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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: SEPTEMBER 30, 2000
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.)
1319 MARQUETTE DRIVE, ROMEOVILLE, ILLINOIS 60446
(Address of principal executive offices, and zip code)
Registrant's telephone number, including area code: (630) 323-1200
-------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
---
As of November 10, 2000, there were outstanding 13,595,583 shares of
common stock, par value $.01, of the registrant.
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NANOPHASE TECHNOLOGIES CORPORATION
QUARTER ENDED SEPTEMBER 30, 2000
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
PART I - FINANCIAL INFORMATION.................................................................................. 3
Item 1. Financial Statements............................................................................. 3
Balance Sheets as of September 30, 2000 (unaudited) and December 31, 1999........................ 3
Statements of Operations (unaudited) for the three months ended September 30,
2000 and 1999 and the nine months ended September 30, 2000 and 1999............................ 4
Statements of Cash Flows (unaudited) for the nine months ended September 30, 2000 and 1999....... 5
Notes to Financial Statements (unaudited)........................................................ 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ........... 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk....................................... 12
PART II - OTHER INFORMATION..................................................................................... 12
Item 1. Legal Proceedings................................................................................ 12
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>
SEPTEMBER 30, DECEMBER 31,
2000 1999
---------------- ---------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.................................................. $ 412,643 $ 624,509
Investments................................................................ 18,213,349 21,216,168
Trade accounts receivable, less allowance for doubtful accounts 1,256,231 401,826
of $81,450 at September 30, 2000 and $120,000 at December 31, 1999......
Other receivable, net..................................................... 362,984 247,841
Inventories, net........................................................... 951,739 766,778
Prepaid expenses and other current assets.................................. 62,662 90,358
---------------- ---------------
Total current assets..................................................... 21,259,608 23,347,480
Equipment and leasehold improvements, net.................................... 2,470,422 2,152,413
Other assets, net............................................................ 197,210 177,646
---------------- ---------------
$ 23,927,240 $ 25,677,539
================ ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable........................................................... $ 897,320 $ 615,818
Accrued expenses........................................................... 993,305 900,398
---------------- ---------------
Total current liabilities................................................ 1,890,625 1,516,216
CONTINGENT LIABILITIES...................................................... - -
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 24,088 shares authorized and
no shares issued and outstanding........................................... - -
Common stock, $.01 par value, 25,000,000 shares authorized
and 13,561,821 shares issued and outstanding at September 30, 2000 and
12,764,058 shares issued and outstanding at December 31, 1999.............. 135,618 127,641
Additional paid-in capital................................................... 49,799,184 48,529,300
Accumulated deficit.......................................................... (27,898,187) (24,495,618)
---------------- ---------------
Total stockholders' equity................................................. 22,036,615 24,161,323
---------------- ---------------
$ 23,927,240 $ 25,677,539
================ ===============
</TABLE>
See Notes to Financial Statements.
3
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NANOPHASE TECHNOLOGIES CORPORATION
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- --------------------------------
2000 1999 2000 1999
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
REVENUE:
Product revenue....................... $ 1,251,932 $ 315,197 $ 2,739,939 $ 862,499
Other revenue......................... 103,019 50,000 339,269 156,917
-------------- -------------- -------------- --------------
Total revenue....................... 1,354,951 365,197 3,079,208 1,019,416
OPERATING EXPENSE:
Cost of revenue....................... 1,351,974 597,098 3,475,960 2,058,982
Research and development expense...... 388,861 344,287 1,431,474 1,129,009
Selling, general and administrative
expense............................ 638,582 995,949 2,466,307 3,138,154
-------------- -------------- -------------- --------------
Total operating expense............. 2,379,417 1,937,334 7,373,741 6,326,145
-------------- -------------- -------------- --------------
Loss from operations.................... (1,024,466) (1,572,137) (4,294,533) (5,306,729)
Interest income......................... 309,225 285,125 891,964 861,782
-------------- -------------- -------------- --------------
Net loss................................ $ (715,241) $ (1,287,012) $ (3,402,569) $ (4,444,947)
============== ============== ============== ==============
Net loss per share...................... $ (0.05) $ (0.10) $ (0.26) $ (0.35)
============== ============== ============== ==============
Weighted average number of common
shares outstanding................... 13,512,850 12,746,805 13,325,075 12,666,280
============== ============== ============== ==============
</TABLE>
See Notes to Financial Statements.
4
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NANOPHASE TECHNOLOGIES CORPORATION
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------
2000 1999
---------------- --------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss................................................................. $ (3,402,569) $ (4,444,947)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization........................................ 541,252 505,536
Allowance for excess inventory quantities............................ (122,051) 90,025
Stock compensation expense........................................... - 124,325
Changes in assets and liabilities related to operations:
Trade accounts receivable............................................ (854,405) 93,027
Other receivable..................................................... (115,143) (181,196)
Inventories.......................................................... (62,910) 263,423
Prepaid expense and other assets..................................... (864) 48,557
Accounts payable..................................................... 281,502 (203,110)
Accrued liabilities.................................................. 92,907 281,190
---------------- --------------
Net cash used in operating activities.................................... (3,642,281) (3,423,170)
INVESTING ACTIVITIES:
Acquisition of equipment and leasehold improvements...................... (850,265) (284,663)
Purchases of held-to-maturity investments................................ (38,610,970) (101,149,426)
Maturities of held-to-maturity investments............................... 41,613,789 105,091,861
---------------- --------------
Net cash provided by investing activities................................ 2,152,554 3,657,772
FINANCING ACTIVITIES:
Proceeds from sale of common stock....................................... 1,277,861 41,973
---------------- --------------
Net cash provided by financing activities................................ 1,277,861 41,973
---------------- --------------
(Decrease) Increase in cash and cash equivalents......................... (211,866) 276,575
Cash and cash equivalents at beginning of period......................... 624,509 363,394
---------------- --------------
Cash and cash equivalents at end of period............................... $ 412,643 $ 639,969
================ ==============
</TABLE>
See Notes to Financial Statements.
5
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NANOPHASE TECHNOLOGIES CORPORATION
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PRESENTATION
The accompanying unaudited interim financial statements of Nanophase
Technologies Corporation (the "Company") reflect all adjustments (consisting of
normal recurring adjustments) which, in the opinion of management, are necessary
for a fair presentation of the financial position and operating results of the
Company for the interim periods presented. Operating results for the three and
nine month periods ended September 30, 2000 are not necessarily indicative of
the results that may be expected for the year ended December 31, 2000.
These financial statements should be read in conjunction with the
Company's audited financial statements and notes thereto for the year ended
December 31, 1999, included in the Company's Annual Report on Form 10-K for the
year ended December 31, 1999, as filed with the Securities and Exchange
Commission.
(2) DESCRIPTION OF BUSINESS
The Company was incorporated on November 30, 1989, for the purpose of
developing nanocrystalline materials for commercial production and sale in
domestic and international markets.
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 $430,000 and $550,000
for the nine months ended September 30, 2000 and 1999, respectively.
(3) INVESTMENTS
Investments are classified by the Company at the time of purchase for
appropriate designation and such designations are reevaluated as of each balance
sheet date. Investments are classified as held-to maturity when the Company has
the positive intent and ability to hold the securities to maturity. Held-to
maturity securities are stated at amortized costs and are adjusted to maturity
for the amortization of premiums and accretion of discounts. Such adjustments
for amortization and accretion are included in interest income.
(4) INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000 DECEMBER 31, 1999
------------------ ------------------
<S> <C> <C>
Raw materials........................................................... $ 418,346 $ 257,485
Finished goods.......................................................... 671,556 769,507
------------------ ------------------
1,089,902 1,026,992
Allowance for excess inventory quantities............................... (138,163) (260,214)
------------------ ------------------
$ 951,739 $ 766,778
================== ==================
</TABLE>
6
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NANOPHASE TECHNOLOGIES CORPORATION
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
(5) STOCK OPTIONS AND WARRANTS
During the nine months ended September 30, 2000, 425,184 shares of
Common Stock were issued pursuant to exercises of stock options and 372,579
shares of Common Stock were issued pursuant to exercises of warrants.
(6) CONTINGENT LIABILITIES
Five separate complaints were filed in the United States District Court
for the Northern District of Illinois, each alleging 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 Act of 1933 for making supposedly negligent or reckless material
misstatements of fact and omitting to state material facts necessary to make
other statements of fact not misleading in the Registration Statement and
Prospectus relating to the Offering. Those cases were consolidated and a
consolidated complaint was filed in October 1998. The consolidated complaint
alleges that the action should be maintained as (i) a plaintiff class action on
behalf of certain persons who purchased the Common Stock from November 26, 1997
through January 8, 1998, and (ii) a defendant class action against the
underwriters who participated in the Offering. The consolidated complaint seeks
unquantified damages, pre- and post-judgment interest, attorneys' and expert
witness fees. The consolidated complaint also seeks rescission of plaintiffs'
purchases of the Common Stock. In October 1999, the Court granted in part and
denied in part motions to dismiss the consolidated complaint that previously had
been filed by each defendant. In its ruling, the Court in part found that
plaintiffs who did not purchase their Common Stock during the Offering could not
sue under Section 12(a)(2) of the Securities Act of 1933. Each defendant's
respective answer to the remaining claims in the consolidated complaint was
filed in November 1999.
Following certain discovery, the Company reached an oral agreement in
principle to settle all claims against all defendants in the consolidated
complaint for $4,025,000. The settlement is not an admission of liability by any
party. The Company anticipates that the settlement will be funded by the
Company's directors and officers liability insurance, and that the settlement
payment will not have a material adverse effect on the Company's financial
condition or results of operations. The tentative settlement is subject both to
the parties preparing and signing a definitive Stipulation of Settlement, and to
subsequent submission of that formal Stipulation to the Court for preliminary
and final approval.
The above-described settlement will not resolve a separate complaint
filed in the Northern District of Illinois in November 1998, alleging that the
Company, certain of its officers and directors, and the underwriters of the
Company's Offering are liable under the federal Securities Exchange Act of 1934
for making supposedly fraudulent material misstatements of fact and omitting to
state material facts necessary to make other statements of fact not misleading
in connection with the solicitation of consents to proceed with the Offering
from certain of the Company's preferred stockholders. The complaint alleges that
the action should be maintained as a plaintiff class action on behalf of certain
former preferred stockholders whose shares of preferred stock were converted
into Common Stock on or about the date of the Offering. The complaint seeks
unquantified damages, pre- and post-judgment interest, attorneys' and expert
witness fees. In March 1999, the preferred stockholders' complaint was
reassigned to the judge hearing the consolidated complaint described above. All
defendants subsequently filed a joint motion to
7
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dismiss the preferred stockholders' complaint which the Court denied in August
2000, finding that the preferred stockholders' allegations were pleaded
sufficiently to fulfill the requirements applicable to their complaint. Each
defendant's respective answer to the preferred stockholders' complaint was filed
in late September 2000 and discovery, begun thereafter, currently is pending.
Pursuant to the underwriting agreement for the Offering, the Company
has agreed to pay the underwriters' attorneys' fees in all the above-described
litigation. The Company and the defendant directors and officers each have
retained counsel and intend to defend vigorously against the preferred
stockholders' complaint. Although the Company believes that the allegations of
the preferred stockholders' complaint are without merit, it is not feasible for
the Company to predict at this time the outcome of this litigation or whether
its resolution could have a material adverse effect on the Company's results of
operations or financial condition.
8
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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 September 30, 2000, the Company was primarily capitalized through
the private offering of approximately $19,600,000 of equity securities and its
initial public offering of approximately $28,800,000 of the Company's common
stock (the "Common Stock"), each net of issuance costs. The Company has incurred
cumulative losses of $27,898,187 from inception through September 30, 2000.
RESULTS OF OPERATIONS
Revenue is recorded when title transfers to the customer for sales of
products, when specific milestones are met regarding development arrangements or
when the Company licenses its technology and transfers proprietary information.
Total revenue increased to $1,354,951 and $3,079,208 for the three and nine
months, respectively, ended September 30, 2000, compared to $365,197 and
$1,019,416 for the same periods in 1999. The increase in total revenue for the
three and nine-month periods was primarily attributed to increased product
revenue. Product revenue increased to $1,251,932 and $2,739,939 for the three
and nine-month periods ended September 30, 2000, respectively, compared to
$315,197 and $862,499 for the same periods in 1999. Increases in product revenue
were attributed to additional customers and growth with existing customers.
Other revenue increased to $103,019 and $339,269 for the three and nine-month
periods ended September 30, 2000, compared to $50,000 and $156,917 for the same
periods in 1999. The majority of the revenue generated during the three and nine
months ended September 30, 2000 was from customers in the healthcare,
electronics, and catalyst markets.
Cost of revenue generally includes costs associated with commercial
production, customer development arrangements and licensing fees. Cost of
revenue increased to $1,351,974 and $3,475,960 for the three and nine months,
respectively, ended September 30, 2000, compared to $597,098 and $2,058,982 for
the same periods in 1999. The increase in cost of revenue was generally
attributed to increased product sales, somewhat offset by efficiencies in the
manufacture of the Company's products. Cost of revenue as a percentage of total
revenue decreased for the three and nine months, respectively, ended September
30, 2000, compared to the same period in 1999, due primarily to the increase 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 $388,861 and $1,431,474
for the three and nine months, respectively, ended September 30, 2000, compared
to $344,287 and $1,129,009 for the same periods in 1999. The increase in
research and development expense was primarily attributed to additional salaries
for newly hired research personnel. This increase was partially offset by
non-recurring payments to a former officer relating to a restructuring in 1999.
The Company expects to further increase its research and development expense for
the remainder of 2000 in connection with its plans to continue to enhance and
expand its product lines, technologies and manufacturing processes.
Selling, general and administrative expense decreased to $638,582 and
$2,466,307 for the three and nine-month periods, respectively, ended September
30, 2000, compared to $995,949 and $3,138,154 for the same periods in 1999. The
net decrease was primarily attributed to a reduction in legal expenses during
2000 relative to 1999, and there being non-recurring restructuring costs,
including payments to
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former officers, in 1999. These decreases were partially offset in 2000 by
increased bad debt expense and additional rent expense relating to the Company's
new facility .
Interest income increased to $309,225 and $891,964 for the three- and
nine-month periods, respectively, ended September 30, 2000, compared to $285,125
and $861,782 for the same periods in 1999. This increase was primarily due to an
increase in investment yields which was somewhat offset by a reduction in funds
available for investment.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash, cash equivalents and investments amounted to
$18,625,992 at September 30, 2000, compared to $21,840,677 at December 31, 1999.
The net cash used in the Company's operating activities was $3,642,281 for the
nine months ended September 30, 2000 and was primarily for the further
development of product applications, the funding of research and development
activities and sales efforts, and the funding of trade receivables, other
receivables and inventory levels, offset by an increase in accounts payable and
accrued liabilities. Net cash provided by investing activities, which is due to
maturities of securities offset somewhat by capital expenditures and purchases
of securities, amounted to $2,152,554 for the nine months ended September 30,
2000. Capital expenditures, primarily related to the further expansion of the
Company's existing manufacturing facility and the purchase of operating
equipment, amounted to $850,265 for the nine months ended September 30, 2000.
Net cash provided by financing activities, which related to the issuance of
shares of Common Stock pursuant to the exercise of options and warrants,
amounted to $1,277,861 for the nine-month period ended September 30, 2000.
The Company believes that cash from operations and cash on hand,
together with the remaining net proceeds from the Company's initial public
offering of Common Stock ("the Offering") and interest income thereon, will be
adequate to fund the Company's current operating plans. The Company's actual
future capital requirements will depend, however, on many factors, including
customer acceptance of the Company's current and potential nanocrystalline
materials and product applications, continued progress in the Company's research
and development activities and product testing programs, the magnitude of these
activities and programs, and the costs necessary to increase and expand the
Company's manufacturing capabilities and to market and sell the Company's
materials and product applications. Depending on future requirements, the
Company may seek additional funding through public or private financing,
collaborative relationships, government contracts or additional licensing
agreements. Additional financing may not be available on acceptable terms or at
all, and any such additional financing could be dilutive to the Company's
stockholders.
At September 30, 2000, the Company had a net operating loss
carryforward of approximately $28 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 2014. As a result of the annual limitation, a
portion of this carryforward may expire before ultimately becoming available to
reduce income tax liabilities. At September 30, 2000, 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.
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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,
each alleging that the Company, certain of its officers and directors, and the
underwriters of the Offering are liable under the federal Securities Act of 1933
for making supposedly negligent or reckless material misstatements of fact and
omitting to state material facts necessary to make other statements of fact not
misleading in the Registration Statement and Prospectus relating to the
Offering. Those cases were consolidated and a consolidated complaint was filed
in October 1998. The consolidated complaint alleges that the action should be
maintained as (i) a plaintiff class action on behalf of certain persons who
purchased the Common Stock from November 26, 1997 through January 8, 1998, and
(ii) a defendant class action against the underwriters who participated in the
Offering. The consolidated complaint seeks unquantified damages, pre- and
post-judgment interest, attorneys' and expert witness fees. The consolidated
complaint also seeks rescission of plaintiffs' purchases of the Common Stock. In
October 1999, the Court granted in part and denied in part motions to dismiss
the consolidated complaint that previously had been filed by each defendant. In
its ruling, the Court in part found that plaintiffs who did not purchase their
Common Stock during the Offering could not sue under Section 12(a)(2) of the
Securities Act of 1933. Each defendant's respective answer to the remaining
claims in the consolidated complaint was filed in November 1999.
Following certain discovery, the Company reached an oral agreement in
principle to settle all claims against all defendants in the consolidated
complaint for $4,025,000. The settlement is not an admission of liability by any
party. The Company anticipates that the settlement will be funded by the
Company's directors and officers liability insurance, and that the settlement
payment will not have a material adverse effect on the Company's financial
condition or results of operations. The tentative settlement is subject both to
the parties preparing and signing a definitive Stipulation of Settlement, and to
subsequent submission of that formal Stipulation to the Court for preliminary
and final approval.
The above-described settlement will not resolve a separate complaint
filed in the Northern District of Illinois in November 1998, alleging that the
Company, certain of its officers and directors, and the underwriters of the
Company's Offering are liable under the federal Securities Exchange Act of 1934
for making supposedly fraudulent material misstatements of fact and omitting to
state material facts necessary to make other statements of fact not misleading
in connection with the solicitation of consents to proceed with the Offering
from certain of the Company's preferred stockholders. The complaint alleges that
the action should be maintained as a plaintiff class action on behalf of certain
former preferred stockholders whose shares of preferred stock were converted
into Common Stock on or about the date of the Offering. The complaint seeks
unquantified damages, pre- and post-judgment interest, attorneys' and expert
witness fees. In March 1999, the preferred stockholders' complaint was
reassigned to the judge hearing the consolidated complaint described above. All
defendants subsequently filed a joint motion to dismiss the preferred
stockholders' complaint which the Court denied in August 2000, finding that the
preferred stockholders' allegations were pleaded sufficiently to fulfill the
requirements applicable to their complaint. Each defendant's respective answer
to the preferred stockholders' complaint was filed in late September 2000 and
discovery, begun thereafter, currently is pending.
The Company and the defendant directors and officers each retained
counsel with respect to all the above-described litigation and intend to defend
vigorously against the preferred stockholders' complaint Although the Company
believes that the allegations of the preferred stockholders' complaint are
without merit, it is not feasible for the Company to predict at this time the
outcome of this litigation or whether its resolution could have a material
adverse effect on the Company's results of operations or financial condition.
11
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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 2000 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, 1999,
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 $180,000 per year.
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, each
alleging that the Company, certain of its officers and directors, and the
underwriters of the Company's Offering are liable under the federal Securities
Act of 1933 for making supposedly negligent or reckless material misstatements
of fact and omitting to state material facts necessary to make other statements
of fact not misleading in the Registration Statement and Prospectus relating to
the Offering. Those cases were consolidated and a consolidated complaint was
filed in October 1998. The consolidated complaint alleges that the action should
be maintained as (i) a plaintiff class action on behalf of certain persons who
purchased the Common Stock from November 26, 1997 through January 8, 1998, and
(ii) a defendant class action against the underwriters who participated in the
Offering. The consolidated complaint seeks unquantified damages, pre- and
post-judgment interest, attorneys' and expert witness fees. The consolidated
complaint also seeks rescission of plaintiffs' purchases of the Common Stock. In
October 1999, the Court granted in part and denied in part motions to dismiss
the consolidated complaint that previously had been filed by each defendant. In
its ruling, the
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Court in part found that plaintiffs who did not purchase their
Common Stock during the Offering could not sue under Section 12(a)(2) of the
Securities Act of 1933. Each defendant's respective answer to the remaining
claims in the consolidated complaint was filed in November 1999.
Following certain discovery, the Company reached an oral agreement in
principle to settle all claims against all defendants in the consolidated
complaint for $4,025,000. The settlement is not an admission of liability by any
party. The Company anticipates that the settlement will be funded by the
Company's directors and officers liability insurance, and that the settlement
payment will not have a material adverse effect on the Company's financial
condition or results of operations. The tentative settlement is subject both to
the parties preparing and signing a definitive Stipulation of Settlement, and to
subsequent submission of that formal stipulation to the Court for preliminary
and final approval.
The above-described settlement will not resolve a separate complaint
filed in the Northern District of Illinois in November 1998, alleging that the
Company, certain of its officers and directors, and the underwriters of the
Company's Offering are liable under the federal Securities Exchange Act of 1934
for making supposedly fraudulent material misstatements of fact and omitting to
state material facts necessary to make other statements of fact not misleading
in connection with the solicitation of consents to proceed with the Offering
from certain of the Company's preferred stockholders. The complaint alleges that
the action should be maintained as a plaintiff class action on behalf of certain
former preferred stockholders whose shares of preferred stock of the Company
were converted into Common Stock on or about the date of the Offering. The
complaint seeks unquantified damages, pre- and post-judgment interest,
attorneys' and expert witness fees. In March 1999, the preferred stockholders'
complaint was reassigned to the judge hearing the consolidated complaint
described above. All defendants subsequently filed a joint motion to dismiss the
preferred stockholders' complaint which the Court denied in August 2000, finding
that the preferred stockholders' allegations were pleaded sufficiently to
fulfill the requirements applicable to their complaint. Each defendant's
respective answer to the preferred stockholders' complaint was filed in late
September 2000 and discovery, begun thereafter, currently is pending.
The Company and the defendant directors and officers each have
retained counsel and intend to defend vigorously against the preferred
stockholders' complaint. Although the Company believes that the allegations of
the preferred stockholders' complaint are without merit, it is not feasible for
the Company to predict at this time the outcome of this litigation or whether
its resolution could have a material adverse effect on the Company's results of
operations or financial condition.
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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 $1,825,000 for capital expenditures primarily related to the
further expansion of the Company's existing manufacturing facility and the
purchase of operating equipment and approximately $8,387,000 for working capital
and other general corporate purposes. The remainder of the net proceeds has been
invested by the Company, pending its use, in short-term, investment grade,
interest-bearing obligations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS.
Exhibit 27 - Financial Data Schedule
B. REPORTS ON FORM 8-K. The Company did not file any Current Reports on
Form 8-K during the third quarter of 2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NANOPHASE TECHNOLOGIES CORPORATION
Date: November 14, 2000 By: /s/ JOSEPH E. CROSS
---------------------------------------
Joseph E. Cross
President, Chief Executive Officer
(principal executive officer) and a Director
Date: November 14, 2000 By: /s/ JESS A. JANKOWSKI
----------------------------------------
Jess A. Jankowski
Acting Chief Financial Officer, Corporate
Controller, Secretary, and Treasurer
(principal financial and accounting officer)
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EXHIBIT INDEX
Exhibit
Number Exhibit Name
------- ------------
Exhibit 27 Financial Data Schedule
