<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended: SEPTEMBER 30, 1999
Commission File Number: 0-22333
NANOPHASE TECHNOLOGIES CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 36-3687863
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
453 COMMERCE STREET, BURR RIDGE, ILLINOIS 60521
(Address of principal executive offices, and zip code)
Registrant's telephone number, including area code: (630) 323-1200
_________________
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
As of November 12, 1999, there were outstanding 12,761,452 shares of
common stock, par value $.01, of the registrant.
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NANOPHASE TECHNOLOGIES CORPORATION
QUARTER ENDED SEPTEMBER 30, 1999
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I - FINANCIAL INFORMATION....................................................................................3
Item 1. Financial Statements...............................................................................3
Balance Sheets as of September 30, 1999 (unaudited) and December 31, 1998..........................3
Statements of Operations (unaudited) for the three months ended September 30,
1999 and 1998 and the nine months ended September 30, 1999 and 1998.......................... ..4
Statements of Cash Flows (unaudited) for the nine months ended September 30, 1999 and 1998.........5
Notes to Financial Statements (unaudited)..........................................................6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations .............8
Item 3. Quantitative and Qualitative Disclosures About Market Risk........................................13
PART II - OTHER INFORMATION......................................................................................14
Item 1. Legal Proceedings.................................................................................14
Item 2. Changes in Securities and Use of Proceeds.........................................................15
Item 6. Exhibits and Reports on Form 8-K..................................................................15
SIGNATURES.......................................................................................................16
</TABLE>
2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NANOPHASE TECHNOLOGIES CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
-------------- -------------
(UNAUDITED)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents.................................................. $ 639,969 $ 363,394
Investments................................................................ 22,328,083 26,270,518
Trade accounts receivable, less allowance for doubtful accounts
of $75,000 at September 30, 1999 and $85,000 at December 31, 1998....... 223,301 316,328
Other receivable, net..................................................... 181,196 -
Inventories, net........................................................... 485,377 838,825
Prepaid expenses and other current assets.................................. 107,866 92,351
------------- ------------
Total current assets..................................................... 23,965,792 27,881,416
Equipment and leasehold improvements, net.................................... 2,105,375 2,383,091
Other assets, net............................................................ 182,252 189,481
------------- ------------
$ 26,253,419 $ 30,453,988
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable........................................................... $ 210,268 $ 413,378
Accrued expenses........................................................... 1,214,210 933,020
------------- ------------
Total current liabilities................................................ 1,424,478 1,346,398
CONTINGENT LIABILITIES...................................................... - -
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 24,088 shares authorized and
no shares issued and outstanding........................................... - -
Common stock, $.01 par value, 24,930,377 shares authorized;
12,761,452 shares issued and outstanding at September 30, 1999 and
12,568,691 shares issued and outstanding at December 31, 1998.............. 127,614 125,687
Additional paid-in capital................................................... 48,524,825 48,360,454
Accumulated deficit.......................................................... (23,823,498) (19,378,551)
------------- ------------
Total stockholders' equity................................................. 24,828,941 29,107,590
------------- ------------
$ 26,253,419 $ 30,453,988
============= ============
</TABLE>
See Notes to Financial Statements.
3
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NANOPHASE TECHNOLOGIES CORPORATION
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------- ----------------------------------
1999 1998 1999 1998
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
REVENUE:
Product revenue....................... $ 315,197 $ 180,568 $ 862,499 $ 958,796
Other revenue......................... 50,000 - 156,917 143,484
-------------- -------------- ---------------- --------------
Total revenue....................... 365,197 180,568 1,019,416 1,102,280
OPERATING EXPENSE:
Cost of revenue....................... 597,098 668,616 2,058,982 2,325,323
Research and development expense...... 344,287 344,657 1,129,009 1,135,679
Selling, general and administrative
expense............................... 995,949 969,761 3,138,154 2,562,424
-------------- -------------- -------------- --------------
Total operating expense............. 1,937,334 1,983,034 6,326,145 6,023,426
-------------- -------------- ---------------- --------------
Loss from operations.................... (1,572,137) (1,802,466) (5,306,729) (4,921,146)
Interest income......................... 285,125 381,615 861,782 1,169,481
-------------- -------------- ---------------- --------------
Loss before provision for income taxes.. (1,287,012) (1,420,851) (4,444,947) (3,751,665)
Provision for income taxes.............. - - - 156,000
-------------- -------------- ---------------- --------------
Net loss................................ $ (1,287,012) $ (1,420,851) $ (4,444,947) $ (3,907,665)
============== ============== ================ ==============
Net loss per share...................... $ (0.10) $ (0.11) $ (0.35) $ (0.32)
============== ============== ================ ==============
Weighted average number of common
shares outstanding...................... 12,746,805 12,507,068 12,666,280 12,365,738
============== ============== ================ ==============
</TABLE>
See Notes to Financial Statements.
4
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NANOPHASE TECHNOLOGIES CORPORATION
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------
1999 1998
------------------ -------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss................................................................. $ (4,444,947) $ (3,907,665)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization........................................ 505,536 368,769
Stock compensation expense........................................... 124,325 -
Allowance for excess inventory quantities............................ 90,025 -
Changes in assets and liabilities related to operations:
Trade accounts receivable............................................ 93,027 1,178,105
Other receivable..................................................... (181,196) -
Inventories.......................................................... 263,423 (234,736)
Prepaid expense and other assets..................................... 48,557 29,491
Accounts payable..................................................... (203,110) (694,461)
Accrued liabilities.................................................. 281,190 348,386
--------------- -------------
Net cash used in operating activities.................................... (3,423,170) (2,912,111)
INVESTING ACTIVITIES:
Acquisition of equipment and leasehold improvements...................... (284,663) (447,880)
Purchases of held-to-maturity investments................................ (101,149,426) (150,850,078)
Maturities of held-to-maturity investments............................... 105,091,861 151,230,298
--------------- -------------
Net cash provided by (used in) investing activities...................... 3,657,772 (67,660)
FINANCING ACTIVITIES:
Proceeds from issuance of stock.......................................... 41,973 89,681
--------------- -------------
Net cash provided by financing activities................................ 41,973 89,681
--------------- -------------
Increase (decrease) in cash and cash equivalents......................... 276,575 (2,890,090)
Cash and cash equivalents at beginning of period......................... 363,394 3,988,368
--------------- -------------
Cash and cash equivalents at end of period............................... $ 639,969 $ 1,098,278
=============== =============
</TABLE>
See Notes to Financial Statements.
5
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NANOPHASE TECHNOLOGIES CORPORATION
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PRESENTATION
The accompanying unaudited interim financial statements of Nanophase
Technologies Corporation (the "Company") reflect all adjustments (consisting of
normal recurring adjustments) which, in the opinion of management, are necessary
for a fair presentation of the financial position and operating results of the
Company for the interim periods presented. Operating results for the three and
nine month periods ended September 30, 1999 are not necessarily indicative of
the results that may be expected for the year ended December 31, 1999.
These financial statements should be read in conjunction with the
Company's audited financial statements and notes thereto for the year ended
December 31, 1998, included in the Company's Annual Report on Form 10-K for the
year ended December 31, 1998, as filed with the Securities and Exchange
Commission.
(2) DESCRIPTION OF BUSINESS
The Company was organized for the purpose of developing nanocrystalline
materials for commercial production and sale in domestic and international
markets. In the course of its corporate development, the Company has experienced
net losses and negative cash flows from operations. Historically, the Company
has funded its operations primarily through the issuance of equity securities.
Revenue from international sources approximated $550,000 and $226,500 for
the nine months ended September 30, 1999 and 1998, respectively.
(3) INVESTMENTS
Investments generally consist of certificates of deposit, commercial
paper, and corporate notes and have an estimated fair value of $22,315,000 at
September 30, 1999 and $26,251,000 at December 31, 1998. All investments have
been classified as held-to-maturity and mature within a twelve month period.
(4) INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 DECEMBER 31, 1998
------------------ -----------------
<S> <C> <C>
Raw materials................................. $ 255,673 $ 284,162
Finished goods................................ 510,361 745,296
----------- ----------
766,034 1,029,458
Allowance for excess inventory quantities..... (280,657) (190,633)
----------- ----------
$ 485,377 $ 838,825
=========== ==========
</TABLE>
6
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NANOPHASE TECHNOLOGIES CORPORATION
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
(5) CONTINGENT LIABILITIES
Five separate complaints were filed in the United States District Court
for the Northern District of Illinois, Eastern Division, each of which alleged
that the Company, certain of its officers and directors, and the underwriters of
the Offering are liable under the federal securities laws for making supposedly
negligent or reckless material misstatements of fact and omitting to state
material facts necessary to make other statements of fact not misleading in the
Registration Statement and Prospectus relating to the Offering. Those cases were
consolidated and a consolidated complaint was filed in October 1998. The
consolidated complaint alleges that the action should be maintained as (i) a
plaintiff class action on behalf of certain persons who purchased the Common
Stock from November 26, 1997 through January 8, 1998, excluding the defendants,
members of their immediate families, and any entity in which a defendant has a
controlling interest, and (ii) a defendant class action against the underwriters
who participated in the Offering. The consolidated complaint seeks unquantified
damages under the federal securities laws, pre- and post-judgment interest,
attorneys' fees, and expert witness fees. In addition, the consolidated
complaint seeks rescission and/or rescissory damages relating to purchases of
the Common Stock under federal securities laws. In October 1999, the Court
granted in part and denied in part motions to dismiss the consolidated complaint
that previously had been filed by each defendant. In its ruling, the Court in
part found that plaintiffs who did not purchase their Common Stock during the
Offering could not sue under Section 12(a)(2) of the Securities Act of 1933.
Each defendant's respective answer to the remaining claims in the consolidated
complaint is scheduled to be filed on November 15, 1999. In August 1998, the
Company received a request for indemnification from the underwriters of the
Offering pursuant to the underwriting agreement for the Offering. In response to
such request, the Company has agreed to be responsible for the underwriters'
attorneys' fees with respect to the litigation.
In November 1998, a separate complaint was filed in the Northern District
of Illinois, Eastern Division, which alleged that the Company, certain of its
officers and directors, and the underwriters of the Company's Offering are
liable under the federal securities laws for making supposedly fraudulent
material misstatements of fact and omitting to state material facts necessary to
make other statements of fact not misleading in connection with the solicitation
of consents to proceed with the Offering from certain of the Company's preferred
stockholders. The complaint alleges that the action should be maintained as a
plaintiff class action on behalf of those former preferred stockholders whose
shares of preferred stock were converted into Common Stock on or about the date
of the Offering, excluding the defendants, other officers and directors of the
Company, members of the immediate families of all individual defendants, and any
entity in which a defendant has a controlling interest. The complaint seeks
unquantified damages as provided for under the federal securities laws, pre- and
post-judgment interest, attorneys' fees, and expert witness fees. In March 1999,
the preferred stockholders' complaint was reassigned to the judge hearing the
consolidated complaint described above. Thereafter, pretrial proceedings
involving the preferred stockholders' complaint were further consolidated with
that litigation. In October 1999, all defendants filed a joint motion to dismiss
the preferred stockholders' complaint; briefing on that motion is scheduled for
completion in February 2000.
The Company, the defendant directors and the defendant officers each have
retained counsel for both of the above-described litigations and intend to
defend against both complaints vigorously. Although the Company believes that
the allegations of the complaints are without merit, it is not feasible for the
Company to predict at this time the outcome of either litigation or whether the
resolution of either litigation could have a material adverse effect on the
Company's results of operations, cash flows or financial condition.
7
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Since January 1, 1997, Nanophase Technologies Corporation (the "Company")
has been engaged in the commercial production and sale of its nanocrystalline
materials. All of the Company's revenue since January 1, 1997 has been generated
through commercial sources. From its inception in November 1989 through
September 30, 1999, the Company was primarily capitalized through the private
offering of approximately $19,558,069 of equity securities and its initial
public offering of $28,837,936 of the Company's common stock (the "Common
Stock"), each net of issuance costs. The Company has incurred cumulative losses
of $23,823,498 from inception through September 30, 1999.
RESULTS OF OPERATIONS
Revenue is recorded when the Company ships products, when specific
milestones are met regarding development arrangements or when the Company
licenses its technology and transfers proprietary information. Total revenue was
$365,197 and $1,019,416 for the three and nine months, respectively, ended
September 30, 1999, compared to $180,568 and $1,102,280 for the same periods in
1998. The increase in total revenue for the three-month period was primarily
attributed to increased product revenue. Product revenue increased to $315,197
for the three months ended September 30, 1999, compared to $180,568 for the same
period in 1998. Other revenue increased to $50,000 for the three-month period
ended September 30, 1999, compared to $0 for the same period in 1998. This
increase was related to two development agreements. The decrease in total
revenue for the nine-month period was mainly due to reduced product revenue
partially offset by increased other revenue. Product revenue decreased to
$862,499 for the nine months ended September 30, 1999, compared to $958,796 for
the same period in 1998. Other revenue increased to $156,917 for the nine-month
period ended September 30, 1999, compared to $143,484 for the same period in
1998. The majority of the revenue generated during the three and nine months
ended September 30, 1999 was from customers in the electronics, cosmetics, and
structural ceramics and composites markets. For the nine-month period ended
September 30, 1999, revenue from three customers composed approximately 37.9%,
13.7%, and 13.6%, respectively, of total revenue.
Cost of revenue generally includes costs associated with commercial
production, customer development arrangements and licensing fees. Cost of
revenue decreased to $597,098 and $2,058,982 for the three and nine months,
respectively, ended September 30, 1999, compared to $668,616 and $2,325,323 for
the same periods in 1998. The decrease in cost of revenue was generally
attributed to reduced product shipments and reduced ceramic superplastic forming
costs. Cost of revenue as a percentage of total revenue decreased for the three
and nine months ended September 30, 1999, compared to the same periods in 1998,
due primarily to the increase in total revenue for the nine months ended
September 30, 1999 and other factors discussed above.
Research and development expense primarily consists of costs associated
with the Company's development or acquisition of new product applications and
coating formulations and the cost of enhancing the Company's manufacturing
processes. Research and development expense decreased to $344,287 and $1,129,009
for the three and nine months, respectively, ended September 30, 1999, compared
to $344,657 and $1,135,679 for the same periods in 1998. The research and
development expense for the three and nine month periods ended September 30,
1998 included $150,000 and $575,000, respectively, in costs related to
arrangements with outside parties to further develop end-use products. Excluding
these costs, research and development expense increased by $149,630 and $568,330
8
<PAGE> 9
in the three and nine months, respectively, ended September 30, 1999, compared
to the same periods in 1998. These increases were attributed to increased costs
related to ongoing development activities, including additional salaries for
newly hired research personnel, and the costs of a restructuring, including
recording amounts due to a former officer and non-cash stock compensation
charges relating to the revision of vesting schedules for options previously
granted to the same officer, recruiting and relocation expenses, and severance
to other employees.
Selling, general and administrative expense increased to $995,949 and
$3,138,154 for the three- and nine-month periods, respectively, ended September
30, 1999, compared to $969,761 and $2,562,424 for the same periods in 1998. For
the three month period ended September 30, 1999 compared to the same period in
1998, these net increases were primarily attributed to increased costs
associated with an organizational restructuring, including recording amounts due
to former officers and non-cash stock compensation charges relating to the
revision of vesting schedules for options previously granted to such officers,
associated legal and professional fees, and severance to other employees. These
increases were somewhat offset by decreases in other legal fees, recruiting and
relocation costs, salaries, bad debt expenses, and cost-cutting measures. For
the nine month period ended September 30, 1999 compared to the same period in
1998, these net increases were primarily attributed to increased costs
associated with the organizational restructuring discussed previously, increased
salaries, and other legal fees. These increases were somewhat offset by
decreases in recruiting and relocation costs, bad debt expenses, and
cost-cutting measures.
Interest income decreased to $285,125 and $861,782 for the three and nine
month periods, respectively, ended September 30, 1999, compared to $381,615 and
$1,169,481 for the same periods in 1998. This decrease was primarily due to a
reduction in funds available for investment compounded by a reduction in
investment yields.
Income tax expense was $0 for the three and nine months ended September
30, 1999, compared to $0 and $156,000 for the same respective periods in 1998.
The 1998 expense was due to foreign taxes withheld from license fees received
from one of the Company's distribution partners, C. I. Kasei Co., Ltd.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash, cash equivalents and investments amounted to
$22,968,052 at September 30, 1999, compared to $26,633,912 at December 31, 1998.
The net cash used in the Company's operating activities was $3,423,170 for the
nine months ended September 30, 1999, compared to $2,912,111 for the same period
in 1998. The net cash used in operating activities for the nine-month period
ended September 30, 1999 was primarily for the ongoing development of additional
product applications, the funding of research and development activities and
sales efforts, increased accrued liabilities and the funding of other
receivables, which was offset by the collection of accounts receivable, a
decrease in inventory, and an increase in accounts payable. Net cash provided by
investing activities, including capital expenditures and purchases of securities
in which cash is invested pending its use for operating activities and expansion
of the Company's manufacturing facilities offset by maturities of such
securities, amounted to $3,657,772 for the nine months ended September 30, 1999,
compared to $67,660 of net cash used in investing activities for the same period
in 1998. Capital expenditures, primarily related to the further expansion of the
Company's existing manufacturing facility and the purchase of operating
equipment, amounted to $284,663 for the nine months ended September 30, 1999,
compared to $447,880 for the same period in 1998. Net cash provided by financing
activities, which related to the exercise of options for 168,261 shares of
Common Stock, amounted to $41,973 for the nine-month period ended September 30,
1999, compared to $89,681, which related to the exercise of options for 124,303
shares of Common Stock, for the same period in 1998.
9
<PAGE> 10
The Company believes that cash from operations and cash on hand, together
with the remaining net proceeds from the Company's initial public offering of
Common Stock ("the Offering") and interest income thereon, will be adequate to
fund the Company's current operating plans. The Company's actual future capital
requirements will depend, however, on many factors, including customer
acceptance of the Company's current and potential nanocrystalline materials and
product applications, continued progress in the Company's research and
development activities and product testing programs, the magnitude of these
activities and programs, and the costs necessary to increase and expand the
Company's manufacturing capabilities and to market and sell the Company's
materials and product applications. Depending on future requirements, the
Company may seek additional funding through public or private financing,
collaborative relationships, government contracts or additional licensing
agreements. Additional financing may not be available on acceptable terms or at
all, and any such additional financing could be dilutive to the Company's
stockholders.
At September 30, 1999, the Company had a net operating loss carryforward
of approximately $23 million for income tax purposes. Because the Company may
have experienced "ownership changes" within the meaning of the U.S. Internal
Revenue Code in connection with its various prior equity offerings, future
utilization of this carryforward may be subject to certain limitations as
defined by the Internal Revenue Code. If not utilized, the carryforward expires
at various dates between 2005 and 2013. As a result of the annual limitation, a
portion of this carryforward may expire before ultimately becoming available to
reduce income tax liabilities. At September 30, 1999, the Company also had a
foreign tax credit carryforward of $156,000, which could be used as an
offsetting tax credit to reduce U.S. income taxes. The foreign tax credit will
expire in 2013 if not utilized before that date.
IMPACT OF YEAR 2000 ISSUE
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Computer programs
that have time-sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices or engage
in similar normal business activities.
The Company has identified the following areas as possibly being affected
by the Year 2000 Issue: (i) IT and non-IT systems, (ii) manufacturing
applications, and (iii) third-party relationships. For each of these areas, the
Company believes it has identified and assessed specific software, equipment,
and systems that could be potentially susceptible to the Year 2000 Issue. The
Company has developed and implemented corrective actions, where it was believed
to be necessary, to ensure that by December 31, 1999 its software, equipment and
systems will function properly with respect to dates in the year 2000 and
thereafter. To date, the Company has not spent a material amount on year 2000
compliance and does not expect that the total cost of its year 2000 compliance
activities will be material. The Company believes that it has no material
exposure to contingencies related to the Year 2000 Issue for the products it has
sold to date.
The Company processes its transactions and applications utilizing personal
computers. In addition, the Company's telephone system, fax machines, payroll,
alarm systems and other miscellaneous systems utilize computer equipment and
software. The Company has identified which software and equipment needs to be
upgraded. Based on its assessment to date, the Company does not believe that
significant modifications or replacements of its software or systems, other than
those already completed will be required to be year 2000 compliant. As of
January 1, 1998, the Company only acquires software and invests in systems that
are year 2000 compliant.
The Company's manufacturing activities rely on its PVS plasma reactors
comprised of modular
10
<PAGE> 11
equipment that contains embedded technology. The Company also relies on a
quality control laboratory for production process control. The Company has
identified the particular hardware and software systems used in such
manufacturing applications to assess whether they are year 2000 compliant. The
Company believes such manufacturing applications are year 2000 compliant.
To date, the Company does not have any direct interface between its
systems and those of any significant supplier or customer. The Company, however,
relies on third party suppliers for raw materials, utilities, cash management
services and other key supplies and services. The Company, therefore, recognizes
that it is vulnerable to third party suppliers that fail to remediate their own
Year 2000 Issues. The Company is corresponding with its significant suppliers to
determine their year 2000 compliance status. The Company is also dependent upon
its customers, product development partners and distributors for sales, cash
flow and product development. The Company does not currently have complete
information concerning the year 2000 compliance status of its customers, product
development partners, and distributors, but has received written and oral
indications that most of them are actively working on their year 2000
compliance. A number of written replies have been received representing that the
respondents are currently year 2000 compliant.
The Company's most reasonably likely worst case scenario with respect to
the Year 2000 Issue is that (i) its manufacturing systems may malfunction, and
(ii) third party suppliers of ceramic and metallic materials, cash management
services and utilities, customers, product development partners and distributors
may be unable to remediate their own Year 2000 Issues. In such scenario, the
Company could experience manufacturing interruptions, difficulties in accessing
its cash and investments, delays in distribution of its products, delays in
development of new product applications and reduced shipments. This would have a
material adverse effect on the Company's operations. The Company currently has
no contingency plan in the event such most reasonably likely worst-case scenario
occurs.
The Company currently believes that the Year 2000 Issue will not pose
significant operational problems for the Company. However, if all Year 2000
Issues are not properly identified or remediated on a timely basis, the
Company's results of operations or relationships with customers and suppliers
may be materially adversely affected. In addition, the systems of other
companies on which the Company relies may not be timely converted and any
failure by them to do so could have a material adverse effect on the Company's
operations.
LEGAL PROCEEDINGS
As disclosed in Note 5 to the Financial Statements and under "Part II -
Other Information - Item 1. Legal Proceedings," five separate complaints were
filed in the United States District Court for the Northern District of Illinois,
Eastern Division, each of which alleged that the Company, certain of its
officers and directors, and the underwriters of the Offering are liable under
the federal securities laws for making supposedly negligent or reckless material
misstatements of fact and omitting to state material facts necessary to make
other statements of fact not misleading in the Registration Statement and
Prospectus relating to the Offering. Those cases were consolidated and a
consolidated complaint was filed in October 1998. The consolidated complaint
alleges that the action should be maintained as (i) a plaintiff class action on
behalf of certain persons who purchased the Common Stock from November 26, 1997
through January 8, 1998, excluding the defendants, members of their immediate
families, and any entity in which a defendant has a controlling interest, and
(ii) a defendant class action against the underwriters who participated in the
Offering. The consolidated complaint seeks unquantified damages under the
federal securities laws, pre- and post-judgment interest, attorneys' fees, and
expert witness fees. In addition, the consolidated complaint seeks rescission
and/or rescissory damages relating to purchases of the Common Stock under
federal securities laws. In October 1999, the Court granted in part and denied
in part motions to dismiss the consolidated complaint that previously had been
filed by each defendant.
11
<PAGE> 12
In its ruling, the Court in part found that plaintiffs who did not purchase
their Common Stock during the Offering could not sue under Section 12(a)(2) of
the Securities Act of 1933. Each defendant's respective answer to the remaining
claims in the consolidated complaint is scheduled to be filed on
November 15, 1999.
In November 1998, a separate complaint was filed in the Northern District
of Illinois, Eastern Division, which alleged that the Company, certain of its
officers and directors, and the underwriters of the Company's Offering are
liable under the federal securities laws for making supposedly fraudulent
material misstatements of fact and omitting to state material facts necessary to
make other statements of fact not misleading in connection with the solicitation
of consents to proceed with the Offering from certain of the Company's preferred
stockholders. The complaint alleges that the action should be maintained as a
plaintiff class action on behalf of those former preferred stockholders whose
shares of preferred stock were converted into Common Stock on or about the date
of the Offering, excluding the defendants, other officers and directors of the
Company, members of the immediate families of all individual defendants, and any
entity in which a defendant has a controlling interest. The complaint seeks
unquantified damages as provided for under the federal securities laws, pre- and
post-judgment interest, attorneys' fees, and expert witness fees. In March 1999,
the preferred stockholders' complaint was reassigned to the judge hearing the
consolidated complaint described above. Thereafter, pretrial proceedings
involving the preferred stockholders' complaint were further consolidated with
that litigation. In October 1999, all defendants filed a joint motion to dismiss
the preferred stockholders' complaint; briefing on that motion is scheduled for
completion in February 2000.
The Company, the defendant directors and the defendant officers each have
retained counsel for both of the above-described litigations and intend to
defend against both complaints vigorously. Although the Company believes that
the allegations of the complaints are without merit, it is not feasible for the
Company to predict at this time the outcome of either litigation or whether the
resolution of either litigation could have a material adverse effect on the
Company's results of operations, cash flows or financial condition.
SAFE HARBOR PROVISION
Because the Company wants to provide investors with more meaningful and
useful information, the Quarterly Report on Form 10-Q contains certain
"forward-looking statements" (as such term is defined in Section 21E of the
Securities Exchange Act of 1934, as amended). Statements contained in this
Quarterly Report on Form 10-Q that are not historical facts are forward-looking
statements that are made pursuant to the Safe Harbor Provisions of the Private
Securities Litigation Reform Act of 1995. These statements reflect the Company's
current expectations regarding its future results of operations, performance,
and achievements and are based on information currently available to the
Company. The Company has tried, wherever possible, to identify these
forward-looking statements by using words such as "intends," "believes,"
"estimates," "expects," "plans," and similar expressions. These statements are
subject to certain risks, uncertainties, and factors which could cause the
Company's actual results, performance, and achievements in 1999 and beyond to
differ materially from those expressed in, or implied by, such statements. These
risks, uncertainties, and factors include, without limitation: uncertain demand
for, and acceptance of, the Company's nanocrystalline materials; the Company's
dependence on a limited number of key customers; the Company's limited
manufacturing capacity and experience; the Company's limited marketing
experience; changes in development and distribution relationships; the impact of
competitive products and technologies; the Company's dependence on patents and
protection of proprietary information; the resolution of litigation the Company
is involved in; and other risks set forth under "Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations - Risk Factors" in
the Company's Annual Report on Form 10-K for the year ended December 31, 1998,
as filed with the Securities and Exchange Commission. Readers of this Quarterly
Report on Form 10-Q
12
<PAGE> 13
should not place undue reliance on any forward-looking statements. Except as
required by federal securities laws, the Company undertakes no obligation to
update or revise these forward-looking statements to reflect new events or
uncertainties.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to interest rate risk on its investment portfolio.
A 1% fluctuation in interest rate would result in a change in the portfolio
earnings of approximately $220,000 per year.
13
<PAGE> 14
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As previously disclosed in the Company's Annual Report on Form 10-K for
the year ended December 31, 1998, five separate complaints were filed in the
United States District Court for the Northern District of Illinois, Eastern
Division, each of which alleged that the Company, certain of its officers and
directors, and the underwriters of the Offering are liable under the federal
securities laws for making supposedly negligent or reckless material
misstatements of fact and omitting to state material facts necessary to make
other statements of fact not misleading in the Registration Statement and
Prospectus relating to the Offering. Those cases were consolidated and a
consolidated complaint was filed in October 1998. The consolidated complaint
alleges that the action should be maintained as (i) a plaintiff class action on
behalf of certain persons who purchased the Common Stock from November 26, 1997
through January 8, 1998, excluding the defendants, members of their immediate
families, and any entity in which a defendant has a controlling interest, and
(ii) a defendant class action against the underwriters who participated in the
Offering. The consolidated complaint seeks unquantified damages under the
federal securities laws, pre- and post-judgment interest, attorneys' fees, and
expert witness fees. In addition, the consolidated complaint seeks rescission
and/or rescissory damages relating to purchases of the Common Stock under
federal securities laws. In October 1999, the Court granted in part and denied
in part motions to dismiss the consolidated complaint that previously had been
filed by each defendant. In its ruling, the Court in part found that plaintiffs
who did not purchase their Common Stock during the Offering could not sue under
Section 12(a)(2) of the Securities Act of 1933. Each defendant's respective
answer to the remaining claims in the consolidated complaint is scheduled to be
filed on November 15, 1999.
In November 1998, a separate complaint was filed in the Northern District
of Illinois, Eastern Division, which alleged that the Company, certain of its
officers and directors, and the underwriters of the Company's Offering are
liable under the federal securities laws for making supposedly fraudulent
material misstatements of fact and omitting to state material facts necessary to
make other statements of fact not misleading in connection with the solicitation
of consents to proceed with the Offering from certain of the Company's preferred
stockholders. The complaint alleges that the action should be maintained as a
plaintiff class action on behalf of those former preferred stockholders whose
shares of preferred stock were converted into Common Stock on or about the date
of the Offering, excluding the defendants, other officers and directors of the
Company, members of the immediate families of all individual defendants, and any
entity in which a defendant has a controlling interest. The complaint seeks
unquantified damages as provided for under the federal securities laws, pre- and
post-judgment interest, attorneys' fees, and expert witness fees. In March 1999,
the preferred stockholders' complaint was reassigned to the judge hearing the
consolidated complaint described above. Thereafter, pretrial proceedings
involving the preferred stockholders' complaint were further consolidated with
that litigation. In October 1999, all defendants filed a joint motion to dismiss
the preferred stockholders' complaint; briefing on that motion is scheduled for
completion in February 2000.
The Company, the defendant directors and the defendant officers each have
retained counsel for both of the above-described litigations and intend to
defend against both complaints vigorously. Although the Company believes that
the allegations of the complaints are without merit, it is not feasible for the
Company to predict at this time the outcome of either litigation or whether the
resolution of either litigation could have a material adverse effect on the
Company's results of operations, cash flows or financial condition.
14
<PAGE> 15
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On November 26, 1997 (the "Effective Date"), the Company's Registration
Statement on Form S-1 (File No. 333-36937) relating to the Offering was declared
effective by the Securities and Exchange Commission. Since the Effective Date,
of its $28,837,936 of net proceeds from the Offering, the Company has used
approximately $755,000 for capital expenditures primarily related to the further
expansion of the Company's existing manufacturing facility and the purchase of
operating equipment and approximately $5,115,000 for working capital and other
general corporate purposes. The remainder of the net proceeds has been invested
by the Company, pending its use, in short-term, investment grade,
interest-bearing obligations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS.
Exhibit 27 - Financial Data Schedule
B. REPORTS ON FORM 8-K.
The Company did not file any Current Reports on Form 8-K during
the third quarter of 1999.
15
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NANOPHASE TECHNOLOGIES CORPORATION
Date: November 12, 1999 By: /s/ JOSEPH E. CROSS
--------------------------------------
Joseph E. Cross
President, Chief Executive Officer
(principal executive officer) and a
Director
Date: November 12, 1999 By: /s/ JESS A. JANKOWSKI
--------------------------------------
Jess A. Jankowski
Corporate Controller, Treasurer
and Secretary (principal financial and
accounting officer)
16
<PAGE> 17
EXHIBIT INDEX
Exhibit
Number Exhibit Name
- ------- ------------
Exhibit 27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 639,969
<SECURITIES> 22,328,083
<RECEIVABLES> 223,301
<ALLOWANCES> 75,000
<INVENTORY> 485,377
<CURRENT-ASSETS> 23,965,792
<PP&E> 3,853,424
<DEPRECIATION> 1,748,049
<TOTAL-ASSETS> 26,253,419
<CURRENT-LIABILITIES> 1,424,478
<BONDS> 0
0
0
<COMMON> 48,652,439
<OTHER-SE> (23,823,498)
<TOTAL-LIABILITY-AND-EQUITY> 26,253,419
<SALES> 862,499
<TOTAL-REVENUES> 1,019,416
<CGS> 2,058,982
<TOTAL-COSTS> 6,326,145
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (4,444,947)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,444,947)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,444,947)
<EPS-BASIC> (0.35)
<EPS-DILUTED> (0.35)
</TABLE>
