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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
COMMISSION FILE NUMBER 0-22333
NANOPHASE TECHNOLOGIES CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 36-3687863
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
453 COMMERCE STREET, BURR RIDGE, ILLINOIS 60521
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (630) 323-1200
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
(Title of Class)
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
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the registrant's voting stock held by
non-affiliates of the registrant, based upon the last reported sale price of the
registrant's Common Stock on March 27, 1998 was $51,205,444.
The number of shares outstanding of the registrant's Common Stock, par
value $.01, as of March 27, 1998 was 12,277,467.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Definitive Proxy Statement in connection with
the registrant's 1998 Annual Meeting of Stockholders are incorporated by
reference into Part III of this Report on Form 10-K.
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PART I
ITEM 1. BUSINESS
Because Nanophase Technologies Corporation ("Nanophase" or the "Company")
wants to provide investors with more meaningful and useful information, this
Annual Report on Form 10-K (the "Form 10-K") contains, and incorporates by
reference, certain "forward-looking statements" (as such term is defined in
Section 21E of the Securities Exchange Act of 1934, as amended), that reflect
the Company's current expectations regarding the future results of operations,
performance and achievements of the Company. These forward-looking statements
are made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. The Company has tried, wherever possible, to
identify these forward-looking statements by using words such as "anticipates,"
"believes," "estimates," "expects," "plans," "intends" and similar expressions.
These statements reflect the Company's current beliefs and are based on
information currently available to it. Accordingly, these statements are subject
to certain risks, uncertainties and contingencies, which could cause the
Company's actual results, performance or achievements to differ materially from
those expressed in, or implied by, such statements. These risks, uncertainties
and contingencies include, without limitation, demand for, and acceptance of,
the Company's nanocrystalline materials; changes in development and distribution
relationships; the impact of competitive products and technologies; and the
factors set forth under "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Risk Factors." The Company
undertakes no obligation to update or revise any such forward-looking statements
that may be made to reflect events or circumstances after the date of this Form
10-K or to reflect the occurrence of unanticipated events.
GENERAL
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 which have been developed or are currently being
developed in these markets include the following:
- Electronics. Abrasives for chemical/mechanical polishing of semiconductor
wafers, anti-radiation coatings for cathode ray tubes and thin-film
materials for semiconductor manufacturing.
- Structural Ceramics and Composites. Ceramic mechanical seals, components
for continuous steel casting, abrasion-resistant polymers for oil
drilling sensors and ceramic armor.
- Cosmetics and Skin-Care. Topical health-care products, transparent
ultraviolet blockers and colorants for cosmetics.
- Industrial Catalysts. Chemical-process catalysts.
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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"), 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 EKC Technology, Inc. ("EKC"), a subsidiary of ChemFirst
Corporation ("ChemFirst"), a manufacturer of semiconductor polishing slurries;
with Schering-Plough Corporation ("Schering-Plough") pursuant to which the
Company is supplying 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 a license agreement which enables
C.I. Kasei Co., Ltd. ("CIK"), a subsidiary of Itochu Corporation ("Itochu"),
formerly C. Itoh, to manufacture, use and sell the Company's nanocrystalline
materials in broad-based industrial markets throughout various Asian countries.
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 ("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 1995, the
Company's patented physical-vapor-synthesis ("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 that are combinations of
atoms. Most solid materials, such as ceramics and metals, are polycrystalline 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
polycrystalline material, including strength, flexibility, color and electronic
conductivity, depend upon the composition, 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
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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 that 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 machining
which is typically used for conventional ceramics.
CLEAN SURFACES enable particles to exhibit consistent surface
chemistry, which facilitates the Company's ability to coat its
nanocrystalline materials. The Company's coatings enhance certain
commercial applications of its nanocrystalline materials, such as cosmetic
dispersions.
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 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 discrete-particle-encapsulation ("DPE")
process that 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
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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 that enables the
rapid fabrication of dimensionally precise, high tolerance structural ceramic
components without costly machining.
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 significant
commercial revenues from the customer.
Following is a more detailed description of the Company's targeted markets
and its activities in certain material 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). It is at this level of performance that Nanophase
believes its engineered nanocrystalline materials demonstrate advantages for
electronics applications.
Nanophase's primary focus in this market has been directed toward two
product applications: (i) semiconductor polishing and (ii) coatings for
electromagnetic radiation protection. 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 oxide
("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) more selective removal of
material, and (iii) 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.
In December 1997, Nanophase entered into a seven-year supply agreement with
EKC, a subsidiary of ChemFirst, pursuant to which the Company will supply its
nanocrystalline alumina and ceria and provide
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related research and customer and technical support to EKC. This agreement
supersedes the Company's five-year requirements contract with Moyco
Technologies, Inc. ("Moyco") and was entered into after Moyco sold its CMP
intellectual property, technologies and certain other intangible assets to EKC
in December 1997. Sales to, and fees from, Moyco pursuant to such contract
constituted approximately 42% of the Company's revenue in 1997. The Company has
agreed to sell its nanocrystalline alumina and ceria to EKC for use in the
production and sale of slurries and other materials used in CMP on an exclusive
basis so long as EKC purchases certain annual minimum dollar amounts specified
in the agreement. If EKC fails to purchase such minimum dollar amounts, the
Company may terminate EKC's exclusivity. In addition, if EKC does not purchase
certain other minimum dollar amounts specified in the agreement, the Company may
terminate the entire agreement or its obligation to supply nanocrystalline
materials to future customers of EKC. The minimum dollar amounts specified in
the agreement which EKC must purchase over the term of the agreement to maintain
exclusivity, avoid termination of future supply obligations or avoid termination
of the agreement are approximately $50 million, $25 million or $5 million,
respectively, of the Company's nanocrystalline materials.
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 has developed a
coating for CRTs which meets the conductivity and transparency requirements of
Philips and is actively working with their manufacturing group to introduce this
product into production for CRTs manufactured by Philips.
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.
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 significantly shorter
period of time and at significantly lower temperatures and pressures than
conventional fabrication methods.
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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 lightweight 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.
Composite Polymer for Oil Drilling Machinery
Nanophase has entered into a 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. 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. Initial tests performed by LWT using the Company's
composite materials indicate that such materials can meet these requirements.
The Company is currently developing composite materials which meet LWT's
particular product specifications.
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
which could approximate up to $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 during the second quarter of 1998.
Ceramic Mechanical Seals
Nanophase has fabricated prototype ceramic mechanical seals which 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 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 other ceramic seals. The Company
believes that reduced manufacturing costs make its ceramic seals cost-effective
for a number of high-volume mechanical-seal applications. The Company is
marketing its ceramic seals for potential commercial sales to various equipment
and machinery manufacturers.
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Ceramic Armor
The Company is currently fabricating net-shaped ceramic 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 ceramic
armor tiles that will have greater durability and impact resistance than
hot-pressed alumina tiles and offer a significant economic advantage over boron
carbide.
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. The Company
(i) is selling its titania to several cosmetics companies for use in sunscreens,
(ii) is shipping its iron oxide to a Fortune 500 cosmetics company for use as a
cosmetic colorant, (iii) is shipping titania dispersions to that same customer
for use in a product with SPF protection, which was introduced to the market in
the fourth quarter of 1997, and (iv) is shipping its nanocrystalline zinc oxide
pursuant to a commercial supply contract with Schering-Plough.
Topical Health-Care Applications
The Company 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 which were introduced to the market 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 that
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. 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 high SPF protection and
transparency, which combination is superior to that achieved by conventional
titania. Nanophase's total-encapsulation coating, based on its DPE 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
that offer chemical-free protection from excessive exposure to UV rays.
Cosmetic Colorants
Through its PVS and DPE processes, the Company has engineered
nanocrystalline iron oxide for use as a coloring agent in cosmetics. Because of
its visible transparency, this iron oxide 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 oxide that
absorb light without significant visible scattering, thereby providing color
without opacity. In addition, the nearly spherical particles of Nanophase's iron
oxide
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enable it 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 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.
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 that 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 that chemically
react with the atoms. Additional gases then cool the atoms sufficiently to
9
<PAGE> 10
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 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 that
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 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.
Surface Treatments and Dispersions (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, many of which are in the
early stage of development or are constantly being refined, 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 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.
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
10
<PAGE> 11
lower temperatures and pressures than used by conventional fabrication methods
(e.g.,1300-1500-C and 2000-4000 psi, as compared to up to 1700-C and 100,000
psi). This technology enables the Company to fabricate dimensionally precise
ceramic components in a short period of time without costly 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, on a month to month basis, 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 projects. The Company and LMSC jointly own technology developed
during the ATP project. 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. The Company has also recently entered into a collaborative
relationship with a parts fabricator which has agreed to develop the capability
to design, engineer and fabricate net-shaped ceramic parts and components for
the Company using the Company's net-shaping technology and nanocrystalline
materials.
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.
MARKETING
The members of the Company's marketing department, which the Company
intends to expand, have experience in each of the Company's targeted markets and
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 seeks to market 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, as part of its strategy to gain access to foreign
markets, Nanophase has entered into a license agreement with CIK, a subsidiary
of Itochu, formerly C. Itoh, which enables CIK to use certain of the Company's
patented technologies to exclusively manufacture, use and sell Nanophase's
nanocrystalline materials in broad-based industrial markets throughout various
Asian countries for all applications except cosmetics, skin care and CMP. The
fees received from CIK constituted approximately 43% of the Company's revenue in
1997. The agreement will, as of April 1, 1998, supersede an existing
distribution agreement between the parties and is intended to enable Nanophase
to quickly establish foothold positions in Asian markets by utilizing the
technology and market-support capabilities of CIK. The agreement does not target
specific materials or applications; however, CIK is pursuing high-volume
industrial applications in electronics, industrial ceramics and catalysts. In
order to maintain exclusivity under this agreement, CIK is required to (i)
achieve 50% of the minimum annual sales obligations set forth in the agreement
for 1999 and thereafter, which would
11
<PAGE> 12
approximate $3 million in 1999 and $5 million in each year thereafter; or (ii)
pay the Company a minimum royalty of $300,000 for the applicable year. In the
event CIK manufactures nanocrystalline materials using certain of the Company's
patented technologies, CIK is required to pay the Company a royalty based on the
net sales of all such nanocrystalline materials manufactured by CIK. If after
1998 CIK elects to manufacture such nanocrystalline materials in order to
achieve the minimum annual sale obligations set forth in the agreement, it must
pay a minimum royalty of $300,000 to the Company in any twelve-month period
following such election. Any royalties received by the Company from CIK are
subject to certain foreign withholding taxes. This agreement expires in 2013 but
may be terminated (i) by the Company after 1998 if CIK fails to achieve 20% of
the minimum annual sales obligations set forth in the agreement for a given year
or (ii) by CIK after March 31, 2000 upon 90 days' prior notice. Upon expiration
of the agreement, CIK will have the non-exclusive right to still use the
patented technologies licensed by the Company to manufacture, use and sell
Nanophase's nanocrystalline materials in various Asian countries as long as CIK
pays the Company a royalty based on the net sales of such materials by CIK.
Initially, to gain worldwide access to the cosmetics and skin-care market,
the Company had entered into a global distribution agreement with Whittaker,
Clark & Daniels, Inc. ("WCD"), a leading distributor of cosmetic and skin-care
ingredients. In February 1998, the Company and WCD mutually agreed to end their
distribution relationship. The Company may discuss distribution arrangements
with other companies having access to the cosmetics and skin-care market or it
may elect to sell directly to potential cosmetic and skin-care customers.
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
that 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 years
ended December 31, 1997, 1996 and 1995 were $990,331, $677,284 and $485,059,
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
"Item 7. 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
12
<PAGE> 13
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 17 United States
patents and patent applications: two issued patents owned directly by Nanophase;
four 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 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 the Japan Science and Technology
Corporation (formerly 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 the Japan Science and Technology
Corporation, 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, and related taxes on any such royalty fees paid to
foreign licensors.
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 non-competition agreements with the
Company, they may become competitors of the Company upon termination of
employment.
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
Corporation, Rodel Incorporated, Fujimi Corporation (of Japan) and Solution
Technology Incorporated, all market polishing slurries for CMP. In addition,
Cabot Corporation, 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
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<PAGE> 14
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.
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 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.
GOVERNMENTAL REGULATIONS
The Company's Chicago facility, which houses its coating operations, is a
"small quantity generator" of hazardous materials, including ethanol, under the
Federal Resource Conservation and Recovery Act 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 that contain the Company's nanocrystalline materials are also subject
to governmental regulation. As a result, the Company is required to adhere to
the current Good Manufacturing Practices ("cGMP") requirements of the U.S. Food
and Drug Administration ("FDA") 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.
EMPLOYEES
On March 15, 1998, the Company had a total of 49 full-time employees, 12 of
whom hold advanced degrees. Of the full-time employees, 8 are engaged in
research, development and engineering, 22 are engaged in manufacturing, 4 are
engaged in quality control, 7 are engaged in marketing and sales, and 8 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. The Company
is not subject to any collective bargaining agreements and considers its
relations with its employees to be good.
ITEM 2. PROPERTIES
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
and leases offsite warehouse space to store its materials. 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.
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<PAGE> 15
As of December 31, 1997, 19 PVS plasma reactors were operational and were
capable of 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.
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. The Company is currently completing the build-out of
its Burr Ridge facility and expects to have 23 PVS reactors available for
production in the second quarter of 1998. 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 not be required
until 1999. 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.
ITEM 3. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 1997, the following matters were submitted to
a vote of security holders by written consent dated as of November 7, 1997.
a. The stockholders voted in favor of the Plan and Agreement of Merger
by and between the Company and its Illinois predecessor pursuant to which
the Company was reincorporated in Delaware. Of the 8,277,467 shares of
voting stock then outstanding (on a post-split basis, which split was
consummated immediately prior to the Offering), 5,733,058 shares voted for
the proposal. The remaining votes were not solicited.
b. The stockholders also voted in favor of the first amendment to the
Nanophase Technologies Corporation Amended and Restated 1992 Stock Option
Plan. Of the 8,277,467 shares of voting stock then outstanding (on a
post-split basis, which split was consummated immediately prior to the
Offering) 5,733,058 shares voted for the proposal. The remaining votes were
not solicited.
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<PAGE> 16
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock, $.01 par value per share (the "Common Stock"),
is traded on the Nasdaq National Market under the symbol NANX. Such trading
began on November 26, 1997 in connection with the Company's initial public
offering of Common Stock (the "Offering"). The following table sets forth for
the period indicated the range of high and low closing sale prices for the
Common Stock on the Nasdaq National Market:
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
Fiscal year ending December 31, 1997:
Fourth Quarter (beginning November 26, 1997).............. $14.125 $7.50
</TABLE>
On March 27, 1998, the last reported sale price of the Common Stock was
$5.5625, and there were approximately 247 holders of record of the Common Stock.
The Company has never declared or paid any cash dividends on its Common
Stock and does not anticipate paying any 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
operation, capital requirements and such other factors deemed relevant by the
Board of Directors.
In June 1997, the Company privately issued 421,992 shares of Series F
Convertible Preferred Stock (the "Series F Preferred") at $5.181 per share to 39
investors, which included various individuals, trusts, partnerships and
retirement plans, in exchange for cash in the aggregate amount of $2,186,487. In
August 1997, the Company privately 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 Company privately issued 142,629 shares of
Series F Preferred at $5.181 per share to 15 investors, which included employees
of Donaldson Lufkin & Jenrette Securities Corporation ("DLJ"), various other
individuals and a trust, in exchange for cash in the aggregate amount of
$739,008. Each share of Series F Preferred was automatically converted into one
share of Common Stock upon consummation of the Offering in December 1997.
The sales of shares of Series F Preferred were made in reliance on the
exemption from registration with the Securities and Exchange Commission (the
"Commission") pursuant to Section 4(2) of the Securities Act of 1933, as amended
(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 persons 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 Series F Preferred, as well as
the Common Stock issued upon conversion of the Series F Preferred, issued
pursuant to these transactions were legended.
On November 26, 1997, the Company's Registration Statement on Form S-1
(File No. 333-36937) (the "Registration Statement") relating to the Offering was
declared effective by the Commission. The Registration Statement registered an
amount of Common Stock having an aggregate offering price of $46,000,000. The
Offering was consummated on December 2, 1997 and the Company issued 4,000,000
shares of Common Stock at $8.00 per share (for an aggregate offering amount of
$32,000,000). The managing underwriters of the Offering were DLJ, Furman Selz
LLC and CIBC Oppenheimer Corp. In connection with the Offering, the Company paid
underwriting discounts and commissions of $2,240,000 and $922,064 of other
expenses. Of such expenses, $100,000 was paid to Cross Technologies, Inc., of
which Robert W. Cross is chief executive officer and sole employee, as a
consulting bonus in connection with Mr. Cross' efforts in helping the Company
consummate the Offering. Mr. Cross is chief executive officer, president and a
director of the Company. Otherwise, none of such expenses were paid to
directors, officers, 10% stockholders or affiliates of the
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<PAGE> 17
Company. After deducting such total expenses of $3,162,064, the Company's net
proceeds from the Offering were $28,837,936. Pending its use of the net
proceeds, the Company has invested the net proceeds in short-term, investment
grade, interest-bearing obligations.
ITEM 6. 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 Form 10-K and "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations." The
selected financial data set forth below as of, and for, each of the years in the
five-year period ended December 31, 1997 have been derived from the audited
financial statements of the Company.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Commercial revenue............... $ 25,265 $ 31,144 $ 93,591 $ 485,036 $ 3,723,492
Government research contracts.... -- 64,015 27,995 110,770 --
--------- ----------- ----------- ----------- -----------
Total revenue.................... 25,265 95,159 121,586 595,806 3,723,492
Cost of revenue.................. 61,978 164,746 532,124 4,019,484 3,935,766
Research and development
expense........................ 143,362 456,162 485,059 677,284 990,331
Selling, general and
administrative expense......... 556,616 799,558 1,150,853 1,661,504 2,074,728
--------- ----------- ----------- ----------- -----------
Total operating expense.......... 761,956 1,420,466 2,168,036 6,358,272 7,000,825
--------- ----------- ----------- ----------- -----------
Operating expense in excess of
revenue........................ (736,691) (1,325,307) (2,046,450) (5,762,466) (3,277,333)
Other income, net................ 7,022 37,535 86,576 184,778 204,863
--------- ----------- ----------- ----------- -----------
Net loss......................... $(729,669) $(1,287,772) $(1,959,874) $(5,577,688) $(3,072,470)
========= =========== =========== =========== ===========
Pro forma net loss per
share(1)....................... $ (0.37)
===========
Shares used in computing the pro
forma net loss per share(1).... 8,208,306
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents....... $ 225,230 $ 18,462 $ 261,902 $ 617,204 $ 3,988,368
Working capital................. 225,988 2,226,184 2,451,627 3,070,789 32,038,915
Total assets.................... 406,238 2,568,691 3,741,128 5,539,634 36,196,569
Total stockholders' equity...... 348,434 2,456,516 3,506,050 5,110,450 34,651,334
</TABLE>
- -------------------------
(1) Does not include as of December 31, 1997 the anti-dilutive effect of (i)
662,287 shares of Common Stock issuable upon the exercise of outstanding
warrants at an exercise price of $1.123 per share, (ii) 1,438,989 shares of
Common Stock issuable upon the exercise of outstanding options at a weighted
average exercise price of $2.471 per share and (iii) 1,275,618 shares of
Common Stock reserved for issuance upon the exercise of options that may be
granted in the future under the Stock Option Plan.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Item 6. Selected Financial Data" and financial statements and related notes
thereto appearing elsewhere in this Form 10-K. When used in the following
discussions, the words "anticipates," "believes," "estimates," "expects,"
"plans," "intends" and similar expressions are intended to identify
forward-looking statements. Such statements are subject to certain risks,
uncertainties and contingencies that could cause actual results, performance or
achievements to differ materially from those expressed in, or implied by, such
statements. See "-- Risk Factors."
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
the development of commercial applications and formulations and the recruiting
of marketing, technical and administrative personnel. From inception through
December 31, 1997, 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 Common Stock, each 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 the
Company ships products, when specific milestones are met regarding development
arrangements or when the Company licenses its technology and transfers
proprietary information. Cost of revenue generally includes costs associated
with commercial production, customer development agreements and licensing
arrangements, and net 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. In 1997, the Company incurred additional
one-time costs as it began the completion of its build-out of the Burr Ridge
facility.
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
Years Ended December 31, 1997 and 1996
Total revenue increased to $3,723,492 in 1997, compared to $595,806 in
1996. Commercial revenue increased to $3,723,492 in 1997, compared to $485,036
in 1996. This increase in commercial revenue was due primarily to a one-time
technology transfer fee of $1,400,000 from CIK for a license to use certain
patented technology to exclusively manufacture, use and sell the Company's
nanocrystalline materials in Asia, a product development fee of $775,000 from
Moyco, a one-time fee of $160,000 from CIK for training in the operation of a
PVS reactor, and increased customer development agreements and product sales.
Commercial revenue for the year ended December 31, 1997 was primarily generated
from sales of the Company's products to, product development agreements with,
and licensing fees paid by, customers in the electronics and structural ceramics
and composites markets. In particular, sales to, and fees from, Moyco and fees
from CIK constituted approximately 42% and 43%, respectively, of the Company's
revenue in 1997. Revenue from governmental research contracts decreased to zero
for the year ended December 31, 1997, compared to $110,770 for the same period
in 1996, because the Company did not pursue any further U.S. government
contracts for the year. See "Item 1. Business -- Customers and Applications --
Electronics -- Semiconductor Polishing" and "-- Marketing."
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Cost of revenue decreased to $3,935,766 in 1997, compared to $4,019,484 in
1996. This decrease in cost of revenue was generally attributed to increased
efficiencies in the manufacture of the Company's products and the reduced cost
of product development activities. Cost of revenue as a percentage of total
revenue decreased significantly for the year ended December 31, 1997, compared
to the same period in 1996 because of the increased efficiencies in the
Company's manufacturing processes, minimal costs associated with the one-time
technology transfer fee from CIK and the product development fee from Moyco, and
increased production volumes.
Research and development expense primarily consists of costs associated
with the Company's development or acquisition of new product applications and
coating formulations and the cost of enhancing the Company's manufacturing
processes. Research and development expense increased to $990,331 in 1997,
compared to $677,284 in 1996. The increase in research and development expense
is attributable primarily to the acquisition of certain knowledge and technology
from Moyco for a one-time fee of $223,000, increased costs of developing new
coating formulations and product applications, and ongoing experimentation
expenses associated with technological enhancements and product improvements.
The Company expects to increase its research and development expense in 1998 in
connection with its plans to continue to enhance and expand its product lines
and manufacturing processes.
Selling, general and administrative expense increased to $2,074,728 for the
year ended December 31, 1997, compared to $1,661,504 for the same period in
1996. This increase is attributable primarily to the expensing of certain
one-time costs aggregating $375,103 related to a proposed public offering
withdrawn in May 1997 and certain one-time costs associated with the Company's
Asian distribution agreement with CIK. These one-time costs were offset by
decreases in selling and general expenses. The Company expects its selling,
general and administrative expense to increase in 1998 due to the hiring of
additional marketing, sales and administrative personnel.
Interest income increased to $204,863 in 1997, compared to $184,778 in
1996. This increase is primarily due to the investment of net proceeds from its
sale of equity securities pending use of such proceeds for operations and
expansion.
Years Ended December 31, 1996 and 1995
Total revenue increased to $595,806 in 1996, compared to $121,586 in 1995.
Commercial revenue increased to $485,036 in 1996, compared to $93,591 in 1995.
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,
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. 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. 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. 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.
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Interest income was $184,778 in 1996, compared to $86,576 in 1995. The
increase 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash, cash equivalents and investments were $30,873,220 at
December 31, 1997, compared to $2,614,992 at December 31, 1996 and $2,483,303 at
December 31, 1995. The Company's net cash used in operating activities was
$3,387,367, $5,795,858 and $1,860,353 for the years ended December 31, 1997,
1996 and 1995, respectively. The net cash used in operating activities for the
year ended December 31, 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 $25,854,823, $951,806 and $905,615 for the years ended December 31, 1997,
1996 and 1995, respectively. Capital expenditures amounted to $1,063,608,
$1,173,437 and $937,956 for the years ended December 31, 1997, 1996 and 1995,
respectively, and were primarily for leasehold improvements and equipment
purchases. In December 1997, in connection with the Offering, the Company
received aggregate proceeds, net of issuance costs, of approximately
$28,837,936. In addition, proceeds provided by private placements of equity
securities, net of issuance costs, was $3,770,543 during the year ended December
31, 1997, compared to $7,182,088 and $3,009,408 during the years ended December
31, 1996 and 1995, respectively.
The Company believes that funds from operations and cash on hand, together
with the net proceeds of its initial public offering consummated in December
1997, will be adequate to fund the Company's current operating plans for the
foreseeable future. The Company expects capital expenditures of approximately
$20 million over the next two years, which expenditures will be funded in part
by the net proceeds from the 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 "-- Risk Factors -- Risk of Rescission of
Series F Offering."
At December 31, 1997, the Company had a net operating loss carryforward of
approximately $13.4 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 the issuance of its
various 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 2012. As a result of
the annual limitation, a portion of this carryforward may expire before
ultimately becoming available to reduce income tax liabilities. As a result of
various agreements with companies located in foreign countries, the Company may
have generated foreign tax liabilities for which the Company would be entitled
to an offsetting tax credit that could be used to reduce U.S. income taxes.
IMPACT OF YEAR 2000
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.
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The Company processes its transactions and applications utilizing personal
computers. Based on a recent assessment, the Company determined that no
significant modifications or replacements of its software or systems will be
required to function properly with respect to dates in the year 2000 and
thereafter. As of January 1, 1998, the Company will only acquire software and
invest in systems which are compliant with the year 2000 conventions.
To date, the Company does not have any direct interface between its systems
and those of any significant supplier or customer. Although the Company
recognizes that it is vulnerable to third parties that fail to remediate their
own Year 2000 Issues, it does not believe that such failure would significantly
affect its operations. However, there can be no guarantee that the systems of
other companies on which the Company relies will be timely converted or that
their failure to do so would not have an adverse effect on the Company's
operations. The Company has determined it has no exposure to contingencies
related to the Year 2000 Issue for the products it has previously sold.
QUARTERLY INFORMATION
The following table presents selected unaudited quarterly results of the
Company for each quarter 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 Form 10-K 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.
<TABLE>
<CAPTION>
1997
-------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Commercial revenue......................... $ 429,464 $ 603,003 $ 1,212,948 $1,478,077
Government research contracts.............. -- -- -- --
----------- ----------- ----------- ----------
Total revenue.............................. 429,464 603,003 1,212,948 1,478,077
Cost of revenue............................ (1,102,877) (1,059,204) (1,159,207) (614,478)
Research and development expense........... (161,198) (215,334) (194,678) (419,121)
Selling, general and administrative
expense.................................. (425,497) (765,995) (523,233) (360,003)
Interest income............................ 21,917 9,830 25,645 147,471
----------- ----------- ----------- ----------
Net (loss)/income.......................... $(1,238,191) $(1,427,700) $ (638,525) $ 231,946
=========== =========== =========== ==========
</TABLE>
RISK FACTORS
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
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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 "Item 1. 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 December 31, 1997, had an accumulated deficit of $13,744,671. 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 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 "Item 1. Business" and "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations."
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. For example, sales to,
and fees from, Moyco and fees from CIK constituted approximately 42% and 43%,
respectively, of the Company's revenue in 1997. 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 December 1997,
Nanophase entered into a seven-year supply agreement with EKC, a subsidiary of
ChemFirst, a manufacturer of semiconductor polishing slurries, pursuant to which
the Company will supply certain of its nanocrystalline materials and provide
related research and customer and technical support to EKC. This agreement
supersedes the Company's five-year requirements contract with Moyco and was
entered into after Moyco sold its CMP intellectual property, technologies and
certain other intangible assets to EKC in December 1997. Sales to EKC are
currently expected to constitute a significant portion of the Company's revenues
over the next several years. There can be no assurance, however, that EKC's
purchase of the Company's materials will occur as expected or will not be for a
lesser dollar amount or on a slower timetable as compared to that which the
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Company previously expected from Moyco. See "Item 1. 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 decide to manufacture jointly developed products
internally, obtain them from alternative sources or no longer pursue their
development. 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 "Item 1.
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, and may incur significant start-up
costs and unforeseen 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. There can also be no assurance that the Company will be able to
successfully develop its surface treatment and dispersion technologies so as to
be able to coat significant quantities of its nanocrystalline materials with
consistent quality, at acceptable cost and on a timely basis. 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 "Item 2. Properties."
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 therefore has recently established
an early-stage manufacturing arrangement with a third-party. The Company may
also develop an in-house capability to fabricate net-shaped components or
establish manufacturing arrangements with additional third parties. There can be
no assurance that the Company will be able to successfully collaborate with
others for the fabrication of net-shaped components or fabricate its net-shaped
components internally, or that it will be able to enter into additional
third-party arrangements on satisfactory terms. See "Item 1. Business -- The
Company's Technologies -- Net-Shaping."
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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 four 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 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
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<PAGE> 25
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 "Item 1.
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; 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 additional 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 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. In February 1998, the Company
and WCD mutually agreed to end their cosmetics and skin-care ingredients
distribution relationship. While the Company expects to either discuss
distribution arrangements with other companies having access to the cosmetics
and skin-care market or sell directly to potential cosmetic and skin-care
customers, there can be no assurance that the Company will be able to maintain
significant worldwide access to such market. See "Item 1. Business -- Customers
and Applications" and "--Marketing."
International Sales
For the year ended December 31, 1997, 46% 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, foreign withholding
taxes relating to royalties, difficulties in
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<PAGE> 26
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. In particular, the Company has a license
agreement with CIK for the distribution of its materials throughout various
Asian countries. There can be no assurance that the recent economic
uncertainties in Korea and other Asian markets will not continue and have a
material adverse effect on the Company's sale of its materials in such markets.
See "Item 1. Business -- 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 "Item 1.
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 "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations."
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
26
<PAGE> 27
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 other key employees.
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 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.
Possible Volatility of Common Stock Price
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 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 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.
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 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 materials. 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
27
<PAGE> 28
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 "Item 1. 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.
Anti-Takeover Provisions
The Company's Board of Directors has the authority to issue up to 24,088
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.
Shares Eligible for Future Sale
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. Of the 12,277,467 shares of Common Stock
outstanding as of March 27, 1998, 8,277,467 shares of Common Stock are
"restricted securities" within the meaning of Rule 144 ("Rule 144") under the
Securities Act, (the "Restricted Shares") and all of such Restricted Shares are
subject to the lock-up provisions of a registration rights agreement or lock-up
agreements 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 prior to May 26, 1998 without the prior written consent
of DLJ. Upon expiration of the lock-up provisions of the registration rights
agreement or lock-up agreements (or earlier upon the consent of DLJ), 7,529,365
of the Restricted Shares will be eligible for sale under Rule 144, subject to,
in the case of the affiliates, 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 1,438,989 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. Such optionholders have also agreed not to sell, offer for sale or
otherwise dispose of any shares of Common Stock prior to May 26, 1998 without
the prior written consent of DLJ.
Subject to the lock-up provisions of the registration rights agreement and
lock-up agreements, the holders of all but 95,535 of the outstanding Restricted
Shares and all of the Restricted Shares issuable upon exercise
28
<PAGE> 29
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.
Risk of Rescission of Series F Offering
In June, August and September 1997, the Company issued shares of 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 were converted into approximately 748,000 shares
of Common Stock upon consummation of the Offering in December 1997) pursuant to
Section 12(a)(1) of the Securities Act, and there may be a risk of enforcement
action by the 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 current financial condition.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and financial statement schedules, with the report
of independent auditors, listed in Item 14 are included in this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
29
<PAGE> 30
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information in response to this item is incorporated by reference from
the "Proposal No. 1 -- Election of Directors," "Executive Officers" and "Section
16(a) Beneficial Ownership Compliance" sections of the Definitive Proxy
Statement to be filed with the Commission in connection with the Company's 1998
Annual Meeting of Stockholders (the "1998 Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
The information in response to this item is incorporated by reference from
the section of the 1998 Proxy Statement captioned "Executive Compensation and
Certain Transactions."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information in response to this item is incorporated by reference from
the section of the 1998 Proxy Statement captioned "Security Ownership of
Management and Principal Stockholders."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information in response to this item is incorporated by reference from
the section of the 1998 Proxy Statement captioned "Executive Compensation and
Certain Transactions."
30
<PAGE> 31
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Form 10-K:
1. The following financial statements of the Company, with the report
of independent auditors, are filed as part of this Form 10-K:
Report of Ernst & Young LLP, Independent Auditors
Balance Sheets as of December 31, 1996 and 1997
Statements of Operations for the Years Ended December 31, 1995, 1996
and 1997
Statements of Stockholders' Equity for the Years Ended December 31,
1995, 1996 and 1997
Statements of Cash Flows for the Years Ended December 31, 1995, 1996,
and 1997
Notes to Financial Statements
2. The following financial statement schedules of the Company are
filed as part of this Form 10-K:
Schedule II -- Valuation and Qualifying Accounts
All other financial schedules are omitted because such schedules are
not required or the information required has been presented in the
aforementioned financial statements.
3. The following exhibits are filed with this Form 10-K or
incorporated by reference as set forth below.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C> <S>
2 Plan and Agreement of Merger dated as of November 25, 1997
by and between the Company and its Illinois predecessor.
3.1 Certificate of Incorporation of the Company.
3.2 Bylaws of the Company.
4.1 Specimen stock certificate representing Common Stock,
incorporated by reference to Exhibit 4.1 to the Company's
Registration Statement on Form S-1 (File No. 333-36937) (the
"IPO S-1").
4.2 Form of Warrants, incorporated by reference to Exhibit 4.2
to the IPO S-1.
10.1 The Nanophase Technologies Corporation Amended and Restated
1992 Stock Option Plan, as amended, incorporated by
reference to Exhibit 10.1 to the IPO S-1.
10.2 Form of Indemnification Agreement between the Company and
each of its directors and executive officers, incorporated
by reference to Exhibit 10.3 to the IPO S-1.
10.3 Amended and Restated Registration Rights Agreements dated as
of March 16, 1994, as amended, incorporated by reference to
Exhibit 10.3 to the IPO S-1.
10.4* Employment Agreement dated February 3, 1994 between the
Company and Robert W. Cross, incorporated by reference to
Exhibit 10.4 to the IPO S-1.
10.5* Employment Agreement dated as of September 3, 1996 between
the Company and Dennis J. Nowak, incorporated by reference
to Exhibit 10.5 to the IPO S-1.
10.6* Severance Benefits Agreement dated as of November 15, 1994
between the Company, Steven Lazarus and John C. Parker,
incorporated by reference to Exhibit 10.6 to the IPO S-1.
10.7 License Agreement dated June 1, 1990 between the Company and
ARCH Development Corporation, as amended, incorporated by
reference to Exhibit 10.7 to the IPO S-1.
10.8 License Agreement dated October 12, 1994 between the Company
and Hitachi, incorporated by reference to Exhibit 10.8 to
the IPO S-1.
</TABLE>
31
<PAGE> 32
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<S> <C>
10.9 License Agreement dated May 31, 1996 between the Company and
Research Development Corporation of Japan, incorporated by
reference to Exhibit 10.9 to the IPO S-1.
10.10 License Agreement dated April 1, 1996 between the Company
and Cornell Research Foundation, incorporated by reference
to Exhibit 10.1 to the IPO S-1.
10.11* Consulting and Stock Purchase Agreement between Richard W.
Siegel and the Company dated as of May 9, 1990, as amended
February 13, 1991, November 21, 1991 and January 1, 1992,
incorporated by reference to Exhibit 10.11 to the IPO S-1.
10.12 Lease Agreement between the Village of Burr Ridge and the
Company, dated September 15, 1994, incorporated by reference
to Exhibit 10.12 to the IPO S-1.
10.13 Distribution Agreement between the Company and C.I. Kasei,
Ltd., (a subsidiary of Itochu Corporation) dated as of
October 30, 1996, incorporated by reference to Exhibit 10.15
of the IPO S-1.
10.14 Purchase Agreement between the Company and LWT Instruments,
Inc., dated February 1, 1997, incorporated by reference to
Exhibit 10.16 to the IPO S-1.
10.15 Letter of Understanding between the Company and LWT
Services, Inc. dated as of January 13, 1998.
10.16 Supply Agreement between the Company and Schering-Plough
HealthCare Products, Inc. dated as of March 15, 1997,
incorporated by reference to Exhibit 10.17 to the IPO S-1.
10.17 License Agreement between the Company and C.I. Kasei Co.,
Ltd. (a subsidiary of Itochu Corporation) dated as of
December 30, 1997.
10.18 Supply Agreement by and between the Company and EKC
Technology, Inc., dated as of December 31, 1997.
11 Statement regarding computation of per share earnings.
27.1 Financial Data Schedule.
27.2 Restated Financial Data Schedule.
</TABLE>
---------------------------------
* Management contract or compensatory plan or arrangement required to be
filed as an exhibit to this Form 10-K.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed by the Company for the quarter ended
December 31, 1997.
32
<PAGE> 33
NANOPHASE TECHNOLOGIES CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........... F-2
Balance Sheets as of December 31, 1996 and 1997............. F-3
Statements of Operations for the years ended December 31,
1995, 1996 and 1997....................................... F-4
Statements of Stockholders' Equity for the years ended
December 31, 1995, 1996 and 1997.......................... F-5
Statements of Cash Flows for the years ended December 31,
1995, 1996 and 1997....................................... F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<PAGE> 34
The Board of Directors and Stockholders
Nanophase Technologies Corporation
We have audited the accompanying balance sheets of Nanophase Technologies
Corporation as of December 31, 1996 and 1997, and the related statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 1997. Our audits also included the financial
statement schedule listed in the Index at Item 14(a). These financial statements
and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule 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, 1996 and 1997, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1997, in conformity with generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
Ernst & Young LLP
Chicago, Illinois
January 23, 1998
F-2
<PAGE> 35
NANOPHASE TECHNOLOGIES CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------------
1996 1997
---- ----
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 617,204 $ 3,988,368
Investments............................................... 1,997,788 26,884,852
Trade accounts receivable, less allowance for doubtful
accounts of $0 in 1996 and $19,276 in 1997............. 389,501 1,641,489
Inventories............................................... 445,205 957,303
Prepaid expenses and other current assets................. 50,275 112,138
------------ ------------
Total current assets................................... 3,499,973 33,584,150
Equipment and leasehold improvements, net................... 1,794,798 2,399,893
Other assets, net........................................... 244,863 212,526
------------ ------------
$ 5,539,634 $ 36,196,569
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 221,936 $ 930,397
Accrued expenses.......................................... 207,248 614,838
------------ ------------
Total current liabilities.............................. 429,184 1,545,235
STOCKHOLDERS' EQUITY:
Series A convertible preferred stock, no par value; 292,728
shares authorized, 169,490 shares issued and outstanding
at December 31, 1996; no shares authorized, issued, and
outstanding at December 31, 1997.......................... 600,000 --
Series B convertible preferred stock, no par value;
1,309,722 shares authorized, 758,358 shares issued and
outstanding at December 31, 1996; no shares authorized,
issued, and outstanding at December 31, 1997.............. 851,351 --
Series C convertible preferred stock, no par value;
1,143,846 shares authorized, 662,287 shares issued and
outstanding at December 31, 1996; no shares authorized,
issued, and outstanding at December 31, 1997.............. 743,500 --
Series D convertible preferred stock, no par value;
6,729,566 shares authorized, 3,896,419 shares issued and
outstanding at December 31, 1996; no shares authorized,
issued, and outstanding at December 31, 1997.............. 6,429,500 --
Series E convertible preferred stock, no par value;
3,500,000 shares authorized, 1,921,800 shares issued and
outstanding at December 31, 1996; no shares authorized,
issued, and outstanding at December 31, 1997.............. 7,157,850 --
Series F convertible preferred stock, no par value; no
shares authorized, issued, and outstanding at December 31,
1996 and December 31, 1997................................ -- --
Preferred stock, $.01 par value; no shares authorized,
issued, and outstanding at December 31, 1996; 24,088
shares authorized and no shares issued and outstanding at
December 31, 1997......................................... -- --
Common stock, no par value at December 31, 1996 and $.01 par
value at December 31, 1997; 10,316,158 shares authorized
at December 31, 1996 and 25,000,000 shares authorized at
December 31, 1997; 77,586 shares issued and outstanding at
December 31, 1996 and 12,277,467 shares issued and
outstanding at December 31, 1997.......................... 450 122,775
Additional paid-in capital.................................. -- 48,273,230
Accumulated deficit......................................... (10,672,201) (13,744,671)
------------ ------------
Total stockholders' equity................................ 5,110,450 34,651,334
------------ ------------
$ 5,539,634 $ 36,196,569
============ ============
</TABLE>
See Notes to Financial Statements
F-3
<PAGE> 36
NANOPHASE TECHNOLOGIES CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
REVENUE:
Commercial revenue.................................. $ 93,591 $ 485,036 $ 3,723,492
Governmental research contracts..................... 27,995 110,770 --
----------- ----------- -----------
Total revenue.................................. 121,586 595,806 3,723,492
OPERATING EXPENSE:
Cost of revenue..................................... 532,124 4,019,484 3,935,766
Research and development expense.................... 485,059 677,284 990,331
Selling, general and administrative expense......... 1,150,853 1,661,504 2,074,728
----------- ----------- -----------
Total operating expenses....................... 2,168,036 6,358,272 7,000,825
----------- ----------- -----------
Operating expenses in excess of revenue............... (2,046,450) (5,762,466) (3,277,333)
Interest income....................................... 86,576 184,778 204,863
----------- ----------- -----------
Net loss.............................................. $(1,959,874) $(5,577,688) $(3,072,470)
=========== =========== ===========
Pro forma net loss per share.......................... $ (0.48) $ (0.82) $ (0.37)
=========== =========== ===========
Pro forma weighted average number of common shares
outstanding......................................... 4,122,881 6,835,680 8,208,306
=========== =========== ===========
</TABLE>
See Notes to Financial Statements
F-4
<PAGE> 37
NANOPHASE TECHNOLOGIES CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
------------------------- --------------------- PAID-IN ACCUMULATED
DESCRIPTION SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
----------- ------ ------ ------ ------ ---------- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance as of January 1, 1995... 3,730,073 $ 5,590,705 77,586 $ -- $ 450 $ (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.......................... 5,472,520 8,600,113 77,586 -- 450 (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.......................... 7,408,354 15,782,201 77,586 -- 450 (10,672,201) 5,110,450
Issuance of Series F shares
net of offering costs....... 748,089 3,770,543 -- -- -- -- 3,770,543
Exercise of stock options..... -- -- 43,425 434 4,441 -- 4,875
Conversion of all outstanding
Preferred shares into Common
shares and all Common shares
to $0.01 par value.......... (8,156,443) (19,552,744) 8,156,456 82,341 19,470,403 -- --
Issuance of Common shares, net
of offering costs........... -- -- 4,000,000 40,000 28,797,936 -- 28,837,936
Net loss for the year ended
December 31, 1997........... -- -- -- -- -- (3,072,470) (3,072,470)
---------- ------------ ---------- -------- ----------- ------------ -----------
Balance as of December 31,
1997.......................... -- $ -- 12,277,467 $122,775 $48,273,230 $(13,744,671) $34,651,334
========== ============ ========== ======== =========== ============ ===========
</TABLE>
See Notes to Financial Statements
F-5
<PAGE> 38
NANOPHASE TECHNOLOGIES CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net Loss........................................... $(1,959,874) $ (5,577,688) $ (3,072,470)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization................. 126,947 309,850 416,414
Loss on sale of equipment..................... -- -- 29,281
Write off of patents.......................... 19,857 -- --
Changes in assets and liabilities related to
operations:
Trade accounts receivable..................... (23,573) (318,656) (1,251,988)
Inventories................................... (65,280) (379,924) (512,098)
Prepaid expense and other assets.............. (50,261) 17,002 (164,365)
Patent costs.................................. (31,072) (40,548) (27,314)
Accounts payable.............................. 168,643 2,525 708,461
Accrued liabilities........................... (45,740) 191,581 486,712
----------- ------------ -------------
Net cash used in operating activities.............. (1,860,353) (5,795,858) (3,387,367)
INVESTING ACTIVITIES:
Acquisition of equipment and leasehold
improvements..................................... (937,956) (1,173,437) (1,063,608)
Purchases of held-to-maturity investments.......... (8,512,957) (15,486,131) (118,684,404)
Maturities of held-to-maturity investments......... 8,547,165 15,709,744 93,797,340
(Increase) decrease in asset held in trust......... (1,867) (1,982) 78,849
Proceeds from sale of equipment.................... -- -- 17,000
----------- ------------ -------------
Net cash used in investing activities.............. (905,615) (951,806) (25,854,823)
FINANCING ACTIVITIES:
Proceeds from issuance of stock, net of offering
costs............................................ 3,009,408 7,182,088 32,613,354
Deferred offering costs............................ -- (79,122) --
----------- ------------ -------------
Net cash provided by financing activities.......... 3,009,408 7,102,966 32,613,354
----------- ------------ -------------
Increase in cash and cash equivalents.............. 243,440 355,302 3,371,164
Cash and cash equivalents at beginning of period... 18,462 261,902 617,204
----------- ------------ -------------
Cash and cash equivalents at end of period......... $ 261,902 $ 617,204 $ 3,988,368
=========== ============ =============
</TABLE>
See Notes To Financial Statements
F-6
<PAGE> 39
NANOPHASE TECHNOLOGIES CORPORATION
NOTES TO FINANCIAL STATEMENTS
(1) DESCRIPTION OF BUSINESS
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. The Company began full-scale production in early 1997 at
which time it no longer was a development stage company. The Company issued
common stock in its initial public offering consummated on December 2, 1997.
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 $51,400, $256,500, and $1,695,700 for the years
ended December 31, 1995, 1996, and 1997, respectively.
(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.
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.
Patent Costs
Patent costs are included in other assets and 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.
F-7
<PAGE> 40
NANOPHASE TECHNOLOGIES CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Commercial Revenue
Commercial revenue consists of sales of product and revenue from research
and development arrangements with non-governmental entities, and fees from the
transfer of technology. 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. Fees related to the transfer of technology are
recognized when the transfer of technology to the acquiring party is completed
and the Company has no further significant obligation.
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 significant effect on the financial position or results of operation of the
Company.
Research and Development Expense
Expenditures for research and development activities are charged to
operations as incurred by the Company. During 1997, the Company acquired certain
research and development from a customer for $223,000 and charged this
acquisition to research and development expense.
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 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.
F-8
<PAGE> 41
NANOPHASE TECHNOLOGIES CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Net Loss and Pro Forma Net Loss Per Share
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" (FASB No. 128).
FASB No. 128 replaced the calculation of primary and fully diluted earnings per
share with basic and diluted earnings per share. Unlike primary earnings per
share, basic earnings per share excludes any dilutive effects of options,
warrants and convertible securities. Diluted earnings per share is generally
consistent with the previously reported fully diluted earnings per share. All
earnings per share amounts for all periods have been presented and, where
appropriate, restated to conform to the FASB No. 128 requirements.
Pro forma net loss per 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.
In addition, for the pro forma calculation, all convertible preferred stock is
treated as if converted into common shares for all periods shown.
Net loss per common share computed on a historical basis is as follows:
$25.26, $71.89 and $2.39 for the years ended December 31, 1995, 1996 and 1997,
respectively. The weighted average number of common shares outstanding used to
calculate these net loss per common share amounts are 77,586, for 1995 and 1996,
and 1,283,359 for 1997.
(3) INVESTMENTS
Investments consist of U.S. Treasury bills, government bonds, and
commercial paper with an estimated fair value of $1,998,000 and $26,885,000 at
December 31, 1996 and 1997, respectively. All investments have been classified
as held-to-maturity and mature in the subsequent year.
(4) INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------
1996 1997
---- ----
<S> <C> <C>
Raw Materials............................................ $332,167 $379,505
Finished Goods........................................... 113,038 577,798
-------- --------
$445,205 $957,303
======== ========
</TABLE>
(5) EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements consist of the following:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------
1996 1997
---- ----
<S> <C> <C>
Machinery and equipment............................... $1,662,721 $1,835,964
Office equipment...................................... 113,959 116,307
Office furniture...................................... 49,864 49,864
Leasehold improvements................................ 447,465 610,932
---------- ----------
2,274,009 2,613,067
Less: Accumulated depreciation and amortization....... (479,211) (881,323)
---------- ----------
1,794,798 1,731,744
Construction in progress.............................. -- 668,149
---------- ----------
$1,794,798 $2,399,893
========== ==========
</TABLE>
F-9
<PAGE> 42
NANOPHASE TECHNOLOGIES CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(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 $8,100
for this facility. The Company also leases a smaller pilot manufacturing space
as well as offsite warehouse space, both under renewable annual agreements.
Monthly minimum lease payments amount to $5,000 and $2,100, respectively, for
these facilities.
Net rent expense under these leases amounted to $122,422, $175,538, and
$168,781, for the years ended December 31, 1995, 1996, and 1997, respectively.
(7) ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------
1996 1997
---- ----
<S> <C> <C>
Accrued subcontract costs................................ $ 40,000 $161,791
Accrued payroll and related expenses..................... 87,124 138,798
Accrued costs for goods received but not invoiced........ 24,332 98,802
Other.................................................... 55,792 215,447
-------- --------
$207,248 $614,838
======== ========
</TABLE>
(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 the total 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 year ended December 31,
1995, the Company offset $154,710 received from the U.S. government 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 $54,680, $236,019, and
$1,445,705 of revenues for the years ended December 31, 1995, 1996, and 1997,
respectively.
(9) LICENSE AGREEMENTS
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 December 31, 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
December 31, 1997, royalties under this agreement amounting to $10,688 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
F-10
<PAGE> 43
NANOPHASE TECHNOLOGIES CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
defined. As of December 31, 1997, royalties under this agreement approximated
$13,000. 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 December 31, 1997, no royalty payments were due to this party under this
agreement.
In December 1997, the Company entered into a license agreement whereby the
Company granted a royalty-bearing exclusive right and license, as defined, to
purchase, make, use and sell nanocrystalline materials to a third party. As
consideration for the right and license thereby granted, the Company recognized
a non-refundable technology transfer fee of $1,400,000, which was earned upon
execution of the agreement. As defined, the Company also will earn royalties on
net sales of manufactured products containing nanocrystalline materials. The
agreement also provides for minimum sales targets and minimum royalty payments
to maintain exclusivity. The agreement expires on March 31, 2013 unless earlier
terminated as provided therein. As of December 31, 1997, no royalty payments
were earned by the Company under this agreement.
(10) INCOME TAXES
The Company has net operating loss carryforwards for tax purposes of
approximately $13,400,000 at December 31, 1997, which expire between 2005 and
2012. The Company has not paid income taxes since inception.
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:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------------
1996 1997
---- ----
<S> <C> <C>
DEFERRED TAX ASSETS:
Net operating loss carryforward................... $ 4,212,000 $ 5,226,000
Start-up cost capitalized for income tax
purposes....................................... 162,000 122,000
Other accrued costs............................... 29,000 74,000
----------- -----------
Total deferred tax assets...................... 4,403,000 5,422,000
DEFERRED TAX LIABILITY:
Accelerated tax depreciation...................... (53,000) (62,000)
----------- -----------
Net deferred tax asset.............................. 4,350,000 5,360,000
Less: Valuation allowance......................... (4,350,000) (5,360,000)
----------- -----------
Deferred income taxes............................... $ -- $ --
=========== ===========
</TABLE>
The valuation allowance increased $1,010,000 for the year ended December
31, 1997 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
the Company's initial public offering of common stock, may subject the Company
to annual limitations on the utilization of its net operating loss carryforward.
As a result of certain transactions with third parties operating in foreign
countries, the Company may be subject to the withholding and payment of foreign
income taxes as transactions are completed. Under the Internal Revenue Code,
foreign tax payments may be used to offset federal income tax liabilities when
F-11
<PAGE> 44
NANOPHASE TECHNOLOGIES CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
incurred, subject to certain limitations. At December 31, 1997, the Company had
not recognized any foreign tax liability or foreign tax credit regarding these
transactions.
(11) CAPITAL STOCK
In November 1997, the Company's Board of Directors approved a migratory
merger of the Company from Illinois to Delaware, authorized a reverse stock
split and restated the par value of the Company's common stock. All 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 and restatement
of the par value to $0.01 for all common stock.
In 1997, a total of 748,089 shares of Series F convertible preferred stock
was issued for cash amounting to $3,770,543, which is net of financing costs of
$105,565.
In November 1997, a total of 4,000,000 shares of common stock was issued in
conjunction with the Company's initial public offering at an offering price of
$8 per share. The Company received proceeds of $28,837,936, which is net of
offering costs of $3,162,064. Pursuant to the Company's prior Illinois articles
of incorporation, all Series A,B,C,D,E and F convertible preferred stock was
automatically converted to common stock in conjunction with the initial public
offering.
At December 31, 1997, authorized but unissued shares of common stock have
been reserved for future issuance as follows:
<TABLE>
<S> <C>
Warrants.................................................... 662,287
Options..................................................... 2,714,607
---------
3,376,894
=========
</TABLE>
(12) STOCK OPTIONS AND WARRANTS
The Company has entered into stock option agreements with certain officers,
employees, directors (one of whom is also a service provider) and three Advisory
Board members. At December 31, 1997, the Company had granted options to purchase
1,438,989 shares of common stock. The stock options generally expire ten years
from the date of grant. Of the total number of options granted, 673,377 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
are met. Of the remaining 765,612 outstanding options, 748,242 vest over a
five-year period and 17,370 vest over a three-year period from their respective
grant dates.
F-12
<PAGE> 45
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 December 31, 1997:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER EXERCISE AVERAGE EXERCISE
OF OPTIONS PRICE PRICE
---------- -------- ----------------
<S> <C> <C> <C>
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 exercised during 1997......................... (43,425) .112 .112
Options canceled during 1997.......................... (150,482) .112-3.886 3.760
---------
Outstanding at December 31, 1997...................... 1,438,989 .112-5.181 2.471
=========
</TABLE>
At December 31, 1997, options for 180,378, 75,270, 62,903 and 17,833 shares
of common stock were exercisable at $.112, $.432, $1.727 and $3.886 per share,
respectively. To date, 43,425 options have been exercised and none have expired.
The weighted average remaining contractual life of the outstanding options at
December 31, 1997 was eight years.
In connection with the issuance of Series C convertible preferred stock,
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 December 31, 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 assumptions for the years ended December
31, 1995, 1996, and 1997: U.S. government zero coupon 7-year bond interest rates
ranging from 6.0% to 7.2%, depending upon the specific grant date of the
options; 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 was privately held and no market existed for its stock in 1995, 1996, or
during the period during which options were granted in 1997. The weighted
average fair value of the net options granted during 1995, 1996 and 1997 was
$.170, $1.124 and $1.753 per share, respectively.
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 opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
F-13
<PAGE> 46
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 would be $1,965,649, $5,621,482, $3,275,177 and
the pro forma net loss per share would be $0.48, $0.82, and $0.40 for the years
ended December 31, 1995, 1996, and 1997, respectively.
(13) 401(K) PROFIT-SHARING PLAN
The Company has 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) 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.
(15) SIGNIFICANT CUSTOMERS
Revenue from two customers was approximately 43% and 42%, respectively, of
total revenue for the year ended December 31, 1997. The amount due from one of
these companies comprised 85% of the Company's trade accounts receivable at
December 31, 1997.
F-14
<PAGE> 47
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
----------------------------------------------------------------------
BALANCE BEGINNING COSTS AND OTHER BALANCE AT
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS END OF PERIOD
----------- ----------------- --------- -------- ---------- -------------
<S> <C> <C> <C> <C> <C>
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
========== ========== ==== ======= ==========
Year ended December 31, 1997:
Allowance for doubtful accounts..... $ -- $ 46,976 $ -- $27,700 $ 19,276
========== ========== ==== ======= ==========
Deferred tax asset valuation
account........................... $4,350,000 $1,010,000 $ -- $ -- $5,360,000
========== ========== ==== ======= ==========
</TABLE>
S-1
<PAGE> 48
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on the 30th day of
March, 1998.
NANOPHASE TECHNOLOGIES CORPORATION
By: /s/ ROBERT W. CROSS
------------------------------------
Robert W. Cross
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on the 30th day of March, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/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
Dennis J. Nowak (Principal Financial and Accounting Officer)
/s/ LEONARD A. BATTERSON Chairman of the Board and Director
- ------------------------------------------------
Leonard A. Batterson
/s/ STEVEN LAZARUS Director
- ------------------------------------------------
Steven Lazarus
/s/ DONALD PERKINS Director
- ------------------------------------------------
Donald Perkins
/s/ RICHARD W. SIEGEL Director
- ------------------------------------------------
Richard W. Siegel
/s/ ROBERT W. SHAW, JR. Director
- ------------------------------------------------
Robert W. Shaw, Jr.
</TABLE>
<PAGE> 49
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -------
<S> <C>
2 Plan and Agreement of Merger dated as of November 25, 1997
by and between the Company and its Illinois predecessor.
3.1 Certificate of Incorporation of the Company.
3.2 Bylaws of the Company.
10.15 Letter of Understanding between the Company and LWT
Services, Inc. dated as of January 13, 1998.
10.17 License Agreement between the Company and C.I. Kasei Co.,
Ltd. (a subsidiary of Itochu Corporation) dated as of
December 30, 1997.
10.18 Supply Agreement by and between the Company and EKC
Technology, Inc., dated as of December 31, 1997.
11 Statement regarding computation of per share earnings.
27.1 Financial Data Schedule.
27.2 Restated Financial Data Schedule.
</TABLE>
<PAGE> 1
EXHIBIT 2
PLAN AND AGREEMENT OF MERGER
OF
NANOPHASE TECHNOLOGIES CORPORATION
AN ILLINOIS CORPORATION
WITH AND INTO
NANOPHASE TECHNOLOGIES CORPORATION OF DELAWARE
A DELAWARE CORPORATION
SECTION 1. AGREEMENT TO MERGE. Nanophase Technologies Corporation,
an Illinois corporation ("NTC-ILLINOIS"), shall be merged into Nanophase
Technologies Corporation of Delaware, a Delaware corporation ("NTC-DELAWARE"),
in accordance with applicable provisions of the laws of Illinois and Delaware.
NTC-Delaware shall be the surviving corporation.
SECTION 2. TERMS AND CONDITIONS.
2.1 The terms and conditions of the merger and the mode of carrying
the merger into effect are as follows.
2.2 NTC-Illinois and NTC-Delaware shall become a single corporation
which shall be NTC-Delaware, the surviving corporation. The separate existence
of NTC-Illinois shall cease but the existence of NTC-Delaware shall continue.
2.3 NTC-Delaware shall possess all the rights, privileges,
immunities, and franchises, of a public as well as of a private nature, of
NTC-Delaware and of NTC-Illinois. All property, real, personal and mixed, and
all debts due on whatever account, including subscriptions to shares, and all
other choses in action, and all and every other interest, of or belonging to or
due to NTC-Illinois shall be taken and deemed to be transferred to and vested
in NTC-Delaware without further act. The title to any real estate, or any
interest therein, vested in NTC-Illinois shall be taken and deemed to be
transferred to NTC-Delaware and shall not revert or be in any way impaired by
reason of the merger contemplated by this Plan and Agreement of Merger (the
"MERGER").
2.4 NTC-Delaware shall be responsible and liable for all the
liabilities and obligations of NTC-Illinois.
2.5 The aggregate amount of the net assets of NTC-Delaware and
NTC-Illinois available for the payment of dividends or the purchase of treasury
shares immediately prior to the Merger, to the extent that the value thereof is
not transferred to paid-in capital by the issuance of shares of NTC-Delaware or
otherwise, shall continue to be available for the payment of dividends or the
purchase of treasury shares by NTC-Delaware.
<PAGE> 2
SECTION 3. CONVERSION OF SHARES.
3.1 The manner and basis of converting the shares of NTC-Delaware and
NTC-Illinois into shares or other securities or obligations of NTC-Delaware are
as follows.
3.2 The number of shares which NTC-Illinois has authority to issue is:
(a) 21,817,198 shares of Common Stock, no par value, of which 134,000
shares are issued; and
(b) 24,849,324 shares of Preferred Stock, no par value, of which
292,728 are designated Series A Convertible Preferred Stock, 1,309,772 are
designated Series B Convertible Preferred Stock, 1,143,846 are designated
Series C Convertible Preferred Stock, 1,143,846 are designated Series C-1
Convertible Preferred Stock, 6,729,566 are designated Series D Convertible
Preferred Stock, 6,729,566 are designated Series D-1 Convertible Preferred
Stock, 3,500,000 are designated Series E Convertible Preferred Stock, and
4,000,000 are designated Series F Convertible Preferred Stock.
(c) Of the shares designated Series A Convertible Preferred Stock,
292,728 shares are issued. Of the shares designated Series B Convertible
Preferred Stock, 1,309,772 shares are issued. Of the shares designated Series
C Convertible Preferred Stock, 1,143,846 shares are issued. Of the shares
designated Series C-1 Convertible Preferred Stock, no shares are issued. Of
the shares designated Series D Convertible Preferred Stock, 6,729,566 shares
are issued. Of the shares designated Series D-1 Convertible Preferred Stock,
no shares are issued. Of the shares designated Series E Convertible Preferred
Stock, 3,319,171 shares are issued. Of the shares designated Series F
Convertible Preferred Stock, 1,292,036 are issued.
3.3 The number of shares which NTC-Delaware has authority to issue is:
(a) 25,000,000 shares of Common Stock, $0.01 par value, of which
one share is issued; and
(b) 17,000,000 shares of Preferred Stock, $0.01 par value, of
which 292,728 are designated Series A Convertible Preferred Stock, 1,309,772
are designated Series B Convertible Preferred Stock, 1,143,846 are designated
Series C Convertible Preferred Stock, 1,143,846 are designated Series C-1
Convertible Preferred Stock, 6,729,566 are designated Series D Convertible
Preferred Stock, 6,729,566 are designated Series D-1 Convertible Preferred
Stock, 3,500,000 are designated Series E Convertible Preferred Stock, and
4,000,000 are designated Series F Convertible Preferred Stock.
(c) None of the shares of Preferred Stock of NTC-Delaware is
issued.
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<PAGE> 3
3.4 Upon the issuance of a Certificate of Merger:
(a) Each share of Common Stock of NTC-Illinois which is issued and
outstanding on the effective date of the Merger shall be converted, by and upon
the Merger and without any action on the part of the holder of such share, into
0.579 shares or portion of a share of fully paid and non-assessable Common
Stock of NTC-Delaware, as described below. The rate at which such shares shall
be converted is hereby designated as the "Conversion Rate". Prior to the
effective date of the Merger, the Boards of Directors of NTC-Illinois and
NTC-Delaware, or authorized committees thereof, shall, upon the advice of their
investment bankers, fix the Conversion Rate such that the shares of Common
Stock of the surviving corporation to be sold in the surviving corporation's
initial public offering (the "OFFERING") may be issued in a price range
necessary or appropriate to effect the Offering.
(b) Each share of Series A Convertible Preferred Stock of
NTC-Illinois which is issued and outstanding on the effective date of the
Merger shall be converted, by and upon the Merger and without any action on the
part of the holder of such share, into such number of shares or portion of a
share of fully paid and non-assessable Series A Convertible Preferred Stock of
NTC-Delaware as shall be determined by multiplying such share by the Conversion
Rate.
(c) Each share of Series B Convertible Preferred Stock of
NTC-Illinois which is issued and outstanding on the effective date of the
Merger shall be converted, by and upon the Merger and without any action on the
part of the holder of such share, into such number of shares or portion of a
share of fully paid and non-assessable Series B Convertible Preferred Stock of
NTC-Delaware as shall be determined by multiplying such share by the Conversion
Rate.
(d) Each share of Series C Convertible Preferred Stock of
NTC-Illinois which is issued and outstanding on the effective date of the
Merger shall be converted, by and upon the Merger and without any action on the
part of the holder of such share, into such number of shares or portion of a
share of fully paid and non-assessable Series C Convertible Preferred Stock of
NTC-Delaware as shall be determined by multiplying such share by the Conversion
Rate.
(e) Each share of Series D Convertible Preferred Stock of
NTC-Illinois which is issued and outstanding on the effective date of the
Merger shall be converted, by and upon the Merger and without any action on the
part of the holder of such share, into such number of shares or portion of a
share of fully paid and non-assessable Series D Convertible Preferred Stock of
NTC-Delaware as shall be determined by multiplying such share by the Conversion
Rate.
(f) Each share of Series E Convertible Preferred Stock of
NTC-Illinois which is issued and outstanding on the effective date of the
Merger shall be converted, by and upon the Merger and without any action on the
part of the holder of such share, into such number of shares or portion of a
share of fully paid and non-assessable Series E Convertible Preferred Stock of
NTC-Delaware as shall be determined by multiplying such share by the Conversion
Rate.
(g) Each share of Series F Convertible Preferred Stock of
NTC-Illinois which is issued and outstanding on the effective date of the
Merger shall be converted, by and upon the Merger and without any action on the
part of the holder of such share, into such number of shares or
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<PAGE> 4
portion of a share of fully paid and non-assessable Series F Convertible
Preferred Stock of NTC-Delaware as shall be determined by multiplying such
share by the Conversion Rate.
(h) The paid-in capital of NTC-Illinois shall be transferred to the
paid-in capital of NTC-Delaware.
(i) Certificates for the shares of Common Stock, Series A Convertible
Preferred Stock, Series B Convertible Preferred Stock, Series C Convertible
Preferred Stock, Series D Convertible Preferred Stock, Series E Convertible
Preferred Stock and Series F Convertible Preferred Stock of NTC-Delaware shall
be issued to the holders of all of the outstanding Common Stock, Series A
Convertible Preferred Stock, Series B Convertible Preferred Stock, Series C
Convertible Preferred Stock, Series D Convertible Preferred Stock, Series E
Convertible Preferred Stock and Series F Convertible Preferred Stock,
respectively, as of the Merger date, in place and upon the surrender of
previously issued stock certificates, on the aforesaid basis. Stock
certificates of NTC-Illinois shall be surrendered to NTC-Delaware at its office
located at 453 Commerce Street, Burr Ridge, Illinois 60521. However, upon the
Merger becoming effective, the holders of the shares of NTC-Illinois
outstanding immediately prior to the Merger shall thereupon cease to be holders
of said shares and shall be and become holders of shares of NTC-Delaware upon
the basis hereinabove specified, whether or not stock certificates representing
the previously outstanding shares of NTC-Illinois are surrendered or stock
certificates representing shares of NTC-Delaware are issued and delivered.
Upon the effective time of the Merger, the shares of NTC-Delaware outstanding
immediately prior to the Merger shall be automatically cancelled and retired
and shall cease to exist and no new shares shall be issued in lieu thereof.
SECTION 4. CERTIFICATE OF INCORPORATION.
4.1 The Certificate of Incorporation of the surviving corporation
shall be amended by the Merger by the deletion of Article 1 in its entirety and
the insertion in lieu thereof of the following Article 1:
"ARTICLE 1. NAME
The name of the Corporation is NANOPHASE TECHNOLOGIES CORPORATION
(the "CORPORATION")."
4.2 As of the effective time of the Merger, the Certificate of
Incorporation of NTC-Delaware, amended in accordance with Section 4.1 above,
and the By-Laws of NTC-Delaware shall be the Certificate of Incorporation and
the By-Laws of the surviving corporation.
SECTION 5. TERMINATION. At any time prior to the filing of the
Articles of Merger with respect to the Merger, the Merger may be terminated or
abandoned by the Board of Directors of either NTC-Delaware or NTC-Illinois
notwithstanding approval of the Merger by the shareholders of NTC-Illinois or
the stockholders of NTC-Delaware, subject to the provisions of applicable law.
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<PAGE> 5
SECTION 6. AMENDMENTS. The Board of Directors of either NTC-Illinois
or NTC-Delaware may amend this Plan and Agreement of Merger at any time prior
to the filing of the Articles of Merger with respect to the Merger, provided
that an amendment made subsequent to the adoption of this Plan and Agreement of
Merger by the shareholders of NTC- Illinois and the stockholders of
NTC-Delaware shall not, without the consent of such shareholders and
stockholders, as appropriate, effect any change which could not be effected
under applicable law without their consent.
SECTION 7. ADOPTION. This Plan and Agreement of Merger has been
approved, adopted, certified, executed and acknowledged by NTC-Illinois and
NTC-Delaware in accordance with the laws under which each is, respectively,
organized.
***END OF TEXT***
<PAGE> 6
NANOPHASE TECHNOLOGIES CORPORATION Dated November 25, 1997
(AN ILLINOIS CORPORATION)
By /S/ ROBERT CROSS Attested by: /S/ DENNIS NOWAK
------------------- -------------------
Robert Cross Dennis Nowak
President Secretary
NANOPHASE TECHNOLOGIES CORPORATION OF DELAWARE Dated November 25, 1997
(A DELAWARE CORPORATION)
By /S/ ROBERT CROSS Attested by: /S/ DENNIS NOWAK
------------------- -------------------
Robert Cross Dennis Nowak
President Secretary
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<PAGE> 1
EXHIBIT 3.1
CERTIFICATE OF INCORPORATION
OF
NANOPHASE TECHNOLOGIES CORPORATION
ARTICLE I
The name of the corporation is Nanophase Technologies Corporation.
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.
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:
<TABLE>
<CAPTION>
NUMBER OF
SHARES PAR VALUE
CLASS AUTHORIZED PER SHARE
------------------------------------------ -------------- -----------
<S> <C> <C>
Common Stock (the"Common Stock") 25,000,000 $.01
Preferred Stock (the "Preferred Stock") 17,000,000 $.01
</TABLE>
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
<PAGE> 2
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
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, $.01 par value
(herein designated "Series A Preferred"). A second series consists of
1,309,772 shares and is designated Series B Convertible Preferred
Stock, $.01 par value (herein called "Series B Preferred"). A third
series consists of 1,143,846 shares designated as Series C Convertible
Preferred Stock, $.01 par value (herein called "Series C Preferred"),
and 1,143,846 shares designated as Series C-1 Convertible Preferred
Stock, $.01 par value (herein called "Series C-1 Preferred"). A
fourth series consists of 6,729,566 shares designated as Series D
Convertible Preferred Stock, $.01 par value (herein called "Series D
Preferred"), and 6,729,566 shares designated as Series D-1 Convertible
Preferred Stock, $.01 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, $.01 par value
(herein called "Series E Preferred"). A fifth series consists of
4,000,000 shares designated as Series F Convertible Preferred Stock,
$.01 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
-2-
<PAGE> 3
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 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.
-3-
<PAGE> 4
(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 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
-4-
<PAGE> 5
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 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
-5-
<PAGE> 6
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).
(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
-6-
<PAGE> 7
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".
(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
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<PAGE> 8
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 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:
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<PAGE> 9
(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 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".
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<PAGE> 10
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 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
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<PAGE> 11
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:
(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
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<PAGE> 12
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.
(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:
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<PAGE> 13
(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 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
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<PAGE> 14
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
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.
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<PAGE> 15
(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 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.
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ARTICLE V
The name and mailing address of the incorporator is:
Bruce A. Zivian
20 N. Wacker, Suite 3220
Chicago, Illinois 60606
ARTICLE VI
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 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.
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<PAGE> 17
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 VI. 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 VI.
ARTICLE VII
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 VIII
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 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
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<PAGE> 18
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 VIII.A.1. and 2., or in defense
of any claim, issue or matter therein; and
4. make any indemnification under Article VIII.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 VIII.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
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<PAGE> 19
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 VIII.
Notwithstanding anything to the contrary in this Article
VIII.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 VIII
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 VIII 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 VIII; and
8. deem the provisions of this Article VIII 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 VIII is in effect and any repeal or
modification of this Article VIII 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 VIII 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
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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 VIII,
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 VIII 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 IX
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 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.
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ARTICLE X
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 X.
ARTICLE XI
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 XII
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 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
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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 XIII
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.
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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.
<PAGE> 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
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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 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
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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
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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 66-2/3% of the
voting power of the shares entitled to vote at an election of directors.
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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.
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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
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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.
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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
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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
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<PAGE> 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.
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<PAGE> 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
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<PAGE> 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.
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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.
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<PAGE> 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.
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<PAGE> 1
EXHIBIT 10.15
LETTER OF UNDERSTANDING
1. Payment of NTC invoices 3199 and 3271 relating to $1200.00 per gallon x 25
gallons, plus shipping, taxes, etc., for a total of $30,163.97(USD) shall
be made immediately, based on shipment made July 23, 1997.
2. Payment of NTC invoice 3021 relating to scale-up development work
completed on March 31, 1997, shall be made on February 1, 1998. Amount of
Payment shall be $32,000.00(USD)
3. LWT and NTC agree to revise the existing Purchase Agreement dated February
3, 1997, when adequate information regarding production timing and
volumes are established.
4. NTC agrees to a discount of $70.0(USD) per gallon for the first Five
Hundred (500) gallons of product purchased under the revised Purchase
agreement.
5. LWT and NTC shall mutually agree upon the Product Specifications at the
conclusion of LWT's field trials. NTC shall provide a product which meets
these agreed upon specifications. If NTC cannot provide such a product,
payment of $17,500.00(USD) shall be made to LWT. Payment shall not be
required as long as NTC is diligently pursuing perfection of the product
to the agreement specifications.
ACKNOWLEDGED AND AGREED to this 13th day of January, 1998.
LWT Services, Inc. Nanophase Technologies Corporation
Per: /s/ Jeffrey West Per: /s/ Don Freed
------------------------- -------------------------------
Jeffrey West, President Don Freed, Vice President
<PAGE> 1
EXHIBIT 10.17
LICENSE AGREEMENT
Nanophase Technologies Corporation of Burr Ridge, Illinois (NTC) and C.I.Kasei
Co., Ltd., of Tokyo, Japan (CIK), effective December 30th, 1997 ("Effective
Date") agree as follows:
WHEREAS, NTC owns Information, as hereinafter defined, relating to
nanocrystalline materials; and
WHEREAS, CIK desires to have a royalty-bearing exclusive right and license to
purchase, make, use and sell NTC Product using such Information upon the terms
and conditions set forth in this Agreement; and
WHEREAS, for such consideration and upon such terms as hereinafter set forth,
NTC is willing to grant such royalty-bearing exclusive right and license to
CIK;
THEREFORE, NTC and CIK hereby agree as follows:
1. DEFINITIONS
1.1 The "Territory" is China, India, Indonesia, Japan, Korea, Malaysia, the
Philippines, Singapore, Kingdom of Thailand and Taiwan.
1.2 "NTC Product" shall be any nanocrystalline materials made using the
Information.
1.3 "Applications" are all applications except cosmetics, skin care and
chemical/mechanical planarization of metal layers on semiconductor wafers.
1.4 "Information" shall mean US patent Nos. 5,460,701 and 5,514,349 and any
foreign counterpart applications (hereinafter collectively called
"Patents"), and "Confidential Information" as hereafter defined.
1.5 (a) "Confidential Information" shall mean all information of confidential
or proprietary nature disclosed by NTC to CIK during the period commencing
August 18, 1996 and ending on the termination of this Agreement,
including, but not limited to, all NTC drawings, specifications, know-how
and other information, whether such information is in tangible or
intangible form, provided that all information that is in written form or
other tangible medium shall prior to delivery be marked as "Confidential"
or "Proprietary", and all information disclosed orally or otherwise shall
be identified as being "Confidential" or "Proprietary" by a memorandum
delivered to CIK within thirty days after the date of disclosure.
(b) Notwithstanding the foregoing, this Agreement shall not apply to
Confidential Information which is:
a) in the public domain at the time it is disclosed under this
Agreement;
b) subsequently published or publicly disclosed by persons other than
CIK;
c) acquired by CIK from a third party having no obligation of
confidentiality;
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<PAGE> 2
d) known to CIK at the time of disclosure, provided that CIK shall have the
burden of establishing such prior knowledge by competent written proof;
e) developed independently by or on behalf of CIK, without reliance on or
use of any Confidential Information of NTC, or
f) compelled by law to be disclosed, provided that CIK shall use its best
efforts to give NTC ten days prior written notice of compelled
disclosure.
1.6 "Net Sales" shall be determined as follows:
(a) for NTC Product sold directly in normal commercial transactions, Net
Sales are the total sales of NTC Product based on the actual gross sales
price less ordinary discounts, allowances, rebates, returns, sales taxes,
insurance, packing costs and transportation expenses (therein included
freight and postage), (b) for NTC Product incorporated in another product
which is not itself an NTC Product, Net Sales shall be determined by the
selling price or fair market value of the incorporated NTC Product which
would be billed if it were sold independently and separately from such
another product.
1.7 "Term" shall be from Effective Date to March 31, 2013 unless earlier
terminated as provided herein.
2. LICENSE
2.1 NTC hereby grants to CIK the exclusive right and license, with no right
to sublicense, to use the Information to manufacture subject to the
additional terms and conditions in this Paragraph 2.1, and to use and sell
NTC Product subject to the other terms in this Agreement, in the
Territory for use in the Applications, provided, however, that in case of
the application for transparent conductive coatings the licensed territory
shall be limited to Japan. The right and license granted herein by NTC to
CIK shall (a) oblige CIK to purchase NTC Product worth 30 million yen from
NTC for the period of 1998, and thereafter no less than 60% of actual
gross sales amount by CIK, and (b) allow CIK to manufacture the balance of
each such annual obligation (Sales target) as set forth in Paragraph 2.3.
2.2 As consideration for the right and license granted herein by NTC to CIK,
CIK agrees to pay NTC,
a) technology transfer fee of US$ 1.4 million, payable by CIK to NTC within
60 days of the Effective Date, which shall be fully earned and
non-refundable on said date, and
b) running royalties on Net Sales of CIK-manufactured NTC Product as
follows:
<TABLE>
<CAPTION>
Year Royalty
---- -------
<S> <C>
1998: 5.0% of Net Sales
1999: 4.5% of Net Sales
2000:
| 4.0% of Net Sales
2013(March 31)
| 2.0% of Net Sales (non-exclusive) * see Par. 5.4
</TABLE>
2.3 As further consideration for the right and license granted herein, and
subject to Paragraph 2.5 and 5.2, CIK agrees to the following annual
obligations;
2
<PAGE> 3
<TABLE>
<S> <C>
Sales target (minimum)
- ------------
1998: 100 million yen (Yen 100,000,000) sales of NTC Product
1999: 300 million yen (Yen 300,000,000) sales of NTC Product
2000: 500 million yen (Yen 500,000,000) sales of NTC Product
2013 (March 31)
</TABLE>
* For the purpose of this Paragraph, "sales of NTC Product" shall
be calculated in accordance with actual gross sales price by CIK.
There shall be no penalty if CIK fails to meet 100% of the annual
obligation in 1998 and thereafter. In 1999 and thereafter, however, NTC
may terminate the exclusive nature of this Agreement if CIK fails to
meet at least 50% of the sales target for each year, and may terminate
the entire Agreement if CIK fails to meet at least 20% of the sales
target for each year. In either of such cases, however, the exclusive
nature shall remain if CIK pays to NTC minimum royalty of three
hundred thousands U.S. dollars (US$300,000).
2.4 Royalty reports and payments shall be made within 30 days of each
semi-annual period ending on September 30 and March 31 during the Term
of this Agreement. CIK shall furnish to NTC a statement of royalty
specifying Net Sales and the total amount of royalties accrued under
Paragraph 2.2. At the same time, CIK shall make the payment to NTC by
telegraphic transfer. CIK shall keep complete and accurate records with
respect to NTC Product for which royalties are due and payable and such
records shall be available at all reasonable times for a period of two
years after each semi-annual period for inspection by NTC. The first
royalty period shall begin on April 1, 1998. Thereafter, for the
purpose of payments for royalty, purchase or any other payments
required under this Agreement, each annual period begins on April 1 of
each year and ends on March 31 of the following year. CIK is allowed to
start the installation of PVS Reactor Systems from the Effective Date.
2.5 At any time after December 31, 1998, CIK may elect to manufacture its
total annual obligation for NTC Product. In such event, CIK agrees to
a minimum royalty payment to NTC in any twelve-month period following
such election of three hundred thousands U.S. dollars (US$300,000.).
Should CIK elect to manufacture its total obligation, there shall be no
requirement or obligation under Paragraph 2.3 hereof, including
requirement to purchase NTC Product from NTC.
2.6 For as long as this Agreement remains in effect, unless the parties
otherwise agree in writing, and subject to the provisions of Paragraph
2.3, NTC will not directly or indirectly grant the right or license to
manufacture, use or sell NTC Product to anyone other than CIK in the
Territory, except that NTC shall retain its right to manufacture,
license or sell any of the Product in the Territory for use in
cosmetics, skin care or chemical/mechanical planarization of metal
layers on semiconductor wafers.
2.7 All payments which are.
a) required by this Agreement,
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<PAGE> 4
b) subject to a tax by the Government of Japan on payments by CIK, and
c) subject to a requirement by said Government that CIK withhold said
tax from said payments and submit the withheld amount to the
Government on behalf of NTC,
shall have said tax withheld by CIK, and the payments made shall be net
after deduction of said tax. CIK shall supply NTC with certificates of
payment of said withholding tax.
2.8 In case NTC assigns or transfers its rights and obligations under this
Agreement to other person or entity by way of merger or otherwise, such
assignee shall succeed and undertake all obligations and rights
specified herein.
3. IMPROVEMENTS AND WARRANTY
3.1 NTC agrees to supply to CIK improvements including, but not limited to,
inventions, system modifications and precursor modifications without any
additional payments by CIK, however, such improvements are the sole
property of NTC.
3.2 CIK agrees that any improvements relating to or arising from CIK's
manufacture, sale or use of NTC Product including, but not limited to,
inventions, patents and patent applications, system modifications and
precursor modifications which arise during the term of this Agreement
shall be transmitted promptly to NTC and CIK further agrees that NTC
shall have a royalty-free, worldwide excluding Territory hereof,
non-exclusive right and license, including the right to use such
improvements, with no right to sublicense.
3.3 NTC provides no performance warranty and no implied warranty of
merchantability or fitness for a particular purpose. NTC is not
responsible for consequential damages, and assumes no risk or liability
involved in the manufacture or use of NTC Product, including without
limitation liability with regard to third-party patent claims. NTC
represents, however, that to the best of its knowledge as of this date
there exists no valid patent which covers NTC Product.
4. CONFIDENTIALITY
CIK shall, during the term of this Agreement, keep confidential and
shall cause its employees to keep confidential Confidential Information
disclosed and supplied to CIK by NTC under this Agreement, and CIK shall
prevent and shall cause its employees to prevent disclosure thereof to
other parties except as may be required for the proper performance of
CIK's obligation under this Agreement. NTC shall undertake the same
confidentiality obligation with regard to any confidential information
transmitted by CIK to NTC pursuant to Paragraph 3.2 hereof.
5. TERMINATION
5.1 In the event of any material breach of this Agreement, the
non-defaulting party may terminate this Agreement if the breach is not
cured within 60 days following notice of breach. In the event of
termination by reason of the breach or default
4
<PAGE> 5
by either party hereunder, other party shall be entitled to recover all
losses and damages calculated on the profits such other party would have
received but for the breach or default on the part of either party. This
Agreement shall be governed by and construed in accordance with the
laws of State of Illinois.
5.2 CIK may terminate this Agreement effective at the beginning of any
12-month period after March 31, 2000 provided that notice of such
cancellation shall be given at least 90 days prior to such effective
date. NTC may not terminate this Agreement unless otherwise provided
herein.
5.3 Upon expiration or earlier termination of this Agreement as provided
herein, all rights and obligations provided in this Agreement shall
forthwith terminate except (1) the obligation concerning any amount
payable to NTC by CIK which would have accrued under this Agreement on
or prior to such termination and (2) the confidentiality obligation
set forth in Paragraph 4 hereof for five years after the termination
or expiration of this Agreement.
5.4 Notwithstanding Paragraph 5.3, after the expiration of this Agreement
CIK shall have a non-exclusive rights and license to use the
Information and to manufacture, sell and use NTC Product in the
Territory if CIK pays to NTC running royalty of 2% of Net Sales of NTC
Product. NTC agrees to have a meeting with CIK, upon request by CIK,
to discuss appropriate reduction of royalty, if appropriate, in view
of decrease of Confidential Information.
6. GENERAL
6.1 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 stated below, and shall be effective upon
receipt.
6.2 NTC and CIK agree that any prior agreements between NTC and CIK
relating to the distribution, use or manufacture of NTC Product,
including Confidentiality and Non-Use Agreement dated August 13, 1996,
shall be superseded by this Agreement excepting that the License
Agreement of April 15, 1997 and Distribution Agreement of October 30,
1996 between NTC and CIK shall be effective until April 1, 1998, when
the first royalty period under this Agreement begins, to the extent and
solely for the purpose of enabling CIK to continue its manufacture and
distribution of NTC Product until April 1, 1998.
6.3 Each party is an independent contractor. Neither party is the agent of
the other, and neither shall have authority to bind the other.
AGREED:
Nanophase Technologies Corporation C.I.Kasei Co., Ltd.
453 Commerce Street 18-1, 1-Chome, Kyobashi, Chuo-ku
Burr Ridge, Illinois 60521 Tokyo, Japan
By: /s/ Donald J. Freed By: /s/ Shigeo Sano
--------------------------------- ----------------------------------
Donald J. Freed, Vice President Shigeo Sano, Senior Managing Director
5
<PAGE> 1
EXHIBIT 10.18
SUPPLY AGREEMENT
This SUPPLY AGREEMENT (the "Agreement") is made and entered into as of
December 31, 1997 by and among EKC TECHNOLOGY, INC., a California corporation
("EKC") and NANOPHASE TECHNOLOGIES CORPORATION, a Delaware corporation
("Nanophase") with reference to the following recitals:
RECITALS
A. Effective on the date hereof, Moyco Technologies, Inc. ("Moyco") and
certain of its affiliates and EKC have entered into that certain Asset
Purchase Agreement (the "Asset Purchase Agreement") and agreed to sell to EKC
all of its CMP Assets (as defined in the Asset Purchase Agreement).
B. Effective on the date hereof, Moyco and EKC have entered into that
certain Interim Manufacturing Agreement whereby Moyco has agreed to
manufacture for EKC certain CMP Products (as defined in the Asset Purchase
Agreement) for an interim period.
C. In connection with the Asset Purchase Agreement and with the express
written consent of Nanophase, Moyco has assigned, or will assign, to EKC the
supply contract by and between Moyco and Nanophase (the "Existing Supply
Agreement") relating to Nanophase Particles (as defined below).
D. It is understood that EKC has substantial experience in
developing products for the semiconductor industry and obtaining the
necessary qualifications therefor, and that the process of qualifying CMP
Products (defined below) with semiconductor companies is a lengthy and
expensive process that EKC would be unwilling to undertake without the
assurances granted hereby.
<PAGE> 2
E. It is further understood that Nanophase has limited experience in
developing a market application for CMP Products or obtaining the necessary
qualifications from semiconductor companies with respect thereto.
F. Accordingly, subject to the terms of this Agreement, Nanophase
believes that it is in the best interest of fostering competition in the
market for CMP Products for the right to use of Nanophase Particles in CMP
Products to be granted to a single company in the business of marketing CMP
Products.
G. EKC and Nanophase believe it is in their respective best interests to
amend and restate the Existing Supply Agreement as provided herein.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
and agreements contained herein and for other good and valuable consideration,
the receipt and sufficiency of which is hereby acknowledged, the parties
hereto agree as follows:
1. AGREEMENT TO SUPPLY. Subject to the terms and conditions hereof,
Nanophase agrees to sell and deliver to EKC such Nanophase Particles (as
defined below) that EKC shall order for its use in the production and sale or
use of products, chemicals, slurries, compounds or other materials which are
in any way used or useful in chemical mechanical polishing ("CMP Activities").
Nanophase Particles shall mean those products described in EXHIBIT A hereto
together with any improvements thereto and any new particles developed by or
for Nanophase which are used or useful in chemical mechanical polishing.
2. EXCLUSIVITY.
(a) Subject to the terms and conditions of this Agreement, Nanophase
agrees that without the express written consent of EKC, it shall not sell
or deliver to any party other than EKC any Nanophase Particles which it
has reason to believe, after investigation or advised by EKC, shall be
used in any of the CMP Activities.
2
<PAGE> 3
(b) The parties hereto understand and agree that EKC shall not be
precluded from obtaining, by purchase or otherwise, particles or abrasives for
use in chemical mechanical polishing from suppliers other than Nanophase;
except, however, before obtaining plasma produced particles for use in
chemical mechanical polishing from other suppliers, EKC shall give Nanophase
the first right of refusal to supply such plasma produced particles on no less
favorable terms and conditions as the other supplier.
3. TERM. This Agreement shall commence on January 1, 1998 and shall extend
through and until December 31 2004, unless earlier terminated as provided in
Section 4 hereof.
4. TERMINATION. Nanophase may terminate this Agreement upon thirty (30)
days written notice to EKC following EKC's failure to meet the applicable
Minimum Annual Purchase Threshold (set forth below); however, EKC shall have
the right to cure such deficiency and avoid termination of this Agreement by
submitting to Nanophase a prepaid order for the deficiency in the applicable
Minimum Annual Purchase Threshold prior to the expiration of the 30-day notice
period.
For each year during the term hereof, the Minimum Annual Purchase Threshold
shall be as follows:
<TABLE>
<CAPTION>
Minimum Annual
Year Purchase Threshold
---- ------------------
(000's omitted)
<S> <C>
1998 $ 50
1999 $ 100
2000 $ 250
2001 $ 600
2002 $1,000
2003 $1,500
2004 $1,500
</TABLE>
3
<PAGE> 4
5. TERMINATION OF EXCLUSIVITY. If EKC fails to purchase from Nanophase an
amount of Nanophase Particles required to meet the applicable Minimum Annual
Exclusivity Threshold (set forth below), then Nanophase may terminate its
exclusivity obligation only as set forth in Section 2(a) hereof, upon thirty
(30) days written notice to EKC; however, EKC shall have the right to cure
such deficiency and avoid the termination of Nanophase's exclusivity
obligation by submitting to Nanophase a prepaid order in the amount of such
deficiency prior to the expiration of the 30-day notice period. In the event
the exclusivity obligation of Nanophase is so terminated, the remaining rights
and obligations of this Agreement shall nevertheless remain in full force and
effect unless terminated in accordance with Section 4 hereof.
For each year during the term hereof, the Minimum Annual Exclusivity
Threshold shall be as follows:
<TABLE>
<CAPTION>
Minimum Annual
Exclusivity Threshold
---------------------
Year (000's omitted)
----
<S> <C>
1998 $ 500 (1)
1999 $ 1,000
2000 $ 2,500
2001 $ 6,000
2002 $10,000
2003 $15,000
2004 $15,000
</TABLE>
6. TERMINATION OF SUPPLY MAINTENANCE OBLIGATION. If EKC fails to purchase
from Nanophase an amount of Nanophase Particles required to meet the applicable
supply maintenance obligation (set forth below), Nanophase may terminate its
obligation to supply Nanophase Particles to EKC hereunder, except, however,
Nanophase shall thereafter continue to be obligated to supply EKC with
quantities of Nanophase Particles sufficient for EKC to satisfy all orders for
CMP Products that EKC receives from its customer base existing at the time of
such termination (the "Supply Maintenance Obligation"). Nanophase may terminate
its
- --------------------------------------------------------------------------------
(1) For purposes of the 1998 Minimum Exclusivity Threshold, Nanophase shall
give credit to EKC for EKC's purchase, pursuant to the Asset Purchase
Agreement, of $250,000 of Nanophase Particles from Moyco.
4
<PAGE> 5
obligation to supply Nanophase Particles other than to EKC's existing customers
base upon thirty (30) days written notice to EKC following EKC's failure to
meet the applicable Minimum Supply Maintenance Threshold (set forth below);
however, EKC shall have the right to cure such deficiency and avoid such
termination by submitting to Nanophase a prepaid order for the deficiency in
the applicable Minimum Supply Maintenance Threshold prior to the expiration of
the 30-day notice period.
For each of the years during the term hereof, the Minimum Supply
Maintenance Threshold shall be as follows:
<TABLE>
<CAPTION>
Minimum Annual
Maintenance Threshold
---------------------
Year (000's omitted)
----
<S> <C>
1998 $ 250 (2)
1999 $ 500
2000 $1,250
2001 $3,000
2002 $5,000
2003 $7,500
2004 $7,500
</TABLE>
7. TECHNICAL SERVICE. Nanophase shall provide EKC with customer and
technical support and related research, with respect to Nanophase Particles and
CMP products containing Nanophase Particles. The scope and level of such
technical support and related research shall be established by mutual agreement
of the parties prior to the beginning of each year that this Agreement is in
effect. The parties shall also mutually agree prior to each year this Agreement
is in effect the extent to which, if any, EKC shall fund such technical support
and related research, except, however, EKC and Nanophase agree that EKC shall
pay to Nanophase $100,000 for technical support and related research in
calendar year 1998, such amount to be payable in quarterly installments of
$25,000 each. Such technical support and related research shall include, but be
not limited to (i) customer technical presentations, (ii) customer technical
support
- --------------------------------------------------------------------------------
(2) For purposes of meeting the 1998 Minimum Supply Maintenance
Threshold, Nanophase shall give credit to EKC for EKC's purchase of
$250,000 of Nanophase Particles from Moyco.
5
<PAGE> 6
activities, (iii) hosting visits by EKC customers and prospective customers at
Nanophase's facilities, and (iv) provide such other reasonable support
requested by EKC. Nanophase agrees to provide competent, qualified personnel,
facilities and material to perform the technical support and related research
required by this Section 7.
8. ORDERS. On or before the 15th day of each month during the term
hereof, EKC shall submit to Nanophase a schedule of its anticipated
requirements of Nanophase Particles for the succeeding four (4) months (each a
"Monthly Schedule"). It is agreed that EKC's anticipated requirements of
Nanophase Particles as set forth on the Monthly Schedule for the first and
second succeeding months shall be deemed an irrevocable purchase order and the
anticipated requirements for the third and fourth succeeding months shall be
deemed non-binding estimates. Notwithstanding the foregoing, EKC shall not be
required to submit a Monthly Schedule to Nanophase before June 15, 1998.
9. PRICE. The initial prices for Nanophase Particles to be supplied to
EKC under this Agreement are set forth on Exhibit "A" attached hereto.
Nanophase agrees not to increase such prices prior to January 1, 2000 and that
any proposed price changes thereafter shall not be effective for any quarter
unless Nanophase has given EKC ninety (90) days prior written notice of
proposed price changes prior to the first day of such quarter. For example, in
order for a proposed price change to be effective on January 1, 2000, written
notice thereof shall have to be given to EKC no later than October 2, 1999.
10. PAYMENT. Payment for Nanophase Particles shall be due within thirty
(30) days of delivery of such Nanophase Particles to a suitable common carrier
F.O.B. Nanophase's domestic Plant.
11. Specifications, Warranty, etc. Nanophase agrees that all Nanophase
Particles supplied to EKC pursuant hereto shall meet the specifications set
forth on Exhibit "A" hereto.
6
<PAGE> 7
12. SHIPMENT. The Nanophase Particles shall be shipped F.O.B. Nanophase's
domestic Plant via a common carrier reasonably suitable to EKC and title and
risk of loss with respect thereto shall pass to EKC at the FOB point.
13. NON-EXCLUSIVE LICENSE. If Nanophase fails to perform any of its
material obligations hereunder and such failure has not been cured within
sixty (60) days following written notice from EKC, in addition to any other
rights and remedies EKC may have, then Nanophase shall grant to EKC, at
commercially reasonable royalty rates, a non-exclusive license to manufacture
Nanophase Particles for use in CMP Products. In that event Nanophase shall
promptly supply to EKC any and all trade secrets, know-how, manufacturing
information, documents, software, databases or other information used or which
may be used in the manufacture of Nanophase Particles. EKC reserves the right
to offset against such royalties otherwise due and payable to Nanophase any
claims, damages, expenses or losses it suffered as a result of Nanophase's
failure to perform its obligation hereunder.
14. NOTICES. All notices, requests, consents and other communications
hereunder shall be in writing, shall be addressed to the receiving party's
address set forth below or to such other address as a party may designate by
written notice hereunder, and shall be either (i) delivered by hand, (ii) made
by telex or facsimile transmission, (iii) sent by recognized overnight
courier, or (iv) sent by registered or certified mail, return receipt
requested, postage prepaid:
<TABLE>
<S> <C>
If to Nanophase: Nanophase Technology Corporation
453 Commerce Street
Burr Ridge,IL 60521
ATTN: Vice President, Marketing
Phone: (630) 323-1200
Fax: (630) 323-1221
With copy to:
If to EKC: EKC Technology, Inc.
2520 Barrington Court
Hayward, California 94545
ATTN: President
</TABLE>
7
<PAGE> 8
<TABLE>
<S> <C>
Phone: (510) 784-9105
Fax: (510) 784-9182
With a copy to: ChemFirst Inc.
700 North Street
Jackson, MS 39202
ATTN: General Counsel
Phone: (601)948-7550
Fax: (601) 949-0292
</TABLE>
All notices, requests, consents and other communication hereunder shall be
deemed effective (i) if by hand, at the time of the delivery thereof to the
receiving party at the address of such party set forth above, (ii) if made by
telex, or facsimile transmission, at the time that receipt thereof has been
acknowledged by electronic confirmation or otherwise, (iii) if sent by
overnight courier, on the next business day following the day such notice is
delivered to the courier service, or (iv) if sent by registered or certified
mail, on the fifth business day following the day such mailing is made.
15. ENTIRE AGREEMENT. This Agreement together with the Exhibits hereto
(the "Documents") embodies the entire agreement and understanding between the
parties hereto with respect to the subject matter hereof and supersedes all
prior oral or written agreements and understandings relating to the subject
matter hereof. No statement, representation, warranty, covenant or agreement
of any kind not expressly set forth in the Documents shall affect, or be used
to interpret, change or restrict, the express terms and provisions of this
Agreement.
16. MODIFICATIONS AND AMENDMENTS. No failure or delay by a party hereto in
exercising any right, power or remedy under this Agreement, and no course of
dealing between the parties hereto, shall operate as a waiver of any such
right, power or remedy of the party. No single or partial exercise of any
right, power of remedy under this Agreement by a party hereto, nor any
abandonment or discontinuance of steps to enforce any such right, power or
remedy, shall preclude such party from any other or further exercise thereof or
the exercise of any other right, power or remedy hereunder. The election of any
remedy by a party hereto shall not constitute a waiver of the right of such
party to pursue other available remedies. No notice to or
8
<PAGE> 9
demand on a party not expressly required under this Agreement shall entitle
the party receiving such notice or demand to any other or further notice or
demand in similar or other circumstances or constitute a waiver of the rights
of the party giving such notice or demand to any other or further action in
any circumstances without such notice or demand. The terms and provisions of
this Agreement may be waived, or consent for the departure therefrom granted,
only by written document executed by the party entitled to the benefits of
such terms or provisions. No such waiver or consent shall be deemed to be or
shall constitute a waiver or consent with respect to any other terms or
provisions of this Agreement, whether or not similar. Each such waiver or
consent shall be effective only in the specific instance and for the purpose
for which it was given, and shall not constitute a continuing waiver or
consent.
17. ASSIGNMENT. Neither this Agreement, nor any right or obligation
hereunder, may be assigned by any of the parties hereto without the prior
written consent of the other party, which consent shall not be unreasonably
withheld.
18. PARTIES IN INTEREST. This Agreement shall be binding upon and inure
solely to the benefit of each party hereto and their permitted assigns, and
nothing in this Agreement, express or implied, is intended to confer upon any
other person any rights or remedies of any nature whatsoever under or by
reason of this Agreement. Nothing in this Agreement shall be construed to
create any rights or obligations except among the parties hereto, and no
person or entity shall be regarded as a third-party beneficiary of this
Agreement.
19. GOVERNING LAW. This Agreement and the rights and obligations of the
parties hereunder shall be construed in accordance with and governed by the
internal laws of the State of Illinois, without giving effect to the conflict
of law principles thereof.
20. SEVERABILITY. In the event that any court of competent jurisdiction
shall finally determine that any provision, or any portion thereof, contained
in this Agreement shall be void or unenforceable in any respect, then such
provision shall be deemed limited to the extent that such court determines it
enforceable, and as so limited shall remain in full force and effect. In the
9
<PAGE> 10
event that such court shall determine any such provision, or portion thereof,
wholly unenforceable, the remaining provisions of this Agreement shall
nevertheless remain in full force and effect.
21. HEADINGS AND CAPTIONS. The headings and captions of the various
subdivisions of this Agreement are for convenience of reference only and shall
in no way modify, or affect, or be considered in construing or interpreting
the meaning or construction of any of the terms or provisions hereof.
22. EXPENSES. Each of the parties hereto shall pay its own fees and
expenses (including the fees of any attorneys, accountants, appraisers or
others engaged by such party) in connection with this Agreement and the
transactions contemplated hereby whether or not the transactions contemplated
hereby are consummated.
23. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, and by different parties hereto on separate counterparts, each
of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
24. ALTERNATE DISPUTE RESOLUTION. If a dispute arises concerning or
related to this Agreement, it is the express intent of the parties hereto that
they commit to enter into good faith efforts to resolve the dispute at a
meeting or meetings in which a senior official or officials with decision
making power shall participate. The purposes of such negotiations will be an
honest effort to allow the parties an opportunity to determine if the dispute
is resolvable prior to expensive and lengthy litigation. The parties shall
have complete discretion as to what procedure shall be used and what agenda
shall be discussed.
Any such negotiation or series of negotiations shall be held as
confidential by all parties and the parties hereto do commit themselves that
they shall not disclose either the existence of such proceedings or the content
thereof. Any participation in or initiation of such discussions shall not be
deemed to be an admission of liability and no statement made or provided in or
10
<PAGE> 11
related to such negotiations shall be construed as a statement against
interest or otherwise disclosed or used in any proceeding involving the
parties.
The parties commit to commence these negotiations prior to litigation
being filed (except for injunctive proceedings); but in no event shall they
commence later than four (4) months after litigation is filed. If a party
declines to participate, the other party may request the Court to grant a stay
of the litigation (except for injunctive relief) while the parties attempt to
settle the litigation through this negotiation method, and the party declining
to participate agrees not to oppose such a stay.
25. TERMINATION OF EXISTING SUPPLY AGREEMENT. The parties hereby
terminate, without further liability to either party, that certain Purchase
and Distribution Agreement effective February 27, 1997 as amended and that
certain Marketing Agreement dated August 29, 1996 by and between Moyco
Technologies, Inc. and Nanophase, which agreements were assigned by Moyco to
EKC as of December 31, 1997, and the rights and obligations of Nanophase and
EKC with respect to the supply of Products shall be solely governed by this
Supply Agreement.
IN WITNESS WHEREOF, Buyer and Seller have executed this Agreement as of
the day and year first above written.
EKC TECHNOLOGY, INC.
By: /s/ SIGNATURE
-------------------------------
Title:
----------------------------
NANOPHASE TECHNOLOGIES CORPORATION
By: /s/ Donald J. Freed
-------------------------------
Title: VP, Marketing
----------------------------
11
<PAGE> 12
EXHIBIT "A"
PART A: PRICE SCHEDULE
Price per kilogram, FOB NTC Plant
NanoTek(R) Aluminum Oxide per specification A(1) $50.00
NanoTek(R) Cerium Oxide per specification A(2) $70.00
PART B: PARTICLE SPECIFICATIONS
Al. NanoTek Aluminum Oxide:
Free flowing, white powder manufactured by Physical Vapor Synthesis under one
or more of U.S. Patents 5,128,081, 5,320,800, 5,460,701, 5,514,349, 4,482,134,
4,642,207, 4,689,075, 4,889,665, 4,610,718 and 4,732,369, and having the
following attributes:
Crystal Phase Gamma
2 + 2
Surface Area (BET) 45 m /gm - 15 m /gm
Chemical Purity (assay) >99.6%
A2. NanoTek Cerium Oxide:
Free flowing, pale yellow powder manufactured by Physical Vapor Synthesis
under one or more of U.S. Patents 5,128,081, 5,320,800, 5,460,701, 5,514,349,
4,482,134, 4,642,207, 4,689,075, 4,889,665, 4,610,718 and 4,732,369, and
having the following attributes:
Crystal Phase Gamma
2 + 2
Surface Area (BET) 80 m gm - 10 m /gm
Chemical Purity (assay) >99.6%
12
<PAGE> 1
EXHIBIT 11
STATEMENT REGARDING COMPUTATION OF LOSS PER SHARE
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1995 1996 1997
HISTORICAL:
<S> <C> <C> <C>
Weighted average common shares
outstanding 77,586 77,586 1,283,359
Net loss $(1,959,874) $(5,577,688) $(3,072,470)
Net loss per common share $(25.26) $(71.89) $(2.39)
<CAPTION>
YEAR ENDED DECEMBER 31,
1995 1996 1997
<S> <C> <C> <C>
PRO FORMA:
Weighted average common shares
outstanding 77,596 77,586 1,283,359
Weighted average preferred
shares outstanding 4,045,295 6,758,094 6,924,947
Total 4,122,881 6,835,680 8,208,306
Net loss $(1,959,874) $(5,577,688) $(3,072,470)
Pro forma net loss per share $(.48) $(.82) $(.37)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 3,988,368
<SECURITIES> 26,884,852
<RECEIVABLES> 1,641,489
<ALLOWANCES> 19,276
<INVENTORY> 957,303
<CURRENT-ASSETS> 33,584,150
<PP&E> 3,281,216
<DEPRECIATION> 881,323
<TOTAL-ASSETS> 36,196,569
<CURRENT-LIABILITIES> 1,545,235
<BONDS> 0
0
0
<COMMON> 48,396,005
<OTHER-SE> (13,744,671)
<TOTAL-LIABILITY-AND-EQUITY> 36,196,569
<SALES> 3,723,492
<TOTAL-REVENUES> 3,723,492
<CGS> 3,935,766
<TOTAL-COSTS> 7,000,825
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (3,072,470)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,072,470)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,072,470)
<EPS-PRIMARY> (2.39)
<EPS-DILUTED> (2.39)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 770,704
<SECURITIES> 2,001,429
<RECEIVABLES> 1,441,206
<ALLOWANCES> 46,976
<INVENTORY> 503,815
<CURRENT-ASSETS> 4,768,215
<PP&E> 2,980,884
<DEPRECIATION> 767,924
<TOTAL-ASSETS> 7,286,071
<CURRENT-LIABILITIES> 1,709,155
<BONDS> 0
0
19,553,083
<COMMON> 450
<OTHER-SE> (13,976,617)
<TOTAL-LIABILITY-AND-EQUITY> 7,286,071
<SALES> 2,245,415
<TOTAL-REVENUES> 2,245,415
<CGS> 3,321,288
<TOTAL-COSTS> 5,607,223
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (3,304,416)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,304,416)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,304,416)
<EPS-PRIMARY> (42.59)
<EPS-DILUTED> (42.59)
</TABLE>
