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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, 2000
COMMISSION FILE NUMBER 0-22333
NANOPHASE TECHNOLOGIES CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 36-3687863
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1319 MARQUETTE DRIVE, ROMEOVILLE, ILLINOIS 60446
(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. Yes [ ] No [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 20, 2001 was $84,709,008.
The number of shares outstanding of the registrant's Common Stock, par
value $.01, as of March 20, 2001 was 13,621,549.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Definitive Proxy Statement in connection with
the registrant's 2001 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
("Nanophase" or the "Company"), 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. 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.
The Company's objective is to exploit its capabilities to efficiently
engineer and manufacture nanocrystalline materials. Nanophase 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.
THE COMPANY'S TECHNOLOGIES
Nanophase intends to maintain and grow its 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.
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
include evaluation and qualification of potential markets, identification of the
lead customers within each market, and development a business strategy for
successful market penetration. Nanophase then forms a technical/marketing team
to provide the customer with an engineered solution to meet that company's
specific requirements. 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.
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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.
A limited number of key customers have initially accounted for a
substantial portion of the Company's commercial revenue. In particular, revenue
from BASF Corporation ("BASF") and CIK constituted approximately 68.5% and
10.0%, respectively, of the Company's 2000 revenue. 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 of these key customers or the failure to
attract new customers could have a material adverse effect on the Company's
business, results of operations and financial condition.
Dr. Richard W. Siegel, an internationally recognized scientific leader in
the nanotechnology field, is a significant resource for the Company. 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. Dr. Siegel is also a founder of the Company and is currently
serving as a Director of the Company.
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.
TECHNOLOGY AND ENGINEERING
The Company's Technology and Engineering Group includes the research and
development 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.
Nanophase's total research and development expense, which includes all
expense relating to the technology and engineering group, during the years ended
December 31, 2000, 1999 and 1998 were $1,837,036, $1,456,126 and $1,504,127,
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.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
Nanophase relies on a combination of copyright, trademark, trade secret and
other intellectual property law, nondisclosure agreements and other protective
measures to protect its intellectual property. In addition to obtaining patent
and trademarks based on the Company's inventions and products, Nanophase also
licenses third-party patents to expand its technology base. The Company
currently owns or licenses 29 United States and foreign patents and patent
applications. Nanophase's intellectual property rights, however, could be
challenged, invalidated or circumvented. The Company does not believe that its
products or processes infringe the intellectual property rights of others, but
such claims, if they are established, could result in material liabilities or
loss of business.
The Company generally requires its employees, consultants, outside
scientific collaborators and other advisors to sign confidentiality and
noncompete 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
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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, the Company's employees who have not entered
into non-compete agreements may become competitors when their employment at
Nanophase ends.
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
many markets, the Company has major competitors, some of which are larger and
more diversified than the Company. Although management believes its materials
and technologies are superior to those of its competitors, competitive 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.
In addition, the number of development-stage companies involved in
nanocrystalline materials continues to grow posing significant and increasing
competitive risks. 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.
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.
EMPLOYEES
On December 31, 2000, the Company had a total of 54 full-time employees, 13
of whom hold advanced degrees. In the first quarter of 2001, the Company hired
Robert Haines, an experienced vice president of operations, to improve its
manufacturing and related operations. Nanophase is not subject to any collective
bargaining agreements, and management believes it has good relationships with
employees.
PROPERTIES
Nanophase operates a 36,000 square-foot production, research and
headquarters facility in Romeoville, Illinois and a 20,000 square-foot
production facility in Burr Ridge, Illinois; both are Chicago suburbs. The
Company also leases offsite warehouse space from time to time. 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 Romeoville facility houses the Company's headquarters, research and
development laboratories, and will be used for additional commercial and
pilot-scale manufacturing space in 2001. Nanophase leases its Romeoville
facility under an agreement whose initial term will expire in July 2006, with an
option to extend the lease for two additional periods of five years each. The
Burr Ridge facility has a quality control laboratory
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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 second
additional one-year term, which expires in September 2001.
FORWARD-LOOKING STATEMENTS
Nanophase Technologies Corporation 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 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 2001 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 The Company's previous
filings with the Securities and Exchange Commission. 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
See Note 18 to the Financial Statements for additional information.
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 2000.
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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. 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:
HIGH LOW
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Fiscal year ending December 31, 2000:
First Quarter............................................ $22.06 $4.31
Second Quarter........................................... 16.69 5.50
Third Quarter............................................ 17.50 8.13
Fourth Quarter........................................... 15.25 8.38
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
On March 20, 2001, the last reported sale price of the Common Stock was
$6.22 per share, and there were approximately 118 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 Common Stock to
Joseph Cross, the Company's Chief Executive Officer, as part of an arrangement
made to induce Mr. Cross to join the Company as its Chief Executive Officer.
Effective January 2000, the Company granted 3,177 shares of Common Stock to each
of the following directors of the Company for services performed in their
capacity as directors: Donald Perkins, Edward Hagenlocker, Jerry Pearlman and
Richard Siegel. Effective January 2001, the Company granted 1,361 shares of
Common Stock to each of the following directors of the Company for services
performed in their capacity as directors: Donald Perkins, Edward Hagenlocker,
James McClung, Jerry Pearlman and Richard Siegel. Each of the preceding
issuances were made in reliance on the exemption from registration found in
section 4(2) of the Securities Act of 1933.
On November 26, 1997 the Company's Registration Statement on Form S-1 (File
No. 333-36937) relating to the Company's initial public offering of common stock
(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 $2,800,000 for capital
expenditures primarily related to the further expansion of the Company's
existing manufacturing facility and the purchase of operating equipment and
approximately $8,735,000 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.
At December 31, 2000, the Company had approximately $17,300,000 in cash, cash
equivalents and investments.
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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financial data set forth below as of, and for, each of the years in the
five-year period ended December 31, 2000 have been derived from the audited
financial statements of the Company.
YEARS ENDED DECEMBER 31,
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2000 1999 1998 1997 1996
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STATEMENT OF OPERATIONS
DATA:
Product revenue.......... $3,824,159 $ 1,128,861 $ 1,140,845 $ 924,763 $ 249,017
Other revenue............ 449,194 295,986 162,944 2,798,729 236,019
Governmental research
contracts.............. -- -- -- -- 110,770
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Total revenue............ 4,273,353 1,424,847 1,303,789 3,723,492 595,806
Cost of revenue.......... 4,754,485 2,610,667 3,221,996 3,935,766 4,019,484
Research and development
expense................ 1,837,036 1,456,126 1,504,127 990,331 677,284
Selling, general and
administrative
expense................ 3,388,758 3,641,736 3,594,946 2,074,728 1,661,504
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Total operating
expense................ 9,980,279 7,708,529 8,321,069 7,000,825 6,358,272
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Operating loss........... (5,706,926) (6,283,682) (7,017,280) (3,277,333) (5,762,466)
Interest income.......... 1,188,599 1,166,615 1,539,400 204,863 184,778
Provision for income
taxes.................. -- -- (156,000) -- --
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Net loss................. $4,518,327 $(5,117,067) $(5,633,880) $(3,072,470) $(5,577,688)
========== =========== =========== =========== ===========
Net loss per share-basic
and diluted............ $ (0.34) $ (0.40) $ (0.45)
========== =========== ===========
Shares used in computing
the net loss per
share.................. 13,390,741 12,690,483 12,416,305
AS OF DECEMBER 31,
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2000 1999 1998 1997 1996
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BALANCE SHEET DATA:
Cash and cash
equivalents............ $ 473,036 $ 624,509 $ 363,394 $ 3,988,368 $ 617,204
Working capital.......... 18,356,349 21,831,264 26,535,018 32,038,915 3,070,789
Total assets............. 23,830,163 25,677,539 30,453,988 36,196,569 5,539,634
Total stockholders'
equity................. 21,007,745 24,161,323 29,107,590 34,651,334 5,110,450
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," risks discussed in other filings made by the
Company with the Securities and Exchange Commission, 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.
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
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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, 2000, the Company was primarily
capitalized through the private offering of approximately $19,558,000 of equity
securities and its initial public offering of $28,838,000 of Common Stock, each
net of issuance costs. The Company has incurred cumulative losses of $29,013,945
from inception through December 31, 2000.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2000 AND 1999
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 $4,273,353 in 2000, compared to $1,424,847 in 1999. The increase in
total revenue between 2000 and 1999 was primarily attributed to a $2,695,298
increase in product revenue and a $153,208 increase in other revenue. Product
revenue increased to $3,824,159 in 2000, compared to $1,128,861 in 1999. Other
revenue increased to $449,194 in 2000, compared to $295,986 in 1999. Revenue
from two major customers constituted approximately 78.5% of the Company's 2000
revenue. In particular, revenue from BASF and CIK constituted approximately
68.5% and 10.0%, respectively, of the Company's 2000 revenue.
Cost of revenue generally includes costs associated with commercial
production, customer development arrangements, the transfer of technology, and
licensing fees. Cost of revenue increased to $4,754,485 in 2000, compared to
$2,610,667 in 1999. The increase in cost of revenue was generally attributed to
increased product sales, somewhat offset by efficiencies in the manufacture of
the Company's products and a reduction in the allowance for excess quantities in
inventory in 2000 as a result of the sale of inventories for which an allowance
had previously been provided. Cost of revenue as a percentage of total revenue
decreased in 2000, compared to the same period in 1999, due primarily to the
increase in total revenue.
Research and development expense primarily consists of costs associated
with the Company's development or acquisition of new product applications and
coating formulations and the cost of enhancing the Company's manufacturing
processes. Research and development expense increased to $1,837,036 in 2000,
compared to $1,456,126 in 1999. The increase in research and development expense
was primarily attributed to additional salaries for newly hired research
personnel and increases in internal costs regarding the development of new
formulations and product applications. These increases were partially offset by
a reduction in recruiting and relocation expenses in 2000 and non-recurring
payments to a former officer relating to a restructuring in 1999. The Company
expects to further increase its research and development expense in 2001 in
connection with its plans to continue to enhance and expand its product lines,
technologies and manufacturing processes.
Selling, general and administrative expense decreased to $3,388,758 in
2000, compared to $3,641,736 in 1999. The net decrease was primarily attributed
to non-recurring restructuring costs, including payments to former officers in
1999, and decreased legal expenses in 2000. These decreases were partially
offset in 2000 by additional rent expense relating to the Company's new
facility, and increased investor relations and printing costs.
Interest income increased to $1,188,599 in 2000, compared to $1,166,615 in
1999. This increase was primarily due to an increase in investment yields which
was somewhat offset by a reduction in funds available for investment.
There was no income tax expense for the years ended December 31, 2000 and
1999.
YEARS ENDED DECEMBER 31, 1999 AND 1998
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
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$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 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. 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 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.
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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash, cash equivalents and investments amounted to
$17,304,757 at December 31, 2000, compared to $21,840,677 at December 31, 1999.
The net cash used in the Company's operating activities was $5,127,473,
$4,335,648, and $3,859,019 for the years ended December 31, 2000, 1999, and
1998, respectively. The net cash used in operating activities for the year ended
December 31, 2000 was primarily for the further development of product
applications, the funding of research and development activities, sales efforts,
and the funding of trade receivables, and prepaid expenses, offset by increases
in accounts payable and a decrease in the other receivable. Net cash provided by
investing activities, which is due to maturities of securities offset somewhat
by capital expenditures and purchases of securities, amounted to $2,560,824,
$4,550,288, and $143,909, for the years ended December 31, 2000, 1999, and 1998,
respectively. Capital expenditures, primarily related to the further expansion
of the Company's existing manufacturing facilities and the purchase of operating
equipment, amounted to $1,823,623, $504,061, and $470,425 for the years ended
December 31, 2000, 1999, and 1998, respectively. Net cash provided by financing
activities, which related to the issuance of shares of Common Stock pursuant to
the exercise of options and warrants, a promissory note, and an insurance
finance agreement amounted to $2,415,176 for the year ended December 31, 2000,
compared to $46,475 for the year ended December 31, 1999, which related to the
exercise of options for 170,876 shares of common stock, and $90,136 for the year
ended December 31, 1998 which related to the exercise of options for 128,356
shares of common stock.
In 2000, the Company borrowed $650,000 from BASF, as part of a $1.3 million
promissory note, in order to finance the construction of a coating line in its
Romeoville, Illinois facility. The note bears interest at 8.45% per annum with
the first payment commencing on June 1, 2001. Payments are to be made on a per
kilogram
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basis, as invoiced. Any remaining outstanding balance at June 1, 2004 shall
become payable on demand at that time. The Company also financed $486,000 in
insurance premiums. This agreement bears interest at 8.53% per annum through
September 2001. In September 2001, the interest rate will be adjusted to the
30-Day LIBOR rate plus 1.84%. Expected monthly payments will be approximately
$26,000 through July 2002.
The Company believes that cash on hand, together with the remaining net
proceeds from the Company's initial public offering of common stock and interest
income thereon, will be adequate to fund the Company's current operating plans.
The Company's actual future capital requirements will depend, however, on many
factors, including customer acceptance of the Company's current and potential
nanocrystalline materials and product applications, continued progress in the
Company's research and development activities and product testing programs, the
magnitude of these activities and programs, and the costs necessary to increase
and expand the Company's manufacturing capabilities and to market and sell the
Company's materials and product applications. Depending on future requirements,
the Company may seek additional funding through public or private financing,
collaborative relationships, government contracts or additional licensing
agreements. Additional financing may not be available on acceptable terms or at
all, and any such additional financing could be dilutive to the Company's
stockholders.
At December 31, 2000, the Company had a net operating loss carryforward of
approximately $32.1 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 2015. As a result of the annual limitation and
uncertainty as to the amount of future taxable income that will be earned 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, 2000, the
Company also had a foreign tax credit carryforward of $156,000, which could be
used as an offsetting tax credit to reduce U.S. income taxes. The foreign tax
credit will expire in 2013 if not utilized before that date.
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 schedule, 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.
10
11
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 2001
Annual Meeting of Stockholders (the "2001 Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
The information in response to this item is incorporated by reference from
the section of the 2001 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 2001 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 2001 Proxy Statement captioned "Executive Compensation and
Certain Transactions."
11
12
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, 2000 and 1999
Statements of Operations for the Years Ended December 31, 2000, 1999
and 1998
Statements of Stockholders' Equity for the Years Ended December 31,
2000, 1999 and 1998
Statements of Cash Flows for the Years Ended December 31, 2000, 1999
and 1998
Notes to Financial Statements
2. The following financial statement schedule of the Company is 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.
EXHIBIT
NUMBER
-------
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.
12
13
EXHIBIT
NUMBER
-------
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 incorporated by reference to
Exhibit 10.14 to the 1999 10-K.
10.15* Employment Agreement dated as of November 9, 1999 between
the Company and Joseph Cross, incorporated by reference to
Exhibit 10.15 to the 1999 10-K.
10.16* 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.
10.17* 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.
10.18* Employment Agreement dated as of June 1, 1999 between the
Company and Donald Freed incorporated by reference to
Exhibit 10.19 to the 1999 10-K.
10.19* 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).
10.20* 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.
10.21** Zinc Oxide Supply Agreement dated as of September 16, 1999
between the Company and BASF Corporation, as assignee,
incorporated by reference to Exhibit 10.22 to the 1999 10-K.
10.22* Employment Agreement dated as of November 2, 2000 between
the Company and Robert Haines.
10.23 Lease Agreement between Centerpointe Properities Trust and
the Company, dated June 15, 2000.
13
14
EXHIBIT
NUMBER
-------
10.24*** Amendment No. 1 to Zinc Oxide Supply Agreement dated as of
January, 2001 between the Company and BASF Corporation.
10.25 Promissory Note dated as of September 14, 2000 between the
Company and BASF Corporation.
11 Statement regarding computation of loss per share.
23 Consent of Ernst & Young LLP.
- ---------------
* Management contract or compensatory plan or arrangement.
** Confidentiality previously requested for portions of this agreement.
The Company has disclosed that such agreement is with BASF
Corporation, as assignee.
*** Confidentially 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.
14
15
NANOPHASE TECHNOLOGIES CORPORATION
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Report of Ernst & Young LLP, Independent Auditors........... F-2
Balance Sheets as of December 31, 2000 and 1999............. F-3
Statements of Operations for the years ended December 31,
2000, 1999 and 1998....................................... F-4
Statements of Stockholders' Equity.......................... F-5
Statements of Cash Flows for the years ended December 31,
2000, 1999 and 1998....................................... F-6
Notes to the Financial Statements........................... F-7
F-1
16
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, 2000 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, 2000. Our audit also included the financial
statement schedule 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, 2000 and 1999, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
2000, in conformity with accounting principles generally accepted in the United
States. Also in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set therein.
/s/ Ernst & Young LLP
Ernst & Young LLP
Chicago, Illinois
February 2, 2001
F-2
17
NANOPHASE TECHNOLOGIES CORPORATION
BALANCE SHEETS
AS OF DECEMBER 31,
----------------------------
2000 1999
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 473,036 $ 624,509
Investments............................................... 16,831,721 21,216,168
Trade accounts receivable, less allowance for doubtful
accounts of $81,450 in 2000 and $120,000 in 1999....... 1,238,334 401,826
Other receivable, net..................................... 144,818 247,841
Inventories, net.......................................... 892,674 766,778
Prepaid expenses and other current assets................. 770,200 90,358
------------ ------------
Total current assets................................... 20,350,783 23,347,480
Equipment and leasehold improvements, net................... 3,266,245 2,152,413
Other assets, net........................................... 213,135 177,646
------------ ------------
$ 23,830,163 $ 25,677,539
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings..................................... $ 285,316 $ --
Accounts payable.......................................... 824,338 615,818
Accrued expenses.......................................... 884,780 900,398
------------ ------------
Total current liabilities.............................. 1,994,434 1,516,216
Long-term debt.............................................. 827,984 --
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;
13,593,914 and 12,764,058 shares issued and outstanding at
December 31, 2000 and December 31, 1999, respectively..... 135,939 127,641
Additional paid-in capital.................................. 49,885,751 48,529,300
Accumulated deficit......................................... (29,013,945) (24,495,618)
------------ ------------
Total stockholders' equity............................. 21,007,745 24,161,323
------------ ------------
$ 23,830,163 $ 25,677,539
============ ============
(See accompanying Notes to Financial Statements)
F-3
18
NANOPHASE TECHNOLOGIES CORPORATION
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
-----------------------------------------
2000 1999 1998
----------- ----------- -----------
REVENUE:
Product revenue..................................... $ 3,824,159 $ 1,128,861 $ 1,140,845
Other revenue....................................... 449,194 295,986 162,944
----------- ----------- -----------
Total revenue.................................. 4,273,353 1,424,847 1,303,789
OPERATING EXPENSE:
Cost of revenue..................................... 4,754,485 2,610,667 3,221,996
Research and development expense.................... 1,837,036 1,456,126 1,504,127
Selling, general and administrative expense......... 3,388,758 3,641,736 3,594,946
----------- ----------- -----------
Total operating expenses....................... 9,980,279 7,708,529 8,321,069
----------- ----------- -----------
Loss from operations................................ (5,706,926) (6,283,682) (7,017,280)
Interest income..................................... 1,188,599 1,166,615 1,539,400
----------- ----------- -----------
Loss before provision for income taxes.............. (4,518,327) (5,117,067) (5,477,880)
Provision for income taxes.......................... -- -- (156,000)
----------- ----------- -----------
Net loss............................................ $(4,518,327) $(5,117,067) $(5,633,880)
=========== =========== ===========
Net loss net per share-basic and diluted............ $ (0.34) $ (0.40) $ (0.45)
=========== =========== ===========
Weighted average number of common shares
outstanding...................................... 13,390,741 12,690,483 12,416,305
=========== =========== ===========
(See accompanying Notes to Financial Statements)
F-4
19
NANOPHASE TECHNOLOGIES CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
PREFERRED STOCK COMMON STOCK ADDITIONAL
------------------------- ---------------------- PAID-IN ACCUMULATED
DESCRIPTION SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
----------- ------ ------ ------ ------ ---------- ----------- -----------
Balance as of January 1, 1998..... -- -- 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
---------- ------------ ----------- -------- ----------- ------------ -----------
Exercise of stock options....... -- -- 444,569 4,445 1,147,431 -- 1,151,876
Stock compensation.............. -- -- 372,579 3,726 146,274 -- 150,000
Exercise of warrants............ -- -- 12,708 127 62,746 -- 62,873
Net loss for the year ended
December 31, 2000............. -- -- -- -- -- (4,518,327) (4,518,327)
---------- ------------ ----------- -------- ----------- ------------ -----------
Balance as of December 31, 2000... -- $ -- 13,593,914 $135,939 $49,885,751 $(29,013,945) $21,007,745
========== ============ =========== ======== =========== ============ ===========
(See accompanying Notes to Financial Statements)
F-5
20
NANOPHASE TECHNOLOGIES CORPORATION
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
-----------------------------------------------
2000 1999 1998
------------- ------------- -------------
OPERATING ACTIVITIES:
Net loss...................................... $ (4,518,327) $ (5,117,067) $ (5,633,880)
Adjustments to reconcile net loss to cash
used in operating activities:
Depreciation and amortization............ 722,877 678,749 491,098
Stock compensation expense............... 62,873 124,325 --
Allowance for excess inventory
quantities............................. (168,627) 69,581 190,633
Provision for asset write-down........... -- 61,011 --
Changes in assets and liabilities related to
operations:
Trade accounts receivable................ (836,508) (85,498) 1,325,161
Other receivable......................... 103,023 (247,841) --
Inventories.............................. 42,731 2,466 (72,155)
Prepaid expenses and other assets........ (728,417) 8,807 38,961
Accounts payable......................... 208,520 202,440 (517,019)
Accrued expenses......................... (15,618) (32,621) 318,182
------------- ------------- -------------
Net cash used in operating activities......... (5,127,473) (4,335,648) (3,859,019)
INVESTING ACTIVITIES:
Acquisition of equipment and leasehold
improvements................................ (1,823,623) (504,061) (470,425)
Purchases of held-to-maturity investments..... (132,457,935) (126,819,265) (182,750,264)
Maturities of held-to-maturity investments.... 136,842,382 131,873,614 183,364,598
------------- ------------- -------------
Net cash (used in) provided by investing
activities.................................. 2,560,824 4,550,288 143,909
FINANCING ACTIVITIES:
Principal payment on debt obligation.......... (22,700) -- --
Proceeds from borrowings...................... 1,136,000 -- --
Proceeds from sale of common stock............ 1,301,876 46,475 90,136
------------- ------------- -------------
Net cash provided by financing activities..... 2,415,176 46,475 90,136
------------- ------------- -------------
Increase (decrease) in cash and cash
equivalents................................. (151,473) 261,115 (3,624,974)
Cash and cash equivalents at beginning of
period...................................... 624,509 363,394 3,988,368
------------- ------------- -------------
Cash and cash equivalents at end of period.... $ 473,036 $ 624,509 $ 363,394
============= ============= =============
(See accompanying Notes to Financial Statements)
F-6
21
NANOPHASE TECHNOLOGIES CORPORATION
NOTES TO FINANCIAL STATEMENTS
(1) DESCRIPTION OF BUSINESS
The Company was incorporated on November 30, 1989, for the purpose of
developing nanocrystalline materials for commercial production and sale in
domestic and international markets.
In the course of its corporate development, the Company has experienced net
losses and negative cash flows from operations. Historically, the Company has
funded its operations primarily through the issuance of equity securities.
Revenue from international sources approximated $587,500, $573,300, and
$347,500 for the years ended December 31, 2000, 1999, and 1998, 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.
ACCOUNTS RECEIVABLE
Credit evaluations of customers are ongoing and collateral or other
security is generally not required on accounts receivable. An allowance for
doubtful accounts is maintained at a level management believes is sufficient to
cover potential credit losses.
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 (4-16
years).
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.
F-7
22
NANOPHASE TECHNOLOGIES CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
PRODUCT REVENUE
Product revenue consists of sales of product which are recorded as
shipments are made by the Company and risk of loss transfers to the customer.
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 per the contractual arrangement.
SHIPPING AND HANDLING COST
Shipping and handling costs are included in cost of goods sold.
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, accrued liabilities, and long-term debt. The fair
values of all financial instruments were not materially different from their
carrying values.
F-8
23
NANOPHASE TECHNOLOGIES CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NET LOSS PER SHARE
Net loss per common share is computed based upon the weighted average
number of common shares outstanding. Common equivalent shares of 961,207 for
2000, 483,927 for 1999, and 967,549 for 1998 are not included in the per share
calculations because the effect of their inclusion would be anti-dilutive.
ADOPTION OF ACCOUNTING PRINCIPLES
The Company is required to adopt Statement of Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133),
as amended by SFAS No. 137 and 138, effective January 1, 2001. SFAS No. 133
requires all derivatives to be recognized in the statement of financial position
as either assets or liabilities and measured at fair value. In addition, all
hedging relationships must be designated, reassessed and documented pursuant to
the provisions of SFAS No. 133. Management believes the adoption of SFAS No. 133
will not have a material effect on the financial position or results of
operations of the Company.
(3) INVESTMENTS
Investments consist of government bonds and commercial paper with an
approximate fair value of $16,838,000 and $21,113,000 at December 31, 2000 and
1999, respectively. All investments have been classified as held-to-maturity and
mature in the subsequent year.
(4) INVENTORIES
Inventories consist of the following:
AS OF DECEMBER 31,
------------------------
2000 1999
---------- ----------
Raw materials......................................... $ 328,786 $ 257,485
Finished goods........................................ 655,475 769,507
---------- ----------
984,261 1,026,992
Allowance for excess quantities....................... (91,587) (260,214)
---------- ----------
$ 892,674 $ 766,778
========== ==========
(5) EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements consist of the following:
AS OF DECEMBER 31,
--------------------------
2000 1999
----------- -----------
Machinery and equipment............................. $ 3,137,182 $ 3,072,978
Office equipment.................................... 292,202 226,760
Office furniture.................................... 69,230 43,580
Leasehold improvements.............................. 873,317 729,505
Construction in progress............................ 1,524,515 --
----------- -----------
5,896,446 4,072,823
Less: Accumulated depreciation and amortization..... (2,630,201) (1,920,410)
----------- -----------
$ 3,266,245 $ 2,152,413
=========== ===========
F-9
24
NANOPHASE TECHNOLOGIES CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Depreciation expense was $709,792, $673,728, and $486,444 for the years
ended December 31, 2000, 1999, and 1998, respectively.
(6) LONG-TERM DEBT
In November 2000, the Company entered into a three-year promissory note,
held by its largest customer, in the amount of $1,293,895 for the construction
of a coating line at the Company's Romeoville, Illinois facility. At December
31, 2000, borrowings against this note were $650,000. The note bears interest at
8.45% per annum with the first payment commencing on June 1, 2001. Payments are
to be made at a rate of $1.37 per kilogram of coated material invoiced, with any
remaining outstanding balance at June 1, 2004 becoming payable on demand at that
time.
In December 2000, the Company financed $486,000 in insurance premiums. The
agreement bears interest at 8.53% per annum through September 2001. In September
2001, the interest rate will be adjusted to the 30 Day LIBOR rate plus 1.84%.
Expected monthly payments will be approximately $26,000 through July 2002.
(7) LEASE COMMITMENTS
During the year ended December 31, 2000, the Company entered into a
six-year term operating lease with multiple renewable options for its operating
facility. The lease is a net lease which requires the payment of executory costs
such as real estate taxes, insurance, and maintenance.
The Company also leases manufacturing and office space under an agreement
that will expire in September 2001. Monthly minimum lease payments amount to
$8,800 for this facility.
The following is a schedule of future minimum lease payments as required
under the above operating leases:
Year ending December 31:
2001........................................................ $ 346,265
2002........................................................ 284,293
2003........................................................ 292,815
2004........................................................ 301,601
2005........................................................ 310,651
2006........................................................ 184,345
----------
Total minimum payments required:............................ $1,719,970
==========
Rent expense under these leases amounted to $243,356, $190,832, and
$191,995 for the years ended December 31, 2000, 1999, and 1998, respectively.
(8) ACCRUED EXPENSES
Accrued expenses consist of the following:
AS OF DECEMBER 31,
-------------------------
2000 1999
----------- -----------
Accrued payroll and related expenses................ $ 534,994 $ 364,911
Accrued professional services....................... 122,768 133,923
Other............................................... 227,018 220,499
Accrued payments to former officers................. -- 181,065
----------- -----------
$ 884,780 $ 900,398
=========== ===========
F-10
25
NANOPHASE TECHNOLOGIES CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(9) RESEARCH AND DEVELOPMENT ARRANGEMENTS
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 $10,500, $197,500, and $160,984 of revenues for the years ended
December 31, 2000, 1999, and 1998, respectively.
(10) LICENSE AGREEMENTS
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 $24,200, $12,900, and $9,900 for the years
ended December 31, 2000, 1999, and 1998, 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
$0, $37,900, and $12,100 for the years ended December 31, 2000, 1999, and 1998,
respectively.
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 C. I. Kasei, a
division of Itochu Corporation ("CIK"). Under this agreement, 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 payments to maintain exclusivity. The agreement expires on
March 31, 2013 unless earlier terminated as provided therein. The Company
recorded royalty revenues, classified as "Other Revenue" on the Statements of
Operations, under this agreement of $300,000, $4,417, and $1,690 for the years
ended December 31, 2000, 1999, and 1998, respectively. For 1999 and 1998, the
Company allowed CIK to purchase additional product as a substitute for its
minimum royalty requirements.
(11) INCOME TAXES
The Company has net operating loss carryforwards for tax purposes of
approximately $32,100,000 at December 31, 2000, which expire between 2005 and
2015. 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:
AS OF DECEMBER 31,
--------------------------
2000 1999
------------ -----------
DEFERRED TAX ASSETS:
Net operating loss carryforwards................. $ 12,498,000 $ 8,932,000
Foreign tax credit carryforward.................. 156,000 156,000
Start-up cost capitalized for income tax
purposes...................................... -- 41,000
Inventory and other allowances................... 67,000 148,000
Excess book depreciation......................... 179,000 113,000
Other accrued costs.............................. 189,000 203,000
------------ -----------
Total deferred tax assets..................... $ 13,089,000 9,593,000
Less: Valuation allowance........................ ($13,089,000) (9,593,000)
------------ -----------
Deferred income taxes.............................. $ -- $ --
============ ===========
F-11
26
NANOPHASE TECHNOLOGIES CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The valuation allowance increased $1,712,000 for the year ended December
31, 2000 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, 2000, the Company has
a foreign tax credit carryforward of $156,000.
(12) CAPITAL STOCK
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 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, 2000, 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:
Warrants.................................................... 28,949
Options..................................................... 1,970,815
---------
1,999,764
=========
(13) STOCK OPTIONS AND WARRANTS
The Company has entered into stock option agreements with certain officers,
employees, directors and three Advisory Board members. At December 31, 2000, the
Company had outstanding options to purchase 1,451,681 shares of common stock.
The stock options generally expire ten years from the date of grant. Of the
total number of options granted 861,076 of the outstanding options vest over a
five-year period, 531,166 vest over a three-year period from their respective
grant dates and 59,439 vest on the eighth anniversary following their grant
date. For the year ended December 31, 2000, the Company recognized $62,873 in
stock compensation expense related to the grant of 12,708 shares of stock to
four directors. 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
27
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, 2000:
WEIGHTED
NUMBER OF AVERAGE EXERCISE
OPTIONS EXERCISE PRICE PRICE
--------- --------------- ----------------
Outstanding at January 1, 1998................. 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
Options granted during 2000.................... 335,675 6.312 - 11.625 7.777
Options exercised during 2000.................. (444,569) .432 - 5.750 2.732
Options canceled during 2000................... (292,669) 1.727 - 7.687 3.732
---------
Outstanding at December 31, 2000............... 1,451,681 .112 - 11.625 3.876
=========
Information with respect to stock options outstanding and stock options
exercisable at December 31, 2000 follows:
OPTIONS OUTSTANDING
----------------------------------------------------------
WEIGHTED-AVERAGE
NUMBER REMAINING WEIGHTED-
OUTSTANDING CONTRACTUAL LIFE AVERAGE
AT DECEMBER 31, 2000 (YEARS) EXERCISE PRICE
-------------------- ---------------- --------------
Range of Exercise Prices
$0.112-0.432.............................. 71,150 3.515 $0.354
$1.727-2.375.............................. 420,700 7.634 1.895
$2.813-3.886.............................. 621,666 6.873 5.951
$5.000-6.313.............................. 28,740 8.023 5.616
$7.625-11.625............................. 309,425 9.405 7.824
---------
1,451,681
=========
OPTIONS EXERCISABLE
----------------------------------------------------------
NUMBER WEIGHTED-
EXERCISABLE AVERAGE
AT DECEMBER 31, 2000 EXERCISE PRICE
-------------------- --------------
Range of Exercise Prices
$0.112-0.432.............................. 71,150 $0.354
$2.813-3.886.............................. 153,520 1.814
$5.000-6.313.............................. 314,791 3.697
$7.625-11.625............................. 10,072 5.172
---------
549,533
=========
F-13
28
NANOPHASE TECHNOLOGIES CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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. No warrants were converted in 1999. For the year
ended December 31, 2000, 400,847 warrants were converted to common stock, of
which 267,231 warrants were converted, via a cashless exchange into 238,963
shares of common stock, and 133,616 warrants were exercised for $150,000. At
December 31, 2000, 28,949 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, 2000, 1999, and 1998: 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 used was 25%. The weighted
average fair value of the options granted during 2000, 1999, and 1998 was
$3.263, $0.885, and $ 1.505 per share, respectively.
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 $4,789,332, $5,456,516, and $5,922,570
and the pro forma net loss per share, basic and diluted, would be $0.36, $0.43,
and $0.48 for the years ended December 31, 2000, 1999, and 1998, respectively.
(14) 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 maximum contribution by the
Company not to exceed 3% of the participant's salary. In 2000, the Company
contribution under this plan was $42,026. There was no contribution in 1999 or
1998.
(15) RELATED PARTY TRANSACTIONS
The Company has an ongoing consulting agreement with a
director/stockholder. Payments under this agreement amount to $2,000 per month.
F-14
29
NANOPHASE TECHNOLOGIES CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(16) SIGNIFICANT CUSTOMERS
Revenue from two customers constituted approximately 68.5% and 10.0%,
respectively, of the Company's 2000 revenue. Revenue from three customers
constituted approximately 33.8%, 9.9%, and 9.7%, respectively, of the Company's
1999 revenue. Revenue from four customers constituted approximately 16.9%,
14.0%, 13.4% and 11.5% respectively, of the Company's 1998 revenue.
(17) QUARTERLY FINANCIAL DATA (UNAUDITED)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
----------- ----------- ----------- -----------
2000
Total revenue....................... $ 618,921 $ 1,105,336 $ 1,354,951 $ 1,194,145
Loss from operations................ (1,717,784) (1,552,282) (1,024,466) (1,412,394)
Net loss............................ (1,434,559) (1,252,767) (715,241) (1,115,760)
Basic and diluted loss per share.... (0.11) (0.09) (0.05) (0.08)
1999
Total revenue....................... $ 324,998 $ 329,211 $ 365,197 $ 405,441
Loss from operations................ (1,864,951) (1,869,641) (1,572,137) (976,953)
Net loss............................ (1,575,902) (1,582,033) (1,287,012) (672,120)
Basic and diluted loss per share.... (0.13) (0.12) (0.10) (0.05)
(18) CONTINGENT LIABILITIES
Five separate complaints were filed in the United States District Court for
the Northern District of Illinois, each alleging that the Company, certain of
its officers and directors, and the underwriters of the Company's initial public
offering of Common Stock (the "Offering") are liable under the federal
Securities Act of 1933 for making supposedly negligent or reckless material
misstatements or omissions of fact in the Registration Statement and Prospectus
relating to the Offering. A consolidated complaint was filed in those cases in
October 1998. The consolidated complaint alleges that the action should be
maintained as (i) a plaintiff class action on behalf of certain persons who
purchased the Common Stock from November 26, 1997 through January 8, 1998, and
(ii) a defendant class action against the underwriters who participated in the
Offering. The consolidated complaint seeks unquantified damages, pre- and
post-judgment interest, attorneys' and expert witness fees. The consolidated
complaint also seeks rescission of plaintiffs' purchases of the Common Stock. In
October 1999, the Court granted in part and denied in part defendants' motions
to dismiss the consolidated complaint. In its ruling, the Court in part found
that plaintiffs who did not purchase their Common Stock during the Offering
could not sue under Section 12(a)(2) of the Securities Act of 1933. Each
defendant's respective answer to the remaining claims in the consolidated
complaint was filed in November 1999.
Following certain discovery, the Company agreed to settle all claims
against all defendants in the consolidated complaint for $4,025,000. The
settlement is not an admission of liability by any party. Because the settlement
has been funded by the Company's directors and officers liability insurance, the
settlement payment will not have a material adverse effect on the Company's
financial condition or results of operations. The Court ordered preliminary
approval of the settlement on December 6, 2000. The settlement remains subject
to the Court's final approval at a hearing scheduled for March 27, 2001.
The above-described settlement will not resolve a separate complaint filed
in the Northern District of Illinois in November 1998, alleging that the
Company, certain of its officers and directors, and the underwriters of the
Company's Offering are liable under the federal Securities Exchange Act of 1934
for making supposedly fraudulent material misstatements and omissions of fact in
connection with the solicitation
F-15
30
NANOPHASE TECHNOLOGIES CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
of consents to proceed with the Offering from certain of the Company's preferred
stockholders. The complaint alleges that the action should be maintained as a
plaintiff class action on behalf of certain former preferred stockholders whose
shares of preferred stock were converted into Common Stock on or about the date
of the Offering. The complaint seeks unquantified damages, pre- and
post-judgment interest, attorneys' and expert witness fees. In March 1999, the
preferred stockholders' complaint was reassigned to the judge hearing the
consolidated complaint described above. All defendants subsequently filed a
motion to dismiss the preferred stockholders' complaint. In August 2000, the
Court denied that motion, finding that the preferred stockholders' allegations
were pleaded sufficiently to permit their claims to proceed. Each defendant's
respective answer to the preferred stockholders' complaint was filed in
September 2000. Discovery currently is pending.
Pursuant to the underwriting agreement for the Offering, the Company has
agreed to pay the underwriters' attorneys' fees in all the above-described
litigation. The Company and the defendant directors and officers each have
retained counsel and intend to defend vigorously against the preferred
stockholders' complaint. Although the Company believes that the allegations of
the preferred stockholders' complaint are without merit, it is not feasible for
the Company to predict at this time the outcome of this litigation or whether
its resolution could have a material adverse effect on the Company's results of
operations or financial condition.
F-16
31
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS
---------------------------------------------------------------------
BALANCE
BEGINNING COSTS AND OTHER BALANCE AT
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS END OF PERIOD
----------- --------- --------- -------- ---------- -------------
Year ended December 31, 1998:
Allowance for doubtful accounts...... $ 19,276 $ 125,623 $5,005 $ 64,904(1) $ 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(1) $ 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
========== ========== ====== ======== ===========
Year ended December 31, 2000:
========== ========== ====== ======== ===========
Allowance for doubtful accounts...... $ 120,000 $ -- $ -- $ 38,550(1) $ 81,450
========== ========== ====== ======== ===========
Allowance for excess inventory
quantities accounts................ $ 260,214 $ -- $ -- $168,627(2) $ 91,587
========== ========== ====== ======== ===========
Deferred tax asset valuation
account............................ $9,593,000 $3,496,000 $ -- $ -- $13,089,000
========== ========== ====== ======== ===========
- ---------------
(1) Uncollectible accounts written off.
(2) Reduction in inventory allowance as a result of the sale of inventories for
which an allowance had previously been provided.
S-1
32
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 28th day of
March, 2001.
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 28th day of March, 2000.
SIGNATURE TITLE
--------- -----
/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 SIEGEL Director
- ------------------------------------------------
Richard Siegel
33
EXHIBIT INDEX
EXHIBIT
NUMBER
- -------
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.
34
EXHIBIT
NUMBER
- -------
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 incorporated by reference to
Exhibit 10.14 to the 1999 10-K.
10.15* Employment Agreement dated as of November 9, 1999 between
the Company and Joseph Cross, incorporated by reference to
Exhibit 10.15 to the 1999 10-K.
10.16* 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.
10.17* 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.
10.18* Employment Agreement dated as of June 1, 1999 between the
Company and Donald Freed incorporated by reference to
Exhibit 10.19 to the 1999 10-K.
10.19* 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).
10.20* 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.
10.21** Zinc Oxide Supply Agreement dated as of September 16, 1999
between the Company and BASF Corporation, as assignee,
incorporated by reference to Exhibit 10.22 to the 1999 10-K.
10.22* Employment Agreement dated as of November 2, 2000 between
the Company and Robert Haines.
10.23 Lease Agreement between Centerpointe Properities Trust and
the Company, dated June 15, 2000.
10.24*** Amendment No. 1 to Zinc Oxide Supply Agreement dated as of
January, 2001 between the Company and BASF Corporation.
10.25 Promissory Note dated as of September 14, 2000 between the
Company and BASF Corporation.
11 Statement regarding computation of loss per share.
23 Consent of Ernst & Young LLP.
- ---------------
* Management contract or compensatory plan or arrangement.
** Confidentiality previously requested for portions of this agreement. The
Company has disclosed that such agreement is with BASF Corporation, as
assignee.
*** Confidentially Requested, confidential portions have been omitted and filed
separately with the Commission as required by Rule 24b-2.