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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended: JUNE 30, 1999
Commission File Number: 0-22333
NANOPHASE TECHNOLOGIES CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 36-3687863
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
453 COMMERCE STREET, BURR RIDGE, ILLINOIS 60521
(Address of principal executive offices, and zip code)
Registrant's telephone number, including area code: (630) 323-1200
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
As of August 12, 1999, there were outstanding 12,736,952 shares of common
stock, par value $.01, of the registrant.
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NANOPHASE TECHNOLOGIES CORPORATION
QUARTER ENDED JUNE 30, 1999
INDEX
PAGE
PART I - FINANCIAL INFORMATION 3
Item 1.Financial Statements 3
Balance Sheets as of June 30, 1999 (unaudited) and December 31, 1998 3
Statements of Operations (unaudited) for the three months ended June
30, 1999 and 1998 and the six 4
months ended June 30, 1999 and 1998
Statements of Cash Flows (unaudited) for the six months ended June 30,
1999 and 1998 5
Notes to Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk 12
PART II - OTHER INFORMATION 13
Item 1.Legal Proceedings 13
Item 2.Changes in Securities and Use of Proceeds 14
Item 4.Submissions of Matters to a Vote of Security Holders 14
Item 6.Exhibits and Reports on Form 8-K 14
SIGNATURES 15
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NANOPHASE TECHNOLOGIES CORPORATION
BALANCE SHEETS
JUNE 30, DECEMBER 31,
1999 1998
------------ ------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents...................................... $ 646,423 $ 363,394
Investments.................................................... 23,244,378 26,270,518
Trade accounts receivable, less allowance for doubtful accounts
of $75,000 at June 30, 1999 and $85,000 at December 31, 1998. 288,656 316,328
Other receivable, net.......................................... 477,904 -
Inventories, net............................................... 644,342 838,825
Prepaid expenses and other current assets...................... 96,751 92,351
------------ ------------
Total current assets.......................................... 25,398,454 27,881,416
Equipment and leasehold improvements, net....................... 2,143,127 2,383,091
Other assets, net............................................... 176,963 189,481
------------ ------------
$ 27,718,544 $ 30,453,988
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable............................................... $ 487,689 $ 413,378
Accrued expenses............................................... 1,239,227 933,020
------------ ------------
Total current liabilities..................................... 1,726,916 1,346,398
CONTINGENT LIABILITIES.......................................... - -
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 24,088 shares authorized and
no shares issued and outstanding............................... - -
Common stock, $.01 par value, 24,930,377 shares authorized;
12,736,952 shares issued and outstanding at June 30, 1999 and
12,568,691 shares issued and outstanding at December 31, 1998.. 127,369 125,687
Additional paid-in capital...................................... 48,400,745 48,360,454
Accumulated deficit............................................. (22,536,486) (19,378,551)
------------ ------------
Total stockholders' equity..................................... 25,991,628 29,107,590
------------ ------------
$ 27,718,544 $ 30,453,988
============ ============
See Notes to Financial Statements
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NANOPHASE TECHNOLOGIES CORPORATION
STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------------ ----------------------------
1999 1998 1999 1998
-------------- -------------- ------------- -------------
REVENUE:
Product revenue...................... $ 281,054 $ 141,494 $ 547,302 $ 778,228
Other revenue........................ 48,167 76,684 106,917 143,484
------------- ------------- ------------ ------------
Total revenue....................... 329,221 218,178 654,219 921,712
OPERATING EXPENSE:
Cost of revenue...................... 680,795 687,995 1,461,884 1,656,707
Research and development expense..... 394,308 601,808 784,722 791,022
Selling, general and administrative
expense............................. 1,123,759 909,364 2,142,205 1,592,663
------------- ------------- ------------ ------------
Total operating expense............. 2,198,862 2,199,167 4,388,811 4,040,392
------------- ------------- ------------ ------------
Loss from operations.................. (1,869,641) (1,980,989) (3,734,592) (3,118,680)
Interest income....................... 287,608 381,575 576,657 787,866
------------- ------------- ------------ ------------
Loss before provision for income taxes (1,582,033) (1,599,414) (3,157,935) (2,330,814)
Provision for income taxes............ - - - (156,000)
------------- ------------- ------------ ------------
Net loss.............................. $(1,582,033) $(1,599,414) $(3,157,935) $(2,486,814)
============= ============= ============ ============
Net loss per share.................... $ (0.12) $ (0.13) $ (0.25) $ (0.20)
============= ============= ============ ============
Weighted average number of common
shares outstanding.................... 12,656,636 12,310,154 12,625,351 12,293,900
============= ============= ============ ============
See Notes to Financial Statements
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NANOPHASE TECHNOLOGIES CORPORATION
STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
-------------------------
1999 1998
---- ----
OPERATING ACTIVITIES:
Net loss................................................. $ (3,157,935) $ (2,486,814)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.......................... 335,822 238,849
Allowance for excess inventory quantities.............. 71,237 -
Changes in assets and liabilities related to operations:
Trade accounts receivable.............................. 27,672 1,086,109
Other receivable....................................... (477,904) -
Inventories............................................ 123,246 (157,702)
Prepaid expense and other assets....................... 66,331 13,010
Accounts payable....................................... 74,311 (527,120)
Accrued liabilities.................................... 306,207 401,895
------------ ------------
Net cash used in operating activities.................... (2,631,013) (1,431,773)
INVESTING ACTIVITIES:
Acquisition of equipment and leasehold improvements...... (154,071) (320,233)
Purchases of held-to-maturity investments................ (62,680,599) (112,743,273)
Maturities of held-to-maturity investments............... 65,706,739 110,997,923
------------ ------------
Net cash provided by (used in) investing activities...... 2,872,069 (2,065,583)
FINANCING ACTIVITIES:
Proceeds from issuance of stock.......................... 41,973 79,197
------------ ------------
Net cash provided by financing activities................ 41,973 79,197
------------ ------------
Increase (decrease) in cash and cash equivalents......... 283,029 (3,418,159)
Cash and cash equivalents at beginning of period......... 363,394 3,988,368
------------ ------------
Cash and cash equivalents at end of period............... $ 646,423 $ 570,209
============ ============
See Notes to Financial Statements
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NANOPHASE TECHNOLOGIES CORPORATION
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PRESENTATION
The accompanying unaudited interim financial statements of Nanophase
Technologies Corporation (the "Company") reflect all adjustments (consisting of
normal recurring adjustments) which, in the opinion of management, are
necessary for a fair presentation of the financial position and operating
results of the Company for the interim periods presented. Operating results
for the three and six month periods ended June 30, 1999 are not necessarily
indicative of the results that may be expected for the year ended December 31,
1999.
These financial statements should be read in conjunction with the
Company's audited financial statements and notes thereto for the year ended
December 31, 1998, included in the Company's Annual Report on Form 10-K for the
year ended December 31, 1998, as filed with the Securities and Exchange
Commission.
(2) DESCRIPTION OF BUSINESS
The Company was organized for the purpose of developing nanocrystalline
materials for commercial production and sale in domestic and international
markets. In the course of its corporate development, the Company has
experienced net losses and negative cash flows from operations. Historically,
the Company has funded its operations primarily through the issuance of equity
securities.
Revenue from international sources approximated $354,500 and $169,500 for
the six months ended June 30, 1999 and 1998, respectively.
(3) INVESTMENTS
Investments generally consist of certificates of deposit, commercial
paper, and corporate notes and have an estimated fair value of $23,232,000 at
June 30, 1999 and $26,251,000 at December 31, 1998. All investments have been
classified as held-to-maturity and mature within a twelve month period.
(4) INVENTORIES
Inventories consist of the following:
JUNE 30, 1999 DECEMBER 31, 1998
------------- -----------------
Raw materials............................ $ 258,316 $ 284,162
Finished goods........................... 647,896 745,296
--------- ---------
906,212 1,029,458
Allowance for excess inventory quantities (261,870) (190,633)
--------- ---------
$ 644,342 $ 838,825
========= =========
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NANOPHASE TECHNOLOGIES CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (Continued)
(UNAUDITED)
(5) CONTINGENT LIABILITIES
Five separate complaints were filed in the United States District Court
for the Northern District of Illinois, Eastern Division, each of which alleged
that the Company, certain of its officers and directors, and the underwriters
of the Company's initial public offering of Common Stock ("the Offering") are
liable under the federal securities laws for making material misstatements of
fact and omitting and failing to state material facts necessary to make other
statements of fact not misleading in the Registration Statement and Prospectus
relating to the Offering. In an order entered by the Court, those cases were
consolidated and a consolidated complaint was filed on October 30, 1998. The
consolidated complaint alleges that the action should be maintained as (i) a
plaintiff class action on behalf of certain persons who purchased the Common
Stock from November 26, 1997 through January 8, 1998, excluding the defendants,
members of their immediate families, any entity in which a defendant has a
controlling interest and certain others related to or affiliated with the
foregoing, and (ii) a defendant class action against the underwriters who
participated in the Offering. The consolidated complaint seeks unquantified
damages as provided for under the federal securities laws, pre- and
post-judgment interest, attorneys' fees, expert witness fees, other costs and
expenses and such other and further relief as the Court may find proper. In
addition, the consolidated complaint seeks rescission and/or rescissory damages
relating to purchases of the Common Stock, as provided for under federal
securities laws. All defendants have filed motions to dismiss the consolidated
complaint that are fully briefed and under advisement by the Court. In August
1998, the Company received a request for indemnification from the underwriters
of the Offering pursuant to the underwriting agreement for the Offering. In
response to such request, the Company has agreed to be responsible for the
underwriters' attorneys' fees with respect to the litigation.
On November 20, 1998, a separate complaint was filed in the Northern
District of Illinois, Eastern Division, which alleged that the Company, certain
of its officers and directors, and the underwriters of the Company's Offering
are liable under the federal securities laws for making material misstatements
of fact and omitting or failing to state material facts necessary to make other
statements of fact not misleading in connection with the solicitation of
consents to proceed with the Offering from certain of the Company's preferred
stockholders. The complaint alleges that the action should be maintained as a
plaintiff class action on behalf of those former preferred stockholders whose
shares of preferred stock of the Company were converted into Common Stock on or
about the date of the Offering, excluding the defendants, other officers and
directors of the Company, members of the immediate families of all individual
defendants, any entity in which a defendant has a controlling interest and
certain others related to, employed by or affiliated with the foregoing. The
complaint seeks unquantified damages as provided for under the federal
securities laws, pre- and post-judgment interest, attorneys' fees, expert
witness fees, other costs and expenses and such other and further relief as the
Court may find proper. On March 24, 1999, the preferred stockholders' complaint
was reassigned to the judge hearing the consolidated complaint described above.
Thereafter, the preferred stockholders' complaint was further consolidated
with that litigation.
The Company, the defendant directors and the defendant officers have each
retained counsel with respect to both of the above-described litigations and
intend to defend against both complaints vigorously. Although the Company
believes that the allegations of the complaints are without merit, it is not
feasible for the Company to predict at this time the outcome of either
litigation or whether the resolution of either litigation could have a material
adverse effect on the Company's results of operations, cash flows or financial
condition.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Since January 1, 1997, Nanophase Technologies Corporation (the "Company")
has been engaged in the commercial production and sale of its nanocrystalline
materials. All of the Company's revenue since January 1, 1997 has been
generated through commercial sources. From its inception in November 1989
through June 30, 1999, the Company was primarily capitalized through the
private offering of approximately $19,558,069 of equity securities and its
initial public offering of $28,837,936 of the Company's common stock (the
"Common Stock"), each net of issuance costs. The Company has incurred
cumulative losses of $22,536,486 from inception through June 30, 1999.
RESULTS OF OPERATIONS
Revenue is recorded when the Company ships products, when specific
milestones are met regarding development arrangements or when the Company
licenses its technology and transfers proprietary information. Total revenue
was $329,221 and $654,219 for the three and six months, respectively, ended
June 30, 1999, compared to $218,178 and $921,712 for the same periods in 1998.
The increase in total revenue for the three-month period was primarily
attributed to increased product revenue. Product revenue increased to $281,054
for the three months ended June 30, 1999, compared to $141,494 for the same
period in 1998. Other revenue decreased to $48,167 for the three-month period
ended June 30, 1999, compared to $76,684 for the same period in 1998. The
decrease in total revenue for the six-month period was mainly due to reduced
product revenue. Product revenue decreased to $547,302 for the six months
ended June 30, 1999, compared to $778,228 for the same period in 1998. Other
revenue decreased to $106,917 for the six-month period ended June 30, 1999,
compared to $143,484 for the same period in 1998. The majority of the revenue
generated during the three and six months ended June 30, 1999 was from
customers in the electronics, structural ceramics and composites, and cosmetics
markets. For the six month period ended June 30, 1999, revenue from four
customers constituted 71.4% of the Company's total revenue. Revenue from these
four customers composed approximately 32.4%, 15.1%, 12.5%, and 11.4%,
respectively, of total revenue for the six months ended June 30, 1999.
Cost of revenue generally includes costs associated with commercial
production, customer development arrangements and licensing fees. Cost of
revenue decreased to $680,795 and $1,461,884 for the three and six months,
respectively, ended June 30, 1999, compared to $687,995 and $1,656,707 for the
same periods in 1998. The decrease in cost of revenue was generally attributed
to reduced product shipments and reduced ceramic superplastic forming costs,
somewhat offset by inefficiencies in the Company's coating operations. Cost of
revenue as a percentage of total revenue decreased for the three months ended
June 30, 1999, compared to the same period in 1998, due primarily to the
increase in total revenue and other factors discussed above. Cost of revenue
as a percentage of total revenue increased for the six months ended June 30,
1999, compared to the same period in 1998, due primarily to the reduction in
total revenue and other factors discussed above.
Research and development expense primarily consists of costs associated
with the Company's development or acquisition of new product applications and
coating formulations and the cost of enhancing the Company's manufacturing
processes. Research and development expense decreased to $394,308 and $784,722
for the three and six months, respectively, ended June 30, 1999, compared to
$601,808 and $791,022 for the same periods in 1998. The three and six month
periods ended June 30, 1998 included $425,000 in costs related to arrangements
with outside parties to further develop end-use products. Excluding these
costs, research and development expense increased by $217,500 and $418,700 in
the three and six months, respectively, ended June 30, 1999, compared to the
same periods in 1998. These increases were attributed to increased costs
related to ongoing development activities, increased
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recruiting and relocation activities, additional salaries for newly hired
research personnel, and separation costs relating to the termination of a
former officer. The Company expects to further increase its research and
development expense for the remainder of 1999 in connection with its plans to
continue to enhance and expand its product lines, technologies and
manufacturing processes.
Selling, general and administrative expense increased to $1,123,759 and
$2,142,205 for the three- and six-month periods, respectively, ended June 30,
1999, compared to $909,364 and $1,592,663 for the same periods in 1998. These
net increases were primarily attributed to increased costs associated with
additional legal expenses, salaries of additional sales and administrative
personnel, separation costs associated with the departure of the Company's
former chief executive officer, and an organizational restructuring. The
Company expects limited increases in its selling, general and administrative
expense during the remainder of 1999 in connection with its plans to continue
to refocus its sales effort.
Interest income decreased to $287,608 and $576,657 for the three- and
six-month periods, respectively, ended June 30, 1999, compared to $381,575 and
$787,866 for the same periods in 1998. This decrease was primarily due to a
reduction in funds available for investment compounded by a reduction in
investment yields.
Income tax expense was $0 for the three and six months ended June 30,
1999, compared to $0 and $156,000 for the same respective periods in 1998. The
1998 expense was due to foreign taxes withheld from license fees received from
one of the Company's distribution partners, C. I. Kasei Co., Ltd.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash, cash equivalents and investments amounted to
$23,890,801 at June 30, 1999, compared to $26,633,912 at December 31, 1998. The
net cash used in the Company's operating activities was $2,631,013 for the six
months ended June 30, 1999, compared to $1,431,773 for the same period in 1998.
The net cash used in operating activities for the six-month period ended June
30, 1999 was primarily for the ongoing development of additional product
applications, the funding of research and development activities and sales
efforts, and the funding of other receivables, which was offset by the
collection of accounts receivable, a decrease in inventory, and an increase in
accounts payable and accrued liabilities. Net cash provided by investing
activities, including capital expenditures and purchases of securities in which
cash is invested pending its use for operating activities and expansion of the
Company's manufacturing facilities offset by maturities of such securities,
amounted to $2,872,069 for the six months ended June 30, 1999, compared to
$2,065,583 of net cash used in investing activities for the same period in
1998. Capital expenditures, primarily related to the further expansion of the
Company's existing manufacturing facility and the purchase of operating
equipment, amounted to $154,071 for the six months ended June 30, 1999,
compared to $320,233 for the same period in 1998. Net cash provided by
financing activities, which related to the exercise of options for 168,261
shares of Common Stock, amounted to $41,973 for the six-month period ended June
30, 1999, compared to $79,197, which related to the exercise of options for
115,572 shares of Common Stock, for the same period in 1998.
The Company believes that cash from operations and cash on hand, together
with the remaining net proceeds from the Company's initial public offering of
Common Stock ("the Offering") and interest income thereon, will be adequate to
fund the Company's current operating plans. The Company's actual future capital
requirements will depend, however, on many factors, including customer
acceptance of the Company's current and potential nanocrystalline materials and
product applications, continued progress in the Company's research and
development activities and product testing programs, the magnitude of these
activities and programs, and the costs necessary to increase and expand the
Company's
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manufacturing capabilities and to market and sell the Company's materials and
product applications. Depending on future requirements, the Company may seek
additional funding through public or private financing, collaborative
relationships, government contracts or additional licensing agreements.
Additional financing may not be available on acceptable terms or at all, and
any such additional financing could be dilutive to the Company's stockholders.
At June 30, 1999, the Company had a net operating loss carryforward of
approximately $22 million for income tax purposes. Because the Company may have
experienced "ownership changes" within the meaning of the U.S. Internal Revenue
Code in connection with its various prior equity offerings, future utilization
of this carryforward may be subject to certain limitations as defined by the
Internal Revenue Code. If not utilized, the carryforward expires at various
dates between 2005 and 2013. As a result of the annual limitation, a portion of
this carryforward may expire before ultimately becoming available to reduce
income tax liabilities. At June 30, 1999, the Company also had a foreign tax
credit carryforward of $156,000, which could be used as an offsetting tax
credit to reduce U.S. income taxes. The foreign tax credit will expire in 2013
if not utilized before that date.
IMPACT OF YEAR 2000 ISSUE
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Computer programs
that have time-sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices or engage
in similar normal business activities.
The Company has identified the following areas as possibly being affected
by the Year 2000 Issue: (i) IT and non-IT systems, (ii) manufacturing
applications, and (iii) third-party relationships. For each of these areas, the
Company is in the process of identifying and assessing specific software,
equipment, and systems which are potentially susceptible to the Year 2000
Issue. The Company expects to develop and implement corrective actions, if
necessary, to ensure that by September 30, 1999 its software, equipment and
systems will function properly with respect to dates in the year 2000 and
thereafter. The Company believes the total cost of such year 2000 compliance
activities will not be material. The Company believes that it has no material
exposure to contingencies related to the Year 2000 Issue for the products it
has sold to date.
The Company processes its transactions and applications utilizing personal
computers. In addition, the Company's telephone system, fax machines, payroll,
alarm systems and other miscellaneous systems utilize computer equipment and
software. The Company is identifying which software and equipment needs to be
upgraded. Based on its assessment to date, the Company does not believe that
significant modifications or replacements of its software or systems will be
required to be year 2000 compliant. As of January 1, 1998, the Company only
acquires software and invests in systems which are year 2000 compliant.
The Company's manufacturing activities rely on its PVS plasma reactors
comprised of modular equipment that contains embedded technology. The Company
also relies on a quality control laboratory for production process control. The
Company is identifying the particular hardware and software systems used in
such manufacturing applications to assess whether they are year 2000 compliant.
The Company believes such manufacturing applications are year 2000 compliant.
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To date, the Company does not have any direct interface between its
systems and those of any significant supplier or customer. The Company,
however, relies on third party suppliers for raw materials, utilities, cash
management services and other key supplies and services. The Company,
therefore, recognizes that it is vulnerable to third party suppliers that fail
to remediate their own Year 2000 Issues. The Company is corresponding with its
significant suppliers to determine their year 2000 compliance status. The
Company is also dependent upon its customers, product development partners and
distributors for sales, cash flow and product development. Although the Company
has received some formal information concerning the year 2000 compliance status
of certain of its customers, product development partners and distributors,
this information is limited and incomplete at this time. The Company has,
however, received indications that most of these entities are working on year
2000 compliance.
The Company's most reasonably likely worst case scenario with respect to
the Year 2000 Issue is that (i) its manufacturing systems may malfunction, and
(ii) third party suppliers of ceramic and metallic materials, cash management
services and utilities, customers, product development partners and
distributors may be unable to remediate their own Year 2000 Issues. In such
scenario, the Company could experience manufacturing interruptions,
difficulties in accessing its cash and investments, delays in distribution of
its products, delays in development of new product applications and reduced
shipments. This would have a material adverse effect on the Company's
operations. The Company currently has no contingency plan in the event such
most reasonably likely worst case scenario occurs.
The Company currently believes that the Year 2000 Issue will not pose
significant operational problems for the Company. However, if all Year 2000
Issues are not properly identified or remediated on a timely basis, the
Company's results of operations or relationships with customers and suppliers
may be materially adversely affected. In addition, the systems of other
companies on which the Company relies may not be timely converted and any
failure by them to do so could have a material adverse effect on the Company's
operations.
LEGAL PROCEEDINGS
As disclosed in Note 5 to the Financial Statements and under "Part II -
Other Information - Item 1. Legal Proceedings," five separate complaints were
filed in the United States District Court for the Northern District of
Illinois, Eastern Division, each of which alleged that the Company, certain of
its officers and directors, and the underwriters of the Offering are liable
under the federal securities laws for making material misstatements of fact and
omitting and failing to state material facts necessary to make other statements
of fact not misleading in the Registration Statement and Prospectus relating to
the Offering. In an order entered by the Court, those cases were consolidated
and a consolidated complaint was filed on October 30, 1998. The consolidated
complaint alleges that the action should be maintained as (i) a plaintiff class
action on behalf of certain persons who purchased the Common Stock from
November 26, 1997 through January 8, 1998, excluding the defendants, members of
their immediate families, any entity in which a defendant has a controlling
interest and certain others related to or affiliated with the foregoing, and
(ii) a defendant class action against the underwriters who participated in the
Offering. The consolidated complaint seeks unquantified damages as provided for
under the federal securities laws, pre- and post-judgment interest, attorneys'
fees, expert witness fees, other costs and expenses and such other and further
relief as the Court may find proper. In addition, the consolidated complaint
seeks rescission and/or rescissory damages relating to purchases of the Common
Stock, as provided for under federal securities laws. All defendants have filed
motions to dismiss the consolidated complaint that are fully briefed and under
advisement by the Court.
On November 20, 1998, a separate complaint was filed in the Northern
District of Illinois, Eastern Division, which alleged that the Company, certain
of its officers and directors, and the underwriters of the Company's Offering
are liable under the federal securities laws for making material
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misstatements of fact and omitting or failing to state material facts necessary
to make other statements of fact not misleading in connection with the
solicitation of consents to proceed with the Offering from certain of the
Company's preferred stockholders. The complaint alleges that the action should
be maintained as a plaintiff class action on behalf of those former preferred
stockholders whose shares of preferred stock of the Company were converted into
Common Stock on or about the date of the Offering, excluding the defendants,
other officers and directors of the Company, members of the immediate families
of all individual defendants, any entity in which a defendant has a controlling
interest and certain others related to, employed by or affiliated with the
foregoing. The complaint seeks unquantified damages as provided for under the
federal securities laws, pre- and post-judgment interest, attorneys' fees,
expert witness fees, other costs and expenses and such other and further relief
as the Court may find proper. On March 24, 1999, the preferred stockholders'
complaint was reassigned to the judge hearing the consolidated complaint
described above. Thereafter, the preferred stockholders' complaint was further
consolidated with that litigation.
The Company, the defendant directors and the defendant officers have each
retained counsel with respect to both of the above-described litigations and
intend to defend against both complaints vigorously. Although the Company
believes that the allegations of the complaints are without merit, it is not
feasible for the Company to predict at this time the outcome of either
litigation or whether the resolution of either litigation could have a material
adverse effect on the Company's results of operations, cash flows or financial
condition.
SAFE HARBOR PROVISION
Because the Company wants to provide investors with more meaningful and
useful information, the Quarterly Report on Form 10-Q contains certain
"forward-looking statements" (as such term is defined in Section 21E of the
Securities Exchange Act of 1934, as amended). Statements contained in this
Quarterly Report on Form 10-Q that are not historical facts are forward-looking
statements that are made pursuant to the Safe Harbor Provisions of the Private
Securities Litigation Reform Act of 1995. These statements reflect the
Company's current expectations regarding its future results of operations,
performance, and achievements and are based on information currently available
to the Company. The Company has tried, wherever possible, to identify these
forward-looking statements by using words such as "intends," "believes,"
"estimates," "expects," "plans," and similar expressions. These statements are
subject to certain risks, uncertainties, and factors which could cause the
Company's actual results, performance, and achievements in 1999 and beyond to
differ materially from those expressed in, or implied by, such statements.
These risks, uncertainties, and factors include, without limitation: uncertain
demand for, and acceptance of, the Company's nanocrystalline materials; the
Company's dependence on a limited number of key customers; the Company's
limited manufacturing capacity and experience; the Company's limited marketing
experience; changes in development and distribution relationships; the impact
of competitive products and technologies; the Company's dependence on patents
and protection of proprietary information; the resolution of litigation the
Company is involved in; and other risks set forth under "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations - Risk
Factors" in the Company's Annual Report on Form 10-K for the year ended
December 31, 1998, as filed with the Securities and Exchange Commission.
Readers of this Quarterly Report on Form 10-Q should not place undue reliance
on any forward-looking statements. Except as required by federal securities
laws, the Company undertakes no obligation to update or revise these
forward-looking statements to reflect new events or uncertainties.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to interest rate risk on its investment portfolio.
A 1% fluctuation in interest rate would result in a change in the portfolio
earnings of approximately $230,000 per year.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As previously disclosed in the Company's Annual Report on Form 10-K for
the year ended December 31, 1998, five separate complaints were filed in the
United States District Court for the Northern District of Illinois, Eastern
Division, each of which alleged that the Company, certain of its officers and
directors, and the underwriters of the Company's Offering are liable under the
federal securities laws for making material misstatements of fact and omitting
and failing to state material facts necessary to make other statements of fact
not misleading in the Registration Statement and Prospectus relating to the
Offering. In an order entered by the Court, those cases were consolidated and a
consolidated complaint was filed on October 30, 1998. The consolidated
complaint alleges that the action should be maintained as (i) a plaintiff class
action on behalf of certain persons who purchased the Common Stock from
November 26, 1997 through January 8, 1998, excluding the defendants, members of
their immediate families, any entity in which a defendant has a controlling
interest and certain others related to or affiliated with the foregoing, and
(ii) a defendant class action against the underwriters who participated in the
Offering. The consolidated complaint seeks unquantified damages as provided for
under the federal securities laws, pre- and post-judgment interest, attorneys'
fees, expert witness fees, other costs and expenses and such other and further
relief as the Court may find proper. In addition, the consolidated complaint
seeks rescission and/or rescissory damages relating to purchases of the Common
Stock, as provided for under federal securities laws. All defendants have filed
motions to dismiss the consolidated complaint that are fully briefed and under
advisement by the Court.
On November 20, 1998, a separate complaint was filed in the Northern
District of Illinois, Eastern Division, which alleged that the Company, certain
of its officers and directors, and the underwriters of the Company's Offering
are liable under the federal securities laws for making material misstatements
of fact and omitting or failing to state material facts necessary to make other
statements of fact not misleading in connection with the solicitation of
consents to proceed with the Offering from certain of the Company's preferred
stockholders. The complaint alleges that the action should be maintained as a
plaintiff class action on behalf of those former preferred stockholders whose
shares of preferred stock of the Company were converted into Common Stock on or
about the date of the Offering, excluding the defendants, other officers and
directors of the Company, members of the immediate families of all individual
defendants, any entity in which a defendant has a controlling interest and
certain others related to, employed by or affiliated with the foregoing. The
complaint seeks unquantified damages as provided for under the federal
securities laws, pre- and post-judgment interest, attorneys' fees, expert
witness fees, other costs and expenses and such other and further relief as the
Court may find proper. On March 24, 1999, the preferred stockholders' complaint
was reassigned to the judge hearing the consolidated complaint described above.
Thereafter, the preferred stockholders' complaint was further consolidated
with that litigation.
The Company, the defendant directors and the defendant officers have each
retained counsel with respect to both of the above-described litigations and
intend to defend against both complaints vigorously. Although the Company
believes that the allegations of the complaints are without merit, it is not
feasible for the Company to predict at this time the outcome of either
litigation or whether the resolution of either litigation could have a material
adverse effect on the Company's results of operations, cash flows or financial
condition.
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ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On November 26, 1997 (the "Effective Date"), the Company's Registration
Statement on Form S-1 (File No. 333-36937) relating to the Offering was
declared effective by the Securities and Exchange Commission. Since the
Effective Date, of its $28,837,936 of net proceeds from the Offering, the
Company has used approximately $625,000 for capital expenditures primarily
related to the further expansion of the Company's existing manufacturing
facility and the purchase of operating equipment and approximately $4,325,000
for working capital and other general corporate purposes. The remainder of the
net proceeds has been invested by the Company, pending its use, in short-term,
investment grade, interest-bearing obligations.
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS.
a) The 1999 Annual Meeting of Stockholders of the Company was
held on June 11, 1999.
b) The stockholders voted to re-elect two Class II directors to the
Company's Board of Directors. Results of the voting were as follows:
Directors For Authority Withheld Abstentions Broker Non-Votes
- ------------------------ --------- ------------------ ----------- ----------------
Joseph E. Cross 9,316,661 107,717 - -
Richard W. Siegel, Ph.D. 9,316,661 107,717 - -
Edward E. Hagenlocker, Ph.D., Jerry Pearlman and Donald S. Perkins
continued their terms of office as directors of the Company after the
1999 Annual Meeting of Stockholders.
c) The stockholders also voted to ratify the appointment by the Company's
Board of Directors of Ernst & Young LLP as the independent auditors of
the Company's financial statements for the year ended December 31, 1999.
Results of the voting were as follows:
For Against Abstentions Broker Non-Votes
- --------- ------- ----------- ----------------
9,340,811 69,017 14,550 -
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS.
Exhibit 10.1 - Employment Agreement entered into June
1, 1999 between the Company and Donald Freed
Exhibit 10.2 - Consulting Agreement entered into June
25, 1999 between the Company and Dennis J. Nowak
Exhibit 27 - Financial Data Schedule
B. REPORTS ON FORM 8-K.
The Company did not file any Current Reports on Form 8-K during the
second quarter of 1999.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NANOPHASE TECHNOLOGIES CORPORATION
Date: August 13, 1999 By: /s/ JOSEPH E. CROSS
-------------------
Joseph E. Cross
President, Chief Executive
Officer (principal executive
officer) and a Director
Date: August 13, 1999 By: /s/ JESS A. JANKOWSKI
----------------------------------------------------
Jess A. Jankowski
Corporate Controller (principal financial and
accounting officer)
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EXHIBIT INDEX
Exhibit
Number Exhibit Name
- -------------- ----------------------------------------------------------------
Exhibit 10.1 - Employment Agreement entered into June 1, 1999 between the
Company and Donald Freed
Exhibit 10.2 - Consulting Agreement entered into June 25, 1999 between the
Company and Dennis J. Nowak
Exhibit 27 Financial Data Schedule