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