<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: JUNE 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.)
453 COMMERCE STREET, BURR RIDGE, ILLINOIS 60521
(Address of principal executive offices, and zip code)
Registrant's telephone number, including area code: (630) 323-1200
----------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
---
As of August 10, 2000, there were outstanding 13,496,407 shares of
common stock, par value $.01, of the registrant.
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NANOPHASE TECHNOLOGIES CORPORATION
QUARTER ENDED JUNE 30, 2000
INDEX
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PART I - FINANCIAL INFORMATION.................................................................................. 3
Item 1. Financial Statements............................................................................. 3
Balance Sheets as of June 30, 2000 (unaudited) and December 31, 1999............................. 3
Statements of Operations (unaudited) for the three months ended June 30, 2000 and
1999 and the six months ended June 30, 2000 and 1999.......................................... 4
Statements of Cash Flows (unaudited) for the six months ended June 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 ........... 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk....................................... 11
PART II - OTHER INFORMATION..................................................................................... 11
Item 1. Legal Proceedings................................................................................ 11
Item 2. Changes in Securities and Use of Proceeds........................................................ 13
Item 4. Submissions of Matters to a Vote of Security Holders............................................. 13
Item 6. Exhibits and Reports on Form 8-K................................................................. 13
SIGNATURES...................................................................................................... 14
</TABLE>
2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NANOPHASE TECHNOLOGIES CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.................................................. $ 504,781 $ 624,509
Investments................................................................ 18,785,372 21,216,168
Trade accounts receivable, less allowance for doubtful accounts
of $86,450 at June 30, 2000 and $120,000 at December 31, 1999............ 1,154,256 401,826
Other receivable, net...................................................... 631,343 247,841
Inventories, net........................................................... 950,813 766,778
Prepaid expenses and other current assets.................................. 97,552 90,358
------------ ------------
Total current assets..................................................... 22,124,117 23,347,480
Equipment and leasehold improvements, net.................................... 1,983,513 2,152,413
Other assets, net............................................................ 189,627 177,646
------------ ------------
$ 24,297,257 $ 25,677,539
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable........................................................... $ 806,940 $ 615,818
Accrued expenses........................................................... 1,018,674 900,398
------------ ------------
Total current liabilities................................................ 1,825,614 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 13,455,729 shares issued and outstanding at June 30, 2000 and
12,764,058 shares issued and outstanding at December 31, 1999.............. 134,557 127,641
Additional paid-in capital................................................... 49,520,030 48,529,300
Accumulated deficit.......................................................... (27,182,944) (24,495,618)
------------ ------------
Total stockholders' equity................................................. 22,471,643 24,161,323
------------ ------------
$ 24,297,257 $ 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 JUNE 30, SIX MONTHS ENDED JUNE 30,
----------------------------- ------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUE:
Product revenue....................... $ 1,000,836 $ 281,054 $ 1,488,007 $ 547,302
Other revenue......................... 104,500 48,167 236,250 106,917
------------ ------------ ------------ ------------
Total revenue....................... 1,105,336 329,211 1,724,257 654,219
OPERATING EXPENSE:
Cost of revenue....................... 1,305,233 680,795 2,123,985 1,461,884
Research and development expense...... 452,950 394,308 1,042,612 784,722
Selling, general and administrative
expense............................... 899,435 1,123,759 1,827,725 2,142,205
------------ ------------ ------------ ------------
Total operating expense............. 2,657,618 2,198,862 4,994,322 4,388,811
------------ ------------ ------------ ------------
Loss from operations.................... (1,552,282) (1,869,641) (3,270,065) (3,734,592)
Interest income......................... 299,515 287,608 582,739 576,657
------------ ------------ ------------ ------------
Net loss................................ $ (1,252,767) $ (1,582,033) $ (2,687,326) $ (3,157,935)
============ ============ ============ ============
Net loss per share...................... $ (0.09) $ (0.12) $ (0.20) $ (0.25)
============ ============ ============ ============
Weighted average number of common
shares outstanding...................... 13,451,344 12,656,636 13,230,156 12,625,351
============ ============ ============ ============
</TABLE>
See Notes to Financial Statements.
4
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NANOPHASE TECHNOLOGIES CORPORATION
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
---------------------------------
2000 1999
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss...................................................................... $ (2,687,326) $ (3,157,935)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization............................................. 355,998 335,822
Allowance for excess inventory quantities................................. (60,768) 71,237
Changes in assets and liabilities related to operations:
Trade accounts receivable................................................. (752,430) 27,672
Other receivable.......................................................... (365,121) (477,904)
Inventories............................................................... (123,267) 123,246
Prepaid expense and other assets.......................................... (43,956) 66,331
Accounts payable.......................................................... 191,122 74,311
Accrued liabilities....................................................... 118,276 306,207
------------ ------------
Net cash used in operating activities......................................... (3,367,472) (2,631,013)
INVESTING ACTIVITIES:
Acquisition of equipment and leasehold improvements........................... (180,698) (154,071)
Purchases of held-to-maturity investments..................................... (38,323,803) (62,680,599)
Maturities of held-to-maturity investments.................................... 40,754,599 65,706,739
------------ ------------
Net cash provided by investing activities..................................... 2,250,098 2,872,069
FINANCING ACTIVITIES:
Proceeds from sale of common stock............................................ 997,646 41,973
------------ ------------
Net cash provided by financing activities..................................... 997,646 41,973
------------ ------------
(Decrease) Increase in cash and cash equivalents.............................. (119,728) 283,029
Cash and cash equivalents at beginning of period.............................. 624,509 363,394
------------ ------------
Cash and cash equivalents at end of period.................................... $ 504,781 $ 646,423
============ ============
</TABLE>
See Notes to Financial Statements.
5
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NANOPHASE TECHNOLOGIES CORPORATION
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PRESENTATION
The accompanying unaudited interim financial statements of Nanophase
Technologies Corporation (the "Company") reflect all adjustments (consisting of
normal recurring adjustments) which, in the opinion of management, are necessary
for a fair presentation of the financial position and operating results of the
Company for the interim periods presented. Operating results for the three and
six month periods ended June 30, 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 $267,500 and $354,500
for the six months ended June 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>
JUNE 30, 2000 DECEMBER 31, 1999
--------------- -----------------
<S> <C> <C>
Raw materials........................................................... $ 352,045 257,485
Finished goods.......................................................... 788,134 769,507
--------------- ---------------
1,140,179 1,026,992
Allowance for excess inventory quantities............................... (189,366) (260,214)
--------------- ---------------
$ 950,813 $ 766,778
=============== ===============
</TABLE>
6
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NANOPHASE TECHNOLOGIES CORPORATION
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
(5) STOCK OPTIONS AND WARRANTS
During the six months ended June 30, 2000, 319,092 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. In addition, the consolidated complaint 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 recently reached an oral
agreement in principal 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 primarily 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 position 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. In
October 1999, all defendants filed a joint motion to dismiss the preferred
stockholders' complaint. That motion is fully briefed and under advisement by
the Court.
Pursuant to the underwriting agreement for the Offering, the Company
has agreed to be responsible for the underwriters' attorneys' fees in all the
above-described litigation. The Company and the defendant directors and officers
each have 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,
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 June 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 $27,182,944 from inception through June 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 $1,105,336 and $1,724,257 for the three and six
months, respectively, ended June 30, 2000, compared to $329,221 and $654,219 for
the same periods in 1999. The increase in total revenue for the three and
six-month periods was primarily attributed to increased product revenue. Product
revenue increased to $1,000,836 and $1,488,007 for the three and six-month
periods ended June 30, 2000, respectively, compared to $281,054 and $547,302 for
the same periods in 1999. Increases in product revenue were attributed to
additional customers and growth with existing customers. Other revenue increased
to $104,500 and $236,250 for the three and six-month periods ended June 30,
2000, compared to $48,167 and $106,917 for the same periods in 1999. The
majority of the revenue generated during the three and six months ended June 30,
2000 was from customers in the healthcare and electronics markets.
Cost of revenue generally includes costs associated with commercial
production, customer development arrangements and licensing fees. Cost of
revenue increased to $1,305,233 and $2,123,985 for the three and six months,
respectively, ended June 30, 2000, compared to $680,795 and $1,461,884 for the
same periods in 1999. The increase in cost of revenue was generally attributed
to increased product shipments, 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 six months, respectively, ended June 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 $452,950 and $1,042,612
for the three and six months, respectively, ended June 30, 2000, compared to
$394,308 and $784,722 for the same periods in 1999. The increase in research and
development expense was primarily attributed to additional salaries for newly
hired research personnel and increased costs related to ongoing development
activities. 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 $899,435 and
$1,827,725 for the three and six-month periods, respectively, ended June 30,
2000, compared to $1,123,759 and $2,142,205 for the same periods in 1999. The
net decrease was primarily attributed to a reduction in legal expenses and
executive compensation. These decreases were somewhat offset by salaries of
additional sales and administrative personnel, and expenses relating to
advertising and promotion.
8
<PAGE> 9
Interest income increased to $299,515 and $582,739 for the three- and
six-month periods, respectively, ended June 30, 2000, compared to $287,608 and
$576,657 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
$19,290,153 at June 30, 2000, compared to $21,840,677 at December 31, 1999. The
net cash used in the Company's operating activities was $3,367,472 for the six
months ended June 30, 2000, compared to $2,631,013 for the same period in 1999.
The net cash used in operating activities for the six-month period ended June
30, 2000 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, which was
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
$2,250,098 for the six months ended June 30, 2000 compared to $2,872,069 of net
cash used in investing activities for the same period in 1999. Capital
expenditures, primarily related to the further expansion of the Company's
existing manufacturing facility and the purchase of operating equipment,
amounted to $180,698 for the six months ended June 30, 2000, compared to
$154,071 for the same period in 1999. 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 $997,646 for the six-month period ended
June 30, 2000, compared to $41,973 for the same period in 1999.
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 June 30, 2000, the Company had a net operating loss carryforward of
approximately $27 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 June 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.
9
<PAGE> 10
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. In addition, the
consolidated complaint 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 recently reached an oral
agreement in principal 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 primarily 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 position 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. In
October 1999, all defendants filed a joint motion to dismiss the preferred
stockholders' complaint. That motion is fully briefed and under advisement by
the Court.
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, 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
10
<PAGE> 11
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 $190,000 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. In addition, the
consolidated complaint 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 recently reached an oral
agreement in principal 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 primarily 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 position 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
11
<PAGE> 12
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. In October 1999, all defendants filed a
joint motion to dismiss the preferred stockholders' complaint. That motion is
fully briefed and under advisement by the Court.
The Company and the defendant directors and officers each have 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, cash flows 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 $1,155,000 for capital expenditures primarily related to the
further expansion of the Company's existing manufacturing facility and the
purchase of operating equipment and approximately $8,393,000 for working capital
and other general corporate purposes. The remainder of the net proceeds has been
invested by the Company, pending its use, in short-term, investment grade,
interest-bearing obligations.
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS.
a) The 2000 Annual Meeting of Stockholders of the Company was held on
May 25, 2000.
b) The stockholders voted to re-elect two Class II directors to the
Company's Board of Directors. Results of the voting were as follows:
Directors For Authority Withheld Abstentions Broker Non-Votes
--------- --- ------------------ ----------- ----------------
Jerry K. Pearlman 12,014,996 91,991 - -
Donald S. Perkins 12,010,145 96,842 - -
Joseph E. Cross, Edward E. Hagenlocker, Ph.D., and Richard W. Siegel,
Ph.D. continued their terms of office as directors of the Company
after the 2000 Annual Meeting of Stockholders.
c) The stockholders also voted to ratify the appointment by the
Company's Board of Directors of Ernst & Young LLP as the independent
auditors of the Company's financial statements for the year ended
December 31, 2000. Results of the voting were as follows:
For Against Abstentions Broker Non-Votes
--- ------- ----------- ----------------
12,024,028 9,117 73,742 100
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 second 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: August 14, 2000 By: /s/ JOSEPH E. CROSS
---------------------------------------------
Joseph E. Cross
President, Chief Executive Officer (principal
executive officer) and a Director
Date: August 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
