihood that a conflict of interest exists between the Corporation and the Indemnitee in the conduct of any such defense. -4- 5 7. DETERMINATION OF RIGHT TO INDEMNIFICATION. (a) SUCCESSFUL PROCEEDING. To the extent Indemnitee has been successful, on the merits or otherwise, in the defense of any Proceeding referred to in SECTIONS 3(a) OR 3(b) above, the Corporation shall indemnify Indemnitee against all Liabilities incurred by him in connection therewith. If Indemnitee is not wholly successful in such Proceeding, but is successful, on the merits or otherwise, as to one or more but less than all claims, issues or matters in such Proceeding, then the Corporation shall indemnify Indemnitee against all Liabilities actually or reasonably incurred by or for him in connection with each successfully resolved claim, issue or matter. For purposes of this SECTION 7(a), and without limitation, the termination of any Proceeding, or any claim, issue, or matter in such a Proceeding, by dismissal, with or without prejudice, shall be deemed to be a successful result as to such Proceeding, claim, issue or matter, so long as there has been no finding (either adjudicated or pursuant to SECTION 7(c) below) that Indemnitee (i) did not act in good faith, (ii) did not act in a manner reasonably believed to be in, or not opposed to, the best interests of the Corporation, or (iii) with respect to any criminal proceeding, had reasonable grounds to believe his conduct was unlawful. (b) OTHER PROCEEDINGS. In the event that SECTION 7(a) above is inapplicable, the Corporation shall nevertheless indemnify Indemnitee, unless and only to the extent that the forum listed in SECTION 7(c) below determines that Indemnitee has not met the applicable standard of conduct set forth in SECTIONS 3(a) OR 3(b) above required to entitle Indemnitee to such indemnification. (c) FORUM IN EVENT OF DISPUTE. The determination that indemnification of Indemnitee is proper in the circumstances because Indemnitee has met the applicable standard of conduct set forth in SECTIONS 3(a) OR 3(b) shall be made (i) by the Board, by a majority vote of the directors who are not parties to such Proceeding, even though less than a quorum, or (ii) by a committee of disinterested directors designated by a majority of such disinterested directors, even though less than a quorum, or (iii) if there are no such disinterested directors, or if such disinterested directors shall so direct, by independent legal counsel in a written opinion, or (iv) by the shareholders of the Corporation. The choice of which forum shall make the determination shall be made by the Board. The forum shall act in the utmost good faith to assure Indemnitee a complete opportunity to present to the forum Indemnitee's case that Indemnitee has met the applicable standard of conduct. (d) APPEAL TO COURT. Notwithstanding a determination by any forum listed in SECTION 7(c) above that Indemnitee is not entitled to indemnification with respect to a specific Proceeding, Indemnitee shall have the right to apply to the court in which that Proceeding is or was pending or any other court of competent jurisdiction for the purpose of enforcing Indemnitee's right to indemnification pursuant to this Agreement. (e) INDEMNITY FOR LIABILITIES IN ENFORCEMENT OF AGREEMENT. Notwithstanding any other provision in this Agreement to the contrary, the Corporation shall indemnify Indemnitee against all Liabilities incurred by Indemnitee in connection with any other Proceeding between the Corporation and Indemnitee involving the -5- 6 interpretation or enforcement of the rights of Indemnitee under this Agreements unless a court of competent jurisdiction finds that the material claims and/or defenses of Indemnitee in any such Proceeding were frivolous or made in bad faith. 8. CONTRIBUTION. If and to the extent that a final adjudication shall specify that the Corporation is not obligated to indemnify Indemnitee under this Agreement for any reason (including but not limited to the exclusion set forth in SECTION 9 hereof), then in respect of any Proceeding in which the Corporation is jointly liable with Indemnitee (or would be so liable if joined in such action, suit or proceeding), the Corporation shall contribute to the amount of Liabilities reasonably incurred and paid or payable by Indemnitee in connection with such Proceeding in such proportion as is appropriate to reflect (i) the relative benefits received by the Corporation, on the one hand, and Indemnitee, on the other hand, from the transaction with respect to which such Proceeding arose, and (ii) the relative fault of the Corporation, on the one hand, and Indemnitee, on the other hand, in connection with the circumstances which resulted in such Liabilities, as well as any other relevant equitable considerations. The relative fault of the Corporation, on the one hand, and Indemnitee, on the other hand, shall be determined by reference to, among other things, the parties' relative intent, knowledge, access to information and opportunity to correct or prevent the circumstances resulting in such Liabilities. The Corporation agrees that it would not be just and equitable if contribution pursuant to this SECTION 8 were determined by pro rata allocation or any other method of allocation which does not take account of the foregoing equitable considerations. 9. EXCEPTIONS. (a) CLAIMS INITIATED BY INDEMNITEE. Notwithstanding any other provision herein to the contrary, the Corporation shall not be obligated pursuant to the terms of this Agreement to indemnify or advance Liabilities to Indemnitee with respect to Proceedings or claims initiated or brought voluntarily by Indemnitee and not by way of defense, except with respect to Proceedings brought to establish or enforce a right to indemnification under this Agreement, but such indemnification or advancement of expenses may be provided by the Corporation in specific cases if the Board finds it to be appropriate. (b) UNAUTHORIZED SETTLEMENTS. Notwithstanding any other provision herein to the contrary, the Corporation shall not be obligated pursuant to the terms of this Agreement to indemnify Indemnitee under this Agreement for any amount paid in settlement of a Proceeding without the prior written consent of the Corporation to such settlement. (c) NO DUPLICATIVE PAYMENT. The Corporation shall not be liable under this Agreement to make any payment of amounts otherwise indemnifiable hereunder if and to the extent that Indemnitee has otherwise actually received such payment under any insurance policy, contract, agreement or otherwise. -6- 7 10. CERTIFICATE OF INCORPORATION AND BY-LAWS. The Corporation agrees that the Certificate of Incorporation and By-laws of the Corporation in effect on the date hereof shall not be amended to reduce, limit, hinder or delay (a) the rights of Indemnitee granted hereby, or (b) the ability of the Corporation to indemnify Indemnitee as required hereby. The Corporation further agrees that it shall exercise the powers granted to it under its Certificate of Incorporation, its By-laws and by applicable law to indemnify any Indemnitee to the fullest extent possible as required hereby. 11. NON-EXCLUSIVITY. The provisions for indemnification and advancement of Liabilities set forth in this Agreement shall not be deemed exclusive of any other rights which the Indemnitee may have under any provision of law, the Corporation's Certificate of Incorporation or By-laws, the vote of the Corporation's shareholder or disinterested directors, other agreements or otherwise. 12. INTERPRETATION OF AGREEMENT. It is understood that the parties hereto intend this Agreement to be interpreted and enforced so as to provide indemnification to Indemnitee to the fullest extent now or hereafter permitted by law. 13. SEVERABILITY. If any provision or provisions of this Agreement shall be held to be invalid, illegal or unenforceable for any reason whatsoever, (i) the validity, legality and enforceability of the remaining provisions of the Agreement (including, without limitation, all portions of any paragraphs of this Agreement containing any such provision held to be invalid, illegal or unenforceable) shall not in any way be effected or impaired thereby, and (ii) to the fullest extent possible, the provisions of this Agreement (including, without limitation, all portions of any paragraph of this Agreement containing any such provision held to be invalid, illegal, or unenforceable, that are not themselves invalid, illegal, or unenforceable) shall be construed so as to give effect to the intent manifested by the provision held invalid, illegal or unenforceable and to give effect to SECTION 12 hereof. 14. MODIFICATION AND WAIVER. No supplement, modification or amendment to this Agreement shall be binding unless executed in writing by both of the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed, or shall constitute, a waiver of any other provisions hereof (whether or not similar), nor shall such waiver constitute a continuing waiver. 15. SUBROGATION. In the event that the Corporation makes any payment under this Agreement, the Corporation shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all papers and do all things that may be necessary to secure such rights, including but not limited to the execution of such documents as shall be necessary to enable the Company effectively to bring suit to enforce such rights. 16. SURVIVAL, SUCCESSORS, AND ASSIGNS. Indemnitee's rights under this Agreement shall continue after Indemnitee has ceased acting as an Agent of the Corporation. The terms of this Agreement shall be binding on and inure to the benefit of the Corporation -7- 8 and its successors and assigns and shall be binding on and inure to the benefit of Indemnitee and Indemnitee's heirs, executors and administrators. 17. NOTICES. All notices, demands, consents, requests, approvals and other communications between the parties pursuant to this Agreement must be in writing and will be deemed given when delivered in person, one (1) business day after being dispatched by a nationally recognized overnight courier service, three (3) business days after being deposited in the U.S. Mail, registered or certified mail, return receipt requested, or one (1) business after being sent by facsimile (with receipt acknowledged), to the Corporation at the address of its principal office in Burr Ridge, Illinois and to Indemnitee at Indemnitee's address as shown on the Corporation's records. Indemnitee may change Indemnitee's address for notice purposes by delivering notice to the Corporation in accordance with this SECTION 17. All notices sent to the Corporation shall also be delivered to Katten Muchin & Zavis, 525 West Monroe Street, Suite 1600, Chicago, Illinois 60661-3693, Attention: Matthew S. Brown, Esq., Facsimile No. (312-902-1061). 18. GOVERNING LAW. This Agreement shall be governed exclusively by and construed according to the laws of the State of Illinois, without regard to its principles of conflicts of laws. 19. COUNTERPARTS. This agreement may be executed in counterparts, each of which when so executed and delivered shall be deemed an original, and such counterparts together shall constitute one instrument. -8- 9 The parties hereto have entered into this Indemnification Agreement effective as of the date first above written. NANOPHASE TECHNOLOGIES CORPORATION By:___________________________________ Name:______________________________ Its:_______________________________ INDEMNITEE: ______________________________________ (Sign Name) ______________________________________ (Print Name) ______________________________________ ______________________________________ (Print Address) -9- 10 LIST OF DIRECTORS TO RECEIVE INDEMNIFICATION AGREEMENTS - Leonard A. Batterson - Robert W. Cross - Steven Lazarus - Richard W. Siegel - Robert W. Shaw, Jr. -10- EX-10.3 9 AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT 1 Exhibit 10.3 AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT Amended and Restated Registration Rights Agreement ("Agreement") dated March 16, 1994, among Nanophase Technologies Corporation, an Illinois corporation (with its successors and assigns, called the "Company"), and the persons listed as Holders on the signature pages of a counterpart of this Agreement. Capitalized terms used in this Agreement and not otherwise defined are defined in Section 11 of this Agreement. PRELIMINARY STATEMENT The Company and the Holders have previously entered into that certain Registration Rights Agreement dated as of November 21, 1991, as amended by a First Amendment to Registration Rights Agreement dated February 8, 1993 (collectively, the "Original Agreement"). Concurrently with the execution of this Agreement, the Company and certain of the Holders propose to execute a Series D Preferred Stock Purchase Agreement (the "Series D Purchase Agreement") pursuant to which certain of the Holders will purchase additional securities of the Company. To induce such Holders to execute the Series D Purchase Agreement, the Company and the Holders agree to amend and restate the Original Agreement as follows. AGREEMENT Section 1. Required Registrations. 1.1 (a) The Holders of Preferred and Registrable Common equivalent to more than 60% of the Registrable Common may, by a written notice to the Company, request that the Company register any Registrable Common specified in the notice, under the Securities Act on a form other than a Short Form and under other relevant securities laws, for disposition in accordance with methods stated in the notice. Such notice may specify an underwriter for such registration. 1.2 When it receives a registration notice under Section 1.1, the Company shall, within three (3) days, deliver a copy of such registration notice to each Holder of Convertible Securities or Registrable Common who is not a party to the registration notice, each of whom may then specify, by written notice to the Company delivered within fifteen (15) days of receipt of the notice from the Company, a number of shares of Registrable Common held by it which it wishes to include in any registration pursuant to the registration notice under Section 1.1. 2 1.3 When it receives a registration notice under Section 1.1, the Company will expeditiously cause a registration statement to be filed, and use its best efforts to cause such registration statement to become effective under the Securities Act for the Registrable Common specified in the registration notice under Section 1.1 and subsequent notices under Section 1.2 to permit disposition by such Holders in accordance with the methods of disposition described in the registration notice. Section 2. Registrations on Short Forms. 2.1 If at any time the Company is a registrant entitled to use a Short Form to register Registrable Common, one or more Holders may, by a written notice to the Company, request that the Company register Registrable Common specified in the notice on a Short Form. 2.2 When it receives a Short Form registration notice under Section 2.1, the Company shall, within three (3) days, deliver a copy of such registration notice to each Holder of Convertible Securities or Registrable Common, who is not a party to such registration notice, each of whom may then specify, by written notice to the Company delivered within fifteen (15) days of receipt of the notice from the Company, a number of shares of Registrable Common held by it that it wishes to include in any registration pursuant to the registration notice under Section 2.1 hereof. 2.3 When it receives a notice under Section 2.1, and provided that the reasonably anticipated price to the public of the Registrable Common proposed to be registered by all sellers of such Registrable Common would total more than $500,000, the Company will expeditiously cause a registration statement to be filed, and use its best efforts to cause such registration statement to become effective under the Securities Act on the Short Form specified in the notice for the Registrable Common specified in the registration notice under Section 2.1 and subsequent notices under Section 2.2. Section 3. Incidental Registration. Each time the Company proposes to register any of its Securities under the Securities Act, it will give written notice of its intention to do so to each Holder, which notice shall identify the proposed underwriter for such offering. Each Holder may then specify, by written notice to the Company delivered within fifteen (15) days of receipt of notice from the Company, a number of shares of Registrable Common held by it which it wishes to include in the Company's proposed registration. If at least 50% of the shares to be registered in such offering are held by Holders of Preferred or Registrable Common, then such Holders shall have the right to approve the underwriter (voting as a group, based upon the number of shares of Registrable Common held by each to be included in such offering), which approval shall not be unreasonably withheld. Subject to the limitations of Section 8, the Company will use its best efforts to effect the registration under the Securities Act of Registrable Common specified by Holders under this Section 3. Page 2 3 Section 4. Limitations on Registration Rights. Notwithstanding any contrary provision of this Agreement: A. the Company shall not be required to effect more than one registration pursuant to Section 1 (for purposes of this Section 4.A., a registration shall not be deemed "effective" unless the registration statement is declared effective by the Commission); and B. Section 3 shall not apply to a registration effected solely to implement an employee benefit plan or to any other form or type of registration which does not permit inclusion of Registrable Common pursuant to Commission rule or practice; and C. if the registration notice under Section 1 would result in the first offering of the Company's Securities to the public, then the registration specified under Section 1.1 must be for an underwritten public offering to be managed by an underwriter of recognized national standing reasonably acceptable to the Company and shall be for a minimum of $10,000,000, at a price of not less than $3.00 per share, as adjusted for stock splits, stock dividends and other similar events; and D. the Company shall not be obligated to effect a registration pursuant to Section 1 during the period starting with the date thirty days prior to the Company's estimated date of filing of, and ending on a date six months following the effective date of, a registration pertaining to an underwritten public offering of securities for the account of the Company, provided that the Company is actively employing in good faith all reasonable efforts to cause such registration statement to become effective and that the Company's estimates of the date of filing of such registration statement is made in good faith; and E. if (a) there is material non-public information regarding the Company which the Board reasonably determines not to be in the Company's best interest to disclose and which the Company is not otherwise required to disclose, or (b) there is a significant business opportunity available to the Company which the Board reasonably determines not to be in the Company's best interest to disclose, or (c) there is a significant business opportunity available to the Company and the Board reasonably determines that the Company's ability to pursue such opportunity would be materially and adversely affected by a registered public offering of the Company's Securities, then the Company may postpone filing a registration statement requested pursuant to Sections 1 or 2 for a period not to exceed 90 days, provided that the Company may not postpone its obligations as permitted under this Section 4.E. more than once every 12 months. Page 3 4 Section 5. Registration Procedures. 5.1 Whenever the Company is required by the provisions of this Agreement to effect the registration of any Registrable Common under the Securities Act, the Company will, as expeditiously as possible: A. in the case of a registration required under Section 1, engage the underwriters designated by the Holders giving notice under Section 1.1 or in the case of an incidental registration under Section 3, the underwriter specified in the notice given to the Holders and approved by the Holders; B. before filing each registration statement or prospectus or amendment or supplement thereto with the Commission, furnish counsel for the Holders of Registrable Common included in such registration with copies of all such documents proposed to be filed which shall be subject to the reasonable approval of such counsel; C. prepare and file with the Commission a registration statement with respect to such Registrable Common and use its best efforts to cause such registration statement to become and remain effective for such period as may be reasonably necessary to effect the sale of such securities, not to exceed nine months; D. prepare and file with the Commission (and any exchange on which the Company's Securities may be or are proposed to be listed and with the National Association of Securities Dealers, Inc.) such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective for such period and to comply with the provisions of the Securities Act with respect to the sale or other disposition of all Registrable Common covered by such registration statement in accordance with the intended methods of disposition set forth in such registration statement, but only to the extent provided in this Section 5; E. prepare and promptly file with the Commission, and notify each seller of such Registrable Common as expeditiously as possible of the necessity for and the filing of, such amendment or supplement to such registration statement or prospectus as may be necessary to correct any statements or omissions if, during such periods as a prospectus relating to such securities is required to be delivered under the Securities Act, any event shall have occurred as the result of which any such prospectus or any other prospectus as then in effect would include an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances in which they were made, not misleading; F. furnish to the underwriters and each seller of such Registrable Common such numbers of copies of such registration statement, each amendment and supplement thereto, the prospectus included in such registration statement (including Page 4 5 each preliminary prospectus) and such other documents as such underwriters or sellers may reasonably request in order to facilitate the disposition of the Registrable Common subject to such registration statement in accordance with such registration statement; G. use its best efforts to register or qualify any Registrable Common covered by such registration statement under the securities or blue sky laws of such jurisdictions within the United States of America as the seller or the underwriters reasonably request, and to take any other acts which a seller or the underwriters may reasonably request under such securities or blue sky laws to enable the consummation of the disposition in such jurisdictions of such Registrable Common (provided, however, that the Company may not be required under this Agreement (i) to qualify generally to do business as a foreign corporation in any jurisdiction in which it would not otherwise be required to qualify, or (ii) to subject itself to taxation in any such jurisdiction, or (iii) to consent to general service of process in any such jurisdiction); H. provide a transfer agent and registrar for all Registrable Common sold under the registration not later than the effective date of the registration statement; I. cause all Registrable Common sold under the registration to be listed on a recognized securities exchange, if any, or to become eligible for trading on any over-the-counter trading system, on which similar securities issued by the Company are then listed or traded; J. enter into such customary agreements (including underwriting agreements in customary form) and take all such other actions as the underwriters, if any, or the Holders of a Majority of the Registrable Common being sold reasonably request in order to expedite or facilitate the disposition of such Registrable Common (including, without limitation, effecting a stock split or a combination of shares); K. make available for inspection by the sellers of Registrable Common, any underwriter participating in any disposition pursuant to such registration statement, and any attorney, accountant or other agent retained by any such seller or underwriter, all financial and other records, pertinent corporate documents and properties of the Company, and cause the Company's officers, directors, employees and independent accountants to supply all information reasonably requested by any such seller or underwriter in connection with such registration statement, all subject to such limitations as the Company reasonably deems appropriate in order to protect the Company's confidential or proprietary information; and Page 5 6 L. advise each seller of Registrable Common, immediately after it shall receive notice or obtain knowledge thereof, of the issuance of any stop order by the Commission suspending the effectiveness of such registration statement or the initiation or threatening of any proceeding for such purpose and promptly use reasonable efforts to prevent the issuance of any stop order or to obtain its withdrawal if such stop order should be issued. 5.2 It shall be a condition precedent to the inclusion of the Registrable Common of any Holder in a registration effected pursuant to this Agreement that such Holder shall furnish to the Company such information regarding such Holder, the Registrable Common of such Holder to be registered and the intended method of disposition of such Registrable Common, and shall execute such indemnities with respect to such information provided by such Holders, underwriting agreements and other documents, as the Company shall reasonably request in order to satisfy the requirements applicable to such registration. Section 6. Expenses. The Company shall pay all expenses incurred in effecting the registration of Registrable Common provided for in this Agreement, including, without limitation, all registration and filing fees, printing expenses, listing fees, fees and disbursements of counsel for the Company, reasonable fees and disbursements of a single counsel for the sellers selected by the Holders of a majority of the Registrable Common subject to such registration, underwriting expenses other than discounts and commissions, expenses of any audits incident to or required by any such registration and expenses of complying with the securities or blue sky laws of any jurisdictions pursuant to Section 5.1G hereof. Notwithstanding the foregoing, if a registration is requested by a single Holder pursuant to Section 1.1(b), and no other Holder elects to have any shares owned by it included in such registration, then the Holder requesting such registration shall pay all of the expenses incurred in connection with such registration. Section 7. Indemnification. 7.1 In the event of any registration of any of its Registrable Common under the Securities Act pursuant to this Agreement, the Company agrees, to the extent permitted by law, to indemnify and hold harmless each seller of such Registrable Common, each partner in, or director and officer of, each such seller, and each other person, if any, who controls (within the meaning of the Securities Act) such seller against any losses, claims, damages or liabilities, joint or several, arising out of or based upon: (1) any alleged untrue statement of any material fact contained in any registration statement under which such Securities were registered under the Securities Act, any preliminary prospectus or final prospectus contained therein, or any summary prospectus contained therein, or any amendment or supplement to any such registration statement or prospectus, or Page 6 7 (2) any alleged omission to state in any such document a material fact required to be stated therein or necessary to make the statements therein not misleading, except, with respect to any seller, insofar as any such loss, claim, damage or liability is: (a) caused by or contained in any information furnished in writing to the Company by such seller expressly for use in connection with such registration, or (b) caused by such seller's failure to deliver a copy of the registration statement or prospectus or any amendment or supplement thereto as required by the Securities Act or the rules or regulations thereunder, or (c) caused by the use of a prospectus or preliminary prospectus or any amendment or supplement thereto by such seller after receipt of notice from the Company that it should no longer be used. In connection with an underwritten offering, the Company will indemnify such underwriters, their officers and directors and each person who controls (within the meaning of the Securities Act) such underwriters to the same extent as provided above with respect to the sellers of Registrable Common and as to such other matters as such underwriters may reasonably request or which are covered in such underwriters' customary form of underwriters' agreement. The Company shall reimburse each person indemnified pursuant to this Section 7.1 in connection with investigating or defending any loss, claim, damage, liability or action indemnified against. The reimbursements required by this Section 7.1 shall be made by periodic payments during the course of the investigation or defense, as and when bills are received or expenses incurred. The indemnities provided pursuant to this Section 7.1 shall survive transfer of Registrable Common by a seller. 7.2 In the event of any registration of any of its Registrable Common under the Securities Act pursuant to this Agreement, each Holder agrees to furnish to the Company in writing such information and affidavits as the Company reasonably requests for use in connection with any registration statement or prospectus in connection with the registration or any amendment or supplement thereto and, to the extent permitted by law, agrees severally and not jointly to indemnify and hold harmless the Company, its directors and officers, each other seller of securities in such registration, each partner in, or officer or director of, each such seller, and each person who controls (within the meaning of the Securities Act) the Company or such other seller against any losses, claims, damages or liabilities, joint or several, arising out of or based upon: (1) any alleged untrue statement of any material fact contained, on the effective date thereof, in any registration statement under which such Securities were registered under the Securities Act, any preliminary prospectus or final prospectus contained therein, or any summary prospectus contained therein, or any Securities being registered, or any amendment or supplement thereto, or Page 7 8 (2) any alleged omission to state in any such document a material fact required to be stated therein or necessary to make the statements therein not misleading, but only insofar as any such loss, claim, damage or liability is caused by or contained in any information furnished in writing to the Company by the indemnifying seller expressly for use in connection with such registration, and excluding any such loss, claim, damage or liability which is caused by or contained in such statements, or caused by such omissions, based upon the authority of an expert as defined in the Securities Act (but only if the indemnifying seller had no ground to believe, and did not believe, that the statements made on the authority of an expert were untrue or that there was an omission to state a material fact. In connection with an underwritten offering, each seller will indemnify such underwriters, their officers and directors and each person who controls (within the meaning of the Securities Act) such underwriters to the same extent as provided above with respect to the Company and other sellers. Each seller shall reimburse each person indemnified pursuant to this Section 7.2 in connection with investigating or defending any loss, claim, damage, liability or action indemnified against. The indemnities provided pursuant to this Section 7.2 shall survive transfer of Registrable Common by an indemnifying seller, and transfer of other securities by any other indemnified seller. 7.3 Indemnification similar to that specified in Sections 7.1 and 7.2 (with such modifications as shall be appropriate) shall be given by the Company and each Holder of any Registrable Common covered by any registration or other qualification of Securities under any federal or state securities law or regulation other than the Securities Act with respect to any such registration or other qualification effected pursuant to this Agreement. 7.4 In the event the Company or any Holder receives a complaint, claim or other notice of any loss, claim or damage, liability or action, giving rise to claim for indemnification under this Section 7, the person claiming indemnification shall promptly notify the person against whom indemnification is sought (unless such person is also a party to such complaint, notice, claim or action) of such complaint, notice, claim or action, and such indemnifying person shall have the right to investigate and defend any such loss, claim, damage, liability or action, provided that such indemnifying person shall not settle any such claim or action unless (i) such settlement is approved by the person claiming indemnification, or (ii) such settlement provides for a full, general release from all claims against the person claiming indemnification. The person claiming indemnification shall have the right to employ separate counsel in any such action and to participate in the defense thereof but the fees and expenses of such counsel shall not be at the expense of the person against whom indemnification is sought and the indemnifying person shall not be obligated to indemnify any person for any settlement of any claim or action effected without the indemnifying person's consent, which consent will not be unreasonably withheld. Page 8 9 Section 8. Marketing Restrictions. 8.1 If: A. a registration is to be made pursuant to a registration notice under Section 1 or Section 2 of this Agreement, and B. the offering proposed to be made by the Holder or Holders for whom such registration is to be made is to be an underwritten public offering, and C. the managing underwriters of such public offering furnish a written opinion that the total amount of Registrable Common to be included in such offering would exceed the maximum number of shares of Common (as specified in such opinion) which can be marketed at a price reasonably related to the current market value of such Common and without otherwise materially and adversely affecting such offering, then the rights of the Holders, of the holders of other Securities having the right to include Common in such registration and of the Company to participate in such offering shall be in the following order of priority: First: the Holders shall be entitled to participate in such offering to the extent of such maximum number of shares of Common, or of the aggregate number of shares of Registrable Common that all such Holders shall have requested be registered, whichever is less, pro rata among themselves in accordance with the number of shares of Registrable Common which each such Holder shall have requested be registered; and then Second: if such maximum number of shares of Common exceeds the aggregate number of shares of Registrable Common that all such Holders shall have requested be registered, the Company and all holders of other Securities having the right to include such Securities in such registration shall be entitled to participate in accordance with the relative priorities, if any, that shall exist among them and the Company; and no Securities (issued or unissued) other than those registered and included in the underwritten offering shall be offered for sale or other disposition by the Company or any Holder in a transaction which would require registration under the Securities Act for a period beginning thirty (30) days prior to the anticipated effective date of such registration statement and continuing until ninety (90) days after the effective date of the registration statement filed in connection with such registration or such earlier time consented to by the managing underwriter, but in no event shall such period exceed 120 days. In the future, the Company shall require each person to whom the Company grants such rights, as a condition precedent to the effectiveness of such rights, to agree to be bound by the foregoing restriction on distribution after conclusion of the underwritten offering. Page 9 10 8.2 If: A. any Holder of Preferred or Registrable Common requests inclusion of Registrable Common in a registration statement filed by the Company under Section 3 of this Agreement, and B. the offering proposed to be made is to be an underwritten public offering, and C. the managing underwriters of such public offering furnish a written opinion that the total amount of securities to be included in such offering would exceed the maximum amount of Securities (as specified in such opinion) which can be marketed at a price reasonably related to the then current market value of such Securities and without materially and adversely affecting such offering, then the rights of the Holders, of the holders of other Securities having the right to include such Securities in such registration and of the Company to participate in such offering shall be in the following order of priority: First: the Company; and then Second: the Holders shall be entitled to participate in such offering, pro rata among themselves in accordance with the number of shares of Registrable Common which each such Holder shall have requested be registered; and then Third: all other holders (including the Company, if such registration shall have been requested by a person other than the Company) of Securities having the right to include such Securities in such registration shall be entitled to participate in accordance with the relative priorities, if any, that shall exist among them; and no Securities (issued or unissued) other than those registered and included in the underwritten offering shall be offered for sale or other disposition by the Company or any Holder in a transaction which would require registration under the Securities Act for a period beginning thirty (30) days prior to the anticipated effective date of such registration statement and continuing until ninety (90) days after the effective date of the registration statement filed in connection with such registration or such earlier time consented to by the managing underwriter, but in no event shall such period exceed 120 days. 8.3 In connection with any offering involving an underwriting of Registrable Common pursuant to Section 3 of this Agreement, the Company shall not be required to include any of the Registrable Common of a Holder in such offering unless such Holder agrees to the terms of the underwriting agreed to between the Company and the underwriter or underwriters selected by the Company, provided that no such agreement shall add to the indemnities or affect the priorities set forth in this Agreement. Page 10 11 Section 9. Sale of Preferred to Underwriter. Notwithstanding anything in this Agreement to the contrary, in lieu of converting any Preferred to Common prior to or simultaneously with the filing or the effectiveness of any registration statement filed pursuant to this Agreement, the Holder of such Preferred may sell such Preferred to the underwriter of the offering being registered upon the undertaking of such underwriter to (i) convert such Preferred into Common before making any distribution pursuant to such registration statement, and (ii) include such Common among the Securities being offered pursuant to such registration statement. The Company agrees to cause the Common issuable on conversion of such Preferred to be issued within such time as will permit the underwriter to make and complete the distribution contemplated by the underwriting and to register the Preferred in any registration statement so that the Holder may make the sale described in the first sentence of this Section 9. Section 10. Lockup Agreement. Each Holder and the Company agrees in connection with any registration of any of the Company's Securities that, upon the request of the Company or the underwriters managing any underwritten offering of the Company's Securities, he or it will not sell, make any short sale of, loan, grant any option for the purchase of, or otherwise dispose of any Securities of the Company (other than the Securities included in the registration) without the prior written consent of the Company or such underwriters, as the case may be, for such period of time beginning thirty (30) days prior to the anticipated effective date of such registration statement and continuing until ninety (90) days after the effective date of such registration statement, but in no event shall such period exceed one hundred and twenty (120) days. Section 11. Definitions. As used in this Agreement, the following terms shall have the following meanings: "Board" means the Board of Directors of the Company. "Commission" means the Securities and Exchange Commission, and any successor thereto. "Common" means the Company's common stock, no par value. "Convertible Securities" means the Preferred and any other Security of the Company which is convertible or exchangeable for Common. "Holders" means the parties listed on the signature pages hereof, and any subsequent legal or beneficial owner of Preferred or Registrable Common who has become a party to this Agreement in accordance with Section 12 hereof. "Preferred" means, collectively, the Company's Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series C-1 Preferred Stock, Series D Preferred Stock and Series D-1 Preferred Stock, each having no par value. Page 11 12 "Registrable Common" means at any time (i) any shares of Common then outstanding which were issued upon conversion of Preferred; and (ii) any shares of Common then issuable upon conversion of then outstanding Preferred; and (iii) any shares of Common then outstanding which were issued as, or were issued directly or indirectly upon the conversion or exercise of other Securities issued as, a dividend or other distribution with respect to, or in replacement of, Preferred or other Registrable Common; (iv) any shares of Common then issuable directly or indirectly upon the conversion or exercise of other Securities issued as a dividend or other distribution with respect to, or in replacement of, Preferred or other Registrable Common, and (v) any shares of Common then outstanding which were issued upon exercise of any Warrant, and any shares of Common then issuable upon exercise of any Warrant. For purposes of determining the equivalent of a given amount of Registrable Common, a person will be deemed to be the holder of Registrable Common then issuable but not actually issued whenever such person has the then-existing right (by conversion or otherwise) to acquire such Registrable Common, even though such acquisition has not actually been effected. "Securities" means any debt or equity securities of the Company, whether now or hereafter authorized, and any instrument convertible or exchangeable for any such debt or equity securities. "Security" means one of the Securities. "Securities Act" means the Securities Act of 1933, as amended prior to or after the date of this Agreement, or any federal statute or statutes which shall be enacted to take the place of such Act, together with all rules and regulations promulgated thereunder. "Short Form" means Form S-2 or Form S-3 under the Securities Act, and any other form promulgated after the date of this Agreement applicable in circumstances substantially comparable to either of those forms, regardless of its designation. "Warrant" means any one of those certain warrants of the Company previously purchased pursuant to that certain Series C Preferred Stock and Warrant Purchase Agreement dated February 8, 1993, by and among the Company and the other parties thereto. Section 12. Assignability of Registration Rights. The rights set forth in this Agreement shall accrue to each subsequent holder of Preferred or Registrable Common who shall have executed a written consent after becoming the holder of such Securities agreeing to be bound by the terms and conditions of this Agreement as a party to this Agreement. Section 13. Termination of Registration Rights. Notwithstanding any contrary provision of this Agreement, the rights to registration granted under this Agreement shall terminate as to any particular Registrable Common when such Registrable Common shall have been (i) effectively registered under the Securities Act and sold by the holder thereof in accordance with such registration, or (ii) sold to the public pursuant to Rule 144 of the Commission, or any successor rule. Nanophase - Amended and Restated RRA Page 12 13 Section 14. Miscellaneous. 14.1 Amendment. Any provision of this Agreement may be amended by a written agreement signed by all of the following: (a) the Company, and (b) the Holders of Preferred and Registrable Common equivalent to more than 67% of the Registrable Common. Notwithstanding the foregoing, no amendment shall confer any greater rights, or impose any additional restrictions, on any shares of Preferred as compared to any other shares of Preferred, or any shares of Common as compared to any other shares of Common, or any Holder as compared to any other Holder, with the consent of the Holders of Preferred and Registrable Common equivalent to 100% of the Registrable Common. 14.2 Severability. In the event that any court or any governmental authority or agency declares all or any part of any Section of this Agreement to be unlawful or invalid, such unlawfulness or invalidity shall not serve to invalidate any other Section of this Agreement, and in the event that only a portion of any Section is so declared to be unlawful or invalid, such unlawfulness or invalidity shall not serve to invalidate the balance of such Section. 14.3 Notices. All communications in connection with this Agreement shall be in writing and shall be deemed properly given if hand delivered, sent by telecopy or facsimile transmission, with confirmation by the recipient, or sent by registered or certified mail, return receipt requested, and, if to a Holder, addressed to the persons and at such addresses as are set forth below such Holder's name on the signature pages to this Agreement or, if no such person or address appears, at such Holder's address as shown on the books of the Company or its transfer agent, and if to the Company, at: Nanophase Technologies Corporation 8205 S Cass Avenue, Suite 105 Darien, Illinois 60559 Telecopy No. (708) 963-0317 or to such other persons or addresses as the recipient shall have specified by a notice delivered to the Company (if the recipient is a Holder) or by a notice delivered to each Holder (if the recipient is the Company) in accordance with the terms of this Section. Any notice called for hereunder shall be deemed given when received. 14.4 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Illinois applicable to agreements between Illinois residents entered into and to be performed entirely within Illinois. Nanophase - Amended and Restated RRA Page 13 14 14.5 Counterparts. This Agreement may be executed in two or more counterparts, each which shall be deemed an original but all of which shall together constitute one and the same instrument. 14.6 Heading. The headings used herein are solely for the convenience of the parties and shall not serve to modify or interpret the text of the Sections at the beginning of which they appear. 14.7 Remedies. Each of the parties confirms that damages at law may not be an adequate remedy for a breach or threatened breach of this Agreement, and agrees that in the event of a breach or threatened breach of any of the provisions hereof, the respective rights and obligations of the parties hereunder shall be enforceable by specific performance, injunction or other equitable remedy. Nothing contained in this Section 14.7 shall limit any party's right to seek or obtain any and all remedies available to such party, whether at law, by statute or otherwise. END OF TEXT *********************** Nanophase - Amended and Restated RRA Page 14 15 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed on the day first above written. The Company: NANOPHASE TECHNOLOGIES CORPORATION, an Illinois corporation By /s/ ROBERT W. CROSS ---------------------------------- Its President Holders: ARCH VENTURE FUND LIMITED PARTNERSHIP, a Delaware limited partnership By: ARCH Development Corporation, an Illinois not-for-profit corporation, its General Partner By: /s/ STEVEN LAZARUS ---------------------------------- Its President --------------------------- ARCH VENTURE FUND II, L.P., a Delaware limited partnership By: ARCH MANAGEMENT PARTNERS II, L.P. a Delaware limited partnership, its general partner By: ARCH Venture Partners, L.P., a Delaware limited partnership, its general partner By: Lifework, Inc., an Illinois corporation, its general partner By: /s/ STEVEN LAZARUS ---------------------- Its Managing Director BATTERSON, JOHNSON & WANG, L.P., a Delaware limited partnership By: /s/ LEONARD A. BATTERSON ------------------------------------------ Leonard A. Batterson, its Managing General Partner 16 UVCC FUND II, a Delaware general partnership By: Arete Venture Management Associates II, L.P. its Managing General Partner By: Arete Ventures, Inc., a Maryland corporation, its general partner By: /s/ ROBERT W. SHAW ------------------------------ Robert W. Shaw, Jr., President UVCC II PARALLEL FUND, L.P., a Delaware limited partnership By: Arete Ventures L.P. III, General Partner By: Arete Ventures, Inc., a Maryland corporation, its general partner By: /s/ ROBERT W. SHAW ------------------------------ Robert W. Shaw, Jr., President THE COLUMBINE VENTURE FUND II, a Delaware partnership By: Columbine Venture Management II, its general partner By: /s/ SIGNATURE ------------------------------------- Its General Partner ADVANCE MATERIAL TECHNOLOGIES VENTURE PARTNER LIMITED, a Delaware partnership By: /s/ TOM DELIMITROS ------------------------------------ Tom H. Delimitros, a General Partner 17 JHAM LIMITED PARTNERSHIP, a Delaware partnership By: /s/ TOM DELIMITROS ------------------------------------ Tom H. Delimitros, a General Partner AMT CAPITAL, LTD., a Delaware corporation By: AMT Capital, Inc., its general partner By: /s/ TOM DELIMITROS ---------------------------- Tom H. Delimitros, President ILLINOIS DEPARTMENT OF COMMERCE AND COMMUNITY AFFAIRS By: /s/ SIGNATURE ------------------------------------- Its Director /s/ RICHARD W. SIEGEL -------------------------------------- RICHARD W. SIEGEL 18 FIRST AMENDMENT TO AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT First Amendment to Amended and Restated Registration Rights Agreement dated as of April 22, 1996 (this "Amendment"), among NANOPHASE TECHNOLOGIES CORPORATION, an Illinois corporation (the "Company"), and the persons executing a counterpart of this Amendment listed as holders on the signature pages to this Amendment (the "Holders"). PRELIMINARY STATEMENT The Company and the Holders have previously entered into that certain Amended and Restated Registration Rights Agreement dated as of March 16, 1994 (the "Registration Rights Agreement"). Concurrently with the execution of this Amendment, the Company and certain investors (the "Investors") have executed a Series E Preferred Stock Purchase Agreement (the "Series E Purchase Agreement") pursuant to which the Investors are purchasing securities of the Company. To induce the Investors to execute the Series E Purchase Agreement, the Company and the Holders agree as follows. AGREEMENT 1. Amendments. The Company and the Holders agree that: (a) The definition of "Preferred" in Section 11 of the Registration Rights Agreement is hereby amended and restated in its entirety to read as follows: "Preferred" means, collectively, the Company's Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series C-1 Preferred Stock, Series D Preferred Stock, Series D-1 Preferred Stock, and Series E Preferred Stock, each having no par value; and (b) The address of the Company in Section 14.3 of the Registration Rights Agreement is hereby amended and restated in its entirety to read as follows: Nanophase Technologies Corporation 453 Commerce Street Burr Ridge, Illinois 60521 Telecopy No. (708) 323-1221 19 2. Continuing Effect. Except as otherwise specifically provided in this Amendment, the Registration Rights Agreement shall remain in full force and effect in accordance with its terms. This Amendment may be executed in multiple counterparts, all of which shall constitute one and the same instrument. END OF TEXT ******************* page 2 20 IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to Amended and Restated Registration Rights Agreement to be executed on the day first above written. The Company: NANOPHASE TECHNOLOGIES CORPORATION, an Illinois corporation By /s/ ROBERT W. CROSS ------------------------------- Its President Holders: ARCH VENTURE FUND LIMITED PARTNERSHIP, a Delaware limited partnership By: ARCH Development Corporation an Illinois not-for-profit corporation, its General Partner By: /s/ STEVEN LAZARUS ----------------------------- Its ________________________ ARCH VENTURE FUND II, L.P., a Delaware limited partnership By: ARCH MANAGEMENT PARTNERS II, L.P. a Delaware limited partnership, its general partner By: ARCH Venture Partners, L.P., a Delaware limited partnership, its general partner By: ARCH Venture Corporation, an Illinois corporation, its general partner By: /s/ STEVEN LAZARUS ---------------------- Its Managing Director Page 3 21 ARCH II PARALLEL FUND, L.P., a Delaware limited partnership By: ARCH MANAGEMENT PARTNERS II, L.P. a Delaware limited partnership, its general partner By: ARCH Venture Partners, L.P., a Delaware limited partnership,its general partner By: ARCH Venture Corporation, an Illinois corporation, its general partner By: /s/ STEVEN LAZARUS --------------------- Its Managing Director BATTERSON, JOHNSON & WANG, L.P., a Delaware limited partnership By: /s/ LEONARD A. BATTERSON -------------------------------------------------- Leonard A. Batterson, its Managing General Partner THE COLUMBINE VENTURE FUND II, a Delaware partnership By: Columbine Venture Management II, its General Partner By: /s/ SIGNATURE ----------------------- Its ----------------------- UVCC FUND II, a Delaware general partnership By: Arete Venture Management Associates II, L.P., its Managing General Partner By: Arete Ventures, Inc., a Maryland corporation, its general partner By: /s/ ROBERT W. SHAW, JR. ------------------------------ Robert W. Shaw, Jr., President Page 4 22 UVCC II PARALLEL FUND, L.P., a Delaware limited partnership By: Arete Ventures L.P. III, General Partner By: Arete Ventures, Inc., a Maryland corporation, its general partner By: /s/ ROBERT W. SHAW, JR. ------------------------------ Robert W. Shaw, Jr., President ADVANCE MATERIAL TECHNOLOGIES VENTURE PARTNER LIMITED, a Delaware partnership By: /s/ TOM DELIMITROS ------------------ A General Partner JHAM LIMITED PARTNERSHIP, a Delaware limited partnership By: /s/ TOM DELIMITROS ------------------ A General Partner AMT CAPITAL, LTD., a Delaware corporation By: AMT Capital, Inc., its general partner By: /s/ TOM DELIMITROS ---------------------------- Tom H. Delimitros, President ILLINOIS DEPARTMENT OF COMMERCE AND COMMUNITY AFFAIRS By: /s/ SIGNATURE ----------------------------------- Its Director /s/ RICHARD W. SIEGEL ----------------------------------- RICHARD W. SIEGEL Nanophase - First Amendment to RRA Page 5 23 HARRIS & HARRIS GROUP, INC., a New York corporation By: /s/ SIGNATURE --------------------------------------- Its: --------------------------------------- GRACE INVESTMENTS, LTD., an Illinois limited partnership By:/s/ SIGNATURE ---------------------------------------- Its: --------------------------------------- Nanophase - First Amendment to RRA Page 6 24 SECOND AMENDMENT TO AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT Second Amendment to Amended and Restated Registration Rights Agreement dated as of June 30, 1997 (this "AMENDMENT"), among NANOPHASE TECHNOLOGIES CORPORATION, an Illinois corporation (the "COMPANY"), and the persons executing a counterpart of this Amendment listed as holders on the signature pages to this Amendment (the "HOLDERS"). PRELIMINARY STATEMENT The Company and the Holders have previously entered into that certain Amended and Restated Registration Rights Agreement dated as of March 16, 1994 (the "AGREEMENT"), as amended pursuant to that certain First Amendment to Amended and Restated Registration Rights Agreement dated as of April 22, 1996 (the "FIRST AMENDMENT", and together with the Agreement, the "REGISTRATION RIGHTS AGREEMENT"). Concurrently with the execution of this Amendment, the Company and certain investors (the "INVESTORS") have executed a Series F Preferred Stock Purchase Agreement (the "SERIES F PURCHASE AGREEMENT") pursuant to which the Investors are purchasing securities of the Company. To induce the Investors to execute the Series F Purchase Agreement, the Company and the Holders agree as follows. AGREEMENT 1. Amendments. The Company and the Holders agree that: (a) Section 10 of the Registration Rights Agreement is amended and restated in its entirety to read as follows: "Section 10. Lockup Agreement. Each Holder and the Company agrees in connection with any registration of any of the Company's Securities that, upon the request of the Company or the underwriters managing any underwritten offering of the Company's Securities, he or it will not sell, make any short sale of, loan, grant any option for the purchase of, or otherwise dispose of any Securities of the Company (other than the Securities included in the registration) without the prior written consent of the Company or such underwriters, as the case may be, for such period of time beginning thirty (30) days prior to the anticipated effective date of such registration statement and continuing until one hundred eighty (180) days after the effective date of such registration statement, but in no event shall such period exceed one hundred and twenty (180) days." (b) The definition of "Preferred" in Section 11 of the Registration Rights Agreement is hereby amended and restated in its entirety to read as follows: "Preferred" means, collectively, the Company's Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series C-1 Preferred Stock, Series D Preferred Stock, Series D-1 Preferred Stock, Series E Preferred Stock, and Series F Preferred Stock, each having no par value; and 25 (c) The address of the Company in Section 14.3 of the Registration Rights Agreement is hereby amended and restated in its entirety to read as follows: Nanophase Technologies Corporation 453 Commerce Street Burr Ridge, Illinois 60521 Telecopy No. (630) 323-1221 2. Continuing Effect. Except as otherwise specifically provided in this Amendment, the Registration Rights Agreement shall remain in full force and effect in accordance with its terms. This Amendment may be executed in multiple counterparts, all of which shall constitute one and the same instrument. END OF TEXT ******************* 26 IN WITNESS WHEREOF, the parties hereto have caused this Second Amendment to Amended and Restated Registration Rights Agreement to be executed on the day first above written. The Company: NANOPHASE TECHNOLOGIES CORPORATION, an Illinois corporation By /s/ ROBERT W. CROSS ------------------- Its President Holders: ARCH VENTURE FUND LIMITED PARTNERSHIP, a Delaware limited partnership By: ARCH Development Corporation an Illinois not-for-profit corporation, its General Partner By: /s/ STEVEN LAZARUS --------------------------- Its ----------------------- ARCH VENTURE FUND II, L.P., a Delaware limited partnership By: ARCH MANAGEMENT PARTNERS II, L.P. a Delaware limited partnership, its general partner By: ARCH Venture Partners, L.P., a limited partnership, its general partner By: ARCH Venture Corporation, an Illinois corporation, its general partner By: /s/ STEVEN LAZARUS ------------------ Its Managing Director ARCH II PARALLEL FUND, L.P., a Delaware limited partnership By: ARCH MANAGEMENT PARTNERS II, L.P. a Delaware limited partnership, its general partner By: ARCH Venture Partners, L.P., a Delaware limited partnership, its general partner By: ARCH Venture Corporation, an Illinois corporation, its general partner By: /s/ STEVEN LAZURUS ------------------ Its Managing Director 27 BATTERSON, JOHNSON & WANG, L.P., a Delaware limited partnership By: /s/ LEONARD A. BATTERSON ---------------------------------- Leonard A. Batterson, its Managing General Partner THE COLUMBINE VENTURE FUND II, a Delaware partnership By: Columbine Venture Management II, its General Partner By: /s/ SIGNATURE ------------------------ Its GENERAL PARTNER UVCC FUND II, a Delaware general partnership By: ARETE VENTURE MANAGEMENT ASSOCIATES II, L.P., its Managing General Partner By: /s/ ROBERT W. SHAW, JR. ------------------------ Robert W. Shaw, Jr. General Partner UVCC II PARALLEL FUND, L.P., a Delaware limited partnership By: ARETE VENTURES L.P. III, its General Partner By:/s/ ROBERT W. SHAW, JR. ------------------------ Robert W. Shaw, Jr. General Partner ADVANCE MATERIAL TECHNOLOGIES VENTURE PARTNER LIMITED, a Delaware partnership By: /s/ TOM DELIMITROS ------------------ A General Partner 28 JHAM LIMITED PARTNERSHIP, a Delaware limited partnership By: /s/ TOM DELIMITROS ------------------ A General Partner AMT CAPITAL, LTD., a Delaware corporation By: AMT Capital, Inc., its general partner By:/s/ TOM DELIMITROS ---------------------------- Tom H. Delimitros, President ILLINOIS DEPARTMENT OF COMMERCE AND COMMUNITY AFFAIRS By:/s/ DENNIS R. WHETSTONE -------------------------------- Its Director /s/ RICHARD W. SIEGEL ---------------------- RICHARD W. SIEGEL HARRIS & HARRIS GROUP, INC., a New York corporation By:/s/ SIGNATURE -------------------------------- Its: President and CEO ----------------------------------- GRACE INVESTMENTS, LTD., an Illinois limited partnership By:/s/ SIGNATURE ------------------------------------ Its: ----------------------------------- 29 THIRD AMENDMENT TO AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT Third Amendment to Amended and Restated Registration Rights Agreement dated as of October 10, 1997 (this "AMENDMENT"), among NANOPHASE TECHNOLOGIES CORPORATION, an Illinois corporation (the "COMPANY"), and the persons executing a counterpart of this Amendment and all other parties to the Registration Rights Agreement (as defined below). PRELIMINARY STATEMENT The Company and certain parties have previously entered into that certain Amended and Restated Registration Rights Agreement dated as of March 16, 1994 (the "AGREEMENT"), as amended pursuant to that certain First Amendment to Amended and Restated Registration Rights Agreement dated as of April 22, 1996 (the "FIRST AMENDMENT"), and as further amended pursuant to that certain Second Amendment to Amended and Restated Registration Rights Agreement dated as of June 30, 1997 (the "SECOND AMENDMENT", and together with the First Amendment and the Agreement, the "REGISTRATION RIGHTS AGREEMENT"). AGREEMENT 1. Amendments. The parties to this Amendment agree that: (a) Section 10 of the Registration Rights Agreement is amended and restated in its entirety to read as follows: "Section 10. Lockup Agreement. Each Holder and the Company agrees in connection with any registration of any of the Company's Securities that, upon the request of the Company or the underwriters managing any underwritten offering of the Company's Securities, he or it will not sell, make any short sale of, loan, grant any option for the purchase of, or otherwise dispose of any Securities of the Company (other than the Securities included in the registration) without the prior written consent of the Company or such underwriters, as the case may be, for such period of time beginning thirty (30) days prior to the anticipated effective date of such registration statement and continuing until one hundred eighty (180) days after the effective date of such registration statement, but in no event shall such period exceed two hundred and ten (210) days." (b) The definition of "Holders" in Section 11 of the Registration Rights Agreement is amended and restated in its entirety to read as follows: "Holders" means and includes the parties listed on the signature pages hereof, any subsequent legal or beneficial owner of Preferred or Registrable Common who becomes a party to this Agreement in accordance with Section 12 hereof, and any subsequent parties who agree to be bound by this Agreement, as amended from time to time." 2. Continuing Effect. Except as otherwise specifically provided in this Amendment, the Registration Rights Agreement shall remain in full force and effect in accordance with its terms. This Amendment may be executed in multiple counterparts, all of which shall constitute one and the same instrument. 30 IN WITNESS WHEREOF, the parties hereto have caused this Third Amendment to Amended and Restated Registration Rights Agreement to be executed on the day first written above. The Company: NANOPHASE TECHNOLOGIES CORPORATION, an Illinois corporation By /s/ ROBERT W. CROSS ------------------- Its President Holders: ARCH VENTURE FUND LIMITED PARTNERSHIP, a Delaware limited partnership By: ARCH Development Corporation an Illinois not-for-profit corporation, its General Partner By: /s/ STEVEN LAZARUS ---------------------------- Its ------------------------ ARCH VENTURE FUND II, L.P., a Delaware limited partnership By: ARCH MANAGEMENT PARTNERS II, L.P. a Delaware limited partnership, its general partner By: ARCH Venture Partners, L.P., a Delaware limited partnership, its general partner By: ARCH Venture Corporation, an Illinois corporation, its general partner By: /s/ STEVEN LAZARUS --------------------- Its Managing Director ARCH II PARALLEL FUND, L.P., a Delaware limited partnership By: ARCH MANAGEMENT PARTNERS II, L.P. a Delaware limited partnership, its general partner By: ARCH Venture Partners, L.P., a Delaware limited partnership, its general partner By: ARCH Venture Corporation, an Illinois corporation, its general partner By: /s/ STEVEN LAZARUS --------------------- Its Managing Director 31 BATTERSON, JOHNSON & WANG, L.P., a Delaware limited partnership By: /s/ LEONARD BATTERSON ------------------------------------------ Leonard A. Batterson, its Managing General Partner THE COLUMBINE VENTURE FUND II, a Delaware partnership By: Columbine Venture Management II, its General Partner By: /s/ SIGNATURE ------------------------- Its --------------------- UVCC FUND II, a Delaware general partnership By: ARETE VENTURES INVESTORS II, L.P. its Managing General Partner By:/s/ ROBERT W. SHAW, JR. ----------------------- Robert W. Shaw, Jr. General Partner UVCC II PARALLEL FUND, L.P., a Delaware limited partnership By: ARETE VENTURES L.P. III, its General Partner By:/s/ ROBERT W. SHAW, JR. ----------------------- Robert W. Shaw, Jr. General Partner ADVANCE MATERIAL TECHNOLOGIES VENTURE PARTNER LIMITED, a Delaware partnership By: /s/ TOM DELIMITROS ------------------ A General Partner JHAM LIMITED PARTNERSHIP, a Delaware limited partnership 32 By: /s/ TOM DELIMITROS ------------------ A General Partner AMT CAPITAL, LTD., a Delaware corporation By: AMT Capital, Inc., its general partner By: /s/ TOM DELIMITROS ---------------------------- Tom H. Delimitros, President ILLINOIS DEPARTMENT OF COMMERCE AND COMMUNITY AFFAIRS By: ------------------------------- Its Director /s/ RICHARD W. SIEGEL ----------------------------------- RICHARD W. SIEGEL HARRIS & HARRIS GROUP, INC., a New York corporation By: /s/ SIGNATURE ---------------------------------------- Its: --------------------------------------- GRACE INVESTMENTS, LTD., an Illinois limited partnership By: /s/ SIGNATURE ---------------------------------------- Its: --------------------------------------- 33 IN WITNESS WHEREOF, the parties have caused this Third Amendment to Amended and Restated Registration Rights Agreement to be executed on the day first written above. The Company: NANOPHASE TECHNOLOGIES CORPORATION, an Illinois Corporation By -------------------------------------------- Its President Holders: MKW PARTNERS, L.P. By: Durandal, Inc., its general partner By: /s/ SIGNATURE -------------------------------------------- A duly authorized Officer 34 IN WITNESS WHEREOF, the parties have caused this Third Amendment to Amended and Restated Registration Rights Agreement to be executed on the day first written above. The Company: NANOPHASE TECHNOLOGIES CORPORATION, an Illinois Corporation By -------------------------------------------- Its President Holders: WILBLAIRCO ASSOCIATES By: /s/ SIGNATURE -------------------------------------------- A duly authorized Partner 35 IN WITNESS WHEREOF, the parties have caused this Third Amendment to Amended and Restated Registration Rights Agreement to be executed on the day first written above. The Company: NANOPHASE TECHNOLOGIES CORPORATION, an Illinois Corporation By -------------------------------------------- Its President Holders: GEMSTAR, L.L.C. By /s/ SIGNATURE -------------------------------------------- A duly authorized Manager 36 IN WITNESS WHEREOF, the parties have caused this Third Amendment to Amended and Restated Registration Rights Agreement to be executed on the day first written above. The Company: NANOPHASE TECHNOLOGIES CORPORATION, an Illinois Corporation By -------------------------------------------- Its President Holders: DODI VENTURES LLC By: /s/ SIGNATURE -------------------------------------------- A duly authorized Manager or Member 37 IN WITNESS WHEREOF, the parties have caused this Third Amendment to Amended and Restated Registration Rights Agreement to be executed on the day first written above. The Company: NANOPHASE TECHNOLOGIES CORPORATION, an Illinois Corporation By ------------------------------------------- Its President Holders: EVELYN JAFFE RESIDUARY TRUST UAD 10/15/87 By /s/ SIGNATURE ------------------------------------------- A Duly Authorized Trustee or Agent 38 IN WITNESS WHEREOF, the parties have caused this Third Amendment to Amended and Restated Rights Agreement to be excuted on the day first written above. The Company: NANOPHASE TECHNOLOGIES CORPORATION, an Illinois Corporation By ------------------------------------- Its President Holders: ASTRAL FUND, L.L.C. By /s/ Signature ------------------------------------ A Duly Authorized Agent or Manager 39 IN WITNESS WHEREOF, the parties have caused this Third Amendment to Amended and Restated Registration Rights Agreement to be executed on the day first written above. The Company: NANOPHASE TECHNOLOGIES CORPORATION, an Illinois Corporation By -------------------------------------- Its President Holders: /s/ Signature -------------------------------------- Bruce A. Zivian 40 IN WITNESS WHEREOF, the parties have caused this Third Amendment to Amended and Restated Registration Rights Agreement to be executed on the day first written above. The Company: NANOPHASE TECHNOLOGIES CORPORATION, an Illinois Corporation By --------------------------------------------- Its President Holders: EUGENE R. JAFFE REVOCABLE TRUST UAD 4/12/83 By /s/ SIGNATURE --------------------------------------------- A Duly Authorized Trustee or Agent EX-10.13 10 PURCHASE ORDER 1 EXHIBIT 10.13 BLANKET PURCHASE ORDER -------------- [LOGO] ABOVE NUMBER MUST APPEAR ON PACKAGES, B/L, PACKING SLIPS [MOYCO LOGO] AND INVOICES. Moyco Technologies, Inc. CORPORATE OFFICES 7 Ultralap / Abrasives Div. MOYCO UNION BROACH / Dental Division 200 commerce Drive - Montgomeryville - PA 18936 589 Davies Drive - York - PA 17402 (215) 855-4300 - FAX: (215) 362-3809 (717) 840-9335 - FAX:(717) 840-9347 REQUISITIONER VENDOR NO. P.O. DATE P.O. # DELIVERY DATE Picardi 14090 2/24/97 10517 See Schedule TO NANOPHASE TECHNOLOGIES SHIP TO MOYCO TECHNOLOGIES 453 Commerce Street 200 Commerce Drive Burr Ridge, IL 60521 Montgomeryville, PA 18936 (Or as otherwise directed) FOB: / / CONFIRMATION ONLY - ------------------------------------------------------------------------------------------------------------------------------------ ITEM NO. QTY UNITS DESCRIPTION UNIT COST EXTENDED PRICE - ------------------------------------------------------------------------------------------------------------------------------------ SEE ALL ATTACHED DOCUMENTS WHICH DETAILS THIS PURCHASE ORDER REFER TO ATTACHED PURCHASE PLAN AND ORDER DESCRIPTION POWER MATERIALS AND R&D USED FOR MOYCO CMP SLURRIES PROVIDED ON N/A N/A EXCLUSIVE BASIS $30,000,00 See Documents Incorporated ALL DOCUMENTS, ADDENDUMS AS WELL AS TERMS AND CONDITINOS ON REVERSE SIDE OF THIS PURCHASE ORDER ARE INCORPORATED HEREIN ALL DRAWSINGS, REFERENCE MATERIALS AND INTERRELATED IDEAS ASSOCIATED WITH THIS PROJECT ARE FOR THE SOLE AND EXCLUSIVE USE OF MOYCO INDUSTRIES INC, AND CANNOT BE USED BY OTHERS UNDER ANY CIRCUMSTANCES WHATSOEVER WITHOUT THE WRITTEN CONSENT OF MOYCO TOTAL $30,000,000 - ------------------------------------------------------------------------------------------------------------------------------------ NO PARTIAL SHIPMENTS WITHOUT PRIOR AUTHORIZATION DO NOT SHIP FREIGHT C.O.D. TRAFFIC MANAGER, PLEASE NOTE: SUBJECT TO THE TERMS AND CONDITIONS ON THE BACK HEREOF WHICH ARE INCORPORATED AND MADE A PART THEREOF. MOYCO TECHNOLOGIES, INC. USE SINGLE FACE PALLETS -- DO NOT DOUBLE TIER. /s/ Jerome J. Lipkin Executive Vice President ---------------------------------------------------------------------------- / / PURCHASING MGR. / / SR BUYER - ------------------------------------------------------------------------------------------------------------------------------------ WHEN SHIPPING CHARGES ARE NOT PREPAID OUR ROUTING MUST BE OBSERVED, OTHERWISE DIFFERENCE IN TRANSPORTAION CHARGES WILL BE CHARGED TO SUPPLIER WHEN NO ROUTING IS SPECIFIED. SHIP CHEAPEST STORE DOOR DELIVERY. Page 1 of 5 No Order will be valid unless signed. ORIGINAL
2 MOYCO/NANOPHASE 5 YEAR PURCHASE AND DISTRIBUTION AGREEMENT With reference to the Marketing Agreement between Nanophase Technologies Corporation ("NTC") and Moyco Technologies, Incorporated ("Moyco"), dated August 29, 1996, NTC and Moyco hereby agree to the following: 1. NTC agrees to supply to Moyco, on an exclusive basis and for a period of five years from the date last written below ("Effective Date"), NTC Nanotek Aluminum Oxide, and Cerium Oxide, on a continuing basis, for use by Moyco in the production of proprietary formulations for the use in chemical mechanical planarization (CMP) of metal and di-electric layers in the production of semiconductor devices ("Product") as per the terms of the Moyco 5 year purchase order. 2. THE PARTIES AGREE TO NEGOTIATE IN GOOD FAITH FOR THE DEVELOPMENT OF ADDITIONAL MATERIALS FOR EXCLUSIVE SALE TO MOYCO, IN THE FUTURE, FOR CMP MARKETS. MOYCO RETAINS THE RIGHT OF FIRST REFUSAL REGARDING NEW NTC PRODUCTS DEVELOPED AND APPLICABLE TO CMP (SUBJECT TO THE AFOREMENTIONED GOOD FAITH NEGOTIATIONS). A RESEARCH AND DEVELOPMENT FEE OF $100,000 OVER A 2 YEARS PERIOD WILL BE PAID TO NTC AS PER THE TERMS AND CONDITIONS OF THE MOYCO 5 YEAR PURCHASE ORDER. 3. Moyco agrees that upon the Effective Date, Moyco shall commence the execution of deliveries of Nanophase products as per the terms of the Moyco 5 year purchase order from NTC. (refer to Schedule1/Delivery Objectives*). 4. Moyco and NTC agree that, should Moyco fail to comply with the terms and conditions of the Moyco five year purchase order, this Purchase and Distribution Agreement may be terminated by NTC upon thirty days notice. In the event that NTC terminates this Agreement and Purchase Order, Moyco shall maintain all rights to place orders and purchase the materials indicated herein on a non-exclusive basis for a period of nine (9) months. 5. Moyco and NTC agree that should NTC fail to meet Moyco specifications, terms, delivery, and conditions, that this Purchase and Distribution Agreement may be terminated by Moyco upon 30 days written notice. 6. NTC futher commits that for all product orders drawn in calender years 1997 and 1998 Moyco shall receive a 3% discount from the prices below; thereafter, on all orders exceeding the contract annual minimum requirements, Moyco shall receive a 5% discount from the prices below. 7. Pricing for the sale of the Product by NTC to Moyco shall be determined soley by NTC. NTC commits that through 12/31/98: the price of Nanotek Aluminum Oxide Product to Moyco shall not exceed $55 per kilogram, and, the price of Nanotek Cerium Oxide shall not exceed $70.00 per kilogram, excepting that through 12/31/2000, the price to Moyco for any order of NTC Product shall not increase by more than the actual increase, if any, in the cost to NTC for feedstock(s) used by NTC for production of such order. 8. The Moyco 5 Year Purchase Order is for ($USD) 30,000,000.00 over a 5 year period; and, is subject to standard Moyco purchsae order terms and conditions. *Schedule 1/Delivery Objectives [NTC shipment rate to Moyco (tons)]:
1097 2097 3097 4097 1997 1998 1999 2000 2001 - -------------------------------------------------------------------------------- Aluminum Oxide (1) (2) (6) (14) (23) (50) (80) (140) (200) - -------------------------------------------------------------------------------- Cerium Oxide (0.1) (0.4) (2.0) (2.5) (4) (8) (16) (20) (30)
Cumulative Objective for 1997: (USD) $1,518,150.00 Agreed: NANOPHASE TECHNOLOGIES CORPORATION MOYCO TECHNOLOGIES, INCORPORATED BY: /S/ Robert W. Cross BY: /S/ Marvin E. Sternberg ------------------------------- -------------------------------- ROBERT W. CROSS PRESIDENT - NTC MARVIN E. STERNBERG, PRESIDENT MOYCO dATE: 2/27/97 DATE: 2/25/97 ----------------------------- ------------------------------- Page 2 of 5 3
ITEM QTY UNITS DESCRIPTION UNIT COST - -------------------------------------------------------------------------- N/A N/A N/A NANOPHASE 5 Year Purchase Order* $30,000,000.00 * refer to Moyco/Nanophase 5 Year Purchase and Distribution Agreement attached and in- corporated herein Payment Terms: 2% - 15 days from Invoice Date; Net 10 R&D PAYMENT TERMS: NET % ON 3/31/97 INVOICE; $5,000.00/MONTH ON 1/31/98 INVOICE MOYCO IMMDEIDATE DRAW OFF OF THE PURCHASE ORDER AS FOLLOWS: ITEM QTY UNITS DESCRIPTION UNIT COST - -------------------------------------------------------------------------- POWDER 1 TONS NTC Nanotek Aluminum Oixde $50,000.00 (Target Delivery Date** 3/22/97) POWDER 0.5 TONS NTC Cerium Oxide $31,815.00 (Target Delivery Date** 3/22/97) R&D 1 N/A CERIA DEVELOPMENT R&D FEE $50,000.00 (Invoice Date: 3/31/97) for work performed through 3/31/97 POWDER 2 TONS NTC Nanotek Aluminum Oxide $100,000.00 (Target Delivery Date** 5/30/97) POWDER 0.5 TONS NTC Cerium Oxide $31,815.00 (Target Delivery Date** 5/30/97) R&D 1 N/A 1998 R&D FEES $50,000.00 (Invoice Date 1/31/98) - -------------------------------------------------------------------------- MOYCO DRAW OBJECTIVES: 1997 CALENDAR QUARTER 3 AND QUARTER 4 POWDER 6 TONS NTC Nanotek Alumium Oxide $300,000.00 (Target Delivery Date**: 1/30/97) POWDER 1.5 TONS NTC Cerium Oxide $95,445.00 (Target Delivery Date**: 8/30/97) POWDER 14 TONS NTC Nanotek Alumium Oxide $700,000.00 (Target Delivery Date**: 11/30/97) POWDER 2 TONS NTC Cerium Oxide $127,260.00 (Target Delivery Date**: 11/30/97) ** within 10 day window Total Calender Year 1997 DRAW OBJECTIVE: $1,586,335
Page 3 of 5 4 - ------------------------------------------------------ 30,000,000.00 Cost Break-Out: *Research and Development Fee of $100,000.00 $ 100,000.00 over a two (2) year period. (Item 2 of the Moyco/ Nanophase 5 Year Purchase and Distribution Agree- ment. *NTC Aluminum Oxide as per the Moyco/Nano- $24,650,000.00 phase 5 year Purchase and Distribution Agreement *NTC Cerium Oxide as per the Moyco/Nano- $ 5,250,000.00 phase 5 year Purchase and Distribution Agreement - --------------------------------------------------------------------------------
NOTATIONS AND AMMENDMENTS: It is hereby formally agreed that this Purchase Order is subject to standard Moyco Terms and Conditions of Sale contained on the reverse side of this purchase Order, as well as all other incorporated documents. Page 4 of 5 5 MOYCO INDUSTRIES INC. TERMS AND CONDITIONS OF PURCHASE 1. ACCEPTANCE: This purchase order constitutes a binding contract on the terms set forth herein when it is accepted by Seller either by acknowledgment or by commencement of performance. No addition, change or modification of this purchase order shall be binding unless made in writing and signed by an authorized representative of Buyer. 2. WARRANTY: Seller expressly warrants that all articles, assemblies, parts and materials delivered under this purchase order will be free from defects in labor, materials or fabrication. This warranty shall run to Buyer, its successors, assigns and customers. All warranties shall be construed as conditions as well as warranties and shall not be deemed to be exclusive. 3. PACKING: All items shall be packed by Seller in suitable containers for protection in shipment and storage. All highly polished, highly finished or precision parts are to be properly greased and packed in containers as protection against deterioration. 4. PATENT INDEMNITY: Seller agrees to idemnify and hold harmless the Buyer and its customers against all claims, demands and liability for actual or alleged infringement of any U.S. or foreign patents, trade-marks or similar right by the materials or articles delivered by the Seller, and the Seller will at its own expense defend any action, suit or claim in which such infringement is alleged, provided Seller is duly notified as to suits or claims against Buyer, and provided further that Seller's idemnity as to use shall not apply to articles delivered made to Buyer's drawings or design. 5. COPYRIGHTS: Seller agrees to grant to Buyer and to the Government a royalty-free right to reproduce, use and disclose any and all copyrighted or coyrightable matter required to be delivered by Seller to Buyer under this purchase order. However, it is not deemed to grant a license under any patent now or hereafter issued or employ any right to reproduce anything else called for under this purchase order. 6. MATERIALS FURNISHED: When Buyer furnishes materials to Seller to be worked upon, Seller will be responsible for the care and safe-guarding of materials furnished by Buyer. All such materials not used shall be disposed of as directed by Buyer. 7. TOOLS AND DRAWINGS: Seller agrees that it will use any designs, tools, patents, drawings, Information and equipment furnished by Buyer only in the production of the articles called for in the purchase order and not otherwise unless written consent has been granted by an authorized representative of the Buyer. Buyer does not warrant the accuracy of tools and fixtures furnished and all work must be in strict accordance with specifications. Upon completion or termination, all items shall be returned to Buyer immediately. 8. LABOR DISPUTES: Whenever an actual or potential labor dispute is delaying or threatens to delay performance of this contract, Seller will immediately give notice thereof to the Buyer and further if this order is a Government contract the Seller shall immediately give notice also to the nearest Government Department concerned. Such notice shall include all relevant information with respect to such dispute. 9. DELAYS: Buyer reserves the right to cancel this order in the event shipments are not made within specified time. Seller willl not, however, be liable for damages occassioned by delays in delivery due to causes beyond Seller's control and without his fault or negligence, provided Seller properly notifies Buyer as soon as such delay becomes evident. 11. TERMINATION (NON-GOVERNMENT ORDERS): Buyer may, at its option, terminate this purchase order in whole or in part at any time by written or telegraphic notice to Seller. Upon termination in whole or in part of the work under this purchase order by Buyer, the Seller will stop work immediately, notify sub contractors to stop work and protect property in Seller's possession in which Buyer has or may acquire an interest. If the parties cannot agree by negotiation within a reasonable time upon the amount of fair compensation to the Seller of such termination, Buyer will pay Seller without duplication: (a) The contract price for articles which have been completed. 12. CONFIDENTIAL: Seller agrees to be responsible within its control for the safeguarding of all secret, confidential or restricted matters in connection with the work to be performed by the Seller and to require a similar agreement of third parties to whom any work in this order may be alloted. 13. COMPLIANCE WITH LAWS: Seller agrees that in the performance of this contract that it will comply with all applicable Federal, State and local laws and executive orders and regulations. 16. SUB-CONTRACTING: The Seller may not sub-contract in whole or in part any portion of this purchase order, except with prior written consent of the Buyer. 17. INSURANCE: Seller agrees to be responsible for any bodily injury or property damage resulting from Seller's performance under this purchase order, and Seller warrants that adequate insurance is being carried to cover such liabilities. Seller agrees to carry fire and extended coverage insurance and be responsible for any of Buyer's property while in Seller's possession. Seller agrees to maintain Buyer's property in good condition and not to dispose of said property except in accordance with Buyer's instructions. 20. PRICE QUALITY: If price is not stated on this order, Seller shall invoice at lowest prevailing market price. Material is subject to MOYCO's inspection, and approval within a reasonable time after delivery. If specifications are not met, material may be returned at Seller's expense and risk for all damages incidental to the rejection Payment shall not constitute an acceptance of the material nor impair MOYCO's right to inspect or any of its remedies. NOTATIONS: 1.) Items 10, 14, 15, 18, 19, and 21 are stricken from this Purchase Order. 2.) Item 11, Sections b and c are stricken from this Purchase Order. 3.) Item 11, Section a (Buyer's Right of Termination) shall apply equally to the Seller subject to the terms stated in Item 4 of Moyco Nanophase 5 Year Purchase and Distribution Agreement. AGREED: /s/ Robert Cross /s/ Marvin E. Sternberg ------------------------------ ----------------------------- Mr. Robert Cross-NTC Mr. Marvin E. Sternberg-MOYCO 2-27-97 2-25-97 ---------------- ------------ DATE DATE Page 5 of 5 6 ADDENDUM TO MOYCO/NANOPHASE 5 YEAR PURCHASE AND DISTRIBUTION AGREEMENT Except as modified by the Moyco/Nanophase Purchase and Distribution Agreement effective as of February 27, 1997, the Marketing Agreement dated August 28, 1996 shall remain in effect. In particular, and without limitation, we confirm that: For as long as this agreement remains in effect, or unless the parties otherwise agree in writing, NTC will not directly or indirectly provide or sell any of the Products to anyone other than Moyco knowingly for use in the Applications. For as long as this agreement remains in effect, or unless the parties otherwise agree in writing, Moyco will not directly or indirectly sell or provide formulations containing aluminum oxide or cerium dioxide other than the Products knowingly for use in the Applications. AGREED: Nanophase Technologies Corporation Moyco Technologies, Incorporated By: /s/ Donald J. Freed By: [SIG] -------------------------------- --------------------------- Donald J. Freed Its: Vice President Its: Vice President -------------------------- Date: March 6, 1997 Date: 3/6/97 ----------------------------- ------------------------- 7 [MOYCO TECHNOLOGIES, INC. LETTERHEAD] Nanophase MR. Don Freed Dear Don: I spoke with Mr. Marvin Sternberg earlier today regarding your re-structuring of the deliveries and payments portion of the Moyco/Nanophase Purchase Order/Agreement. The following changes can be immediatly agreed to: FROM TO - ---- -- A. 1 Ton A12O3 3/22/97 net 30 days 2 Tons A12O3 3/22/96 net 90 days - ------------------------------------------------------------------------- B. 2 Tons A12O3 5/30/97 net 30 days 1 Ton A12O3 5/30/97 net 90 days - ------------------------------------------------------------------------- C. 1/2 Ton CeO 3/22/97 net 30 days 1/4 Ton CeO 3/22/97 net 60 days - ------------------------------------------------------------------------- D. Ceria R&D $50,000.00 3/31/97 $75,000 3/31/97 - ------------------------------------------------------------------------- E. 1998 R&D Fees $50,000 1/31/98 $25,000 1/31/98 - ------------------------------------------------------------------------- AGREES: /s/ Marvin E. Sternberg 3/31/97 /s/ Don Freed NANOPHASE - ----------------------------- ------- ------------------------ ------- Mr. Marvin E. Sternberg-MOYCO Date Mr. Don Freed-NANOPHASE Date 8 [MOYCO TECHNOLOGIES, INC. LETTERHEAD] MOYCO/NANOPHASE 5 YEAR PURCHASE AND DISTRIBUTION AGREEMENT (Addendum/Amendment) ISSUE 1 ITEM: AMMEND/ADD 2. Moyco agrees to accept a Nanophase Invoice (Invoice Date 6/30/97) for an additional Ceria Development R&D Fee, for work performed from 4/1/97 through 6/30/97, of $70,000.00 terms are Net 90 days. ISSUE 2 ITEM: AMMEND/ADD 6. NTC further commits to sell Nanotek Al2O3 at a price not to exceed $49.50 per kilogram (22.50/lb.) commencing on July 1, 1997 continuing through December 31, 1998. NOTE= The 3% Discount is rescinded effective July 1, 1997. Signed and Agreed this 30th Day of June 1997: /s/ S. Charles Picardi /s/ Donald J. Freed - ---------------------------- ---------------------------- Mr. S. Charles (Chuck) Picardi Mr. Don Freed Moyco Technologies, Inc. Nanophase Technologies, Inc. 9 MARKETING AGREEMENT Parties: Nanophase Technologies Corporation ("NTC") 453 Commerce Street Burr Ridge, Illinois 60521 Moyco Technologies, Incorporated ("Moyco") 200 Commerce Drive Montgomeryville, Pennsylvania 10036 Appointment: NTC hereby appoints, and Moyco hereby accepts appointment as NTC's globally-exclusive customer of the Products for the Applications defined below. Products: NTC NanoTek(TM) Aluminum Oxide, in any form as determined by NTC and Moyco to be required for use by Moyco's customers in the Applications defined below (the Products). From time to time, upon mutual agreement between NTC and Moyco, additional applications may be added to this agreement. Applications: Chemical mechanical planation (CMP) of metal layers in the production of semiconductor devices (the Applications). From time to time, upon mutual agreement between NTC and Moyco, additional applications may be added to this agreement. Marketing Objectives: To achieve and maintain a dominant market position for the Products based upon superior performance of the Products within the Applications defined above. Colabrative The parties agree that the primary role of NTC under this Relationship: agreement shall be to provide Products and related technology support to Moyco, and the primary role of Moyco shall be to develop and manufacture formulations for the Applications incorporating the Products, perform the marketing functions, and provide the related customer technical support. Nonetheless, the parties agree to actively confer and collaborate with each other concerning significant issues and activities relating to achievement of the marketing objectives. Responsibilities Establish and maintain appropriate production and of NTC: handling facilities to apply the Products on schedules and in quantities adequate to support the marketing objectives. Use its best efforts to achieve and maintain quality (including elimination of aluminum metal contaminants), technological superiority, and competitive costs of the Products. Secure and utilize such chemical analysis equipment as may be required for this purpose. Actively collaborate with Moyco in efforts to further develop and enhance the Products in support of the marketing objectives. This shall include further refinement of particle size distribution. Secure and utilize such electron microscopy equipment as may be required for this purpose. Actively provide technical and marketing assistance to Moyco in support of the marketing objectives. Employ a dedicated abrasive scientist on the NTC staff. Support shall include but not be limited to: Customer technical presentations. Customer technical support activities. Hosting visits by Moyco customer and prospective customers to NTC facilities . On-going strategic patent review. Enforce all patents relevant to NANOTEK Aluminum Oxide. 10 Responsibilities Use the best efforts to achieve and maintain quality, of Moyco: technological superiority, and competitive costs of its formulations for the Applications. Use its best efforts to diligently market and promote its formulations containing the Products for Applications in support of the marketing objectives. Provide NTC with an initial and rolling schedule of confirmed or planned presentations, samplings and evaluations. On-going and on a current basis, provide NTC with empirical feedback from presentations, samplings and evaluations that are arranged or conducted by Moyco, and otherwise provide NTC with all information available to Moyco concerning Product performance, and concerning market requirements relating to Product performance. Secure and utilize such equipment and facilities as may be required to demonstrate and test formulations for the Applications and to quantify performance. This shall include but not be limited to a CMP metal polishing tool, meteorology equipment and a classroom. Employ technical support staff experienced in CMP polishing and expert in the underlying sciences relevant to the Application. Upon execution of this agreement, order and maintain a buffer inventory of no less than 750 pounds of the Products. This quantity shall be above and beyond Moyco's needs for development, sampling, and customer orders. Upon securing customer orders for production purposes, Moyco shall maintain a buffer inventory of the Products of no less than 750 pounds or the total of estimated customer requirements for two months, whichever is greater. Provide NTC monthly with a rolling six-month forecast and every six months provide NTC with a rolling three-year forecast, of Moyco's Product requirements for the Applications defined above. Mutual For as long as the agreement remains in effect, or unless the parties otherwise agree in writing, NTC will not directly or indirectly provide or sell any of the Products to anyone other than Moyco knowingly for use in the Applications. Exclusivity: For as long as this agreement remains in effect, or unless the parties otherwise agree in writing, Moyco will not directly or indirectly sell or provide formulations containing aluminum oxide other than the Products knowingly for use in the Applications. Pricing: Pricing for the sale of Products by NTC to Moyco shall be determined solely by NTC. NTC commits that through 12/31/97 the price to Moyco for NanoTek(TM) Aluminum Oxide shall not exceed $25 per pound for orders in excess of 2000 pounds with a defined delivery schedule. When Moyco's purchases of the Products reach an average of 2000 pounds per month over a four month period, NTC shall rebate that portion of the price paid for purchases since 1/1/96 which exceeded $25 per pound. The rebate shall be in the form of six pounds of Products to be delivered for each five pounds of product ordered. Pricing for the sale of Products by Moyco to Moyco's customers shall be determined solely by Moyco. Shipping: FOB NTC facility. Disclaimers: NTC assumes no risk or liability involved in the use of the Products, including without limitation liability with regard to third-party patent claims. 11 Term of One year, automatic renewal unless terminated as provided below. Agreement: Termination without cause: six-month notice. Termination for failure to deliver, non-payment, or for material breech of this agreement: Option of non-defaulting party to terminate if failure not cured within 30 days following notice of default. Notices: All notices required or desired to be given hereunder shall be given by hand delivery, or by registered or certified mail, return receipt requested, to the addresses listed above, and shall be effective upon receipt. Proprietary The parties agree to the terms of the confidentiality agreement Rights: executed on 2/1/96. The sale of Products by NTC to Moyco shall not constitute a license from NTC to Moyco. Independent Each party is an independent contractor. Neither party is the Contractors: agent of the other, and neither shall have authority to bind the other. Jurisdiction: All disputes arising out of this Agreement shall be decided by a competent court having jurisdiction over the defendant in accordance with the laws of the state of Illinois applicable to contracts made and to be performed in Illinois. Prior This agreement supersedes the prior agreement of the parties Agreements: dated 2/1/96. AGREED: NANOPHASE TECHNOLOGIES CORPORATION MOYCO TECHNOLOGIES, INCORPORATED By: /s/ Robert W. Cross By: /s/ Marvin Sternberg ------------------------------- -------------------------------- Robert W. Cross, President Marvin Sternberg, President Date: 29 August 1996 Date: August 29, 1996 ----------------------------- ----------------------------- EX-10.17 11 SUPPLY AGREEMENT 1 Exhibit 10.17 SUPPLY AGREEMENT Agreement effective March 15, 1997 ("Effective Date"), by and between Nanophase Technologies Corporation, 453 Commerce Street, Burr Ridge, Illinois 50521 ("NTC") and Schering-Plough HealthCare Products, Inc., 3030 Jackson Avenue, Memphis TN 38151 ("S-P"). NTC and S-P are collectively referred to as the "Parties" and individually as a "Party." PURPOSE S-P desires to promote and market Nanophase (TM) Zinc Oxide ("NZO") in consumer products marketed for footcare products including odor, wetness and athlete's foot applications. NZO has not previously been used in these products. S-P wants to develop a market for those products which products are to contain NZO. In order to justify the expense and effort required to create a market for products containing NZO S-P requires a limited period of exclusive supply of NZO from NTC. Accordingly, S-P and NTC hereby agree to the following terms and conditions: ARTICLE I TERM, TERRITORY, AND OPTION 1.1 Territory. The territory of the Agreement will be the United States, Canada, Mexico and Puerto Rico. 1.2 Term. The term of this Agreement shall be four (4) years commencing on the Effective Date. ARTICLE II NTC'S SUPPLY RESPONSIBILITIES 2.1 Supply of NZO. NTC will exclusively supply NZO for S-P and S-P shall exclusively purchase from NTC, all of S-P's requirements for NZO ingredients for footcare products including odor, wetness and athlete's foot applications, to be sold within the food, mass merchandiser and drug store classes of trade. However, S-P's exclusivity outlined in this Section #2.1 shall be contingent upon S-P's purchase of NZO in a quantity of at least one thousand (1,000) kilograms ("Kg") in each three (3) month period, commencing July 1, 1997. 2.2 Exception to Exclusivity. NTC may continue to supply NZO to other current and new customers; however, it is understood and agreed that NTC will inform the customers, in writing, that NZO may not be used in products marketed for use in the categories listed in 2.1 unless the use is previously known to NTC or, if NTC's customer discloses the present use at the time of notification. 2.3 Priority. NTC agrees to give first supply priority to S-P's orders for NZO. 2 ARTICLE III S-P'S RESPONSIBILITIES 3.1 Forecasts and Purchase Orders. S-P will provide to NTC, on a quarterly basis, a forecast estimating S-P's or S-P's contract manufacturer's monthly purchase requirements (the "Forecast"), along with the expected delivery dates for the succeeding twelve (12) month period (the "Delivery Date"). S-P or S-P's contract manufacturer will issue firm purchase orders for each delivery no later than thirty-five (35) days prior to the requested delivery date. The leadtime agreed upon by the parties is thirty (30) days after receipt of order. ARTICLE IV PRICING 4.1 Pricing. The parties hereby agree that the supply price for NZO shall be in accordance with Exhibit A which indicates the price for various quantities of NZO to be purchased. Terms of payment are net thirty (30) days from date of Bill of Lading ship date. For purposes of this Agreement, acceptance will occur only after S-P has completed such quality control testing as S-P deems necessary to verify the conformity of NZO to the specifications as set forth in Exhibit B. 4.2 Basis for Product Price. The prices set forth above include all materials, manufacturing, packaging of NZO, and such quality control measures as required by this Agreement. 4.3 The price for NZO set forth in Section #4.1 shall be effective through December 31, 1998 unless raw material price increases are greater than five percent (5%) in which case price must be reviewed and negotiated by the parties. Thereafter, the price of the NZO for a calendar year shall be subject to annual review pursuant to a written request at intervals of not less than twelve (12) months by the parties to take into account any increase or decrease in NTC's labor, raw material and/or component costs directly allocable to the manufacture of NZO. The first such review should occur three (3) months prior to January 1, 1999. It is the intent of the parties to have all annual price increases or decreases be effective on January 1 of each year, which will reflect any increase or decrease in cost for the preceding calendar year. NTC shall use reasonable efforts to obtain competitive prices for raw materials and services from a qualified third party vendor. All calculations for overhead or labor costs made pursuant to this Section #4.3 shall be in accordance with NTC's accounting principles. If an agreement cannot be reached as to the price for NZO, S-P shall have the right to terminate this Agreement. 2 3 4.4 Maximum Price Increase. Notwithstanding the foregoing, in no event shall the percentage of any price increase based on increases in NTC's manufacturing costs exceed the lesser of the percentage increase in the cost of raw materials or five percent (5%) which increase shall be substantiated by NTC. 4.5 Records. NTC shall maintain records with respect to its costs, obligations and performance under this Agreement. Specifically, but without limitation, NTC shall maintain all records reasonably necessary to support financial accounting entries and tax requirements in the Territory. All such records shall be maintained for a period of not less than two (2) years following termination of this Agreement or such longer period as may be required by law, rule or regulation. Prior to the destruction of any record available for review, notice shall be provided to S-P, and S-P shall have the right to request and retain said record. ARTICLE V DELIVERY 5.1 Risk of Loss. Delivery of each order of NZO shall be F.O.B., Approved Facility (as defined in Section 7.1 of this Agreement), freight collect (call S-P's Transportation Department to arrange for pickup or carrier to contact) or such other shipping point agreed upon between the parties. S-P shall arrange via its designated common carrier transportation of the NZO to S-P's specified plant or other designated destination. Title to and risk of loss of the NZO shall pass to S-P at the time of delivery to the specified carrier. NTC shall promptly bill S-P for all NZO tendered and invoices shall be accompanied by the certificate of analysis for each lot of NZO delivered. 5.1(a) Identification. Each NZO ship case and pallet shall be clearly marked in accordance with S-P's instructions. 5.1(b) All NZO shall be packaged in a manner to avoid breakage and contamination. 5.2 Schedule. NTC shall schedule the timely manufacturing and delivery of the NZO pursuant to S-P's purchase orders. For purposes of this Agreement, a timely shipment shall be a shipment delivered by NTC at the F.O.B. point no later than five (5) days prior to the dock date. The parties agree that for purposes of delivery, time is of the essence. 5.3 Delay and Failure to Supply. Should NTC, at any time during the course of this Agreement, have reason to believe that it will be unable to meet S-P's requested delivery dates, NTC will promptly notify S-P in writing setting forth the reasons for the delay. In connection therewith, 3 4 (a) In the event NTC, for any reason (including events of excused performance as set forth in this Agreement) has been unable to supply S-P's binding purchase orders for NZO meeting the warranties contained in Paragraph 5.6 of this Agreement, without being able to supply ninety percent (90%) of such binding purchase orders within an additional ten (10) days, (including any new orders in such period), then NTC, upon written notice to S-P may establish secondary sources of supply for the purchase requirements set forth in Paragraph 7.4 of this Agreement. (b) In the event S-P has reason to believe that NTC or NTC's secondary sources for any reason (including events of excused performance as set forth in this Agreement) will not be able to supply S-P's purchase orders for NZO meeting the warranties contained in this Agreement, S-P may notify NTC in writing requesting adequate assurances of future performance and that NTC will be able to supply S-P with at least ninety percent (90%) of the purchase orders to be delivered in accordance with this Agreement. NTC shall, within ten (10) days, respond in writing to S-P's request for adequate assurances of future performance stating whether NTC is or is not able to supply S-P with at least ninety percent (90%) of the purchase orders. If NTC fails to live up to its assurances, then S-P may also seek and/or establish a secondary supplier. (c) In the event NTC anticipates that in the future NTC or any NTC secondary source will be unable to supply S-P's purchase orders for NZO meeting the warranties contained in this Agreement, with no prospect of being able to provide ninety percent (90%) of such purchase orders within an additional thirty (30) days, then NTC shall notify S-P in writing to that effect. Upon such notification, S-P may, if it chooses, temporarily suspend this Agreement and produce the NZO for its own purchase requirements as set forth in this Agreement. At such time as NTC or a NTC secondary source is able to resume production, with NTC exercising diligent efforts to resume production as quickly as possible, NTC shall notify S-P in writing and continue and/or reinstate this Agreement with NTC supplying S-P's requested requirements for NZO for the term remaining in this Agreement. 5.4 Acceptance/Rejection. All shipments of NZO are subject to S-P's inspection prior to acceptance. In the event that S-P believes that any batch of NZO does not meet the previously agreed-upon NZO Specifications (as set forth in Exhibit B), S-P shall give NTC prompt notice of its rejection of such batch, including reasons for rejection. Upon receipt of any such notice, within twenty (20) days following receipt of notice of rejection by S-P, NTC shall deliver a new batch of NZO to replace the rejected batch. NTC will destroy or dispose of the entire rejected batch in question at its sole expense. 4 5 5.5 Overruns. Should the delivered NZO exceed the binding P. O. by more than five (5) percent, S-P may return the excess to NTC without payment, with all shipping costs to be paid by NTC. 5.6 Warranty. NTC warrants that at the time of delivery of the NZO at the F.O.B. point of delivery, the NZO shall (i) have been manufactured in accordance with GMPs and all other applicable laws, rules, regulations or requirements of any Regulatory Authority in the Territory, (ii) meet the NZO Specifications, (ii) shall not be adulterated or misbranded under the Federal Food, Drug and Cosmetic Act, as amended, and (iii) be in good, usable and merchantable condition. SPECIFICATIONS; APPROVAL SUPPORT; REGULATORY MATTERS; RECORDS 6.1 Specifications. NTC is to supply NZO in accordance with the previously agreed-upon specifications set forth in Exhibit B. All specifications in Exhibit B which have not been defined as of the execution of this agreement will be jointly determined by the parties. Should the parties be unable to jointly determine the specifications within a reasonable time, this agreement shall be null and void and either party may notify the other, in writing of the immediate termination of this agreement. 6.2 Equipment. NTC shall obtain and maintain the equipment required to fulfill its obligations under this Agreement consistent with applicable cGMPs. 6.3 Approval Support. NTC shall produce stability batches, engage in various development activities and perform various tests as are necessary for compliance with the United States Pharmacopeia (USP) in the Territory and to be prepared for the pre-approval inspections by the Regulatory Authorities and perform other activities as may be applicable. 6.4 Requlatory Assistance for Maintaining Filing. NTC shall provide S-P with such information and assistance as S-P may require for the NZO including, without limitation, providing S-P with all reports, authorizations, certificates, methodologies, specifications and other documentation, excluding formula and manufacturing processes, in the possession or under the control of NTC relating to the pharmaceutical/technical development and manufacture of NZO, or any component thereof needed for S-P's filings. 6.5 NTC Approvals. Except as otherwise specifically set forth herein, NTC shall be responsible for obtaining and maintaining all approvals from the Regulatory Authorities and any other governmental authorities necessary to fulfill its obligations hereunder. 5 6 6.6 Records and Inspection. NTC shall maintain all records necessary to comply with all applicable laws, rules and regulations in the Territory of sale of the NZO. Specifically, but without limitation, NTC shall maintain all records and samples reasonably necessary to support GMPs and other regulatory requirements in the Territory. All records shall be available for inspection, audit and copying by S-P and its representatives and agents upon reasonable request during normal business hours. All such records shall be maintained for a period as may be required by law, rule or regulation and all records relating to the manufacture, stability and quality control of all NZO shall be retained for a period of not less than seven (7) years from the date of expiration of each batch of each NZO to which said records pertain. Prior to destruction of any record, NTC shall give notice to S-P, which shall have the right to request and retain such record. 6.7 Retention of Samples. NTC shall retain a sufficient quantity of NZO to perform at least full duplicate quality control testing. Retained repository samples shall be maintained in a suitable storage facility for a period of not less than seven (7) years after the date of manufacture of each batch of the NZO. All such samples shall be available for inspection and testing by S-P upon reasonable notice. 6.8 Complaints or Adverse Experiences. NTC agrees to notify S-P within twenty-four (24) hours of the receipt of any complaints and reports of adverse drug events ("AEs") associated with the NZO. S-P shall have primary responsibility for fielding, investigating and responding to all NZO complaints and AEs from the Territory. S-P shall interface with NTC's Pharmaceutical Quality Assurance Department, as appropriate and needed, to investigate such complaints or AEs. The parties shall each report monthly on the resolution of complaints. NTC shall cooperate with S-P in investigating and responding to NZO complaints and NTC will assume all responsibility for investigating and responding to complaints or AEs which are determined to result from the Manufacturing of the NZO and shall report to S-P on a monthly basis. In the event the parties' expenses to undertake the activities described in this paragraph result in, or may result in, extraordinary costs of investigation or testing (other than for those expenses which are solely manufacturing problems), S-P and NTC agree to negotiate whether to incur, and how to allocate, such costs. 6.9 Debarment. NTC represents and warrants that it will not use in any capacity, in connection with any manufacturing or other services to be performed under this Agreement, any individual who has been debarred pursuant to the Federal Food, Drug and Cosmetic Act. NTC agrees to immediately inform S-P in writing if any person who is performing services hereunder is debarred or if any action, suit, claim, investigation or legal or administrative proceeding is pending, or, to the best of NTC's knowledge, is threatened, 6 7 relating to the debarment of NTC or any person performing Manufacturing or other services hereunder. ARTICLE VII QUALITY CONTROL 7.1 Facility Compliance and Related Matters. (a) NTC covenants that they will provide approved designated site(s) for the manufacture of the NZO ("Approved Facility/ies") and such Approved Facility/ies" shall i) include all of NTC's equipment, machinery and facilities at those locations which have been specifically approved as a GMP manufacturing facility in the manufacture and storage of NZO, and (ii) the Approved Facility for NZO shall be in compliance with all applicable laws, rules and regulations at all times during the term of this Agreement. NTC shall be responsible for all costs and expenses related to the compliance of the Approved Facility with GMP's and such laws, rules and regulations related to the manufacture of the NZO in accordance with the Specifications. NZO shall be manufactured at the Approved Facility and the location thereof shall not be changed without S-P's written consent. (b) Exhibit C attached hereto describes all products which are manufactured on machinery or equipment used to manufacture NZO. NTC shall notify S-P in writing of any potential additional products to Exhibit C. If S-P identifies a potential problem of cross-contamination arising from the products listed on Exhibit C or any additions thereto, the parties will meet to address the cross-contamination issue. At S-P's request, NTC shall provide S-P with all information and written procedures necessary to examine and resolve the cross-contamination issue. Until the parties mutually satisfactorily resolve the cross-contamination issue, NTC shall not manufacture products on machinery or equipment used to manufacture the NZOs which S-P believes could cause cross-contamination for the NZOs. [Include, if applicable.] 7.2 Specifications Amendments. The NZO Specifications shall be amended or supplemented to comply with GMPs and may be amended or supplemented (including, without limitation, for the purpose of incorporating improvements) from time to time upon the written request of S-P. In the event such amendment requires additional actual cost to NTC for the manufacture of the NZO, S-P and NTC shall agree on the additional compensation therefore. 7.3 Quality Control Program. NTC shall maintain a quality control program consistent with GMP, as required by the Regulatory Authorities in the Territory, which program, as amended or supplemented, shall be provided to S-P from time to time. 7.4 Approval for Manufacturing Changes; Third Party 7 8 Manufacturing. NTC agrees that no changes will be made to any materials, suppliers, equipment or methods of production or testing for the NZO without S-P's prior written approval. Upon written approval of S-P, NTC may then make those changes in manufacturing procedures required by GMP or other applicable law, rule or regulation or Regulatory Authority. Under no circumstances will NTC contract out all or any part of the Manufacturing to a third party without prior written approval from S-P. 7.5 Standards. All NZO supplied hereunder shall be manufactured in accordance with GMPs, and all other applicable national, state and local laws, rules and regulations in effect at the time of manufacture. 7.6 Production Samples. NTC shall provide S-P's Quality Control Department with production samples of the NZO and copies of completed batch records upon request, and will provide a written certificate of analysis with each lot of NZO. 7.7 Batch Failure. NTC agrees to notify S-P within two (2) working days of discovery of any batch failure which could result in NTC's inability to meet S-P's requested delivery dates, or of learning of any failure of any batch of NZO to meet standards set forth in the S-P Manufacturing Know-how. 7.8 Notification of Inspections. NTC agrees to notify S-P immediately of any inquiries, notifications, or inspection activity by any Regulatory Authority in regard to the NZO. NTC shall provide a reasonable description to S-P of any such governmental inquiries, notifications or inspections promptly after such visit or inquiry, but in less than two (2) calendar days, NTC shall furnish to S-P, (a) within two (2) days after receipt, any report or correspondence issued by the Regulatory Authority in connection with such visit or inquiry, including but not limited to, any FDA Form 483 Establishment Inspection Reports, warning letters and (b) prior to responding to a Regulatory Authority, copies of any and all proposed responses or explanations relating to items set forth above, in each case purged only of trade secrets of NTC that are unrelated to the obligations under this Agreement or are unrelated to the NZO. 7.9 Inspection by S-P. S-P shall have the right during normal business hours (including, without limitation, during production or after normal business hours if reasonably requested and in connection with a production run that commenced during the normal business hours) and with reasonable advance notice to visit NTC's Approved Facility for the purpose of observing the manufacturing, packaging, testing, and warehousing of the NZO, and to inspect for compliance with GMPs and other applicable regulatory requirements. S-P shall also have the right to be present at an inspection referenced in Section 8.8 above. 8 9 7.10 Environmental and Other Laws and Regulations. In carrying out its obligations under this Agreement, NTC shall comply with all applicable environmental and health and safety laws, regulations, ordinances, guidelines and policies (current or as amended or added) (hereinafter "Laws"), and shall be solely responsible for determining how to carry out these obligations. Notwithstanding any other provision in this Agreement to the contrary, nothing provided to NTC by S-P, by way of materials, specifications, processing information or otherwise, is meant to diminish this as NTC's sole responsibility. NTC also represents and warrants that it has the appropriate skills, personnel, equipment, permits, approvals or the like necessary to perform its services or provide materials under this Agreement in compliance with all applicable Laws. NTC shall immediately notify S-P, in writing, or any circumstances, including the receipt of any notice, warning, citation, finding, report or service of process or the occurrence of any release, spill, upset, or discharge, relating to NTC's compliance with this Section 7.10 or which may impose environmental liability upon NTC. NTC's noncompliance with this Section 7.10 is considered a material breach of this Agreement. S-P reserves the right to conduct an environmental inspection of NTC's facility or facilities, during normal business hours and with reasonable advance notice, for the purpose of determining compliance with this Section 7.10. S-P will share the results of any environmental inspection with NTC. Such inspection, if it occurs, does not relieve NTC of its sole obligation to comply with all applicable Laws and does not constitute a waiver of any right otherwise available to S-P. 7.11 Inspection and Acceptance. S-P will inspect the NZO and conduct any quality control testing it deems necessary to verify conformity to raw material specifications as referenced in this Agreement. Product rejected by S-P will be returned to NTC, at NTC's cost, for credit & replacement. ARTICLE VIII RESERVED ARTICLE IX RENEWAL AND TERMINATION 9.1 Renewal of the Agreement. S-P may on sixty (60) days written notice to NTC notify S-P's intentions to renegotiate extending the term of this Agreement listed in Paragraph 1.2(a). NTC will renegotiate renewal in good faith upon mutual agreement. 9.2 Termination by Non-Renewal. Either party may terminate this Agreement by giving the other party written notice of termination at least ninety (90) days prior to the end of the 9 10 initial term or any renewal period. 9.3 Termination by S-P. S-P shall have the right to terminate this Agreement if: 9.3.1 there is a change in control of NTC. For purposes of this provision, a "change in control" shall mean the acquisition of fifty percent (50%) or more of the assets or outstanding common stock or other equity interest of NTC by a non-affiliated third party. NTC shall notify S-P in writing at least sixty (60) days prior to any "change in control". S-P shall notify NTC in writing within thirty (30) days of such notification whether or not S-P elects to terminate this Agreement. S-P warrants that it will make a reasonable effort to continue this Agreement with any controlling parties and will not arbitrarily terminate it under this paragraph 9.3.1. 9.3.2 NTC files a petition in bankruptcy, or enters into an arrangement with its creditors, or applies for or consents to the appointment of a receiver or trustee, or makes an assignment for the benefit of creditors, or suffers or permits the entry of an order adjudicating it to be bankrupt or insolvent. In the event this Agreement is terminated under Section 9.3.2, all rights and licenses granted under this Agreement by NTC to S-P are, and shall otherwise be deemed to be, for purposes of Section 365(n) of the Bankruptcy Code, licenses of rights to "intellectual property" as defined under Section 101(52) of the Bankruptcy Code. The parties agree that S-P, as a licensee of such rights under this Agreement, shall retain and may fully exercise all of its rights and elections under the Bankruptcy Code. The parties further agree that, in the event of the commencement of a bankruptcy proceeding by or against NTC under the Bankruptcy Code, S-P shall be entitled to a complete duplicate of (or complete access to, as appropriate) any such intellectual property and all embodiments of such intellectual property upon written request therefore by S-P. Such intellectual property and all embodiments thereof shall be promptly delivered to S-P (i) upon any such commencement of a bankruptcy proceeding upon written request therefore by S-P, unless NTC elects to continue to perform all of its obligations under this Agreement or (ii) if not delivered under (i) above, upon the rejection of this Agreement by or on behalf of NTC upon written request therefore by S-P. 9.4 Termination for Material Default. Upon default by a party in the performance of any material obligation in this Agreement which results in significant harm to the non-defaulting party, the non-defaulting party may give notice in writing to the party in default and the defaulting party shall have sixty (60) days thereafter to cure the default. Except as qualified in the last sentence of this paragraph, if the defaulting party does not cure or institute measures to substantially cure such default within sixty (60) days and diligently complete the cure within an 10 11 additional sixty (60) days, the non-defaulting party may terminate this Agreement by providing notice of intent to terminate which shall take effect ten (10) days following the receipt by the defaulting party of such notice. Termination under this Article shall not relieve either party of any obligation existing upon the date of termination or relieve the defaulting party from liability for breach of this Agreement. 9.5 Effect of Termination. Expiration or termination of the Agreement shall not relieve the parties of any obligation accruing prior of such expiration or termination, and the provisions of Sections 6.5 and Articles 12, 13 and 14, shall survive the expiration of the Agreement. Any expiration or early termination of this Agreement shall be without prejudice to the rights of either party against the other accrued or accruing under this Agreement prior to termination. 9.6 No Waiver. The failure of either party to terminate this Agreement by reason of the breach of any of its provisions by the other party shall not be construed as a waiver of the rights or remedies available for any subsequent breach of the terms and provisions of this Agreement. ARTICLE X FORCE MAJEURE; INABILITY TO SUPPLY 10.1 Force Majeure. Neither party shall be responsible for any failure to comply with the terms of this Agreement where such failure is due to force majeure, which shall include, without limitation, fire, flood, explosion, strike, labor disputes, labor shortages, picketing, lockout, transportation embargo or failures or delays in transportation, strikes or labor disputes affecting supplies, or acts of God, civil riot or insurrection, acts of the government, or judicial action. Specifically excluded from this definition are those acts of any governmental agency, or judicial action, which could have been avoided by compliance with such laws or regulations, publicly available and reasonably expected to be known by either party. Upon the cessation of any cause operating to excuse performance of either party under this Section 9.1, this Agreement shall continue in full force and effect unless or until otherwise terminated pursuant to this Agreement and each party shall endeavor to resume its performance hereunder as quickly as possible if such performance is delayed or interrupted by reason of any cause set forth herein. If one or more of said causes set forth herein is asserted by either party as a basis of that party's nonperformance, the other party shall have the right to terminate this Agreement forthwith by giving written notice to that effect prior to the resumption of performance. 11 12 ARTICLE XI COMPLIANCE WITH LAWS All NZO manufactured by NTC pursuant to this Agreement shall be subject to all applicable Federal, State and local laws, including, but not limited to, the Fair Labor Standards Act of 1938, as amended and, unless NTC is exempted, the President's Executive Order No. 11246, Section 202, relating to equal employment opportunities and all subsequent additions or amendments thereto, and the Immigration Reform Act of 1986. ARTICLE XII INDEMNIFICATION AND INSURANCE 12.1 NTC's Indemnification Obligation. NTC agrees to indemnify and hold S-P, its agents and employees harmless from and against all claims, liabilities (including product liability), costs, damages, losses, judgments for damages or expenses (including reasonable attorney's fees) caused by, arising out of, or resulting from i) NTC's negligent acts and/or omissions relating to the manufacture of NZO and ii) NTC's performance of its obligations hereunder (including any environmental contamination or release of hazardous substance, or hazardous wastes to the environment caused by NTC, its Approved Facilities, its employees, agents or contractors), its failure to comply with this Agreement, or any laws and regulations applicable to such performance. 12.2 S-P's Indemnification Obligation. S-P agrees to indemnify and hold NTC, its agents and employees harmless from and against all claims, liabilities, costs, damages, losses, judgments for damages or expenses (including reasonable attorneys' fees) caused by, arising out of, or resulting from S-P's negligent acts and/or omissions relating to the marketing, distribution and sale of the NZO. 12.3 Notice of Suit. The indemnified party agrees to give the indemnifying party prompt notice in writing of the institution of any suit, including any suit or claim asserted or made by any governmental authority having jurisdiction, and the indemnified party agrees to permit the indemnifying party to have control and conduct of the defense of such suit, and give the indemnifying party all needed information in the indemnified parties possession and all authority and assistance necessary to enable the indemnifying party to carry on the defense of such suit and any appeal from a judgment or decree rendered therein. 12.4 Insurance. NTC represents and warrants that during the term of this Agreement and any renewals or extensions, it shall maintain the types and amounts of insurance set forth below: 12 13 (i) Commercial General Liability Insurance, including contractual liability coverage of all of NTC's obligations under this Agreement and Products Liability/Completed Operations coverage with a minimum limit of one (1) million dollars ($1,000,000) each claim. (ii) NTC will provide a certificate of insurance for their current coverage. NTC shall provide thirty (30) days' written notice of cancellation or material change in the policy to S-P, if possible. 12.5 Prior Written Consent. Neither NTC nor S-P shall be responsible or bound by any compromise of claims, demand, judgments or causes of action made without its prior written consent. 12.6 Notice of Claims. Each party agrees to give the other prompt written notice of any claims made, including any claims asserted or made by any governmental authority having jurisdiction, for which the other might be liable under the foregoing indemnification together with the opportunity to defend, negotiate and settle such claims. ARTICLE XIII TRADE NAMES AND TRADEMARKS 13.1 S-P and NTC hereby acknowledge that neither party has, and shall not acquire, any interest in any of the other party's trademarks, tradenames, tradedress or copyrights appearing on the labels or packaging materials for the NZO unless otherwise expressly agreed. ARTICLE XIV CONFIDENTIALITY 14.1 Both NTC and S-P recognize that know-how of a party disclosed to the other party pursuant to this Agreement or developed as a result of Manufacturing NZO carried out pursuant to this Agreement, is of proprietary value and is to be considered highly confidential ("Proprietary Information"). NTC and S-P shall use only in accordance with this Agreement and shall not disclose to any third party any Proprietary Information, without the prior written consent of the other party. The foregoing obligations shall survive the expiration or termination of this Agreement for a period of twenty (20) years. These obligations shall not apply to Proprietary Information that: (a) is known by the receiving party at the time of its receipt, and not through a prior disclosure by the disclosing party, as documented by business records; 13 14 (b) is at the time of disclosure or thereafter becomes published or otherwise part of the public domain without breach of this Agreement by the receiving party; (c) is subsequently disclosed to the receiving party by a third party who has the right to make such disclosure; (d) is developed by the receiving party independently of Proprietary Information or other information received from the disclosing party and such independent development can be properly demonstrated by the receiving party; (e) is disclosed to governmental or other regulatory agencies in order to obtain patents or to gain approval to conduct clinical trials or to market NZO, but such disclosure may be only to the extent reasonably necessary to obtain such patents or authorizations; (f) is necessary to be disclosed to sublicensees, agents, consultants, Affiliates and/or other third parties for the research and development, manufacturing and/or marketing of NZO (or for such parties to determine their interest in performing such activities) in accordance with this Agreement on the condition that such third parties agree to be bound by the confidentiality obligations contained in this Agreement, provided that the term of confidentiality for such third parties shall be no less than twenty (20) years; or (g) is required to be disclosed by law or court order, provided that notice is promptly delivered to the other party in order to provide an opportunity to seek a protective order or other similar order with respect to such Proprietary Information and thereafter discloses only the minimum information required to be disclosed in order to comply with the request, whether or not a protective order or other similar order is obtained by the other party. Nothing herein shall be interpreted to prohibit S-P from publishing the results of its studies in accordance with industry practices. 14.2 No Publicity. A party may not use the name of the other party in any publicity or advertising and, may not issue a press release or otherwise publicize or disclose any information related to this Agreement or the terms or conditions hereof, without the prior written consent of the other party. The parties shall agree on a form of initial press release that may be used by either party to describe this Agreement. Nothing in the foregoing, however, shall prohibit a party from making such disclosures to the extent deemed necessary under applicable federal or state securities laws or any rule or regulation of any nationally recognized securities exchange; in such event, however, the disclosing party shall use 14 15 good faith efforts to consult with the other party prior to such disclosure and, where applicable, shall request confidential treatment to the extent available. ARTICLE XV NOTICES 15.1 Notices. Each notice required or permitted to be given or sent under this Agreement shall be given by facsimile transmission (with confirmation copy by registered first-class mail) or by registered or overnight courier (return receipt requested), to the parties at the addresses and facsimile numbers indicated below. If to NTC, to: Nanophase Technologies Corporation 453 Commerce Street Burr Ridge, IL 50521 Attention: D. J. Freed Facsimile No.: 630/323-1221 If to S-P, to: Schering-Plough HealthCare Products, Inc. 3030 Jackson Avenue Memphis, TN 38151 Attention: Mark Yost Facsimile No.: (901) 320-2997 with copies to: Schering-Plough Corporation 2000 Galloping Hill Road Kenilworth, NJ 07033 Attention: Charles Oppenheimer Legal Director Facsimile No.: (908) 298-2927 Any such notice shall be deemed to have been received on the earlier of the date actually received and the date five (5) days after the same was posted. Either party may change its address or its facsimile number by giving the other party written notice, delivered in accordance with this Section. 15 16 ARTICLE XVI ASSIGNMENT 16.1. Neither this Agreement nor any or all of the rights and obligations of a party hereunder shall be assigned, delegated, sold, transferred, sublicensed (except as otherwise provided herein) or otherwise disposed of, by operation of law or otherwise, to any third party other than an Affiliate of such party, without the prior written consent of the other party, and any attempted assignment, delegation, sale, transfer, sublicense or other disposition, by operation of law or otherwise, of this Agreement or of any rights or obligations hereunder contrary to this Section #16.1 shall be a material breach of this Agreement by the attempting party, and shall be void and without force or effect; provided, however, S-P and NTC may, with consent and said consent will not be unreasonably withheld, assign the Agreement and its rights and obligations hereunder to an Affiliate or in connection with the transfer or sale of all or substantially all of its assets related to the division or the subject business, or in the event of its merger or consolidation or change in control or similar transaction. This Agreement shall be binding upon, and inure to the benefit of, each party, its Affiliates, and its permitted successors and assigns. Each party shall be responsible for the compliance by its Affiliates with the terms and conditions of this Agreement. ARTICLE XVII GOVERNING LAW 17.1 This Agreement shall be governed, interpreted and construed in accordance with the laws of the State of Tennessee, without giving effect to conflict of law principles. ARTICLE XVIII MISCELLANEOUS 18.1 Waiver. A waiver of any breach or any provision of this Agreement shall not be construed as a continuing waiver of other breaches of the same or other provisions of this Agreement. 18.2 Independent Relationship. Nothing herein contained shall be deemed to create an employment, agency, joint venture or partnership relationship between the parties hereto or any of their agents or employees, or any other legal arrangement that would impose liability upon one party for the act or failure to act of the other party. Neither party shall have any power to enter into any contracts or commitments or to incur any liabilities in the name of, or on behalf of, the other party, or to bind the other party in any respect whatsoever. 16 17 18.3 Export Control. This Agreement is made subject to any restrictions concerning the export of products or technical information from the United States of America which may be imposed upon or related to NTC or S-P from time to time by the government of the United States of America. Furthermore, S-P agrees that it will not export, directly or indirectly, any technical information acquired from NTC under this Agreement or any products using such technical information to any country for which the United States government or any agency thereof at the time of export requires an export license or other governmental approval, without first obtaining the written consent to do so from the Department of Commerce or other agency of the United States government when required by an applicable statute or regulation. 18.4 Entire Agreement; Amendment. This Agreement, including the Exhibits and Schedules hereto, sets forth the complete, final and exclusive agreement and all the covenants, promises, agreements, warranties, representations, conditions and understandings between the parties hereto and supersedes and terminates all prior agreements and understandings between the parties. There are no covenants, promises, agreements, warranties, representations, conditions or understandings, either oral or written, between the parties other than as are set forth herein and therein. No subsequent alteration, amendment, change or addition to this Agreement shall be binding upon the parties unless reduced to writing and signed by an authorized officer of each party. 18.5 Severability. If any provision of this Agreement is declared invalid or unenforceable by a court having competent jurisdiction, it is mutually agreed that this Agreement shall endure except for the part declared invalid or unenforceable by order of such court. The parties shall consult and use their best efforts to agree upon a valid and enforceable provision which shall be a reasonable substitute for such invalid or unenforceable provision in light of the intent of this Agreement. 18.6 Counterparts. This Agreement shall become binding when any one or more counterparts hereof, individually or taken together, shall bear the signatures of each of the parties hereto. This Agreement may be executed in any number of counterparts, each of which shall be an original as against either party whose signature appears thereon, but all of which taken together shall constitute but one and the same instrument. 17 18 IN WITNESS WHEREOF, S-P and NTC have caused this Agreement to be executed by their duly authorized officers as of the day and year first above written. SCHERING-PLOUGH HEALTHCARE NANOPHASE TECHNOLOGIES PRODUCTS, INC. CORPORATION By: /s/ John W. Clayton By: /s/ D. J. Freed ---------------------- ---------------------- D. J. Freed, Ph.D. Vice President, Title: Senior Vice President Marketing ----------------------- Scientific and Regulatory Affairs 18 19 EXHIBIT A Pricing - NanoGard ZNO USP Pricing: $18.81/kg for 3,000-10,000 kg annual quantities $22.00/kg for less than 3,000 kg annual quantities Lot Size: 550 kg +/- 10% 1,210 lb +/- 10% 20 EXHIBIT B [SCHERING-PLOUGH LOGO] To: Joyce Weems From: Mark Wiggins Date: October 15, 1996 Subject: PROPOSED SPECIFICATIONS FOR NEW RAW MATERIAL - -------------------------------------------------------------------------------- ITEM: Zinc Oxide NanoGard ITEM NO: 04727-40 Attached are the Propsed Specifications for the above raw material. Also included are copies of the following. X Certificate of Analysis (COA) - ----- X Material Safety Data Sheet (MSDS) - ----- X Vendor Specifications - ----- USP methods are used for sample analysis with the following additional comments. Loss on Ignition: Vendor specifications are (less than or equal to) 1.5% which is different from the USP specifications of (less than or equal to) 1.0%. Average Particle Size is taken from the Certificate of Analysis. Please contact me if you need any additional information. Compiled by: /s/ [Signature] 10/15/96 --------------------------------------------------------------- Analytical Research Date Received by: /s/ [Signature] 10/15/96 --------------------------------------------------------------- Quality Standards Date c: E. Martz (Specifications and MSDS) W. Wright (Specifications and MSDS) M. Birkholz (MSDS) 21 SCHERING-PLOUGH HEALTHCARE PRODUCTS, MEMPHIS OPERATIONS QUALITY CONTROL PROPOSED TESTING STANDARD PAGE 1 OF 1 - ------------------------------------------------------------------------------- ITEM: ITEM NO: ZINC OXIDE NANOGARD 04727-40 - ------------------------------------------------------------------------------- T.S. NUMBER: SUPERSEDES: EFFECTIVE DATE: RM-04727 NEW - ------------------------------------------------------------------------------- COMPLILED BY: APPROVED BY: - -------------------------------------------------------------------------------
=============================================================================== TEST SPECIFICATION REFERENCE =============================================================================== * Description Must pass USP. USP 23, p. 2115 - ------------------------------------------------------------------------------- * Identification Must Pass USP. USP 23, p. 1644 - ------------------------------------------------------------------------------- $ Average Particle Limits: 23 - 43 nm. Vendor Spec Size - ------------------------------------------------------------------------------- * Loss on Ignition Maximum: 1.5% (w/w) USP 23, p. 1644 and Vendor Spec - ------------------------------------------------------------------------------- * Assay Limits: 99.0 - 100.5% (w/w) USP 23, p. 1644 (Calculated on the ignited basis.) ===============================================================================
$ Certificate of Analysis Result Required * Retest Interval Test Retest Interval: 12 Months 22 [NANOPHASE LETTERHEAD] - -------------------------------------------------------------------------------- CERTIFICATE OF ANALYSIS - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TRADE NAME: NanoGard(TM) Zinc oxide PRODUCT NAME: Zinc oxide LOT NUMBER: ZM60923-03 DATE: 9/25/96 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 SPECIFIC SUFRACE AREA: 32 m /g (Test method gas adsorption) AVERAGE PARTICLE SIZE 33 nm (Deduced by SSA measurement) DENSITY: 5.6 g/cc (Test method gas pycnometry) Material Certified By: /s/ [Signature] - -------------------------------------------------------------------------------- Quality Assurance SAFETY PRECAUTIONS: Please see the MSDS before handling the material. - -------------------------------------------------------------------------------- 23 [NANOPHASE LOGO] - -------------------------------------------------------------------------------- ZINC OXIDE POWDER
- ------------------------------------------------------------------------------------------------- Test Specification Test method - ------------------------------------------------------------------------------------------------- Specific Surface Area 2 25-45 (m /g) Gas Adsorption 5-point BET (QA-01-518) - ------------------------------------------------------------------------------------------------- Particle Size (Avg) 43-23 nm calculated calculated from BET 99.9% of total distribution PS (nm) = [6/(density x BET)] x 1000 - ------------------------------------------------------------------------------------------------- Density 5.6+0.2 g/cc Helium Gas Pycnometry (QA-01-525) - - -------------------------------------------------------------------------------------------------
9-26-96 24 [NANOPHASE LOGO] - -------------------------------------------------------------------------------
ZINC OXIDE - ------------------------------------------------------------------------------- Test Spec. Test method - ------------------------------------------------------------------------------- Identification A Passes USP USP-23 (ZnO official monograph) - ------------------------------------------------------------------------------- Identification B Passes USP USP-23 (ZnO official monograph) - ------------------------------------------------------------------------------- Carbonate, & clarity & color Passes USP USP-23 (ZnO official monograph) - ------------------------------------------------------------------------------- Alkalinity Passes USP USP-23 (ZnO official monograph) - ------------------------------------------------------------------------------- Iron or other metals Passes USP USP-23 (ZnO official monograph) - ------------------------------------------------------------------------------- Loss on Ignition <1.5% USP-23 (ZnO official monograph) - - ------------------------------------------------------------------------------- Assay 99.0-100.5 USP-23 (ZnO official monograph) - ------------------------------------------------------------------------------- Color DE < 20 Spectrophotometry - - ------------------------------------------------------------------------------- 2 Specific Surface Area 25-45 (m /g) Gas Adsorption Multi-point BET - ------------------------------------------------------------------------------- TRACE IMPURITIES: - ------------------------------------------------------------------------------- As <2 PPM ICP - - ------------------------------------------------------------------------------- Cd <15 PPM ICP - - ------------------------------------------------------------------------------- Pb <20 PPM ICP - - ------------------------------------------------------------------------------- Hg <1 PPM ICP - - -------------------------------------------------------------------------------
25 [NANOPHASE LOGO] PRODUCT SPECIFICATIONS - ------------------------------------------------------------------------------- NANOGARD(TM) ZINC OXIDE (ZnO) DESCRIPTION NanoGard(TM) Zinc oxide is a white to off white colored, loosely agglomerated ZnO with a spherical morphology. NanoGard(TM) zinc oxide is manufactured by a physical vapor synthesis method, resulting in highly reproducible, contaminant-free surfaces, and a minimum purity of 99.95%. Residual impurity levels meet USP, CFR, and JP standards, making NanoGard(TM) Zinc oxide ideally suited for OTC and cosmetic applications. PHYSICAL PROPERTIES 2 2 Typical average surface area (BET) 35 m /g+ 10 m /g - Typical average particle size 31 nm True density 5.6 g/cc ASSAY Before surface treatment 99.9+% TRACE ELEMENTS (TYPICAL) As <2 PPM Hg <1 PPM Pb <20 PPM Cd <15 PPM KEY FEATURES AND BENEFITS - Spherical, free flowing powders facilitate preparation of agglomerate-free dispersions when particles are properly coated - pH-stable aqueous dispersions available. - NanoGard(TM) Zinc oxide can be dispersed in a wide variety of cosmetic vehicles to meet customer requirements - Transparent to visible light when properly dispersed - UV-attenuating properties 26 NANOGARD(TM) ZINC OXIDE Page 1 of 4 MATERIAL SAFETY DATA SHEET Revision Date: August 19, 1996 NANOPHASE TECHNOLOGIES CORPORATION 453 Commerce Street Burr Ridge, IL 60521 Phone: (630) 323-1200, FAX: (630) 323-1221 INFOTRAC emergency phone number: (800) 535-5053 - ------------------------------------------------------------------------------- SECTION 1 - PRODUCT IDENTIFICATION - ------------------------------------------------------------------------------- PRODUCT NAMES(S): NanoGard(TM) Zinc oxide SYNONYMS: Zinc oxide fume, zinc white, zincite, zincoid, snow white, protox type, ozide, ozio, pasco, permanent white, philosopher's wool, emanay zinc oxide, emar, flowers of zinc, calamine, Chinese white, pigment white CHEMICAL FAMILY: Metal oxide CAS NUMBER: 1314-13-2 MOLECULAR FORMULA: ZnO - ------------------------------------------------------------------------------- SECTION 2 - INGREDIENTS - ------------------------------------------------------------------------------- PRINCIPAL HAZARDOUS COMPONENTS CAS NO. % PEL TLV - ------------------------------ ------- - --- --- 3 3 Zinc oxide 1314-13-2 100 15mg/m 5 mg/m - ------------------------------------------------------------------------------- SECTION 3 - PHYSICAL DATA - ------------------------------------------------------------------------------- BOILING POINT: Not known % VOLATILES: N/A SOLUBILITY IN WATER: 0.00016 gms per 100 cc SPECIFIC GRAVITY (H O=1): 5.60 2 FREEZING/MELTING POINT: 1975 degrees C EVAPORATION RATE (BUTYL ACETATE=1): N/A VAPOR DENSITY (AIR=1): N/A VAPOR PRESSURE: N/A APPEARANCE AND ODOR: White powder, odorless OTHER: No data - ------------------------------------------------------------------------------- SECTION 4 - FIRE AND EXPLOSION HAZARD DATA - ------------------------------------------------------------------------------- FLASH POINT: N/A Method: N/A FLAMMABLE LIMITS IN AIR, % BY VOLUME: N/A Lower: N/A Upper: N/A AUTO IGNITION TEMPERATURE: N/A EXTINGUISHING MEDIA: Will not burn 27 NANOGARD(TM) ZINC OXIDE Page 2 of 4 - ------------------------------------------------------------------------------- SECTION 4 - FIRE AND EXPLOSION HAZARD DATA (CONT.) - ------------------------------------------------------------------------------- SPECIAL FIRE FIGHTING PROCEDURES: = No special fire procedures needed. = Use normal procedures which include wearing NIOSH/MSHA approved self-contained breathing apparatus, flame and chemical resistant clothing, hats, boots and gloves. = If without risk, remove material from fire area. Cool metal and plastic containers with water from maximum distance. = Avoid any actions which cause dusting if possible, to prevent contact with skin and eyes. If unavoidable wear self-contained breathing apparatus. UNUSUAL FIRE AND EXPLOSIONS HAZARDS: Emits toxic fumes under fire conditions. =============================================================================== SECTION 5 - HEALTH DATA =============================================================================== A. TOXICITY: LD : Intraperitoneal-mouse: 7950 mg/kg 50 Intraperitoneal-rat: 240 mg/kg LC : Intraperitoneal-mouse: 2500 mg/kg 50 LD : Human: 500 mg/kg LO B. EFFECTS OF EXPOSURE ACUTE EFFECTS PRIMARY ROUTE OF ENTRY: Harmful if inhalation. INGESTION: May be harmful if swallowed. SKIN CONTACT: May be harmful if absorbed through skin. May cause skin irritation. EYE CONTACT: May cause eye irritation. INHALATION: Harmful if inhaled. Material may be irritating to mucous membranes and upper respiratory tract. OTHER: To the best of our knowledge, the chemical, physical, and toxicological properties have not been thoroughly investigated. MEDICAL CONDITIONS, IF ANY, AGGRAVATED BY THE CHEMICAL: None known other than those which could be aggravated by dust such as respiratory impairment. Persons with chronic respiratory disease may be at increased risk. CHRONIC EFFECTS INGESTION: None known SKIN CONTACT: Prolonged skin contact can produce a severe dermatitis called oxide pox. EYE CONTACT: None known INHALATION: Dust of fumes can irritate the respiratory tract. OTHER: Exposure to high levels of dust or fumes can cause metallic taste, marked thirst, coughing, fatigue, weakness, muscular pain and nausea, followed by fever and chills. Severe overexposure may result in bronchitis or pneumonia with a bluish tint to the skin. 28 NANOGARD(TM) ZINC OXIDE Page 3 of 4 - ------------------------------------------------------------------------------- SECTION 5 - HEALTH DATA (CONT.) - ------------------------------------------------------------------------------- THIS IS AN EXPERIMENTAL POWDER COMPRISED OF LOOSELY AGGREGATED ULTRA FINE NANOMETER SIZED PARTICLES. NO DATA YET EXISTS ON THE EFFECT OF SUCH FINE PARTICLE SIZES, PER SE, ON THE BODY. SPECIAL CARE SHOULD BE TAKEN TO AVOID INHALATION, INGESTION, SKIN CONTACT, AND EYE CONTACT. C. EMERGENCY AND FIRST AID PROCEDURES INGESTION: Wash out mouth with water, provided person is conscious. Call a physician. SKIN CONTACT: Remove contaminated clothing, wash skin clean promptly with soap and large amounts of water. EYE CONTACT: Immediately flush eyes, including under eyelids, with large amounts of water for at least 15 minutes. Call a physician if irritation persists. INHALATION: Remove to fresh air. If not breathing, give artificial respiration. If breathing is difficult, give oxygen. Call a physician. - ------------------------------------------------------------------------------- SECTION 6 - REACTIVITY - ------------------------------------------------------------------------------- INCOMPATIBILITY: Materials to avoid: strong oxidizing agents. Reacts violently with magnesium when heated resulting in an explosion. Mixtures of zinc oxide and chlorinated rubber explode when heated above 215 degrees C. HAZARDOUS DECOMPOSITION PRODUCTS: Not known CONDITIONS TO AVOID: Fire and incompatibles. STABILITY: Stable * Unstable --- --- Conditions to avoid: No data HAZARDOUS POLYMERIZATION: May occur Will not occur * --- --- Conditions to avoid: No data OTHER: No data - ------------------------------------------------------------------------------- SECTION 7 - ENVIRONMENTAL INFORMATION - ------------------------------------------------------------------------------- RCRA CODE: None TSCA REGISTERED: Yes SPILL AND LEAK PROCEDURES: = Wear suitable protective equipment as listed under Section 8. = Sweep up and containerize, and hold for waste disposal. Avoid raising dust. = Comply with the reporting requirements of all Federal, State and Local regulations. = Ventilate area and wash spill site after material pickup is complete. WASTE DISPOSAL: Consult state, local or federal EPA regulations for proper disposal. 29 NANOGARD(TM) ZINC OXIDE Page 4 of 4 - ------------------------------------------------------------------------------- SECTION 8 - PROTECTION INFORMATION - ------------------------------------------------------------------------------- VENTILATION REQUIREMENTS: Use with adequate ventilation to meet the exposure limits listed in Section 2. Where the exposure limit is or may be exceeded, use NIOSH approved respiratory protection. Select the appropriate dust respirator based on the actual or potential concentration of airborne dust from this product. Comply with all appropriate OSHA, EPA, state and local regulations. RESPIRATORY PROTECTION: High efficiency particle respirator PROTECTIVE GLOVES: Rubber or plastic EYE/FACE PROTECTION: ANSI approved safety goggles - ------------------------------------------------------------------------------- SECTION 9 - SPECIAL PRECAUTIONS - ------------------------------------------------------------------------------- HANDLING AND STORAGE: Handle in hoods or other well ventilated areas only. Take care not to cause airborne dust to be generated out side of ventilated areas. Keep container tightly closed and store in a cool, dry, well ventilated area. Wash thoroughly after use. Comply with all OSHA, EPA, State and local regulations. Magnesium violently reduces zinc oxide when heated, resulting in an explosion. Mixtures of chlorinated rubber and zinc oxide explode when heated above 215 degrees C. OTHER PRECAUTIONS: Have available: lab coats, aprons, flame and chemical resistant coveralls, high efficiency particle respirators, continuously-flushing eyewash, safety drench shower, hygienic facilities for washing. Use as appropriate to the task being performed or the situation being addressed. - ------------------------------------------------------------------------------- SECTION 10 - TRANSPORTATION INFORMATION - U.S. D.O.T. - ------------------------------------------------------------------------------- PER: 49 CFR 172.101 PROPER SHIPPING NAME: Not regulated HAZARD CLASSIFICATION: None UN NUMBER: None PACKING GROUP: None LABEL(S) REQUIRED: None - ------------------------------------------------------------------------------- SECTION 11 - COMMENTS - ------------------------------------------------------------------------------- The statements contained herein are offered for informational purposes only and are based on technical data that Nanophase Technologies Corporation believes to be accurate. It is intended for use only by persons having the necessary technical skill, and at their own discretion and risk. Since conditions and manner of use are outside our control, we make no warranty, express or implied, of merchantability, fitness or otherwise. EX-10.18 12 AMENDED & RESTATED SHAREHOLDERS AGREEMENT 1 EXHIBIT 10.18 AMENDED AND RESTATED SHAREHOLDERS' AGREEMENT Amended and Restated Shareholders' Agreement dated as of March 16, 1994 (the "Agreement") among Nanophase Technologies Corporation, an Illinois corporation (the "Company"), and the persons executing a counterpart of this Agreement listed as holders on the signature pages to this Agreement (the "Holders"). PRELIMINARY STATEMENT The Company and the Holders have previously entered into that certain Shareholders' Agreement dated as of November 21, 1991, as amended by a First Amendment to Shareholders' Agreement dated February 8, 1993 (collectively, the "Original Agreement"), which provides certain restrictions on the transfer of Shares of the Company now or hereafter issued, provides for certain agreements with respect to the management of the Company, and otherwise provides for certain matters regarding their relations as shareholders. Concurrently with the execution of this Agreement, the Company and the Holders propose to execute that certain Series D Preferred Stock Purchase Agreement (the "Series D Purchase Agreement") pursuant to which certain of the Holders will purchase additional securities of the Company. To induce the Holders to execute the Series D Purchase Agreement, the Company and the Holders agree to amend and restate the Original Agreement as follows. AGREEMENT 1. Definitions. Capitalized terms used in this Agreement and not otherwise defined are defined in the Series D Purchase Agreement. As used in this Agreement, the following terms shall have the following meanings: "BJW" means Batterson, Johnson & Wang, L.P., an Illinois limited partnership. "New Securities" means all equity securities (including debt securities convertible into equity securities, and debt securities issued in connection with the issuance of any equity securities or debt securities convertible into equity securities) issued by the Company after the date hereof, except (a) the Preferred, (b) the Conversion Stock, (c) securities offered to the public pursuant to a registered public offering, (d) securities issued in connection with the acquisition of another corporation by the Company through a merger, purchase by the Company of all or substantially all of the assets of such other corporation or other reorganization following which the Company owns not less than 51% of the voting stock of such other corporation, (e) securities of the Company issued in connection with any stock split, stock dividend or recapitalization of the Company, (f) up to 1,378,548 shares of Common which may be issued in the discretion of the Board to employees or directors of, or 2 consultants or advisors to, the Company, and options for the purchase of such shares of Common, and (g) Common issued upon exercise of the Warrants. "Preferred Holder" means any person or entity who holds any Shares of Preferred. "Shareholder" means any of the Holders, their respective permitted transferees, and any other person or entity who holds Shares subject to this Agreement. "Shares" means any shares of Common, including shares of Conversion Stock, and Preferred. As to any particular shares of stock, such shares shall cease to be Shares when they have been (a) effectively registered under the Securities Act and disposed of in accordance with the registration statement covering them or (b) distributed to the public through a broker, dealer or market maker pursuant to Rule 144 under the Securities Act (or any similar rule then in force). "Transfer" shall include any sale, assignment, negotiation, pledge, hypothecation, and all other dispositions of the Shares and all other events or transactions where a lien is created against the Shares. 2. Restrictions on Transfers of Shares. No current or future Shareholder shall Transfer any Shares owned by it or him except in accordance with the provisions of this Agreement. Any Transfer of Shares made in violation of this Agreement shall be void. 3. Election of Directors. (a) The Board shall consist of up to seven (7) members, composed as follows: (i) Two (2) members designated jointly by the holders of Common (excluding for this purpose any Conversion Stock), one of whom shall be (A) Robert Cross, or (B) if Robert Cross is not the President of the Company, the President of the Company; (ii) Three (3) members designated jointly by the Series C Preferred Holders; (iii) One (1) member designated jointly by each Holder who shall have purchased at least 750,000 shares of Series D Preferred pursuant to the Series D Purchase Agreement; and (iv) One (1) member unrelated to any of the Preferred Holders designated jointly by the members of the Board designated pursuant to clauses (i) and (ii) of this Section 3(a). The Shareholders agree that, so long as BJW continues to own Series D Preferred, the Shareholders shall use their best efforts to elect Leonard A. Batterson as Chairman of the Company. The persons appointed as directors pursuant to this Section 3 as of the execution of this Agreement are as set forth on the attached Exhibit A. 3 (b) In each case where the holders of Common, the Preferred Holders or Preferred Holders holding a designated class of Preferred shall have the right to designate a director or directors jointly, such right shall be exercised upon the vote or written consent of the holders of Common or the Preferred Holders acting as a class, as the case may be, holding a majority of the relevant class of Shares held by all of the holders of such class of Shares at the time such designation is to be made, provided that a holder of Common or a Preferred Holder shall not participate in the selection of directors as provided in this Section 3 from and after the time such holder of Common or Preferred Holder holds less than the sum of (i) 40% of the Preferred purchased by such Person pursuant to the Series B Purchase Agreement, plus (ii) 40% of the Preferred purchased by such Person pursuant to the Series C Purchase Agreement, plus (iii) 40% of the Preferred purchased by such Person pursuant to the Series D Purchase Agreement, plus (iv) 40% of the New Securities which such Person may be entitled to purchase pursuant to Section 6 below. (c) The parties agree to take all actions necessary to implement the provisions of this Section 3, including without limitation the voting of their shares of Common or Preferred, the execution of written consents, the calling of special meetings, the waiving of notice, and the attendance of meetings. All parties specifically agree that the provisions of this Section 3 constitute a voting agreement under Section 7.70 of the Illinois Business Corporation Act, and, in connection therewith, each party hereby grants the secretary of the Company an irrevocable proxy to cast all of such party's votes for directors selected in accordance with this Section 3. (d) The Company shall reimburse all reasonable expenses of the persons serving as directors pursuant to Section 3 hereof incurred in serving as directors attending any meetings of the Board or any committee thereof (whether such service and attendance is in person or by telephone), including (i) coach-class airfare for attendance at Board meetings by out-of-town directors, and (ii) reasonable expenses incurred in connection with the performance of other services on behalf of the Company for which prior approval has been received from the Board. (e) The Company will furnish each Preferred Holder holding, in the aggregate, at least 4 1/2% or more of the total Shares outstanding from time to time, with at least five days' prior written notice of each meeting of the Board, and such Holder or a Person designated by such Holder may attend any such meeting as an observer. The Company will also furnish each such Holder with copies of all actions of the Board taken without a meeting, whether by written consent or otherwise. Notwithstanding the foregoing, (i) such Holder or other Person shall agree to hold in confidence and trust as fiduciary all information furnished to or learned by such Holder or Person pursuant to this subsection (e), and (ii) the Company may exclude such Holder or other Person from any portion of any such meeting, and may decline to furnish any such information, to the extent that counsel to the Company deems necessary in order to protect the attorney-client privilege between the Company and its counsel. 4 4. Right of First Refusal. (a) Transfer Notice. Except as otherwise provided in Sections 5 and 8 below, if any Shareholder desires to Transfer all or any part of its Shares ("Sale Shares"), such Shareholder shall deliver written notice thereof to the Company and each other Shareholder specifying the number of Shares which such Shareholder desires to Transfer and the purchase price and other terms thereof (a "Transfer Notice"). The purchase price for the Sale Shares may be payable either in cash or in the form of an unsecured promissory note, and in no other medium of exchange or form. (b) Company Option. Upon the delivery of such Transfer Notice, the Company shall have an option, exercisable for twenty (20) days after the date of receipt of such Transfer Notice, to buy any or all of the shares of the Sale Shares from the Selling Shareholder at the price and on the terms set forth in the Transfer Notice. (c) Shareholder Option. If the Company does not exercise its option to buy all of the Sale Shares within such period, then each non-selling Shareholder shall have the right to purchase any or all of the remaining Sale Shares upon the terms set forth in the Transfer Notice, which right may be exercised by written notice (an "Exercise Notice") given to the Company and the selling Shareholder within fifteen (15) days after the date on which Company's option shall expire or, if earlier, the date on which the Company shall notify such non-selling Shareholders that the Company will not exercise its option under Section 4(b). In the event that the number of the Shares specified in the Exercise Notices exceed the number of Sale Shares, then each Shareholder delivering an Exercise Notice shall be entitled to purchase the percentage of Sale Shares obtained by dividing the number of shares of Common (treating each share of Preferred as though converted to Common) held by such Shareholder by the number of shares of Common (treating each share of Preferred as though converted to Common) held by all Shareholders delivering Exercise Notices. (d) Remaining Shares. (i) If the Company or the Company and the Shareholders do not elect to purchase any of the Sale Shares, then the selling Shareholder shall be free, for a period of ninety (90) days thereafter, to consummate the Transfer of the Sale Shares on terms no less favorable to itself than as set forth in the Transfer Notice. (ii) If the Company or the Company and the Shareholders together elect to purchase some, but not all, of the Sale Shares, then the Selling Shareholder shall have the option (A) to consummate the Transfer of the Sale Shares, as set forth in clause (i) above, as though the Company and the Shareholders had not elected to purchase any of the Sale Shares, or (B) to sell to the Company and the electing Shareholders as the case may be, the portion of Sale Shares elected by such parties, and Transfer the balance of such Sale Shares to the Transferee set forth in the Transfer Notice on the terms set forth therein. If the Transfer of the Sale Shares is not consummated within the ninety (90) day period referenced in clause (i) above, the provisions of this Section 4 shall once again apply to such Shares. 5 (iii) Notwithstanding clause (ii) above, if a Shareholder shall have elected to purchase not less than its Pro Rata Share (as defined below) of the Sale Shares in accordance with this Section 4, and shall have so notified the selling Shareholder in such Shareholder's Election Notice, the selling Shareholder shall be required to exercise the option set forth in clause (ii)(B) above with respect to the Pro Rata Share of such Shareholder. For purposes of this clause (iii), the term "Pro Rata Share" means the product of (A) the total number of Sale Shares, and (B) a fraction having a numerator equal to the number of Shares held by the Shareholder exercising its rights under this subsection (iii), and a denominator equal to the number of Shares held by all Shareholders (other than the selling Shareholder) as of the date of the Transfer Notice. (e) Mechanics of Sale. The sale of the Sale Shares (the "Sale Share Closing") to the Company, any electing Shareholders and third parties, as the case may be, shall occur at 10:00 a.m. central standard time, at the principal offices of the Company, on (i) the 20th business day following the expiration of the exercise period set forth in Section 4(c) above, if the Company or any Shareholders exercise their respective options for all of the Sale Shares, (ii) the day specified in the Transfer Notice (which is within the ninety (90) day period referenced in subsection (d)(i) above), if neither the Company nor any other Shareholders are party to the Sale Share Closing, or (iii) such other place or time (but not date) as the parties to the Sale Share Closing may mutually agree. At the Sale Share Closing, the purchasers shall respectively deliver the appropriate amount of consideration in the form set forth in the Transfer Notice, and the selling Shareholder shall deliver a certificate or certificates representing the Sale Shares, free and clear of all liens, claims or encumbrances whatsoever (other than those imposed by this Agreement). (f) Transferees Bound. In the event of any Transfer under this Section 4, the Shares so Transferred shall be subject to the provisions of this Agreement, and the persons acquiring the Shares shall, as a condition precedent to the acquisition of the Shares, execute a counterpart copy of this Agreement and agree to be bound thereby, and shall also pay any costs incurred by the Company as a result of such Transfer. 5. Permitted Transfers. Notwithstanding anything contained herein to the contrary, any Shareholder, without having complied with the provisions of Section 4 hereof, may Transfer any or all of the Shares standing in his or its name to or for the benefit of any of (i) in the case of a Shareholder who is a natural person, upon his death to his spouse, an immediate ancestor or descendant, or a trust created for the primary benefit of any of the foregoing permitted transferees (provided that such trust, if it provides for a secondary or contingent beneficiary, shall provide for a second or contingent beneficiary to whom a Transfer could have been made under this Section 5), or (ii) in the case of a Shareholder which is a corporation or partnership, and only to the extent permitted by applicable laws or regulations without registration of the Shares so Transferred, any affiliate of the Shareholder (which, for purposes of this Section 5 shall mean any Person controlled by, controlling, or under common control with such Shareholder), any general or limited partner of a Shareholder which is a partnership, or any person or entity holding capital stock entitling such person or entity to a vote for the election of directors of a Shareholder which is a corporation. In the event of any Transfer under this Section 5, the Shares so Transferred 6 shall be subject to the provisions of this Agreement, and the persons acquiring the Shares shall, as a condition precedent to the acquisition of the Shares, execute a counterpart copy of this Agreement and agree to be bound thereby, and shall also pay any costs incurred by the Company as a result of such Transfer. Any person to whom Shares may be Transferred pursuant to this Section 5 is referred to as a "Permitted Transferee". 6. Right of First Refusal - New Securities. (a) Meaning of "Preferred" and "Preferred Holder". For the purposes of this Section 6, the term "Preferred" shall be deemed to include (i) any Conversion Stock received on the exercise of the conversion right of the Preferred and the Warrants, and (ii) with respect to Richard Siegel, the number of shares of Common held by Siegel as of any time of determination of the number of outstanding shares of Preferred. (b) Grant of Right. Subject to Section 6(g) hereof, each Preferred Holder shall have the right (the "Right of First Refusal"), at such Preferred Holder's option, to purchase any New Securities that the Company may from time to time propose to sell and issue at the price and upon the general terms specified in the Notice of Intent (as defined below) regarding such New Securities and otherwise on the terms of this Section 6. (c) Corporation's Notice of Intent. If the Company proposes to issue and sell New Securities, the Company shall give each Preferred Holder written notice ("Notice of Intent") of such intention, describing the type of New Securities proposed and the price and general terms upon which the Company proposes to issue such New Securities. (d) Right of First Refusal - First Round. Each Preferred Holder shall have thirty (30) days from the date such Preferred Holder receives a Notice of Intent to agree, by written notice delivered to the Company within such thirty day period (a "New Securities Exercise Notice"), to purchase up to such Preferred Holder's "Pro Rata Share" of the New Securities described in such Notice of Intent. For purposes of this Section 6(d), the "Pro Rata Share" of each Preferred Holder shall be that percentage of the New Securities obtained by dividing the number of shares of Preferred held by such Preferred Holder by the total number of shares of Preferred held by all Preferred Holders. (e) Right of First Refusal - Second Round. If some but not all Preferred Holders deliver a New Securities Exercise Notice in which they elect to purchase their full pro rata share of such New Securities to the Company within the thirty (30) day period provided, then upon the completion of such thirty (30) day period the Company shall give each Preferred Holder who shall have delivered such a New Securities Exercise Notice (a "New Securities Purchaser") written notice (the "Remaining Shares Availability Notice") of the amount of New Securities remaining not committed to Preferred Holders hereunder (the "Remaining Shares"). Each New Securities Purchaser shall have ten (10) days from the date such New Securities Purchaser receives such Remaining Shares Notice to agree to purchase any or all of the Remaining Shares, which right shall be exercisable by written notice to the Company ("Remaining Shares Exercise Notice") delivered within such ten (10) day period (each New Securities Purchaser giving a Remaining Shares Exercise Notice shall be referred to herein as 7 a "Remaining Shares Purchaser"). In the event that the sum of the Remaining Shares specified in the Remaining Shares Exercise Notices received by the Company shall exceed the number of Remaining Shares, then each Remaining Shares Purchaser shall be entitled to purchase that percentage of Remaining Shares obtained by dividing the number of shares of Preferred held by such Remaining Shares Purchaser by the total number of shares of Preferred held by all Remaining Shares Purchasers. (f) Mechanics of Sales. The Rights of First Refusal of each Preferred Holder shall expire as to particular New Securities if such Preferred Holder shall not have delivered a New Securities Exercise Notice or Remaining Shares Exercise Notice, respectively, to the Company within the thirty (30) day period provided in Section 6(d) or the ten (10) day period provided in Section 6(e), respectively. In the event that Preferred Holders fail to agree to purchase all of a proposed issue of New Securities within the periods provided above, the Corporation may sell, or enter into a binding agreement to sell, any New Securities that the Preferred Holders have not agreed to purchase at a price and upon general terms no more favorable to the purchasers than those specified in the Notice of Intent with regard to such New Securities, at any time during (and only during) the 180 days following the expiration of the thirty (30) day period provided in Section 6(d) above or, if a Remaining Shares Notice was required as to such New Securities, the ten (10) day period provided in Section 6(e) above (provided, in the case of a binding agreement to sell, that the sale pursuant to such agreement is closed within ninety (90) days after the execution of such agreement). If not all of a proposed issue of New Securities is committed to be purchased, by Preferred Holders or others, within such 180-day period, the Company shall not be bound to sell any of such New Securities. The sale of any New Securities to Preferred Holders shall be closed at the same place as and simultaneously with the sale of such New Securities to any other purchasers or, if Preferred Holders are purchasing the entire issue of New Securities, at the principal office of the Company 45 days after Preferred Holders have agreed to buy all of such New Securities, or such other place or date as the parties to such transaction may mutually agree. (g) Going Public. The Rights of First Refusal created by this Section 6 shall terminate upon the consummation of the Company's Qualified Initial Public Offering. 7. Market Stand-Off. In connection with any underwritten public offering by the Company of its equity securities pursuant to an effective registration statement filed under the Securities Act, no Shareholder shall Transfer for value or otherwise agree to Transfer any Shares without the prior written consent of the Company or its underwriters, for such period of time beginning ninety (90) days prior to the anticipated effective date of such registration statement and continuing until one hundred twenty (120) days after the effective date of such registration statement. In order to enforce this Section 7, the Company may impose stop-transfer instructions with respect to the Shares until the end of the applicable stand-off period. 8 8. Other Agreements Concerning Shares. (a) At any time on or after December 1, 1997, but prior to December 1, 1999, Preferred Holders holding at least a majority of the Series C Preferred and the Series D Preferred then outstanding may, but shall not be obligated to, jointly (and not severally) give one (1) written notice (a "Put Notice") to the Company and to the other Series C Preferred Holders and Series D Preferred Holders not joining in the Put Notice offering to put to the Company, for the price, on the terms and conditions and otherwise in accordance with the provisions of this Section 8, all of the Series C Preferred Shares and Series D Preferred Shares owned by such Preferred Holders at the time of the Put Notice (the "Put Offer"). (b) Any holder of Series C Preferred or Series D Preferred not having joined in the Put Notice may, but shall not be obligated to, notify the Company of its desire to participate in the Put Offer with respect to such holder's Series C Preferred and Series D Preferred by delivering written notice to the Company on or before the 30th day following the date of the Put Notice. (c) The Company shall, within five (5) business days of the expiration of the thirty (30) day period referenced in (b) above, notify in writing all of the Series C Preferred and Series D Preferred Holders having elected to participate in the Put Offer of the time and date for the consummation of the initial purchase contemplated by the Put Offer, which shall be no later than the one hundred and eightieth (180th) day following the date on which the Company gives such written notice, which shall occur at the executive offices of the Company. At such time, the participating Preferred Holders shall deliver certificates representing all of their Series C Preferred and Series D Preferred free and clear of any and all liens, claims and encumbrances whatsoever, and the Company shall deliver to each participating Series C Preferred and Series D Preferred Holders the appropriate consideration therefor evidenced by the Company's promissory note in such amount payable to such Holder in three (3) equal annual installments on each of the first three anniversaries of the issuance of such note, together with interest on the outstanding principal balance of such note at the rate of 8% per annum calculated on the basis of a 365 day year, and payable annually as of each principal repayment date. (d) The purchase price to be paid by the Company for each share of Series C Preferred put to the Company pursuant to this Section 8 shall equal the price originally paid for such share, plus a deemed cumulative dividend of 8% per annum from the date of original purchase of the Series C Preferred through the date of repurchase specified above. The purchase price to be paid by the Company for each share of Series D Preferred put to the Company pursuant to this Section 8 shall equal the price originally paid for such share, plus a deemed cumulative dividend of 8% per annum from the date of original purchase of the Series D Preferred through the date of repurchase specified above. If the funds of the Corporation legally available therefor shall be insufficient to discharge the Company's obligation to consummate the Put Offer in full, funds to the extent legally available therefor shall be employed to purchase the maximum number of Series C Preferred Shares and Series D Preferred Shares that can be purchased with such funds, ratably from the Holders participating in such transaction in proportion to the preferential amounts each such Holder 9 would be entitled to receive pursuant to Article 4(B)3(a) of the Articles of Incorporation. Thereafter, the Company shall redeem shares of Series C Preferred and Series D Preferred from such Holders as funds become legally available therefor, ratably from such Holders in the proportions set forth in the preceding sentence, until all shares of Series C Preferred and Series D Preferred originally subject to the Put Offer shall have been purchased. (e) Each Shareholder, whether or not participating in the Put Offer, hereby agrees that, for purposes of any and all agreements to which it may be a party or by which it is bound, it shall be deemed to have consented to the consummation of the Put Offer so long as such transaction is initiated and consummated in accordance with all of the provisions of this Section 8. 9. General Proxy. (a) The Department hereby constitutes and appoints each Preferred Holder, as to such Preferred Holder's Pro Rata Proxy Share (defined below) of the Shares now or hereafter owned by the Department, as the Department's proxies, and hereby authorizes each Preferred Holder to represent it, as to such Shares, at all meetings of shareholders with all powers the Department would have if it were present, and to vote such Shares in all matters, submitted to the Shareholders of the Company for a vote. (b) The proxies granted to each Preferred Holder are coupled with an interest, and shall be irrevocable. Such proxies shall automatically expire on the sooner to occur of (i) an amendment to the Investment Act to allow the Department to exercise voting rights with respect to such Shares, or (ii) the Transfer by the Department of all of its Shares to any Person who is not prohibited from exercising voting rights as to such Shares. (c) For purposes of this Section 9, the term "Pro Rata Proxy Share" means, as to any Preferred Holder, the product of (A) the total number of Shares held by the Department as of any time of determination, and (B) a fraction having a numerator equal to the number of Shares held by such Preferred Holder, and a denominator equal to the number of Shares held by all Preferred Holders (other than the Department) as of the time of determination. 10. Legend. So long as this Agreement shall remain in force, all certificates now or hereafter representing the Shares shall bear the following legend: "The shares of stock which are evidenced by this certificate may not be sold, transferred, pledged or otherwise disposed of by the registered owner thereof, and no votes may be cast or consents given on behalf thereof, except in accordance with and subject to the terms and conditions of an Amended and Restated Shareholders' Agreement dated as of March 16, 1994, among the corporation and the stockholders thereof, a copy of which Agreement is on deposit with the Secretary of the corporation. No transfer of such Shares shall be effective unless made in accordance with such Agreement, and each holder of this certificate agrees to be bound by such Agreement." 10 When the restrictions on transfer imposed by this Agreement shall terminate, any Shareholder shall be entitled to receive from the Company, upon surrender of their existing certificates representing such Shares, without cost or expense, one or more new certificates representing such Shareholder's Shares not bearing the above legend. 11. Stock Dividends. If a stock dividend of shares of the same or a different class as the Shares is paid, or if the Shares of any portion thereof are exchanged for Shares of stock of the Company of a different class or for voting trust certificates evidencing the beneficial interest possessed in said shares or if any other event (such as a stock split, reclassification, or similar event) shall occur so that the shareholders of the Company shall receive additional or replacement shares of stock of the Company (whether of the same or different class), then such stock of the same or a different class, or such voting trust certificates, as the case may be, shall thereupon become subject to the provisions of this Agreement upon the same terms and conditions as the Shares originally covered by this Agreement. 12. Only Record Holder Entitled to be Recognized. Only the record holder of Shares shall be entitled to receive dividends or to exercise any other right as a Shareholder, and the mere existence or exercise of any option hereunder shall not give the party holding or exercising such option any rights as a Shareholder prior to the time that a stock certificate has been duly issued to it by the Company or otherwise delivered to it by the transferring Shareholder in accordance with this Agreement. 13. Termination. This Agreement and all restrictions on the transfer of Shares created hereby shall terminate upon the completion of the Company's Qualified Initial Public Offering, and shall not apply to any shares sold in the Company's Qualified Initial Public Offering (provided that the market stand-off provisions of Section 7 shall remain in full force and effect as set forth in such Section). The termination of this Agreement for any reason shall not affect any right or remedy existing hereunder prior to the effective date of termination hereof. 14. Enforcement Costs. In any instance wherein any party hereto is required to take legal action to enforce the provisions hereof, the prevailing party shall be entitled to recover, in addition to all other damages allowed at law or in equity, all costs and expenses, including reasonable attorneys' fees, incurred in enforcing the provisions hereof. 15. Notices. All notices which may or are to be given hereunder shall be effective when received, shall be in writing and shall be given by hand delivery, sent by telecopy or facsimile transmission, confirmed by the recipient, or sent by certified or registered mail, postage prepaid, return receipt requested, to the party at such party's address as set forth below: 11 If to the Company: Nanophase Technologies Corporation 8205 S. Cass Avenue, Suite 105 Darien, Illinois 60559 Attention: President Telecopy: (708) 963-0317 with a copy to: Mr. Bruce A. Zivian Fitzpatrick Law Offices 20 North Wacker Drive, Suite 2200 Chicago, Illinois 60606 Telecopy: (312) 704-6841 If to a Shareholder, to the address of such Shareholder shown on the books of the Company. Any party may change his address for notices by a notice given in accordance with the provisions hereof. 16. Governing Law. This Agreement has been entered into in the State of Illinois and shall be governed by and construed in accordance with the laws thereof. 17. Severability. If any provision of this Agreement, or its application to any person or circumstance, is invalid or unenforceable, then the remainder of this Agreement or the application of such provision to other persons or circumstances shall not be affected thereby. 18. Successors and Assigns. This Agreement is binding upon and inures to the benefit of the Company, its successors and assigns, and the Shareholders, their successors and assigns, respective heirs, and personal representatives. 19. Entire Agreement. This instrument contains the entire agreement among the parties with respect to the transactions set forth herein and there are no terms or agreements between the parties not contained herein. This Agreement may be modified only by an instrument in writing signed by the then parties hereto. 20. Counterparts. This Agreement may be executed in two or more counterparts, each which shall be deemed an original but all of which shall together constitute one and the same instrument. 21. Remedies. Each of the parties confirms that damages at law may not be an adequate remedy for a breach or threatened breach of this Agreement, and agrees that in the event of a breach or threatened breach of any of the provisions hereof, the respective rights and obligations of the parties hereunder shall be enforceable by specific performance, 12 injunction or other equitable remedy. Nothing contained in this Section 10.14 shall limit any party's right to seek or obtain any and all remedies available to such party, whether at law, by statute or otherwise. 22. Amendment and Waiver. This Agreement may be amended, the performance of any provision may be waived, and any action hereunder may be consented to, only by a written agreement of (a) the Company, and (b) the Holders of a majority of the outstanding Common, and (c) the holders of at least sixty percent (60%) of the Preferred (treating each share of Preferred as though converted to Common for this purpose). Notwithstanding the foregoing, no amendment shall confer any greater rights, or impose any additional restrictions, on any shares of Preferred as compared to any other shares of Preferred, or on any shares of Common as compared to any other shares of Common, or on any Shareholder as compared to any other Shareholder, without the prior written consent of all of the parties to this Agreement. 23. Terms. As used in this Agreement, all pronouns and any variations thereof and all defined terms shall be deemed to refer to the masculine, feminine, neuter, singular or plural, and all references to a Shareholder shall be deemed to refer to the transferee of the Shares of such Shareholder, other than the Company, or to the transferee of a transferee, other than the Company, as the identity of the person, persons or entity or the context may require. END OF TEXT ************************** 13 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed on the day first above written. The Company: NANOPHASE TECHNOLOGIES CORPORATION, an Illinois corporation By /s/ Robert Cross --------------------------------- Its President Holders: ARCH VENTURE FUND LIMITED PARTNERSHIP, a Delaware limited partnership By: ARCH Development Corporation, an Illinois not-for-profit corporation, its General Partner By: /s/ Steve Lazarus ------------------------------------- Its President --------------------------- ARCH VENTURE FUND II, L.P., a Delaware limited partnership By: ARCH MANAGEMENT PARTNERS II, L.P. a Delaware limited partnership, its general partner By: ARCH Venture Partners, L.P., a Delaware limited partnership, its general partner By: Lifework, Inc., an Illinois corporation, its general partner By: /s/ Steve Lazarus ------------------- Its Managing Director BATTERSON, JOHNSON & WANG, L.P., a Delaware limited partnership By: /s/ Leonard Batterson ---------------------------------- Leonard A. Batterson, its Managing General Partner 14 UVCC FUND II, a Delaware general partnership By: Arete Venture Management Associates II, L.P. its Managing General By: Arete Ventures, Inc., a Maryland corporation, its general partner By: /s/ Robert W. Shaw ------------------------------ Robert W. Shaw, Jr., President UVCC II PARALLEL FUND, L.P., a Delaware limited partnership By: Arete Ventures L.P. III, General Partner By: Arete Ventures, Inc., a Maryland corporation, its general partner By: /s/ Robert W. Shaw ------------------------------ Robert W. Shaw, Jr., President THE COLUMBINE VENTURE FUND II, a Delaware partnership By: Columbine Venture Management II, its general partner By: /s/ SIGNATURE ----------------------------- Its General Partner ADVANCE MATERIAL TECHNOLOGIES VENTURE PARTNER LIMITED, a Delaware partnership By: /s/ Tom Delimitros ------------------------------------ Tom H. Delimitros, a General Partner 15 JHAM LIMITED PARTNERSHIP, a Delaware partnership By: /s/ Tom Delimitros ------------------------------------ Tom H. Delimitros, a General Partner AMT CAPITAL, LTD., a Delaware corporation By: AMT Capital, Inc., its general partner By: /s/ Tom Delimitros --------------------------------------- Tom H. Delimitros, President ILLINOIS DEPARTMENT OF COMMERCE AND COMMUNITY AFFAIRS By: /s/ SIGNATURE --------------------- Its Director /s/ Richard W. Siegel ----------------------- RICHARD W. SIEGEL 16 EXHIBIT A AMENDED AND RESTATED SHAREHOLDERS' AGREEMENT Section 3(a)(i) Directors: Steven Lazarus Robert Cross Section 3(a)(ii) Directors: Leonard Batterson Robert Shaw, Jr. Richard Siegel Section 3(a)(iii) Directors: None Section 3(a)(iv) Directors: None 17 FIRST AMENDMENT TO AMENDED AND RESTATED SHAREHOLDERS' AGREEMENT First Amendment to Amended and Restated Shareholders' Agreement dated as of October 31, 1994 (this "AMENDMENT"), among NANOPHASE TECHNOLOGIES CORPORATION, an Illinois corporation (the "COMPANY"), and the persons executing a counterpart of this Amendment listed as holders on the signature pages to this Amendment (the "HOLDERS"). PRELIMINARY STATEMENT The Company and the Holders have previously entered into that certain Amended and Restated Shareholders' Agreement dated as of March 16, 1994 (the "SHAREHOLDERS' AGREEMENT"). Concurrently with the execution of this Amendment, the Company, the Holders and certain other parties have executed a Series D Preferred Stock Purchase Agreement (the "SERIES D PURCHASE AGREEMENT") pursuant to which the Holders and such other parties are purchasing additional securities of the Company. To induce the Holders and such other parties to execute the Series D Purchase Agreement, the Company and the Holders agree as follows. AGREEMENT 1. Amendments. The Company and the Holders agree that: (a) The second paragraph of the Preliminary Statement of the Shareholders' Agreement is deleted and replaced as follows: "The Company and the Holders have previously executed that certain Series D Preferred Stock Purchase Agreement dated March 16, 1994 (the "PRIOR SERIES D PURCHASE AGREEMENT"), and propose to enter into an additional Series D Preferred Stock Purchase Agreement dated as of October 31, 1994 (the "CURRENT SERIES D PURCHASE AGREEMENT") pursuant to which certain parties will purchase additional securities of the Company."; and (b) The first sentence of Section 1 of the Shareholders' Agreement is deleted and replaced as follows: "Capitalized terms used in this Agreement and not otherwise defined are defined in the Current Series D Purchase Agreement."; (c) The reference in subsection (f) of the definition of "New Securities" to "1,378,548" in the Shareholders' Agreement is hereby deleted and replaced with "1,968,500"; and (d) The following phrase is inserted in Section 10 of the Shareholders' Agreement after the phrase "March 16, 1994,": "... as amended pursuant to a First Amendment to Amended and Restated Shareholders' Agreement dated as of October 31, 1994,". 18 2. Continuing Effect. Except as otherwise specifically provided in this Amendment, the Shareholders' Agreement shall remain in full force and effect in accordance with its terms. This Amendment may be executed in multiple counterparts, all of which shall constitute one and the same instrument. END OF TEXT ******************* -2- 19 IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to Amended and Restated Shareholders' Agreement to be executed on the day first above written. The Company: NANOPHASE TECHNOLOGIES CORPORATION, an Illinois corporation By /s/ Robert Cross ------------------------------- Its President Holders: ARCH VENTURE FUND LIMITED PARTNERSHIP, a Delaware limited partnership By: ARCH Development Corporation an Illinois not-for-profit corporation, its General Partner By: /s/ Steve Lazarus ----------------------------- Its ----------------------------- ARCH VENTURE FUND II, L.P., a Delaware limited partnership By: ARCH MANAGEMENT PARTNERS II, L.P. a Delaware limited partnership, its general partner By: ARCH Venture Partners, L.P., a Delaware limited partnership, its general partner By: Lifework, Inc., an Illinois corporation, its general partner By: /s/ Steve Lazarus ----------------------------- Its Managing Director BATTERSON, JOHNSON & WANG, L.P., a Delaware limited partnership By: /s/ Leonard Batterson ---------------------------------- Leonard A. Batterson, its Managing General Partner -3- 20 THE COLUMBINE VENTURE FUND II, a Delaware partnership By: Columbine Venture Management II, its General Partner By: /s/ SIGNATURE --------------------------- Its ------------------------ UVCC FUND II, a Delaware general partnership By: Arete Venture Management Associates II, L.P., its Managing General By: Arete Ventures, Inc., a Maryland corporation, its general partner By: /s/ Robert W. Shaw ------------------------------ Robert W. Shaw, Jr., President UVCC II PARALLEL FUND, L.P., a Delaware limited partnership By: Arete Ventures L.P. III, General Partner By: Arete Ventures, Inc., a Maryland corporation, its general partner By: /s/ Robert W. Shaw ------------------------------ Robert W. Shaw, Jr., President -4- 21 ADVANCE MATERIAL TECHNOLOGIES VENTURE PARTNER LIMITED, a Delaware partnership By: /s/ Tom Delimitros --------------------------- A General Partner JHAM LIMITED PARTNERSHIP, a Delaware limited partnership By: /s/ Tom Delimitros --------------------------- A General Partner AMT CAPITAL, LTD., a Delaware corporation By: AMT Capital, Inc., its general partner By: /s/ Tom Delimitros ---------------------------- Tom H. Delimitros, President ILLINOIS DEPARTMENT OF COMMERCE AND COMMUNITY AFFAIRS By: /s/ SIGNATURE ------------------------------ Its Director /s/ Richard W. Siegel ------------------------------------- Richard W. Siegel -5- 22 SECOND AMENDMENT TO AMENDED AND RESTATED SHAREHOLDERS' AGREEMENT Second Amendment to Amended and Restated Shareholders' Agreement dated as of November 7, 1995 (this "AMENDMENT"), among NANOPHASE TECHNOLOGIES CORPORATION, an Illinois corporation (the "COMPANY"), and the persons executing a counterpart of this Amendment listed as holders on the signature pages to this Amendment (the "HOLDERS"). PRELIMINARY STATEMENT The Company and the Holders have previously entered into that certain Amended and Restated Shareholders' Agreement dated as of March 16, 1994 (the "AGREEMENT"), as amended pursuant to that certain First Amendment to Amended and Restated Shareholders' Agreement dated as of October 31, 1994 (the "FIRST AMENDMENT", and, together with the Agreement, the "SHAREHOLDERS' AGREEMENT"). Concurrently with the execution of this Amendment, the Company, the Holders and certain other parties have executed a Series D Preferred Stock Purchase Agreement (the "SERIES D PURCHASE AGREEMENT") pursuant to which the Holders and such other parties are purchasing additional securities of the Company. To induce the Holders and such other parties to execute the Series D Purchase Agreement, the Company and the Holders agree as follows. AGREEMENT 1. Amendments. The Company and the Holders agree that: (a) The second paragraph of the Preliminary Statement of the Shareholders' Agreement is deleted and replaced as follows: "The Company and the Holders have previously executed that certain Series D Preferred Stock Purchase Agreement dated October 31, 1994, (the "PRIOR SERIES D PURCHASE AGREEMENT"), and propose to enter into an additional Series D Preferred Stock Purchase Agreement dated as of November 7, 1995 (the "CURRENT SERIES D PURCHASE AGREEMENT") pursuant to which certain parties will purchase additional securities of the Company."; and (b) The first sentence of Section 1 of the Shareholders' Agreement is deleted and replaced as follows: "Capitalized terms used in this Agreement and not otherwise defined are defined in the Current Series D Purchase Agreement."; (c) The reference in subsection (f) of the definition of "New Securities" to "1,968,500" in the Shareholders' Agreement is hereby deleted and replaced with "up to 2,753,805 (such number subject to ratification and confirmation by the Board)"; and 23 (d) The following phrase is inserted in Section 10 of the Shareholders' Agreement after the phrase "October 31, 1994,": "... and as further amended pursuant to a Second Amended and Restated Shareholders' Agreement dated as of November 7, 1995,". 2. Continuing Effect. Except as otherwise specifically provided in this Amendment, the Shareholders' Agreement shall remain in full force and effect in accordance with its terms. This Amendment may be executed in multiple counterparts, all of which shall constitute one and the same instrument. END OF TEXT ******************* -2- 24 IN WITNESS WHEREOF, the parties hereto have caused this Second Amendment to Amended and Restated Shareholders' Agreement to be executed on the day first above written. The Company: NANOPHASE TECHNOLOGIES CORPORATION, an Illinois corporation By /s/ Robert Cross ---------------------------- Its President Holders: ARCH VENTURE FUND LIMITED PARTNERSHIP, a Delaware limited partnership By: ARCH Development Corporation an Illinois not-for-profit corporation, its General Partner By: /s/ Steve Lazarus ------------------------------ Its ________________________ ARCH VENTURE FUND II, L.P., a Delaware limited partnership By: ARCH MANAGEMENT PARTNERS II, L.P. a Delaware limited partnership, its general partner By: ARCH Venture Partners, L.P., a Delaware limited partnership, its general partner By: ARCH Venture Corporation, an Illinois corporation, its general partner By: /s/ Steve Lazarus ----------------------- Its Managing Director BATTERSON, JOHNSON & WANG, L.P., a Delaware limited partnership By: /s/ Leonard A. Batterson ---------------------------------- Leonard A. Batterson, its Managing General Partner -3- 25 THE COLUMBINE VENTURE FUND II, a Delaware partnership By: Columbine Venture Management II, its General Partner By: /s/ SIGNATURE --------------------------- Its _____________________ UVCC FUND II, a Delaware general partnership By: Arete Venture Management Associates II, L.P., its Managing General By: Arete Ventures, Inc., a Maryland corporation, its general partner By: /s/ Robert W. Shaw ---------------------------------- Robert W. Shaw, Jr., President UVCC II PARALLEL FUND, L.P., a Delaware limited partnership By: Arete Ventures L.P. III, General Partner By: Arete Ventures, Inc., a Maryland corporation, its general partner By:/s/ Robert W. Shaw ---------------------------------- Robert W. Shaw, Jr., President ADVANCE MATERIAL TECHNOLOGIES VENTURE PARTNER LIMITED, a Delaware partnership By: /s/ Tom Delimitros --------------------------------- A General Partner -4- 26 JHAM LIMITED PARTNERSHIP, a Delaware limited partnership By: /s/ Tom Delimitros ---------------------------- A General Partner AMT CAPITAL, LTD., a Delaware corporation By: AMT Capital, Inc., its general partner By: /s/ Tom H. Delimitros ----------------------------------- Tom H. Delimitros, President ILLINOIS DEPARTMENT OF COMMERCE AND COMMUNITY AFFAIRS By: /s/ SIGNATURE -------------------------------- Its Director /s/ Richard W. Siegel ------------------------------------ RICHARD W. SIEGEL HARRIS & HARRIS GROUP, INC., a New York corporation By: /s/ SIGNATURE ---------------------------------- Its: --------------------------------- GRACE INVESTMENTS, LTD., an Illinois limited partnership By: /s/ SIGNATURE ----------------------------------- Its: ---------------------------------- -5- 27 THIRD AMENDMENT TO AMENDED AND RESTATED SHAREHOLDERS' AGREEMENT Third Amendment to Amended and Restated Shareholders' Agreement dated as of April 22, 1996 (this "Amendment"), among NANOPHASE TECHNOLOGIES CORPORATION, an Illinois corporation (the "Company"), and the persons executing a counterpart of this Amendment listed as holders on the signature pages to this Amendment (the "Holders"). PRELIMINARY STATEMENT The Company and the Holders have previously entered into that certain Amended and Restated Shareholders' Agreement dated as of March 16, 1994 (the "Agreement"), as amended pursuant to that certain First Amendment to Amended and Restated Shareholders' Agreement dated as of October 31, 1994 (the "First Amendment") and that certain Second Amendment to Amended and Restated Shareholders' Agreement dated as of November 7, 1995 (the "Second Amendment", and together with the First Amendment and the Agreement, the "Shareholders' Agreement"). Concurrently with the execution of this Amendment, the Company and certain investors (the "Investors") have executed a Series E Purchase Agreement (the "Series E Purchase Agreement") pursuant to which the Investors are purchasing securities of the Company. To induce the Investors to execute the Series E Purchase Agreement, the Company and the Holders agree as follows. AGREEMENT 1. Amendments. The Company and the Holders agree that: (a) The phrase "2,753,805 shares of Common" in subsection (f) of the definition of "New Securities" in the Shareholders' Agreement is hereby deleted and replaced with the phrase "3,563,440 shares of Common (which number is subject to ratification and confirmation by the Board)"; (b) The following phrase is inserted in Section 10 of the Shareholders' Agreement after the phrase "November 7, 1995,": "and as further amended pursuant to a Third Amendment to Amended and Restated Shareholders' Agreement dated as of April 22, 1996"; and (c) The address of the Company in Section 15 of the Shareholders' Agreement is hereby amended and restated to read in its entirety as follows: Nanophase Technologies Corporation 453 Commerce Street Burr Ridge, Illinois 60521 Telecopy: (708) 323-1221 28 2. Continuing Effect. Except as otherwise specifically provided in this Amendment, the Shareholders' Agreement shall remain in full force and effect in accordance with its terms. This Amendment may be executed in multiple counterparts, all of which shall constitute one and the same instrument. END OF TEXT ******************* 29 IN WITNESS WHEREOF, the parties hereto have caused this Third Amendment to Amended and Restated Shareholders' Agreement to be executed on the day first above written. The Company: NANOPHASE TECHNOLOGIES CORPORATION, an Illinois corporation By /s/ Robert Cross --------------------------- Its President Holders: ARCH VENTURE FUND LIMITED PARTNERSHIP, a Delaware limited partnership By: ARCH Development Corporation an Illinois not-for-profit corporation, its General Partner By: /s/ Steve Lazarus ------------------------------ Its ------------------------ ARCH VENTURE FUND II, L.P., a Delaware limited partnership By: ARCH MANAGEMENT PARTNERS II, L.P. a Delaware limited partnership, its general partner By: ARCH Venture Partners, L.P., a Delaware limited partnership, its general partner By: ARCH Venture Corporation, an Illinois corporation, its general partner By: /s/ Steve Lazarus ----------------------- Its Managing Director 30 ARCH II PARALLEL FUND, L.P., a Delaware limited partnership By: ARCH MANAGEMENT PARTNERS II, L.P. a Delaware limited partnership, its general partner By: ARCH Venture Partners, L.P., a Delaware limited partnership, its general partner By: ARCH Venture Corporation, an Illinois corporation, its general partner By: /s/ Steve Lazarus ------------------------------ Its Managing Director BATTERSON, JOHNSON & WANG, L.P., a Delaware limited partnership By: /s/ Leonard A. Batterson ------------------------------------ Leonard A. Batterson, its Managing General Partner THE COLUMBINE VENTURE FUND II, a Delaware partnership By: Columbine Venture Management II, its General Partner By: /s/ SIGNATURE ----------------------------- Its ------------------------ UVCC FUND II, a Delaware general partnership By: Arete Venture Management Associates II, L.P., its Managing General By: Arete Ventures, Inc., a Maryland corporation, its general partner By: /s/ Robert Shaw --------------------------------- Robert W. Shaw, Jr., President 31 UVCC II PARALLEL FUND, L.P., a Delaware limited partnership By: Arete Ventures L.P. III, General Partner By: Arete Ventures, Inc., a Maryland corporation, its general partner By: /s/ Robert Shaw -------------------------------- Robert W. Shaw, Jr., President ADVANCE MATERIAL TECHNOLOGIES VENTURE PARTNER LIMITED, a Delaware partnership By: /s/ Tom Delimitros ----------------------------- A General Partner JHAM LIMITED PARTNERSHIP, a Delaware limited partnership By: /s/ Tom Delimitros ----------------------------- A General Partner AMT CAPITAL, LTD., a Delaware corporation By: AMT Capital, Inc., its general partner By: /s/ Tom Delimitros ---------------------------------- Tom H. Delimitros, President ILLINOIS DEPARTMENT OF COMMERCE AND COMMUNITY AFFAIRS By: /s/ SIGNATURE ------------------------------- Its Director /s/ Richard Siegel -------------------------------- RICHARD W. SIEGEL 32 HARRIS & HARRIS GROUP, INC., a New York corporation By: /s/ SIGNATURE ----------------------------------- Its: ----------------------------------- GRACE INVESTMENTS, LTD., an Illinois limited partnership By: /s/ SIGNATURE ----------------------------------- Its: ----------------------------------- 33 FOURTH AMENDMENT TO AMENDED AND RESTATED SHAREHOLDERS' AGREEMENT Fourth Amendment to Amended and Restated Shareholders' Agreement dated as of June 30, 1997 (this "AMENDMENT"), among NANOPHASE TECHNOLOGIES CORPORATION, an Illinois corporation (the "COMPANY"), and the persons executing a counterpart of this Amendment listed as holders on the signature pages to this Amendment (the "HOLDERS"). PRELIMINARY STATEMENT The Company and the Holders have previously entered into that certain Amended and Restated Shareholders' Agreement dated as of March 16, 1994 (the "AGREEMENT"), as amended pursuant to that certain First Amendment to Amended and Restated Shareholders' Agreement dated as of October 31, 1994 (the "FIRST AMENDMENT"), that certain Second Amendment to Amended and Restated Shareholders' Agreement dated as of November 7, 1995 (the "SECOND AMENDMENT"), and that certain Third Amendment to Amended and Restated Shareholders' Agreement dated as of April 22, 1996 (the "THIRD AMENDMENT", and together with the Second Amendment, the First Amendment and the Agreement, the "SHAREHOLDERS' AGREEMENT"). Concurrently with the execution of this Amendment, the Company and certain investors (the "INVESTORS") have executed a Series F Purchase Agreement (the "SERIES F PURCHASE AGREEMENT") pursuant to which the Investors are purchasing securities of the Company. To induce the Investors to execute the Series F Purchase Agreement, the Company and the Holders agree as follows. AGREEMENT 1. Amendments. The Company and the Holders agree that: (a) Section 7 of the Shareholders' Agreement is amended and restated in its entirety to read as follows: "7. Market Stand-Off. In connection with any underwritten public offering by the Company of its equity securities pursuant to an effective registration statement filed under the Securities Act, no Shareholder shall Transfer for value or otherwise agree to Transfer any Shares without the prior written consent of the Company or its underwriters, for such period of time beginning thirty (30) days prior to the anticipated effective date of such registration statement and continuing until one hundred eighty (180) days after the effective date of such registration statement. In order to enforce this Section 7, the Company may impose stop-transfer instructions with respect to the Shares until the end of the applicable stand-off period." (b) The following phrase is inserted in Section 10 of the Shareholders' Agreement after the phrase "April 22, 1996": "and as further amended pursuant to a Fourth Amendment to Amended and Restated Shareholders' Agreement dated as of June 30, 1997"; and 34 (c) The address of the Company in Section 15 of the Shareholders' Agreement is hereby amended and restated to read in its entirety as follows: Nanophase Technologies Corporation 453 Commerce Street Burr Ridge, Illinois 60521 Telecopy: (630) 323-1221 2. Continuing Effect. Except as otherwise specifically provided in this Amendment, the Shareholders' Agreement shall remain in full force and effect in accordance with its terms. This Amendment may be executed in multiple counterparts, all of which shall constitute one and the same instrument. END OF TEXT ******************* 35 IN WITNESS WHEREOF, the parties hereto have caused this Fourth Amendment to Amended and Restated Shareholders' Agreement to be executed on the day first above written. The Company: NANOPHASE TECHNOLOGIES CORPORATION, an Illinois corporation By /s/ Robert Cross ------------------------------ Its President Holders: ARCH VENTURE FUND LIMITED PARTNERSHIP, a Delaware limited partnership By: ARCH Development Corporation an Illinois not-for-profit corporation, its General Partner By: /s/ Steve Lazarus ----------------------- Its ----------------------- ARCH VENTURE FUND II, L.P., a Delaware limited partnership By: ARCH MANAGEMENT PARTNERS II, L.P. a Delaware limited partnership, its general partner By: ARCH Venture Partners, L.P., a Delaware limited partnership, its general partner By: ARCH Venture Corporation, an Illinois corporation, its general partner By: /s/ Steve Lazarus --------------------- Its Managing Director ARCH II PARALLEL FUND, L.P., a Delaware limited partnership By: ARCH MANAGEMENT PARTNERS II, L.P. a Delaware limited partnership, its general partner By: ARCH Venture Partners, L.P., a Delaware limited partnership, its general partner By: ARCH Venture Corporation, an Illinois corporation, its general partner By: /s/ Steve Lazarus --------------------------- Its Managing Director 36 BATTERSON, JOHNSON & WANG, L.P., a Delaware limited partnership By: /s/ Leonard Batterson ---------------------------- Leonard A. Batterson, its Managing General Partner THE COLUMBINE VENTURE FUND II, a Delaware partnership By: Columbine Venture Management II, its General Partner By: /s/ Leonard Batterson ------------------------ Its --------------------- UVCC FUND II, a Delaware general partnership By: ARETE VENTURE MANAGEMENT ASSOCIATES II, L.P., its Managing General Partner By: /s/ Robert Shaw --------------------- Robert W. Shaw, Jr. General Partner UVCC II PARALLEL FUND, L.P., a Delaware limited partnership By: ARETE VENTURES L.P. III, its General Partner By: /s/ Robert Shaw --------------------- Robert W. Shaw, Jr. General Partner ADVANCE MATERIAL TECHNOLOGIES VENTURE PARTNER LIMITED, a Delaware partnership By: /s/ Tom Delimitros ----------------------- A General Partner 37 JHAM LIMITED PARTNERSHIP, a Delaware limited partnership By: /s/ Tom Delimitros -------------------------- A General Partner AMT CAPITAL, LTD., a Delaware corporation By: AMT Capital, Inc., its general partner By: /s/ Tom Delimitros ---------------------- Tom H. Delimitros, President ILLINOIS DEPARTMENT OF COMMERCE AND COMMUNITY AFFAIRS By: /s/ SIGNATURE ----------------------- Its Director /s/ Richard Siegel -------------------------- RICHARD W. SIEGEL HARRIS & HARRIS GROUP, INC., a New York corporation By: /s/ SIGNATURE --------------------- Its: --------------------- GRACE INVESTMENTS, LTD., an Illinois limited partnership By: /s/ SIGNATURE --------------------- Its: --------------------- EX-11 13 STATEMENT RE: COMPUTATION OF LOSS 1 EXHIBIT 11 STATEMENT REGARDING COMPUTATION OF LOSS PER SHARE
YEAR ENDED NINE MONTHS ENDED DECEMBER 31 SEPTEMBER 30 ------------------------------------------- --------------------------------- 1994 1995 1996 1996 1997 (Unaudited) HISTORICAL: Weighted average common shares outstanding 77,586 77,586 77,586 77,586 77,586 Net effect of dilutive stock options based on the treasury method 476,712 476,712 476,712 476,712 476,712 ----------- ---------- ----------- ----------- ----------- Total 554,298 554,298 554,298 554,298 554,298 Net loss $(1,287,772) $(1,959,874) $(5,577,688) $<4,218,092> $<3,304,416> Net income (loss) per common share $ (2.32) $ (3.54) $ (10.06) $ (7.61) $ (5.96) YEAR ENDED NINE MONTHS ENDED DECEMBER 31, 1996 SEPTEMBER 30,1997 ----------------- ------------------- PRO FORMA: Weighted average common shares outstanding 77,586 77,586 Weighted average preferred shares outstanding 6,758,094 7,585,514 Net effect of dilutive stock options based on the treasury method 476,712 476,712 ----------- ----------- Total 7,312,392 8,139,812 Net income (loss) $(5,577,688) $(3,304,416) Pro forma net loss per share $ (.76) $ (.41)
EX-23.1 14 CONSENT OF INDEPENDENT AUDITORS 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" and to the use of our report dated October 24, 1997 in Amendment No. 1 to the Registration Statement (Form S-1 File No. 333-36937) and related Prospectus of Nanophase Technologies Corporation dated November 4, 1997 for the sale of 5,000,000 shares of its Common Stock. /s/ ERNST & YOUNG LLP Ernst & Young LLP Chicago, Illinois November 3, 1997 EX-23.3 15 CONSENT OF MCANDREWS, HELD 1 EXHIBIT 23.3 [LETTERHEAD OF MCANDREWS, HELD & MALLOY, LTD.] November 3, 1997 Robert W. Cross, President and Chief Executive Officer Nanophase Technologies Corporation 453 Commerce Street Burr Ridge, Illinois 60521 Re: Form S-1 Registration Statement Our File Nanophase/71297 We hereby consent to be named as an expert in the "Legal Matters" and "Experts" sections of Amendment No. 1 to the Registration Statement on Form S-1 filed with the Securities and Exchange Commission by Nanophase Technologies Corporation. Very truly yours, /s/ ROBERT W. FIESELER --------------------------- Robert W. Fieseler EX-27 16 FINANCIAL DATA SCHEDULE
5 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 770,704 2,001,429 1,441,206 0 503,815 4,768,215 2,980,884 767,924 7,286,071 1,709,155 0 0 19,553,083 450 (13,976,617) 7,286,071 2,245,415 2,245,415 3,321,288 5,607,223 0 0 0 (3,304,416) 0 (3,304,416) 0 0 0 (3,304,416) 0 0
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