-----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, ExtCtSX0Tl0/QwpN0vqVL3J+YeKrs2wTfLWsNPIhXgMLoblHhNPQT24WGoe/+RMJ Rg9k9wpSk25n76UxycklAA== 0000950137-99-003043.txt : 19990817 0000950137-99-003043.hdr.sgml : 19990817 ACCESSION NUMBER: 0000950137-99-003043 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990816 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NANOPHASE TECHNOLOGIES CORPORATION CENTRAL INDEX KEY: 0000883107 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS PRIMARY METAL PRODUCTS [3390] IRS NUMBER: 363687863 STATE OF INCORPORATION: IL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-22333 FILM NUMBER: 99690395 BUSINESS ADDRESS: STREET 1: 453 COMMERCE ST CITY: BURR RIDGE STATE: IL ZIP: 60521 BUSINESS PHONE: 6303231200 MAIL ADDRESS: STREET 1: 453 COMMERCE STREET CITY: BURR RIDGE STATE: IL ZIP: 60521 10-Q 1 FORM 10-Q 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended: JUNE 30, 1999 Commission File Number: 0-22333 NANOPHASE TECHNOLOGIES CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 36-3687863 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.)
453 COMMERCE STREET, BURR RIDGE, ILLINOIS 60521 (Address of principal executive offices, and zip code) Registrant's telephone number, including area code: (630) 323-1200 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No As of August 12, 1999, there were outstanding 12,736,952 shares of common stock, par value $.01, of the registrant. 2 NANOPHASE TECHNOLOGIES CORPORATION QUARTER ENDED JUNE 30, 1999 INDEX
PAGE PART I - FINANCIAL INFORMATION 3 Item 1.Financial Statements 3 Balance Sheets as of June 30, 1999 (unaudited) and December 31, 1998 3 Statements of Operations (unaudited) for the three months ended June 30, 1999 and 1998 and the six 4 months ended June 30, 1999 and 1998 Statements of Cash Flows (unaudited) for the six months ended June 30, 1999 and 1998 5 Notes to Financial Statements (unaudited) 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Item 3. Quantitative and Qualitative Disclosures About Market Risk 12 PART II - OTHER INFORMATION 13 Item 1.Legal Proceedings 13 Item 2.Changes in Securities and Use of Proceeds 14 Item 4.Submissions of Matters to a Vote of Security Holders 14 Item 6.Exhibits and Reports on Form 8-K 14 SIGNATURES 15
2 3 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS NANOPHASE TECHNOLOGIES CORPORATION BALANCE SHEETS
JUNE 30, DECEMBER 31, 1999 1998 ------------ ------------ (UNAUDITED) ASSETS CURRENT ASSETS: Cash and cash equivalents...................................... $ 646,423 $ 363,394 Investments.................................................... 23,244,378 26,270,518 Trade accounts receivable, less allowance for doubtful accounts of $75,000 at June 30, 1999 and $85,000 at December 31, 1998. 288,656 316,328 Other receivable, net.......................................... 477,904 - Inventories, net............................................... 644,342 838,825 Prepaid expenses and other current assets...................... 96,751 92,351 ------------ ------------ Total current assets.......................................... 25,398,454 27,881,416 Equipment and leasehold improvements, net....................... 2,143,127 2,383,091 Other assets, net............................................... 176,963 189,481 ------------ ------------ $ 27,718,544 $ 30,453,988 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable............................................... $ 487,689 $ 413,378 Accrued expenses............................................... 1,239,227 933,020 ------------ ------------ Total current liabilities..................................... 1,726,916 1,346,398 CONTINGENT LIABILITIES.......................................... - - STOCKHOLDERS' EQUITY: Preferred stock, $.01 par value, 24,088 shares authorized and no shares issued and outstanding............................... - - Common stock, $.01 par value, 24,930,377 shares authorized; 12,736,952 shares issued and outstanding at June 30, 1999 and 12,568,691 shares issued and outstanding at December 31, 1998.. 127,369 125,687 Additional paid-in capital...................................... 48,400,745 48,360,454 Accumulated deficit............................................. (22,536,486) (19,378,551) ------------ ------------ Total stockholders' equity..................................... 25,991,628 29,107,590 ------------ ------------ $ 27,718,544 $ 30,453,988 ============ ============
See Notes to Financial Statements 3 4 NANOPHASE TECHNOLOGIES CORPORATION STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, ------------------------------ ---------------------------- 1999 1998 1999 1998 -------------- -------------- ------------- ------------- REVENUE: Product revenue...................... $ 281,054 $ 141,494 $ 547,302 $ 778,228 Other revenue........................ 48,167 76,684 106,917 143,484 ------------- ------------- ------------ ------------ Total revenue....................... 329,221 218,178 654,219 921,712 OPERATING EXPENSE: Cost of revenue...................... 680,795 687,995 1,461,884 1,656,707 Research and development expense..... 394,308 601,808 784,722 791,022 Selling, general and administrative expense............................. 1,123,759 909,364 2,142,205 1,592,663 ------------- ------------- ------------ ------------ Total operating expense............. 2,198,862 2,199,167 4,388,811 4,040,392 ------------- ------------- ------------ ------------ Loss from operations.................. (1,869,641) (1,980,989) (3,734,592) (3,118,680) Interest income....................... 287,608 381,575 576,657 787,866 ------------- ------------- ------------ ------------ Loss before provision for income taxes (1,582,033) (1,599,414) (3,157,935) (2,330,814) Provision for income taxes............ - - - (156,000) ------------- ------------- ------------ ------------ Net loss.............................. $(1,582,033) $(1,599,414) $(3,157,935) $(2,486,814) ============= ============= ============ ============ Net loss per share.................... $ (0.12) $ (0.13) $ (0.25) $ (0.20) ============= ============= ============ ============ Weighted average number of common shares outstanding.................... 12,656,636 12,310,154 12,625,351 12,293,900 ============= ============= ============ ============
See Notes to Financial Statements 4 5 NANOPHASE TECHNOLOGIES CORPORATION STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, ------------------------- 1999 1998 ---- ---- OPERATING ACTIVITIES: Net loss................................................. $ (3,157,935) $ (2,486,814) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization.......................... 335,822 238,849 Allowance for excess inventory quantities.............. 71,237 - Changes in assets and liabilities related to operations: Trade accounts receivable.............................. 27,672 1,086,109 Other receivable....................................... (477,904) - Inventories............................................ 123,246 (157,702) Prepaid expense and other assets....................... 66,331 13,010 Accounts payable....................................... 74,311 (527,120) Accrued liabilities.................................... 306,207 401,895 ------------ ------------ Net cash used in operating activities.................... (2,631,013) (1,431,773) INVESTING ACTIVITIES: Acquisition of equipment and leasehold improvements...... (154,071) (320,233) Purchases of held-to-maturity investments................ (62,680,599) (112,743,273) Maturities of held-to-maturity investments............... 65,706,739 110,997,923 ------------ ------------ Net cash provided by (used in) investing activities...... 2,872,069 (2,065,583) FINANCING ACTIVITIES: Proceeds from issuance of stock.......................... 41,973 79,197 ------------ ------------ Net cash provided by financing activities................ 41,973 79,197 ------------ ------------ Increase (decrease) in cash and cash equivalents......... 283,029 (3,418,159) Cash and cash equivalents at beginning of period......... 363,394 3,988,368 ------------ ------------ Cash and cash equivalents at end of period............... $ 646,423 $ 570,209 ============ ============
See Notes to Financial Statements 5 6 NANOPHASE TECHNOLOGIES CORPORATION NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (1) BASIS OF PRESENTATION The accompanying unaudited interim financial statements of Nanophase Technologies Corporation (the "Company") reflect all adjustments (consisting of normal recurring adjustments) which, in the opinion of management, are necessary for a fair presentation of the financial position and operating results of the Company for the interim periods presented. Operating results for the three and six month periods ended June 30, 1999 are not necessarily indicative of the results that may be expected for the year ended December 31, 1999. These financial statements should be read in conjunction with the Company's audited financial statements and notes thereto for the year ended December 31, 1998, included in the Company's Annual Report on Form 10-K for the year ended December 31, 1998, as filed with the Securities and Exchange Commission. (2) DESCRIPTION OF BUSINESS The Company was organized for the purpose of developing nanocrystalline materials for commercial production and sale in domestic and international markets. In the course of its corporate development, the Company has experienced net losses and negative cash flows from operations. Historically, the Company has funded its operations primarily through the issuance of equity securities. Revenue from international sources approximated $354,500 and $169,500 for the six months ended June 30, 1999 and 1998, respectively. (3) INVESTMENTS Investments generally consist of certificates of deposit, commercial paper, and corporate notes and have an estimated fair value of $23,232,000 at June 30, 1999 and $26,251,000 at December 31, 1998. All investments have been classified as held-to-maturity and mature within a twelve month period. (4) INVENTORIES Inventories consist of the following:
JUNE 30, 1999 DECEMBER 31, 1998 ------------- ----------------- Raw materials............................ $ 258,316 $ 284,162 Finished goods........................... 647,896 745,296 --------- --------- 906,212 1,029,458 Allowance for excess inventory quantities (261,870) (190,633) --------- --------- $ 644,342 $ 838,825 ========= =========
6 7 NANOPHASE TECHNOLOGIES CORPORATION NOTES TO FINANCIAL STATEMENTS -- (Continued) (UNAUDITED) (5) CONTINGENT LIABILITIES Five separate complaints were filed in the United States District Court for the Northern District of Illinois, Eastern Division, each of which alleged that the Company, certain of its officers and directors, and the underwriters of the Company's initial public offering of Common Stock ("the Offering") are liable under the federal securities laws for making material misstatements of fact and omitting and failing to state material facts necessary to make other statements of fact not misleading in the Registration Statement and Prospectus relating to the Offering. In an order entered by the Court, those cases were consolidated and a consolidated complaint was filed on October 30, 1998. The consolidated complaint alleges that the action should be maintained as (i) a plaintiff class action on behalf of certain persons who purchased the Common Stock from November 26, 1997 through January 8, 1998, excluding the defendants, members of their immediate families, any entity in which a defendant has a controlling interest and certain others related to or affiliated with the foregoing, and (ii) a defendant class action against the underwriters who participated in the Offering. The consolidated complaint seeks unquantified damages as provided for under the federal securities laws, pre- and post-judgment interest, attorneys' fees, expert witness fees, other costs and expenses and such other and further relief as the Court may find proper. In addition, the consolidated complaint seeks rescission and/or rescissory damages relating to purchases of the Common Stock, as provided for under federal securities laws. All defendants have filed motions to dismiss the consolidated complaint that are fully briefed and under advisement by the Court. In August 1998, the Company received a request for indemnification from the underwriters of the Offering pursuant to the underwriting agreement for the Offering. In response to such request, the Company has agreed to be responsible for the underwriters' attorneys' fees with respect to the litigation. On November 20, 1998, a separate complaint was filed in the Northern District of Illinois, Eastern Division, which alleged that the Company, certain of its officers and directors, and the underwriters of the Company's Offering are liable under the federal securities laws for making material misstatements of fact and omitting or failing to state material facts necessary to make other statements of fact not misleading in connection with the solicitation of consents to proceed with the Offering from certain of the Company's preferred stockholders. The complaint alleges that the action should be maintained as a plaintiff class action on behalf of those former preferred stockholders whose shares of preferred stock of the Company were converted into Common Stock on or about the date of the Offering, excluding the defendants, other officers and directors of the Company, members of the immediate families of all individual defendants, any entity in which a defendant has a controlling interest and certain others related to, employed by or affiliated with the foregoing. The complaint seeks unquantified damages as provided for under the federal securities laws, pre- and post-judgment interest, attorneys' fees, expert witness fees, other costs and expenses and such other and further relief as the Court may find proper. On March 24, 1999, the preferred stockholders' complaint was reassigned to the judge hearing the consolidated complaint described above. Thereafter, the preferred stockholders' complaint was further consolidated with that litigation. The Company, the defendant directors and the defendant officers have each retained counsel with respect to both of the above-described litigations and intend to defend against both complaints vigorously. Although the Company believes that the allegations of the complaints are without merit, it is not feasible for the Company to predict at this time the outcome of either litigation or whether the resolution of either litigation could have a material adverse effect on the Company's results of operations, cash flows or financial condition. 7 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Since January 1, 1997, Nanophase Technologies Corporation (the "Company") has been engaged in the commercial production and sale of its nanocrystalline materials. All of the Company's revenue since January 1, 1997 has been generated through commercial sources. From its inception in November 1989 through June 30, 1999, the Company was primarily capitalized through the private offering of approximately $19,558,069 of equity securities and its initial public offering of $28,837,936 of the Company's common stock (the "Common Stock"), each net of issuance costs. The Company has incurred cumulative losses of $22,536,486 from inception through June 30, 1999. RESULTS OF OPERATIONS Revenue is recorded when the Company ships products, when specific milestones are met regarding development arrangements or when the Company licenses its technology and transfers proprietary information. Total revenue was $329,221 and $654,219 for the three and six months, respectively, ended June 30, 1999, compared to $218,178 and $921,712 for the same periods in 1998. The increase in total revenue for the three-month period was primarily attributed to increased product revenue. Product revenue increased to $281,054 for the three months ended June 30, 1999, compared to $141,494 for the same period in 1998. Other revenue decreased to $48,167 for the three-month period ended June 30, 1999, compared to $76,684 for the same period in 1998. The decrease in total revenue for the six-month period was mainly due to reduced product revenue. Product revenue decreased to $547,302 for the six months ended June 30, 1999, compared to $778,228 for the same period in 1998. Other revenue decreased to $106,917 for the six-month period ended June 30, 1999, compared to $143,484 for the same period in 1998. The majority of the revenue generated during the three and six months ended June 30, 1999 was from customers in the electronics, structural ceramics and composites, and cosmetics markets. For the six month period ended June 30, 1999, revenue from four customers constituted 71.4% of the Company's total revenue. Revenue from these four customers composed approximately 32.4%, 15.1%, 12.5%, and 11.4%, respectively, of total revenue for the six months ended June 30, 1999. Cost of revenue generally includes costs associated with commercial production, customer development arrangements and licensing fees. Cost of revenue decreased to $680,795 and $1,461,884 for the three and six months, respectively, ended June 30, 1999, compared to $687,995 and $1,656,707 for the same periods in 1998. The decrease in cost of revenue was generally attributed to reduced product shipments and reduced ceramic superplastic forming costs, somewhat offset by inefficiencies in the Company's coating operations. Cost of revenue as a percentage of total revenue decreased for the three months ended June 30, 1999, compared to the same period in 1998, due primarily to the increase in total revenue and other factors discussed above. Cost of revenue as a percentage of total revenue increased for the six months ended June 30, 1999, compared to the same period in 1998, due primarily to the reduction in total revenue and other factors discussed above. Research and development expense primarily consists of costs associated with the Company's development or acquisition of new product applications and coating formulations and the cost of enhancing the Company's manufacturing processes. Research and development expense decreased to $394,308 and $784,722 for the three and six months, respectively, ended June 30, 1999, compared to $601,808 and $791,022 for the same periods in 1998. The three and six month periods ended June 30, 1998 included $425,000 in costs related to arrangements with outside parties to further develop end-use products. Excluding these costs, research and development expense increased by $217,500 and $418,700 in the three and six months, respectively, ended June 30, 1999, compared to the same periods in 1998. These increases were attributed to increased costs related to ongoing development activities, increased 8 9 recruiting and relocation activities, additional salaries for newly hired research personnel, and separation costs relating to the termination of a former officer. The Company expects to further increase its research and development expense for the remainder of 1999 in connection with its plans to continue to enhance and expand its product lines, technologies and manufacturing processes. Selling, general and administrative expense increased to $1,123,759 and $2,142,205 for the three- and six-month periods, respectively, ended June 30, 1999, compared to $909,364 and $1,592,663 for the same periods in 1998. These net increases were primarily attributed to increased costs associated with additional legal expenses, salaries of additional sales and administrative personnel, separation costs associated with the departure of the Company's former chief executive officer, and an organizational restructuring. The Company expects limited increases in its selling, general and administrative expense during the remainder of 1999 in connection with its plans to continue to refocus its sales effort. Interest income decreased to $287,608 and $576,657 for the three- and six-month periods, respectively, ended June 30, 1999, compared to $381,575 and $787,866 for the same periods in 1998. This decrease was primarily due to a reduction in funds available for investment compounded by a reduction in investment yields. Income tax expense was $0 for the three and six months ended June 30, 1999, compared to $0 and $156,000 for the same respective periods in 1998. The 1998 expense was due to foreign taxes withheld from license fees received from one of the Company's distribution partners, C. I. Kasei Co., Ltd. LIQUIDITY AND CAPITAL RESOURCES The Company's cash, cash equivalents and investments amounted to $23,890,801 at June 30, 1999, compared to $26,633,912 at December 31, 1998. The net cash used in the Company's operating activities was $2,631,013 for the six months ended June 30, 1999, compared to $1,431,773 for the same period in 1998. The net cash used in operating activities for the six-month period ended June 30, 1999 was primarily for the ongoing development of additional product applications, the funding of research and development activities and sales efforts, and the funding of other receivables, which was offset by the collection of accounts receivable, a decrease in inventory, and an increase in accounts payable and accrued liabilities. Net cash provided by investing activities, including capital expenditures and purchases of securities in which cash is invested pending its use for operating activities and expansion of the Company's manufacturing facilities offset by maturities of such securities, amounted to $2,872,069 for the six months ended June 30, 1999, compared to $2,065,583 of net cash used in investing activities for the same period in 1998. Capital expenditures, primarily related to the further expansion of the Company's existing manufacturing facility and the purchase of operating equipment, amounted to $154,071 for the six months ended June 30, 1999, compared to $320,233 for the same period in 1998. Net cash provided by financing activities, which related to the exercise of options for 168,261 shares of Common Stock, amounted to $41,973 for the six-month period ended June 30, 1999, compared to $79,197, which related to the exercise of options for 115,572 shares of Common Stock, for the same period in 1998. The Company believes that cash from operations and cash on hand, together with the remaining net proceeds from the Company's initial public offering of Common Stock ("the Offering") and interest income thereon, will be adequate to fund the Company's current operating plans. The Company's actual future capital requirements will depend, however, on many factors, including customer acceptance of the Company's current and potential nanocrystalline materials and product applications, continued progress in the Company's research and development activities and product testing programs, the magnitude of these activities and programs, and the costs necessary to increase and expand the Company's 9 10 manufacturing capabilities and to market and sell the Company's materials and product applications. Depending on future requirements, the Company may seek additional funding through public or private financing, collaborative relationships, government contracts or additional licensing agreements. Additional financing may not be available on acceptable terms or at all, and any such additional financing could be dilutive to the Company's stockholders. At June 30, 1999, the Company had a net operating loss carryforward of approximately $22 million for income tax purposes. Because the Company may have experienced "ownership changes" within the meaning of the U.S. Internal Revenue Code in connection with its various prior equity offerings, future utilization of this carryforward may be subject to certain limitations as defined by the Internal Revenue Code. If not utilized, the carryforward expires at various dates between 2005 and 2013. As a result of the annual limitation, a portion of this carryforward may expire before ultimately becoming available to reduce income tax liabilities. At June 30, 1999, the Company also had a foreign tax credit carryforward of $156,000, which could be used as an offsetting tax credit to reduce U.S. income taxes. The foreign tax credit will expire in 2013 if not utilized before that date. IMPACT OF YEAR 2000 ISSUE The Year 2000 Issue is the result of computer programs being written using two digits rather than four to define the applicable year. Computer programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices or engage in similar normal business activities. The Company has identified the following areas as possibly being affected by the Year 2000 Issue: (i) IT and non-IT systems, (ii) manufacturing applications, and (iii) third-party relationships. For each of these areas, the Company is in the process of identifying and assessing specific software, equipment, and systems which are potentially susceptible to the Year 2000 Issue. The Company expects to develop and implement corrective actions, if necessary, to ensure that by September 30, 1999 its software, equipment and systems will function properly with respect to dates in the year 2000 and thereafter. The Company believes the total cost of such year 2000 compliance activities will not be material. The Company believes that it has no material exposure to contingencies related to the Year 2000 Issue for the products it has sold to date. The Company processes its transactions and applications utilizing personal computers. In addition, the Company's telephone system, fax machines, payroll, alarm systems and other miscellaneous systems utilize computer equipment and software. The Company is identifying which software and equipment needs to be upgraded. Based on its assessment to date, the Company does not believe that significant modifications or replacements of its software or systems will be required to be year 2000 compliant. As of January 1, 1998, the Company only acquires software and invests in systems which are year 2000 compliant. The Company's manufacturing activities rely on its PVS plasma reactors comprised of modular equipment that contains embedded technology. The Company also relies on a quality control laboratory for production process control. The Company is identifying the particular hardware and software systems used in such manufacturing applications to assess whether they are year 2000 compliant. The Company believes such manufacturing applications are year 2000 compliant. 10 11 To date, the Company does not have any direct interface between its systems and those of any significant supplier or customer. The Company, however, relies on third party suppliers for raw materials, utilities, cash management services and other key supplies and services. The Company, therefore, recognizes that it is vulnerable to third party suppliers that fail to remediate their own Year 2000 Issues. The Company is corresponding with its significant suppliers to determine their year 2000 compliance status. The Company is also dependent upon its customers, product development partners and distributors for sales, cash flow and product development. Although the Company has received some formal information concerning the year 2000 compliance status of certain of its customers, product development partners and distributors, this information is limited and incomplete at this time. The Company has, however, received indications that most of these entities are working on year 2000 compliance. The Company's most reasonably likely worst case scenario with respect to the Year 2000 Issue is that (i) its manufacturing systems may malfunction, and (ii) third party suppliers of ceramic and metallic materials, cash management services and utilities, customers, product development partners and distributors may be unable to remediate their own Year 2000 Issues. In such scenario, the Company could experience manufacturing interruptions, difficulties in accessing its cash and investments, delays in distribution of its products, delays in development of new product applications and reduced shipments. This would have a material adverse effect on the Company's operations. The Company currently has no contingency plan in the event such most reasonably likely worst case scenario occurs. The Company currently believes that the Year 2000 Issue will not pose significant operational problems for the Company. However, if all Year 2000 Issues are not properly identified or remediated on a timely basis, the Company's results of operations or relationships with customers and suppliers may be materially adversely affected. In addition, the systems of other companies on which the Company relies may not be timely converted and any failure by them to do so could have a material adverse effect on the Company's operations. LEGAL PROCEEDINGS As disclosed in Note 5 to the Financial Statements and under "Part II - Other Information - Item 1. Legal Proceedings," five separate complaints were filed in the United States District Court for the Northern District of Illinois, Eastern Division, each of which alleged that the Company, certain of its officers and directors, and the underwriters of the Offering are liable under the federal securities laws for making material misstatements of fact and omitting and failing to state material facts necessary to make other statements of fact not misleading in the Registration Statement and Prospectus relating to the Offering. In an order entered by the Court, those cases were consolidated and a consolidated complaint was filed on October 30, 1998. The consolidated complaint alleges that the action should be maintained as (i) a plaintiff class action on behalf of certain persons who purchased the Common Stock from November 26, 1997 through January 8, 1998, excluding the defendants, members of their immediate families, any entity in which a defendant has a controlling interest and certain others related to or affiliated with the foregoing, and (ii) a defendant class action against the underwriters who participated in the Offering. The consolidated complaint seeks unquantified damages as provided for under the federal securities laws, pre- and post-judgment interest, attorneys' fees, expert witness fees, other costs and expenses and such other and further relief as the Court may find proper. In addition, the consolidated complaint seeks rescission and/or rescissory damages relating to purchases of the Common Stock, as provided for under federal securities laws. All defendants have filed motions to dismiss the consolidated complaint that are fully briefed and under advisement by the Court. On November 20, 1998, a separate complaint was filed in the Northern District of Illinois, Eastern Division, which alleged that the Company, certain of its officers and directors, and the underwriters of the Company's Offering are liable under the federal securities laws for making material 11 12 misstatements of fact and omitting or failing to state material facts necessary to make other statements of fact not misleading in connection with the solicitation of consents to proceed with the Offering from certain of the Company's preferred stockholders. The complaint alleges that the action should be maintained as a plaintiff class action on behalf of those former preferred stockholders whose shares of preferred stock of the Company were converted into Common Stock on or about the date of the Offering, excluding the defendants, other officers and directors of the Company, members of the immediate families of all individual defendants, any entity in which a defendant has a controlling interest and certain others related to, employed by or affiliated with the foregoing. The complaint seeks unquantified damages as provided for under the federal securities laws, pre- and post-judgment interest, attorneys' fees, expert witness fees, other costs and expenses and such other and further relief as the Court may find proper. On March 24, 1999, the preferred stockholders' complaint was reassigned to the judge hearing the consolidated complaint described above. Thereafter, the preferred stockholders' complaint was further consolidated with that litigation. The Company, the defendant directors and the defendant officers have each retained counsel with respect to both of the above-described litigations and intend to defend against both complaints vigorously. Although the Company believes that the allegations of the complaints are without merit, it is not feasible for the Company to predict at this time the outcome of either litigation or whether the resolution of either litigation could have a material adverse effect on the Company's results of operations, cash flows or financial condition. SAFE HARBOR PROVISION Because the Company wants to provide investors with more meaningful and useful information, the Quarterly Report on Form 10-Q contains certain "forward-looking statements" (as such term is defined in Section 21E of the Securities Exchange Act of 1934, as amended). Statements contained in this Quarterly Report on Form 10-Q that are not historical facts are forward-looking statements that are made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. These statements reflect the Company's current expectations regarding its future results of operations, performance, and achievements and are based on information currently available to the Company. The Company has tried, wherever possible, to identify these forward-looking statements by using words such as "intends," "believes," "estimates," "expects," "plans," and similar expressions. These statements are subject to certain risks, uncertainties, and factors which could cause the Company's actual results, performance, and achievements in 1999 and beyond to differ materially from those expressed in, or implied by, such statements. These risks, uncertainties, and factors include, without limitation: uncertain demand for, and acceptance of, the Company's nanocrystalline materials; the Company's dependence on a limited number of key customers; the Company's limited manufacturing capacity and experience; the Company's limited marketing experience; changes in development and distribution relationships; the impact of competitive products and technologies; the Company's dependence on patents and protection of proprietary information; the resolution of litigation the Company is involved in; and other risks set forth under "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Risk Factors" in the Company's Annual Report on Form 10-K for the year ended December 31, 1998, as filed with the Securities and Exchange Commission. Readers of this Quarterly Report on Form 10-Q should not place undue reliance on any forward-looking statements. Except as required by federal securities laws, the Company undertakes no obligation to update or revise these forward-looking statements to reflect new events or uncertainties. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to interest rate risk on its investment portfolio. A 1% fluctuation in interest rate would result in a change in the portfolio earnings of approximately $230,000 per year. 12 13 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS As previously disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 1998, five separate complaints were filed in the United States District Court for the Northern District of Illinois, Eastern Division, each of which alleged that the Company, certain of its officers and directors, and the underwriters of the Company's Offering are liable under the federal securities laws for making material misstatements of fact and omitting and failing to state material facts necessary to make other statements of fact not misleading in the Registration Statement and Prospectus relating to the Offering. In an order entered by the Court, those cases were consolidated and a consolidated complaint was filed on October 30, 1998. The consolidated complaint alleges that the action should be maintained as (i) a plaintiff class action on behalf of certain persons who purchased the Common Stock from November 26, 1997 through January 8, 1998, excluding the defendants, members of their immediate families, any entity in which a defendant has a controlling interest and certain others related to or affiliated with the foregoing, and (ii) a defendant class action against the underwriters who participated in the Offering. The consolidated complaint seeks unquantified damages as provided for under the federal securities laws, pre- and post-judgment interest, attorneys' fees, expert witness fees, other costs and expenses and such other and further relief as the Court may find proper. In addition, the consolidated complaint seeks rescission and/or rescissory damages relating to purchases of the Common Stock, as provided for under federal securities laws. All defendants have filed motions to dismiss the consolidated complaint that are fully briefed and under advisement by the Court. On November 20, 1998, a separate complaint was filed in the Northern District of Illinois, Eastern Division, which alleged that the Company, certain of its officers and directors, and the underwriters of the Company's Offering are liable under the federal securities laws for making material misstatements of fact and omitting or failing to state material facts necessary to make other statements of fact not misleading in connection with the solicitation of consents to proceed with the Offering from certain of the Company's preferred stockholders. The complaint alleges that the action should be maintained as a plaintiff class action on behalf of those former preferred stockholders whose shares of preferred stock of the Company were converted into Common Stock on or about the date of the Offering, excluding the defendants, other officers and directors of the Company, members of the immediate families of all individual defendants, any entity in which a defendant has a controlling interest and certain others related to, employed by or affiliated with the foregoing. The complaint seeks unquantified damages as provided for under the federal securities laws, pre- and post-judgment interest, attorneys' fees, expert witness fees, other costs and expenses and such other and further relief as the Court may find proper. On March 24, 1999, the preferred stockholders' complaint was reassigned to the judge hearing the consolidated complaint described above. Thereafter, the preferred stockholders' complaint was further consolidated with that litigation. The Company, the defendant directors and the defendant officers have each retained counsel with respect to both of the above-described litigations and intend to defend against both complaints vigorously. Although the Company believes that the allegations of the complaints are without merit, it is not feasible for the Company to predict at this time the outcome of either litigation or whether the resolution of either litigation could have a material adverse effect on the Company's results of operations, cash flows or financial condition. 13 14 ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS On November 26, 1997 (the "Effective Date"), the Company's Registration Statement on Form S-1 (File No. 333-36937) relating to the Offering was declared effective by the Securities and Exchange Commission. Since the Effective Date, of its $28,837,936 of net proceeds from the Offering, the Company has used approximately $625,000 for capital expenditures primarily related to the further expansion of the Company's existing manufacturing facility and the purchase of operating equipment and approximately $4,325,000 for working capital and other general corporate purposes. The remainder of the net proceeds has been invested by the Company, pending its use, in short-term, investment grade, interest-bearing obligations. ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS. a) The 1999 Annual Meeting of Stockholders of the Company was held on June 11, 1999. b) The stockholders voted to re-elect two Class II directors to the Company's Board of Directors. Results of the voting were as follows:
Directors For Authority Withheld Abstentions Broker Non-Votes - ------------------------ --------- ------------------ ----------- ---------------- Joseph E. Cross 9,316,661 107,717 - - Richard W. Siegel, Ph.D. 9,316,661 107,717 - -
Edward E. Hagenlocker, Ph.D., Jerry Pearlman and Donald S. Perkins continued their terms of office as directors of the Company after the 1999 Annual Meeting of Stockholders. c) The stockholders also voted to ratify the appointment by the Company's Board of Directors of Ernst & Young LLP as the independent auditors of the Company's financial statements for the year ended December 31, 1999. Results of the voting were as follows:
For Against Abstentions Broker Non-Votes - --------- ------- ----------- ---------------- 9,340,811 69,017 14,550 -
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K A. EXHIBITS. Exhibit 10.1 - Employment Agreement entered into June 1, 1999 between the Company and Donald Freed Exhibit 10.2 - Consulting Agreement entered into June 25, 1999 between the Company and Dennis J. Nowak Exhibit 27 - Financial Data Schedule B. REPORTS ON FORM 8-K. The Company did not file any Current Reports on Form 8-K during the second quarter of 1999. 14 15 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NANOPHASE TECHNOLOGIES CORPORATION Date: August 13, 1999 By: /s/ JOSEPH E. CROSS ------------------- Joseph E. Cross President, Chief Executive Officer (principal executive officer) and a Director Date: August 13, 1999 By: /s/ JESS A. JANKOWSKI ---------------------------------------------------- Jess A. Jankowski Corporate Controller (principal financial and accounting officer) 15 16 EXHIBIT INDEX Exhibit Number Exhibit Name - -------------- ---------------------------------------------------------------- Exhibit 10.1 - Employment Agreement entered into June 1, 1999 between the Company and Donald Freed Exhibit 10.2 - Consulting Agreement entered into June 25, 1999 between the Company and Dennis J. Nowak Exhibit 27 Financial Data Schedule
EX-10.1 2 EMPLOYMENT AGREEMENT DATED 6/1/99 1 Exhibit 10.1 EMPLOYMENT AGREEMENT Employment Agreement dated and effective as of June 1, 1999 (this "AGREEMENT"), between NANOPHASE TECHNOLOGIES CORPORATION, a Delaware corporation (with its successors and assigns, referred to as the "COMPANY"), and Mr. Donald Freed (referred to as "EXECUTIVE"). PRELIMINARY STATEMENT The Company desires to employ Executive, and Executive wishes to be employed by the Company, upon the terms and subject to the conditions set forth in this Agreement. The Company and Executive also wish to enter into the other covenants set forth in this Agreement, all of which are related to Executive's employment with the Company. In consideration of the mutual promises and covenants stated below, Executive and the Company therefore agree as follows: AGREEMENT 1. EMPLOYMENT FOR TERM. The Company hereby employs Executive, and Executive hereby accepts employment with the Company, beginning on June 2, 1999, and renewing automatically on an annual basis until terminated pursuant to Section 7 below (the "TERM"). 2. POSITION AND DUTIES. During the Term, Executive shall serve as the Vice President of Business Development and shall report to the Vice President of Sales and Marketing of the Company or such other person as designated by the Company President. During the Term, Executive shall also hold such additional positions and titles as the President or the Board of Directors of the Company (the "BOARD") may determine from time to time. During the Term, Executive shall devote substantially all of Executive's business time and best efforts to Executive's duties as an employee of the Company. 3. SIGNING BENEFITS. In consideration of and in reliance upon Executive's execution of this Agreement, and based entirely upon Executive's acceptance of the duties and obligations to the Company under this Agreement (specifically including, without limitation, Executive's obligations under the covenants in Section 9, and the restrictions in Sections 10 and 11 of the Agreement), the Company shall provide Executive with the following Severance Benefits if the Company ends the Term for reasons other than Cause (as defined in Section 8): (i) the Company shall pay Executive a sum equal in annual amount to Executive's base salary in effect at the time of termination during the period (the "SEVERANCE PERIOD") of twenty six (26) full weeks after the effective date of termination, payable in proportionate amounts on the Company's regular pay cycle for professional employees and (if the last day of the Severance Period is not the last day of a pay period) on the last day of the Severance Period, and (ii) the Initial Stock Options shall become fully vested, and shall become exercisable in accordance with the applicable option grant agreement and the Plan. 4. COMPENSATION. (a) BASE SALARY. For Executive's service as an employee of the Company, the Company shall pay Executive a base salary, beginning on the first day of the Term and ending on the last day of the Term, of not less than $125,000 per annum, payable on the Company's regular pay cycle for professional employees. (b) BONUS PAYMENT. Executive will be eligible for additional bonuses for services to be performed as an employee of the Company in calendar year 1999 and subsequent years based on performance milestones agreed upon by Executive and the Vice President of Sales and Marketing of the Company and approved by the Board. (c) STOCK OPTIONS AND PURCHASE RIGHTS. The Company agrees that Executive shall be eligible for option grants based on annual performance reviews and awarded in the discretion of the Board. 2 (d) OTHER AND ADDITIONAL COMPENSATION. Sections 4(a), 4(b) and 4(c) establish minimum salary, bonus and option grant levels for Executive during the Term, and shall not preclude the Board from awarding Executive a higher salary or more stock options at any time, nor shall they preclude the Board from awarding Executive additional bonuses or other compensation in the discretion of the Board. 5. EMPLOYEE BENEFITS. During the Term, Executive shall be entitled to the employee benefits made available by the Company generally to all other employees of the Company, and shall be entitled to vacation in accordance with in the Company's vacation policy in effect from time to time. 6. EXPENSES. The Company shall reimburse Executive for actual out-of-pocket expenses reasonably incurred by Executive in the performance of services as an employee of the Company in accordance with the Company's policy for such reimbursements applicable to employees generally, and upon receipt by the Company of appropriate documentation and receipts for such expenses. 7. TERMINATION. (a) GENERAL. The Term shall end immediately upon Executive' death. Either Executive or the Company may end the Term at any time for any reason or no reason, with or without Cause, in the absolute discretion of Executive or the Board (but subject to Executive's obligations under Sections 9, 10 and 11 this Agreement), provided that Executive will provide the Company with at least thirty (30) days' prior written notice of Executive's resignation from Executive's positions as an employee with the Company. (b) NOTICE OF TERMINATION. Promptly after it ends the Term, the Company shall give Executive notice of the termination, including a statement of whether the termination was for "Cause" (as defined in Section 8(a) below). The Company's failure to give notice under this Section 7(b) shall not, however, affect the validity of the Company's termination of the Term or Executive's employment hereunder. 8. SEVERANCE BENEFITS. (a) "CAUSE" DEFINED. "Cause" means (i) willful or gross malfeasance or misconduct by Executive in connection with Executive's employment; (ii) Executive' gross negligence in performing any of Executive's duties under this Agreement; (iii) Executive's conviction of, or entry of a plea of guilty or nolo contendere with respect to, any crime other than a misdemeanor; (iv) Executive's willful or gross breach of any written policy applicable to all employees adopted by the Company concerning conflicts of interest, political contributions, standards of business conduct or fair employment practices, procedures with respect to compliance with securities laws or any similar matters, or adopted pursuant to the requirements of any government contract or regulation; (v) material breach by Executive of any of the terms and conditions of this Agreement; or (vi) Executive's acts or omissions which in the Company's reasonable judgment are materially detrimental, or may in the future be materially detrimental, to the best interests of the Company. (b) TERMINATION WITHOUT CAUSE. If the Company ends the Term other than for Cause, Executive shall receive the benefits provided under Section 3 of this Agreement. (c) TERMINATION FOR ANY OTHER REASON. If the Company ends the Term for Cause, or if Executive resigns as an employee of the Company, or if Executive dies, then the Company shall have no obligation to pay Executive any amount, whether for salary, benefits, bonuses, or other compensation or expense reimbursements of any kind, accruing after the end of the Term, and such rights shall, except as otherwise required by law (or, with respect to the Options, as set forth in the Plan or the applicable option grant agreements), be forfeited immediately upon the end of the Term. 3 9. ADDITIONAL COVENANTS. (a) CONFIDENTIALITY. Executive agrees to execute the Company's standard form of Confidential Information and Proprietary Rights Agreement (as may be in effect as of the date of this Agreement) promptly upon execution of this Agreement. (b) "RESTRICTED PERIOD" DEFINED. "Restricted Period" means the period beginning at the end of the Term and ending either (i) 365 days after the end of the Severance Period, if the Company is obligated to make payments under Section 8(b) above, or (ii) 365 days after the end of the Term, if the Company is not obligated to make payments under Section 8(b) above. (c) COVENANTS OF NON-COMPETITION AND NON-SOLICITATION. Executive acknowledges that but for Executive's employment with the Company: (i) Executive would not have had access to the confidential information, proprietary data and trade secrets of the Company; (ii) Executive would not have had contact with the Company's customers relating to Nanocrystalline materials, products, technologies and know how, with many of whom the Company enjoys a near permanent relationship; (iii) Executive would not have had contact with many of the Company's employees and officers, many of whom have information and expertise of importance to the Company; (iv) the Company's business is national in scope and cannot be confined to any particular geographic area of the United States or the State of Illinois. Executive further acknowledges that Executive's services are unique and extraordinary, that the Company will be dependent upon Executive for the development and growth of its business and related functions, and that Executive will develop personal relationships with significant customers, employees and contractors of the Company and have control of confidential information concerning, and lists of customers of, the Company. For the foregoing reasons, and in consideration of the execution of this Agreement by the Company, Executive covenants and agrees that during the Restricted Period Executive shall not, without the prior written consent of the Company President, in any manner, directly or indirectly, own, manage, operate, control, be employed by, participate in, or be connected in any manner with the ownership, management, operation or control of, any other business (conducted for profit or not for profit) which is competitive with the nanophase and ultrafine powder production, coating and forming businesses engaged in by the Company or which are under development by the Company. For the reasons acknowledged by Executive at the beginning of this Section 9(c), Executive additionally covenants and agrees that during the Restricted Period, Executive shall not, directly or indirectly, whether on Executive's own behalf or in behalf of any other person or entity, in any manner (A) contact, solicit or accept (or participate in contracting, soliciting or accepting) the trade or patronage of any customer or prospective customer of the Company (including any employee, officer, director or agent of any customer or prospective customer) with respect to the nanophase and ultrafine powder, coating and forming businesses engaged in by the Company or which are under development by the Company, or (B) solicit, induce or attempt to induce (or participate in soliciting, inducing or attempting to induce) any employee or contractor of the Company (and any person who was an employee or contractor of the Company at any time within the 180 days prior to the end of the Term) to leave the Company's employ or engagement to become connected in any way with, or employ, engage or otherwise utilize any such employee or contractor in, any other business that is competitive with the nanophase and ultrafine powder, coating and forming businesses engaged in by the Company or which are under development by the Company. 4 (d) EXCLUSIONS. The restrictions on Executive's activities set forth in this Section 9 shall not preclude Executive from the ownership of three percent (3%) or less of the voting securities of any corporation whose voting securities are registered under Section 12(g) of the Securities Exchange Act of 1934. (e) INJUNCTIONS. In view of Executive's access to the Company's customer base, employees, confidential information, proprietary data and trade secrets, Executive agrees that the covenants set forth in this Section 9 are necessary to protect the interests of the Company in such information, data, secrets and relationships, and to protect and maintain near permanent customer relationships, and other legitimate, proprietary interests of the Company, both actual and potential, which Executive would not have had access to or any involvement in but for Executive's employment relationship with the Company. Executive confirms and agrees that enforcement of the covenants set forth in this Section 9 would not prevent Executive from earning a livelihood. Executive further agrees that in the event of an actual or threatened breach by Executive of any of the covenants set forth in this Agreement, the Company would be irreparably harmed and the full extent of injury resulting therefrom would be impossible to calculate and the Company therefore will not have an adequate remedy at law. Accordingly, Executive agrees that temporary and permanent injunctive relief would be appropriate remedies against such breach, without bond or security; provided, however, that nothing herein shall be construed as limiting any other legal or equitable remedies available to the Company. (f) EXPENSES. Executive shall pay all costs and expenses, including without limitation court costs, investigation costs, expert witness fees, and attorneys' fees, incurred by the Company in connection with the successful enforcement by the Company of its rights under this Agreement. The Company shall have the right to disclose the contents of this Agreement or to deliver a copy of this Agreement bearing Executive's signature to any person to whom or for whose benefit the Company reasonably believes the Executive has solicited, or has or may disclose or use any confidential or proprietary information in violation of this Agreement. 10. ARBITRATION. No dispute involving any action or claims to enforce any provisions of Section 9 of this Agreement shall be subject to arbitration. However, any dispute or claim arising out of any other provisions of this Agreement, or otherwise relating to Executive's employment, whether based on statute, ordinance, regulation, contract, tort or other law, shall be resolved by binding arbitration before a single arbitrator pursuant to the Employment Arbitration Rules of the American Arbitration Association. Any such arbitration shall be conducted in Chicago, Illinois. An arbitration award rendered under this Section 10 shall be final and binding on the parties and may be submitted to any court of competent jurisdiction for entry of a judgment thereon in accord with the Federal Arbitration Act or the Uniform Arbitration Act. 11. LIMITATION ON CLAIMS. Executive agrees that he will not commence any action or suit relating to matters arising out of his employment with the Company (irrespective of whether such action or suit arises out of the provisions of this Agreement) later than six months after the first to occur of (a) the date such claim initially arises, or (b) the date Executive's employment terminates for any reason whatsoever. Executive expressly waives any applicable statute of limitation to the contrary. 12. SUCCESSORS AND ASSIGNS. (a) EXECUTIVE. This Agreement is a personal contract, and the rights and interests that this Agreement accords to Executive may not be sold, transferred, assigned, pledged, encumbered, or hypothecated by Executive. Executive shall not have any power of anticipation, alienation or assignment of the payments contemplated by this Agreement, all rights and benefits of Executive shall be for the sole personal benefit of Executive, and no other person shall acquire any right, title or interest under this Agreement by reason of any sale, assignment, transfer, claim or judgment or bankruptcy proceedings against Executive. Except as so provided, this Agreement shall inure to the benefit of and be binding upon Executive and Executive's personal representatives, distributees and 5 legatees. (b) THE COMPANY. This Agreement shall be binding upon the Company and inure to the benefit of the Company and its successors and assigns, including but not limited to any person or entity that may acquire all or substantially all of the Company's assets or business or with which the Company may be consolidated or merged. This Agreement shall continue in full force and effect in the event the Company sells all or substantially all of its assets, merges or consolidates, otherwise combines or affiliates with another business, dissolves and liquidates, or otherwise sells or disposes of substantially all of its assets. The Company's obligations under this Agreement shall cease, however, if the successor to the Company, the purchaser or acquirer either of the Company or of all or substantially all of its assets, or the entity with which the Company has affiliated, shall assume in writing the Company's obligations under this Agreement (and deliver an executed copy of such assumption to Executive), in which case such successor or purchaser, but not the Company, shall thereafter be the only party obligated to perform the obligations that remain to be performed on the part of the Company under this Agreement. 13. ENTIRE AGREEMENT. This Agreement and the other agreements referenced herein represent the entire agreement between the parties concerning Executive's employment with the Company and supersedes all prior negotiations, discussions, understandings and agreements, whether written or oral, between Executive and the Company relating to the subject matter of this Agreement. 14. AMENDMENT OR MODIFICATION, WAIVER. No provision of this Agreement may be amended or waived unless such amendment or waiver is agreed to in writing signed by Executive and by a duly authorized officer of the Company other than Executive. No waiver by any party to this Agreement of any breach by another party of any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of a similar or dissimilar condition or provision at the same time, any prior time or any subsequent time. 15. NOTICES. Any notice provided for in this Agreement must be in writing and must be either personally delivered, mailed by first class mail (postage prepaid and return receipt requested), sent by reputable overnight courier service (charges prepaid), or by facsimile to the recipient at the address below indicated: To the Company: Nanophase Technologies Corporation 453 Commerce Street Burr Ridge, IL 60521 Attn: Chief Executive Officer Facsimile: (630) 323-1221 With a copy to: Bruce A. Zivian Ehrenreich Eilenberg Krause & Zivian, LLP 20 North Wacker Drive, Suite 3230 Chicago, IL 60606 Facsimile: (312) 917-9911 To Executive: Mr. Donald Freed 1034 Pleasant Street Oak Park, IL 60301 or such other address or facsimile number, or to the attention of such other person as the recipient shall have specified by prior written notice to the sending party. Any notice under this Agreement shall be deemed to have been given when so personally delivered, or one day after deposit, if sent by courier, when confirmed received if sent by facsimile, or if mailed, five days after deposit in the U.S. first-class mail, postage prepaid. 6 16. SEVERABILITY. If any provision of this Agreement or the application of any such provision to any party or circumstances shall be determined by any court of competent jurisdiction to be invalid and unenforceable to any extent, the remainder of this Agreement or the application of such provision to such person or circumstances other that those to which it is so determined to be invalid and unenforceable shall not be affected, and each provision of this Agreement shall be validated and shall be enforced to the fullest extent permitted by law. If for any reason any provision of this Agreement containing restrictions is held to cover an area or to be for a length of time that is unreasonable or in any other way is construed to be too broad or to any extent invalid, such provision shall not be determined to be entirely null, void and of no effect; instead, it is the intention and desire of both the Company and Executive that, to the extent that the provision is or would be valid or enforceable under applicable law, any court of competent jurisdiction shall construe and interpret or reform this Agreement to provide for a restriction having the maximum enforceable area, time period and such other constraints or conditions (although not greater than those currently contained in this Agreement) as shall be valid and enforceable under the applicable law. 17. SURVIVORSHIP. The respective rights and obligations of the parties hereunder shall survive any termination of this Agreement to the extent necessary to the intended preservation of such rights and obligations. 18. HEADINGS. All descriptive headings of sections and paragraphs in this Agreement are intended solely for convenience of reference, and no provision of this Agreement is to be construed by reference to the heading of any section or paragraph. 19. WITHHOLDING TAXES. Except as otherwise specifically set forth in Section 4(d) above, all salary, benefits, reimbursements and any other payments to Executive under this Agreement shall be subject to all applicable payroll and withholding taxes and deductions required by any law, rule or regulation of any federal, state or local authority. 20. APPLICABLE LAW: JURISDICTION. The laws of the State of Illinois shall govern the interpretation, validity and performance of the terms of this Agreement, without reference to rules relating to conflicts of law. Any suit, action or proceeding against Executive with respect to this Agreement, or any judgment entered by any court in respect thereof, may be brought in any court of competent jurisdiction in the State of Illinois, as the Company may elect in its sole discretion, and Executive hereby submits to the nonexclusive jurisdiction of such courts for the purpose of any such suit, action, proceeding or judgment and to service of process by means of delivery of notice pursuant to Section 15 above. IN WITNESS WHEREOF, the parties hereto have executed this Employment Agreement as of the date first written above. NANOPHASE TECHNOLOGIES CORPORATION By: /S/ JOSEPH CROSS _________________________ Its: Chief Executive Officer /S/ DONALD FREED ________________________ Mr. Donald Freed EX-10.2 3 CONSULTING AGREEMENT DATED 6/25/99 1 Exhibit 10.2 CONSULTING AGREEMENT This Consulting Agreement is made between Dennis J. Nowak ("Mr. Nowak") and Nanophase Technologies Corporation ("NTC"). WHEREAS, during the period between September 3, 1996 and June 25, 1999, Mr. Nowak served as the Vice President, Chief Financial Officer, Secretary and Treasurer of NTC pursuant to agreements including that certain letter agreement presenting the terms of employment between NTC and Mr. Nowak dated as of September 3, 1996 (the "Employment Agreement"); WHEREAS, effective June 25, 1999, Mr. Nowak will cease serving as an officer and employee of NTC; WHEREAS, NTC wishes to have periodic future access to Mr. Nowak's knowledge and experience, and Mr. Nowak wishes to provide NTC with such access; and WHEREAS, NTC wishes to engage Mr. Nowak as NTC's consultant and Mr. Nowak wishes to provide consulting services to NTC upon the terms and conditions stated in this Consulting Agreement. NOW, THEREFORE, in consideration of the parties' mutual promises set forth below, Mr. Nowak and NTC agree as follows: 1. For a period of twelve months starting on June 26, 1999 and ending on June 26, 2000, Mr. Nowak shall render reasonable consulting services to NTC, as may reasonably be requested by NTC's President from time to time (the "Term"). Mr. Nowak shall make himself reasonably available to NTC for such consulting services; however, Mr. Nowak shall not be required to render services in an amount or manner that would unreasonably interfere with any other business activities or employment obligations which Mr. Nowak may have or may hereafter undertake. To the extent Mr. Nowak incurs reasonable out of pocket expenses in connection with such consulting services, such expenses shall be reimbursable, subject to Mr. Nowak's compliance with NTC's reimbursement policy applicable to corporate executives. 2. NTC shall pay Mr. Nowak consulting fees in the aggregate amount of $170,000 (the "Consulting Fees"), payable in 26 equal proportionate amounts on NTC's regular payroll periods. NTC shall tender payments of all Consulting Fees by first-class or overnight mail, addressed to Dennis J. Nowak, 10113 Wellington Terrace, Munster, Indiana 46321 or such other address as Mr. Nowak subsequently may provide to NTC. 3. The parties to this Consulting Agreement understand and agree that the foregoing Consulting Fees shall be paid by NTC solely in exchange for Mr. Nowak's agreement to perform consulting services for NTC. The Consulting Fees are not intended and 2 should not be construed as NTC's payment to Mr. Nowak of wages, salary or compensation for his services. NTC will forward Form 1099 to the U.S. Internal Revenue Service, the Indiana Department of Revenue and any other applicable taxing authority in connection with the Consulting Fees paid by NTC under this Consulting Agreement. 4. Within five business days after both Mr. Nowak and NTC have signed this Consulting Agreement, NTC shall provide Mr. Nowak with payment of $30,403.85, consisting of 372 hours of unused vacation pay that Mr. Nowak accrued during his employment with NTC. Such vacation pay will be subject to applicable payroll and withholding taxes and deductions required by law. 5. Within fourteen days following NTC's receipt of appropriate invoices from an outplacement provider mutually acceptable to Mr. Nowak and NTC, NTC will issue to such outplacement provider a maximum payment of $4,250.00 for outplacement services received by Mr. Nowak from the outplacement provider. 6. Within fourteen days following NTC's receipt of an appropriately detailed, itemized invoice from an attorney of Mr. Nowak's choice, NTC will issue to such attorney a maximum payment of $1,000.00 for legal services the attorney rendered to Mr. Nowak in connection with his negotiation and review of this instrument. 7. Within fourteen days after execution of this Consulting Agreement, Mr. Nowak shall submit to NTC a request for reimbursement of any outstanding out of pocket expenses incurred by Mr. Nowak in connection with his employment by NTC and which are reimbursable pursuant to paragraph 3 of the Employment Agreement, supported by appropriate documentation. NTC shall process such reimbursement request in accordance with NTC's policy for reimbursements applicable to NTC's executive officers on the same terms and conditions generally applicable to such officers, and submit a check for any such reimbursable amounts to Mr. Nowak within fourteen days after NTC's receipt of the reimbursement request and appropriate supporting documentation. 8. Mr. Nowak shall be entitled to keep the Canon Fax B360IF fax machine previously provided to him by NTC. NTC hereby transfers to Mr. Nowak all its right, title and interest in and to this fax machine. 9. Within five days after Mr. Nowak's execution of this Consulting Agreement, he shall return to NTC its following property previously entrusted to Mr. Nowak: A. The original and any copies of all documents (including any tangible material or computer-maintained data containing information derived from such documents) containing, referencing or pertaining to information concerning any aspects of NTC's plans or activities regarding research, development, products, marketing, unpublished financial information, prices, costs or any other information within the 2 3 scope of that certain Confidential Information And Proprietary Rights Agreement between Mr. Nowak and NTC dated September 3, 1996. B. The Dell Latitude CP Laptop Computer with battery, carrying case, power cord and related peripherals, and all software and hardware contained in this computer (including modem card, ethernet card and adapter, Windows 98, Lotus Organizer 98, and Office 97 Professional Version). Mr. Nowak warrants that no data or information contained in the above-described computer (including its hard-drive or memory) as of June 22, 1999 has been subsequently modified, deleted, supplemented or altered in any way. C. The portable cellular flip telephone with external battery and recharger. D. All keys to any cabinets, containers or doors on NTC's premises which were in Mr. Nowak's possession or control as of June 22, 1999. 10. Subject to the continuation election and eligibility of Mr. Nowak and his family for COBRA continuation coverage under the terms of NTC's group health and dental insurance plans, NTC will pay Mr. Nowak's monthly insurance premium under COBRA for a period of twelve months starting on June 26, 1999 and ending on June 26, 2000. Thereafter, Mr. Nowak and his family can continue participation in NTC's group health and dental insurance plan at their own expense, pursuant to COBRA. 11. NTC will not contest any claim for unemployment insurance benefits that Mr. Nowak may file with the Illinois Department of Employment Security or an analogous Indiana governmental agency. 12. Mr. Nowak acknowledges that NTC makes no representations or warranties to him concerning the tax consequences, if any, of the Consulting Fees or any other monies paid or benefits provided by NTC under this Consulting Agreement. Each party to this instrument shall bear its own such tax consequences, if any, and any related applicable tax reporting or filing obligations. 13. NTC acknowledges and confirms that under its Amended and Restated 1992 Stock Option Plan, as amended to date (the "Stock Option Plan") and any Stock Option Agreement between NTC and Mr. Nowak (the "Stock Option Agreements"): A. Any stock options previously granted to Mr. Nowak shall remain in effect and operate solely according to the provisions of the respective Stock Option Agreements and the Stock Option Plan throughout the Term of this Consulting Agreement. 3 4 B. Throughout the Term of this Consulting Agreement, Mr. Nowak shall have "Continuous Status as an Employee, Consultant or Outside Director" within the meaning of Sections 2(e) and 2(f) of the Stock Option Plan and Mr. Nowak's interests under the Stock Option Agreements shall continue to vest consistent with the provisions of each respective Stock Option Agreement. C. Pursuant to Section 8(b)(ii)(D) of the Stock Option Plan, Mr. Nowak may exercise any stock options previously granted to him, subject to the terms of the Stock Option Agreements and the Stock Option Plan, by the delivery of cash to NTC by a broker-dealer to whom Mr. Nowak has submitted an irrevocable notice of exercise. D. Pursuant to Section 7(d) of the Stock Option Plan and the terms of the Stock Option Agreements, Mr. Nowak may exercise any stock options previously granted to him in accord with the provisions of each respective Stock Option Agreement and subject to the withholding and tax payment requirements of the Stock Option Plan, the Stock Option Agreements and applicable law. NTC will report any such exercise of stock options by Mr. Nowak to the U.S. Internal Revenue Service on Form W-2. 14. The parties to this instrument understand and agree that NTC's obligations under Paragraphs 2, 5, 6 and 10 of this Consulting Agreement are expressly subject to Mr. Nowak's complying with his following obligations: A. Mr. Nowak shall render such consulting services to NTC as reasonably requested pursuant to Paragraph 1 of this Consulting Agreement; provided, however, that NTC shall provide Mr. Nowak with notice and reasonable opportunity to cure with respect to Paragraph 1. B. Concurrently with Mr. Nowak's executing this Consulting Agreement, he shall provide NTC with written notice of his voluntary resignation as Vice President, Chief Financial Officer, Secretary and Treasurer, and as an employee of NTC, effective June 25, 1999. C. Mr. Nowak hereby waives and releases any claim, action, suit, debt, dues, account, controversy, damages or judgment which Mr. Nowak had, has or hereafter may have, whether known or unknown, for (i) any claim for salary, bonuses, severance benefits or severance payments from NTC, and (ii) any claim under Paragraph 5 of the Employment Agreement. D. Mr. Nowak hereby confirms the continuing existence and enforceability of, and his compliance with: (i) all terms of that certain Confidential Information And Proprietary Rights Agreement between Mr. Nowak and NTC dated September 3, 1996, and (ii) the confidentiality covenant in Paragraph 6 of the Employment Agreement. 4 5 E. Mr. Nowak shall maintain the confidentiality of all terms of this Consulting Agreement, and he warrants that he will not, in any manner or means, by act or omission, disclose the terms of this Consulting Agreement to any person or entity. Mr. Nowak specifically warrants that he will not represent to any person or entity that he is a consultant to, or otherwise affiliated with, NTC. The warranties in this Paragraph 14.E shall not apply to Mr. Nowak's disclosures to his spouse, financial advisors or lawyers, or to disclosures of Mr. Nowak as required by applicable law or legal process. F. Mr. Nowak's complying with all his obligations with respect to NTC's property as described in Paragraph 9 of this Consulting Agreement. 15. The parties to this instrument do not intend that any provisions of this Consulting Agreement shall release or waive any claim, action, suit, debt, dues, account, controversy, damages or judgment that any party had, has or may hereafter have against another party or any other person, except as expressly provided in Paragraph 14.C of this instrument. NTC specifically acknowledges that this instrument does not waive any rights or claims that Mr. Nowak now has or hereafter may have under that certain Indemnification Agreement between NTC and Mr. Nowak dated November 26, 1997, which remains in full force and effect in accordance with its terms, or under Directors and Officers Insurance and Company Reimbursement Policy No. GA6079397 issued to NTC by Gulf Insurance Company. 16. This Consulting Agreement, and all obligations of NTC under Paragraphs 2, 5, 6 and 10 of this instrument, shall end immediately upon the earlier of: (a) Mr. Nowak's death; (b) the conclusion of the Term; or (c) Mr. Nowak failing to comply with his obligations under Paragraph 14 of this Consulting Agreement; provided, however, that no breach of Paragraph 14.A of this Consulting Agreement by Mr. Nowak will be deemed to have occurred until NTC provides him with notice and a reasonable opportunity to cure. 17. Mr. Nowak shall have no power to assign his respective rights or obligations under this Consulting Agreement. 18. Any dispute or controversy based upon or arising in connection with any party's respective rights or obligations under this Consulting Agreement shall be submitted to arbitration before a single arbitrator in Chicago, Illinois pursuant to the commercial arbitration rules of the American Arbitration Association. An arbitration award rendered pursuant to this Paragraph 18 shall be final, binding on the parties and may be submitted to any court of competent jurisdiction for entry of a judgment thereon, in accord with the Federal Arbitration Act or the Uniform Arbitration Act. 19. Except as otherwise provided in Paragraph 2 of this instrument, any notice to be given under this Consulting Agreement shall be in writing and delivered personally or by overnight courier, addressed to the party concerned at the address stated below or to such other address as such party subsequently may provide in writing: 5 6 If to Mr. Nowak: Dennis J. Nowak 10113 Wellington Terrace Munster, Indiana 46321 with a copy to: Richard L. Fenton Sonnenschein, Nath & Rosenthal 8000 Sears Tower Chicago, Illinois 60606 If to NTC: Nanophase Technologies Corporation 453 Commerce Street Burr Ridge, Illinois 60521 Attention: President with a copy to: David L. Weinstein Wildman, Harrold, Allen & Dixon 225 West Wacker Drive Chicago, Illinois 60606 20. Mr. Nowak acknowledges that the only consideration for this Consulting Agreement is described in this instrument; that no other promise or agreement has been made to or with him by any person or entity whatsoever to cause him to sign this Consulting Agreement; that he is represented by counsel and that counsel has explained to him all the terms of this Consulting Agreement and that he has voluntarily signed it; and that this instrument constitutes the entire agreement between the parties on all the subjects described herein. 21. This Consulting Agreement shall be construed in accord with, and governed by, the laws of the State of Illinois. 22. David L. Weinstein, one of the attorneys for NTC, represents and warrants that he has been duly authorized to execute this Consulting Agreement on behalf of NTC. 23. This Consulting Agreement may be signed by the parties by facsimile and in multiple counterparts. DENNIS J. NOWAK 6/25/99 ______________________________ ____________________ DENNIS J. NOWAK Date
6 7 NANOPHASE TECHNOLOGIES CORPORATION By: DAVID L. WEINSTEIN 6/25/99 __________________________ ____________________ David L. Weinstein Date One of Its Attorneys
7 EX-27 4 FINANCIAL DATA SCHEDULE
5 U.S. DOLLARS 6-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 1 646,423 23,244,378 288,656 75,000 644,342 25,398,454 3,722,832 1,579,705 27,718,544 1,726,916 0 0 0 48,528,114 (22,536,486) 27,718,544 547,302 654,219 1,461,884 4,388,811 0 0 0 (3,157,935) 0 (3,157,935) 0 0 0 (3,157,935) (0.25) (0.25)
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