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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
COMMISSION FILE NUMBER 0-22333
NANOPHASE TECHNOLOGIES CORPORATION
(Exact name of registrant as specified in its charter)
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<S> <C>
DELAWARE 36-3687863
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
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453 COMMERCE STREET, BURR RIDGE, ILLINOIS 60521
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (630) 323-1200
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
PREFERRED STOCK PURCHASE RIGHTS
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the registrant's voting stock held by
non-affiliates of the registrant, based upon the last reported sale price of the
registrant's Common Stock on March 22, 2000 was $151,929,428.
The number of shares outstanding of the registrant's Common Stock, par
value $.01, as of March 22, 2000 was 13,449,253.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Definitive Proxy Statement in connection with
the registrant's 2000 Annual Meeting of Stockholders are incorporated by
reference into Part III of this Report on Form 10-K.
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PART I
ITEM 1. BUSINESS
GENERAL
Nanotechnology, as practiced by Nanophase Technologies Corporation,
involves creating nanostructured materials by controlling matter at the
nanometer-size scale -- at the level of atoms and molecules. Because these
"nanostructures" are made with molecular building blocks, they can be designed
to exhibit novel and significantly improved physical, chemical and mechanical
properties.
When the structural features are sized between individual molecules and
bulk materials -- in the range of about 10 to 100 nanometers -- the objects
often display physical attributes substantially different from those found in
bulk materials. As a result, the properties of nanocrystalline materials often
cannot be predicted from those seen at larger sizes, and nanoparticles can
exhibit novel properties. For example, important changes in catalytic behavior
can occur because a significantly larger proportion of atoms are found at the
surface of a nanometer-sized particle than a normal-sized one. When it is
possible to control particle size and shape, it also is possible to enhance
material properties and devise functions beyond those normally found in a
material.
Nanophase's objective is to exploit its capabilities to efficiently
engineer and manufacture nanocrystalline materials. The Company does this by
providing value-enhanced solutions for commercial applications in multiple
global markets. Recognizing a need to offer enhanced performance and assist
customers with their product improvements, Nanophase targets markets in which a
practical solution may be found through using nanoengineered products. The
Company works closely with leaders in these target markets to identify their
material and performance requirements.
NANOCRYSTALLINE MATERIALS
Nanocrystalline materials generally are made of particles that are less
than 100 nanometers (billionths of a meter) in diameter. They contain only
1,000s or 10,000s of atoms, rather than the millions or billions of atoms found
in larger size particles. The properties of nanocrystalline materials depend
upon the composition, size, shape, structure, and surface of the individual
particles. Nanophase's methods for engineering and manufacturing nanocrystalline
materials result in particles with a controlled size and shape, and surface
characteristics that behave differently from conventionally produced larger
sized materials.
Although Nanophase's particles are sometimes the end product for various
customers, they more often are the required building blocks in a solution
engineered to meet a specific performance requirement for a customer's product
or process.
There have been problems with the traditional mechanical and chemical
methods of producing nanocrystalline materials. These methods have been unable
to consistently and economically produce commercial quantities of materials with
the unique properties found in the Company's products. The Company has developed
proprietary and patented technologies for the high-volume production of
nanocrystalline materials. Management believes this approach can satisfy the
high-level performance requirements of -- and provide the value-added solutions
desired by -- customers in its target markets.
THE COMPANY'S TECHNOLOGIES
Nanophase intends to maintain and grow a leading intellectual property
position in the rapidly emerging science of nanotechnology. The Company uses its
technologies to engineer and produce nanocrystalline materials designed for
specific product applications. These technologies include methods for the
synthesis, surface-treatment and dispersion of nanocrystals. Nanophase also is
engaged in ongoing research and technology-licensing activities that add to its
core technologies or provide complementary technologies. Management believes
that aggressively pursuing applications, inventions and patents will help it
maintain a technical and commercial leadership position. A description of
Nanophase's current technologies follows.
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THE PHYSICAL-VAPOR-SYNTHESIS ("PVS") PROCESS
The Company uses its patented PVS process to produce nanocrystalline
powders. This process begins by introducing a precursor material into a plasma
reactor, then heating it to a temperature above its melting point. As the
temperature rises, the atoms of this material evaporate from its surface into a
stream of flowing vapor. The evaporated atoms then are mixed with selected
gases, which chemically react with the atoms. Other gases then cool the atoms
sufficiently to condense the vapor into solid, nanometer-sized crystals. The
flowing gas transports these crystals to a collection vessel. The rapid
transport and cooling of the nanocrystalline particles prevent strong
agglomeration-clusters sticking to each other.
Nanophase holds three fundamental US patents on its PVS process, which do
not expire until July 2013. One covers the process itself, another includes the
apparatus used in the process, and a third protects the nanocrystalline
particles produced by the process. Corresponding patents have issued in Japan
and Australia, with additional applications pending in Europe and Japan. The
Company's plasma reactor has proprietary features that enable it to produce
nanocrystalline materials at commercial-volume and costs. Nanophase uses its PVS
process to exploit the relative advantages of physical versus chemical synthesis
of nanocrystalline materials. These advantages include the production of
nanocrystalline materials with particles that are extremely small, nonporous,
essentially free of chemical residue, relatively uniform in size, and not
strongly agglomerated.
Management believes its PVS process is superior to other methods because of
the degree of control it can exercise over particle size, particle surface
properties, and particle size distribution. By controlled and subtle
modifications -- the evaporation rate, the type or pressure of the gas, or how
quickly the flow of gas carries the clusters to the collection vessel, for
example -- Nanophase can control the particle size. This allows it to engineer
and produce high purity, nonporous particles with a narrow size distribution and
controllable size, without substantial process and product re-engineering.
SURFACE TREATMENTS AND DISPERSIONS: THE DISCRETE PARTICLE ENCAPSULATION
("DPE") PROCESS
Many of the applications Nanophase is pursuing can benefit if the Company
further engineers the particles produced by PVS. For example, some of
Nanophase's customers require the particles to uniformly disperse in a fluid. To
meet these needs, the Company developed a range of surface-treatment
technologies to achieve these objectives:
- Provide particle surfaces with reactive functional groups, enabling the
Company to create 3-D nanostructures.
- Modify the nanoparticle surface to allow particles to disperse in fluids
or polymers without agglomeration.
- Modify the chemical, physical, mechanical, electrical, and optical
properties of the particles.
At the core of these surface-treatment and dispersion technologies is
Nanophase's proprietary and patented DPE process. This enables the Company to
surround each nanocrystalline particle with a durable coating. Two fundamental
US patents protect the process, and additional applications are pending in
Europe and Japan.
The DPE process can encapsulate the surface of each nanometer-sized
particle (produced through PVS) with a robust shell that is not removed by
subsequent processing. This shell also can be engineered to contain bound spacer
groups of controllable size, which prevent particles from sticking to each
other. Alternatively, coated materials can be formulated to attach various
functional chemical groups to the shell, for specific properties and
applications. The coatings allow the particles to be dispersed in a wide range
of media, including water, cosmetic emollients, and polymers (plastics). As a
result, these materials can be used in applications from transparent
abrasion-resistant coatings to cosmetic sunscreens.
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EMERGING NANOTECHNOLOGIES
Nanophase owns or licenses 18 patents protecting its core technologies for
engineering nanoparticles and an additional 7 applications are pending. The
Company continually evaluates, acquires, licenses, or develops additional core
technologies relating to nanocrystalline materials, in an effort to augment its
current portfolio of technologies. This enables Nanophase to maintain and
enhance its leadership in intellectual property for nanoparticle creation, to
develop new product applications, to satisfy the demanding performance
requirements of its targeted markets, and to offer additional value-added
nanoengineered solutions.
ADVANTAGES OF THE COMPANY'S NANOCRYSTALLINE MATERIALS
Through its patented PVS process, the Company produces nanocrystalline
materials with these characteristics:
SMALL PARTICLE SIZE provides a high surface-to-volume ratio compared
with conventional materials. The ability to functionally tailor this
surface allows Nanophase to modify and control the material's properties.
CONTROLLED PARTICLE SIZE WITHIN SPECIFIC SIZE RANGES permits the
Company to create nanocrystalline materials for specific particle-size
critical applications. Additionally, it allows the Company to create
various functional coatings with a defined thickness.
NONPOROUS PARTICLES allow a large number of particles to be dispersed
in a fluid without undesirable thickening or absorbing of the fluid. This
means Nanophase can produce formulations with high weight loadings that are
relatively easy to apply to a variety of surfaces.
HIGH SURFACE PURITY enables particles to exhibit consistent surface
chemistry with little foreign contamination. This facilitates the Company's
ability produce materials for a variety of applications that are sensitive
to contaminants, such as products for health care or chemical catalysis.
NARROW SIZE DISTRIBUTION AND AGGREGATION CONTROL results in
nanocrystalline materials that are essentially free of large particles,
while containing uniformly small and loosely agglomerated ones. These
materials can be further modified to enhance and tailor the performance of
basic raw materials for specific product applications. For example,
Nanophase's nanocrystalline materials can be readily and uniformly
dispersed in a variety of media.
MARKETS
The Company focuses on advanced materials technology, using nanocrystalline
material formulations for process and product applications in a number of
markets. Management believes Nanophase is a pioneering leader in the "bottom up"
engineering and production of nanomaterials that add value to its customers'
products or processes. The Company evaluates several parameters--including
time-to-market, value of its solution, market drivers, revenue potential and
horizontal market opportunities--to select and prioritize its target markets.
Nanophase management believes it must understand market needs and be able
to deliver effective solutions that use its materials to successfully penetrate
its target markets. As part of its market penetration strategy, the Company
seeks to partner with market leaders to co-develop solutions that represent a
viable opportunity for both parties. Most if not all of these solutions are new
and innovative, and they must meet customers' specific and demanding performance
requirements. This combination meant the Company's time-to-market for commercial
products historically was 18 months or longer. Nanophase's new business model is
designed to provide nano-based solutions to lead customers in focused markets.
This model is based on driving product introduction acceptance, reducing
time-to-market, and gaining intellectual property in those markets. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Risk Factors -- Limited History of Commercial Revenue; Uncertain
Market Acceptance of the Company's Nanocrystalline Materials", and "Reliance on
Collaborative Development Relationships".
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Nanotechnology is a rapidly emerging science. Nanophase management believes
many new markets for this approach will develop in the coming decades. The
Company's marketing strategy is to develop lead customers in attractive market
segments where the technical benefit of the Company's nanoengineered
products(TM) results in a profitable and long-term partnership. The following
section describes the nature of Nanophase's current market segments.
TRANSPARENT FUNCTIONAL COATINGS
Management believes that transparent functional coatings have a myriad of
applications, which makes this one of the most significant areas for growth.
CONDUCTIVE AND ANTISTATIC COATINGS The world market for indium/tin
oxide-based (ITO-based) conductive coatings is estimated at 20-30 metric tons,
with an estimated market size of $10-$20 million. These coatings are used
primarily for shielding electromagnetic radiation from computer monitors (in
response to increased regulatory requirements limiting these emissions).
Coatings typically are applied from solution via spin coating. Conventional
solutions suffer from poor in-use and shelf life problems, and usually are
shipped and stored in a frozen state. Management believes the primary advantages
of its ITO-based products lie in their ability to be stored and used at ambient
temperature, which provides a significant economic advantage to the end user.
Antimony/tin oxide (ATO) materials for transparent, antistatic coatings are
designed to replace more traditional raw materials, which are based on carbon
black and/or evaporated metals. ATO materials can be used in electronic
component packaging, prevention of static buildup on TV monitors and flat panel
displays, and colored toners for photocopying. The Company's key advantage here
is its ability to formulate transparent coatings from its nanometer-sized ATO.
These coatings, in contrast to those based on carbon or metal, enable an end
user to easily see the contents of a package, while maintaining anti-static
protection.
ABRASION-RESISTANT COATINGS Nanophase incorporates aluminum oxide into a
variety of coating products, which are aimed at creating transparent scratch-and
abrasion-resistant protective coatings. These coatings are used in applications
from coating vinyl flooring (which enhance scratch and scuff resistance while
retaining high gloss), to protective coatings (which decrease maintenance costs
of high-traffic area flooring). Additional applications include plastic
ophthalmic lenses, with a potential opportunity in temporary protective coatings
for automotive applications. The benefit offered by the Company's materials lies
in their ability to combine the two desirable functions of transparency and
scratch resistance.
CATALYSTS
Nanophase's materials have a large percentage of atoms lying on their
surfaces. This occurs because as particles become smaller, their surface area
becomes a larger percentage of the total bulk. When surface atoms comprise such
a large portion of the material, surface and interface effects strongly
influence the behavior of the material as a whole, such as catalytic activity.
Potential applications include cerium oxide-based environmental catalysts,
palladium on alumina hydrogenation catalysts, and iron oxide-based chemical
process catalysts
Much of the world's chemical manufacture is done through catalysts, which
is a global $7 billion industry. Environmental catalysts -- a significant
portion of the catalyst market -- are dominated by auto emissions control.
Ceria-based raw materials represent an important and widely used ingredient in
this market. Raw materials for palladium-based process catalysts and iron oxide
catalysts also hold high attractiveness for the Company. The available market
for Nanophase in these markets is estimated at $30-$60 million.
HEALTH CARE: SUNSCREENS AND OTHER TOPICAL HEALTH CARE PRODUCTS
The global market for health care products at the consumer level is
estimated at $50-60 billion. An important portion of this is attributable to
sunscreen products. Among the active ingredients in sunscreens, the market
opportunity for Nanophase lies in the inorganic segment: titanium dioxide and
zinc oxide. The demand for inorganic active ingredients is increasing along with
consumer awareness of the harmful effects of
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ultraviolet (UV) radiation. This has led to a rapid movement toward
incorporating UV protection in everyday skin care and cosmetic formulations. The
world market for inorganic sunscreen actives is predominantly titania-based.
However, zinc oxide is seeing rapid growth because it is hypoallergenic, can
provide broad coverage for protection from the entire solar spectrum, and has
better economics than titania.
Zinc oxide also is widely used for skin care applications, ranging from
topical antifungal ointments to odor and wetness absorbents for incontinence
products.
Nanophase's strengths lie in its ability to 1) manufacture USP (US
Pharmacopoeia) zinc oxide with a smaller particle size and a narrower size
distribution than competitive materials, and 2) to discretely encapsulate the
particles so they disperse in a wide range of media. Based on these attributes,
management estimates the potential available market for Nanophase zinc oxide in
this market is $20-$40 million.
ADVANCED CERAMICS
The Company's primary focus is in structural ceramics: the cutting tool
segment, with additional interests in ceramic bearings and related
wear-resistant products. The current worldwide market is estimated at over $1
billion.
Management believes Nanophase's strengths lie in its ability to formulate
alloys of nanoparticle-based ceramic oxides into dry, free-flowing powders,
which can be consolidated under heat and pressure to form dense parts. Initial
tests have shown that the wear resistance and impact strength of cutting tools
based on the Company's formulations are a significant improvement over
conventional materials.
CONTINUOUS DEVELOPMENT OF VERTICAL AND HORIZONTAL MARKET OPPORTUNITIES
Management believes Nanophase is viewed as a leader in nanotechnology, and
one of the very few companies that can deliver significant commercial quantities
of nanoproducts. The Company plans to continue developing new opportunities by
working with lead customers to co-develop products. This leads to a better
understanding of the customer's requirements and increased internal focus, while
reducing development risk and time-to-market. Nanophase continuously and
actively pursues both vertical and horizontal markets, where it can take
advantage of already developed products for new valued-added applications.
MARKETING
The Company markets and sells its products through a combination of
business development and sales activities in close collaborative relationships
with a lead customer in each market segment. Business development activities
evaluate and qualify potential markets, identify the lead customers within them,
and develop a business case strategy for successful market penetration. Once a
market is qualified, Nanophase forms a technical/marketing team to provide the
customer with an engineered solution to meet that company's specific
requirements. In many cases, products that satisfy a vertical market need can be
applied across similar or horizontal markets. For instance, materials used in
conductive coatings also can be used for antistatic coatings and conductive
strip carriers for color toners.
Nanophase tailors materials to provide specific solutions required by its
customers. Once a solution is established, application and customer management
is moved to a sales team that is organized along market lines. The sales team is
expected to increase revenue by selling product and process solutions and
broadening the customer base.
The Company leverages its resources through partnerships with organizations
and individuals focused on market-specific or geography-specific areas. This
enhances Nanophase's ability to quickly develop lead customers and applications
for its products. For example, to promote a more rapid penetration into Japanese
markets, the Company continues to maintain its relationship with C. I. Kasei, a
division of Itochu Corporation ("CIK"). CIK develops, engineers and manufactures
products under license from the Company for use in multiple industrial markets.
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Dr. Richard W. Siegel, an internationally recognized scientific leader in
the nanotechnology field, is a significant resource for the Company. Dr. Siegel
is a director of the Company. In addition, Nanophase has a consulting contract
with Dr. Siegel, who provides support for business development and marketing
activities. The Company also employs a number of marketing representatives and
third-party sales agents focused in specific application areas, including
conductive coatings, advanced ceramics and high intensity lighting.
Nanophase also markets itself and its capabilities by 1) sponsorship,
attendance and presentations at advanced materials symposia; 2) publishing
articles in scientific journals, and 3) participating in industry trade shows
for its target markets. The Company also uses its Website, advertises in
selected industry and trade journals, and provides specification sheets,
corporate journals, and other marketing materials. In addition, Nanophase
routinely networks with Fortune 500 companies to display its technology and
uncover potential applications. See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Risk
Factors -- Limited Marketing Experience; Use of Distribution Agreements" and
"-- Revenue from International Sources".
TECHNOLOGY AND ENGINEERING
The Company's Technology and Engineering Group includes the R&D and
engineering functions. The near-term objective of Nanophase's research and
process-development activities is to gather core technologies that have the
capability to serve multiple markets and provide the technical basis for
significant company growth. There are three legs to the Company's R&D strategy:
- Research and development to characterize novel or unique behavior and
characteristics of the nanocrystalline materials that it produces.
- Design of engineered solutions for customer-specific applications.
- To develop process engineering innovations that enable continuous
improvement in manufacturing yields, throughput and cost. This is
accomplished in a three ways: 1) by developing processes that
consistently produce sufficient commercial quantities of
application-specific nanocrystalline materials; 2) by developing
additional technologies to allow the PVS-produced particles to be
dispersed in a variety of matrices, and 3) by developing entirely new
methods for producing nanoparticles.
Nanophase's total Research and Development Expense, which includes all
expense relating to the technology and engineering group, during the years ended
December 31, 1999, 1998 and 1997 were $1,456,126, $1,504,127 and $990,331,
respectively. The Company's future success will depend in large part upon its
ability to keep pace with evolving advanced materials technologies and industry
standards, and the Company may be unable to do so. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations -- Risk
Factors -- Rapid Technological Change".
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
The objective of Nanophase's intellectual property activities is to develop
a leadership position in the nanotechnology by implementing strategies that
maximize and protect its proprietary rights. These strategies include 1)
obtaining patents and trademarks based on Nanophase inventions and products, and
2) licensing third-party patents to expand the Company's technology base and
prevent Nanophase from being blocked if future developments require use of
technology covered by those patents. Nanophase currently owns or licenses an
aggregate of 25 United States and foreign patents and patent applications: seven
issued patents owned directly by Nanophase, seven pending patent applications
owned directly by Nanophase, and 11 patents licensed from third parties.
Five United States patents have been issued to Nanophase: one covering its
PVS process for synthesizing nanocrystalline materials, one covering the related
apparatus, one covering the materials produced by the PVS process and two
covering the DPE process for encapsulating nanoparticles. The three patents
relating to the PVS process expire in July 2013 and the two patents relating to
the DPE process expire in March 2017. PVS Patents also were issued in Japan and
Australia, and additional patent applications relating to both PVS and DPE
processes are pending in Europe and Japan for the PVS process and apparatus.
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The Company holds the following licenses of United States patents. The
first is a fully paid-up exclusive worldwide license of two patents owned by
ARCH Development Corporation, which involve a laboratory-scale method and
apparatus for making nanocrystalline materials. The second is a non-exclusive
license from the Japan Science and Technology Corporation (formerly Research
Development Corporation of Japan) of four patents, which embody early
laboratory-scale work in the physical synthesis of nanocrystalline materials.
The third is a non-exclusive license of two patents owned by Hitachi, Ltd.,
which relate to the synthesis of nanocrystalline materials. The fourth is a
remainder-exclusive license of three patents held by Cornell University,
relating to a laboratory-scale process for net-shaping a limited range of
materials. Other than the license from the Japan Science and Technology
Corporation, which remains in force until May 2006 and is extendable upon
further agreement, each of the licenses lasts for the life of their respective
patents. Under each of the licenses, Nanophase is obligated to pay the licensor
royalties equal to a percentage of net sales of products that use the licensed
technology, and related taxes on any royalties paid to foreign licensors.
The Company requires its employees, consultants, outside scientific
collaborators and other advisors to sign confidentiality and non-compete
agreements when their employment or consulting relationships begin. These
agreements generally provide that all confidential information developed or made
known to the individual during the course of that person's relationship with the
Company will be kept confidential, and not be disclosed to third parties except
in specific circumstances. In the case of research employees, the agreements
also provide that all inventions made by the individual shall be the exclusive
property of Nanophase. There can be no assurance, however, that these agreements
will provide meaningful protection for the Company's trade secrets, know-how or
patent rights, or will provide Nanophase with adequate remedies in the event of
unauthorized use or disclosure of such information. In addition, because many of
the Company's employees have not entered into non-compete agreements, they may
become competitors when their employment at Nanophase ends. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Risk Factors -- Dependence on Patents and Protection of
Proprietary Information".
COMPETITION
Within each of its targeted markets and product applications, Nanophase
faces current and potential competition from many chemical companies, as well as
the in-house capabilities of several of its current and potential customers. In
the health care market, for example, several companies offer ultrafine zinc
oxide (Zinc Corporation of America, Elementis UK Limited, Millennium Chemical
and others) manufactured by chemical or other means. In structural ceramics, the
Company competes with manufacturers of ceramic composites who machine their
products for specific applications. Although management believes its materials
and technologies are superior to those used by its competitors, these companies
pose significant risks to Nanophase because they have substantially greater
financial and technical resources, larger research and development staffs, and
greater manufacturing and marketing capabilities.
The Company also faces potential competition from Vacuum Metallurgical Co.,
Ltd. of Japan ("Vacuum Metallurgical"), which manufactures nanocrystalline
materials and equipment. Nanophase does not currently compete with Vacuum
Metallurgical, but this company may develop products or manufacturing
capabilities to compete with Nanophase in the future. The number of
development-stage companies involved in nanocrystalline materials also represent
potential competitive risks. These include Advanced Powder Technology Pty. Ltd.;
Nanomaterials Research Corporation; Plasma Quench Technologies, Inc., and
Nanopowder Enterprises, Inc. Many of these companies are associated with
university or national laboratories, and use chemical and physical methods to
produce nanocrystalline materials. Management believes that most of these
companies are engaged primarily in funded research, and is not aware that any of
them have commercial production capability. However, they may represent
significant competitive risks in the future. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations -- Risk
Factors -- Competition".
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GOVERNMENTAL REGULATIONS
The manufacture and use of certain of the products that contain the
Company's nanocrystalline materials are subject to governmental regulation. As a
result, the Company is required to adhere to the current Good Manufacturing
Practices ("cGMP") requirements of the U.S. Food and Drug Administration ("FDA")
and similar regulations in other countries that include testing, control and
documentation requirements enforced by periodic inspections.
In addition, the Company's facilities and all of its operations are subject
to the plant and laboratory safety requirements of various occupational safety
and health laws. To date, those regulations have not materially restricted or
impeded operations. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Risk Factors -- Governmental
Regulations".
EMPLOYEES
On December 31, 1999, the Company had a total of 42 full-time employees, 12
of whom hold advanced degrees. In the first quarter of 1999, the Company hired
1) an experienced vice president of technology and engineering to improve
technology management, implement its solution-provider approach, and further
enhance and expand the Company's core technologies, and 2) an experienced vice
president of sales and marketing, to strengthen its capabilities in the United
States and internationally. Nanophase is not subject to any collective
bargaining agreements, and management believes it has good relationships with
employees.
PROPERTIES
Nanophase operates a 20,000 square-foot production, research and
headquarters facility in Burr Ridge, Illinois, a Chicago suburb. The Company
also leases offsite warehouse space. Management believes the Burr Ridge facility
is the first in the world solely dedicated to the large-scale production of a
broad range of PVS nanocrystalline materials. The Company's operations in Burr
Ridge are registered under ISO 9001, and management believes that its
manufacturing operations are in compliance with the cGMP requirements of the
FDA.
The Company's primary means of nanoparticle manufacturing occurs in its PVS
plasma reactors. The throughput of each reactor depends on many factors,
including 1) the mix of products produced; 2) the commencement, expiration or
termination of development programs; 3) the status of tests and evaluations of
samples and prototypes, and 4) production yields. Management expects to increase
the throughput per reactor by increasing the efficiency and yields of its PVS
process, and decreasing the amount of downtime for each reactor. Each PVS plasma
reactor is made of modular equipment, which is designed and assembled to the
Company's proprietary specifications. These modular reactors provide the
flexibility to expand Nanophase's manufacturing capability. The Burr Ridge
facility has a quality control laboratory designed for the dual purposes of
validating operations to cGMP and ISO standards, and production process control.
This laboratory is equipped to handle many routine analytical and in-process
techniques the Company currently requires. Nanophase leases its Burr Ridge
facility under an agreement whose initial term expired in September 1999. The
Company has options to extend the lease for up to five additional one-year terms
and is currently in the first additional one-year term which expires in
September 2000.
Management believes that additional space will be required in the near
term. Nanophase intends to use a portion of the net proceeds from its initial
public offering (the "Offering") of its Common Stock, $.01 par value (the
"Common Stock") for the relocation to, or acquisition of another site for its
manufacturing and laboratory facilities. As of December 31, 1999, the Company
was in discussions with third parties concerning the potential occupancy of such
a site.
FORWARD-LOOKING STATEMENTS
Nanophase Technologies Corporation ("Nanophase" or the "Company") wants to
provide investors with more meaningful and useful information. As a result, this
Annual Report on Form 10-K (the "Form 10-K") contains and incorporates by
reference certain "forward-looking statements", as defined in Section 21E of the
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Securities Exchange Act of 1934, as amended. These statements reflect the
Company's current expectations on the future results of its operations,
performance and achievements. Forward-looking statements are covered under the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
Nanophase has tried, wherever possible, to identify these statements by using
words such as "anticipates", "believes", "estimates", "expects", "plans",
"intends" and similar expressions. These statements reflect management's current
beliefs and are based on information now available to it. Accordingly, these
statements are subject to certain risks, uncertainties and contingencies that
could cause the Company's actual results, performance or achievements in 2000
and beyond to differ materially from those expressed in, or implied by, what
appears here. These risks, uncertainties and contingencies include, without
limitation, 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
in which the Company is involved; and other risks set forth under "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Risk Factors". The Company undertakes no obligation to update or
revise any forward-looking statements to reflect events or circumstances after
the date of this Form 10-K, or to reflect the occurrence of unanticipated
events.
ITEM 3. LEGAL PROCEEDINGS
As disclosed in Note 16 to the Financial Statements and as previously
disclosed in the Company's Annual Report on Form 10-K for the year ended
December 31, 1998, five separate complaints were filed in the United States
District Court for the Northern District of Illinois, Eastern Division, each of
which alleged that the Company, certain of its officers and directors, and the
underwriters of the Offering are liable under the federal securities laws for
making supposedly negligent or reckless material misstatements of fact and
omitting to state material facts necessary to make other statements of fact not
misleading in the Registration Statement and Prospectus relating to the
Offering. Those cases were consolidated and a consolidated complaint was filed
in October 1998. The consolidated complaint alleges that the action should be
maintained as (i) a plaintiff class action on behalf of certain persons who
purchased the Common Stock from November 26, 1997 through January 8, 1998,
excluding the defendants, members of their immediate families, and any entity in
which a defendant has a controlling interest, and (ii) a defendant class action
against the underwriters who participated in the Offering. The consolidated
complaint seeks unquantified damages under the federal securities laws, pre- and
post-judgment interest, attorneys' fees, and expert witness fees. In addition,
the consolidated complaint seeks rescission and/or rescissory damages relating
to purchases of the Common Stock under federal securities laws. In October 1999,
the Court granted in part and denied in part motions to dismiss the consolidated
complaint that previously had been filed by each defendant. In its ruling, the
Court in part found that plaintiffs who did not purchase their Common Stock
during the Offering could not sue under Section 12(a)(2) of the Securities Act
of 1933. Each defendant's respective answer to the remaining claims in the
consolidated complaint was filed on November 15, 1999 and discovery began
thereafter.
In November 1998, a separate complaint was filed in the Northern District
of Illinois, Eastern Division, which alleged that the Company, certain of its
officers and directors, and the underwriters of the Company's Offering are
liable under the federal securities laws for making supposedly fraudulent
material misstatements of fact and omitting to state material facts necessary to
make other statements of fact not misleading in connection with the solicitation
of consents to proceed with the Offering from certain of the Company's preferred
stockholders. The complaint alleges that the action should be maintained as a
plaintiff class action on behalf of those former preferred stockholders whose
shares of preferred stock were converted into Common Stock on or about the date
of the Offering, excluding the defendants, other officers and directors of the
Company, members of the immediate families of all individual defendants, and any
entity in which a defendant has a controlling interest. The complaint seeks
unquantified damages as provided for under the federal securities laws, pre- and
post-judgment interest, attorneys' fees, and expert witness fees. In March 1999,
the preferred stockholders' complaint was reassigned to the judge hearing the
consolidated complaint described above. Thereafter, pretrial proceedings
involving the preferred stockholders' complaint were further consolidated with
that litigation. In October 1999, all defendants filed a joint motion to dismiss
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<PAGE> 11
the preferred stockholders' complaint; briefing on that motion was completed in
February 2000. To date, the Court has not ruled on the motion to dismiss the
preferred stockholders' complaint nor has the Court indicated when it
anticipates ruling.
The Company, the defendant directors and the defendant officers each have
retained counsel for both of the above-described litigations and intend to
defend against both complaints vigorously. Although the Company believes that
the allegations of the complaints are without merit, it is not feasible for the
Company to predict at this time the outcome of either litigation or whether the
resolution of either litigation could have a material adverse effect on the
Company's results of operations, cash flows or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of 1999.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the Nasdaq National Market under
the symbol NANX. Such trading began on November 26, 1997 in connection with the
Offering. The following table sets forth, for the periods indicated, the range
of high and low sale prices for the Common Stock on the Nasdaq National Market:
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
Fiscal year ending December 31, 1998:
First Quarter............................................. $13.25 $5.00
Second Quarter............................................ 9.38 4.25
Third Quarter............................................. 5.13 1.81
Fourth Quarter............................................ 3.69 1.50
Fiscal year ending December 31, 1999:
First Quarter............................................. 3.00 2.03
Second Quarter............................................ 2.63 1.50
Third Quarter............................................. 2.72 1.50
Fourth Quarter............................................ 5.75 1.63
</TABLE>
On March 22, 2000, the last reported sale price of the Common Stock was
$13.44, and there were approximately 134 holders of record of the Common Stock.
The Company has never declared or paid any cash dividends on its Common
Stock and does not currently anticipate paying any cash dividends or other
distributions on its Common Stock in the foreseeable future. The Company intends
instead to retain any future earnings for reinvestment in its business. Any
future determination to pay cash dividends will be at the discretion of the
Company's Board of Directors and will be dependent upon the Company's financial
condition, results of operations, capital requirements and such other factors
deemed relevant by the Board of Directors.
On August 25, 1999, the Company issued 24,500 shares of the Company's
Common Stock to Joseph Cross, the Company's Chief Executive Officer, as part of
the Company's compensation arrangement with Mr. Cross.
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 $974,000 for capital expenditures primarily related to the further
expansion of the Company's existing manufacturing facility and the purchase of
operating equipment and $6,023,000 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. SELECTED FINANCIAL DATA
The following selected financial data is qualified by reference to, and
should be read in conjunction with, the financial statements and related notes
thereto appearing elsewhere in this Form 10-K and "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations." The
selected
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<PAGE> 13
financial data set forth below as of, and for, each of the years in the
five-year period ended December 31, 1999 have been derived from the audited
financial statements of the Company.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
----------------------------------------------------------------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Product revenue................. $ -- $ 249,017 $ 924,763 $ 1,140,845 $1,128,861
Other revenue................... 93,591 236,019 2,798,729 162,944 295,986
Governmental research
contracts..................... 27,995 110,770 -- -- --
----------- ----------- ----------- ----------- ----------
Total revenue................... 121,586 595,806 3,723,492 1,303,789 1,424,847
Cost of revenue................. 532,124 4,019,484 3,935,766 3,221,996 2,610,667
Research and development
expense....................... 485,059 677,284 990,331 1,504,127 1,456,126
Selling, general and
administrative expense........ 1,150,853 1,661,504 2,074,728 3,594,946 3,641,736
----------- ----------- ----------- ----------- ----------
Total operating expense......... 2,168,036 6,358,272 7,000,825 8,321,069 7,708,529
----------- ----------- ----------- ----------- ----------
Operating loss.................. (2,046,450) (5,762,466) (3,277,333) (7,017,280) (6,283,682)
Interest income................. 86,576 184,778 204,863 1,539,400 1,166,615
Provision for income taxes...... -- -- -- (156,000) --
----------- ----------- ----------- ----------- ----------
Net loss........................ $(1,959,874) $(5,577,688) $(3,072,470) $(5,633,880) (5,117,067)
=========== =========== =========== =========== ==========
Net loss per share.............. $ (0.45) $ (0.40)
=========== ==========
Shares used in computing the net
loss per share................ 12,416,305 12,690,483
=========== ==========
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31
-----------------------------------------------------------------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents...... $ 261,902 $ 617,204 $ 3,988,368 $ 363,394 $ 624,509
Working capital................ 2,451,627 3,070,789 32,038,915 26,535,018 21,831,264
Total assets................... 3,741,128 5,539,634 36,196,569 30,453,988 25,677,539
Total stockholders' equity..... 3,506,050 5,110,450 34,651,334 29,107,590 24,161,323
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Item 6. Selected Financial Data" and the financial statements and related notes
thereto appearing elsewhere in this Form 10-K. When used in the following
discussions, the words "anticipates," "believes," "estimates," "expects,"
"plans," "intends" and similar expressions are intended to identify
forward-looking statements. Such statements are subject to certain risks,
uncertainties and contingencies that could cause actual results, performance or
achievements to differ materially from those expressed in, or implied by, such
statements. See "-- Risk Factors."
OVERVIEW
From its inception in November 1989 through December 31, 1996, the Company
was in the development stage. During that period, the Company primarily focused
on the development of its manufacturing processes in order to transition from
laboratory-scale to commercial-scale production. As a result, the Company
developed an operating capacity to produce significant quantities of its
nanocrystalline materials for commercial sale. The Company was also engaged in
the development of commercial applications and formulations and the recruiting
of marketing, technical and administrative personnel. Since January 1, 1997, the
Company has been engaged in commercial production and sales of its
nanocrystalline materials, and the Company no longer considers itself in the
development stage. All of the Company's revenue since January 1, 1997 has been
generated through commercial sources. From inception through December 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 Common Stock, each net of issuance costs. The Company has
incurred cumulative losses of $24,495,618 from inception through December 31,
1999.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999 AND 1998
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
increased to $1,424,847 in 1999, compared to $1,303,789 in 1998. The increase in
total revenue between 1999 and 1998 was primarily attributed to a $133,042
increase in other revenue offset by a $11,984 reduction in product revenue.
Product revenue decreased to $1,128,861 in 1999, compared to $1,140,845 in 1998.
Other revenue increased to $295,986 in 1999, compared to $162,944 in 1998.
Revenue from three major customers constituted approximately 53.4% of the
Company's 1999 revenue. In particular, revenue from (1) CIK, (2) a cosmetics
customer and (3) a ceramics customer constituted approximately 33.8%, 9.9%, and
9.7%, respectively, of the Company's 1999 revenue. The Company does not
currently anticipate future revenue from either the cosmetics customer or the
ceramics customer. See "-- Risk Factors -- Dependence on a Limited Number of Key
Customers."
Cost of revenue generally includes costs associated with commercial
production, customer development arrangements, the transfer of technology, and
licensing fees. Cost of revenue decreased to $2,610,667 in 1999, compared to
$3,221,996 in 1998. The decrease in cost of revenue was generally attributed to
cost reduction activities and efficiencies in the manufacture of the Company's
products, decreased ceramic superplastic forming costs, and a smaller increase
in the allowance for excess quantities in inventory in 1999 than in 1998. Cost
of revenue as a percentage of total revenue decreased in 1999, compared to the
same period in 1998, due primarily to the factors discussed above.
Research and development expense primarily consists of costs associated
with the Company's development or acquisition of new product applications and
coating formulations and the cost of enhancing the Company's manufacturing
processes. Research and development expense decreased to $1,456,126 in 1999,
compared to $1,504,127 in 1998. The decrease in research and development expense
was primarily attributed to the lack of costs relating to arrangements with
outside parties to further develop end-use products utilizing nanocrystalline
materials, versus $745,000 of such costs in 1998, offset by increases in
salaries, related recruiting and relocation, and payments to a former officer.
The Company expects to further increase its
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<PAGE> 15
research and development expense in 2000 in connection with its plans to
continue to enhance and expand its product lines, technologies and manufacturing
processes.
Selling, general and administrative expense increased to $3,641,736 in
1999, compared to $3,594,946 in 1998. The net increase was primarily attributed
to costs associated with an organizational restructuring, including recording
amounts due to former officers and non-cash stock compensation charges relating
to the revision of vesting schedules for options previously granted to such
officers, associated legal and professional fees, and severance to other
employees. These increases were somewhat offset by an adjustment of estimated
amounts related to contingent liabilities, a reduction in recruiting and
relocation costs, and a reduction in bad debt expense.
Interest income decreased to $1,166,615 in 1999, compared to $1,539,400 in
1998. This decrease was primarily due to a reduction in funds available for
investment compounded by a reduction in investment yields.
There was no income tax expense in 1999, compared to $156,000 in 1998. The
1998 expense was due to the foreign taxes withheld from license fees received
from CIK. The payment of such taxes creates a foreign tax credit which may be
available to offset federal income taxes when the Company generates taxable
income.
YEARS ENDED DECEMBER 31, 1998 AND 1997
Total revenue decreased to $1,303,789 in 1998, compared to $3,723,492 in
1997. The decrease in total revenue between 1998 and 1997 was primarily
attributed to a $2,635,785 reduction in other revenue offset by a $216,082
increase in product revenue. Other revenue decreased to $162,944 in 1998,
compared to $2,798,729 in 1997. Product revenue increased to $1,140,845 in 1998,
compared to $924,763 in 1997. The majority of the revenue generated in 1998 was
from customers in the electronics and structural ceramics and composites
markets. Revenue from four customers constituted 55.8% of the Company's 1998
revenue. In particular, revenue from (1) EKC Technology, Inc., a manufacturer of
semiconductor polishing slurries ("EKC"), (2) CIK, (3) a ceramics customer and
(4) an electronics customer constituted approximately 11.5%, 14.0%, 16.9% and
13.4%, respectively, of the Company's 1998 revenue. See "-- Risk
Factors -- Dependence on a Limited Number of Key Customers."
Cost of revenue decreased to $3,221,996 in 1998, compared to $3,935,766 in
1997. The decrease in cost of revenue was generally attributed to the reduced
cost of development activities and efficiencies in the manufacture of the
Company's products, somewhat offset by inefficiencies in the Company's coating
operations and increased ceramic superplastic forming costs. Cost of revenue as
a percentage of total revenue increased in 1998, compared to the same period in
1997, due primarily to the decrease in total revenue.
Research and development expense increased to $1,504,127 in 1998, compared
to $990,331 in 1997. The increase in research and development expense was
primarily attributed to increased costs of $745,000 related to arrangements with
outside parties to further develop end-use products utilizing nanocrystalline
materials, slightly offset by reductions in internal costs regarding the
development of new formulations and product applications.
Selling, general and administrative expense increased to $3,594,946 in
1998, compared to $2,074,728 in 1997. The selling, general and administrative
expense in 1997 included a one-time charge of $375,103 related to a public
offering withdrawn in May 1997. Excluding such one-time charge, selling, general
and administrative expense increased by $1,895,321 in 1998 over 1997. The net
increase was primarily attributed to increased costs associated with being a
public company, costs related to ongoing investor relation programs, additional
legal expenses, salaries of additional sales and administrative personnel and
increased recruiting and relocation costs.
Interest income increased to $1,539,400 in 1998, compared to $204,863 in
1997. This increase was primarily due to the investment of net proceeds from the
Company's sale of equity securities pending use of such proceeds.
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<PAGE> 16
Income tax expense was $156,000, compared to $0 in 1997. The 1998 expense
was due to the foreign taxes withheld from license fees received from CIK. The
payment of such taxes creates a foreign tax credit which may be available to
offset federal income taxes when the Company generates taxable income.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash, cash equivalents and investments amounted to
$21,840,677 at December 31, 1999, compared to $26,633,912 at December 31, 1998.
The net cash used in the Company's operating activities was $4,335,648,
$3,859,019, and $3,370,367 for the years ended December 31, 1999, 1998 and 1997,
respectively. The net cash used in operating activities for the year ended
December 31, 1999 was primarily for the further development of product
applications, the funding of research and development activities, and the
funding of receivables, which was offset by increases in accounts payable. Net
cash provided by or (used in) 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 $4,550,288,
$143,909, and $(25,871,823) for the years ended December 31, 1999, 1998 and
1997, respectively. Capital expenditures, primarily related to the further
expansion of the Company's existing manufacturing facilities and the purchase of
operating equipment, amounted to $504,061, $470,425, and $1,063,608 for the
years ended December 31, 1999, 1998 and 1997, respectively. Net cash provided by
financing activities, which related to the exercise of options for 170,876
shares of Common Stock, amounted to $46,475 for the year ended December 31,
1999, compared to $90,136 for the year ended December 31, 1998, which related to
the exercise of options for 128,356 shares of common stock, and $32,613,354 for
the year ended December 31, 1997 which related mainly to the net proceeds from
the issuance of equity securities.
The Company believes that cash on hand, together with the remaining net
proceeds from 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. See "-- Risk Factors -- Future Capital Needs."
At December 31, 1999, the Company had a net operating loss carryforward of
approximately $23.1 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 and
uncertainty as to the amount of future taxable income that will be incurred
prior to the expiration of the carryforward, the Company has concluded that it
is likely that some portion of this carryforward will expire before ultimately
becoming available to reduce income tax liabilities. At December 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.
YEAR 2000 SYSTEMS PREPAREDNESS
The Year 2000 issue focuses on the ability of information systems to
properly recognize and process date-sensitive information beyond December 31,
1999. To address this problem, the Company implemented a Year 2000 readiness
plan for information technology systems ("IT") and non-IT equipment, facilities
and systems. All material IT and non-IT equipment, processes and software were
compliant and resulted in no material
16
<PAGE> 17
Y2K issues as of the date of this report. While no material Y2K problems have
been encountered to date and none are expected, it is possible that such
problems could arise as the year progresses.
Total expenses on the project through December 31, 1999 were less than
$100,000 and were related to expenses for repair or replacement of software and
hardware, expenses associated with facilities, products and supplier reviews and
project management expenses.
RISK FACTORS
Investors should consider the following risks in connection with an
investment in the Company.
LIMITED HISTORY OF COMMERCIAL REVENUE; UNCERTAIN MARKET ACCEPTANCE OF THE
COMPANY'S NANOCRYSTALLINE MATERIALS
The Company was founded in November 1989 and through December 31, 1996 was
engaged principally in research and development activities. While the Company
recently commenced marketing certain nanocrystalline materials, it is in the
early stage of commercialization and the potential product applications
utilizing the Company's nanocrystalline materials are in various stages of
development or under evaluation. As a result, the Company's nanocrystalline
materials have been sold only in limited quantities, often for testing and
evaluation purposes, and a significant market may not develop for such
materials. Because most, if not all, of the solutions utilizing the Company's
materials are new and innovative, the Company's time-to-market for commercial
products utilizing its materials has historically been at least 18 months and
may take several years. The Company is attempting to reduce this period by
organizing and restructuring internal resources. The Company may be unable to
decrease this time-to-market. The Company's current and potential commercial
customers establish demanding specifications for performance and reliability.
The Company's nanocrystalline materials may not meet future customer performance
standards, or offer sufficient price or performance advantages as required to
achieve commercial success. The Company's failure to develop, manufacture and
commercialize nanocrystalline materials on a timely and cost-effective basis or
successfully reduce the time-to-market of commercial products would have a
material adverse effect on the Company's business, results of operations and
financial condition. Because the Company's materials are used as ingredients in,
or components of, other companies' products, the inability of the Company's
customers to achieve market acceptance with respect to end-users of their
products or to successfully manufacture their products could also have a
material adverse effect on the Company's business, results of operations and
financial condition.
LIMITED OPERATING HISTORY; HISTORY OF LOSSES; UNCERTAINTY OF FUTURE
PROFITABILITY
The Company began shipping significant amounts of its materials for
commercial use in January 1997. Accordingly, the Company has only a limited
operating history upon which an evaluation of the Company and its prospects can
be based. An investment in the Company must be considered in light of the risks,
expenses and difficulties frequently encountered by companies in the early
stages of development. The Company's nanocrystalline materials may not generate
significant revenues from commercial applications.
The Company has incurred net losses in each year since its inception, and
as of December 31, 1999, had an accumulated deficit of $24,495,618. The Company
may continue to incur operating losses and may be unable to achieve a profitable
level of operations. If the Company does achieve profitability, it may be unable
to sustain it. Commercial development of the Company's nanocrystalline materials
will require the commitment of substantial resources to continuing research and
development, establishment of additional commercial-scale and pilot-scale
manufacturing facilities, and further development of quality control, marketing,
sales, service and administrative capabilities. The Company's ability to achieve
profitability will depend on many factors, including the Company's ability to
enter into collaborative customer relationships and the Company's ability, alone
or with its customers, to develop, manufacture, introduce and market
commercially acceptable products based on the Company's nanocrystalline
materials and proprietary processes. The Company and its customers may not
successfully manufacture, introduce or market significant quantities of the
Company's nanocrystalline materials or their product applications.
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<PAGE> 18
DEPENDENCE ON A LIMITED NUMBER OF KEY CUSTOMERS
A limited number of key customers have initially accounted for a
substantial portion of the Company's commercial revenue. In particular, revenue
from (1) CIK, (2) a cosmetics customer and (3) a ceramics customer constituted
approximately 33.8%, 9.9%, and 9.7%, respectively, of the Company's 1999
revenue. The Company does not currently anticipate future revenue from either
the cosmetics customer or the ceramics customer. The Company's customers are
significantly larger than, and are able to exert a high degree of influence
over, the Company. The loss of one or more of the Company's customers or failure
to attract new customers could have a material adverse effect on the Company's
business, results of operations and financial condition.
RELIANCE ON COLLABORATIVE DEVELOPMENT RELATIONSHIPS
The Company has established, and will continue to pursue, collaborative
relationships with a variety of corporate customers. Through such relationships,
the Company seeks to develop applications for the Company's nanocrystalline
materials, share development and manufacturing resources and coordinate the
development, manufacturing, commercialization and marketing of nanocrystalline
product applications. The Company's future success will depend, in part, on its
continued relationships with these customers, its ability to enter into similar
collaborative relationships, the commitment of the Company's customers to the
potential product applications under development and, eventually, the customers'
success in manufacturing and marketing, or willingness to purchase the Company's
nanocrystalline materials for, such product applications. The Company's
customers may decide to manufacture jointly developed products internally,
obtain them from alternative sources or no longer pursue their development.
These customers may require the Company to share control of its development,
manufacturing and marketing programs, limit its ability to license its
technology to others, or restrict its ability to engage in certain product
development, manufacturing and marketing activities. These relationships may
also be subject to unilateral termination by the Company's customers. If the
Company is unable to initiate or sustain such collaborative relationships, the
Company may be limited in its ability to independently develop, manufacture,
market or sell its current and future nanocrystalline materials or their product
applications. The failure of the Company to initiate or sustain such
collaborative relationships would have a material adverse effect on the
Company's business, results of operations and financial condition.
LIMITED MANUFACTURING CAPACITY AND EXPERIENCE
The Company's success will depend, in part, on its ability to manufacture
its nanocrystalline materials in significant quantities, with consistent
quality, at acceptable cost, on a timely basis, and in a format needed by its
customers. The Company has limited experience in high-volume manufacturing and
may incur significant start-up costs and unforeseen expenses in connection with
attempts to manufacture substantial quantities.
The Company will need to improve manufacturing efficiency significantly,
implement additional manufacturing capability and expand its current facilities
and/or obtain other facilities in the near future in order to manufacture
adequate quantities of its products to meet expected market demands. The Company
may be unable to make the transition from pilot manufacturing to high-volume
manufacturing successfully on a timely basis. The Company may also be unable to
successfully develop its surface treatment and dispersion technologies so as to
be able to coat significant quantities of its nanocrystalline materials with
consistent quality, at acceptable cost and on a timely basis. The Company may
have to develop manufacturing capability that enables it to produce dispersions,
slurries, or formulations that contain its nanocrystalline materials in order to
provide solutions demanded by certain customers and/or markets. The Company's
primary operations, including research, engineering, manufacturing, marketing,
distribution and general administration, are currently housed in a facility in
Burr Ridge, Illinois. Any material disruption in the Company's operations,
whether due to fire, natural disaster, power loss or otherwise, could have a
material adverse effect on the Company's business, results of operations and
financial condition. While the Company maintains property and business
interruption insurance, such insurance may not adequately compensate the Company
for all losses that it may incur.
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DEPENDENCE ON PATENTS AND PROTECTION OF PROPRIETARY INFORMATION
The Company's success will depend, in part, on its ability to obtain
expanded patent protection for its nanocrystalline materials and processes, to
preserve its trade secrets, and to operate without infringing the patent or
other proprietary rights of others and without breaching or otherwise losing
rights in the technology licenses upon which any of the Company's products are
based. Patent applications filed by the Company may not result in issued patents
and the scope and breadth of any claims allowed in any patents issued to the
Company or its licensors may not exclude competitors or provide competitive
advantages to the Company. In addition, any patents issued to the Company or its
licensors may not be held valid if subsequently challenged. Others may claim
rights in the patents and other proprietary technology owned or licensed by the
Company. It is also possible that others have developed or will develop similar
products or technologies without violating any of the Company's proprietary
rights. The Company's inability to obtain patent protection, preserve its trade
secrets or operate without infringing the proprietary rights of others, as well
as the Company's loss of any license to technology that it now has or acquires
in the future, would have a material adverse effect on the Company's business,
results of operations and financial condition.
Patent applications in the United States are currently maintained in
secrecy until patents issue, and patent applications in foreign countries are
maintained in secrecy for a period of time after filing. Accordingly,
publication of discoveries in the scientific literature or of patents themselves
or laying open of patent applications in foreign countries tends to lag behind
actual discoveries and filings of related patent applications. Due to this
factor and the large number of patents and patent applications related to
nanocrystalline materials, comprehensive patent searches and analysis associated
with nanocrystalline materials are often impractical or not cost-effective.
Therefore, the Company's patent and publication searches may not have been
comprehensive, or materials or processes used by the Company for its planned
products may, now or in the future, infringe upon existing technology described
in United States patents or will not infringe upon claims of patent applications
of others. Because of the volume of patents issued and patent applications filed
relating to nanocrystalline materials, there is a significant risk that current
and potential competitors and other third parties have filed or will file patent
applications for, or have obtained or will obtain patents or other proprietary
rights relating to, materials or processes used or proposed to be used by the
Company. In any such case, to avoid an infringement, the Company would have to
either license such technology or design around any such patents. The Company
may be unable either to successfully design around these third-party patents or
obtain licenses to such technology or if obtainable, such licenses may not be
available on terms acceptable to the Company.
Litigation, which could result in substantial cost to, and diversion of
effort by, the Company, may be necessary to enforce patents issued or licensed
to the Company, to defend the Company against infringement claims made by
others, or to determine the ownership, scope or validity of the proprietary
rights of the Company and others. An adverse outcome in any such litigation
could subject the Company to significant liabilities to third parties, require
the Company to seek licenses from third parties, and/or require the Company to
cease using certain technology, any of which could have a material adverse
effect on the Company's business, results of operations and financial condition.
The Company may also become involved in interference proceedings declared by the
United States Patent and Trademark Office ("PTO") in connection with one or more
of the Company's owned or licensed patents or patent applications to determine
priority of invention. Any such proceeding could result in substantial cost to
the Company, as well as a possible adverse decision as to priority of invention
of the patent or patent application involved. In addition, the Company may
become involved in reissue or reexamination proceedings in the PTO in connection
with the scope or validity of the Company's owned or licensed patents. Any such
proceeding could have a material adverse effect on the Company's business,
results of operations and financial condition, and an adverse outcome in such
proceeding could result in a reduction of the scope of the claims of any such
patents or such patents being declared invalid. In addition, from time to time,
to protect its competitive position, the Company may initiate reexamination
proceedings in the PTO with respect to patents owned by others. Such proceedings
could result in substantial cost to, and diversion of effort by, the Company,
and an adverse decision in such proceedings could have a material adverse effect
on the Company's business, results of operations and financial condition.
19
<PAGE> 20
The Company also relies on trade secrets and proprietary know-how in the
conduct of its business and uses employee and third-party confidentiality and
non-disclosure agreements to protect such trade secrets and know-how. The
obligation to maintain the confidentiality of such trade secrets or proprietary
information may wrongfully be breached by employees, consultants, advisors or
others and the Company may not have adequate remedies for any breach. In
addition, the Company's trade secrets or proprietary know-how may otherwise
become known or be independently developed or discovered by third parties. In
addition, because not all of the Company's employees have entered into
noncompetition agreements with the Company, they may become competitors of the
Company upon termination of employment.
RAPID TECHNOLOGICAL CHANGE
Rapid changes have occurred, and are likely to continue to occur, in the
development of advanced materials and processes. The future success of the
Company will depend, in large part, upon its ability to keep pace with advanced
materials technologies, industry standards and market trends and to develop and
introduce new and improved products on a timely basis. The Company will require
substantial resources to expand its commercial manufacturing capacity, further
develop its technologies and develop and introduce innovative product
applications. The Company's development efforts may be rendered obsolete by the
research efforts and technological advances of others or other advanced
materials may prove more advantageous than those produced by the Company.
LIMITED MARKETING EXPERIENCE; USE OF DISTRIBUTION AGREEMENTS
The Company has limited experience marketing and selling its products. To
market its nanocrystalline materials directly, the Company must continue
developing a marketing and sales force that can effectively demonstrate the
advantages of its nanocrystalline product applications compared to competitive
products containing conventional or advanced materials. The Company currently
has arrangements for distribution of certain of its nanocrystalline materials
and expects to enter into additional distribution or other arrangements with
third parties regarding the commercialization or marketing of its materials. The
Company's future success will depend in part on its continued relationships with
distributors, its ability to enter into other distribution arrangements, the
continuing interest of the Company's distributors in current and potential
product applications and, eventually, the distributors' success in marketing, or
willingness to purchase, any of the Company's nanocrystalline materials. The
Company may be unsuccessful in its marketing efforts or may be unable to
establish adequate sales and distribution capabilities or to enter into or
maintain marketing and distribution arrangements with third parties on
financially acceptable terms. In addition, any third parties with whom it enters
into such arrangements may not be successful in marketing the Company's
products. While the Company may discuss distribution arrangements with companies
having access to the cosmetics and skin-care market and is currently selling
directly to a small number of cosmetic and skin-care customers, the Company may
be unable to maintain significant worldwide access to such market.
REVENUE FROM INTERNATIONAL SOURCES
For the year ended December 31, 1999, 40.2% of the Company's total revenues
were derived from product shipments to, and development agreements with,
international customers, and the Company expects that it will continue to derive
a substantial percentage of revenues from international customers in the future.
The Company may be unable to successfully market, sell and deliver its
nanocrystalline materials in international markets. In addition, there are
certain risks inherent in conducting international business, including exposure
to currency fluctuations, longer payment cycles, greater difficulties in
accounts receivable collection, political instability, foreign withholding taxes
relating to royalties, difficulties in complying with a variety of foreign laws
and unexpected changes in regulatory requirements. One or more of such factors
could have a material adverse effect on the Company's business, results of
operations and financial condition. In particular, the Company has a license
agreement with CIK for the distribution of its materials throughout various
Asian countries. The recent economic uncertainties in Korea and other Asian
markets may continue and could have a material adverse effect on the Company's
ability to generate revenue from such markets.
20
<PAGE> 21
COMPETITION
The advanced materials industry is highly competitive. The market for
materials having the characteristics and potential uses of the Company's
nanocrystalline materials is the subject of intensive research and development
efforts by both governmental entities and private enterprises around the world.
The Company believes that the level of competition will increase further as more
product applications with significant commercial potential are developed. The
nanocrystalline product applications being developed by the Company will compete
directly with products incorporating conventional and advanced materials and
technologies. While the Company is not currently aware of the existence of
commercially available competitive products with the same attributes as those
offered by the Company, such competitive products may be introduced by third
parties, or competing materials based on different or new technologies may
become commercially available. The Company's competitors may succeed in
developing or marketing materials, technologies and products that exhibit
superior performance, are more commercially desirable or are more cost effective
than those developed or marketed by the Company. In addition, many potential
competitors of the Company have substantially greater financial and technical
resources, larger research and development staffs, and greater manufacturing and
marketing capabilities than the Company. Failure of the Company's current and
potential nanocrystalline product applications to improve performance
sufficiently at an acceptable price, achieve commercial acceptance or otherwise
compete with conventional materials would have a material adverse effect on the
Company's business, results of operations and financial condition.
VOLATILITY OF COMMON STOCK PRICE AND ASSOCIATED LITIGATION
During the first few months after the Offering, the market price of the
Company's Common Stock was volatile. Following such volatility in the market
price of the Company's Common Stock, class action lawsuits alleging violations
of federal securities laws were filed against the Company, certain of its
officers and directors and the underwriters of the Company's initial public
offering of its common stock. Such litigation initiated against the Company may
result in substantial costs and a diversion of management's attention and
resources, which could have a material adverse effect on the Company's business,
results of operations and financial condition. In addition, the stock market has
from time to time experienced significant price and volume fluctuations that may
be unrelated to the operating performance of any particular company. In
particular, there has been significant volatility in the market price of
securities of technology companies, particularly those that, like the Company,
are still primarily engaged in product development activities. Factors such as
announcements of technology innovations and new product applications,
collaborative development relationships or distribution relationships by the
Company or its competitors, disputes relating to patents and proprietary rights,
changes in financial estimates by securities analysts, failure to meet or exceed
earnings expectations of the market or of analysts, general market conditions
and actual or anticipated fluctuations in quarterly operating results may have a
significant impact on the future market price of the Common Stock.
In addition, the stock market, and specifically the stock prices of
advanced materials companies, has been very volatile. This volatility is often
not related to the operating performance of the companies. This broad market
volatility and industry volatility may reduce the price of our common stock,
without regard to our operating performance. Due to this volatility, the market
price of our common stock could significantly fluctuate.
FUTURE CAPITAL NEEDS
The Company believes that its future capital requirements will depend on
many factors, including continued progress in its research and development and
product testing programs, the magnitude of these programs, the costs necessary
to increase the Company's manufacturing capabilities and to market any resulting
materials and product applications, and customer acceptance of the Company's
current and potential materials and product applications. Additional factors
that may affect the Company's future capital requirements are the costs involved
in preparing, filing, prosecuting, maintaining and enforcing patents and other
proprietary rights or in obtaining licenses, the ability of the Company to
establish collaborative relationships, the costs related to the Company's
possible acquisition of complementary technologies or businesses, and the amount
and timing of future revenues. Depending on its requirements, the Company may
21
<PAGE> 22
seek additional funding through public or private financing, collaborative
relationships, government contracts or licensing agreements. Such additional
financing may not be available on acceptable terms or at all. If adequate funds
are not available on acceptable terms, the Company may be required to delay,
scale-back or eliminate manufacturing and marketing of one or more of its
materials or product applications or research and development programs, or to
obtain funds through arrangements with customers or others that may require the
Company to relinquish rights to certain of its technologies or nanocrystalline
materials that the Company would not otherwise relinquish. Inadequate funding
also could impair the Company's ability to compete in the marketplace.
DEPENDENCE ON KEY PERSONNEL
The Company's success will depend, in large part, upon its ability to
attract and retain highly qualified research and development, management,
manufacturing and marketing and sales personnel. Due to the specialized nature
of the Company's business, it may be difficult to locate and hire qualified
personnel, and to retain such personnel once hired. The loss of the services of
any of the Company's executive officers or other key personnel, or the failure
of the Company to attract and retain other skilled and experienced personnel on
acceptable terms, could have a material adverse effect on the Company's
business, results of operations and financial condition. The Company does not
have "key-man" life insurance policies covering any of its executive officers or
other key employees.
PRODUCT LIABILITY RISKS
The Company may be subject to product liability claims in the event that
any of its nanocrystalline product applications are alleged to be defective or
cause harmful effects. Because the Company's nanocrystalline materials are used
as ingredients in, or components of, other companies' products, to the extent
certain of the Company's customers become subject to claims, suits or complaints
relating to their products, such as cosmetic and skin-care products, such claims
may be asserted against the Company. The cost of defending or settling product
liability claims may be substantial and the Company may be unable to do so on
acceptable terms or such claims, if successful or settled, could have a material
adverse effect on the Company's business, results of operations and financial
condition.
GOVERNMENTAL REGULATIONS
The Company is currently a producer of certain hazardous materials, such as
ethanol, governed by the Federal Resource Conservation and Recovery Act and, as
a result, is subject to stringent federal, state and local regulations governing
the handling, storage and disposal of such materials. It is possible that
current or future laws and regulations could require the Company to make
substantial expenditures for preventative or remedial action, reduction of
chemical exposure or waste treatment or disposal. The Company's operations,
business or assets could be materially and adversely affected by the
interpretation and enforcement of current or future environmental laws and
regulations. The Company believes it has complied in all material respects with
regard to environmental regulations applicable to it and does not anticipate
generating substantially increased amounts of such materials. In addition,
although management believes that its safety procedures for handling and
disposing of such materials comply with the standards prescribed by state and
federal regulations, the Company's coating operations do pose a risk of
accidental contamination or injury. To date, the Company has not needed, nor has
it been required to make substantial expenditures for preventive or remedial
action with respect to the hazardous materials it generates. The damages in the
event of an accident or the costs of such preventive or remedial actions could
have a material adverse effect on the Company's business, results of operations
and financial condition.
In addition, the Company's facilities and all of its operations are subject
to the plant and laboratory safety requirements of various occupational safety
and health laws. The Company believes it has complied in all material respects
with regard to governmental regulations applicable to it. There can be no
assurance, however, that the Company will continue to comply with applicable
government regulations or that such regulations will not materially restrict or
impede the Company's operations in the future.
22
<PAGE> 23
The manufacture and use of certain products which contain the Company's
nanocrystalline materials are subject to governmental regulation. As a result,
the Company is required to adhere to the cGMP requirements of the FDA and
similar regulations in other countries which include testing, control and
documentation requirements enforced by periodic inspections. Such regulations
can increase the Company's cost of doing business and/or render certain
potential markets prohibitively expensive.
QUARTERLY FLUCTUATIONS IN OPERATING RESULTS
The Company has experienced, and expects to continue to experience,
quarterly fluctuations in its results of operations as a result of a variety of
factors, including the timing of collaborative relationships with, and
performance of, customers, the timing of new product application offerings,
changes in the Company's revenue mix among its product application offerings,
the timing and amount of expenses associated with expansion of the Company's
operations, and changes in the mix between pilot production of new
nanocrystalline materials and full-scale manufacturing of existing
nanocrystalline materials. The Company did not have any significant backlog of
orders at December 31, 1999. The timing of revenues will therefore depend upon
the amount and timing of new orders received for the Company's nanocrystalline
materials.
ANTI-TAKEOVER PROVISIONS
In October 1998, the Company adopted a stockholders rights plan (the
"Rights Plan"). The Rights Plan may have the effect of delaying or preventing a
change of control of the Company, including acquisitions that may offer a
premium over market price to some or all of the Company's stockholders. Further,
certain provisions of the Company's Certificate of Incorporation and Bylaws and
Delaware law could delay or make more difficult a merger, tender offer or proxy
contest involving the Company. For example, the Company has a staggered Board of
Directors with three-year terms and the Company's Board of Directors has the
authority to issue up to 24,088 shares of undesignated preferred stock and to
determine the price, rights, preferences, privileges and restrictions, including
voting rights, of those shares without any further vote or action by the
Company's stockholders.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not have any material market risk sensitive instruments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and financial statement schedules, with the report
of independent auditors listed in Item 14 are included in this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
23
<PAGE> 24
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information in response to this item is incorporated by reference from
the "Proposal No. 1 -- Election of Directors," "Executive Officers" and "Section
16(a) Beneficial Ownership Compliance" sections of the Definitive Proxy
Statement to be filed with the Commission in connection with the Company's 2000
Annual Meeting of Stockholders (the "2000 Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
The information in response to this item is incorporated by reference from
the section of the 2000 Proxy Statement captioned "Executive Compensation and
Certain Transactions."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information in response to this item is incorporated by reference from
the section of the 2000 Proxy Statement captioned "Security Ownership of
Management and Principal Stockholders."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information in response to this item is incorporated by reference from
the section of the 2000 Proxy Statement captioned "Executive Compensation and
Certain Transactions."
24
<PAGE> 25
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Form 10-K:
1. The following financial statements of the Company, with the report of
independent auditors, are filed as part of this Form 10-K:
Report of Ernst & Young LLP, Independent Auditors
Balance Sheets as of December 31, 1998 and 1999
Statements of Operations for the Years Ended December 31, 1997, 1998
and 1999
Statements of Stockholders' Equity for the Years Ended December 31,
1997, 1998 and 1999
Statements of Cash Flows for the Years Ended December 31, 1997, 1998
and 1999
Notes to Financial Statements
2. The following financial statement schedules of the Company are filed
as part of this Form 10-K:
Schedule II -- Valuation and Qualifying Accounts
All other financial schedules are omitted because such schedules are
not required or the information required has been presented in the
aforementioned financial statements.
3. The following exhibits are filed with this Form 10-K or incorporated
by reference as set forth below.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C> <S>
2 Plan and Agreement of Merger dated as of November 25, 1997
by and between the Company and its Illinois predecessor,
incorporated by reference to Exhibit 2 to the Company's
Annual Report on Form 10-K for the year ended December 31,
1997 (the "1997 10-K").
3.1 Certificate of Incorporation of the Company, incorporated by
reference to Exhibit 3.1 to the 1997 10-K.
3.2 Bylaws of the Company, incorporated by reference to Exhibit
3.2 to the 1997 10-K.
4.1 Specimen stock certificate representing Common Stock,
incorporated by reference to Exhibit 4.1 to the Company's
Registration Statement on Form S-1 (File No. 333-36937) (the
"IPO S-1").
4.2 Form of Warrants, incorporated by reference to Exhibit 4.2
to the IPO S-1.
4.3 Rights Agreement dated as of October 28, 1998 by and between
the Company and LaSalle National Bank, incorporated by
reference to Exhibit 1 to the Company's Registration
Statement on Form 8-A, filed October 28, 1998.
4.4 Certificate of Designation of Series A Junior Participating
Preferred Stock incorporated by reference to Exhibit 4.4 to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1998 (the "1998 10-K").
10.1 The Nanophase Technologies Corporation Amended and Restated
1992 Stock Option Plan, as amended (the "Stock Option
Plan"), incorporated by reference to Exhibit 10.1 to the IPO
S-1.
10.2 Form of Indemnification Agreement between the Company and
each of its directors and executive officers, incorporated
by reference to Exhibit 10.2 to the IPO S-1.
10.3 Amended and Restated Registration Rights Agreements dated as
of March 16, 1994, as amended, incorporated by reference to
Exhibit 10.2 to the IPO S-1.
10.4 License Agreement dated June 1, 1990 between the Company and
ARCH Development Corporation, as amended, incorporated by
reference to Exhibit 10.7 to the IPO S-1.
</TABLE>
25
<PAGE> 26
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C> <S>
10.5 License Agreement dated October 12, 1994 between the Company
and Hitachi, incorporated by reference to Exhibit 10.8 to
the IPO S-1.
10.6 License Agreement dated May 31, 1996 between the Company and
Research Development Corporation of Japan, incorporated by
reference to Exhibit 10.9 to the IPO S-1.
10.7 License Agreement dated April 1, 1996 between the Company
and Cornell Research Foundation, incorporated by reference
to Exhibit 10.10 to the IPO S-1.
10.8* Consulting and Stock Purchase Agreement between Richard W.
Siegel and the Company dated as of May 9, 1990, as amended
February 13, 1991, November 21, 1991 and January 1, 1992,
incorporated by reference to Exhibit 10.11 to the IPO S-1.
10.9 Lease Agreement between the Village of Burr Ridge and the
Company, dated September 15, 1994, incorporated by reference
to Exhibit 10.12 to the IPO S-1.
10.10 Distribution Agreement between the Company and C.I. Kasei,
Ltd., (a subsidiary of Itochu Corporation) dated as of
October 30, 1996, incorporated by reference to Exhibit 10.15
to the IPO S-1.
10.11 Supply Agreement between the Company and Schering-Plough
HealthCare Products, Inc. dated as of March 15, 1997,
incorporated by reference to Exhibit 10.17 to the IPO S-1.
10.12 License Agreement between the Company and C.I. Kasei Co.,
Ltd. (a subsidiary of Itochu Corporation) dated as of
December 30, 1997, incorporated by reference to Exhibit
10.17 to the 1997 10-K.
10.13* Employment Agreement dated as of September 3, 1996 between
the Company and Dennis J. Nowak, incorporated by reference
to Exhibit 10.5 to the IPO S-1.
10.14* Consulting Agreement dated as of June 25, 1999 between the
Company and Dennis J. Nowak.
10.15* Employment Agreement dated as of November 9, 1999 between
the Company and Joseph Cross.
10.16* Consulting Agreement effective as of October 29, 1998
between the Company and Donald S. Perkins, incorporated by
reference to Exhibit 10.17 to the 1998 10-K.
10.17* Employment Agreement dated as of February 15, 1999 between
the Company and Gina Kritchevsky, incorporated by reference
to Exhibit 10.18 to the 1998 10-K.
10.18* Employment Agreement dated as of March 15, 1999 between the
Company and Daniel S. Bilicki, incorporated by reference to
Exhibit 10.19 to the 1998 10-K.
10.19* Employment Agreement dated as of June 1, 1999 between the
Company and Donald Freed.
10.20* Form of Options Agreement under the Stock Option Plan,
incorporated by reference to Exhibit 4.5 to the Company's
Registration Statement on Form S-8 (File No. 333-53445).
10.21* Consulting and Severance Agreement dated October 28, 1998
between the Company and John C. Parker, incorporated by
reference to Exhibit 10.21 to the 1998 10-K.
10.22** Zinc Oxide Supply Agreement dated as of September 16, 1999
between the Company and an undisclosed customer of the
Company.
</TABLE>
26
<PAGE> 27
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C> <S>
11 Statement regarding computation of loss per share.
23 Consent of Ernst & Young LLP.
27 Financial Data Schedule.
</TABLE>
- ---------------
* Management contract or compensatory plan or arrangement.
** Confidentiality Requested, confidential portions have been omitted
and filed separately with the Commission as required by Rule 24b-2.
(b) Reports on Form 8-K:
None
27
<PAGE> 28
NANOPHASE TECHNOLOGIES CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........... F-2
Balance Sheets as of December 31, 1998 and 1999............. F-3
Statements of Operations for the years ended December 31,
1997, 1998 and 1999....................................... F-4
Statements of Stockholders' Equity.......................... F-5
Statements of Cash Flows for the years ended December 31,
1997, 1998 and 1999....................................... F-6
Notes to the Financial Statements........................... F-7
</TABLE>
F-1
<PAGE> 29
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Nanophase Technologies Corporation
We have audited the accompanying balance sheets of Nanophase Technologies
Corporation as of December 31, 1998 and 1999, and the related statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 1999. Our audit also included the financial
statement schedule for the three years in the period ended December 31, 1999,
listed in the index at Item 14(a). These financial statements and schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audits to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Nanophase Technologies
Corporation at December 31, 1998 and 1999, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1999, in conformity with accounting principles generally accepted in the United
States. Also in our opinion, the related financial statement schedule for the
three years in the period ended December 31, 1999, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
Ernst & Young LLP
Chicago, Illinois
February 8, 2000
F-2
<PAGE> 30
NANOPHASE TECHNOLOGIES CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------------
1998 1999
---- ----
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 363,394 $ 624,509
Investments............................................... 26,270,518 21,216,168
Trade accounts receivable, less allowance for doubtful
accounts of $85,000 in 1998 and $120,000 in 1999....... 316,328 401,826
Other receivable, net..................................... -- 247,841
Inventories, net.......................................... 838,825 766,778
Prepaid expenses and other current assets................. 92,351 90,358
------------- -------------
Total current assets................................... 27,881,416 23,347,480
Equipment and leasehold improvements, net................... 2,383,091 2,152,413
Other assets, net........................................... 189,481 177,646
------------- -------------
$ 30,453,988 $ 25,677,539
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 413,378 $ 615,818
Accrued expenses.......................................... 933,020 900,398
------------- -------------
Total current liabilities.............................. 1,346,398 1,516,216
CONTINGENT LIABILITIES:..................................... -- --
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; 24,088 authorized and no
shares issued and outstanding............................. -- --
Common stock, $.01 par value; 25,000,000 shares authorized
and 12,568,691 shares issued and outstanding at December
31, 1998; 25,000,000 shares authorized and 12,764,058
shares issued and outstanding at December 31, 1999........ 125,687 127,641
Additional paid-in capital.................................. 48,360,454 48,529,300
Accumulated deficit......................................... (19,378,551) (24,495,618)
------------- -------------
Total stockholders' equity............................. 29,107,590 24,161,323
------------- -------------
$ 30,453,988 $ 25,677,539
============= =============
</TABLE>
F-3
<PAGE> 31
NANOPHASE TECHNOLOGIES CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
REVENUE:
Product revenue..................................... $ 924,763 $ 1,140,845 $ 1,128,861
Other revenue....................................... 2,798,729 162,944 295,986
----------- ----------- -----------
Total revenue.................................. 3,723,492 1,303,789 1,424,847
OPERATING EXPENSE:
Cost of revenue..................................... 3,935,766 3,221,996 2,610,667
Research and development expense.................... 990,331 1,504,127 1,456,126
Selling, general and administrative expense......... 2,074,728 3,594,946 3,641,736
----------- ----------- -----------
Total operating expenses....................... 7,000,825 8,321,069 7,708,529
----------- ----------- -----------
Loss from operations................................ (3,277,333) (7,017,280) (6,283,682)
Interest income..................................... 204,863 1,539,400 1,166,615
----------- ----------- -----------
Loss before provision for income taxes.............. (3,072,470) (5,477,880) (5,117,067)
Provision for income taxes.......................... -- (156,000) --
----------- ----------- -----------
Net loss............................................ $(3,072,470) $(5,633,880) $(5,117,067)
=========== =========== ===========
Basic and diluted net loss net per share............ n/a $ (0.45) $ (0.40)
=========== =========== ===========
Weighted average number of common shares
outstanding...................................... n/a 12,416,305 12,690,483
=========== =========== ===========
Pro forma net loss per share........................ $ (0.37) n/a n/a
=========== =========== ===========
Pro forma weighted average number of common shares
outstanding...................................... 8,208,306 n/a n/a
=========== =========== ===========
</TABLE>
F-4
<PAGE> 32
NANOPHASE TECHNOLOGIES CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
------------------------- --------------------- PAID-IN ACCUMULATED
DESCRIPTION SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
----------- ------ ------ ------ ------ ---------- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance as of January 1, 1997...... 7,408,354 $ 15,782,201 77,586 $ -- $ 450 $(10,672,201) $ 5,110,450
Issuance of Series F shares, net
of offering costs.............. 748,089 3,770,543 -- -- -- -- 3,770,543
Exercise of stock options.......... -- -- 43,425 434 4,441 -- 4,875
Conversion of all outstanding
Preferred shares into Common
shares and all Common shares to
$0.01 par value................ (8,156,443) (19,552,744) 8,156,456 82,341 19,470,403 -- --
Issuance of Common shares, net of
offering costs................. -- -- 4,000,000 40,000 28,797,936 -- 28,837,936
Net loss for the year ended
December 31, 1997.............. -- -- -- -- -- (3,072,470) (3,072,470)
---------- ------------ ---------- -------- ----------- ------------ -----------
Balance as of December 31, 1997.... -- -- 12,277,467 122,775 48,273,230 (13,744,671) 34,651,334
Exercise of stock options........ -- -- 128,356 1,283 88,853 -- 90,136
Exercise of warrants............. -- -- 162,868 1,629 (1,629) -- --
Net loss for the year ended
December 31, 1998.............. -- -- -- -- -- (5,633,880) (5,633,880)
---------- ------------ ---------- -------- ----------- ------------ -----------
Balance as of December 31, 1998.... -- -- 12,568,691 125,687 48,360,454 (19,378,551) 29,107,590
Exercise of stock options........ -- -- 170,867 1,709 44,766 -- 46,475
Stock Compensation............... -- -- 24,500 245 124,080 -- 124,325
Net loss for the year ended
December 31, 1999.............. -- -- -- -- -- (5,117,067) (5,117,067)
---------- ------------ ---------- -------- ----------- ------------ -----------
Balance as of December 31, 1999.... -- $ -- 12,764,058 $127,641 $48,529,300 $(24,495,618) $24,161,323
========== ============ ========== ======== =========== ============ ===========
</TABLE>
F-5
<PAGE> 33
NANOPHASE TECHNOLOGIES CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss...................................... $ (3,072,470) $ (5,633,880) $ (5,117,067)
Adjustments to reconcile net loss to cash
used in operating activities:
Depreciation and amortization............ 416,414 491,098 678,749
Stock compensation expense............... -- -- 124,325
Allowance for excess inventory
quantities............................. -- 190,633 69,581
Provision for asset write-down........... -- -- 61,011
Changes in assets and liabilities related to
operations:
Trade accounts receivable................ (1,251,988) 1,325,161 (85,498)
Other receivable......................... -- -- (247,841)
Inventories.............................. (512,098) (72,155) 2,466
Prepaid expenses and other assets........ (145,398) 38,961 8,807
Accounts payable......................... 708,461 (517,019) 202,440
Accrued liabilities...................... 486,712 318,182 (32,621)
------------- ------------- -------------
Net cash used in operating activities......... (3,370,367) (3,859,019) (4,335,648)
INVESTING ACTIVITIES:
Acquisition of equipment and leasehold
improvements................................ (1,063,608) (470,425) (504,061)
Purchases of held-to-maturity investments..... (118,684,404) (182,750,264) (126,819,265)
Maturities of held-to-maturity investments.... 93,797,340 183,364,598 131,873,614
Decrease in asset held in trust............... 78,849 -- --
------------- ------------- -------------
Net cash (used in) provided by investing
activities.................................. (25,871,823) 143,909 4,550,288
FINANCING ACTIVITIES:
Proceeds from issuance of stock, net of
offering costs.............................. 32,608,479 -- --
Proceeds from option exercises................ 4,875 90,136 46,475
------------- ------------- -------------
Net cash provided by financing activities..... 32,613,354 90,136 46,475
------------- ------------- -------------
Increase (decrease) in cash and cash
equivalents................................. 3,371,164 (3,624,974) 261,115
Cash and cash equivalents at beginning of
period...................................... 617,204 3,988,368 363,394
------------- ------------- -------------
Cash and cash equivalents at end of period.... $ 3,988,368 $ 363,394 $ 624,509
============= ============= =============
</TABLE>
F-6
<PAGE> 34
NANOPHASE TECHNOLOGIES CORPORATION
NOTES TO FINANCIAL STATEMENTS
(1) DESCRIPTION OF BUSINESS
Nanophase Technologies Corporation (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. The
Company issued common stock in its initial public offering consummated on
December 2, 1997.
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.
Export revenue approximated $1,695,700, $347,500, and $573,300 for the
years ended December 31, 1997, 1998, and 1999, respectively.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH EQUIVALENTS
Cash equivalents primarily consist of money market accounts which have a
maturity of three months or less from the date of purchase.
INVESTMENTS
Investments are classified by the Company at the time of purchase for
appropriate designation and such designation is 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 cost 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.
INVENTORY
Inventory is stated at the lower of cost, maintained on a first in, first
out basis, or market. The Company has recorded allowances to reduce inventory
relating to excess quantities of certain materials. Although materials subject
to this allowance remain in good condition, the quantities on hand exceed the
Company's short-term needs.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment is stated at cost and is being depreciated over its estimated
useful life (3-7 years) using the straight-line method. Leasehold improvements
are stated at cost and are being amortized using the straight-line method over
the shorter of the useful life of the asset or the term of the lease.
PATENT COSTS
Patent costs are included in other assets and are being amortized over the
life of the respective patent using the straight-line method.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company to make estimates and
assumptions that affect the amounts reported in the Financial statements and
accompanying notes. Actual results could differ from those estimates.
F-7
<PAGE> 35
NANOPHASE TECHNOLOGIES CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
PRODUCT REVENUE
Product revenue consists of sales of product which are recorded as
shipments are made by the Company.
OTHER REVENUE
Other revenue consists of revenue from research and development
arrangements with non-governmental entities, fees from the transfer of
technology and related royalties. Research and development arrangements include
both cost-plus and fixed fee agreements and such revenue is recognized when
specific milestones are met under the arrangements. Fees related to the transfer
of technology are recognized when the transfer of technology to the acquiring
party is completed and the Company has no further significant obligation.
Royalties are recognized when earned pursuant to the contractual arrangement.
RESEARCH AND DEVELOPMENT EXPENSES
Expenditures for research and development activities are charged to
operations as incurred by the Company. During 1998, the Company incurred
$745,000 in third party development expenses that were charged to research and
development expense. During 1997, the Company acquired certain research and
development from a customer for $223,000 and charged this acquisition to
research and development expense.
INCOME TAXES
The Company accounts for income taxes using the liability method. As such,
deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Deferred tax assets and
liabilities are calculated using the enacted tax rates and laws that are
expected to be in effect when the anticipated reversal of these differences is
scheduled to occur.
EMPLOYEE STOCK OPTIONS
As permitted by Statement of Financial Accounting Standards No. 123
"Accounting for Stock-Based Compensation" (FASB 123), the Company accounts for
stock options granted to employees in accordance with APB Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB No. 25). As long as the exercise
price of the options granted equals the estimated fair value of the underlying
stock on the measurement date, no compensation expense is recognized by the
Company for these options. FASB 123, established an alternative fair value
method of accounting for stock-based compensation plans. As required by FASB 123
for companies using APB No. 25 for financial reporting purposes, the Company
makes pro forma disclosures regarding the impact on net loss of using the fair
value method of FASB Statement No. 123.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments include investments, accounts
receivable, accounts payable and accrued liabilities. The fair values of all
financial instruments were not materially different from their carrying values.
NET LOSS AND PRO FORMA NET LOSS PER SHARE
Pro forma net loss per common share and historical net loss per common
share are computed based upon the weighted average number of common shares
outstanding. Common equivalent shares of 1,041,300 for 1997, 643,484 for 1998,
and 252,349 for 1999 are not included in the pro forma and historical per share
calculations because the effect of their inclusion would be anti-dilutive. For
the pro forma calculation, all convertible preferred stock is treated as if
converted into common shares for all periods shown.
F-8
<PAGE> 36
NANOPHASE TECHNOLOGIES CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Net loss per common share computed on a historical basis is as follows:
$2.39, $.45, and $.40 for the years ended December 31, 1997, 1998, and 1999
respectively. The weighted average number of common shares outstanding used to
calculate these net loss per common share amounts are 1,283,359 for 1997,
12,416,305 for 1998, and 12,690,483 for 1999.
(3) INVESTMENTS
Investments consist of government bonds and commercial paper with an
estimated fair value of $26,251,000 and $21,113,000 at December 31, 1998 and
1999, respectively. All investments have been classified as held-to-maturity and
mature in subsequent year.
(4) INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------
1998 1999
---- ----
<S> <C> <C>
Raw Materials......................................... $ 284,162 $ 257,485
Finished Goods........................................ 745,296 769,507
---------- ----------
1,029,458 1,026,992
Allowance for Excess Quantities....................... (190,633) (260,214)
---------- ----------
$ 838,825 $ 766,778
========== ==========
</TABLE>
(5) EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements consist of the following:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------------
1998 1999
---- ----
<S> <C> <C>
Machinery and equipment............................. $ 2,842,258 $ 3,072,978
Office equipment.................................... 194,258 226,760
Office furniture.................................... 49,864 43,580
Leasehold improvements.............................. 664,143 729,505
----------- -----------
3,750,523 4,072,823
Less: Accumulated depreciation and amortization..... (1,367,432) (1,920,409)
----------- -----------
$ 2,383,091 $ 2,152,414
=========== ===========
</TABLE>
Depreciation expense was $412,233, $486,444, and $673,728 for the years
ended December 31, 1997, 1998, and 1999, respectively.
(6) LEASE COMMITMENTS
The Company leases manufacturing and office space under an agreement that
will expire in September 2000. Monthly minimum lease payments amount to $8,600
for this facility. The Company also leases off site warehouse space under an
agreement expiring in September 2000. Monthly minimum lease payments amount to
$2,900 for this facility.
Net rent expense under these leases amounted to $168,781, $191,995, and
$190,832 for the years ended December 31, 1997, 1998, and 1999, respectively.
F-9
<PAGE> 37
NANOPHASE TECHNOLOGIES CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(7) ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------
1998 1999
---- ----
<S> <C> <C>
Accrued payroll and related expenses..................... $211,283 $364,911
Accrued professional services............................ 288,000 133,923
Other.................................................... 201,353 174,143
Accrued payments to former officers...................... -- 181,065
Accrued costs for goods received but not invoiced........ 232,384 46,356
-------- --------
$933,020 $900,398
======== ========
</TABLE>
(8) RESEARCH AND DEVELOPMENT AGREEMENTS
The Company is party to a number of research and development arrangements
with commercial entities. These arrangements are generally short-term in nature
and provided $1,445,705, $160,984, and $197,500 of revenues for the years ended
December 31, 1997, 1998, and 1999, respectively.
(9) LICENSE AGREEMENTS
The Company was granted an exclusive license by a third party to make, have
made, use and sell products of the type claimed in a U.S. patent. In
consideration for this license, the Company agreed to pay royalties of 1/2% of
net sales of licensed products, as defined. As of December 31, 1999, no royalty
payments were due under this agreement.
The Company was granted a non-exclusive license by a third party to make,
use, and sell products of the type claimed in two U.S. patents. In consideration
for this license, the Company agreed to pay royalties of 1% of net sales, as
defined, and made an advance royalty payment of $17,500. Royalties under this
agreement amounted to approximately $8,400, $9,900, and $12,900 for the years
ended December 31, 1997, 1998, and 1999, respectively.
The Company was granted a non-exclusive license by a third party to produce
and sell ultrafine powders of metal and ceramics claimed in four U.S. patents.
In consideration for this license, the Company agreed to pay $14,000 as an
initial payment, and pay royalties of 3% of net proceeds of sales of the
product, as defined. Royalties under this agreement amounted to approximately
$11,900, $12,100, and $37,900 for the years ended December 31, 1997, 1998, and
1999, respectively. The Company was also granted a remainder-exclusive license
by a third party to make, have made, use, import, sell or have sold products of
the type claimed in three U.S. patents. In consideration for this license, the
Company agreed to pay $5,000 as an initial payment, $5,000 upon reaching the
earlier of either defined profitability or the second anniversary of the
agreement, and royalties at the rate of 4% of the defined net sales of the
related products. The agreement also provides for minimum royalty payments
beginning in 1999, the fourth license year. As of December 31, 1999, aggregate
royalties under this agreement amounted to $20,000.
In December 1997, the Company entered into a license agreement whereby the
Company granted a royalty-bearing exclusive right and license, as defined, to
purchase, make, use and sell nanocrystalline materials to a third party. As
consideration for the right and license thereby granted, the Company recognized
a non-refundable technology transfer fee of $1,400,000, which was earned upon
execution of the agreement. As defined, the Company also will earn royalties on
net sales of manufactured products containing nanocrystalline materials. The
agreement also provided for minimum sales targets and minimum royalty
F-10
<PAGE> 38
NANOPHASE TECHNOLOGIES CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
payments to maintain exclusivity. The agreement expires on March 31, 2013 unless
earlier terminated as provided therein. In 1998 and 1999, the Company recorded
revenue of $1,690 and $4,417, respectively.
(10) INCOME TAXES
The Company has net operating loss carryforwards for tax purposes of
approximately $23,100,000 at December 31, 1999, which expire between 2005 and
2014. The Company has not paid income taxes since inception.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred income taxes consist of the following:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------------
1998 1999
---- ----
<S> <C> <C>
DEFERRED TAX ASSETS:
Net operating loss carryforwards.................. $ 7,137,000 $ 8,932,000
Foreign tax credit carryforward................... 156,000 156,000
Start-up cost capitalized for income tax
purposes....................................... 81,000 41,000
Inventory and other allowances.................... 143,000 148,000
Excess book depreciation.......................... -- 113,000
Other accrued costs............................... 146,000 203,000
----------- -----------
Total deferred tax assets...................... 7,663,000 9,593,000
Less: Valuation allowance......................... (7,663,000) (9,593,000)
----------- -----------
Deferred income taxes............................... $ -- $ --
=========== ===========
</TABLE>
The valuation allowance increased $1,930,000 for the year ended December
31, 1999 due principally to the increase in the net operating loss carryforward
and uncertainty as to whether future taxable income will be generated prior to
the expiration of the carryforward period. Under the Internal Revenue Code,
certain ownership changes, including the prior issuance of preferred stock and
the Company's public offering of common stock, may subject the Company to annual
limitations on the utilization of its net operating loss carryforward.
As a result of certain transactions with third parties operating in foreign
countries, the Company may be subject to the withholding and payment of foreign
income taxes as transactions are completed. Under the Internal Revenue Code,
foreign tax payments may be used to offset federal income tax liabilities when
incurred, subject to certain limitations. At December 31, 1999, the Company has
a foreign tax credit carryforward of $156,000.
(11) CAPITAL STOCK
In 1997, a total of 748,089 shares of Series F convertible preferred stock
were issued for cash amounting to $3,770,543 which is net of financing costs of
$105,565.
In November 1997, a total of 4,000,000 shares of common stock was issued in
conjunction with the Company's initial public offering at an offering price of
$8 per share. The Company received proceeds of $28,837,936, which is net of
offering costs of $3,162,064. All Series A, B, C, D, E and F convertible
preferred stock was automatically converted to common stock in conjunction with
the initial public offering.
In October 1998, the Company declared a dividend of one Preferred Stock
Purchase Right (a "Right") for each outstanding share of Company common stock on
November 10, 1998. The Rights are not presently
F-11
<PAGE> 39
NANOPHASE TECHNOLOGIES CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
exercisable. Each Right entitles the holder, upon the occurrence of certain
specified events, to purchase from the Company one ten-thousandth of a share of
the Company's Series A Junior Participating Preferred Stock at a purchase price
of $25 per one-ten thousandth of a share (the "Purchase Price"). The Rights
further provide that each Right will entitle the holder, upon the occurrence of
certain specified events, to purchase from the Company, common stock having a
value of twice the Purchase Price and, upon the occurrence of certain other
specified events, to purchase from another entity into which the Company is
merged or which acquires 50% or more of the Company's assets or earnings power,
common stock of such other entity having a value of twice the Purchase Price. In
general, the Rights may be redeemed by the Company at a price of $0.01 per
Right. The Rights expire on October 28, 2008.
At December 31, 1999, 2,500 shares of authorized but unissued Preferred
Stock have been reserved for future issuance regarding the Rights. In addition,
authorized but unissued shares of common stock have been reserved for future
issuance as follows:
<TABLE>
<S> <C>
Warrants.................................................... 429,796
Options..................................................... 2,415,384
---------
2,845,180
=========
</TABLE>
(12) STOCK OPTIONS AND WARRANTS
The Company has entered into stock option agreements with certain officers,
employees, directors (two of whom are also service providers) and three Advisory
Board members. At December 31, 1999, the Company had outstanding options to
purchase 1,853,244 shares of common stock. The stock options generally expire
ten years from the date of grant. Of the total number of options granted 987,184
of the outstanding options vest over a five-year period and 257,619 vest over a
three-year period from their respective grant dates. Of the remaining 608,441
outstanding options, 103,822 vest on the eighth anniversary following their
grant date, and the remaining 504,619 were accelerated to vest over a five-year
period due to specific performance targets being met. For the year ended
December 31, 1999, the Company recognized $124,325 in stock compensation expense
related to the grant of 24,500 shares of stock to an officer and to the
extension of stock option vesting periods for three former officers.
F-12
<PAGE> 40
NANOPHASE TECHNOLOGIES CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Exercise prices are determined by the Board of Directors and equal the
estimated fair values of the Company's common stock at the grant date. The table
below summarizes all option activity through December 31, 1999:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF EXERCISE AVERAGE EXERCISE
OPTIONS PRICE PRICE
--------- -------------- ----------------
<S> <C> <C> <C>
Outstanding at January 1, 1997.................. 1,615,526 $.112 - 3.886 $2.499
Options granted during 1997..................... 17,370 5.181 5.181
Options exercised during 1997................... (43,425) .112 .112
Options canceled during 1997.................... (150,482) .112 - 3.886 3.760
---------
Outstanding at December 31, 1997................ 1,438,989 .112 - 5.181 2.471
Options granted during 1998..................... 521,400 2.938 - 5.750 3.694
Options exercised during 1998................... (128,356) .112 - 3.886 .702
Options canceled during 1998.................... (50,648) 3.813 - 3.886 3.874
---------
Outstanding at December 31, 1998................ 1,781,385 .112 - 5.750 2.916
Options granted during 1999..................... 417,000 1.750 - 5.000 2.115
Options exercised during 1999................... (170,867) .112 - 1.727 .272
Options canceled during 1999.................... (174,274) .432 - 5.250 3.641
---------
Outstanding at December 31, 1999................ 1,853,244 .112 - 5.750 2.911
=========
</TABLE>
At December 31, 1999, options for 17,371, 83,484, 137,222, 20,000, 5,000,
61,090, 326,131, 11,619, 1,332, and 3,333 shares of common stock were
exercisable at $.112, $.432, $1.727, $2.938, $3.500, $3.813, $3.886, $5.181,
$5.25, and $5.750 per share, respectively. At December 31, 1998, options for
547,940 shares of common stock were exercisable at a weighted average exercise
price of $2.072. At December 31, 1997, options for 336,384 shares of common
stock were exercisable at a weighted average exercise price of $0.686. To date,
342,648 options have been exercised and none have expired. The weighted average
remaining contractual life of the outstanding options at December 31, 1999 was
eight years.
In connection with the issuance of Series C convertible preferred stock in
1993, the Company issued common stock purchase warrants for 662,287 shares at no
additional cost to the Series C convertible preferred stockholders. At the
Company's initial public offering on November 26, 1997, all preferred stock
shares were converted to common stock shares. These warrants have an exercise
price of $1.123 per share and expire upon the tenth anniversary of issuance. In
July of 1998, 232,491 warrants were converted, via a cashless exchange, into
162,868 shares of common stock. At December 31, 1999, 429,796 warrants remain
outstanding.
The Company has elected to follow APB No. 25 and related interpretations in
accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under FASB No. 123 requires use
of option valuation models that were not developed for the use in valuing
employee stock options. Pro forma information regarding net income is required
by FASB No. 123, which also requires that the information be determined as if
the Company had accounted for the employee stock options granted subsequent to
December 31, 1994 under the fair value method of that Statement. The fair value
for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following assumptions for the years ended December
31, 1997, 1998, and 1999: U.S. government zero coupon 7-year bond interest rates
ranging from 4.6% to 6.9%, depending upon the specific grant date of the
options; a dividend yield of zero percent; and a weighted-average expected life
of the option of 7 years. The volatility factor was assumed to be zero as the
Company was privately held and no market existed for its stock during the period
during which options were granted in 1997. For 1998 and 1999, the volatility
factor used was 25%. The weighted average fair value of the net options granted
during 1997, 1998, and 1999 was $1.753, $1.505, and $.885 per share,
respectively.
F-13
<PAGE> 41
NANOPHASE TECHNOLOGIES CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Black-Scholes option valuation model was developed for the use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's option, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of the pro forma disclosures, the estimated fair value of the
options is amortized to expense over the vesting period of the respective
option. Because FASB No. 123 is applicable only to options granted subsequent to
December 31, 1994, its pro forma impact will not be fully reflected until 2002.
The Company's pro forma net loss would be $3,275,177, $5,922,570, and $5,456,516
and the pro forma net loss per share would be $0.40, $0.48, and $0.43 for the
years ended December 31, 1997, 1998, and 1999, respectively.
(13) 401(K) PROFIT-SHARING PLAN
The Company has a 401(k) profit-sharing plan covering substantially all
employees who meet defined service requirements. The plan provides for deferred
salary contributions by the plan participants and a Company contribution.
Company contributions, if any, are at the discretion of the Board of Directors
and are not to exceed the amount deductible under applicable income tax laws. No
Company contributions have been made since inception of the plan.
(14) RELATED PARTY TRANSACTIONS
The Company has an ongoing consulting agreement with a director/stockholder
that is renewable on an annual basis. Payments under this agreement amount to
$2,500 per month. The Company is guarantor of a note payable of an officer
totaling $65,000 at December 31, 1999.
(15) SIGNIFICANT CUSTOMERS
Revenue from two customers constituted approximately 43.1% and 42.2%,
respectively, of the Company's 1997 revenue. Revenue from four customers
constituted approximately 16.9%, 14%, 13.4% and 11.5%, respectively, of the
Company's 1998 revenue. Revenues from three customers constituted approximately
33.8%, 9.9%, and 9.7%, respectively, of the Company's 1999 revenue.
(16) CONTINGENT LIABILITIES
Five separate complaints were filed in the United States District Court for
the Northern District of Illinois, Eastern Division, each of which alleged that
the Company, certain of its officers and directors, and the underwriters of the
Offering are liable under the federal securities laws for making supposedly
negligent or reckless material misstatements of fact and omitting to state
material facts necessary to make other statements of fact not misleading in the
Registration Statement and Prospectus relating to the Offering. Those cases were
consolidated and a consolidated complaint was filed in October 1998. The
consolidated complaint alleges that the action should be maintained as (i) a
plaintiff class action on behalf of certain persons who purchased the Common
Stock from November 26, 1997 through January 8, 1998, excluding the defendants,
members of their immediate families, and any entity in which a defendant has a
controlling interest, and (ii) a defendant class action against the underwriters
who participated in the Offering. The consolidated complaint seeks unquantified
damages under the federal securities laws, pre- and post-judgment interest,
attorneys' fees, and expert witness fees. In addition, the consolidated
complaint seeks rescission and/or rescissory damages relating to purchases of
the Common Stock under federal securities laws. In October 1999, the Court
granted in part and denied in part motions to dismiss the consolidated complaint
that previously had been filed by each defendant. In its ruling, the Court in
part found that plaintiffs who did not purchase their Common Stock
F-14
<PAGE> 42
NANOPHASE TECHNOLOGIES CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 on November 15, 1999 and discovery began
thereafter. In August 1998, the Company received a request for indemnification
from the underwriters of the Offering pursuant to the underwriting agreement for
the Offering. In response to such request, the Company has agreed to be
responsible for the underwriters' attorneys' fees with respect to the
litigation.
In November 1998, a separate complaint was filed in the Northern District
of Illinois, Eastern Division, which alleged that the Company, certain of its
officers and directors, and the underwriters of the Company's Offering are
liable under the federal securities laws for making supposedly fraudulent
material misstatements of fact and omitting to state material facts necessary to
make other statements of fact not misleading in connection with the solicitation
of consents to proceed with the Offering from certain of the Company's preferred
stockholders. The complaint alleges that the action should be maintained as a
plaintiff class action on behalf of those former preferred stockholders whose
shares of preferred stock were converted into Common Stock on or about the date
of the Offering, excluding the defendants, other officers and directors of the
Company, members of the immediate families of all individual defendants, and any
entity in which a defendant has a controlling interest. The complaint seeks
unquantified damages as provided for under the federal securities laws, pre- and
post-judgment interest, attorneys' fees, and expert witness fees. In March 1999,
the preferred stockholders' complaint was reassigned to the judge hearing the
consolidated complaint described above. Thereafter, pretrial proceedings
involving the preferred stockholders' complaint were further consolidated with
that litigation. In October 1999, all defendants filed a joint motion to dismiss
the preferred stockholders' complaint; briefing on that motion was completed in
February 2000. To date, the Court has not ruled on the motion to dismiss the
preferred stockholders' complaint nor has the Court indicated when it
anticipates ruling.
The Company, the defendant directors and the defendant officers each have
retained counsel for both of the above-described litigations and intend to
defend against both complaints vigorously. Although the Company believes that
the allegations of the complaints are without merit, it is not feasible for the
Company to predict at this time the outcome of either litigation or whether the
resolution of either litigation could have a material adverse effect on the
Company's results of operations, cash flows or financial condition.
F-15
<PAGE> 43
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
-------------------------------------------------------------------
BALANCE
BEGINNING COSTS AND OTHER BALANCE AT
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS END OF PERIOD
----------- --------- --------- -------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1997:
Allowance for doubtful accounts....... $ -- $ 46,976 $ -- $27,700 $ 19,276
========== ========== ====== ======= ==========
Deferred tax asset valuation
account............................. $4,350,000 $1,010,000 $ -- $ -- $5,360,000
========== ========== ====== ======= ==========
Year ended December 31, 1998:
Allowance for doubtful accounts....... $ 19,276 $ 125,623 $5,005 $64,904 $ 85,000
========== ========== ====== ======= ==========
Allowance for excess inventory
quantities accounts................. $ -- $ 190,633 $ -- $ -- $ 190,633
========== ========== ====== ======= ==========
Deferred tax asset valuation
account............................. $5,360,000 $2,303,000 $ -- $ -- $7,663,000
========== ========== ====== ======= ==========
Year ended December 31, 1999:
Allowance for doubtful accounts....... $ 85,000 $ 54,068 $ -- $19,068 $ 120,000
========== ========== ====== ======= ==========
Allowance for excess inventory
quantities accounts................. $ 190,633 $ 69,581 $ -- $ -- $ 260,214
========== ========== ====== ======= ==========
Deferred tax asset valuation
account............................. $7,663,000 $1,930,000 $ -- $ -- $9,593,000
========== ========== ====== ======= ==========
</TABLE>
S-1
<PAGE> 44
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on the 30th day of
March, 2000.
NANOPHASE TECHNOLOGIES CORPORATION
By: /s/ JOSEPH CROSS
------------------------------------
Joseph Cross
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on the 30th day of March, 2000.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ JOSEPH CROSS President, Chief Executive Officer (Principal
- ------------------------------------------------ Executive Officer) and a Director
Joseph Cross
/s/ JESS JANKOWSKI Acting Chief Financial Officer, Corporate
- ------------------------------------------------ Controller, Treasurer and Secretary (Principal
Jess Jankowski Financial and Accounting Officer)
/s/ DONALD S. PERKINS Chairman of the Board and Director
- ------------------------------------------------
Donald S. Perkins
/s/ EDWARD E. HAGENLOCKER Director
- ------------------------------------------------
Edward E. Hagenlocker
/s/ JAMES A. MCCLUNG Director
- ------------------------------------------------
James A. McClung
/s/ JERRY PEARLMAN Director
- ------------------------------------------------
Jerry Pearlman
/s/ RICHARD W. SIEGEL Director
- ------------------------------------------------
Richard W. Siegel
</TABLE>
<PAGE> 45
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -------
<C> <S>
2 Plan and Agreement of Merger dated as of November 25, 1997
by and between the Company and its Illinois predecessor,
incorporated by reference to Exhibit 2 to the Company's
Annual Report on Form 10-K for the year ended December 31,
1997 (the "1997 10-K")
3.1 Certificate of Incorporation of the Company, incorporated by
reference to Exhibit 3.1 to the 1997 10-K
3.2 Bylaws of the Company, incorporated by reference to Exhibit
3.2 to the 1997 10-K
4.1 Specimen stock certificate representing Common Stock,
incorporated by reference to Exhibit 4.1 to the Company's
Registration Statement on Form S-1 (File No. 333-36937) (the
"IPO S-1")
4.2 Form of Warrants, incorporated by reference to Exhibit 4.2
to the IPO S-1.
4.3 Rights Agreement dated as of October 28, 1998 by and between
the Company and LaSalle National Bank, incorporated by
reference to Exhibit 1 to the Company's Registration
Statement on Form 8-A, filed October 28, 1998.
4.4 Certificate of Designation of Series A Junior Participating
Preferred Stock incorporated by reference to Exhibit 4.4 to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1998 (the "1998 10-K")
10.1 The Nanophase Technologies Corporation Amended and Restated
1992 Stock Option Plan, as amended (the "Stock Option
Plan"), incorporated by reference to Exhibit 10.1 to the IPO
S-1.
10.2 Form of Indemnification Agreement between the Company and
each of its directors and executive officers, incorporated
by reference to Exhibit 10.2 to the IPO S-1.
10.3 Amended and Restated Registration Rights Agreements dated as
of March 16, 1994, as amended, incorporated by reference to
Exhibit 10.2 to the IPO S-1.
10.4 License Agreement dated June 1, 1990 between the Company and
ARCH Development Corporation, as amended, incorporated by
reference to Exhibit 10.7 to the IPO S-1.
10.5 License Agreement dated October 12, 1994 between the Company
and Hitachi, incorporated by reference to Exhibit 10.8 to
the IPO S-1.
10.6 License Agreement dated May 31, 1996 between the Company and
Research Development Corporation of Japan, incorporated by
reference to Exhibit 10.9 to the IPO S-1.
10.7 License Agreement dated April 1, 1996 between the Company
and Cornell Research Foundation, incorporated by reference
to Exhibit 10.10 to the IPO S-1.
10.8* Consulting and Stock Purchase Agreement between Richard W.
Siegel and the Company dated as of May 9, 1990, as amended
February 13, 1991, November 21, 1991 and January 1, 1992,
incorporated by reference to Exhibit 10.11 to the IPO S-1.
10.9 Lease Agreement between the Village of Burr Ridge and the
Company, dated September 15, 1994, incorporated by reference
to Exhibit 10.12 to the IPO S-1.
10.10 Distribution Agreement between the Company and C.I. Kasei,
Ltd., (a subsidiary of Itochu Corporation) dated as of
October 30, 1996, incorporated by reference to Exhibit 10.15
to the IPO S-1.
10.11 Supply Agreement between the Company and Schering-Plough
HealthCare Products, Inc. dated as of March 15, 1997,
incorporated by reference to Exhibit 10.17 to the IPO S-1.
10.12 License Agreement between the Company and C.I. Kasei Co.,
Ltd. (a subsidiary of Itochu Corporation) dated as of
December 30, 1997, incorporated by reference to Exhibit
10.17 to the 1997 10-K
10.13* Employment Agreement dated as of September 3, 1996 between
the Company and Dennis J. Nowak, incorporated by reference
to Exhibit 10.5 to the IPO S-1.
</TABLE>
<PAGE> 46
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -------
<C> <S>
10.14* Consulting Agreement dated as of June 25, 1999 between the
Company and Dennis J. Nowak
10.15* Employment Agreement dated as of November 9, 1999 between
the Company and Joseph Cross
10.16* Consulting Agreement effective as of October 29, 1998
between the Company and Donald S. Perkins, incorporated by
reference to Exhibit 10.17 to the 1998 10-K
10.17* Employment Agreement dated as of February 15, 1999 between
the Company and Gina Kritchevsky, incorporated by reference
to Exhibit 10.18 to the 1998 10-K
10.18* Employment Agreement dated as of March 15, 1999 between the
Company and Daniel S. Bilicki, incorporated by reference to
Exhibit 10.19 to the 1998 10-K
10.19* Employment Agreement dated as of June 1, 1999 between the
Company and Donald Freed
10.20* Form of Options Agreement under the Stock Option Plan,
incorporated by reference to Exhibit 4.5 to the Company's
Registration Statement on Form S-8 (File No. 333-53445)
10.21* Consulting and Severance Agreement dated October 28, 1998
between the Company and John C. Parker, incorporated by
reference to Exhibit 10.21 to the 1998 10-K
10.22** Zinc Oxide Supply Agreement dated as of September 16, 1999
between the Company and an undisclosed customer of the
Company
11 Statement regarding computation of loss per share.
23 Consent of Ernst & Young LLP.
27 Financial Data Schedule
</TABLE>
- ---------------
* Management contract or compensatory plan or arrangement.
** Confidentiality Requested, confidential portions have been omitted and filed
separately with the Commission as required by Rule 24b-2.
<PAGE> 1
EXHIBIT 10.14
CONSULTING AGREEMENT
This Consulting Agreement is made between Dennis J. Nowak ("Mr.
Nowak") and Nanophase Technologies Corporation ("NTC").
WHEREAS, during the period between September 3, 1996 and June 25, 1999,
Mr. Nowak served as the Vice President, Chief Financial Officer, Secretary and
Treasurer of NTC pursuant to agreements including that certain letter agreement
presenting the terms of employment between NTC and Mr. Nowak dated as of
September 3, 1996 (the "Employment Agreement");
WHEREAS, effective June 25, 1999, Mr. Nowak will cease serving as an
officer and employee of NTC;
WHEREAS, NTC wishes to have periodic future access to Mr. Nowak's
knowledge and experience, and Mr. Nowak wishes to provide NTC with such access;
and
WHEREAS, NTC wishes to engage Mr. Nowak as NTC's consultant and Mr.
Nowak wishes to provide consulting services to NTC upon the terms and conditions
stated in this Consulting Agreement.
NOW, THEREFORE, in consideration of the parties' mutual promises set
forth below, Mr. Nowak and NTC agree as follows:
1. For a period of twelve months starting on June 26, 1999 and ending
on June 26, 2000, Mr. Nowak shall render reasonable consulting services to NTC,
as may reasonably be requested by NTC's President from time to time (the
"Term"). Mr. Nowak shall make himself reasonably available to NTC for such
consulting services; however, Mr. Nowak shall not be required to render services
in an amount or manner that would unreasonably interfere with any other business
activities or employment obligations which Mr. Nowak may have or may hereafter
undertake. To the extent Mr. Nowak incurs reasonable out of pocket expenses in
connection with such consulting services, such expenses shall be reimbursable,
subject to Mr. Nowak's compliance with NTC's reimbursement policy applicable to
corporate executives.
2. NTC shall pay Mr. Nowak consulting fees in the aggregate amount of
$170,000 (the "Consulting Fees"), payable in 26 equal proportionate amounts on
NTC's regular payroll periods. NTC shall tender payments of all Consulting Fees
by first-class or overnight mail, addressed to Dennis J. Nowak, 10113 Wellington
Terrace, Munster, Indiana 46321 or such other address as Mr. Nowak subsequently
may provide to NTC.
3. The parties to this Consulting Agreement understand and agree that
the foregoing Consulting Fees shall be paid by NTC solely in exchange for Mr.
Nowak's agreement to perform consulting services for NTC. The Consulting Fees
are not intended and should not be construed
Document #: 353392
<PAGE> 2
as NTC's payment to Mr. Nowak of wages, salary or compensation for his services.
NTC will forward Form 1099 to the U.S. Internal Revenue Service, the Indiana
Department of Revenue and any other applicable taxing authority in connection
with the Consulting Fees paid by NTC under this Consulting Agreement.
4. Within five business days after both Mr. Nowak and NTC have signed
this Consulting Agreement, NTC shall provide Mr. Nowak with payment of
$30,403.85, consisting of 372 hours of unused vacation pay that Mr. Nowak
accrued during his employment with NTC. Such vacation pay will be subject to
applicable payroll and withholding taxes and deductions required by law.
5. Within fourteen days following NTC's receipt of appropriate invoices
from an outplacement provider mutually acceptable to Mr. Nowak and NTC, NTC will
issue to such outplacement provider a maximum payment of $4,250.00 for
outplacement services received by Mr. Nowak from the outplacement provider.
6. Within fourteen days following NTC's receipt of an appropriately
detailed, itemized invoice from an attorney of Mr. Nowak's choice, NTC will
issue to such attorney a maximum payment of $1,000.00 for legal services the
attorney rendered to Mr. Nowak in connection with his negotiation and review of
this instrument.
7. Within fourteen days after execution of this Consulting Agreement,
Mr. Nowak shall submit to NTC a request for reimbursement of any outstanding out
of pocket expenses incurred by Mr. Nowak in connection with his employment by
NTC and which are reimbursable pursuant to paragraph 3 of the Employment
Agreement, supported by appropriate documentation. NTC shall process such
reimbursement request in accordance with NTC's policy for reimbursements
applicable to NTC's executive officers on the same terms and conditions
generally applicable to such officers, and submit a check for any such
reimbursable amounts to Mr. Nowak within fourteen days after NTC's receipt of
the reimbursement request and appropriate supporting documentation.
8. Mr. Nowak shall be entitled to keep the Canon Fax B360IF fax machine
previously provided to him by NTC. NTC hereby transfers to Mr. Nowak all its
right, title and interest in and to this fax machine.
9. Within five days after Mr. Nowak's execution of this Consulting
Agreement, he shall return to NTC its following property previously entrusted to
Mr. Nowak:
A. The original and any copies of all documents (including any
tangible material or computer-maintained data containing information
derived from such documents) containing, referencing or pertaining to
information concerning any aspects of NTC's plans or activities
regarding research, development, products, marketing, unpublished
financial information, prices, costs or any other information within
the scope of that certain Confidential Information And Proprietary
Rights Agreement between Mr. Nowak and NTC dated September 3, 1996.
2
<PAGE> 3
B. The Dell Latitude CP Laptop Computer with battery, carrying
case, power cord and related peripherals, and all software and hardware
contained in this computer (including modem card, ethernet card and
adapter, Windows 98, Lotus Organizer 98, and Office 97 Professional
Version). Mr. Nowak warrants that no data or information contained in
the above-described computer (including its hard-drive or memory) as of
June 22, 1999 has been subsequently modified, deleted, supplemented or
altered in any way.
C. The portable cellular flip telephone with external battery
and recharger.
D. All keys to any cabinets, containers or doors on NTC's
premises which were in Mr. Nowak's possession or control as of June 22,
1999.
10. Subject to the continuation election and eligibility of Mr. Nowak
and his family for COBRA continuation coverage under the terms of NTC's group
health and dental insurance plans, NTC will pay Mr. Nowak's monthly insurance
premium under COBRA for a period of twelve months starting on June 26, 1999 and
ending on June 26, 2000. Thereafter, Mr. Nowak and his family can continue
participation in NTC's group health and dental insurance plan at their own
expense, pursuant to COBRA.
11. NTC will not contest any claim for unemployment insurance benefits
that Mr. Nowak may file with the Illinois Department of Employment Security or
an analogous Indiana governmental agency.
12. Mr. Nowak acknowledges that NTC makes no representations or
warranties to him concerning the tax consequences, if any, of the Consulting
Fees or any other monies paid or benefits provided by NTC under this Consulting
Agreement. Each party to this instrument shall bear its own such tax
consequences, if any, and any related applicable tax reporting or filing
obligations.
13. NTC acknowledges and confirms that under its Amended and Restated
1992 Stock Option Plan, as amended to date (the "Stock Option Plan") and any
Stock Option Agreement between NTC and Mr. Nowak (the "Stock Option
Agreements"):
A. Any stock options previously granted to Mr. Nowak shall
remain in effect and operate solely according to the provisions of the
respective Stock Option Agreements and the Stock Option Plan throughout
the Term of this Consulting Agreement.
3
<PAGE> 4
B. Throughout the Term of this Consulting Agreement, Mr. Nowak
shall have "Continuous Status as an Employee, Consultant or Outside
Director" within the meaning of Sections 2(e) and 2(f) of the Stock
Option Plan and Mr. Nowak's interests under the Stock Option Agreements
shall continue to vest consistent with the provisions of each
respective Stock Option Agreement.
C. Pursuant to Section 8(b)(ii)(D) of the Stock Option Plan,
Mr. Nowak may exercise any stock options previously granted to him,
subject to the terms of the Stock Option Agreements and the Stock
Option Plan, by the delivery of cash to NTC by a broker-dealer to whom
Mr. Nowak has submitted an irrevocable notice of exercise.
D. Pursuant to Section 7(d) of the Stock Option Plan and the
terms of the Stock Option Agreements, Mr. Nowak may exercise any stock
options previously granted to him in accord with the provisions of each
respective Stock Option Agreement and subject to the withholding and
tax payment requirements of the Stock Option Plan, the Stock Option
Agreements and applicable law. NTC will report any such exercise of
stock options by Mr. Nowak to the U.S. Internal Revenue Service on Form
W-2.
14. The parties to this instrument understand and agree that NTC's
obligations under Paragraphs 2, 5, 6 and 10 of this Consulting Agreement are
expressly subject to Mr. Nowak's complying with his following obligations:
A. Mr. Nowak shall render such consulting services to NTC as
reasonably requested pursuant to Paragraph 1 of this Consulting
Agreement; provided, however, that NTC shall provide Mr. Nowak with
notice and reasonable opportunity to cure with respect to Paragraph 1.
B. Concurrently with Mr. Nowak's executing this Consulting
Agreement, he shall provide NTC with written notice of his voluntary
resignation as Vice President, Chief Financial Officer, Secretary and
Treasurer, and as an employee of NTC, effective June 25, 1999.
C. Mr. Nowak hereby waives and releases any claim, action, suit,
debt, dues, account, controversy, damages or judgment which Mr. Nowak
had, has or hereafter may have, whether known or unknown, for (i) any
claim for salary, bonuses, severance benefits or severance payments
from NTC, and (ii) any claim under Paragraph 5 of the Employment
Agreement.
D. Mr. Nowak hereby confirms the continuing existence and
enforceability of, and his compliance with: (i) all terms of that
certain Confidential Information And Proprietary Rights Agreement
between Mr. Nowak and NTC dated September 3, 1996, and (ii) the
confidentiality covenant in Paragraph 6 of the Employment Agreement.
4
<PAGE> 5
E. Mr. Nowak shall maintain the confidentiality of all terms
of this Consulting Agreement, and he warrants that he will not, in any
manner or means, by act or omission, disclose the terms of this
Consulting Agreement to any person or entity. Mr. Nowak specifically
warrants that he will not represent to any person or entity that he is
a consultant to, or otherwise affiliated with, NTC. The warranties in
this Paragraph 14.E shall not apply to Mr. Nowak's disclosures to his
spouse, financial advisors or lawyers, or to disclosures of Mr. Nowak
as required by applicable law or legal process.
F. Mr. Nowak's complying with all his obligations with respect
to NTC's property as described in Paragraph 9 of this Consulting
Agreement.
15. The parties to this instrument do not intend that any provisions of
this Consulting Agreement shall release or waive any claim, action, suit, debt,
dues, account, controversy, damages or judgment that any party had, has or may
hereafter have against another party or any other person, except as expressly
provided in Paragraph 14.C of this instrument. NTC specifically acknowledges
that this instrument does not waive any rights or claims that Mr. Nowak now has
or hereafter may have under that certain Indemnification Agreement between NTC
and Mr. Nowak dated November 26, 1997, which remains in full force and effect in
accordance with its terms, or under Directors and Officers Insurance and Company
Reimbursement Policy No. GA6079397 issued to NTC by Gulf Insurance Company.
16. This Consulting Agreement, and all obligations of NTC under
Paragraphs 2, 5, 6 and 10 of this instrument, shall end immediately upon the
earlier of: (a) Mr. Nowak's death; (b) the conclusion of the Term; or (c) Mr.
Nowak failing to comply with his obligations under Paragraph 14 of this
Consulting Agreement; provided, however, that no breach of Paragraph 14.A of
this Consulting Agreement by Mr. Nowak will be deemed to have occurred until NTC
provides him with notice and a reasonable opportunity to cure.
17. Mr. Nowak shall have no power to assign his respective rights or
obligations under this Consulting Agreement.
18. Any dispute or controversy based upon or arising in connection with
any party's respective rights or obligations under this Consulting Agreement
shall be submitted to arbitration before a single arbitrator in Chicago,
Illinois pursuant to the commercial arbitration rules of the American
Arbitration Association. An arbitration award rendered pursuant to this
Paragraph 18 shall be final, binding on the parties and may be submitted to any
court of competent jurisdiction for entry of a judgment thereon, in accord with
the Federal Arbitration Act or the Uniform Arbitration Act.
19. Except as otherwise provided in Paragraph 2 of this instrument, any
notice to be given under this Consulting Agreement shall be in writing and
delivered personally or by overnight courier, addressed to the party concerned
at the address stated below or to such other address as such party subsequently
may provide in writing:
If to Mr. Nowak: Dennis J. Nowak
10113 Wellington Terrace
5
<PAGE> 6
Munster, Indiana 46321
with a copy to: Richard L. Fenton
Sonnenschein, Nath & Rosenthal
8000 Sears Tower
Chicago, Illinois 60606
If to NTC: Nanophase Technologies Corporation
453 Commerce Street
Burr Ridge, Illinois 60521
Attention: President
with a copy to: David L. Weinstein
Wildman, Harrold, Allen & Dixon
225 West Wacker Drive
Chicago, Illinois 60606
20. Mr. Nowak acknowledges that the only consideration for this
Consulting Agreement is described in this instrument; that no other promise or
agreement has been made to or with him by any person or entity whatsoever to
cause him to sign this Consulting Agreement; that he is represented by counsel
and that counsel has explained to him all the terms of this Consulting Agreement
and that he has voluntarily signed it; and that this instrument constitutes the
entire agreement between the parties on all the subjects described herein.
21. This Consulting Agreement shall be construed in accord with, and
governed by, the laws of the State of Illinois.
22. David L. Weinstein, one of the attorneys for NTC, represents and
warrants that he has been duly authorized to execute this Consulting Agreement
on behalf of NTC.
23. This Consulting Agreement may be signed by the parties by facsimile
and in multiple counterparts.
/s/ Dennis J. Nowak June 25, 1999
- --------------------------------------- Date
DENNIS J. NOWAK
NANOPHASE TECHNOLOGIES
CORPORATION
By: /s/ David L. Weinstein June 25, 1999
------------------------------ Date
David L. Weinstein
One of Its Attorneys
6
<PAGE> 1
EXHIBIT 10.15
EMPLOYMENT AGREEMENT
Employment Agreement dated and effective as of November 9, 1999 (this
"Agreement"), between NANOPHASE TECHNOLOGIES CORPORATION, a Delaware corporation
(with its successors and assigns, referred to as the "Company"), and JOSEPH
CROSS (referred to as "Cross").
PRELIMINARY STATEMENT
The Company desires to continue employing Cross, and Cross wishes to
continue being employed by the Company, upon the terms and subject to the
conditions set forth in this Agreement all of which are related to Cross's
employment with the Company. Cross and the Company therefore agree as follows:
AGREEMENT
1. EMPLOYMENT FOR TERM. The Company employs Cross, and Cross accepts
employment with the Company, beginning on the date of this Agreement and
continuing until terminated pursuant to Section 6 below (the "Term").
2. POSITION AND DUTIES. During the Term, Cross shall serve as the
president and chief executive officer of the Company. During the Term, Cross
shall also (i) hold such additional positions and titles as the Board of
Directors of the Company (the "Board") may determine from time to time, and (ii)
serve as a member of the Board until such time as he may resign or be removed,
or until his successor may be duly qualified and elected. During the Term, Cross
shall devote substantially all of his business time and best efforts to his
duties as an employee, officer and director of the Company.
3. COMPENSATION.
(a) BASE SALARY. The Company shall pay Cross a base salary, beginning
on the first day of the Term and ending on the last day of the Term, of not less
than $220,000 per annum, payable on the Company's regular pay cycle for
professional employees. Cross may be entitled to additional compensation for his
service as a member of the Board, as determined by the Board in its sole
discretion.
(b) BONUS PAYMENT. The Company shall pay Cross a bonus of $50,000 by
January 15, 2000, in recognition of his service to the Company prior to the date
of this Agreement and in consideration for his accepting his obligations under
the covenants in Section 8 of this Agreement. Cross may be eligible for
additional bonuses for services to be performed as an officer and employee of
the Company for calendar year 2000 and subsequent years, as determined by the
Board in its sole discretion.
(c) STOCK OPTIONS. Subject to the provisions of the Company's Amended
and Restated 1992 Stock Option Plan ("Plan"), and as determined by the Board in
its sole discretion,
<PAGE> 2
Cross shall be eligible for such stock grants or stock option grants as the
Board deems appropriate.
(d) RELOCATION REIMBURSEMENTS. The Company agrees to pay to or on
behalf of Cross the following costs and expenses, as and when incurred by Cross
or otherwise as specifically set forth below, subject to receipt by the Company
of appropriate documentation or other evidence of such expenses: (i) reasonable
out-of-pocket expenses incurred by Cross in the physical move of his family and
household from his current residence to the Chicago Metropolitan area (including
transport of automobiles and packing and unpacking expenses); (ii) out-of-
pocket costs for reasonable living expenses, including housing, utilities and a
rental or leased automobile, for the period commencing with the first day of the
Term through July 1, 2000, or for such time as may be necessary for Cross to
sell his current residence and relocate to the Chicago Metropolitan area, but in
any event no later than July 1, 2000; (iii) out-of-pocket economy class
commuting costs (including air travel and parking expenses) to and from his
current residence and Chicago, Illinois each weekend for such reasonable time as
may be necessary to relocate his family to the Chicago Metropolitan area, but in
any event no later than a reasonable time; (iv) reimbursement for out-of-pocket
economy-class travel expenses to Chicago for Cross' wife for up to three (3)
trips in connection with the relocation; (v) the services of a relocation
advisor in the Chicago Metropolitan area; (vi) realtor fees, attorneys' fees and
closing costs actually paid by Cross and related to the sale by Cross of his
current residence, in an aggregate amount not to exceed 7% of the gross sales
price of such residence; (vii) $27,000 as reimbursement for incidental costs and
expenses incurred by Cross in the relocation of his family to the Chicago
Metropolitan area; (viii) realtor fees, attorneys' fees, loan origination and
application fees and closing costs actually paid by Cross and related to the
purchase by Cross of a residence in the Chicago Metropolitan area, payable on or
before July 1, 2000, unless a later date is agreed upon by Cross and the
Company; (ix) except for moving expenses reimbursed by the Company pursuant to
this Agreement and which do not constitute taxable income to Cross for federal
income tax purposes, cash in the amount of 38% of the total actual out-of-pocket
relocation expenses incurred by Cross and paid or reimbursed by the Company
under these Sections 3(d)(i) through 3(d)(ix) (and further including the amount
paid to Cross pursuant to subsection 3(d)(vii) above) which are required to be
included in Cross' gross income for federal and state income tax purposes in
calendar years 1999 and 2000, and such reasonable percentage (as agreed upon by
the Chairman of the Board or his designee and Cross in order to facilitate
Cross' not incurring any increased taxable income due to his receipt of the
Company's relocation reimbursements under this Section 3(d)) of the amount of
such expenses incurred by Cross and paid or reimbursed by the Company under this
Section 3(d) in calendar years 1999 and 2000; and (x) an amount of $1,500 per
month commencing with the first month for which Cross is obligated to make a
mortgage payment on a principal residence in the Chicago Metropolitan area, and
for each of the next succeeding twenty-three (23) months thereafter.
(e) OTHER AND ADDITIONAL COMPENSATION. Sections 3(a), 3(b), 3(c) and
3(d) establish minimum salary, reimbursement, bonus, option grant and stock
grant levels for Cross during the Term, and shall not preclude the Board from
awarding Cross a higher salary, stock grants or stock options at any time, nor
shall they preclude the Board from awarding Cross additional bonuses or other
compensation in the discretion of the Board.
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4. EMPLOYEE BENEFITS. During the Term, Cross shall be entitled to the
employee benefits made available by the Company generally to all other employees
of the Company, and shall be entitled to four (4) weeks vacation in the twelve
month period ending November 15, 2000, subject to adjustment based on subsequent
changes in the Company's vacation policy from time to time applicable to the
Company's officers generally.
5. EXPENSES. Without limitation of Section 3(d) above, the Company
shall reimburse Cross for actual out-of-pocket expenses reasonably incurred by
him in the performance of his services as an officer and employee of the Company
in accordance with the Company's policy for such reimbursements applicable to
employees generally, and upon receipt by the Company of appropriate
documentation and receipts for such expenses.
6. TERMINATION.
(a) GENERAL. The Term shall end (i) immediately upon Cross' death, or
(ii) upon Cross becoming disabled (within the meaning of the Americans With
Disabilities Act of 1991, as amended) and unable to perform fully all essential
functions of his job, with or without reasonable accommodation, for a period of
150 calendar days. Either Cross or the Company may end the Term at any time for
any reason or no reason, with or without Cause, in the absolute discretion of
Cross or the Board (but subject to each party's obligations under this
Agreement), provided that Cross will provide the Company with at least thirty
(30) days' prior written notice of his resignation from his positions as an
officer and employee with, and director of, the Company. Upon receipt of such
written notice, the Company, in its sole discretion, may accelerate the
effective date of such resignation to such date as the Company deems
appropriate, provided that Cross shall receive the compensation required under
Section 3 of this Agreement for the full thirty (30) day period.
(b) NOTICE OF TERMINATION. If the Company ends the Term, it shall give
Cross at least thirty (30) days prior written notice of the termination,
including a statement of whether the termination was for "Cause" (as defined in
Section 7(a) below). Upon delivery of such written notice, the Company, in its
sole discretion, may accelerate the effective date of such termination to such
date as the Company deems appropriate, provided that Cross shall receive the
compensation required under Section 3 of this Agreement for the full thirty (30)
day period. The Company's failure to give notice under this Section 6(b) shall
not affect the validity of the Company's termination of the Term or Cross'
employment, nor shall the lack of such notice entitle Cross to any rights or
claims against the Company other than those arising from Cross' right to receive
the compensation required under Section 3 of this Agreement for the full thirty
(30) day period.
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7. SEVERANCE BENEFITS.
(a) "CAUSE" DEFINED. "Cause" means (i) willful and gross malfeasance or
misconduct by Cross in connection with his employment; (ii) Cross' gross
negligence in performing any of his duties under this Agreement; (iii) Cross'
conviction of, or entry of a plea of guilty or nolo contendere with respect to,
any felony or a misdemeanor reflecting upon Cross' honesty; (iv) Cross' breach
of any material written policy applicable to all employees adopted by the
Company concerning conflicts of interest, political contributions, standards of
business conduct or fair employment practices, procedures with respect to
compliance with securities laws or any similar matters, or adopted pursuant to
the requirements of any government contract or regulation; or (v) breach by
Cross of any of the material terms and conditions of this Agreement.
(b) TERMINATION WITHOUT CAUSE. If the Company ends the Term other than
for Cause, or if the Term ends due to Cross' death or disability under Section
6(a) of this Agreement, (i) the Company shall pay Cross an amount equal in
annual amount to his base salary in effect at the time of termination during the
period (the "Severance Period") of fifty- two (52) full weeks after the
effective date of termination, payable in proportionate amounts on the Company's
regular pay cycle for professional employees and (if the last day of the
Severance Period is not the last day of a pay period) on the last day of the
Severance Period, and (ii) any stock options granted to Cross prior to
termination shall become fully vested, and shall immediately become exercisable
(by Cross, or upon his death or disability, by his heirs, beneficiaries and
personal representatives) in accordance with the applicable option grant
agreements and the Plan.
(c) TERMINATION FOR ANY OTHER REASON. If the Company ends the Term for
Cause, or if Cross resigns as an employee, officer or director of the Company,
then the Company shall have no obligation to pay Cross any amount, whether for
salary, benefits, bonuses, or other compensation or expense reimbursements of
any kind, accruing after the end of the Term, and such rights shall, except as
otherwise required by law (or, with respect to the Options, as set forth in the
Plan or the applicable option grant agreements), be forfeited immediately upon
the end of the Term. In addition, upon the end of the Term for any reason other
than the death of Cross, Cross shall tender his resignation as a member of the
Board as of such date in form acceptable to the Company.
8. ADDITIONAL COVENANTS.
(a) CONFIDENTIALITY. Cross agrees to execute the Company's standard form
of Confidentiality and Proprietary Rights Agreement promptly upon execution of
this Agreement.
(b) "NON-COMPETITION PERIOD" DEFINED. "Non-Competition Period" means the
period beginning at the end of the Term and ending two years thereafter.
(c) COVENANTS OF NON-COMPETITION AND NON-SOLICITATION. Cross
acknowledges that his services pursuant to this Agreement are unique and
extraordinary, that the Company relies upon Cross for the development and growth
of its business and related functions, and that he will develop personal
relationships with significant customers and suppliers of the Company
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and have control of confidential information concerning, and lists of customers
of, the Company. Cross further acknowledges that the business of the Company is
international in scope and cannot be confined to any particular geographic area.
For the foregoing reasons, and in consideration of the benefits available to
Cross under Sections 3(b), 3(d) and 7(c) of this Agreement, Cross covenants and
agrees that during both the Term of this Agreement and the subsequent
Non-Competition Period, Cross shall not, in any manner, directly or indirectly,
engage in, be financially interested in, represent, render any advice or
services to, or be employed by, or otherwise affiliated with, any other business
(conducted for profit or not for profit) which is principally or materially
engaged in or is competitive with the Company's business of developing,
producing, coating, refining, forming, marketing, supplying or selling
nanocrystalline and ultrafine powders. For the reasons acknowledged by Cross at
the beginning of this Section 8(c), Cross additionally covenants and agrees that
during the Non-Competition Period, Cross shall not, directly or indirectly,
whether on his own behalf or on behalf of any other person or entity, in any
manner (A) contact, accept or solicit the business of any person or entity that
was a customer, supplier or contractor of or to the Company for the purpose of
obtaining business of the type performed by the Company, or (B) contact, accept
or solicit or attempt to solicit for employment or engagement any persons who
were officers or employees of the Company upon the date of termination of his
employment or at any time during a 180 day period preceding the date of
termination, or aid any person or entity in any attempt to hire or engage any
such officers or employees of the Company. The foregoing restrictions shall not
preclude Cross from the ownership of not more than three percent (3 %) of the
voting securities of any corporation whose voting securities are registered
under Section 12(g) of the Securities Exchange Act of 1934, even if its business
competes with that of the Company.
(d) REMEDIES.
(i) INJUNCTION. In view of Cross' access to the Company's
confidential information, and in consideration of the value of such property to
the Company, Cross acknowledges that the covenants contained in this Section 8
are necessary to protect the Company's interests in its proprietary information
and trade secrets and to protect and maintain customer and supplier
relationships, both actual and potential, which Cross would not have had access
to or involvement in but for his employment with the Company. Cross confirms
that enforcement of the covenants in Section 8 will not prevent him from earning
a livelihood. Cross further agrees that in the event of his actual or threatened
breach of any covenant in this Section 8, the Company would be irreparably
harmed and the full extent of resulting injury would be impossible to calculate,
and the Company therefore will not have an adequate remedy at law. Accordingly,
Cross agrees that temporary and permanent injunctive relief are appropriate
remedies for any such breach, without bond or security; provided that nothing
herein shall be construed as limiting any other legal or equitable remedies
available to the Company.
(ii) ENFORCEMENT. Cross shall pay all costs and expenses (including,
without limitation, court costs, investigation costs, expert witness and
attorneys' fees) incurred by the Company in connection with the Company's
successfully enforcing its rights under this Agreement. The Company shall be
entitled to disclose the contents of this Agreement or to deliver a copy of it
to any person or entity whom the Company believes Cross has solicited.
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(iii) ARBITRATION. No dispute arising from Cross' actual or
threatened breach of any covenant in this Section 8 shall be subject to
arbitration. However, any other dispute or claim arising from any other
provision of this Agreement, or relating to Cross' employment or service as an
officer (whether based on statute, regulation, contract, tort or otherwise),
shall be submitted to arbitration before a single arbitrator pursuant to the
Employment Arbitration Rules of the American Arbitration Association. Any such
arbitration shall be conducted in Chicago, Illinois. An arbitration award
rendered under this Section 8(c)(iii) shall be final and binding on the parties
and may be submitted to any court of competent jurisdiction for entry of a
judgment thereon in accord with the Illinois Arbitration Act or the Federal
Arbitration Act.
9. SUCCESSORS AND ASSIGNS.
(a) CROSS. This Agreement is a personal contract, and the rights and
interests that this Agreement accords to Cross may not be sold, transferred,
assigned, pledged, encumbered, or hypothecated by him. Except to the extent
contemplated in Section 7(c) above, Cross shall not have any power of
anticipation, alienation or assignment of the payments contemplated by this
Agreement, all rights and benefits of Cross shall be for the sole personal
benefit of Cross, and no other person shall acquire any right, tide or interest
under this Agreement by reason of any sale, assignment, transfer, claim or
judgment or bankruptcy proceedings against Cross. Except as so provided, this
Agreement shall inure to the benefit of and be binding upon Cross and his
personal representatives, distributees and legatees.
(b) THE COMPANY. This Agreement shall be binding upon the Company and
inure to the benefit of the Company and its successors and assigns, including
but not limited to any person or entity that may acquire all or substantially
all of the Company's assets or business or with which the Company may be
consolidated or merged. This Agreement shall continue in full force and effect
in the event the Company sells all or substantially all of its assets, merges or
consolidates, otherwise combines or affiliates with another business, dissolves
and liquidates, or otherwise sells or disposes of substantially all of its
assets; provided that upon the closing of any such sale, merger, consolidation,
combination or affiliation, any stock options granted to Cross prior to such
closing shall become fully vested and shall immediately become exercisable in
accordance with the applicable option grant and the Plan. The Company's
obligations under this Agreement shall cease, however, if the successor to the
Company, the purchaser or acquirer either of the Company or of all or
substantially all of its assets, or the entity with which the Company has
affiliated, shall assume in writing the Company's obligations under this
Agreement (and deliver an executed copy of such assumption to Cross), in which
case such successor or purchaser, but not the Company, shall thereafter be the
only party obligated to perform the obligations that remain to be performed on
the part of the Company under this Agreement; provided, however, that such
successor or purchaser shall include in its written assumption of the Company's
obligations under this Agreement the provisions that (a) the successor or
purchaser shall not materially alter Cross' responsibilities, compensation,
assigned work location or title under this Agreement without Cross' prior
written consent, and (b) at Cross' option, any such material alteration made
without Cross' prior written consent shall constitute Termination Without Cause
under Section 7(b) of this Agreement.
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10. ENTIRE AGREEMENT. This Agreement and the other agreements
referenced herein represent the entire agreement between the parties concerning
Cross's employment with the Company and supersedes all prior negotiations,
discussions, understandings and agreements, whether written or oral, between
Cross and the Company relating to the subject matter of this Agreement. The
parties specifically agree that upon the Company's execution of this Agreement,
the Company shall have no further obligations of any kind to Cross under any
prior employment agreement between the parties including that certain employment
agreement dated November 9, 1998.
11. AMENDMENT OR MODIFICATION, WAIVER. No provision of this Agreement
may be amended or waived unless such amendment or waiver is agreed to in writing
signed by Cross and by a duly authorized officer of the Company other than
Cross. No waiver by any party to this Agreement of any breach by another party
of any condition or provision of this Agreement to be performed by such other
party shall be deemed a waiver of a similar or dissimilar condition or provision
at the same time, any prior time or any subsequent time.
12. NOTICES. Any notice provided for in this Agreement must be in
writing and must be either personally delivered, mailed by first class mail
(postage prepaid and return receipt requested), sent by reputable overnight
courier service (charges prepaid), or by facsimile to the recipient at the
address below indicated:
To the Company:
Nanophase Technologies Corporation
453 Commerce Street
Burr Ridge, IL 60521
Attn: Chief Executive Officer
Facsimile: (630) 323-1221
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To Executive:
Joseph Cross
1200 Willow Oaks Trail
Matthews, NC 28105
or such other address or facsimile number, or to the attention of such other
person as the recipient shall have specified by prior written notice to the
sending party. Any notice under this Agreement shall be deemed to have been
given when so personally delivered, or one day after deposit, if sent by
courier, when confirmed received if sent by facsimile, or if mailed, five days
after deposit in the U.S. first-class mail, postage prepaid.
13. SEVERABILITY. If any provision of this Agreement shall be
determined by any court of competent jurisdiction to be unenforceable to any
extent, the remainder of this Agreement shall not be affected, but shall remain
in full force and effect. If any provision of this Agreement containing
restrictions is held to cover an area or to be for a length of time that is
unreasonable or in any other way is construed to be too broad or to any extent
invalid, such provision shall not be determined to be entirely of no effect;
instead, it is the intention of both the Company and Cross that any court of
competent jurisdiction shall interpret or reform this Agreement to provide for a
restriction having the maximum enforceable area, time period and such other
constraints or conditions as shall be enforceable under the applicable law.
14. SURVIVORSHIP. The respective rights and obligations of the parties
hereunder shall survive any termination of this Agreement to the extent
necessary to the intended preservation of such rights and obligations.
15. HEADINGS. All descriptive headings of sections and paragraphs in
this Agreement are intended solely for convenience of reference, and no
provision of this Agreement is to be construed by reference to the heading of
any section or paragraph.
16. WITHHOLDING TAXES. Except as otherwise specifically set forth in
Section 3(d) above, all salary, benefits, reimbursements and any other payments
to Cross under this Agreement shall be subject to all applicable payroll and
withholding taxes and deductions required by any law, rule or regulation of any
federal, state or local authority.
17. APPLICABLE LAW: JURISDICTION. The laws of the State of Illinois
shall govern the interpretation of the terms of this Agreement, without
reference to rules relating to conflicts of law.
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18. LIMITATION ON CLAIMS. CROSS AGREES THAT HE WILL NOT COMMENCE ANY
ACTION, CLAIM OR SUIT RELATING TO MATTERS ARISING FROM HIS EMPLOYMENT WITH THE
COMPANY (IRRESPECTIVE OF WHETHER SUCH ACTION, CLAIM OR SUIT ARISES FROM THE
TERMS OF THIS AGREEMENT) LATER THAN SIX MONTHS AFTER THE FIRST TO OCCUR OF (a)
THE DATE SUCH CLAIM INITIALLY ARISES OR (b) THE DATE OF TERMINATION OF
EMPLOYMENT FOR ANY REASON WHATSOEVER. CROSS EXPRESSLY WAIVES ANY APPLICABLE
STATUTE OF LIMITATION TO THE CONTRARY.
IN WITNESS WHEREOF, the parties hereto have executed this Employment
Agreement as of the date first written above.
/s/ Joseph Cross
- ------------------------------
JOSEPH CROSS
NANOPHASE TECHNOLOGIES
CORPORATION
By: /s/ David L. Weinstein
-------------------------
David L. Weinstein
One of Its Attorneys
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EXHIBIT 10.19
EMPLOYMENT AGREEMENT
Employment Agreement dated and effective as of June 1, 1999 (this
"AGREEMENT"), between NANOPHASE TECHNOLOGIES CORPORATION, a Delaware corporation
(with its successors and assigns, referred to as the "COMPANY"), and Mr. Donald
Freed (referred to as "EXECUTIVE").
PRELIMINARY STATEMENT
The Company desires to employ Executive, and Executive wishes to be
employed by the Company, upon the terms and subject to the conditions set forth
in this Agreement. The Company and Executive also wish to enter into the other
covenants set forth in this Agreement, all of which are related to Executive's
employment with the Company. In consideration of the mutual promises and
covenants stated below, Executive and the Company therefore agree as follows:
AGREEMENT
1. EMPLOYMENT FOR TERM. The Company hereby employs Executive, and
Executive hereby accepts employment with the Company, beginning on June 1, 1999,
and renewing automatically on an annual basis until terminated pursuant to
Section 7 below (the "TERM").
2. POSITION AND DUTIES. During the Term, Executive shall serve as the
Vice President of Research and Development and shall report to the Vice
President of Technology and Engineering of the Company or such other person as
designated by the Company President. During the Term, Executive shall also hold
such additional positions and titles as the President or the Board of Directors
of the Company (the "BOARD") may determine from time to time. During the Term,
Executive shall devote substantially all of Executive's business time and best
efforts to Executive's duties as an employee of the Company.
3. SIGNING BONUS. In consideration of and in reliance upon Executive's
execution of this Agreement, and based entirely upon Executive's acceptance of
the duties and obligations to the Company under this Agreement (specifically
including, without limitation, Executive's obligations under the covenants in
Section 9, and the restrictions in Sections 10 and 11 of the Agreement), the
Company shall provide Executive with the following Severance Benefits if the
Company ends the Term for reasons other than Cause (as defined in Section 8):
(i) the Company shall pay Executive a sum equal in annual amount to Executive's
base salary in effect at the time of termination during the period (the
"SEVERANCE PERIOD") of twenty six (26) full weeks after the effective date of
termination, payable in proportionate amounts on the Company's regular pay cycle
for professional employees and (if the last day of the Severance Period is not
the last day of a pay period) on the last day of the Severance Period, and (ii)
the Initial Stock Options shall become fully vested, and shall become
exercisable in accordance with the applicable option grant agreement and the
Plan.
4. COMPENSATION.
(a) BASE SALARY. For Executive's service as an employee of the Company,
the Company shall pay Executive a base salary, beginning on the first day of the
Term and ending on the last day of the Term, of not less than $125,000 per
annum, payable on the Company's regular pay cycle for professional employees.
(b) BONUS PAYMENT. Executive will be eligible for additional bonuses
for services to be performed as an employee of the Company in calendar year 1999
and subsequent years based on performance milestones agreed upon by Executive
and the Vice President of Technology and Engineering of the Company and approved
by the Board.
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(c) STOCK OPTIONS AND PURCHASE RIGHTS. The Company agrees that
Executive shall be eligible for option grants based on annual performance
reviews and awarded in the discretion of the Board.
(d) OTHER AND ADDITIONAL COMPENSATION. Sections 4(a), 4(b) and 4(c)
establish minimum salary, bonus and option grant levels for Executive during the
Term, and shall not preclude the Board from awarding Executive a higher salary
or more stock options at any time, nor shall they preclude the Board from
awarding Executive additional bonuses or other compensation in the discretion of
the Board.
5. EMPLOYEE BENEFITS. During the Term, Executive shall be entitled to
the employee benefits made available by the Company generally to all other
employees of the Company, and shall be entitled to vacation in accordance with
in the Company's vacation policy in effect from time to time.
6. EXPENSES. The Company shall reimburse Executive for actual
out-of-pocket expenses reasonably incurred by Executive in the performance of
services as an employee of the Company in accordance with the Company's policy
for such reimbursements applicable to employees generally, and upon receipt by
the Company of appropriate documentation and receipts for such expenses.
7. TERMINATION.
(a) GENERAL. The Term shall end immediately upon Executive' death.
Either Executive or the Company may end the Term at any time for any reason or
no reason, with or without Cause, in the absolute discretion of Executive or the
Board (but subject to Executive's obligations under Sections 9, 10 and 11 this
Agreement), provided that Executive will provide the Company with at least
thirty (30) days' prior written notice of Executive's resignation from
Executive's positions as an employee with the Company.
(b) NOTICE OF TERMINATION. Promptly after it ends the Term, the Company
shall give Executive notice of the termination, including a statement of whether
the termination was for "Cause" (as defined in Section 8(a) below). The
Company's failure to give notice under this Section 7(b) shall not, however,
affect the validity of the Company's termination of the Term or Executive's
employment hereunder.
8. SEVERANCE BENEFITS.
(a) "CAUSE" DEFINED. "Cause" means (i) willful or gross malfeasance or
misconduct by Executive in connection with Executive's employment; (ii)
Executive' gross negligence in performing any of Executive's duties under this
Agreement; (iii) Executive's conviction of, or entry of a plea of guilty or nolo
contendere with respect to, any crime other than a misdemeanor; (iv) Executive's
willful or gross breach of any written policy applicable to all employees
adopted by the Company concerning conflicts of interest, political
contributions, standards of business conduct or fair employment practices,
procedures with respect to compliance with securities laws or any similar
matters, or adopted pursuant to the requirements of any government contract or
regulation; (v) material breach by Executive of any of the terms and conditions
of this Agreement; or (vi) Executive's acts or omissions which in the Company's
reasonable judgment are materially detrimental, or may in the future be
materially detrimental, to the best interests of the Company.
(b) TERMINATION WITHOUT CAUSE. If the Company ends the Term other than
for Cause, Executive shall receive the benefits provided under Section 3 of this
Agreement.
(c) TERMINATION FOR ANY OTHER REASON. If the Company ends the Term for
Cause, or if Executive resigns as an employee of the Company, or if Executive
dies, then the Company shall have no obligation to pay Executive any amount,
whether for salary, benefits, bonuses, or other compensation or expense
reimbursements of any kind, accruing after the end of the Term, and such rights
shall, except as otherwise required by law (or, with respect to the Options, as
set forth in the Plan or the applicable option
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grant agreements), be forfeited immediately upon the end of the Term.
9. ADDITIONAL COVENANTS.
(a) CONFIDENTIALITY. Executive agrees to execute the Company's standard
form of Confidential Information and Proprietary Rights Agreement (as may be in
effect as of the date of this Agreement) promptly upon execution of this
Agreement.
(b) "RESTRICTED PERIOD" DEFINED. "Restricted Period" means the period
beginning at the end of the Term and ending either (i) 365 days after the end of
the Severance Period, if the Company is obligated to make payments under Section
8(b) above, or (ii) 365 days after the end of the Term, if the Company is not
obligated to make payments under Section 8(b) above.
(c) COVENANTS OF NON-COMPETITION AND NON-SOLICITATION. Executive
acknowledges that but for Executive's employment with the Company:
(i) Executive would not have had access to the confidential
information, proprietary data and trade secrets of the Company;
(ii) Executive would not have had contact with the Company's customers,
with many of whom the Company enjoys a near permanent relationship;
(iii) Executive would not have had contact with many of the Company's
employees and officers, many of whom have information and expertise of
importance to the Company;
(iv) the Company's business is national in scope and cannot be confined
to any particular geographic area of the United States or the State of
Illinois.
Executive further acknowledges that Executive's services are unique and
extraordinary, that the Company will be dependent upon Executive for the
development and growth of its business and related functions, and that Executive
will develop personal relationships with significant customers, employees and
contractors of the Company and have control of confidential information
concerning, and lists of customers of, the Company. For the foregoing reasons,
and in consideration of the execution of this Agreement by the Company,
Executive covenants and agrees that during the Restricted Period Executive shall
not, without the prior written consent of the Company President, in any manner,
directly or indirectly, own, manage, operate, control, be employed by,
participate in, or be connected in any manner with the ownership, management,
operation or control of, any other business (conducted for profit or not for
profit) which is competitive with the nanophase and ultrafine powder production,
coating and forming businesses engaged in by the Company or which are under
development by the Company. For the reasons acknowledged by Executive at the
beginning of this Section 9(c), Executive additionally covenants and agrees that
during the Restricted Period, Executive shall not, directly or indirectly,
whether on Executive's own behalf or in behalf of any other person or entity, in
any manner (A) contact, solicit or accept (or participate in contracting,
soliciting or accepting) the trade or patronage of any customer or prospective
customer of the Company (including any employee, officer, director or agent of
any customer or prospective customer) with respect to the nanophase and
ultrafine powder, coating and forming businesses engaged in by the Company or
which are under development by the Company, or (B) solicit, induce or attempt to
induce (or participate in soliciting, inducing or attempting to induce) any
employee or contractor of the Company (and any person who was an employee or
contractor of the Company at any time within the 180 days prior to the end of
the Term) to leave the Company's employ or engagement to become connected in any
way with, or employ, engage or otherwise utilize any such employee or contractor
in, any other business that is competitive with the nanophase and ultrafine
powder, coating and forming businesses engaged in by the Company or which are
under development by the Company.
(d) EXCLUSIONS. The restrictions on Executive's activities set forth in
this Section 9 shall not preclude Executive from the ownership of three percent
(3%) or less of the voting securities of any
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corporation whose voting securities are registered under Section 12(g) of the
Securities Exchange Act of 1934.
(e) INJUNCTIONS. In view of Executive's access to the Company's
customer base, employees, confidential information, proprietary data and trade
secrets, Executive agrees that the covenants set forth in this Section 9 are
necessary to protect the interests of the Company in such information, data,
secrets and relationships, and to protect and maintain near permanent customer
relationships, and other legitimate, proprietary interests of the Company, both
actual and potential, which Executive would not have had access to or any
involvement in but for Executive's employment relationship with the Company.
Executive confirms and agrees that enforcement of the covenants set forth in
this Section 9 would not prevent Executive from earning a livelihood. Executive
further agrees that in the event of an actual or threatened breach by Executive
of any of the covenants set forth in this Agreement, the Company would be
irreparably harmed and the full extent of injury resulting therefrom would be
impossible to calculate and the Company therefore will not have an adequate
remedy at law. Accordingly, Executive agrees that temporary and permanent
injunctive relief would be appropriate remedies against such breach, without
bond or security; provided, however, that nothing herein shall be construed as
limiting any other legal or equitable remedies available to the Company.
(f) EXPENSES. Executive shall pay all costs and expenses, including
without limitation court costs, investigation costs, expert witness fees, and
attorneys' fees, incurred by the Company in connection with the successful
enforcement by the Company of its rights under this Agreement. The Company shall
have the right to disclose the contents of this Agreement or to deliver a copy
of this Agreement bearing Executive's signature to any person to whom or for
whose benefit the Company reasonably believes the Executive has solicited, or
has or may disclose or use any confidential or proprietary information in
violation of this Agreement.
10. ARBITRATION. No dispute involving any action or claims to enforce
any provisions of Section 9 of this Agreement shall be subject to arbitration.
However, any dispute or claim arising out of any other provisions of this
Agreement, or otherwise relating to Executive's employment, whether based on
statute, ordinance, regulation, contract, tort or other law, shall be resolved
by binding arbitration before a single arbitrator pursuant to the Employment
Arbitration Rules of the American Arbitration Association. Any such arbitration
shall be conducted in Chicago, Illinois. An arbitration award rendered under
this Section 10 shall be final and binding on the parties and may be submitted
to any court of competent jurisdiction for entry of a judgment thereon in accord
with the Federal Arbitration Act or the Uniform Arbitration Act.
11. LIMITATION ON CLAIMS. Executive agrees that he will not commence
any action or suit relating to matters arising out of his employment with the
Company (irrespective of whether such action or suit arises out of the
provisions of this Agreement) later than six months after the first to occur of
(a) the date such claim initially arises, or (b) the date Executive's employment
terminates for any reason whatsoever. Executive expressly waives any applicable
statute of limitation to the contrary.
12. SUCCESSORS AND ASSIGNS.
(a) EXECUTIVE. This Agreement is a personal contract, and the rights
and interests that this Agreement accords to Executive may not be sold,
transferred, assigned, pledged, encumbered, or hypothecated by Executive.
Executive shall not have any power of anticipation, alienation or assignment of
the payments contemplated by this Agreement, all rights and benefits of
Executive shall be for the sole personal benefit of Executive, and no other
person shall acquire any right, title or interest under this Agreement by reason
of any sale, assignment, transfer, claim or judgment or bankruptcy proceedings
against Executive. Except as so provided, this Agreement shall inure to the
benefit of and be binding upon Executive and Executive's personal
representatives, distributees and legatees.
(b) THE COMPANY. This Agreement shall be binding upon the Company and
inure to the benefit of the Company and its successors and assigns, including
but not limited to any person or entity
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that may acquire all or substantially all of the Company's assets or business or
with which the Company may be consolidated or merged. This Agreement shall
continue in full force and effect in the event the Company sells all or
substantially all of its assets, merges or consolidates, otherwise combines or
affiliates with another business, dissolves and liquidates, or otherwise sells
or disposes of substantially all of its assets. The Company's obligations under
this Agreement shall cease, however, if the successor to the Company, the
purchaser or acquirer either of the Company or of all or substantially all of
its assets, or the entity with which the Company has affiliated, shall assume in
writing the Company's obligations under this Agreement (and deliver an executed
copy of such assumption to Executive), in which case such successor or
purchaser, but not the Company, shall thereafter be the only party obligated to
perform the obligations that remain to be performed on the part of the Company
under this Agreement.
13. ENTIRE AGREEMENT. This Agreement and the other agreements
referenced herein represent the entire agreement between the parties concerning
Executive's employment with the Company and supersedes all prior negotiations,
discussions, understandings and agreements, whether written or oral, between
Executive and the Company relating to the subject matter of this Agreement.
14. AMENDMENT OR MODIFICATION, WAIVER. No provision of this Agreement
may be amended or waived unless such amendment or waiver is agreed to in writing
signed by Executive and by a duly authorized officer of the Company other than
Executive. No waiver by any party to this Agreement of any breach by another
party of any condition or provision of this Agreement to be performed by such
other party shall be deemed a waiver of a similar or dissimilar condition or
provision at the same time, any prior time or any subsequent time.
15. NOTICES. Any notice provided for in this Agreement must be in
writing and must be either personally delivered, mailed by first class mail
(postage prepaid and return receipt requested), sent by reputable overnight
courier service (charges prepaid), or by facsimile to the recipient at the
address below indicated:
To the Company: Nanophase Technologies Corporation
453 Commerce Street
Burr Ridge, IL 60521
Attn: Chief Executive Officer
Facsimile: (630) 323-1221
With a copy to: Bruce A. Zivian
Ehrenreich Eilenberg Krause & Zivian, LLP
20 North Wacker Drive, Suite 3230
Chicago, IL 60606
Facsimile: (312) 917-9911
To Executive: Mr. Donald Freed
1034 Pleasant Street
Oak Park, IL 60301
or such other address or facsimile number, or to the attention of such other
person as the recipient shall have specified by prior written notice to the
sending party. Any notice under this Agreement shall be deemed to have been
given when so personally delivered, or one day after deposit, if sent by
courier, when confirmed received if sent by facsimile, or if mailed, five days
after deposit in the U.S. first-class mail, postage prepaid.
16. SEVERABILITY. If any provision of this Agreement or the application
of any such provision to any party or circumstances shall be determined by any
court of competent jurisdiction to be invalid and unenforceable to any extent,
the remainder of this Agreement or the application of such provision to such
person or circumstances other that those to which it is so determined to be
invalid and unenforceable shall not be affected, and each provision of this
Agreement shall be validated and shall be enforced to the
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fullest extent permitted by law. If for any reason any provision of this
Agreement containing restrictions is held to cover an area or to be for a length
of time that is unreasonable or in any other way is construed to be too broad or
to any extent invalid, such provision shall not be determined to be entirely
null, void and of no effect; instead, it is the intention and desire of both the
Company and Executive that, to the extent that the provision is or would be
valid or enforceable under applicable law, any court of competent jurisdiction
shall construe and interpret or reform this Agreement to provide for a
restriction having the maximum enforceable area, time period and such other
constraints or conditions (although not greater than those currently contained
in this Agreement) as shall be valid and enforceable under the applicable law.
17. SURVIVORSHIP. The respective rights and obligations of the parties
hereunder shall survive any termination of this Agreement to the extent
necessary to the intended preservation of such rights and obligations.
18. HEADINGS. All descriptive headings of sections and paragraphs in
this Agreement are intended solely for convenience of reference, and no
provision of this Agreement is to be construed by reference to the heading of
any section or paragraph.
19. WITHHOLDING TAXES. Except as otherwise specifically set forth in
Section 4(d) above, all salary, benefits, reimbursements and any other payments
to Executive under this Agreement shall be subject to all applicable payroll and
withholding taxes and deductions required by any law, rule or regulation of any
federal, state or local authority.
20. APPLICABLE LAW: JURISDICTION. The laws of the State of Illinois
shall govern the interpretation, validity and performance of the terms of this
Agreement, without reference to rules relating to conflicts of law. Any suit,
action or proceeding against Executive with respect to this Agreement, or any
judgment entered by any court in respect thereof, may be brought in any court of
competent jurisdiction in the State of Illinois, as the Company may elect in its
sole discretion, and Executive hereby submits to the nonexclusive jurisdiction
of such courts for the purpose of any such suit, action, proceeding or judgment
and to service of process by means of delivery of notice pursuant to Section 15
above.
IN WITNESS WHEREOF, the parties hereto have executed this Employment
Agreement as of the date first written above.
NANOPHASE TECHNOLOGIES CORPORATION
By:/s/ Joseph Cross
---------------------------------
Its: Chief Executive Officer
/s/ Donald Freed
----------------------------------
Mr. Donald Freed
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EXHIBIT 10.22
ZINC OXIDE SUPPLY AGREEMENT
This Zinc Oxide Supply Agreement (the "Agreement") is between [ * * * ]
("Purchaser") and Nanophase Technologies Corporation ("Nanophase") and is dated
as of September 16, 1999.
BACKGROUND
1. Purchaser markets and sells topical human sunscreen agents that
include zinc oxide for inclusion in consumer products.
2. Nanophase manufactures zinc oxide using certain proprietary
manufacturing technology.
3. Purchaser wishes to purchase zinc oxide from Nanophase, and
Nanophase wishes to sell zinc oxide to Purchaser, on the terms set forth in this
Agreement.
NOW, THEREFORE, Purchaser and Nanophase agree as follows.
I. PURCHASE AND SALE
1.1. Agreement to Purchase and Sell. On the terms and subject to the
conditions of this Agreement, Nanophase agrees to sell to Purchaser, and
Purchaser agrees to purchase from Nanophase, zinc oxide meeting the
specifications set forth in Exhibit A to this Agreement and manufactured in
accordance with Exhibit A (such zinc oxide being referred to as the "Product").
The terms of this Agreement apply only to the sale and use of the Product as a
topical human sunscreen agent (the "Field")
1.2. Forecasts. Purchaser will give Nanophase two months' notice of the
date and amount of Purchaser's first purchase order. Concurrent with the
delivery of Purchaser's first purchase order, Purchaser will deliver a forecast
within the capacity limits provided in Section 3.01 (including the additional
capacity referenced therein) of Purchaser's expected purchase orders with
Nanophase for the Product for each of the next six months (the "Initial
Forecast"). Purchaser's first purchase order will be for the amount of Product
set forth for the first two months covered by the Initial Forecast. Beginning on
the first day of the calendar quarter following the date of such purchase order,
and on the first day of each subsequent calendar quarter during the term of this
Agreement, Purchaser will deliver to Nanophase a forecast (a "Quarterly
Forecast") of Purchaser's expected purchase orders with Nanophase for the
Product for each of the next six months.
The amount set forth for each month in any Quarterly Forecast shall not exceed
the monthly capacity then required (or then requested to become effective) for
such month under Article III; provided that any such amount may include
inventory required to be maintained under Section 3.04. The Quarterly Forecasts
shall not themselves constitute purchase orders for Product (which will be made
as provided in Section 1.03), but failure to order quantities shown in a
Quarterly Forecast may result in price adjustments as set forth in Section 1.04.
* * * CONFIDENTIAL TREATMENT REQUESTED
<PAGE> 2
1.3. Orders. Each order for Product will be made by a written purchase
order signed by a representative of Purchaser that will set forth the amount of
Product ordered, the price initially payable, and the shipping date, which will
be no sooner than three business days after the date that Nanophase receives the
purchase order.
1.4. Price.
(a) The price payable per kilogram of Product ordered shall be
determined in accordance with the annual volume and price levels set
forth in Exhibit B. The price initially payable for each order of
Product shall be calculated based on the assumption that annual sales
volume will be two times the aggregate amount of Product forecasted to
be ordered for the six months covered by the Quarterly Forecast most
recently delivered by Purchaser as of the date of the order. Pricing
shall be subject to adjustment as set forth in subsections (b) and (c).
(b) If the aggregate amount of Product shipped in any two months
covered by the then most recent Quarterly Forecast is less than 80% of
the aggregate amount shown for such two month period in such Quarterly
Forecast, then Purchaser shall pay to Nanophase, as an additional
increment of the purchase price, an amount equal to (i) the price that
would be payable under Exhibit B for the Product actually ordered
during such two month period at the next higher annual price level than
the one initially applied pursuant to subsection (a) above, minus (ii)
the price initially payable for such Product as provided in subsection
(a). Any such additional increment shall be separately invoiced by
Nanophase, with calculation of the invoiced increment set forth in
reasonable detail. Purchaser will not be required to make any payment
under this subsection (b) if Nanophase has made available for shipment
as provided in this Agreement less Product than Purchaser has ordered
for shipment pursuant to the terms of this Agreement in the relevant
two month period.
(c) Within 30 days of the end of each calendar year during the
term of this Agreement, Nanophase will deliver to Purchaser a statement
setting forth (i) the amount of Product invoiced during the preceding
calendar year, (ii) the aggregate price initially paid for such Product
pursuant to subsection (a) (excluding any increments paid pursuant to
subsection (b) or Section 3.03), and (iii) the amount payable
calculated in accordance with Exhibit B based upon amounts actually
ordered during the relevant year. If the amount referred to in clause
(iii) of the preceding sentence exceeds the amount referred to in
clause (ii), Purchaser will, within 45 days of receipt of Nanophase's
statement, pay to Nanophase the amount of such excess. If the amount
referred to in clause (ii) exceeds the amount referred to in clause
(iii), Nanophase will, within 45 days of its delivery of the statement,
pay to Purchaser the amount of such excess. Purchaser will not be
required to make any payment under this subsection (c) if Nanophase has
provided and invoiced less Product than Purchaser has ordered for
shipment in the relevant calendar year.
(d) Nanophase and Purchaser will, upon the request of Purchaser,
negotiate in good faith with respect to discounted prices for Product
included in material sold by Purchaser to certain preferred Purchaser
customers.
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(e) Nanophase and Purchaser agree to negotiate in good faith
lower purchase prices for annual amounts of Product greater than
681,818 kilograms.
(f) The pricing set forth in Exhibit B will be subject to annual
increases or decreases based upon changes in labor costs, electricity
costs, and changes in the published price of zinc metal, all in
accordance with the calculation described in Exhibit C. The first such
adjustment will be made based on costs and prices as of January 1, 2001
and will be effective as soon thereafter as the statistics referred to
in Exhibit C become available for that date. The base from which
changes will calculated pursuant to Exhibit C will be the most recently
reported statistics as of the date of this Agreement. Prices calculated
pursuant to Exhibit C will be fixed without further adjustment for at
least -twelve months after they become effective.
1.5. Shipping Date. Nanophase will have Product available for shipment
F.O.B. its facility and will deliver Product to the carrier at the Nanophase
loading dock, packaged and labeled in accordance with Exhibit A, by the date set
forth in the relevant purchase order; provided that Nanophase shall not be
required to so ship in any month an amount of more than 120% of the amount shown
for such month in the then current Quarterly Forecast. Nanophase will also have
available and (if ordered) provide as set forth in this Section 1.05 an
additional amount of Product equal to the amount of inventory required to be on
hand pursuant to Section 3.04; provided that if such additional amount is
depleted by orders from Purchaser it shall only be required to be restored to
the extent provided in Section 3.04. Risk of loss or damage to Product will pass
to Purchaser upon shipment.
1.6. Warranty; Acceptance. Nanophase warrants that all Product shipped
under this Agreement will conform to the specifications set forth in Exhibit A
and will be manufactured in accordance with Exhibit A. Nanophase shall be
responsible for quality control prior to shipment. Purchaser shall have thirty
days from delivery of Product hereunder to inspect each shipment prior to
acceptance. Product shipped against a Purchaser purchase order shall be accepted
if the shipment conforms to Exhibit A and the full amount of such shipment is
timely shipped as provided this Agreement. With respect to any nonconforming,
late or incomplete shipment, Purchaser may, at any time prior to the expiration
of the thirty day acceptance period, reject any Product delivered and either (i)
cancel the relevant purchase order, upon which Nanophase will promptly refund in
full any amounts paid under such purchase order, or (ii) in the case of a
nonconforming shipment, require Nanophase to immediately ship Product in
conformity with the relevant purchase order and Exhibit A; provided that with
respect to any incomplete shipment Purchaser may not cancel the relevant
purchase order if Nanophase has made the balance of the order available for
shipment as provided herein within 5 days of the date due. Any rejected Product
will be returned to Nanophase at Nanophase's risk and expense. Incremental costs
incurred by Nanophase to replace non-conforming shipments will be borne by
Nanophase.
1.7. Payment. Payment of the initial purchase price for Product ordered
under this Agreement shall be due 60 days from date of invoice with payment due
on the 60th day. Product will be invoiced on or after shipment. Nanophase shall
retain title to Product until payment in full of the initial purchase price. If
for any reason this retention of title is ineffective, Purchaser grants to
Nanophase a purchase money security interest in ordered Product for payment in
full of the initial purchase price.
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1.8. Batch Size. Product sold under this Agreement will initially be
made in batches of 500 kilograms per batch. Beginning on the 60th day after the
end of the first period of two consecutive months in which Purchaser orders a
total of at least 33,000 kilograms of Product, the size of each batch will be
increased to 1000 kilograms or such other amount as may be mutually agreed upon.
II. EXCLUSIVITY; REQUIREMENTS
2.1. Nanophase Exclusivity. Nanophase covenants that, during the term
of this Agreement and for two years after effectiveness of any termination of
this Agreement, Nanophase will not, directly or indirectly, knowingly sell zinc
oxide to any person other than Purchaser for use in the Field or resale
(directly or indirectly) to any person for use in the Field.
2.2. Purchaser Requirements.
(a) Purchaser will deliver its first purchase order under this
Agreement not later than June 30, 2000. During the twelve month period
beginning on the date of delivery of Purchaser's first purchase order,
Purchaser will purchase at least 100,000 kilograms of Product under
this Agreement. If Purchaser does not order at least 100,000 kilograms
of Product during such twelve month period, then within 30 days of the
first anniversary of the date of delivery of Purchaser's first purchase
order, Purchaser will pay to Nanophase an amount equal to (i) the price
of 100,000 kilograms of Product, determined in accordance with Exhibit
B, minus (ii) the aggregate purchase price of Product ordered by
Purchaser during the twelve month period beginning on the date of
delivery of Purchaser's first purchase order; provided that no such
payment shall be due if Nanophase has failed to meet timely its
shipment obligations for any month during such year. Shipment will be
deemed timely for this purpose if made within two days of the date
required by Section 1.05.
(b) For each of the years beginning on the first and each
subsequent anniversary of the date of delivery of Purchaser's first
purchase order, Purchaser will purchase from Nanophase at least 70% of
its requirements of zinc oxide for use or resale in the Field. This
requirements commitment shall not be effective if Nanophase shall,
during the period up to and including the date on which this
requirements commitment would otherwise become effective, fail to ship
in a timely fashion at least 80% of the Product required to shipped in
any month, or at least 95% of the Product required to be shipped in any
three month period, in either case under purchase orders made by
Purchaser in accordance with this Agreement, with Product meeting the
specifications set forth in Exhibit A and manufactured in accordance
with Exhibit A.
III. CAPACITY
3.1. Initial Capacity. Nanophase represents and warrants that it has
and will have, on the date of this Agreement and throughout the term of this
Agreement, the capacity to manufacture and ship to Purchaser in conformity with
Exhibit A at least 15,200 kilograms of Product per month. Nanophase further
represents and warrants that it has and will have, on the date of this Agreement
and throughout the term of this Agreement, additional capacity to
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manufacture in conformity with Exhibit A at least 3,040 additional kilograms of
Product per month that can be made available on a timely basis to supplant or
supplement the capacity of 15,200 kilograms required by the preceding sentence.
3.2. Increases in Capacity. Purchaser may from time to time, by notice
to Nanophase, request increases in Nanophase's capacity to manufacture and ship
Product to Purchaser hereunder. Each requested increased level of capacity shall
be stated in kilograms per month. Nanophase agrees that it will implement any
request for which, after compliance with such request, total requested capacity
will be 26,500 kilograms per month or less. In the case of any request for
which, after compliance with such request, total requested capacity would be
more than 26,500 kilograms per month (a "Declinable Request"), Nanophase may,
within one month after the delivery of Purchaser's notice, deliver a response
stating that Nanophase declines to implement the requested increase in capacity,
in which case Purchaser shall have the rights set forth in Article V. No more
than one Declinable Request may be made in any calendar quarter, and the
incremental new capacity specified in any Declinable Request may not exceed
15,200 kilograms per month. Any increase requested by Purchaser pursuant to this
Section 3.02 (other than a Declinable Request declined as permitted by this
Section 3.02) shall be implemented within 180 days after the delivery of
Purchaser's request. Nanophase will at all times maintain actual capacity to
manufacture and ship Product of at least 120% of the requested capacity required
to be implemented from time to time pursuant to this Section 3.02.
3.3. Utilization of Increased Capacity. If a requested increase in
capacity is timely implemented and if in any period of three consecutive
calendar months beginning 12 months after Purchaser delivered the request for
such increase, average monthly orders by Purchaser for such three month period
are less than 80% of the total requested capacity, Purchaser will pay to
Nanophase, as an additional increment of the purchase price for Product ordered
during such three month period, an amount equal to (i) the price that would be
payable under Exhibit B for the Product actually ordered during such three month
period at the next higher annual price level than the one initially applied
pursuant to Section 1.04(a), minus (ii) the price initially payable for such
Product as provided in Section 1.04(a). Any such additional increment shall be
separately invoiced by Nanophase, with calculation of the invoiced increment set
forth in reasonable detail.
3.4. Inventory. Nanophase shall maintain inventory of manufactured
Product available to fill orders from Purchaser equal to two times the average
forecasted monthly orders as reflected in the then current Quarterly Forecast.
If this inventory is depleted by orders from Purchaser, Nanophase will restore
the required inventory level as soon as capacity in excess of Purchaser orders
permits. If Purchaser shall request an increase in the amount of inventory to be
maintained by Nanophase under this Agreement, Nanophase shall maintain such
increased inventory level subject to good faith negotiation regarding payment of
the costs of maintaining the increased level of inventory.
3.5. Allocation. The fulfillment of Nanophase's obligations to
Purchaser hereunder shall be the first priority of the relevant Nanophase
facilities as configured for the Product and other resources useable for
manufacture of the Product.
3.6. Initial Samples. Nanophase will propose to Purchaser a plan for
the continuous manufacture at the expense of Nanophase, in the machines and
facilities intended to be used to
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fulfill Nanophase's obligations for the year after the delivery of Purchaser's
first purchase order, of 4000 kilograms of Product. This Product will be for use
by Purchaser as qualification samples with Purchaser's customers during the
period beginning on October 1, 1999 and ending on June 30, 2000. Purchaser may
observe the manufacture and quality control procedures for the production of
this initial 4000 kilograms of Product. Successful completion of this initial
production shall be a condition precedent to the effectiveness of the
obligations of Purchaser and Nanophase under this Agreement; provided that
Purchaser may unilaterally waive this condition for both Purchaser and
Nanophase.
IV. TERM OF RIGHTS AND OBLIGATIONS
4.1. Term and Termination.
(a) The provisions of this Agreement shall remain in effect unless
and until terminated pursuant to this Section 4.01.
(b) At any time after delivery of Purchaser's first purchase order
for Product, either party may terminate this Agreement for any reason
by delivering two years' advance notice of termination to the other
party.
(c) Nanophase may terminate this Agreement by notice to Purchaser
if (i) Purchaser shall have materially breached this Agreement and
shall not have cured such breach within 90 days of delivery by
Nanophase of a notice describing such breach; or (ii) the board of
directors of Purchaser approves the dissolution or winding up of
Purchaser, a receiver is appointed for Purchaser or a substantial
portion of its assets, Purchaser shall make an assignment for the
benefit of creditors or commence any bankruptcy or insolvency
proceedings, or any bankruptcy or insolvency proceedings shall be
commenced against Purchaser which are not stayed or dismissed within 90
days.
(d) Purchaser may terminate this Agreement by notice to Nanophase
if (i) Nanophase shall have failed to ship in a timely fashion at least
80% of the Product required to shipped in any month, or at least 95% of
the Product required to be shipped in any three month period, in either
case under purchase orders made by Purchaser in accordance with this
Agreement, with Product meeting the specifications set forth in Exhibit
A and manufactured in accordance with Exhibit A; (ii) Nanophase shall
have otherwise materially breached this Agreement and shall not have
cured such breach within 90 days of delivery by Purchaser of a notice
describing such breach; or (iii) the board of directors of Nanophase
authorizes the dissolution or winding up of Nanophase, a receiver is
appointed for Nanophase or a substantial portion of its assets,
Nanophase shall make an assignment for the benefit of creditors or
commence any bankruptcy or insolvency proceedings, or any bankruptcy or
insolvency proceedings shall be commenced against Nanophase which are
not stayed or dismissed within 90 days.
4.2. Effect of Termination.
(a) If Nanophase shall deliver notice of termination under Section
4.01(b) on or before the first anniversary of the date of delivery of
Purchaser's first purchase order, Purchaser shall have no further
obligations under Section 2.02 after delivery of
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Nanophase's notice. If Nanophase shall deliver notice of termination
under Section 4.01(b) after the first anniversary of the date of
delivery of Purchaser's first purchase order, and Nanophase shall not
then be in breach of this Agreement, Purchaser shall be obligated to
purchase 50% of its requirements for the Product for the twelve month
period following delivery of notice of termination if Nanophase shall
continue to comply with its shipment and other obligations under this
Agreement. After twelve months from notice of termination by Nanophase
under Section 4.01(b), Purchaser will have no further obligations
under Section 2.02.
(b) If Purchaser shall deliver notice of termination under Section
4.01(b) on or before the first anniversary of the date of delivery of
Purchaser's first purchase order, then (i) Purchaser's obligations
under Section 2.02(a) shall continue in effect for their original term,
(ii) Purchaser shall be obligated to purchase at least 70% of its
requirements for the Product for the period from the earlier of (x) 180
days after delivery of notice of termination and (y) the first
anniversary of delivery of Purchaser's first purchase order until (in
either case) the first anniversary of notice of termination, and (iii)
Purchaser shall be obligated to purchase 50% of its requirements for
the Product for the period from the first anniversary of delivery of
notice of termination until the second anniversary of notice of
termination. If Purchaser shall deliver notice of termination under
Section 4.01(b) after the first anniversary of the date of delivery of
Purchaser's first purchase order, Purchaser shall be obligated to
purchase 70% of its requirements for the Product for the first year
after delivery of notice of termination, and Purchaser shall be
obligated to purchase 50% of its requirements for the Product for the
second year after delivery of notice of termination.
(c) If Nanophase shall terminate this Agreement under Section
4.01(c), Nanophase may, by an express election included in its notice
of termination, obligate Purchaser to purchase under this Agreement 70%
of its requirements for the Product for the first twelve months after
termination and 50% of its requirements for the Product for the second
twelve months after termination. If Nanophase makes such an election,
then for a period of twenty four months after termination Nanophase
shall be obligated to fill Purchaser's orders for Product, on the terms
set forth in Article I, to the extent of Nanophase's required capacity
as of the date of termination, as established as of such date pursuant
to the provisions of Article III (or, if higher, to the extent of the
amount that Purchaser is required to purchase). Purchaser's obligations
to purchase from Nanophase under this Section 4.02(c) will terminate if
Nanophase does not comply with its obligations to fill orders for
Product as provided in this Section 4.02(c).
(d) If Purchaser shall terminate this Agreement under Section
4.01(d), then for a period of two years after termination Nanophase
shall be obligated to fill Purchaser's orders for Product, on the terms
set forth in Article I, to the extent of Nanophase's required capacity
as of the date of termination, as established as of such date pursuant
to the provisions of Article III.
4.3. Survival of Additional Provisions. The obligations of the parties
to make any payments due but unpaid on the date of termination and the
provisions of Article V, Article VI, and Section 7.04 shall survive any
termination of this Agreement. The provisions of
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Section 2.01 shall survive termination of this Agreement for the period set
forth therein. The provisions of Article I shall survive termination with
respect to purchases and sales of Product made after termination.
V. TECHNOLOGY TRANSFER
5.1. Triggering Events. Upon the occurrence of any of the following
events (each a "Triggering Event"), Purchaser's rights to transfer of technology
under this Article V shall become effective:
(a) Nanophase shall deliver notice of termination of this
Agreement under Section 4.01(b).
(b) Purchaser shall terminate this Agreement under Section
4.01(d).
(c) Nanophase shall have failed to ship in a timely fashion at
least 80% of the Product required to be shipped in any month, or at
least 95% of the Product required to be shipped in any three month
period, in either case under purchase orders made by Purchaser in
accordance with this Agreement, with Product meeting the specifications
set forth in Exhibit A and manufactured in accordance with Exhibit A.
(d) Nanophase shall for any reason decline or otherwise fail to
implement in a timely fashion any increase in capacity requested by
Purchaser in compliance with Section 3.02.
(e) (i) Earnings of Nanophase for the twelve month period ending
on the date of Nanophase's most recent published quarterly financial
statements (calculated in accordance with generally accepted accounting
principles applied on a consistent basis) shall be less than $0 and
cash and cash equivalents of Nanophase at the end of such period
(calculated in accordance with generally accepted accounting principles
applied on a consistent basis) shall be less than $4,000,000; (ii) any
event or condition shall occur which results in the acceleration of any
debt of Nanophase having a principal amount of more than $ 10,000,000
or enables (or, with the giving of notice or lapse of time or both,
would enable) the holder of such debt or any person acting on the
holder's behalf to accelerate the maturity thereof; or (iii) Nanophase
shall admit in writing its insolvency or its inability to pay its debts
as they come due, or the board of directors of Nanophase shall
authorize any liquidation or winding up of Nanophase. Nanophase will
give Purchaser prompt notice of the occurrence of any event specified
in this Section 5.01(e). The events described in this Section 5.01(e)
shall cease to be Triggering Events (i) on the first date that
Nanophase shall have had six consecutive quarters of operating income
which in the aggregate exceeds $1,500,000, calculated in accordance
with generally accepted accounting principles applied on a consistent
basis or (ii) on the first date that Nanophase shall have been acquired
by or merged with an entity where the surviving entity has total
stockholders' equity in excess of $50,000,000.
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5.2. License.
(a) In recognition of Purchaser's investment in developing product
lines that include the Product and Purchaser's reliance on continued
availability, Nanophase grants to Purchaser, effective upon (and only
upon) a Triggering Event, a worldwide, exclusive license under U.S.
patent nos. 5,460,701; 5,514,349; and 5,874,684; and all corresponding
foreign patents and patent applications (the "Licensed Patents"), and
any other intellectual property included in the material referred to in
Section 5.03 or otherwise relevant to the manufacture of the Product
for use in the Field (including without limitation existing and future
patent applications or patents and any intellectual property licensed
from third parties), with the right to sublicense, to make, have made,
use, offer to sell, sell, import, lease or otherwise dispose of the
Product for use in the Field, and to practice and have practiced any
method(s) described and claimed in the Licensed Patents or other
intellectual property for such purpose. This license includes the right
of Purchaser: (a) to bring suit in its own name, or if required by law,
jointly with Nanophase, at its own expense and on its own behalf, for
infringement of the Licensed Patents; and (b) in any such suit to
enjoin infringement and to collect for its use, damages, profits and
awards of whatever nature recoverable, for such infringement. Nanophase
agrees to cooperate in the prosecution of any such proceedings,
including by execution of any documents that Purchaser determines to be
necessary or appropriate for such prosecution. In the event that the
validity or the priority of the Licensed Patents is challenged in a
legal proceeding, Purchaser shall have the initial right to defend the
same, at its own expense, whether the legal proceeding is brought
against Nanophase or Purchaser. Nanophase agrees to cooperate fully
with Purchaser in any such proceeding. This license shall have a term
equal to the remaining term of last to expire of the Licensed Patents.
(b) During the effectiveness of the license granted under
subsection (a) above, Purchaser will pay to Nanophase a royalty of [ *
* * ]. "Net Sales" shall mean (i) all sales of zinc oxide manufactured
by Purchaser or its sublicensees under the license and (ii) the amount
of zinc oxide included in other products sold by Purchaser or its
sublicensees and manufactured by Purchaser or its sublicensees under
the license (valued at the manufacturer's then current list price), in
either case less any returns, adjustments, allowances, taxes (other
than income taxes) and credits, and excluding sales of any zinc oxide
purchased from Nanophase. Purchaser will, on or before sixty days after
the end of each calendar quarter after effectiveness of the license,
deliver to Nanophase a statement setting forth in reasonable detail the
calculation of Net Sales and the royalty due for the preceding quarter.
Delivery of each statement shall be accompanied by payment of the
royalty due for the quarter covered by the statement. Nanophase may
request a third party audit, at Nanophase's expense, of Purchaser's and
Purchaser's sublicensees' records and supporting documents relating to
sales of products including zinc oxide manufactured by Purchaser or
Purchaser's licensees under the license. Audits will be made during
normal business hours by a nationally known independent auditor at the
place where the above records are kept. If an audit shows underpayment,
Purchaser will promptly pay Nanophase the amounts due.
* * * CONFIDENTIAL TREATMENT REQUESTED
9
<PAGE> 10
5.3. Escrow. Ninety days after Nanophase receives Purchaser's initial
purchase order pursuant to Section 1.02, Nanophase agrees to deposit with a
mutually agreed escrow agent, at Purchaser's expense, all information that would
be required by Purchaser to configure and operate a facility to manufacture the
Product using Nanophase's technology, including such blue prints and operating
instructions and other documentation as may be necessary to duplicate
Nanophase's manufacturing equipment. The Escrow Agreement under which the escrow
agent will hold such materials (the "Escrow Agreement") will provide that such
materials will be delivered to Purchaser upon notice of the occurrence of a
Triggering Event.
5.4. Equipment Purchase Option. Upon the occurrence of a Triggering
Event, Purchaser shall have the right, at its option, to purchase any or all of
the manufacturing, blending, control and packaging equipment associated with the
production of the Product (including operating manuals and instructions and
quality control records) in good working condition at 115% of such equipment's
net book value (as reflected on the books of Nanophase in accordance with
generally accepted accounting principles consistently applied), F.O.B.
Nanophase's manufacturing facility. Upon the occurrence of a Triggering Event,
Purchaser will also have the right, at its option, to purchase any or all of the
inventory of the Product, and work in process or raw materials for the Product,
held by Nanophase at a price equal to the cost of such materials, as shown on
the books of Nanophase in accordance with generally accepted accounting
principles applied on a consistent basis, F.O.B. Nanophase's manufacturing or
warehouse facility. Nanophase will provide 80 man hours of technology transfer
assistance without charge in connection with any such purchase, and will make
additional assistance available to Purchaser at a rate of $60.00 per man hour.
Nanophase will deliver equipment purchased under this Section 5.04 to its
loading dock in good condition and prepared for crating and transport by
Purchaser, and will provide access and cooperation to Purchaser during normal
business hours for removal of all assets purchased pursuant to this Section
5.04. Payment will be due from Purchaser within 30 days of the date on which
Purchaser takes possession.
5.5. Nature of Agreement. This Agreement is intended to be, and shall
be treated as, a contract under which Nanophase is a licensor of a right to
intellectual property within the meaning of Section 365(n) of the United States
Bankruptcy Code (or any successor provision), and the escrow agreement referred
to in Section 5.03 is intended to be, and shall be treated as, an agreement
supplementary to a contract under which Nanophase is a licensor of a right to
intellectual property within the meaning of such Section (or successor
provision).
VI. INTELLECTUAL PROPERTY
6.1. Ownership of Intellectual Property. Each of Nanophase and
Purchaser agree that, as between Nanophase and Purchaser, all patents,
trademarks, trade secrets, know-how and other intellectual property developed by
or registered in the name of either party shall remain the property of that
party. Neither party will, directly or indirectly, dispute the validity, scope
or enforceability of any patent, trademark, trade secret or other intellectual
property held by the other party, or assist or encourage any other person to do
so. Each party acknowledges and agrees that, except as expressly stated herein
and except for the implied license of Purchaser and its customers to use and
sell Product purchased from Nanophase, no license, implied or otherwise, is
granted hereby under any patent, trademark, trade secret, patent or trademark
application or any other intellectual property right. Nothing contained in this
Agreement shall
10
<PAGE> 11
(i) limit the right of Nanophase to enter into agreements from time to time
which grant rights under patents or patent applications for products other than
for the Product for use in the Field or (ii) affect rights granted to third
parties by Nanophase for products other than the Product for use in the Field.
6.2. Confidentiality. As used in this Agreement, "Confidential
Information" means (i) all confidential or proprietary information (including
without limitation financial information and business information such as
customer lists) that is or has been disclosed by Nanophase to Purchaser or by
Purchaser to Nanophase and (ii) all confidential information, trade secrets,
know-how, and all other intellectual property that is subject to the licenses
granted in this Agreement and in which proprietary rights would be adversely
affected by disclosure. Nanophase and Purchaser agree that they will not, and
will not permit their respective officers, employees, agents and representatives
to, without first obtaining the written consent of the other party, use, sell or
disclose any Confidential Information, except as expressly contemplated hereby
and except that Confidential Information may be disclosed by the party that owns
it unless such disclosure would adversely affect the proprietary nature of
Confidential Information subject to any of the licenses granted hereunder.
Either party may disclose Confidential Information to potential customers, and
to other third parties to the extent necessary to permit any such third party to
assist in manufacturing or marketing activities, provided that any such
potential customer or third party to whom Confidential Information is disclosed
shall execute a confidentiality agreement no less restrictive than this Section
6.02. "Confidential Information" does not include (i) information that is or
becomes (other than by disclosure in violation of this Agreement) generally
available to the public, (ii) information that the receiving party can show was
known to the receiving party prior to its disclosure by the other party, (iii)
information acquired by the receiving party from a third party without
continuing restriction on use or breach of any obligation to the other party to
this Agreement, (iv) information that a party can show by contemporaneous
written records was developed by that party without reference to the other
party's Confidential Information, or (v) information required to be disclosed by
law or regulation or by judicial process or administrative order, provided that
prompt notice and an opportunity to seek a protective order is given to the
other party prior to disclosure. Nanophase and Purchaser agree that this
Agreement and the Exhibits hereto are Confidential Information subject to this
Section 6.02. Purchaser consents to the disclosure of the relationship
contemplated by this Agreement in filings by Nanophase with the U.S. Securities
and Exchange Commission relating to publicly traded securities of Nanophase, and
the filing of this Agreement as a related exhibit; provided that Nanophase shall
diligently seek confidential treatment of all pricing information and the
identity of Purchaser. Nanophase consents to the disclosure of this Agreement to
shareholders, investors, and other third parties with whom Purchaser has
significant business relationships, provided that any party to whom Purchaser
makes disclosure shall agree to keep all pricing information confidential.
6.3. Representations. Nanophase represents to Purchaser that:
(i) Nanophase has full authority to enter into this
Agreement and grant the licenses and rights set forth herein.
11
<PAGE> 12
(ii) To the best of Nanophase's knowledge, the Licensed
Patents, the Product and the manufacture of the Product do not
infringe upon any patent, trade secret or other proprietary right
of any third party.
(iii) Nanophase is not aware of any claim of infringement of
any patent, trade secret or other proprietary right having been
made or pending against Nanophase relative to the Licensed
Patents, the Product or the manufacture of the Product.
6.4. Representations. Purchaser represents to Nanophase that:
(i) Purchaser has full authority to enter into this
Agreement.
(ii) To the best of Purchaser's knowledge, U.S. Patent
5,587,148 (the "Purchaser Patent") does not infringe upon any
patent, trade secret or other proprietary right of any third
party.
(iii) Purchaser is not aware of any claim of infringement of
any patent, trade secret or other proprietary right having been
made or pending against Purchaser relative to the Purchaser
Patent.
6.5. Indemnities.
(a) Nanophase will, at its expense, defend against, hold Purchaser
harmless from, and pay any final judgment against Purchaser or any
customer of Purchaser arising out of (1) any claim that the Licensed
Patents, the Product or the manufacture of the Product infringed a
patent, a trade secret or any other proprietary right (unless such
claim results from designs or specifications provided by Purchaser) or
(2) any claim arising out of the failure of any Product provided by
Nanophase to meet the specifications applicable under Exhibit A at the
time of shipment, or gross negligence or misconduct of Nanophase;
provided that (i) Purchaser notifies Nanophase in writing of such claim
or action, and (ii) Nanophase shall conduct the defense of such claim
or action subject to the effective participation of Purchaser. In
defending any claim or action referred to in clause (1) above,
Nanophase may, at its option, agree to any settlement in which
Nanophase shall either (x) procure, for the benefit of Purchaser, the
right to continue to make and have made, use and sell Product; or (y)
modify the Product or the method of manufacture thereof so that its
making, use and sale shall no longer infringe, to the extent that the
exercise of either such option does not result in a material adverse
change in the Product or its cost. If Nanophase shall fail to
diligently and effectively defend any such claim or action, Purchaser
shall have the right to assume the defense without diminishing
Nanophase's indemnity obligations hereunder.
(b) Purchaser will, at its expense, defend against, hold Nanophase
harmless from, and pay any final judgment against Nanophase arising out
of (1) any claim that modification of the Product by Purchaser or use
of the Product in the Field infringed a patent, a trade secret or any
other proprietary right (unless such claim results from infringements
by Nanophase against which Purchaser is indemnified in (a) above) or
(2) any claim by a third party arising out of the sale of products by
Purchaser (other than
12
<PAGE> 13
claims against which Purchaser is indemnified in (a) above); provided
that (i) Nanophase notifies Purchaser in writing of such claim or
action, and (ii) Purchaser shall conduct the defense of such claim or
action subject to the effective participation of Nanophase. If
Purchaser shall fail to diligently and effectively defend any such
claim or action, Nanophase shall have the right to assume the defense
without diminishing Purchaser's indemnity obligations hereunder.
VII. GENERAL.
7.1. Compliance With Law. Nanophase represents and warrants to
Purchaser that the manufacturing operations of Nanophase and the production and
shipment of the Product will at all times be in compliance with all applicable
laws and regulations, including without limitation laws and regulations relating
to the protection of the environment and to occupational health and safety.
7.2. Plant Visits. Upon reasonable notice to Nanophase, Purchaser shall
have the right to visit any Nanophase facility at which the Product is
manufactured or stored during normal business hours. Purchaser may identify
Nanophase as manufacturer of the Product to its customers and prospective
customers and may bring customers and prospective customers to Nanophase's
facilities to observe the manufacturing process, subject to the execution by
such customers of a confidentiality agreement no less restrictive than the
provisions of Section 6.02. Purchaser may review and copy all quality control
documentation; provided that all such documentation shall be deemed
"Confidential Information" subject to Section 6.02.
7.3. Force Majeure. Neither party will be liable hereunder for any
delay or failure to perform its obligations as a result of war, Act of God, Act
of State, fire, flood, earthquake, riot or political disturbance, strike,
transportation difficulties, or other similar unavoidable cause outside the
control of the affected party for so long as such cause is operative, provided
that the affected party shall promptly give notice of the occurrence of an event
of force majeure and shall use best efforts to remedy the situation as soon as
possible. For the duration of any event of force majeure affecting Nanophase,
Purchaser may purchase its requirements of zinc oxide (and such additional
quantities as Purchaser my contractually agree to in connection with obtaining
supply commitments) from sources other than Nanophase notwithstanding Section
2.02. If any failure or inability of Nanophase to ship Product in accordance
with this Agreement arising from an event of force majeure shall not have been
cured within 150 days after the first occurrence of such event, Purchaser may
then exercise its rights to terminate this Agreement under Section 4.01(d) and
to effect transfer of technology under Article V.
7.4. Limitation of Warranties. THE OBLIGATIONS OF NANOPHASE AND
PURCHASER EXPRESSLY STATED IN THIS AGREEMENT ARE IN LIEU OF ALL OTHER WARRANTIES
OR CONDITIONS EXPRESS OR IMPLIED. TO THE EXTENT ALLOWABLE BY LAW, THIS EXCLUSION
OF ALL OTHER WARRANTIES AND CONDITIONS EXTENDS TO IMPLIED WARRANTIES OR
CONDITIONS OF MERCHANTABLE QUALITY AND FITNESS FOR A PARTICULAR PURPOSE, AND
THOSE ARISING BY STATUTE OR OTHERWISE IN LAW, OR FROM A COURSE OF DEALING OR
USAGE OF TRADE.
13
<PAGE> 14
7.5. Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of New York.
7.6. Assignment. Either party may assign its rights under this
Agreement to a party that has creditworthiness at least equal to that of the
assigning party as of the date of this Agreement and the capability to fulfill
the obligations of the assigning party hereunder. This Agreement shall be
binding upon, and inure to the benefit of, the successors and permitted assigns
of the parties. An assigning party will give prompt notice of assignment to the
other party.
7.7. Effect of Waiver. The waiver or failure of either party to
exercise in any respect any right provided for in this Agreement shall not be
deemed a waiver of any further or future right hereunder.
7.8. Headings. The headings used in this Agreement are for convenience
of reference only and are not to be used in interpreting the provisions of this
Agreement.
7.9. Complete Agreement. This Agreement is the exclusive statement of
the understanding between the parties with respect to its subject matter. It
supersedes all prior agreements, negotiations, representations and proposals,
written or oral, relating to the subject matter hereof. No provisions of this
Agreement may be changed or modified except by an agreement in writing signed by
the party to be bound. No provision of any purchase order or other instrument
issued by Purchaser or any invoice or other form issued by Nanophase that is
inconsistent with the provisions of this Agreement shall be binding or affect
this Agreement unless signed by both parties.
7.10. Severability. If any provision of this Agreement is invalid or
unenforceable in any particular case, such case shall not invalidate or render
unenforceable any other part of this Agreement. This Agreement shall be
construed as not containing the particular provision or provisions held to be
invalid or unenforceable to the extent of the particular case, and the rights
and obligations of the parties hereto shall be construed and enforced
accordingly.
7.11. Effectiveness of Agreement; Counterparts. Subject to the
satisfaction of the conditions set forth in the letter of even date with this
Agreement executed by Nanophase and Purchaser, this Agreement will be effective
when executed by both parties. This Agreement may be executed in counterparts,
each of which shall constitute one and the same instrument.
7.12. Notices. All notices provided for in this Agreement shall be in
writing or facsimile, addressed to the appropriate party at the respective
address set forth below or to such other then-current address as is specified by
notice, as follows:
to Nanophase :
Nanophase Technologies Corporation
453 Commerce Street
Burr Ridge, Illinois 60521
Facsimile:
Attention: Joseph E. Cross
14
<PAGE> 15
to Purchaser:
[ * * * ]
Notices sent by certified mail, return receipt requested to the address
specified pursuant to this Section 7.12 shall be effective three business days
after deposit in the U.S. Mail with postage prepaid. Notice delivered by any
other means shall be effective upon receipt.
7.13. No Agency. Nanophase and Purchaser are independent contractors
and separate legal entities and shall in no way be interpreted as partners,
joint venturers, agents, employees or legal representatives of each other for
any purposes. Neither party shall be responsible for or bound by any act of the
other party or the other party's agents, employees or any persons in any
capacity in its service.
7.14. Equitable Relief. Each party acknowledges that the other would be
irreparably harmed by any breach of Article II, Article III, Article IV or
Section 6.02, and that damages alone would be an inadequate remedy for any such
breach. Accordingly, the aggrieved party shall be entitled to equitable relief,
including without limitation an injunction for specific performance, with
respect to any such breach, without requirement of the posting of a bond or
other surety.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the first date set forth above.
NANOPHASE TECHNOLOGIES
CORPORATION [ * * * ]
By: /s/ Daniel S. Bilicki
-------------------------------
Name: Daniel S. Bilicki
Title: Vice President Sale and Marketing
* * * CONFIDENTIAL TREATMENT REQUESTED
15
<PAGE> 16
EXHIBIT A
Manufacturing Conditions
The product (non-coated zinc oxide) will be manufactured under GMP standards (as
defined in 21 Code of Federal Regulations Parts 210 and 211) and ISO 9000
standards as applicable and such other standards as the parties may mutually
agree from time to time.
Purity
The Product will meet USP, BP purity requirements At least 50% of the product
made will meet the JSCI standard for zinc oxide purity. The Product will be free
of foreign bodies.
Particle Size
It is the present intention of the parties that the specifications for particle
size applicable under this Agreement will be those set forth below. The parties
will conduct additional tests to validate such specifications. If the results of
validation testing are inconsistent with the specifications set forth below, the
parties will in good faith agree on changes to such specifications.
To be determined using a Brook Haven XDC or other instrument mutually agreed
upon.
The Product will have an average particle size (on a number basis) of less than
0.2 microns but greater than .05 microns. The product will have an average
particle size (on a mass basis) of less than 0.250 microns.
The Product will have at least 95% of its mass accounted for by particles with
diameters of less than 1.0 microns with no detectable particles greater than 1.5
microns.
From samples produced by Nanophase, a Reference Standard will be established and
inventoried for comparison and instrument calibration.
Packaging
The Product will be packaged in, at Purchaser's discretion, one or more of the
following containers: 18.18 kg plastic lined boxes, bins containing sixteen
individual 18-18 kg plastic bags or appropriately sized super-sacks.
No more than 25% of the product will packaged in said boxes.
Labeling: To be determined.
16
<PAGE> 17
EXHIBIT B
Indicated below is a pricing schedule for Product F.O.B. Nanophase's Plant.
[ * * * ]
* * * CONFIDENTIAL TREATMENT REQUESTED
17
<PAGE> 18
EXHIBIT C
Pricing set forth in Exhibit B shall be subject to changes in labor costs,
electricity costs and zinc metal prices as published in the Wall Street Journal
and indexed as follows.
[ * * * ]
* * * CONFIDENTIAL TREATMENT REQUESTED
18
<PAGE> 1
EXHIBIT 11
NANOPHASE TECHNOLOGIES CORPORATION
STATEMENTS REGARDING COMPUTATION OF LOSS PER SHARE
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
HISTORICAL:
Weighted average common shares outstanding 1,283,359 12,416,305 12,690,483
================= ================ ================
Net loss $ (3,072,470) $ (5,633,880) $ (5,117,067)
================= ================ ================
Net loss per common share $ (2.39) $ (0.45) $ (0.40)
================= ================ ================
PRO FORMA:
Weighted average common shares outstanding 1,283,359 N/A N/A
Weighted average preferred shares outstanding 6,924,947 N/A N/A
-----------------
Total 8,208,306 N/A N/A
=================
Net loss $ (3,072,470) N/A N/A
=================
Pro forma net loss per common share $ (0.37) N/A N/A
=================
</TABLE>
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration
Statement (Form S-8 No. 333-53445) pertaining to the Nanophase Technologies
Corporation Amended and Restated 1992 Stock Option Plan of our report dated
February 8, 2000, with respect to the financial statements and schedule of
Nanophase Technologies Corporation included in this Annual Report (Form 10-K)
for the year ended December 31, 1999.
/S/ ERNST & YOUNG LLP
---------------------
Ernst & Young LLP
Chicago, Illinois
March 28, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 624,509
<SECURITIES> 21,216,168
<RECEIVABLES> 401,826
<ALLOWANCES> 120,000
<INVENTORY> 766,778
<CURRENT-ASSETS> 23,347,480
<PP&E> 4,072,823
<DEPRECIATION> 1,920,409
<TOTAL-ASSETS> 25,677,539
<CURRENT-LIABILITIES> 1,516,216
<BONDS> 0
0
0
<COMMON> 48,656,941
<OTHER-SE> (24,495,618)
<TOTAL-LIABILITY-AND-EQUITY> 25,677,539
<SALES> 1,128,861
<TOTAL-REVENUES> 1,424,847
<CGS> 2,610,667
<TOTAL-COSTS> 7,708,529
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (5,117,067)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,117,067)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,117,067)
<EPS-BASIC> (0.40)
<EPS-DILUTED> (0.40)
</TABLE>
