<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: MARCH 31, 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 May 14, 1999, there were outstanding 12,654,577 shares of common
stock, par value $.01, of the registrant.
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NANOPHASE TECHNOLOGIES CORPORATION
QUARTER ENDED MARCH 31, 1999
INDEX
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PART I - FINANCIAL INFORMATION...............................................................................3
Item 1. Financial Statements..........................................................................3
Balance Sheets as of March 31, 1999 (unaudited) and December 31, 1998.........................3
Statements of Operations (unaudited) for the three months ended March 31, 1999
and 1998....................................................................................4
Statements of Cash Flows (unaudited) for the three months ended March 31, 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 6. Exhibits and Reports on Form 8-K.............................................................14
SIGNATURES..................................................................................................15
</TABLE>
2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NANOPHASE TECHNOLOGIES CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
---------------- ---------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.................................................. $ 770,621 $ 363,394
Investments................................................................ 25,058,369 26,270,518
Trade accounts receivable, less allowance for doubtful accounts
of $75,000 at March 31, 1999 and $85,000 at December 31, 1998........... 183,327 316,328
Other receivable........................................................... 304,032 -
Inventories, net........................................................... 765,039 838,825
Prepaid expenses and other current assets.................................. 114,283 92,351
---------------- ---------------
Total current assets..................................................... 27,195,671 27,881,416
Equipment and leasehold improvements, net.................................... 2,346,923 2,383,091
Other assets, net............................................................ 180,096 189,481
---------------- ---------------
$ 29,722,690 $ 30,453,988
================ ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable........................................................... $ 819,177 $ 413,378
Accrued expenses........................................................... 1,342,278 933,020
---------------- ---------------
Total current liabilities................................................ 2,161,455 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;
12,654,577 shares issued and outstanding at March 31, 1999 and
12,568,691 shares issued and outstanding at December 31, 1998.............. 126,546 125,687
Additional paid-in capital................................................... 48,389,142 48,360,454
Accumulated deficit.......................................................... (20,954,453) (19,378,551)
---------------- ---------------
Total stockholders' equity................................................. 27,561,235 29,107,590
---------------- ---------------
$ 29,722,690 $ 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 MARCH 31,
-----------------------------------
1999 1998
---------------- -----------------
<S> <C> <C>
REVENUE:
Product revenue........................................................... $ 266,248 $ 636,734
Other revenue............................................................. 58,750 66,800
---------------- -----------------
Total revenue........................................................... 324,998 703,534
OPERATING EXPENSE:
Cost of revenue........................................................... 781,089 968,712
Research and development expense.......................................... 390,414 189,214
Selling, general and administrative expense............................... 1,018,446 683,299
---------------- -----------------
Total operating expense................................................. 2,189,949 1,841,225
---------------- -----------------
Loss from operations........................................................ (1,864,951) (1,137,691)
Interest income............................................................. 289,049 406,291
---------------- -----------------
Loss before provision for income taxes...................................... (1,575,902) (731,400)
Provision for income taxes.................................................. - (156,000)
---------------- -----------------
Net loss.................................................................... $ (1,575,902) $ (887,400)
================ =================
Net loss per share.......................................................... $ (0.13) $ (0.07)
================ =================
Weighted average number of common shares outstanding........................ 12,593,718 12,277,467
================ =================
</TABLE>
See Notes to Financial Statements.
4
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NANOPHASE TECHNOLOGIES CORPORATION
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
------------------------------------
1999 1998
------------------ ----------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss................................................................. $ (1,575,902) $ (887,400)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization........................................ 169,315 111,450
Allowance for excess inventory quantities............................ 50,891 -
Changes in assets and liabilities related to operations:
Trade accounts receivable............................................ 133,001 824,586
Other receivable..................................................... (304,032) -
Inventories.......................................................... 22,895 13,265
Prepaid expense and other assets..................................... (13,912) (39,826)
Accounts payable..................................................... 405,799 (424,760)
Accrued liabilities.................................................. 409,258 224,856
------------------ ----------------
Net cash used in operating activities.................................... (702,687) (177,829)
INVESTING ACTIVITIES:
Acquisition of equipment and leasehold improvements...................... (131,782) (219,522)
Purchases of held-to-maturity investments................................ (40,615,640) (65,178,904)
Maturities of held-to-maturity investments............................... 41,827,789 62,313,000
------------------ ----------------
Net cash provided by (used in) investing activities...................... 1,080,367 (3,085,426)
FINANCING ACTIVITIES:
Proceeds from issuance of stock.......................................... 29,547 -
------------------ ----------------
Net cash provided by financing activities................................ 29,547 -
------------------ ----------------
Increase (decrease) in cash and cash equivalents......................... 407,227 (3,263,255)
Cash and cash equivalents at beginning of period......................... 363,394 3,988,368
------------------ ----------------
Cash and cash equivalents at end of period............................... $ 770,621 $ 725,113
================== ================
</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
months ended March 31, 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 $139,100 and $84,400
for the three months ended March 31, 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 $25,054,000 at
March 31, 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>
MARCH 31, 1999 DECEMBER 31, 1998
------------------- ----------------------
<S> <C> <C>
Raw materials............................................ $ 274,917 $ 284,162
Finished goods........................................... 731,646 745,296
------------------- ----------------------
1,006,563 1,029,458
Allowance for excess inventory quantities................ (241,524) (190,633)
------------------- ----------------------
$ 765,039 $ 838,825
=================== ======================
</TABLE>
(5) STOCK OPTIONS AND WARRANTS
During the three months ended March 31, 1999, options to purchase
85,886 shares of Common Stock were exercised for $29,547.
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(6) 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
and 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 unable
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 March 31, 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 $20,954,453 from inception through March 31, 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
decreased to $324,998 for the three months ended March 31, 1999, compared to
$703,534 for the same period in 1998. The decrease in total revenue was
primarily attributed to a reduction in product revenue. Product revenue
decreased to $266,248 for the three months ended March 31, 1999, compared to
$636,734 for the same period in 1998. Other revenue decreased to $58,750 for the
three-month period ended March 31, 1999, compared to $66,800 for the same period
in 1998. The majority of the revenue generated during the three months ended
March 31, 1999 was from customers in the electronics and cosmetics markets.
Cost of revenue generally includes costs associated with commercial
production, customer development arrangements and licensing fees. Cost of
revenue decreased to $781,089 for the three months ended March 31, 1999,
compared to $968,712 for the same period in 1998. The decrease in cost of
revenue was generally attributed to reduced product shipments, efficiencies in
the manufacture of the Company's products, 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 increased for the
three months ended March 31, 1999, compared to the same period in 1998, due
primarily to the decrease in total revenue.
Research and development expense primarily consists of costs associated
with the Company's development or acquisition of new product applications and
coating formulations and the cost of enhancing the Company's manufacturing
processes. Research and development expense increased to $390,414 for the three
months ended March 31, 1999, compared to $189,214 for the same period in 1998.
The increase in research and development expense was primarily attributed to
increased costs related to ongoing development activities, increased 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.
8
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Selling, general and administrative expense increased to $1,018,446 for
the three-month period ended March 31, 1999, compared to $683,299 for the same
period in 1998. The net increase was primarily attributed to increased costs
associated with ongoing investor relation programs, additional legal expenses,
salaries of additional sales and administrative personnel, increased recruiting
and relocation costs, and separation costs associated with the departure of the
Company's former chief executive officer. The Company expects to further
increase its selling, general and administrative expense during the remainder of
1999 in connection with its plans to refocus its sales effort and restructure
the organization.
Interest income decreased to $289,049 for the three-month period ended
March 31, 1999, compared to $406,291 for the same period 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 months ended March 31, 1999,
compared to $156,000 for the same period in 1998. The 1998 expense was due to
the foreign taxes withheld from license fees received from one of the Company's
distribution partners, C. I. Kasei Co., Ltd.
RECENT DEVELOPMENTS
In connection with the Company's plans to restructure the organization,
Nanophase has recently eliminated certain jobs and positions which it felt were
not currently necessary. The Company believes that the anticipated cost savings
generated by the elimination of these jobs and positions will be offset by
increased sales and marketing expenses primarily related to an expanded sales
effort. The Company expects to recognize charges related to the restructuring of
approximately $125,000 during the second quarter of 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash, cash equivalents and investments amounted to
$25,828,990 at March 31, 1999, compared to $26,633,912 at December 31, 1998. The
net cash used in the Company's operating activities was $702,687 for the three
months ended March 31, 1999, compared to $177,829 for the same period in 1998.
The net cash used in operating activities for the three-month period ended March
31, 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 and inventory levels, which was
offset by the collection of accounts receivable 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
$1,080,367 for the three months ended March 31, 1999, compared to $3,085,426 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 $131,782 for the three months ended March 31, 1999, compared to
$219,522 for the same period in 1998. Net cash provided by financing activities,
which related to the exercise of options for 85,886 shares of Common Stock,
amounted to $29,547 for the three-month period ended March 31, 1999, compared to
$0 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
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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 March 31, 1999, the Company had a net operating loss carryforward of
approximately $20 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 March 31, 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 6 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 and 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 unable
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. 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 $250,000 per year.
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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
and 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.
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
$602,207 for capital expenditures primarily related to the further expansion of
the Company's existing manufacturing facility and the purchase of operating
equipment and $2,406,739 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 10 - Consulting Agreement entered into March 9,
1999 between the Company, Cross
Technologies, Inc., and Robert W. Cross
Exhibit 11 - Statement Regarding Computation of Loss per
Share
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 first 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: May 14, 1999 By: /s/ JOSEPH E. CROSS
---------------------------------------------
Joseph E. Cross
President, Chief Executive Officer (principal
executive officer) and a Director
Date: May 14, 1999 By: /s/ DENNIS J. NOWAK
---------------------------------------------
Dennis J. Nowak
Vice President-Finance and Administration,
Chief Financial Officer, Treasurer and
Secretary (principal financial and chief
accounting officer)
15
<PAGE> 16
EXHIBIT INDEX
Exhibit
Number Exhibit Name
- ------ ------------
10 Consulting Agreement entered into March 9, 1999 between the Company,
Cross Technologies, Inc., and Robert W. Cross
11 Statement Regarding Computation of Loss per Share
27 Financial Data Schedule
<PAGE> 1
EXHIBIT 10
CONSULTING AGREEMENT
This Consulting Agreement is made between Cross Technologies, Inc.
("CTI"), Robert W. Cross ("Mr. Cross"), and Nanophase Technologies Corporation
("NTC").
WHEREAS, during the period between January 14, 1993 and December 16,
1998, Mr. Cross served as the President and Chief Executive Officer of NTC
pursuant to agreements including that certain Employment Agreement between NTC
and Mr. Cross dated February 3, 1994 (the "Employment Agreement");
WHEREAS, effective December 17, 1998, Mr. Cross ceased serving as an
officer of NTC;
WHEREAS, NTC wishes to have periodic future access to Mr. Cross'
knowledge and business experience, and Mr. Cross wishes to provide NTC with such
access;
WHEREAS, Mr. Cross is the sole shareholder and officer of CTI; and
WHEREAS, NTC wishes to engage CTI as NTC's consultant and CTI 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, CTI, Mr. Cross and NTC agree as follows.
1. For a period of eighteen months starting on December 17, 1998 and
ending on June 17, 2000, CTI shall render reasonable consulting services to NTC,
as may be requested by NTC's President from time to time (the "Term"). Such
consulting services shall not preclude CTI or Mr. Cross from conducting other
business consistent with the respective obligations of CTI and Mr. Cross under
this Consulting Agreement.
2. NTC shall pay CTI consulting fees in the aggregate amount of
$307,500 (the "Consulting Fees"). CTI acknowledges that NTC previously has paid
CTI $8,447.85 of these Consulting Fees. NTC's remaining payments of Consulting
Fees, in the aggregate amount of $299,052.15, will be made (a) in an initial
installment of $34,177.30, paid within four business days following all parties'
execution of this Consulting Agreement, and (b) in thirty-one subsequent equal
installments of $8,544.35 each, with each such installment paid on or before the
first business day respectively following the first and seventeenth day of each
month thereafter. NTC shall tender payments of all Consulting Fees by
first-class or overnight mail, addressed to Cross Technologies, Inc., P. O. Box
200, Solebury, PA 18963 or such other address as CTI subsequently may provide to
NTC.
3. On or before the first business day of the first month following all
parties' execution of this Consulting Agreement, NTC shall provide CTI with a
signing bonus consisting of: (a) NTC's payment of $375 to CTI, and (b) NTC's
payment of up to $5,375 to
<PAGE> 2
Wells Fargo Auto Finance, Inc. ("Wells Fargo") or its designee in connection
with the termination of that certain Vehicle Lease No. 500-821-14083973 between
Mr. Cross and Wells Fargo (the "Signing Bonus").
4. The parties to this Consulting Agreement understand and agree that
the foregoing Consulting Fees and Signing Bonus shall be paid by NTC solely in
exchange for CTI's consulting services to NTC. The Consulting Fees and Signing
Bonus are not intended and should not be construed as NTC's payment to CTI of
wages, salary or compensation for services of Mr. Cross. Based on NTC's receipt
of CTI's Federal Employer Identification Number, and the appropriate regulations
of the U.S. Internal Revenue Service and the Illinois Department of Revenue in
effect from time to time during the Term, NTC will not forward any statements of
earnings or payments of monies (Form 1099 or W-2) to either the U.S. Internal
Revenue Service, the Illinois Department of Revenue or any other taxing
authority in connection with the Consulting Fees and Signing Bonus paid by NTC
under this Consulting Agreement.
5. CTI and Mr. Cross acknowledge that NTC makes no representations or
warranties to them concerning the tax consequences, if any, of the Consulting
Fees and Signing Bonus paid by NTC under this Consulting Agreement. Each party
to this instrument shall bear its own such tax consequences, if any, and any
applicable related tax reporting or filing obligations.
6. 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. Cross (the "Stock Option
Agreements"):
A. Any stock options previously granted to Mr. Cross 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.
B. Throughout the Term of this Consulting Agreement, Mr. Cross 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,
subject to Mr. Cross remaining the sole shareholder and officer of CTI,
and Mr. Cross' 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.
Cross 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. Cross has
submitted an irrevocable notice of exercise.
2
<PAGE> 3
D. Pursuant to Section 7(d) of the Stock Option Plan and the terms
of the Stock Option Agreements, Mr. Cross 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. Cross to the U.S. Internal Revenue Service on Form
W-2.
7. The parties to this instrument understand and agree that NTC's
obligations under Paragraphs 2 and 3 of this Consulting Agreement are expressly
subject to CTI and Mr. Cross' complying with their respective following
obligations:
A. CTI shall render such consulting services to NTC as reasonably
requested pursuant to Paragraph 1 of this Consulting Agreement.
B. Mr. Cross shall provide NTC with written notice of his voluntary
resignation from NTC's Board of Directors and as a director of NTC,
concurrently with Mr. Cross' executing this Consulting Agreement.
C. Mr. Cross hereby waives and releases any claim, action, suit,
debt, dues, account, controversy, damages or judgment which Mr. Cross
had, has or hereafter may have, whether known or unknown, in any way
connected with or arising from (i) any claim for severance benefits or
payments from NTC, and (ii) any claim under Section 7 of the Employment
Agreement.
D. Mr. Cross 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. Cross and NTC dated January 14, 1993, and (ii) the
confidentiality and non-competition covenants in Section 8 of the
Employment Agreement.
E. Mr. Cross and CTI shall maintain the confidentiality of all terms
of this Consulting Agreement, and they each warrant that they will not,
in any manner or means, by act or omission, disclose the terms of this
Consulting Agreement to any person or entity. Mr. Cross and CTI
specifically warrant that they will not represent to any person or
entity that Mr. Cross is a consultant to, or otherwise affiliated with,
NTC. The warranties in this Paragraph 7.E shall not apply to Mr. Cross'
disclosures to his spouse, financial advisors or lawyers, to CTI's
disclosures to its financial advisors or lawyers, or to disclosures of
Mr. Cross or CTI as required by applicable law.
8. 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
3
<PAGE> 4
another party or any other person, except as expressly provided in Paragraph 7.C
of this instrument.
9. This Consulting Agreement, and all obligations of NTC under
Paragraphs 2 and 3 of this instrument, shall end immediately upon the earlier
of: (a) Mr. Cross' death; (b) the dissolution, receivership or bankruptcy of
CTI, without CTI having previously notified NTC of the identity and address of
any successor entity to CTI; (c) the conclusion of the Term; or (d) Mr. Cross or
CTI failing to comply with their respective obligations under Paragraph 7 of
this Consulting Agreement.
10. Neither CTI nor Mr. Cross shall have any power to assign their
respective rights or obligations under this Consulting Agreement.
11. 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 11 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.
12. 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:
If to CTI: Cross Technologies, Inc.
P.O. Box 200
Solebury, Pennsylvania 18963
If to Mr. Cross: Robert W. Cross
P.O. Box 200
Solebury, Pennsylvania 18963
If to NTC: Nanophase Technologies Corporation
453 Commerce Street
Burr Ridge, Illinois 60521
Attention: President
13. CTI and Mr. Cross acknowledge 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 them by any person or entity whatsoever to
cause them to sign this Consulting Agreement; that each party to this instrument
is represented by counsel and that counsel has
4
<PAGE> 5
explained to the party all the terms of this Consulting Agreement and that each
party has voluntarily signed it; and that this instrument constitutes the entire
agreement between the parties on all the subjects described herein.
14. This Consulting Agreement shall be construed in accord with, and
governed by, the laws of the State of Illinois.
15. This Consulting Agreement may be signed by the parties in multiple
counterparts.
CROSS TECHNOLOGIES, INC.
By: /s/ ROBERT W. CROSS March 8, 1999
------------------------------ ------------------------
Robert W. Cross Date
Chief Executive Officer
/s/ ROBERT W. CROSS March 8, 1999
- --------------------------------- ------------------------
ROBERT W. CROSS Date
NANOPHSE TECHNOLOGIES
CORPORATION
By: /s/ JOSEPH CROSS March 9, 1999
------------------------------ ------------------------
Joseph Cross Date
Chief Executive Officer
5
<PAGE> 1
EXHIBIT 11
NANOPHASE TECHNOLOGIES CORPORATION
STATEMENT REGARDING COMPUTATION OF LOSS PER SHARE
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------------------
1999 1998
------------------- ------------------
<S> <C> <C>
HISTORICAL:
Weighted average common shares outstanding 12,593,718 12,277,467
=================== ==================
Net loss $ (1,575,902) $ (887,400)
=================== ==================
Net loss per common share $ (0.13) $ (0.07)
=================== ==================
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 770,621
<SECURITIES> 25,058,369
<RECEIVABLES> 183,327
<ALLOWANCES> 75,000
<INVENTORY> 765,039
<CURRENT-ASSETS> 27,195,671
<PP&E> 3,882,305
<DEPRECIATION> 1,535,382
<TOTAL-ASSETS> 29,722,690
<CURRENT-LIABILITIES> 2,161,455
<BONDS> 0
0
0
<COMMON> 48,515,688
<OTHER-SE> (20,954,453)
<TOTAL-LIABILITY-AND-EQUITY> 29,722,690
<SALES> 266,248
<TOTAL-REVENUES> 324,998
<CGS> 781,089
<TOTAL-COSTS> 2,189,949
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,575,902)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,575,902)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,575,902)
<EPS-PRIMARY> (0.13)
<EPS-DILUTED> (0.13)
</TABLE>
