-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Po0/eDO+xKBE/+fOn6H8EgAotxGuow030PgEUMVGXsviehAiEjymcqYfCHnbZOLK HQAaD241C2mxsBnb3AHf0g== 0000950124-97-005025.txt : 19971002 0000950124-97-005025.hdr.sgml : 19971002 ACCESSION NUMBER: 0000950124-97-005025 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 21 FILED AS OF DATE: 19971001 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: NANOPHASE TECHNOLOGIES CORPORATION CENTRAL INDEX KEY: 0000883107 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS PRIMARY METAL PRODUCTS [3390] IRS NUMBER: 363687863 STATE OF INCORPORATION: IL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-36937 FILM NUMBER: 97689453 BUSINESS ADDRESS: STREET 1: 453 COMMERCE STREET CITY: BURR RIDGE STATE: IL ZIP: 60521 BUSINESS PHONE: 6303231200 MAIL ADDRESS: STREET 1: 453 COMMERCE STREET CITY: BURR RIDGE STATE: IL ZIP: 60521 S-1 1 FORM S-1 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 1, 1997 REGISTRATION NO. 333- ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------- FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------- NANOPHASE TECHNOLOGIES CORPORATION (Exact name of registrant as specified in its charter) ILLINOIS 3399 36-3687863 (State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer incorporation or organization) Classification Code No.) Identification No.)
453 COMMERCE STREET, BURR RIDGE, ILLINOIS 60521, (630) 323-1200 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) ROBERT W. CROSS PRESIDENT AND CHIEF EXECUTIVE OFFICER NANOPHASE TECHNOLOGIES CORPORATION 453 COMMERCE STREET, BURR RIDGE, ILLINOIS 60521, (630) 323-1200 (Name, address, including zip code, and telephone number, including area code, of agent for service) ------------------------- Copies to: MATTHEW S. BROWN, ESQ. LAWRENCE D. LEVIN, ESQ. KATTEN MUCHIN & ZAVIS 525 WEST MONROE STREET CHICAGO, ILLINOIS 60661 (312) 902-5200 CHRISTOPHER L. KAUFMAN, ESQ. CLIFFORD MENTRUP, ESQ. LATHAM & WATKINS SEARS TOWER, SUITE 5800 CHICAGO, ILLINOIS 60606 (312) 876-7700 APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box: [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box: [ ] CALCULATION OF REGISTRATION FEE
============================================================================================================ PROPOSED TITLE OF EACH CLASS OF MAXIMUM AGGREGATE AMOUNT OF SECURITIES TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE - ------------------------------------------------------------------------------------------------------------ Common Stock, $.01 par value................ $57,500,000 $17,425 ============================================================================================================
(1) Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(o). ------------------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY DETERMINE. ================================================================================ 2 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED OCTOBER 1, 1997 PROSPECTUS , 1997 5,000,000 SHARES [NANOPHASE LOGO] COMMON STOCK All of the 5,000,000 shares of Common Stock (the "Common Stock") of Nanophase Technologies Corporation ("Nanophase" or the "Company") offered hereby are being sold by the Company. Prior to this offering, there has been no public market for the Common Stock of the Company. It is currently estimated that the initial public offering price will be between $ and $ per share. See "Underwriting" for information relating to the factors considered in determining the initial public offering price. Application has been made for quotation of the Common Stock on the Nasdaq National Market under the symbol "NTCO." AN INVESTMENT IN THE SHARES OF COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK AND SUBSTANTIAL DILUTION AND SHOULD ONLY BE MADE BY PERSONS WHO CAN AFFORD AN ENTIRE LOSS OF THEIR INVESTMENT. SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF COMMON STOCK OFFERED HEREBY. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- ----------------------------------------------------------------------------------------------------------- PRICE UNDERWRITING PROCEEDS TO THE DISCOUNTS AND TO THE PUBLIC COMMISSIONS(1) COMPANY(2) - ----------------------------------------------------------------------------------------------------------- Per Share.......................... $ $ $ Total(3)........................... $ $ $ - -----------------------------------------------------------------------------------------------------------
(1) The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended (the "Securities Act"). See "Underwriting." (2) Before deducting expenses estimated at $750,000, which will be paid by the Company. (3) The Company has granted to the Underwriters a 30-day option to purchase up to 750,000 additional shares at the Price to the Public less Underwriting Discounts and Commissions, solely to cover over-allotments, if any. If such option is exercised in full, the total Price to the Public, Underwriting Discounts and Commissions, and Proceeds to the Company will be $ , $ and $ , respectively. See "Underwriting." The shares are being offered by the several Underwriters when, as and if delivered to and accepted by the Underwriters and subject to various prior conditions, including their right to reject orders in whole or in part. It is expected that delivery of shares will be made in New York, New York on or about , 1997. DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION FURMAN SELZ OPPENHEIMER & CO., INC. 3 TARGETED MARKETS FOR THE COMPANY'S NANOCRYSTALLINE MATERIALS ELECTRONICS [Picture of semiconductor wafer being polished by a CMP slurry] Slurries formulated with the Company's nanocrystalline materials for use in polishing semiconductor wafers. STRUCTURAL CERAMICS AND COMPOSITES [Picture of ceramic rings, valve inserts and armor tiles] Structural ceramics fabricated by the Company's net-shaping process. COSMETICS AND SKIN-CARE [Picture of cosmetics and skin-care products] Cosmetics and skin-care products formulated with the Company's nanocrystalline materials. INDUSTRIAL CATALYSTS [Picture of catalytic cracking tower in an oil refinery] The Company's noncrystalline materials are used in catalysts for the petro-chemical and chemical process industries. ------------------------ The Company's corporate logo and design is a registered trademark of the Company. All other trade names and trademarks appearing in this Prospectus are the property of their respective holders. ------------------------- IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. SEE "UNDERWRITING." 2 4 PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements (and related notes thereto) included elsewhere in this Prospectus. Unless otherwise indicated, all information in this Prospectus (i) reflects a 0.579-for-one stock split to be effected prior to the consummation of this offering, (ii) reflects the conversion of all outstanding shares of all series of Convertible Preferred Stock, no par value, of the Company (collectively, the "Preferred Stock") into 8,156,443 shares of Common Stock upon the consummation of this offering (the "Preferred Stock Conversion"), (iii) reflects the reincorporation of the Company in Delaware to be effected prior to the consummation of this offering and (iv) assumes no exercise of the Underwriters' over-allotment option. THE COMPANY Nanophase Technologies Corporation ("Nanophase" or the "Company") develops and markets nanocrystalline materials for use as ingredients and components in a wide range of commercial applications. The Company began manufacturing nanocrystalline materials in commercial quantities in the fourth quarter of 1996. Nanocrystalline materials are metallic and ceramic materials that generally consist of particles that are less than 100 nanometers (billionths of a meter) in diameter and contain only a few thousand or tens of thousands of atoms, rather than the millions or billions of atoms in particles of most conventional materials. By processing materials in this near-atomic size range, the Company is able to engineer the structure of particles and exploit the properties of their surface atoms to enhance the performance of basic raw materials such as aluminum, iron, titanium and zinc, as well as to molecularly engineer new composite materials. Compared to conventional materials, the Company believes its nanocrystalline materials generally exhibit superior chemical, mechanical, electronic, magnetic and optical properties. The Company believes that through its extensive proprietary research and development programs, combined with its proprietary and patented production processes, it has established new standards for high-performance commercially produced nanocrystalline materials. The Company has identified initial commercial applications for its nanocrystalline materials in four primary markets: electronics, structural ceramics and composites, cosmetics and skin-care, and industrial catalysts. The Company believes each of these markets provides numerous commercial applications in which its nanocrystalline materials will have significant competitive advantages based on product performance. Commercial applications currently being developed in these markets include the following: - Electronics. Abrasives for chemical/mechanical polishing of semiconductor wafers (CMP), anti-radiation coatings for cathode ray tubes ("CRTs"), thin-film materials for semiconductor manufacturing, high-performance electrodes and photonic materials for flat-panel displays. - Structural Ceramics and Composites. Ceramic mechanical seals, components for continuous steel casting, abrasion-resistant polymers for oil drilling sensors, ceramic armor and remotely monitored medical implants. - Cosmetics and Skin-Care. Topical health-care products, transparent ultraviolet ("UV") blockers and colorants for cosmetics. - Industrial Catalysts. Chemical-process catalysts. In each of these markets, the Company's strategy is to establish collaborative relationships with industry leaders in order to validate the capabilities of its materials and coordinate the development and commercial introduction of product applications. These relationships generally include specific milestones and a development path that is intended to lead to significant commercial product revenues. The Company is currently collaborating with, among others, AG Industries ("Acutus Gladwin"), The Dow Chemical Company ("Dow"), E.I. DuPont de Nemours & Co. ("DuPont"), Medtronic, Inc. ("Medtronic"), Pacific Safety, Inc. ("Pacific Safety") and Philips Electronics N.V. ("Philips"). As a result of its collaborative relationships, the Company entered into commercial supply contracts with Moyco Technologies, Inc. ("Moyco"), a manufacturer of semiconductor polishing slurries for use by semiconductor manufacturers, including Hyundai Corporation ("Hyundai"), Samsung Group ("Samsung"), International Business Machines Corporation 3 5 ("IBM"), Lucent Technologies, Inc. ("Lucent") and Motorola, Inc. ("Motorola"); with Schering-Plough Corporation ("Schering-Plough") pursuant to which the Company will supply its nanocrystalline zinc oxide to Schering-Plough for use in topical health-care products; and with LWT Instruments, Inc. ("LWT") for anti- abrasive polymers used in oil drilling applications. To gain access to foreign markets, Nanophase has entered into an agreement with a subsidiary of Itochu Corporation ("Itochu"), formerly C. Itoh, for the distribution of the Company's materials in broad-based industrial markets throughout Asia. To gain world-wide access to the cosmetics and skin-care market, the Company has a global distribution agreement with Whittaker, Clark & Daniels, Inc. ("WCD"), a leading distributor of cosmetic and skin-care ingredients. The Company believes that its nanocrystalline materials have broad and enabling potential beyond the product applications it is currently developing with its customers. In 1995, the Battelle Memorial Institute, a leading contract research organization, identified "molecularly engineered" materials (i.e., nanocrystalline materials) as "super materials" which represent one of the ten most important technologies for the coming decade. Nanophase was organized in 1989 to commercialize technologies that are based on principles developed at Argonne National Laboratory ("Argonne"), and believes that it is the only company to successfully transition the production of high-performance nanocrystalline materials from laboratory to commercial scale. In contrast to particles of conventional materials, including other commercially produced nanocrystalline materials, the particles of the Company's nanocrystalline materials are (i) nearly spherical, (ii) virtually free of chemical residues, (iii) uniformly small, (iv) not strongly agglomerated, and (v) easily engineered. As a result, the Company is able to engineer the attributes, including strength, flexibility, color and electronic conductivity, of materials to yield products that are superior to conventional materials and to establish new standards for a range of high-performance commercial applications. At the core of the Company's technologies is its proprietary and patented physical-vapor-synthesis ("PVS") process, which enables the Company to produce significant quantities of high-quality nanocrystalline materials. The Company also has developed related technologies to further enhance the materials produced by its PVS process. The Company's proprietary discrete-particle-encapsulation ("DPE") process, which completely coats each individual nanocrystalline particle and for which a patent is pending, can alter or enhance the optical, chemical and electronic behavior of particles and prevent agglomeration. The Company also has developed a proprietary net-shaping technology which enables the rapid fabrication of dimensionally-precise, high-tolerance structural ceramic components without costly machining. Nanophase's principal production and research facility is located in Burr Ridge, Illinois, a suburb of Chicago. The Company's operations in Burr Ridge are registered under ISO 9001 standards, and the manufacturing operations are compliant with the current Good Manufacturing Practices ("cGMP") requirements of the U.S. Food and Drug Administration ("FDA"). Nanophase was incorporated in Illinois on November 30, 1989, and will be reincorporated in Delaware not later than the effective date of this offering. As of June 30, 1997, the Company had an accumulated deficit of $12,962,989. Nanophase's principal executive offices are located at 453 Commerce Street, Burr Ridge, Illinois 60521 and its telephone number is (630) 323-1200. 4 6 THE OFFERING Common Stock offered by the Company......... 5,000,000 shares Common Stock to be outstanding after the offering.................................. 13,234,029 shares(1) Use of proceeds............................. To expand the Company's manufacturing facilities and for working capital and other general corporate purposes. See "Use of Proceeds." Proposed Nasdaq National Market symbol...... NTCO
- ------------------------------ (1) Does not include (i) 662,287 shares of Common Stock issuable upon the exercise of outstanding warrants at an exercise price of $1.123 per share, (ii) 1,620,737 shares of Common Stock issuable upon the exercise of outstanding options at a weighted average exercise price of $2.489 per share and (iii) 459,865 shares of Common Stock reserved for issuance upon the exercise of options that may be granted in the future under the Nanophase Technologies Corporation Amended and Restated 1992 Stock Option Plan (the "Stock Option Plan"). See "Management--Stock Option Plan" and "Description of Capital Stock." 5 7 SUMMARY FINANCIAL DATA
SIX MONTHS YEARS ENDED DECEMBER 31, ENDED JUNE 30, --------------------------------------------------------------- ------------------------- 1992 1993 1994 1995 1996 1996 1997 STATEMENT OF OPERATIONS DATA: Commercial revenue... $ 20,006 $ 25,265 $ 31,144 $ 93,591 $ 485,036 $ 107,032 $ 1,032,467 Government research contracts.......... 212,183 -- 64,015 27,995 110,770 20,312 -- --------- --------- ----------- ----------- ----------- ----------- ----------- Total revenue...... 232,189 25,265 95,159 121,586 595,806 127,344 1,032,467 Cost of revenue...... 202,215 61,978 164,746 532,124 4,019,484 1,968,546 2,162,081 Research and development expense............ 29,638 143,362 456,162 485,059 677,284 327,620 376,532 Selling, general and administrative expense............ 366,378 556,616 799,558 1,150,853 1,661,504 823,139 816,389 Interest income...... 10,191 7,022 37,535 86,576 184,778 79,686 31,747 --------- --------- ----------- ----------- ----------- ----------- ----------- Net loss............. $(355,851) $(729,669) $(1,287,772) $(1,959,874) $(5,577,688) $(2,912,275) $(2,290,788) ========= ========= =========== =========== =========== =========== =========== Pro forma net loss per share(1)............. $ (0.76) $ (0.29) =========== =========== Shares used in computing the pro forma net loss per share(1)............. 7,370,220 8,022,811
AS OF JUNE 30, 1997 ---------------------------- PRO FORMA ACTUAL AS ADJUSTED(2) BALANCE SHEET DATA: Cash and cash equivalents................................. $2,490,130 $ Working capital........................................... 2,658,388 Total assets.............................................. 6,271,808 Total stockholders' equity................................ 4,936,149
- ------------------------------ (1) Includes the anti-dilutive effect (equivalent to 534,540 shares) of options issued to employees and a consultant since August 1996. Does not include as of June 30, 1997 (i) 662,287 shares of Common Stock issuable upon the exercise of outstanding warrants at an exercise price of $1.123 per share, (ii) 729,077 shares of Common Stock issuable upon the exercise of outstanding options at a weighted average exercise price of $2.489 per share and (iii) 459,865 shares of Common Stock reserved for issuance upon the exercise of options that may be granted in the future under the Stock Option Plan. See "Management--Stock Option Plan" and "Description of Capital Stock." (2) As adjusted to give effect to the sale of 5,000,000 shares of Common Stock offered hereby at an assumed initial public offering price of $ per share, after deducting estimated underwriting discounts and commissions and offering expenses as described in "Use of Proceeds." 6 8 RISK FACTORS An investment in the shares of Common Stock offered hereby involves a high degree of risk and immediate and substantial dilution and should only be made by persons who can afford a loss of their entire investment. In evaluating an investment in the Common Stock being offered hereby, investors should consider carefully, among other matters, the following risk factors, as well as the other information contained in this Prospectus. LIMITED HISTORY OF COMMERCIAL SALES; UNCERTAIN MARKET ACCEPTANCE OF THE COMPANY'S NANOCRYSTALLINE MATERIALS The Company was founded in November 1989 and through December 31, 1996 was engaged principally in research and development activities. While the Company recently commenced marketing certain nanocrystalline materials, it is in the early stage of commercialization and its potential product applications are in various stages of development or under evaluation. As a result, the Company's nanocrystalline materials have been sold only in limited quantities, generally for testing and evaluation purposes, and there can be no assurance that a significant market will develop for such materials. Because virtually all of the product applications for the Company's materials are new, in order to penetrate its targeted markets, the Company must participate in a multi-step process that includes initial discussions of the product application which highlight the advantages of the Company's nanocrystalline materials, proof of concept, proof of feasibility within the specific application, and evaluations of cost and manufacturability. Completion of this evaluation process usually takes at least 18 months, and may take several years. The Company's current and potential commercial customers establish demanding specifications for performance and reliability. Although the products incorporating the Company's nanocrystalline materials have passed certain product performance and reliability testing by certain current and potential customers, there can be no assurance that the Company's nanocrystalline materials will continue to pass such tests in the future, meet future customer performance standards, or offer sufficient price or performance advantages as required to achieve commercial success. The Company's failure to develop, manufacture and commercialize nanocrystalline materials on a timely and cost-effective basis or successfully complete its customers' multi-step evaluation processes would have a material adverse effect on the Company's business, results of operations and financial condition. Because the Company's materials are used as ingredients in, or components of, other companies' products, the inability of the Company's customers to achieve market acceptance with respect to end-users of their products or successfully to manufacture their products could also have a material adverse effect on the Company's business, results of operations and financial condition. See "Business." LIMITED OPERATING HISTORY; HISTORY OF LOSSES; UNCERTAINTY OF FUTURE PROFITABILITY Substantially all of the Company's revenues through December 31, 1996 were derived from government research contracts, commercial development contracts and sales of nanocrystalline products for customer evaluation. The Company has only recently begun shipping significant amounts of its materials for commercial use and there can be no assurance that the Company's nanocrystalline materials will generate significant revenues from commercial applications. Accordingly, the Company has only a limited operating history upon which an evaluation of the Company and its prospects can be based. An investment in the Company must be considered in light of the risks, expenses and difficulties frequently encountered by companies in the early stages of development. The Company has incurred net losses in each year since its inception, and as of June 30, 1997, had an accumulated deficit of $12,962,989. The Company may continue to incur operating losses and there can be no assurance that the Company will become profitable. Commercial development of the Company's nanocrystalline materials will require the commitment of substantial resources to continuing research and development, establishment of additional commercial-scale manufacturing facilities, and further development of quality control, marketing, sales, service and administrative capabilities. The Company's ability to achieve profitability will depend on many factors, including the Company's ability to enter into collaborative customer relationships and the Company's ability, alone or with its customers, to develop, manufacture, introduce and market commercially acceptable products based on the Company's nanocrystalline materials and proprietary 7 9 processes. There can be no assurance that significant quantities of the Company's nanocrystalline materials or their product applications will be manufactured, introduced or marketed successfully, or that the Company will ever achieve a profitable level of operations or, if profitability is achieved, that it can be sustained. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business." DEPENDENCE ON A LIMITED NUMBER OF KEY CUSTOMERS A limited number of key customers have initially accounted for a substantial portion of the Company's commercial revenue. The Company's customers are significantly larger than, and are able to exert a high degree of influence over, the Company. The loss of one or more of the Company's customers or failure to attract new customers would have a material adverse effect on the Company's business, results of operations and financial condition. In February 1997, the Company entered into a five-year requirements contract with Moyco, one of its key customers, pursuant to which the Company will supply its nanocrystalline materials to Moyco for use in Moyco's semiconductor polishing slurries. In August 1997, Moyco and Ashland Chemical Company ("Ashland") signed a non-binding letter of intent pertaining to the potential purchase by Ashland of Moyco's intellectual properties, technologies and certain other intangible assets for the chemical/ mechanical polishing of semiconductor wafers. Sales to Moyco or Ashland, as the case may be, are currently expected to constitute a significant portion of the Company's revenues over the next three years. In March 1997, Cabot Corporation ("Cabot") filed a claim against Moyco which alleges that the slurries manufactured by Moyco, which contain the Company's nanocrystalline materials, infringe a patent owned by Cabot. Moyco has denied Cabot's allegations of patent infringement. In April 1997, Moyco filed a civil action against Cabot alleging that Cabot's patent is invalid and that Cabot improperly interfered with contractual relationships between Moyco and third parties. If Cabot prevails in its patent infringement claim against Moyco or Moyco is otherwise prevented from manufacturing slurries which contain the Company's materials, then Moyco's purchase of the Company's materials may be significantly reduced which would have a material adverse effect on the Company's business, results of operations and financial condition. See "Business--Customers and Applications--Electronics--Semiconductor Polishing." RELIANCE ON COLLABORATIVE DEVELOPMENT RELATIONSHIPS The Company has established, and will continue to pursue, collaborative relationships with a variety of corporate customers. Through such relationships, the Company seeks to develop applications for the Company's nanocrystalline materials, share development and manufacturing resources and coordinate the development, manufacturing, commercialization and marketing of nanocrystalline product applications. The Company's future success will depend, in part, on its continued relationships with these customers, its ability to enter into similar collaborative relationships, the commitment of the Company's customers to the potential product applications under development and, eventually, the customers' success in marketing, or willingness to purchase the Company's nanocrystalline materials for, such product applications. There can be no assurance that the Company's customers will not seek to manufacture jointly developed products internally or obtain them from alternative sources. These customers may require the Company to share control of its development, manufacturing and marketing programs, limit its ability to license its technology to others, or restrict its ability to engage in certain product development, manufacturing and marketing activities. These relationships may also be subject to unilateral termination by the Company's customers. If the Company is unable to initiate or sustain such collaborative relationships, there can be no assurance that the Company will be able independently to develop, manufacture, market or sell its current and future nanocrystalline materials or their product applications. The failure of the Company to initiate or sustain such collaborative relationships would have a material adverse effect on the Company's business, results of operations and financial condition. See "Business--Customers and Applications." LIMITED MANUFACTURING CAPACITY AND EXPERIENCE The Company's success will depend, in part, on its ability to manufacture its nanocrystalline materials in significant quantities, with consistent quality, at acceptable cost and on a timely basis. The Company has limited experience in high-volume manufacturing, may incur significant start-up costs and unforeseen expenses in connection with attempts to manufacture substantial quantities of nanocrystalline materials, and 8 10 will need to increase the efficiency of its manufacturing operations significantly to reach its production goals. In addition, the Company will need to expand its current facilities or obtain additional facilities in the near future in order to manufacture substantial quantities of its products. No assurance can be given that the Company will be able to make the transition to high-volume production successfully. The Company's primary operations, including research, engineering, manufacturing, marketing, distribution and general administration, are housed in a single facility in Burr Ridge, Illinois. Any material disruption in the Company's operations, whether due to fire, natural disaster, power loss or otherwise, could have a material adverse effect on the Company's business, results of operations and financial condition. While the Company maintains property and business interruption insurance, such insurance may not adequately compensate the Company for all losses that it may incur. See "Business--Manufacturing and Facilities." While most of the Company's product applications involve the Company producing materials which are to be used as ingredients in other companies' products, the Company's net-shaping applications require the Company to produce finished components. The Company currently is not capable of producing ceramic finished components in commercial volume and plans to develop an in-house capability to fabricate net-shaped components or establish manufacturing arrangements with third parties. There can be no assurance that the Company will be able to fabricate its net-shaped components internally or that it will be able to enter into third-party arrangements on satisfactory terms. See "Business--Manufacturing and Facilities." DEPENDENCE ON PATENTS AND PROTECTION OF PROPRIETARY INFORMATION The Company's success will depend, in part, on its ability to obtain patent protection for its nanocrystalline materials and processes, to preserve its trade secrets, and to operate without infringing the patent or other proprietary rights of others and without breaching or otherwise losing rights in the technology licenses upon which any of the Company's products are based. The Company has been granted two United States patents which expire in July 2013, has filed three applications for other United States patents and licenses eleven patents held by others, which licenses generally last the life of their respective patents. No assurance can be given that the patent applications filed by the Company will result in issued patents or that the scope and breadth of any claims allowed in any patents issued to the Company or its licensors will exclude competitors or provide competitive advantages to the Company. In addition, there can be no assurance that any patents issued to the Company or its licensors will be held valid if subsequently challenged or that others will not claim rights in the patents and other proprietary technology owned or licensed by the Company, or that others have not developed or will not develop similar products or technologies without violating any of the Company's proprietary rights. The Company's inability to obtain patent protection, preserve its trade secrets or operate without infringing the proprietary rights of others, as well as the Company's loss of any license to technology that it now has or acquires in the future, would have a material adverse effect on the Company's business, results of operations and financial condition. Patent applications in the United States are currently maintained in secrecy until patents issue, and patent applications in foreign countries are maintained in secrecy for a period of time after filing. Accordingly, publication of discoveries in the scientific literature or of patents themselves or laying open of patent applications in foreign countries tends to lag behind actual discoveries and filings of related patent applications. Due to this factor and the large number of patents and patent applications related to nanocrystalline materials, comprehensive patent searches and analysis associated with nanocrystalline materials are often impractical or not cost-effective. Therefore, there can be no assurance that the Company's patent and publication searches have been comprehensive, or that materials or processes used by the Company for its planned products do not or will not infringe upon existing technology described in United States patents or will not infringe upon claims of patent applications of others in the future. Because of the volume of patents issued and patent applications filed relating to nanocrystalline materials, there is a significant risk that current and potential competitors and other third parties have filed or will file patent applications for, or have obtained or will obtain patents or other proprietary rights relating to, materials or processes used or proposed to be used by the Company. In any such case, to avoid an infringement, the Company would have to either license such technology or design around any such patents. There can be no assurance that the Company will be able either to successfully design around these third-party patents or obtain licenses to such technology or that, if obtainable, such licenses would be available on terms acceptable to the Company. 9 11 Litigation, which could result in substantial cost to, and diversion of effort by, the Company, may be necessary to enforce patents issued or licensed to the Company, to defend the Company against infringement claims made by others, or to determine the ownership, scope or validity of the proprietary rights of the Company and others. An adverse outcome in any such litigation could subject the Company to significant liabilities to third parties, require the Company to seek licenses from third parties, and/or require the Company to cease using certain technology, any of which could have a material adverse effect on the Company's business, results of operations and financial condition. The Company may also become involved in interference proceedings declared by the United States Patent and Trademark Office ("PTO") in connection with one or more of the Company's owned or licensed patents or patent applications to determine priority of invention. Any such proceeding could result in substantial cost to the Company, as well as a possible adverse decision as to priority of invention of the patent or patent application involved. In addition, the Company may become involved in reissue or reexamination proceedings in the PTO in connection with the scope or validity of the Company's owned or licensed patents. Any such proceeding could have a material adverse effect on the Company's business, results of operations and financial condition, and an adverse outcome in such proceeding could result in a reduction of the scope of the claims of any such patents or such patents being declared invalid. In addition, from time to time, to protect its competitive position, the Company may initiate reexamination proceedings in the PTO with respect to patents owned by others. Such proceedings could result in substantial cost to, and diversion of effort by, the Company, and an adverse decision in such proceedings could have a material adverse effect on the Company's business, results of operations and financial condition. The Company also relies on trade secrets and proprietary know-how in the conduct of its business and uses employee and third-party confidentiality and non-disclosure agreements to protect such trade secrets and know-how. There can be no assurance that the obligation to maintain the confidentiality of such trade secrets or proprietary information will not wrongfully be breached by employees, consultants, advisors or others, that the Company will have adequate remedies for any breach, or that the Company's trade secrets or proprietary know-how will not otherwise become known or be independently developed or discovered by third parties. In addition, because the Company's employees have not entered into noncompetition agreements with the Company, they may become competitors of the Company upon termination of employment. See "Business--Intellectual Property and Proprietary Rights." RAPID TECHNOLOGICAL CHANGE Rapid changes have occurred, and are likely to continue to occur, in the development of advanced materials and processes. The future success of the Company will depend, in large part, upon its ability to keep pace with advanced materials technologies, industry standards and market trends and to develop and introduce new and improved products on a timely basis. The Company will require substantial resources to expand its commercial manufacturing capacity, further develop its technologies and develop and introduce innovative product applications. There can be no assurance that the Company's development efforts will not be rendered obsolete by the research efforts and technological advances of others or that other advanced materials will not prove more advantageous than those produced by the Company. LIMITED MARKETING EXPERIENCE; RELIANCE ON DISTRIBUTION AGREEMENTS The Company has limited experience marketing and selling its products. To market its nanocrystalline materials directly, the Company will be required to develop a marketing and sales force that can effectively demonstrate the advantages of its nanocrystalline product applications compared to competitive products containing conventional or advanced materials. The Company currently has arrangements for distribution of certain of its nanocrystalline materials and expects to enter into additional distribution or other arrangements with third parties regarding the commercialization or marketing of its materials. The Company's future success will depend in part on its continued relationships with distributors, its ability to enter into other similar distribution arrangements, the continuing interest of the Company's distributors in current and potential product applications and, eventually, the distributors' success in marketing, or willingness to purchase, any of the Company's nanocrystalline materials. There can be no assurance that the Company will be successful in its marketing efforts, that it will be able to establish adequate sales and distribution capabilities, that it will be 10 12 able to enter into or maintain marketing and distribution arrangements with third parties on financially acceptable terms, or that any third parties with whom it enters into such arrangements will be successful in marketing the Company's products. See "Business--Customers and Applications" and "--Marketing." COMPETITION The advanced materials industry is highly competitive. The market for materials having the characteristics and potential uses of the Company's nanocrystalline materials is the subject of intensive research and development efforts by both governmental entities and private enterprises around the world. The Company believes that the level of competition will increase further as more product applications with significant commercial potential are developed. The nanocrystalline product applications being developed by the Company will compete directly with products incorporating conventional and advanced materials and technologies. While the Company is not currently aware of the existence of commercially available competitive products with the same attributes as those offered by the Company, there can be no assurance that such competitive products will not be introduced by third parties, or that competing materials based on different or new technologies may not become commercially available. There can be no assurance that the Company's competitors will not succeed in developing or marketing materials, technologies and products that exhibit superior performance, are more commercially desirable or are more cost effective than those developed or marketed by the Company. In addition, many potential competitors of the Company have substantially greater financial and technical resources, larger research and development staffs, and greater manufacturing and marketing capabilities than the Company. Failure of the Company's current and potential nanocrystalline product applications to improve performance sufficiently at an acceptable price, achieve commercial acceptance or otherwise compete with conventional materials would have a material adverse effect on the Company's business, results of operations and financial condition. See "Business--Competition." FUTURE CAPITAL NEEDS The Company believes that its future capital requirements will depend, on many factors, including continued progress in its research and development and product testing programs, the magnitude of these programs, the costs necessary to increase the Company's manufacturing capabilities and to market any resulting materials and product applications, and customer acceptance of the Company's current and potential materials and product applications. Additional factors that may affect the Company's future capital requirements are the costs involved in preparing, filing, prosecuting, maintaining and enforcing patents and other proprietary rights or in obtaining licenses, the ability of the Company to establish collaborative relationships, and the amount and timing of future revenues. Depending on its requirements, the Company may seek additional funding through public or private financing, collaborative relationships, government contracts or licensing agreements. There can be no assurance that such additional financing will be available on acceptable terms or at all. If adequate funds are not available on acceptable terms, the Company may be required to delay, scale-back or eliminate manufacturing and marketing of one or more of its materials or product applications or research and development programs, or to obtain funds through arrangements with customers or others that may require the Company to relinquish rights to certain of its technologies or nanocrystalline materials that the Company would not otherwise relinquish. Inadequate funding also could impair the Company's ability to compete in the marketplace. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." RISK OF RESCISSION OF SERIES F OFFERING In June, August and September 1997, the Company issued shares of Series F Convertible Preferred Stock (the "Series F Preferred") for an aggregate of $3,876,107 to approximately 60 investors, all of whom are "accredited investors" within the meaning of rules promulgated under the Securities Act. The offering and sale of the Series F Preferred was not registered under the Securities Act, but may not have qualified for an exemption from the registration requirements of the Securities Act. Consequently, purchasers of Series F Preferred may have a right to rescind their purchases of the Series F Preferred (which will convert into 748,089 shares of Common Stock upon consummation of this offering), and receive $5.18 in exchange for 11 13 each share of Common Stock issued upon conversion of the Series F Preferred, together with interest. The Company does not believe that the holders of Series F Preferred are legally entitled to rescind their purchases of such securities, but there can be no assurance that the Company's position would prevail. Even if the holders of Series F Preferred are entitled to rescind their purchases, the Company does not believe that any rescission would adversely affect its financial condition following consummation of this offering. DEPENDENCE ON KEY PERSONNEL The Company's success will depend, in large part, upon its ability to attract and retain highly qualified research and development, management, manufacturing and marketing and sales personnel. Due to the specialized nature of the Company's business, it may be difficult to locate and hire qualified personnel, and to retain such personnel once hired. The loss of the services of any of the Company's executive officers or other key personnel, or the failure of the Company to attract and retain other skilled and experienced personnel on acceptable terms, could have a material adverse effect on the Company's business, results of operations and financial condition. See "Management." PRODUCT LIABILITY RISKS The Company may be subject to product liability claims in the event that any of its nanocrystalline product applications are alleged to be defective or cause harmful effects. Because the Company's nanocrystalline materials are used as ingredients in, or components of, other companies' products, to the extent certain of the Company's customers become subject to claims, suits or complaints relating to their products, such as medical implants and cosmetic and skin-care products, there can be no assurance that such claims will not be asserted against the Company. The Company currently maintains separate insurance coverage in the amount of $1 million for product liability claims. The cost of defending or settling product liability claims may be substantial and there can be no assurance that the Company could do so on acceptable terms or that such claims, if successful or settled, would not have a material adverse effect on the Company's business, results of operations and financial condition. INTERNATIONAL SALES For the six months ended June 30, 1997, 25% of the Company's total revenues were derived from product sales and development agreements with international customers, and the Company expects that it will continue to derive a substantial percentage of revenues from international customers in the future. There can be no assurance that the Company will be able successfully to market, sell and deliver its nanocrystalline materials in international markets. In addition, there are certain risks inherent in conducting international business, including exposure to currency fluctuations, longer payment cycles, greater difficulties in accounts receivable collection, political instability, difficulties in complying with a variety of foreign laws and unexpected changes in regulatory requirements. There can be no assurance that one or more of such factors will not have a material adverse effect on the Company's business, results of operations and financial condition. GOVERNMENTAL REGULATIONS The Company's coating facility, which is located in Chicago, is a "small quantity generator" of hazardous materials, including ethanol, under the Federal Resource Conservation and Recovery Act ("RCRA") and, as a result, is subject to stringent federal, state and local regulations governing the handling, storage and disposal of such materials. It is possible that current or future laws and regulations could require the Company to make substantial expenditures for preventive or remedial action, reduction of chemical exposure or waste treatment or disposal. There can be no assurance that the Company's operations, business or assets will not be materially and adversely affected by the interpretation and enforcement of current or future environmental laws and regulations. The Company believes it has complied in all material respects with regard to environmental regulations applicable to it and does not anticipate generating substantially increased amounts of such materials. In addition, although management believes that its safety procedures for handling and disposing of such materials comply with the standards prescribed by state and federal regulations, the Company's coating 12 14 operations do pose a risk of accidental contamination or injury. To date, the Company has not been required to make substantial expenditures for preventive or remedial action with respect to the hazardous materials it generates. The damages in the event of an accident or the costs of such preventive or remedial actions could exceed the Company's resources or otherwise have a material adverse effect on the Company's business, results of operations and financial condition. In addition, both of the Company's facilities and all of its operations are subject to the plant and laboratory safety requirements of various occupational safety and health laws. The Company believes it has complied in all material respects with regard to governmental regulations applicable to it. There can be no assurance, however, that the Company will continue to comply with applicable government regulations or that such regulations will not materially restrict or impede the Company's operations in the future. The manufacture and use of certain products which contain the Company's nanocrystalline materials are subject to governmental regulation. As a result, the Company is required to adhere to the cGMP requirements of the FDA and similar regulations in other countries which include testing, control and documentation requirements enforced by periodic inspections. Such regulations can increase the Company's cost of doing business and/or render certain potential markets prohibitively expensive. See "Business--Governmental Regulations." QUARTERLY FLUCTUATIONS IN OPERATING RESULTS The Company has experienced, and expects to continue to experience, quarterly fluctuations in its results of operations as a result of a variety of factors, including the timing and amount of expenses associated with expansion of the Company's operations, the timing of collaborative relationships with, and performance of, customers, the timing of new product application offerings, changes in the Company's revenue mix among its product application offerings, and changes in the mix between pilot production of new nanocrystalline materials and full-scale manufacturing of existing nanocrystalline materials. The Company does not currently have any significant backlog of orders and the timing of revenues will therefore depend upon the amount and timing of new orders received for its nanocrystalline materials. NO PRIOR PUBLIC MARKET FOR COMMON STOCK; DETERMINATION OF OFFERING PRICE; POSSIBLE VOLATILITY OF COMMON STOCK PRICE Prior to this offering, there has been no public market for the Common Stock and there can be no assurance that an active trading market will develop or be sustained after this offering. The initial public offering price for the Common Stock will be determined by negotiations between the Company and the Underwriters based upon several factors and may not be indicative of the price that may prevail in the public market. The stock market has from time to time experienced significant price and volume fluctuations that may be unrelated to the operating performance of any particular company. In particular, there has been significant volatility in the market price of securities of other technology companies, particularly those that, like the Company, are still primarily engaged in product development activities. Factors such as announcements of technology innovations and new product applications by the Company or its competitors, disputes relating to patents and proprietary rights, changes in financial estimates by securities analysts, failure to meet earnings expectations of the market or of analysts, general market conditions and fluctuations in quarterly operating results may have a significant impact on the market price of the Common Stock. In the past, following periods of volatility in the market price of a company's securities, securities class action litigation has often been instituted against such a company. Any such litigation initiated against the Company could result in substantial costs and a diversion of management's attention and resources, which could have a material adverse effect on the Company's business, results of operations and financial condition. See "Underwriting." ANTI-TAKEOVER PROVISIONS Upon consummation of this offering, the Company's Board of Directors will have the authority to issue up to 13,000,000 shares of undesignated preferred stock and to determine the price, rights, preferences, privileges and restrictions, including voting rights, of those shares without any further vote or action by the 13 15 Company's stockholders. The rights of the holders of Common Stock will be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. The issuance of preferred stock, while providing desirable flexibility in connection with possible financings, acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire a majority of the outstanding voting stock of the Company. The Company has no present plans to issue such shares of preferred stock. Further, certain provisions of the Company's Certificate of Incorporation and Bylaws and of Delaware law could delay or make more difficult a merger, tender offer or proxy contest involving the Company. See "Description of Capital Stock--Preferred Stock" and "--Certain Corporate Provisions." SHARES ELIGIBLE FOR FUTURE SALE Upon consummation of this offering, the Company will have a total of 13,234,029 shares of Common Stock outstanding (13,984,029 if the Underwriters exercise in full their over-allotment option), of which the 5,000,000 (5,750,000 if the Underwriters exercise in full their over-allotment option) shares offered hereby will be eligible for immediate sale in the public market without restriction unless they are held by "affiliates" of the Company within the meaning of Rule 144 ("Rule 144") under the Securities Act of 1933, as amended (the "Securities Act"), in which case they will be subject to the volume and other limitations of such rule. The sale of a substantial number of shares of Common Stock, or the perception that such sales could occur, could adversely affect prevailing market prices for the Common Stock. The remaining 8,234,029 shares of Common Stock outstanding upon completion of this offering will be "restricted securities" within the meaning of Rule 144 (the "Restricted Shares") and all of such Restricted Shares are subject to the lock-up provisions of stock purchase agreements entered into with the Company pursuant to which the holders of such Restricted Shares have agreed that they will not, directly or indirectly, sell or otherwise dispose of any shares of Common Stock for a period of 180 days after the date of this Prospectus without the prior written consent of Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"). Upon expiration of the lock-up provisions of the stock purchase agreements (or earlier upon the consent of DLJ), 7,485,940 of the Restricted Shares outstanding upon completion of this offering will be eligible for sale under Rule 144, subject to, in some cases, the volume and other limitations of such rule. An additional 662,287 Restricted Shares are issuable upon exercise of currently exercisable warrants issued to certain of the Company's existing stockholders and 1,620,737 Restricted Shares are issuable at various dates upon exercise of options heretofore granted to certain employees, officers and consultants of the Company pursuant to stock option agreements. Certain of such optionholders have also agreed not to sell, offer for sale or otherwise dispose of any shares of Common Stock for a period of 180 days after the date of this Prospectus without the prior written consent of DLJ. Subject to the lock-up provisions of the stock-purchase agreements, the holders of all of the Restricted Shares that will be outstanding upon consummation of this offering and all of the Restricted Shares issuable upon exercise of the warrants have been accorded registration rights under the Securities Act. No prediction can be made as to the effect, if any, that future sales of shares, or the availability of shares for future sales, will have on the market price of the Common Stock from time to time or the Company's ability to raise capital through an offering of its equity securities. See "Description of Capital Stock--Registration Rights," "Shares Eligible for Future Sale" and "Underwriting." DILUTION AND DIVIDEND POLICY The initial public offering price of the Common Stock offered hereby is substantially higher than the net book value of the currently outstanding Common Stock. Therefore, purchasers of the Common Stock offered hereby will experience immediate and substantial dilution in the net tangible book value of the Common Stock. The Company has never paid a cash dividend on its Common Stock and does not expect to pay dividends in the foreseeable future. See "Dilution" and "Dividend Policy." 14 16 USE OF PROCEEDS The net proceeds to the Company from the sale of the shares of Common Stock being offered hereby, at an assumed initial public offering price of $ per share, are estimated to be approximately $ ($ if the Underwriters' over-allotment option is exercised in full), after deducting estimated underwriting discounts and commissions and offering expenses payable by the Company. The Company currently intends to use approximately $35 to $40 million of the net proceeds for the expansion of its manufacturing facilities over the next 24 months, including installing additional PVS plasma reactors, purchasing additional equipment and making leasehold improvements. The remaining net proceeds will be used for working capital and other general corporate purposes. The Company may from time to time seek to acquire complementary businesses, products, services or technologies. The Company may use a portion of the net proceeds for one or more of such transactions, although the Company has no current plans or agreements with respect to any such transaction. The exact cost, timing and amount of funds required for specific uses by the Company cannot be precisely determined at this time. The Company could also potentially use a portion of the net proceeds to fund a rescission of shares of Series F Preferred. See "Risk Factors-Risk of Rescission of Series F Offering." Pending such uses, the Company intends to invest the net proceeds of this offering in short-term, investment grade, interest-bearing obligations. DIVIDEND POLICY The Company has never declared or paid any cash dividends on its Common Stock and does not anticipate paying cash dividends or other distributions on its Common Stock in the foreseeable future, but 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 as the Company's Board of Directors deems relevant. 15 17 CAPITALIZATION The following table sets forth as of June 30, 1997, the Company's (i) actual capitalization, (ii) capitalization on a pro forma basis to reflect the issuance of 326,097 shares of Series F Preferred in August and September 1997 and the Preferred Stock Conversion, and (iii) adjusted capitalization on a pro forma basis to reflect the issuance of 326,097 shares of Series F Preferred in August and September 1997, the Preferred Stock Conversion and the sale by the Company of 5,000,000 shares of Common Stock offered hereby at an assumed initial public offering price of $ per share after deducting estimated underwriting discounts and commissions and expenses of this offering and the application of the net proceeds therefrom as described under "Use of Proceeds." The information set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements and the related notes thereto included elsewhere in this Prospectus.
AS OF JUNE 30, 1997 -------------------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED Stockholders' equity: Preferred Stock, no par value, 9,829,054 shares authorized, 7,830,346 shares issued and outstanding, actual; no par value, 13,000,000 shares authorized, no shares issued and outstanding, pro forma; $.01 par value, 13,000,000 shares authorized, no shares issued and outstanding, pro forma as adjusted........ $ 17,898,688 $ -- $ -- Common Stock, no par value, 12,632,158 shares authorized; 77,586 shares issued and outstanding, actual; $.01 par value, 25,000,000 shares authorized, 8,234,029 shares issued and outstanding, pro forma; $.01 par value, 25,000,000 shares authorized, 13,234,029 shares issued and outstanding, pro forma as adjusted(1)...................... 450 82,340 132,340 Additional paid-in capital....................... -- 19,506,416 Accumulated deficit........................... (12,962,989) (12,962,989) (12,962,989) ------------ ------------ ------------ Total stockholders' equity and capitalization......................... $ 4,936,149 $ 6,625,767 $ ============ ============ ============
- ------------------------------ (1) Does not include as of June 30, 1997 (i) 662,287 shares of Common Stock issuable upon the exercise of outstanding warrants at an exercise price of $1.123 per share, (ii) 1,603,367 shares of Common Stock issuable upon the exercise of outstanding options at a weighted average exercise price of $2.489 per share and (iii) 459,865 shares of Common Stock reserved for issuance upon the exercise of options that may be granted in the future under the Stock Option Plan. See "Management--Stock Option Plan," "Description of Capital Stock" and Note 12 of Notes to the Financial Statements. 16 18 DILUTION The pro forma net tangible book value of the Company as of June 30, 1997, after giving effect to the sale of 326,097 shares of Series F Preferred after June 30, 1997 was $6,151,966 or $0.75 per share of Common Stock. Net tangible book value per share represents the amount of total tangible assets of the Company reduced by the amount of its total liabilities and divided by the total number of shares of Common Stock outstanding. After giving effect to the sale of the 5,000,000 shares of Common Stock being offered by the Company at an assumed initial public offering price of $ per share, and after deducting estimated underwriting discounts and commissions and offering expenses payable by the Company, the pro forma net tangible book value of the Company as of June 30, 1997 would have been approximately $ , or $ per share of Common Stock. This represents an immediate increase in net tangible book value of $ per share to existing stockholders and an immediate dilution of $ per share to new investors. The following table illustrates this per share dilution: Assumed initial public offering price per share............. $ Pro forma net tangible book value per share before this offering............................................... $0.75 Increase in pro forma net tangible book value per share attributable to new investors.......................... ----- Pro forma net tangible book value per share after this offering.................................................. -------- Dilution per share to new investors......................... $ ========
The following table summarizes, on a pro forma basis as of June 30, 1997, the difference between the existing stockholders and new investors with respect to the number of shares of Common Stock purchased from the Company, the total consideration paid to the Company and the average price per share paid (before deducting estimated underwriting discounts and commissions and offering expenses payable by the Company):
SHARES PURCHASED TOTAL CONSIDERATION --------------------- ---------------------- AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE Existing stockholders.................... 10,499,683 67.7% $24,327,284 % $ 2.32 New investors............................ 5,000,000 32.3 ---------- ----- ----------- ----- Total............................... 15,499,683 100.0% $ 100.0% ========== ===== =========== =====
The foregoing calculations give effect to, as of June 30, 1997, (i) 662,287 shares of Common Stock issuable upon the exercise of outstanding warrants at an exercise price of $1.123 per share and (ii) 1,603,367 shares of Common Stock issuable upon the exercise of outstanding options at a weighted average exercise price of $2.489 per share. Does not give effect to 459,865 shares of Common Stock reserved for issuance upon the exercise of options that may be granted in the future under the Stock Option Plan. See "Capitalization," "Management--Stock Option Plan," "Description of Capital Stock" and Note 12 of Notes to the Financial Statements. 17 19 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 Prospectus and "Management's Discussion and Analysis of Financial Condition and Results of Operations." The selected statement of operations data set forth below for the years ended December 31, 1994, 1995 and 1996 and the balance sheet data as of December 31, 1995 and 1996 are derived from the audited financial statements of the Company, which are included elsewhere in this Prospectus. The selected statement of operations data for the years ended December 31, 1992 and 1993 and the balance sheet data as of December 31, 1992, 1993 and 1994 are derived from audited financial statements of the Company which are not included in this Prospectus. The selected financial data for the six month periods ended June 30, 1996 and 1997 have been derived from unaudited financial statements of the Company which, in the opinion of management, include all adjustments that are necessary for a fair statement of the results of the interim periods, and all adjustments of a recurring nature. Results for the six months ended June 30, 1997 are not necessarily indicative of results to be expected during the remainder of the current fiscal year or for any future period.
SIX MONTHS ENDED YEARS ENDED DECEMBER 31, JUNE 30, --------------------------------------------------------------- ------------------------- 1992 1993 1994 1995 1996 1996 1997 STATEMENT OF OPERATIONS DATA: Commercial revenue........... $ 20,006 $ 25,265 $ 31,144 $ 93,591 $ 485,036 $ 107,032 $ 1,032,467 Government research contracts.................. 212,183 -- 64,015 27,995 110,770 20,312 -- --------- --------- ----------- ----------- ----------- ----------- ----------- Total revenue............ 232,189 25,265 95,159 121,586 595,806 127,344 1,032,467 Cost of revenue.............. 202,215 61,978 164,746 532,124 4,019,484 1,968,546 2,162,081 Research and development expense.................... 29,638 143,362 456,162 485,059 677,284 327,620 376,532 Selling, general and administrative expense..... 366,378 556,616 799,558 1,150,853 1,661,504 823,139 816,389 --------- --------- ----------- ----------- ----------- ----------- ----------- Total operating expense................ 598,231 761,956 1,420,466 2,168,036 6,358,272 3,119,305 3,355,002 --------- --------- ----------- ----------- ----------- ----------- ----------- Operating expense in excess of revenue................. (366,042) (736,691) (1,325,307) (2,046,450) (5,762,466) (2,991,961) (2,322,535) Interest income.............. 10,191 7,022 37,535 86,576 184,778 79,686 31,747 --------- --------- ----------- ----------- ----------- ----------- ----------- Net loss................. $(355,851) $(729,669) $(1,287,772) $(1,959,874) $(5,577,688) $(2,912,275) $(2,290,788) ========= ========= =========== =========== =========== =========== =========== Pro forma net loss per share(1)................... $ (0.76) $ (0.29) =========== =========== Shares used in computing the pro forma net loss per share(1)............... 7,370,220 8,022,811
AS OF DECEMBER 31, AS OF JUNE 30, ---------------------------------------------------------- ----------------------- 1992 1993 1994 1995 1996 1996 1997 BALANCE SHEET DATA: Cash and cash equivalents.......... $ 70,652 $225,230 $ 18,462 $ 261,902 $ 617,204 $ 115,492 $2,490,130 Working capital.................... 184,881 225,988 2,226,184 2,451,627 3,070,789 5,968,876 2,658,388 Total assets....................... 377,042 406,238 2,568,691 3,741,128 5,539,634 8,268,228 6,271,808 Total stockholders' equity......... 334,603 348,434 2,456,516 3,506,050 5,110,450 7,781,833 4,936,149
- ------------------------------ (1) Includes the anti-dilutive effect (equivalent to 534,540 shares) of options issued to employees and a consultant since August 1996. Does not include as of June 30, 1997 (i) 662,287 shares of Common Stock issuable upon the exercise of outstanding warrants at an exercise price of $1.123 per share, (ii) 729,077 shares of Common Stock issuable upon the exercise of outstanding options at a weighted average exercise price of $2.489 per share and (iii) 459,865 shares of Common Stock reserved for issuance upon the exercise of options that may be granted in the future under the Stock Option Plan. See "Management--Stock Option Plan" and "Description of Capital Stock." 18 20 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the Selected Financial Data and financial statements and related notes thereto appearing elsewhere in this Prospectus. When used in the following discussions, the words "believes," "anticipates," "intends," "expects" and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties, including, but not limited to, those set forth in "Risk Factors," which could cause actual results to differ materially from those projected. OVERVIEW From its inception in November 1989 through December 31, 1996, Nanophase was in the development stage. During that period, the Company primarily focused on the development of its manufacturing processes in order to transition from laboratory-scale to commercial-scale production. As a result, the Company developed an operating capacity to produce significant quantities of its nanocrystalline materials for commercial sale. The Company was also engaged in developing commercial applications and formulations and recruiting marketing, technical and administrative personnel. From inception through June 30, 1997, the Company was primarily capitalized through the private placement of approximately $17,899,000 of equity securities, net of issuance costs. Through 1995, the majority of the Company's revenues resulted from government contracts to perform research and development activities. During that period, the Company also entered into cost-sharing agreements with the U.S. government and offset amounts received against the related costs. During 1996, the Company began emerging from the development stage and significantly increased its commercial revenue. Commercial revenue is recorded when products are shipped by the Company or when specific milestones are met regarding development arrangements. Cost of revenue generally includes costs associated with commercial production and customer development agreements, and costs of material production and development related to government research contracts. In 1996, the Company also began to scale-up operations in its Burr Ridge manufacturing facility. The Company incurred substantial operating expenses as a result of certain one-time costs associated with the scale-up of operations. 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. RESULTS OF OPERATIONS SIX MONTHS ENDED JUNE 30, 1997 AND 1996 Total revenue increased to $1,032,467 for the six months ended June 30, 1997, compared to $127,344 for the same period in 1996. Commercial revenue increased to $1,032,467 for the six months ended June 30, 1997, compared to $107,032 for the same period in 1996. This increase in commercial revenue was due primarily to increased product sales volume, increased acceptance of the commercial potential of the Company's products, customer development agreements and a one-time fee paid by the Company's Asian distributor for training and certain distribution rights. Revenue from government research contracts decreased to zero for the six months ended June 30, 1997, compared to $20,312 for the same period in 1996, because the Company did not pursue any further U.S. government contracts for such six month period. Cost of revenue increased to $2,162,081 for the six months ended June 30, 1997, compared to $1,968,546 for the same period in 1996. This increase in cost of revenue was generally attributed to a rapid expansion of the production infrastructure to support anticipated revenue growth and increased costs which are commensurate with the increased sales volume and customer development programs. The Company also incurred development costs to expand its quality assurance programs and obtain its ISO certification. Research and development expense consists of costs associated with the Company's development of new product applications and coating formulations and the cost of enhancing the Company's manufacturing processes. Research and development expense increased to $376,532 for the six months ended June 30, 1997, compared to $327,620 for the same period in 1996. The increase in research and development expense was 19 21 attributable primarily to the costs of developing new coating formulations and product applications, increased usage of research supplies, and ongoing experimentation expenses associated with technological enhancements and product improvements. The Company expects to increase its research and development expenditures during the remainder of 1997 in connection with its plans to continue to enhance and expand its product lines and manufacturing processes. Selling, general and administrative expense decreased to $816,389 for the six months ended June 30, 1997, compared to $823,139 for the same period in 1996. This decrease was attributable primarily to a reduction in selling and advertising expense, recruiting expenses, and outside consulting fees, which was offset by increases in corporate salaries. Selling, general and administrative expense is expected to increase significantly in the next several years to support the Company's business development efforts. Interest income decreased to $31,747 for the six months ended June 30, 1997, compared to $79,686 for the same period in 1996. This decrease was primarily due to a lower outstanding cash balance. YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 Total revenue increased to $595,806 in 1996, compared to $121,586 in 1995 and $95,159 in 1994. Commercial revenue increased to $485,036 in 1996, compared to $93,591 in 1995 and $31,144 in 1994. This increase in commercial revenue was due primarily to increased commercial acceptance and availability of the Company's products. Revenue from government research contracts increased to $110,770 in 1996, compared to $27,995 in 1995 and $64,015 in 1994, as the Company completed certain development agreements with U.S. governmental agencies. Cost of revenue increased to $4,019,484 in 1996, compared to $532,124 in 1995 and $164,746 in 1994. The increase in cost of revenue for 1996 was generally a result of the scale-up of the Company's operations in anticipation of increased commercial sales and development. Specifically, the Company increased expenditures relating to product and process improvement activities. The Company also incurred one-time costs in connection with the establishment of its Chicago coating facility, extensive product development activities, the scale-up of manufacturing operations, and the certification of its Burr Ridge facility under ISO standards. Research and development expense increased to $677,284 in 1996, compared to $485,059 in 1995 and $456,162 in 1994. The increase in research and development expense was attributable primarily to the hiring of additional research and development personnel, costs associated with the development and evaluation of new product applications, and increased purchases and use of research supplies. Selling, general and administrative expense increased to $1,661,504 in 1996, compared to $1,150,853 in 1995 and $799,558 in 1994. This increase was attributable primarily to the hiring of additional marketing and administrative personnel, an increase in selling expenses, and the increase in costs associated with the establishment of the Company's corporate headquarters. Interest income was $184,778 in 1996, compared to $86,576 in 1995 and $37,535 in 1994. The increases resulted from the Company's investment of net proceeds from its sales of equity securities pending use of such proceeds for the Company's operations. 20 22 LIQUIDITY AND CAPITAL RESOURCES The Company's cash and cash equivalents were $2,490,130 at June 30, 1997, compared to $617,204 at December 31, 1996 and $261,902 at December 31, 1995. The Company's net cash used in operating activities was $1,627,167 for the six months ended June 30, 1997, compared to $2,811,711 for the same period in 1996. The net cash used in operating activities for the six months ended June 30, 1997 was primarily for the expansion of the production infrastructure to support anticipated growth, the further development of products, the funding of research and development activities, and the funding of trade accounts receivable and inventory levels, which was offset by an increase in accounts payable and accrued liabilities. Net cash provided by investing activities, including capital expenditures and purchases and sales of securities in which cash is invested pending its use for the Company's operations, amounted to $1,839,787 for the six months ended June 30, 1997, compared to net cash used of $4,522,757 for the same period in 1996. Capital expenditures amounted to $173,850 for the six months ended June 30, 1997, compared to $862,400 for the same period in 1996 and were primarily for leasehold improvements and equipment purchases. Net cash provided by private placements of equity securities was $1,956,287 during the six month period ended June 30, 1997, compared to $7,188,058 during the same period for the prior year. The Company recently closed private placements of Series F Preferred in August and September 1997 for an additional aggregate amount of $1,689,618. The Company's net cash used in operating activities was $5,795,858 in 1996, compared to $1,860,353 in 1995 and $1,206,497 in 1994. The net cash used in 1996 operating activities was primarily for the scale-up of manufacturing operations, for development of products, and to fund research and development expenses. Net cash used in investing activities, including capital expenditures and purchases and sales of securities in which cash is invested pending its use for the Company's operations, amounted to $951,806 in 1996, $905,615 in 1995 and $2,396,125 in 1994. Capital expenditures amounted to $1,173,437 in 1996, $937,956 in 1995 and $66,303 in 1994 and were primarily for leasehold improvements and equipment purchases. Net cash provided by private placements of equity securities was $7,182,088 in 1996, compared to $3,009,408 in 1995 and $3,395,854 in 1994. The Company believes that funds from operations and cash on hand, together with the net proceeds of this offering, will be adequate to fund the Company's current operating plans for the foreseeable future. The Company expects capital expenditures of approximately $2 million in 1997 and approximately $20 million to $25 million in 1998, which expenditures will be funded in part by the net proceeds from this offering. The Company's actual future capital requirements will depend, however, on many factors, including continued progress in its research and development and product testing programs, the magnitude of these programs, the costs necessary to increase the Company's manufacturing capabilities and to market any resulting materials and product applications, and customer acceptance of the Company's current and potential materials and product applications. In addition, the Company could potentially be required to fund a rescission of shares of Series F Preferred. Depending on future requirements, the Company may seek additional funding through public or private financing, collaborative relationships, government contracts or licensing agreements. There can be no assurance that such additional financing will be available on acceptable terms or at all, and any such additional financing could be dilutive to the Company's stockholders. See "Use of Proceeds," "Risk Factors--Future Capital Needs" and "--Risk of Rescission of Series F Offering." At June 30, 1997, the Company had a net operating loss carryforward of approximately $13.0 million for income tax purposes. Because the Company may have experienced "ownership changes" within the meaning of the U.S. Internal Revenue Code (the "Internal Revenue Code") related to prior issuance of its preferred stock and may experience ownership changes due to this offering, 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 2012. As a result of the annual limitation, a portion of this carryforward may expire before ultimately becoming available to reduce income tax liabilities. 21 23 QUARTERLY INFORMATION The following table presents selected unaudited quarterly results of the Company for each quarter of 1996 and the first two quarters of 1997. The financial data is derived from the unaudited financial statements of the Company which have been prepared by the Company on a basis consistent with the Company's audited financial statements included elsewhere in this Prospectus and, in the opinion of management, include all adjustments, including normal recurring adjustments, that are necessary for a fair statement of the Company's results of operations for such periods. These operating results are not necessarily indicative of future performance.
THREE MONTHS ENDED ---------------------------------------------------------------------------------- 1996 1997 ------------------------------------------------------ ------------------------- MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 MARCH 31 JUNE 30 (UNAUDITED) STATEMENT OF OPERATIONS DATA: Commercial revenue................ $ 43,223 $ 63,809 $ 153,981 $ 224,023 $ 429,464 $ 603,003 Government research contracts..... 13,532 6,780 5,895 84,563 -- -- ----------- ----------- ----------- ----------- ----------- ----------- Total revenue................. 56,755 70,589 159,876 308,586 429,464 603,003 Cost of revenue................... (743,651) (1,224,895) (957,014) (1,093,924) (1,102,877) (1,059,204) Research and development expense......................... (150,483) (177,137) (188,055) (161,609) (161,198) (215,334) Selling, general and administrative expense.......... (315,885) (507,254) (386,684) (451,681) (425,497) (390,892) Interest income................... 24,302 55,384 66,060 39,032 21,917 9,830 ----------- ----------- ----------- ----------- ----------- ----------- Net loss.......................... $(1,128,962) $(1,783,313) $(1,305,817) $(1,359,596) $(1,238,191) $(1,052,597) =========== =========== =========== =========== =========== ===========
22 24 BUSINESS Nanophase develops and markets nanocrystalline materials for use as ingredients and components in a wide range of commercial applications. The Company began manufacturing nanocrystalline materials in commercial quantities in the fourth quarter of 1996. Nanocrystalline materials are metallic and ceramic materials that generally consist of particles that are less than 100 nanometers (billionths of a meter) in diameter and contain only a few thousand or tens of thousands of atoms, rather than the millions or billions of atoms in particles of most conventional materials. By processing materials in this near-atomic size range, the Company is able to engineer the structure of particles and exploit the properties of their surface atoms to enhance the performance of basic raw materials such as aluminum, iron, titanium and zinc, as well as to molecularly engineer new composite materials. Compared to conventional materials, the Company believes its nanocrystalline materials generally exhibit superior chemical, mechanical, electronic, magnetic and optical properties. The Company believes that through its extensive proprietary research and development programs, combined with its proprietary and patented production processes, it has established new standards for high-performance commercially produced nanocrystalline materials. The Company has identified initial commercial applications for its nanocrystalline materials in four primary markets: electronics, structural ceramics and composites, cosmetics and skin-care, and industrial catalysts. The Company believes each of these markets provides numerous commercial applications in which its nanocrystalline materials will have significant competitive advantages based on product performance. Commercial applications currently being developed in these markets include the following: - Electronics. Abrasives for chemical/mechanical polishing of semiconductor wafers (CMP), anti-radiation coatings for CRTs, thin-film materials for semiconductor manufacturing, high-performance electrodes and photonic materials for flat-panel displays. - Structural Ceramics and Composites. Ceramic mechanical seals, components for continuous steel casting, abrasion-resistant polymers for oil drilling sensors, ceramic armor and remotely monitored medical implants. - Cosmetics and Skin-Care. Topical health-care products, transparent UV blockers and colorants for cosmetics. - Industrial Catalysts. Chemical-process catalysts. In each of these markets, the Company's strategy is to establish collaborative relationships with industry leaders in order to validate the capabilities of its materials and coordinate the development and commercial introduction of product applications. These relationships generally include specific milestones and a development path that is intended to lead to significant commercial product revenues. The Company is currently collaborating with, among others, Acutus Gladwin, Dow, DuPont, Medtronic, Pacific Safety and Philips. As a result of its collaborative relationships, the Company entered into commercial supply contracts with Moyco, a manufacturer of semiconductor polishing slurries for use by semiconductor manufacturers, including Hyundai, Samsung, IBM, Lucent and Motorola; with Schering-Plough pursuant to which the Company will supply its nanocrystalline zinc oxide to Schering-Plough for use in topical health-care products; and with LWT for anti-abrasive polymers used in oil drilling applications. To gain access to foreign markets, Nanophase has entered into an agreement with a subsidiary of Itochu, formerly C. Itoh, for the distribution of the Company's materials in broad-based industrial markets throughout Asia. To gain world-wide access to the cosmetics and skin-care market, the Company has a global distribution agreement with WCD, a leading distributor of cosmetic and skin-care ingredients. The Company believes that its nanocrystalline materials have broad and enabling potential beyond the product applications it is currently developing with its customers. In 1995, the Battelle Memorial Institute, a leading contract research organization, identified "molecularly engineered" materials (i.e., nanocrystalline materials) as "super materials" which represent one of the ten most important technologies for the coming decade. Nanophase was organized in 1989 to commercialize technologies that are based on principles developed at Argonne National Laboratories, and believes that it is the only company to successfully transition the production of high-performance nanocrystalline materials from laboratory to commercial scale. In 1995, 23 25 the Company's patented PVS process for producing these materials received the R&D 100 Award, given each year by R&D Magazine to recognize the 100 most technologically significant new products and processes in the world. NANOCRYSTALLINE MATERIALS All matter is composed of atoms, or molecules which are combinations of atoms. Most solid materials, such as ceramics and metals, are crystalline in nature, i.e., they consist of microscopic particles, or crystals, the atoms or molecules of which are stacked in orderly patterns. The attributes of a crystalline material, including strength, flexibility, color and electronic conductivity, depend upon the shape and size of the material's individual crystals, the organization of atoms in the individual crystals, and the relationships and interactions among the crystals. The particles of conventional crystalline materials generally have irregular shapes and sizes. The organization of a crystalline material's atoms or molecules, however, can be manipulated to form particles that are much smaller and more uniform. Particles that are less than 100 nanometers (billionths of a meter) in diameter are generally called nanocrystals and contain only a few thousand or tens of thousands of atoms, rather than the millions or billions of atoms in particles of most conventional materials. Through molecular engineering, the shape and size of such particles in nanocrystalline materials can be manipulated to produce materials with superior properties. These nanocrystalline materials behave in enhanced and novel ways because the properties of, and interactions among, their ultra-small particles have been significantly altered. The potential of nanocrystalline materials has been known for decades and such materials have been produced by a variety of other processes. However, these other processes are more limited in their ability to engineer the materials for high-performance applications. Mechanical and chemical processes are the two most common methods for producing nanocrystalline materials. In mechanical processes, fine powders are commonly made from large particles through the use of crushing techniques such as a high-speed ball mill. The resulting fragmented powders contain particles of inconsistent shapes and sizes, are relatively coarse, and are not adequate for many high-performance commercial applications. Nanocrystalline materials can also be made through chemical processes which utilize chemicals to create a reaction that precipitates particles of varying size and shape. Chemical processes, like mechanical processes, often produce nanometric particles of inconsistent shapes and sizes that are difficult to engineer for high-performance applications. Chemical processes also tend to leave chemical residues on the particle surfaces, making it difficult to precisely engineer the mechanical, chemical and electronic properties of the materials. Historically, high-quality nanocrystalline materials have been difficult to consistently produce in other than laboratory-scale quantities and have not been produced at commercially affordable costs. The Company believes that these traditional methods of producing nanocrystalline materials do not provide the means to realize the full potential of such nanocrystalline materials. ADVANTAGES OF THE COMPANY'S NANOCRYSTALLINE MATERIALS The Company has developed new technologies for the engineering and high-volume production of high-quality nanocrystalline materials which it believes cannot be accomplished by the traditional methods described above. At the core of the Company's technologies is its patented PVS process, whereby metallic or ceramic materials are vaporized into atoms that are mixed with a gas to form nanometric particles. The following attributes of the particles produced by the Company's PVS process enable it to produce significant quantities of nanocrystalline materials which it believes to be superior, for a range of high-performance applications, to both conventional materials and nanocrystalline materials produced by other means: SPHERICAL SHAPES AND SMALL SIZES enable particles to slide over each other, which allows the Company's ceramic materials to become more ductile and more easily formed. This enables the Company to rapidly mold variously shaped ceramic components without the costly and time-consuming machining which is typically used for conventional ceramics (e.g., 15 to 30 minutes for the Company's process as opposed to 4 to 8 hours for conventional machining). 24 26 CLEAN SURFACES enable particles to flow freely and be dispersed easily. For example, the Company produces iron oxides that make cosmetics feel smoother on the skin and blend easily. NARROW SIZE DISTRIBUTION of nanometric particles ensures that nanocrystalline materials are virtually free of large particles, which facilitates engineering of the chemical, mechanical, optical and electronic properties of the material because these properties vary according to particle size. For example, the Company produces titanium dioxide with particles that are large enough to block ultraviolet rays but are consistently smaller than the wave length of visible light, which enables sunscreens formulated with these particles to provide an unprecedented combination of high SPF protection and transparency. AGGREGATION CONTROL results in loosely agglomerated and uniformly small particles that can be readily and uniformly dispersed in a variety of media. For example, the Company produces ultra-fine abrasives for slurries used to polish the surfaces of semiconductors, which results in significantly smoother surfaces and faster and more selective removal of material. DIALABLE CONTROL OF PARTICLE SIZE enables precise engineering of particles through subtle modifications of the Company's PVS process. By controlling the evaporation rate of a material's atoms or the type or pressure of gas used in the production process, the Company can alter, enhance and tailor the performance of its basic raw materials for specific product applications. For example, further decreasing the particle size of a metal oxide increases its number of surface atoms, which enables the Company to produce metal oxides with enhanced catalytic performance. The Company has developed related technologies to further enhance the materials produced by its PVS process. Because the PVS process produces particles that, in contrast to particles of conventional materials, are (i) nearly spherical, (ii) virtually free of chemical residues, (iii) uniformly small, (iv) not strongly agglomerated, and (v) easily engineered, the Company can apply its other proprietary technologies to further process these particles to set new standards for a range of additional high-performance commercial applications. For example, certain product applications require surface treatments for nanocrystalline particles so they can be dispersed in a variety of media. To enable the incorporation of its materials in dispersions, the Company developed its proprietary DPE process which prevents particles from agglomerating by completely coating each individual particle. The coating process also enables the Company to alter the optical, chemical and electronic behavior of particles to meet the requirements of particular applications. In addition, certain product applications require nanocrystalline materials to be formed into structural ceramics of a precise shape and tolerance. As part of its strategy to enter markets for structural ceramics, the Company developed its net-shaping technology which enables the rapid fabrication of dimensionally-precise, high tolerance structural ceramic components without costly machining. COMPANY STRATEGY To take advantage of the broad potential applicability of nanocrystalline materials, the Company has adopted a strategy to develop a variety of value-added applications in targeted industries where the potential for future growth is substantial. The Company intends to establish itself as the leading manufacturer of nanocrystalline materials for these targeted application areas by continuously enhancing its technologies, product applications and customer base. Specific elements of the Company's business strategy include the following: Target Innovative Commercial Applications The Company identifies and pursues commercial applications where the value-added benefits of its nanocrystalline materials and technologies (i) represent breakthrough capabilities, (ii) are substantial and demonstrable, (iii) are not achievable with conventional materials, and (iv) offer the Company the potential for long-term market leadership and sustainable revenues. 25 27 Establish Collaborative Relationships with Marquee Customers To facilitate the development of product applications that meet market needs and create markets for its nanocrystalline materials, the Company establishes collaborative relationships with customers who are leaders in their industries. The Company targets such customers because it believes that these customers (i) are technologically innovative, (ii) will support product development and (iii) require a long-term supply of superior products in order to maintain their competitive advantages. The collaborative relationships pursued by the Company include agreed-upon developmental milestones and a development path that is intended to lead to significant commercial revenues from the customer. Expand Product Applications and Broaden the Customer Base After developing nanocrystalline materials and product applications for a customer, the Company seeks to broaden its relationship with that customer by identifying additional opportunities for the Company's nanocrystalline materials and technologies, and seeks to identify other potential customers in that market that can benefit from derivative materials and technologies. The Company also seeks to have the nanocrystalline materials and technologies that it successfully develops for customers in one market meet the application requirements of customers in other markets without significant process or material re-engineering. Maintain Technical and Commercial Leadership The Company is committed to maintaining its status as a leader in the field of nanocrystalline-based materials through ongoing research and development activities, collaborations with industrial, university and government entities, and efforts to continuously attract top scientists and engineers. The Company concentrates its research and development efforts on the key technological issues that affect the production and engineering of nanocrystalline materials that have new and superior capabilities tailored for specific commercial applications. This focus has resulted in the Company's development of its proprietary core technologies, including the PVS process, DPE process and net-shaping. To protect its proprietary core technologies, the Company has been issued patents with respect to its PVS process and the related apparatus, applied for patents with respect to its DPE process and licenses patents related to the synthesis of nanocrystalline materials and net-shaping. CUSTOMERS AND APPLICATIONS The Company has identified four primary markets--electronics, structural ceramics and composites, cosmetics and skin-care, and industrial catalysts--each of which offers the Company significant potential for revenue growth. In addition, the Company believes these markets provide opportunities to achieve competitive advantages based on product performance. The Company's strategy is to collaborate with industry leaders in these markets in order to validate the capabilities of its materials and coordinate the development and commercial introduction of product applications. The collaborative relationships pursued by the Company include (i) agreed-upon specifications for the proposed commercial application of the Company's materials; (ii) confirmation by the customer that the proposed application appears to be commercially viable and valuable; (iii) a significant commitment of developmental resources; (iv) agreed-upon developmental milestones, and (v) a development path that is intended to lead to significant commercial revenues from the 26 28 customer. Certain details of the Company's significant customer and product development relationships are contained in the table below.
CUSTOMER/PRODUCT NANOPHASE DEVELOPMENT PARTNER MATERIAL/TECHNOLOGY PRODUCT APPLICATION STATUS ELECTRONICS Moyco Technologies, Inc................... Aluminum oxide; Abrasives for semiconductor Shipping products pursuant to cerium oxide polishing five- year requirements contract; customer evaluations underway at Hyundai, IBM, Motorola, Lucent and Samsung Philips Electronics N.V................... Metal oxide Anti-radiation coatings for Development agreement CRTs Medtronic, Inc.......... Precious metal High-performance electrodes Samples purchased; tests and evaluations ongoing A leading electronic materials company..... Metal oxides Thin-film materials for Samples purchased; tests and semiconductor manufacturing evaluations ongoing A Fortune 50 communications company............... Metal oxides Photonic materials for Joint application for U.S. flat-panel displays Department of Defense contract STRUCTURAL CERAMICS AND COMPOSITES LWT Instruments, Inc.... Aluminum oxide Abrasion-resistant polymers for Shipping product pursuant to oil drilling sensors requirements contract AG Industries........... Net-shaped ceramics Components for continuous steel Development agreement; field casting tests scheduled A Fortune 100 manufacturer of heavy equipment............. Net-shaped ceramics Ceramic mechanical seals Prototypes purchased; tests and evaluations ongoing Pacific Safety, Inc..... Net-shaped ceramics Ceramic armor Development agreement; tests and evaluations ongoing Medtronic, Inc.......... Metal oxides Remotely monitored medical Samples purchased; tests and implants evaluations ongoing COSMETICS AND SKIN-CARE Schering-Plough Corporation(1)........ Zinc oxide Topical health-care products Shipping product pursuant to four-year requirements contract A Fortune 500 cosmetics company(1)............ Titanium dioxide; Transparent UV blockers and Shipping product iron oxide colorants for cosmetics INDUSTRIAL CATALYSTS E.I. DuPont de Nemours & Co.................... Precious metal Chemical-process catalysts Samples purchased; tests and evaluations ongoing A Fortune 50 chemical company............... Metal oxides Chemical-process catalysts Samples purchased; tests and evaluations ongoing
- ------------------------------ (1) These relationships are through the Company's distribution arrangement with WCD, which is distributing the Company's nanocrystalline materials to a number of cosmetics and skin-care formulators. See "--Cosmetics and Skin-Care" and "--Marketing." Following is a more detailed description of the Company's targeted markets and its activities in specific product applications. ELECTRONICS Electronics is one of the world's largest and fastest growing markets, fueled in part by rising demand for increased computing power and information storage requirements and the rapid growth of communications technologies. The new levels of performance in electronics that are necessary to meet these requirements depend, in large part, on advanced materials, especially advanced ceramics, that enable higher performance and further miniaturization. Increasingly, critical dimensions and performance criteria for high-speed 27 29 electronic pathways and dense platforms are measured in nanometers and angstroms (tenths of nanometers). It is at this level of performance that Nanophase believes its engineered nanocrystalline materials have advantages that can be converted into immediate opportunities. Nanophase's initial focus in this market has primarily been on three product applications: (i) semiconductor polishing, (ii) coatings for electromagnetic radiation protection and (iii) high-performance electrodes. The Company believes that the uniformly small particle size, nearly spherical particle morphology and clean particle surface of the Company's materials allow such materials to provide innovative, value-added benefits for these and other product applications in the electronics market. Semiconductor Polishing Increases in computing power require increased memory capacity, which is achieved by fabricating smaller circuits on smoother semiconductor wafer surfaces. These smoother surfaces are obtained by a technique called chemical/mechanical polishing (CMP), in which an abrasive slurry is used to polish semiconductor surfaces to a very fine finish. Polishing slurries utilizing the Company's nanometer-sized aluminum dioxide ("alumina") and cerium oxide ("ceria"), with their nearly spherical particle shapes and uniformly small particle sizes, provide semiconductor polishing that results in (i) significantly smoother surfaces, (ii) a faster rate of material removal, (iii) more selective removal of material, and (iv) easier cleaning during the manufacturing process, compared to slurries utilizing conventional materials. The Company believes that these attributes will be an important element in the production of semiconductor wafers with smaller geometries that will result in increased memory capacity, faster processing speeds and lower production costs. Nanophase has entered into a five-year requirements contract with Moyco, a manufacturer of semiconductor polishing slurries, pursuant to which the Company will supply its nanocrystalline alumina and ceria to Moyco. Moyco markets its slurries to Hyundai, Samsung, IBM, Lucent and Motorola, all of which are currently evaluating slurries containing the Company's nanocrystalline materials for use in their next generation semiconductor manufacturing processes. The Company has agreed to sell the materials to Moyco for this market on an exclusive basis so long as Moyco purchases the following annual minimums specified in the contract: 23, 50, 80, 140 and 200 tons of alumina and 4, 8, 16, 20 and 30 tons of ceria in 1997, 1998, 1999, 2000 and 2001, respectively. If Moyco purchases the aggregate minimum quantities specified in the contract, it will purchase approximately $30 million of the Company's materials through the end of 2001. If Moyco fails to purchase such minimum quantities, the Company may terminate Moyco's exclusivity, or the Company may terminate the entire contract. In August 1997, Moyco and Ashland signed a non-binding letter of intent pertaining to the potential purchase by Ashland of Moyco's intellectual properties, technologies and certain other intangible assets for the chemical/mechanical polishing of semiconductor wafers. See "Risk Factors--Dependence on a Limited Number of Key Customers." Electromagnetic Radiation Protection Cathode ray tubes ("CRTs") utilized in television and computer monitors emit electromagnetic radiation due to the high voltages used to generate light. In the past, little attention was paid to the potential harmful effects of this radiation. Recent European Economic Community regulations scheduled to go into effect over the next several years, however, place more stringent limits on the quantity of radiation that can be emitted by television and computer monitors. In response to such regulations, CRT manufacturers require transparent, conductive coatings that meet the new electromagnetic radiation standards. The materials currently used for conductive coating of CRTs have not been proven to meet all of the new radiation requirements. Nanophase can produce a proprietary metal oxide mixture which has a narrower particle-size distribution and cleaner particle surfaces than currently used materials. The Company's nanocrystalline metal oxide mixture is highly conductive and easily dispersed and, when applied as a coating to CRTs, is expected by the Company to meet the increased radiation shielding regulatory requirements, while maintaining the transparency required for quality video images. The Company is actively working with Philips pursuant to an agreement to develop a specific coating for CRTs manufactured by Philips. This agreement 28 30 includes an expression of intention by Philips to purchase the Company's coating materials if developmental milestones are met. High-Performance Electrodes Electronic medical devices require new high-performance electrodes which deliver more precise voltages. In order to achieve such precision, the surface area of the electrode needs to be increased substantially. As the surface area of an electrode increases, transient signals caused by polarization at the electrode surface are reduced. In a development program with Medtronic, a leading manufacturer of medical devices, the Company is developing nanocrystalline precious metals that can be directly deposited on medical-device electrodes to create the additional surface area required to decrease polarization. The Company believes that its material provides higher surface area than the conventional technology currently used. The Company is working with Medtronic to meet specific performance requirements and establish developmental milestones. Thin-Film Materials for Semiconductor Manufacturing Nanophase has begun an early stage development program with a leading electronic materials company for developing advanced materials for use in semiconductor manufacturing. The objective is to develop advanced materials which can be used to fabricate thin-films on the surfaces of semiconductors to enable the production of semiconductor wafers with increased memory capacity, faster processing speeds and lower production costs. Nanocrystalline materials are used because the products require a uniform and fine-grained structure. This product application is in an early stage of development and investigation. Flat-Panel Displays Nanophase and a Fortune 50 communications company have submitted a joint proposal to the U.S. Department of Defense for funding to develop photonic materials and manufacturing technology for a new generation of electronic displays for a broad range of light-weight, low-power multi-purpose communication devices. If funded, the two companies will work jointly to develop the products. STRUCTURAL CERAMICS AND COMPOSITES Structural ceramics are advanced compounds that offer hardness, high strength and inertness for a broad range of industrial applications involving harsh chemical and thermal environments. The free-flowing nature and weak agglomeration of the Company's nearly spherical nanocrystalline particles enable the Company to rapidly fabricate high-tolerance, dimensionally precise structural ceramic parts without costly machining. Because the conventional methods for forming structural ceramics involve the use of high temperatures, high pressures or lengthy machining operations, the high costs of fabrication have limited the usage of dimensionally-precise ceramics to only the most critical applications. Through its net-shaping process, the Company can mold nanocrystalline ceramic materials into fully-dense ceramic parts with little or no machining. This process makes it possible to fabricate a variety of dimensionally precise structural ceramic components in a short period of time (e.g., 15 to 30 minutes for the Company's process as opposed to 4 to 8 hours for conventional machining), at significantly lower temperatures and pressures, and at substantially lower costs, than conventional fabrication methods. Composites, like structural ceramics, are engineered structures that consist of diverse elements and are geared toward high-stress product applications that require durable, resistant materials. Composites combine the advantageous qualities of their constituent materials. The properties of these composites depend heavily on the nature and amount of the materials that are incorporated into the composites. For example, incorporating a hard material like alumina into a flexible and light-weight plastic can increase the plastic's resistance to abrasion and wear. Such an increase is related to the number of particles of the constituent alumina. Because there are more particles in one pound of nanocrystalline materials than in one pound of more commonly used micron-sized particles, properties such as abrasion resistance are enhanced by substituting nanocrystalline materials for conventionally used materials. 29 31 Composite Polymer for Oil Drilling Machinery Nanophase has entered into a one-year requirements contract with LWT, a supplier of instrumentation to the oil drilling industry, for the supply of abrasion-resistant composite polymers to protect down-hole data logging equipment. The contract requires LWT to purchase a minimum of $375,000 of materials from the Company. In this application, instrumentation is lowered into a drilled shaft in order to provide information to the drill operator on a continuous basis. Because drilled shafts often pass through hard rock formations, or very abrasive layers of sandstone, the data logging instruments must be protected from potential wear. A protective housing, or collar, is used to protect the data logging equipment. These collars are conventionally coated with a commercially available ceramic-filled polymer. Conventional fabrication of these collars is difficult because the polymer is thick and must be applied by hand. LWT requires a polymer which can be applied by automatic machinery, has a long service life and is abrasion-resistant. Tests performed by LWT using the Company's composite materials indicate that such materials meet these requirements. Ceramic Components for Continuous Steel Casting The Company is collaborating with Acutus Gladwin, a leading supplier of services and products in the steel industry, to produce a ceramic component for use in continuous steel casting. Continuous steel casting is performed by pouring molten steel from a ladle through a funnel-shaped nozzle into a mold which is several hundred feet long. Current nozzles are made of a porous alumina/graphite material and require frequent replacement due to wear. During replacement, steel-casting lines using these nozzles must be shut down for 15 to 45 minutes while new components are installed, resulting in down-time costs of up to approximately $25,000/hour and several tons of second-quality steel which must be remelted or downgraded for use in lower-quality products. Nanophase believes that its denser net-shaped ceramics in this application will substantially increase wear resistance, resulting in significant cost savings due to decreased downtime and less wasted or sub-standard steel. Under a development agreement with Acutus Gladwin, the Company has successfully completed laboratory testing of its material and prototypes are scheduled to be field tested by the end of 1997. Ceramic Mechanical Seals Nanophase is currently fabricating prototype ceramic mechanical seals for a Fortune 100 manufacturer of heavy equipment. The ceramic seals are designed for use in harsh applications to prevent abrasive particles from entering mechanical joints and to prevent oil from leaking from the joints. Conventional seals used in these applications are commonly made of plastic composite materials and either wear or corrode, requiring replacement after only a few thousand hours of operation. Ceramic seals, because of their improved abrasion and corrosion resistance, are believed by the Company to be more reliable and durable than conventional seals. Customer-laboratory tests of prototype seal designs have shown that Nanophase's ceramic seals can increase the service life of a seal up to ten-fold compared to currently-used seal materials, resulting in a reduction of equipment downtime and associated costs. In addition, Nanophase's net-shaping process reduces or eliminates the costly diamond grinding that normally would be required to fabricate these ceramic seals. The Company believes that reduced manufacturing costs make these ceramic seals cost-effective for a number of high-volume mechanical-seal applications. The Company expects field testing of its ceramic seals to begin by the end of 1997. Ceramic Armor The Company is currently fabricating net-shaped alumina armor plates under a development agreement with Pacific Safety, a leading Canadian armor producer. Ceramic based armor is highly desirable because of its strength and weight advantage over steel. It can provide the same protection at a significantly reduced weight. However, current ceramic armor materials, made from hot-pressed alumina or boron carbide, are either not durable enough or very costly to fabricate, and thus have limited markets. Based on preliminary studies, the Company believes that it will be able to produce denser, fine-grained alumina armor tiles which will have greater durability and impact resistance than hotpressed alumina tiles and offer a significant economic advantage over boron carbide. 30 32 Remotely Monitored Medical Implants In collaboration with Medtronic, Nanophase is developing a net-shaped ceramic housing for an electronic medical device. Current housings for this application are fabricated from metal, and while medically proven and in daily use, they do not allow the transmission of Radio Frequency ("RF") signals. A ceramic housing would allow the passage of RF signals and, hence, remote wireless monitoring. Nanophase is also developing materials for medical implants for Medtronic which can be viewed without using X-rays. Both medical devices, if successfully developed, will require the customer to undertake long-term clinical testing and seek FDA approval. See "Risk Factors--Governmental Regulations." COSMETICS AND SKIN-CARE The cosmetics and skin-care market is a substantial consumer of particulate materials as active ingredients and pigments. The Company has targeted three of its nanocrystalline materials, titanium dioxide ("titania"), iron oxide and zinc oxide, for applications in the cosmetics and skin-care market, including sunscreens, cosmetic colorants and topical health-care applications. Nanophase has entered into a global distribution agreement with WCD for exclusive distribution of its nanocrystalline materials to cosmetic and skin-care companies. Through this distribution arrangement, the Company (i) has recently begun commercial sales of its titania to several small cosmetics companies, including Geurlain, the Jafra division of Gillette, Inc., Medicia Pharmaceutical Corporation and Sunny World Co., Ltd (of Thailand), for use in sunscreens, (ii) is shipping its iron oxides to a Fortune 500 cosmetics company for use as cosmetic colorants, (iii) is shipping titania dispersions to that same customer for use in a product with SPF protection, which is presently scheduled for market introduction in the fourth quarter of 1997, and (iv) has entered into a commercial supply contract with Schering-Plough for its nanocrystalline zinc oxide. Topical Health-Care Applications The Company has recently entered into a four-year requirements contract with Schering-Plough pursuant to which the Company will supply its nanocrystalline zinc oxide to Schering-Plough for certain topical health-care products. For example, the Company's nanocrystalline materials are being supplied for use in new anti-fungal sprays and powders presently scheduled for initial market introduction in the fourth quarter of 1997. Several skin-care companies are currently evaluating Nanophase's nanocrystalline zinc oxide for use in other topical health-care products. The Company's zinc oxide contains uniformly small particles which contain a large number of surface area atoms. Initial testing by the Company's customers indicates that this attribute provides enhanced anti-fungal activity compared to conventional materials because a lower amount of the Company's zinc oxide is needed to achieve the desired level of activity. In addition, the Company's zinc oxide, because of its weakly agglomerated particles, is better suited than conventional materials for aerosol applicators. Sunscreens The market for titania-based sunscreens has rapidly expanded due to (i) increasing consumer awareness of the harmful effects of ultraviolet ("UV") rays and (ii) a desire to replace conventional chemical sun-block ingredients, which can cause irritation, with "chemical-free" ingredients, such as titania. Because the Company's nanocrystalline titania is comprised of particles that are large enough to block UV rays, but are consistently smaller than the wave length of visible light, it enables "chemical-free" sunscreen products to provide an unprecedented combination of high SPF protection and transparency. In this regard, sunscreens using Nanophase's titania provide SPF protection of 17+ with transparency, at only 3% weight loading, whereas, based upon independent performance results, competitive products made with conventional titania are able to achieve SPF protection of no better than 12, require a weight loading of 5% or more and often exhibit a whitening effect on the skin. The weight loading percentage is a measure of the amount of material in a product, by weight, in relation to the weight of all of the materials in the product. The relationship between SPF and weight-loading is only roughly linear; however, at these performance points, sunscreens using the Company's titania provide 5.6 SPF points for each percent of weight loading versus 2.4 SPF points for the 31 33 best-performing current competitive products. Nanophase's total-encapsulation coating, based on its DPE process, also makes Nanophase's titania compatible with certain skin-product ingredients, like self-tanning ingredients, with which competitive titania is not compatible. This compatibility enables cosmetics formulators to develop self-tanning products which offer chemical-free protection from excessive exposure to UV rays. Cosmetic Colorants Through its PVS and DPE processes, the Company has engineered nanocrystalline brown, red and black iron oxides for use as coloring agents in cosmetics. Because of their visible transparency, these iron oxides can intensely color the skin without the caking or streaking effects caused by conventional opaque coloring agents. This is due to the nanometer-sized particles of Nanophase's iron oxides which absorb light without significant visible scattering, thereby providing color without opacity. In addition, the nearly spherical particles of Nanophase's iron oxides enable them to be discretely encapsulated and readily dispersed to create smooth, free-flowing cosmetic foundations which cosmetics formulators can blend to more closely match varying skin tones. INDUSTRIAL CATALYSTS Catalysts are materials that help convert, or accelerate the conversion of, one chemical into another. The Company's PVS process allows for the fabrication of two distinct types of solid catalysts: (i) a single pure material, such as iron oxide, which is a widely used chemical-process catalyst for the synthesis of hydrogen, ammonia and other bulk chemicals, and (ii) composite materials in which a nanocrystalline metal, such as palladium, is deposited on a larger substrate. This latter catalyst has a broad range of applications, including polymer synthesis, hydrogen peroxide production and the conversion of petroleum feedstock to higher value chemicals. The activity of a catalyst (i.e., the amount of desired product that can be produced per unit weight of catalytic material) is an important measure of its efficacy, and is related to a number of physical properties of the catalyst, including surface area, particle size and the reactivity of atoms on the surface of the catalytic material. Nanocrystalline materials offer better performance as catalysts because they have a higher proportion of catalytically active surface atoms than conventional materials. In addition to enhanced reactivity, the Company's materials can potentially reduce costs because less catalyst is needed to achieve a desired level of activity. Nanophase is developing a process to directly deposit nanocrystalline metals on a substrate for use by DuPont as a catalyst in large-scale chemical production. Early measurements have shown a two to fourfold increase in catalytic activity over the current, chemically produced DuPont catalyst. The Company is working with DuPont to meet specific performance requirements for this catalyst. The Company has also begun an early-stage development program with a Fortune 50 chemical company to produce catalysts comprised of nanocrystalline metal oxides on larger substrates. Based on the Company's discussions, both internally and with potential customers, additional potential applications for PVS-produced heterogeneous catalysts include wash coats for automotive catalysts and surface-enhanced catalysts for the chemical-process industry. TECHNOLOGICALLY-SIMILAR APPLICATIONS Although the Company focuses its efforts on product applications in the above-mentioned markets, the Company believes there is a broad range of technologically-similar applications, the performances of which could be substantially improved by utilizing the Company's materials and technologies without extensive additional engineering. Based on the Company's discussions, both internally and with potential customers, these include applications for fibers, textiles, plastics, paper, optical polymers, pigments and other specialty products. These applications are primarily based on the coating or dispersion of nanocrystalline materials produced by the PVS process. The Company only pursues those specialty applications which fit into its business strategy and which receive substantial support from a significant prospective customer. 32 34 THE COMPANY'S TECHNOLOGIES Nanophase has developed and employs several related technologies for the engineering and production of nanocrystalline materials and product applications, including technologies for the synthesis, surface-treatment and dispersion of nanocrystalline materials and the fabrication of structural ceramic components. The Company also is engaged in ongoing research and technology-licensing activities as part of its strategy to maintain a technical and commercial leadership position in the field of nanocrystalline materials. The PVS Process The Company uses its patented PVS process to produce nanocrystalline powders. The PVS process is based on the formation of a physical vapor from a selected metallic or ceramic material which is fed through a plasma reactor and heated to a temperature above its melting point. As the temperature rises, the atoms of this material evaporate from its surface into a stream of flowing vapor. These evaporated atoms are then mixed with selected gases which chemically react with the atoms. Additional gases then cool the atoms sufficiently to condense the vapor into solid, nearly spherical clusters of molecules. The flowing gas transports the resulting clusters to a collection vessel. The rapid transport and cooling of the nanometric particles produce a weakly agglomerated powder. [A DIAGRAM OF THE PVS PROCESS] The Company holds two patents relating to its PVS process which expire in 2013; one covers the process itself, while the other covers the apparatus used in the process. The Company's plasma reactor embodies proprietary features which enable the production of high-quality materials at high-volume and competitive cost. Nanophase utilizes its PVS process to exploit the relative advantages of physical versus chemical synthesis of nanocrystalline materials. These advantages include the production of nanocrystalline materials with particles that are nearly spherical, virtually free of chemical residue, uniformly small, not strongly agglomerated, and easily engineered. The Company believes that the PVS process is a superior commercial process in the degree of control that can be exercised over particle size and particle size distribution. By means of controlled and subtle modifications to the PVS process (e.g., the evaporation rate, the type or pressure of the gas, or how quickly the flow of gas carries the clusters to the collection vessel), the Company can control the size of a material's particles, thereby altering the traits of a substance. The Company is thus able to engineer and produce a wide range of materials and products without substantial process and product re-engineering. In 1995, the Company's PVS process received the R&D 100 Award given each year by R&D Magazine to recognize the 100 most technologically significant new products and processes in the world. Surface Treatments (The DPE Process) Many of the applications that the Company is pursuing require further engineering of the particles produced in the PVS process in order to meet specific application requirements. To satisfy these requirements, the Company has developed a variety of surface-treatment technologies to stabilize, alter or enhance the performance of nanocrystalline particles, together with technologies to enable the particles to be dispersed in fluids or polymers. At the core of these surface-treatment and dispersion technologies is Nanophase's proprietary DPE process, which enables Nanophase to completely surround each nanocrystalline particle with a durable coating. The Company has applied for a patent for its DPE process. 33 35 The DPE process can coat the surface of each nanometer-sized particle produced by the PVS process with a proprietary polymer that is not removed by subsequent processing. Traditional coating technologies employ strand-like polymers that cannot completely cover the surfaces of nanometric particles. The Company's DPE process uses polymers that are shaped like hands. When the nanometer-sized particles are coated, the fingers of the hand collapse and completely encapsulate each particle with a thin polymeric shell. This shell also can be engineered to contain covalently bound spacer groups of controllable size that function to prevent particles from sticking to each other. The coatings enable the particles to be uniformly dispersed in a wide range of media, including water, cosmetic emollients, plastics and polymers, thus enabling these materials to be used in applications ranging from highly transparent sunscreens to dense opaque coatings. Net-Shaping Nanophase has developed a proprietary process whereby it net-shapes its nanocrystalline ceramic materials produced by the PVS process to rapidly fabricate precise, high-tolerance industrial ceramic parts without costly machining. This net-shaping technology was developed in collaboration with the Company's subcontractors, Lockheed Missiles & Space Co., Inc. ("LMSC") and Caterpillar, Inc., under an Advanced Technology Program ("ATP") contract funded by the U.S. Department of Commerce. The Nanophase technologies relevant to net-shaping involve (i) the production of nanocrystalline ceramic materials in commercial quantities, (ii) the consolidation of Nanophase's ceramic materials into dense nanocrystalline preforms without exaggerated particle growth, and (iii) net-shape forming of fully-dense, precisely-shaped ceramic parts. [A DIAGRAM OF NET-SHAPING] The conventional fabrication of structural ceramics involves machining that uses diamond tools. This process is costly, time consuming and often produces highly stressed ceramic parts and components with structural flaws. Nanophase's process enables fabrication of ceramic parts and components using significantly lower temperatures and pressures than used by conventional fabrication methods (e.g., 1300-1500 degreesC and 2000-4000 psi, as compared to up to 1700 degreesC and 100,000 psi). This technology enables the Company to fabricate dimensionally precise ceramic components in a short period of time without costly machining (e.g., 15 to 30 minutes for the Company's process as opposed to 4 to 8 hours for conventional machining). This rapid deformation processing is made possible by the consistent ultrafine particle size of the Company's nanocrystalline ceramic materials, the Company's ability to control the consolidation of such particles into preforms of high and uniform density, and the ability of the ultrafine particles to easily slide over one another in the forming process. The Company's net-shaping technology produces ceramic products with a variety of detailed shapes, high tolerances and smooth surface finishes that can be tailored to a customer's needs. Following the successful completion of the ATP program, the Company entered into a research, development and prototyping agreement with LMSC whereby the Company funds LMSC to perform design, prototyping and research and development tasks related to net-shaping using technology developed during the ATP project. LMSC currently designs, engineers and fabricates prototypes to the Company's specifications for the Company's commercial customers. Technology developed during the ATP project is jointly owned by the Company and LMSC. New technology developed under the current arrangement between LMSC and the Company is wholly-owned by the Company and, under the terms of the arrangement, LMSC can use the newly-developed technology only for its internal research. 34 36 Other Technologies The Company constantly seeks to develop new technologies relating to nanocrystalline-based materials through ongoing research and development activities and collaborations with industrial, university and government research programs. For example, the Company is developing a new generation of metallic and ceramic precursors to be processed into nanocrystalline materials. Such activities are intended to enable the Company to develop new product applications and offer more materials with enhanced capabilities. MANUFACTURING AND FACILITIES Nanophase operates a 20,000 square-foot production and research facility in Burr Ridge, Illinois, a suburb of Chicago, which also serves as the Company's administrative headquarters. The Company also operates a smaller facility in Chicago, Illinois, for coating nanocrystalline materials using its DPE process. The Company believes its Burr Ridge facility is the first in the world that is dedicated to the commercial-scale development and production of physically synthesized nanocrystalline materials. The Company's operations in Burr Ridge are registered under ISO 9001 standards, and the manufacturing operations are in compliance with the cGMP requirements of the FDA. Through the first three quarters of 1997, 15 PVS plasma reactors were operational and producing various nanocrystalline materials at the Burr Ridge facility. The throughput of each reactor depends on many factors, including the mix of products produced, the commencement, expiration or termination of development programs, the status of tests and evaluations of samples and prototypes and production yields. In the third quarter of 1997, the Burr Ridge facility operated 24 hours a day, seven days a week. Each PVS plasma reactor is comprised of modular equipment which is designed and assembled to the Company's proprietary specifications. These modular reactors provide flexibility in the expansion of the Company's manufacturing capability. In the third quarter of 1997, the Company began the installation of eight additional PVS plasma reactors in the Burr Ridge facility. The Company expects that such PVS plasma reactors will be operational by the end of 1997. In addition, the Company expects to increase the throughput per reactor as it increases the efficiency and yields of its PVS process and decreases the amount of downtime for each reactor. The Company believes that additional manufacturing capacity will be required in 1998 and intends to use a portion of the net proceeds from this offering for the expansion of its manufacturing facilities. See "Use of Proceeds." Also operational within the Burr Ridge facility is a quality control laboratory designed for the dual purpose of validating operations to cGMP and ISO standards, and production process control. This laboratory is equipped to handle all routine analytical and in-process techniques that are currently required by the Company. In addition, capability for specialized analytical and physical measurements currently is available at Argonne upon terms which the Company believes are reasonable and adequate. The Company leases its Burr Ridge facility pursuant to an agreement which expires in September 1999. The Company has options to extend the lease for up to five additional years. Based on the Company's current product mix, the Company's coating facility has the capacity to coat those nanocrystalline materials which it desires to coat. The Company believes that its coating capacity is adequate to support the Company's anticipated 1998 production plans. The Company subleases its Chicago facility pursuant to a one-year agreement which automatically renews unless terminated by either party upon proper notice. MARKETING The Company believes that one of its principal strengths is its marketing department, the members of which have experience in each of the Company's targeted markets. These individuals are often teamed with the Company's scientists and researchers to demonstrate the advantages of the Company's materials and product applications to potential customers. The Company's scientists, engineers and marketing personnel attend and speak at advanced materials symposia, publish articles in scientific journals and participate in selected industry trade shows. In addition, the Company uses a web page on the internet, advertisements in selected industry and trade journals, and specification sheets and corporate brochures. 35 37 The Company also markets its materials through distributors in certain application areas where the requirements for ongoing development and technical support by Nanophase are not substantial, or where the distributor has existing customer relationships, marketing or post-processing infrastructure, or companion products or services that may enable Nanophase to enter the market more quickly. For example, pursuant to a global distribution agreement, WCD exclusively distributes Nanophase's nanocrystalline titania, iron oxides and zinc oxide to the cosmetics and skin-care market. See "--Customers and Applications--Cosmetics and Skin-Care." As part of its strategy to gain access to foreign markets, Nanophase has entered into an agreement with a subsidiary of Itochu, formerly C. Itoh, for the distribution of Nanophase's materials in broad-based industrial markets throughout Asia. The agreement is intended to enable Nanophase to quickly establish foothold positions in Asian markets by utilizing the technology and market-support capabilities of Itochu. The agreement does not target specific materials or applications; however, Itochu is pursuing high-volume industrial applications in electronics, industrial ceramics and catalysts. Because virtually all of the product applications for the Company's materials are new and innovative, in order for the Company to penetrate its targeted markets, it must participate in a multi-step process that includes initial discussions of the product application which highlight the advantages of the Company's nanocrystalline materials, proof of concept, proof of feasibility within the specific application, and evaluations of cost and manufacturability. Completion of this evaluation process usually takes at least 18 months, and may take several years. RESEARCH AND DEVELOPMENT The near-term objective of the Company's research and process-development activities is to develop and consistently produce sufficient commercial quantities of application-specific nanocrystalline materials to meet the Company's near-term requirements. Although the Company has de-emphasized the pursuit of revenue from government research contracts, a key component of the Company's long-term research and development strategy is to identify and develop relationships with leading industrial, university and government research programs across the United States and internationally to leverage the Company's technological and scientific capabilities. The Company believes that these research relationships may provide accelerated introduction of new technologies into its product applications, early indications of new technology developments which could enhance or compete with the Company's nanocrystalline materials, and high-value improvements in its current key technologies. The Company will also continue its efforts to attract and retain top scientists and engineers, which management believes will enable the Company to maintain a long-term leadership position in the nanocrystalline materials field. The Company's total research and development expenses during the six months ended June 30, 1997 and fiscal years 1996, 1995 and 1994 were $376,532 and $677,284, $485,059 and $456,162, respectively. The future success of the Company will depend in large part upon its ability to keep pace with evolving advanced materials technologies and industry standards, and there can be no assurance it will be able to do so. See "Risk Factors--Rapid Technological Change" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS The objective of Nanophase's intellectual property activities is to implement ongoing strategies that maximize and protect the proprietary rights of the Company. These strategies encompass (i) obtaining patents and trademarks based on Nanophase inventions and products, and (ii) licensing third-party patents to expand the Company's technology base and prevent Nanophase from being blocked should future developments require use of technology covered by those patents. Nanophase currently owns or licenses an aggregate of 16 United States patents and patent applications: two issued patents owned directly by Nanophase; three pending patent applications owned directly by Nanophase; and eleven patents licensed from third parties. 36 38 Two United States patents have been issued to Nanophase: one covering its PVS process for the synthesis of nanocrystalline materials, and the other covering the related apparatus. The patents expire in July 2013. Additional United States patent applications filed by the Company include applications relating to nanocrystalline materials, plasma sensors and the coating of metal oxides. Foreign patent applications owned directly by Nanophase are pending in Australia, Europe and Japan for the PVS process and apparatus. An international patent application owned by the Company for the coating of ceramic powders is also pending under the Patent Cooperation Treaty, with Australia, Canada, Europe and Japan designated for the national phase of the application. The Company holds the following licenses of United States patents: an exclusive worldwide license of two patents owned by ARCH Development Corporation which embody a laboratory-scale method and apparatus for making nanocrystalline materials; a non-exclusive license from Research Development Corporation of Japan of four patents which embody early laboratory-scale work in the physical synthesis of nanocrystalline materials; a non-exclusive license of two patents owned by Hitachi, Ltd. which are related to the synthesis of nanocrystalline materials; and a remainder-exclusive license of three patents held by Cornell University relating to a laboratory-scale process for net-shaping of a limited range of materials. Other than the license from Research Development Corporation of Japan, which remains in force until May 2006 and is extendable upon further agreement, each of the licenses lasts for the life of their respective patents. Under each of the licenses, the Company is obligated to pay the licensor royalties equal to a percentage of net sales of products which embody the licensed technology. The Company requires its employees, consultants, outside scientific collaborators and other advisors to execute confidentiality and proprietary rights agreements upon the commencement of employment or consulting relationships with the Company. These agreements generally provide that all confidential information developed or made known to the individual during the course of the individual's relationship with the Company will be kept confidential and will not be disclosed to third parties except in specific circumstances. In the case of research employees, the agreements also provide that all inventions made by the individual shall be the exclusive property of the Company. 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 the Company with adequate remedies in the event of unauthorized use or disclosure of such information. In addition, because none of the Company's employees have entered into noncompetition agreements with the Company, they may become competitors of the Company upon termination of employment. See "Risk Factors--Patents and Protection of Proprietary Information." COMPETITION Within each of its targeted markets and product applications, Nanophase faces current and potential competition from numerous chemical companies, as well as the in-house capabilities of several of its current and potential customers. For example, with regard to semiconductor wafer polishing, Cabot, Rodel Incorporated, Fujimi Corporation (of Japan) and Solution Technology Incorporated, all market polishing slurries for CMP. In addition, Cabot, Baikowski International Corporation and Norton Company (a unit of Compagnie De Saint-Gobain) all manufacture their own ultrafine alumina. In the cosmetics and skin-care market, various companies manufacture their own sub-micron titania (Tioxide Specialties Limited, Tayca Corporation (of Japan), Ishihara Sangyo Kaisha, Ltd., Kemira Oy, Degussa AG and DuPont), iron oxide (Sun Chemical Corporation, Harcros Pigments Incorporated) and zinc oxide (Zinc Corporation of America) by chemical or other means. In structural ceramics, the Company competes against manufacturers of ceramic composites who machine such composites for specific product applications. In the catalysts market, the Company faces competition from companies that chemically deposit metal oxides onto substrates. Although Nanophase believes that its materials and technologies are superior to the competitive materials and technologies that are utilized by these companies, such companies represent significant competitive risks to Nanophase because they have substantially greater financial and technical resources, larger research and development staffs, and greater manufacturing and marketing capabilities than the Company. See "Risk Factors--Competition." The Company also faces potential competition from Vacuum Metallurgical Co., Ltd. of Japan ("Vacuum Metallurgical"), which manufactures nanocrystalline materials and equipment. Currently, the Company does 37 39 not compete with Vacuum Metallurgical, but there can be no assurance that Vacuum Metallurgical will not develop products or manufacturing capabilities to compete with the Company in the future. Potential competitive risks are also represented by numerous small development companies engaged in the development of nanocrystalline materials, such as Plasma Quench Technologies, Inc. and Nanopowder Enterprises, Inc. Most of these companies are associated with university or national laboratories and use chemical and physical methods to produce nanocrystalline materials. Nanophase believes that most of such companies are engaged primarily in funded research, and is not aware of any such company with commercial production capability. However, there can be no assurance that such companies will not represent significant competitive risks in the future. See "Risk Factors--Competition." GOVERNMENTAL REGULATIONS The Company's Chicago facility, which houses its coating operations, is a "small quantity generator" of hazardous materials, including ethanol, under RCRA and, as a result, is subject to stringent federal, state and local regulations governing the handling, storage and disposal of such materials. To date, the Company has not been required to make substantial expenditures for preventive or remedial action with respect to the hazardous materials it uses. The manufacture and use of certain of the products which contain the Company's nanocrystalline materials are also subject to governmental regulation. As a result, the Company is required to adhere to the FDA's cGMP requirements and similar regulations in other countries which include testing, control and documentation requirements enforced by periodic inspections. In addition, both of 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 the Company's operations. See "Risk Factors--Governmental Regulations." EMPLOYEES On September 30, 1997, the Company had a total of 61 full-time employees, 11 of whom hold advanced degrees. Of the full-time employees, 11 are engaged in research, development and engineering, 30 are engaged in manufacturing, 4 are engaged in quality control, 7 are engaged in marketing and sales, and 9 are engaged in general management, finance and administration. The Company also currently engages two scientists as consultants on a regular basis, one of whom is Dr. Richard W. Siegel, a co-founder and director of the Company. None of the Company's employees is covered by a collective bargaining agreement. The Company considers its relations with its employees to be good. LEGAL PROCEEDINGS The Company is not a party to any litigation and is not aware of any pending or threatened litigation against the Company that could have a material adverse effect on the Company's business, results of operations or financial condition. 38 40 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The following table sets forth certain information with respect to the executive officers and directors of the Company:
NAME AGE POSITION Robert W. Cross........................... 59 President, Chief Executive Officer and Director Dennis J. Nowak........................... 47 Vice President--Finance and Administration, Chief Financial Officer, Treasurer and Secretary Richard W. Brotzman, Ph.D................. 44 Vice President--Research Donald J. Freed, Ph.D..................... 55 Vice President--Marketing Robert M. Kelly........................... 51 Vice President--Cosmetic Products Dennis J. Nagle........................... 45 Vice President--Manufacturing John C. Parker, Ph.D...................... 36 Vice President--Technology Leonard A. Batterson(1)(2)................ 53 Chairman of the Board of Directors Steven Lazarus(1)(2)...................... 66 Director Robert W. Shaw, Jr., Ph.D.(1)(2).......... 55 Director Richard W. Siegel, Ph.D................... 60 Director
- ------------------------------ (1) Member of Compensation Committee. (2) Member of Audit Committee. Robert W. Cross has served as President and Chief Executive Officer of Nanophase since February 1993. He has extensive experience as an entrepreneurial chief executive officer in developmental companies and in the commercialization of complex technologies. He has also served as chief executive officer of Cross Technologies, Inc. ("CTI") since 1990. CTI is a holding company that previously developed secure information systems for U.S. Government and North American Treaty Organization intelligence agencies. For the 20 years prior, Mr. Cross served primarily as chief executive officer or interim management for developmental high-technology venture-backed companies. Mr. Cross' previous positions included Chairman and Chief Executive Officer, Delta Data Systems Corp.; President and Chief Executive Officer, Columbia Data Products, Inc.; and Special Counsel, Control Video Corp. (predecessor to America Online). In 1968 and 1969, Mr. Cross was General Counsel to Electronic Data Systems Corp., Dallas. From 1964 to 1968, he was a corporate finance attorney with Winthrop, Stimson, Putnam & Roberts in New York. He holds BSBA and J.D. degrees from Washington University in St. Louis. In 1995, Mr. Cross served as chairman of the Gorham/Intertech International Conference on Nanostructured Materials and Coatings. Dennis J. Nowak has served as Vice President--Finance and Administration, Chief Financial Officer, Treasurer and Secretary of Nanophase since joining the Company in September 1996. From October 1991 to September 1996, Mr. Nowak was a partner in the accounting firm of Ernst & Young LLP, where he specialized in financial management and audit services for emerging high-technology companies. Mr. Nowak has more than 20 years experience as a public accountant. He holds a B.S. degree from Indiana University. Richard W. Brotzman joined the Company in July 1994 and has served as Vice President--Research of Nanophase since July 1996. He is the inventor of the Company's coating technology. Dr. Brotzman has 15 years experience in research and development of advanced materials leading to new products. His technical areas of expertise include interfacial adhesion and chemistry, self-assembled polymeric coatings, nanosized inorganic powders, powder processing, reactive coupling agents, solgel derived protective coatings, non-destructive evaluation of composites, neo-debye relaxation in green inorganic gels, asymmetric membranes and plasma processing. From January 1991 to July 1994, Dr. Brotzman served as Director of Research at TPL, Inc., an advanced materials company. He holds a B.S. degree in chemical engineering from Lafayette 39 41 College, an M.S. degree in engineering and applied science from the University of California, Davis and a Ph.D. in chemistry from the University of Washington. Donald J. Freed has served as Vice President--Marketing of Nanophase since April 1995. He has extensive experience in the commercial development of new technology products, and has been responsible for the successful startup of advanced-materials initiatives in three Fortune 50 companies. From 1985 to April 1995, Dr. Freed held senior marketing, strategic planning and product-development positions with AMP, Inc., and certain of its subsidiaries, primarily in the development and marketing of advanced materials for microelectronics and photonics. From 1980 to 1985, he held similar positions with GTE Corp. and Imperial Chemical Industries, PLC. Previously, Dr. Freed held various scientific and managerial positions at AT&T Bell Laboratories. He holds a B.A. degree in chemistry from Queens College and an A.M. degree and Ph.D. in chemistry from Harvard University. Dr. Freed is a member of The Illinois Coalition and is past chairman of the International Standards Council for Electronic Interconnection and Packaging Technologies. Robert M. Kelly has served as Vice President--Cosmetic Products of Nanophase since joining the Company in March 1996. He has more than 20 years experience in the marketing of cosmetic, food and pharmaceutical ingredients. From July 1994 to January 1996, Mr. Kelly was Vice President of Sales and Marketing at Crompton & Knowles Corporation, a cosmetic, food and pharmaceutical ingredients company. From January 1992 to July 1994, he was the director of marketing at Milwaukee Seasonings, Inc., a subsidiary of CPC International, Inc. Prior to 1992, he held senior marketing management positions with Warner Jenkinson and Johnson & Johnson. He holds a B.A. degree in business from Parsons College and an M.B.A from the University of Chicago. Dennis J. Nagle has served as Vice President--Manufacturing of Nanophase since joining the Company in July 1996. From March 1991 to March 1996, Mr. Nagle was Manufacturing Manager of the Electronic Chemicals Division of Ashland Chemical. From April 1977 to March 1991, he held positions of progressively increasing responsibility in manufacturing management with the Chemical Division of Olin Corporation. Mr. Nagle holds combined bachelors degrees in chemical engineering and engineering administration from Michigan Technological University. John C. Parker has served as Vice President--Technology of Nanophase since 1993 and has been a principal scientist with the Company since June 1990. Dr. Parker was the principal developer of the Company's PVS production system. He has a broad range of experience in the synthesis, processing and characterization of semiconductor and ceramic materials. Prior to joining Nanophase, Dr. Parker was a research associate at Argonne where he participated in the development and characterization of chemical vapor deposition-grown thin films and nanocrystalline ceramics. Dr. Parker holds a B.S. degree in physics from Northeastern Illinois University and an M.S. degree and Ph.D. in physics from Purdue University. He has published 37 refereed papers and given numerous scientific and technical presentations at national and international conferences and private institutions. Dr. Parker co-chaired the symposium on Nanophase and Nanocomposite Materials at the 1992 and 1996 Materials Research Society fall meetings. Leonard A. Batterson has served as a director and as Chairman of the Board of Nanophase since 1991. He is Chairman and Chief Executive Officer of Batterson Venture Partners L.L.C., a venture capital investment firm which he founded in 1995. In 1988, he co-founded and continues as Managing General Partner of Batterson Johnson and Wang L.P., a venture capital fund. The Batterson Johnson & Wang L.P. fund, a stockholder of the Company, invest in the following industries: publishing, communications, telecommunications, medical, biotechnology, materials, retailing, consumer products, manufacturing, computers and software. As Managing General Partner, Mr. Batterson manages its daily operations, investor relationships, reporting and investment strategy. Prior to 1988, he was Director of the Venture Capital Division of the Allstate Insurance Company. Mr. Batterson is Chairman of the Board of LinksCorp, Inc., a golf course management company, and previously served as Chairman and Chief Executive Officer of the Dytel Corporation and Receptor Laboratories, and as Chief Executive Officer of Lamb Enterprises. He holds a B.A. degree from Washington University, a J.D. degree from Washington University Law School and an M.B.A. degree from the Harvard Graduate School of Business Administration. 40 42 Steven Lazarus has served as a director of Nanophase since 1991. Mr. Lazarus is Managing Director of ARCH Venture Partners L.P. From 1986 to 1994, he served concurrently as President and Chief Executive Officer of ARCH Development Corporation and Associate Dean of the Graduate School of Business of the University of Chicago. Prior to joining ARCH Development Corporation, Mr. Lazarus held a variety of positions at Baxter Travenol Laboratories, Inc., the predecessor of Baxter Healthcare Corporation, including Group Vice President of the Health Care Services Group and Senior Vice President for Technology. From 1972 to 1974, Mr. Lazarus served in Washington, D.C. as Deputy Assistant Secretary of Commerce for East-West Trade and was founder and first Director of the Bureau of East-West Trade. He is a 21-year veteran of the U.S. Navy, retiring in 1973 with the rank of captain. He holds a bachelors degree with honors from Dartmouth College and an M.B.A. degree with high distinction from the Harvard Graduate School of Business Administration, where he was also a Baker Scholar. Mr. Lazarus is a director of Amgen Corporation, Primark Corporation, Illinois Superconductor Corporation and New Era of Networks, Inc., all of which are public companies. Robert W. Shaw, Jr. has served as a director of Nanophase since 1991. He is the founder of Arete Ventures, Inc., President of Arete Corporation and Managing Partner for the Utech Funds. Dr. Shaw is experienced in both venture capital and consulting for the electric utility industry. Prior to forming Arete Ventures, Inc. in 1983, Dr. Shaw was Senior Vice President of Booz, Allen & Hamilton's Energy Division and a member of the firm's board of directors. Earlier in his career, he conducted materials and electronics research at Bell Laboratories and at the Cavendish Laboratory in the U.K. He serves as a director and Chairman of Proton Energy Systems, Inc. and Evergreen Solar, Inc. He holds a Ph.D. in applied physics from Stanford University, an M.P.A. from American University and M.S. and B.E.P. degrees from Cornell University. Richard W. Siegel is a co-founder of Nanophase and has served as a director of Nanophase since 1989. Dr. Siegel is an internationally renowned scientist in the field of nanocrystalline materials. During his tenure on the research staff at Argonne from July 1974 to May 1995, he was the principal scientist engaged in research with the laboratory-scale synthesis process that was the progenitor of Nanophase's PVS production system. He currently is the Robert W. Hunt Professor and Head of the Materials Science and Engineering Department of Rensselaer Polytechnic Institute, a position he has held since June 1995. During 1995, he was also a visiting professor at the Max Planck Institute for Microstructure Physics in Germany on an Alexander von Humboldt Research Prize. He has served on the Council of the Materials Research Society and as Chairman of the International Committee on Nanostructured Materials. He also served on the Committee on Materials with Sub-Micron Sized Microstructures of the National Materials Advisory Board and was the co-chairman of the Study Panel on Clusters and Cluster-Assembled Materials for the U.S. Department of Energy. Dr. Siegel holds an A.B. degree in physics from Williams College and an M.S. degree and Ph.D. from the University of Illinois at Urbana/Champaign. ADVISORY BOARD The Company recently formed an advisory board (the "Advisory Board") to assist the Company in analyzing, developing and implementing its long-term business growth strategies. The Advisory Board will advise and consult with management and the Board of Directors of the Company as needed. Though the members of the Advisory Board have outside commitments that may limit their availability to the Company, each member has agreed to devote at least a certain number of hours to the Company over the term of their service. The Company has entered into a one-year consulting agreement with each of the members of the Advisory Board, pursuant to which each member has been granted stock options to purchase 10,000 shares of Common Stock as compensation for his services on the Advisory Board. Members of the Advisory Board will also be reimbursed for reasonable out-of-pocket expenses incurred in connection with their services to the Company. The members of the Advisory Board are Casey Cowell, James V. Kimsey and Jonathan N. Zakin. Casey Cowell is Vice Chairman of 3Com Corporation ("3Com") and is the founder of U.S. Robotics Corporation ("U.S. Robotics"). Prior to the combination of U.S. Robotics with 3Com in June 1997, 41 43 Mr. Cowell was Chairman and Chief Executive Officer of U.S. Robotics. Mr. Cowell also serves as a director of Eagle River Interactive, Inc., May & Speh, Inc., and Northwestern Memorial Corp., the parent company of Northwestern Memorial Hospital, and is a trustee of the Illinois Institute of Technology. Mr. Cowell holds a bachelors degree in economics from the University of Chicago. James V. Kimsey is the founder and Chairman Emeritus of America Online, Inc. ("AOL"). He was formerly Chairman and Chief Executive Officer of AOL, and continues to serve AOL as a member of its board of directors. Mr. Kimsey also serves as a director of Capital One Financial Corporation, Capital One Bank, EduCap, Inc. and BTG Incorporated, and is an advisory director of Batterson Venture Partners and Carousel Capital. Mr. Kimsey is a graduate of the United States Military Academy at West Point. Jonathan N. Zakin was Executive Vice President, Business Development and Corporate Strategy, of U.S. Robotics prior to its combination with 3Com in June 1997. Currently, Mr. Zakin is a private investor. He holds a bachelors degree in management from New York University and an M.B.A. degree from the Harvard Graduate School of Business Administration. BOARD OF DIRECTORS The Company's Board of Directors is divided into three classes with staggered three-year terms. The terms of Mr. Cross and Dr. Shaw expire at the annual meeting of the Company's stockholders in 1998, the terms of Mr. Lazarus and Dr. Siegel expire at the annual meeting of the Company's stockholders in 1999, and Mr. Batterson's term expires at the annual meeting of the Company's stockholders in 2000. At each annual meeting of the Company's stockholders, the successors to the class of directors whose term expires at such annual meeting are elected for a three-year term. ARRANGEMENTS FOR NOMINATION AS DIRECTOR In connection with the sale of its Preferred Stock, the Company and certain of its stockholders entered into the Amended and Restated Shareholders' Agreement, dated as of March 16, 1994, as amended (the "Shareholders' Agreement"), pursuant to which they agreed that the Company's Board of Directors shall consist of (i) up to two individuals designated jointly by the holders of Common Stock, one of whom shall be the President of the Company, (ii) up to three individuals designated jointly by holders of the Company's Series C Convertible Preferred Stock ("Series C Preferred"), (iii) one individual designated jointly by certain holders of the Company's Series D Convertible Preferred Stock ("Series D Preferred") and (iv) one individual unrelated to any holder of Preferred Stock designated jointly by the members of the Company's Board of Directors who were elected pursuant to (i) and (ii). The Company's stockholders also agreed that as long as Batterson Johnson & Wang L.P. ("BJ&W") continues to own shares of Series D Preferred, they shall use their best efforts to elect Mr. Batterson as Chairman of the Company's Board of Directors. Of the current directors of the Company, Messrs. Cross and Lazarus were elected as nominees of the holders of Common Stock and Mr. Batterson and Drs. Shaw and Siegel were elected as nominees of the holders of the Series C Preferred. Substantially all of the material provisions of the Shareholders' Agreement, including the rights and obligations of the aforementioned parties to elect directors, will terminate upon the consummation of this offering. COMMITTEES OF THE BOARD OF DIRECTORS The Company's Board of Directors has appointed an Audit Committee and a Compensation Committee. The members of the Audit Committee are Messrs. Lazarus (Chairman) and Batterson and Dr. Shaw. The Audit Committee makes recommendations concerning the Company's engagement of independent public accountants, reviews the Company's annual audit, and reviews with the Company's independent public accountants the Company's internal controls and financial management policies. The members of the Compensation Committee are Messrs. Batterson (Chairman) and Lazarus and Dr. Shaw. The Compensation Committee establishes the Company's general compensation policy and recommends to the Company's Board of Directors compensation for the Company's officers and key employees. 42 44 COMPENSATION OF DIRECTORS Each director of the Company who is not an employee or consultant of the Company (the "Outside Directors") and is first elected to the Board of Directors after adoption of the Stock Option Plan will be granted stock options to purchase 10,000 shares of Common Stock at the fair market value of the Common Stock as determined by a committee appointed by the Company's Board of Directors (the "Committee") as of the date of issuance of each stock option. On the date of the annual meeting of the stockholders of the Company, commencing with the 1998 annual meeting, each Outside Director who is elected, re-elected or continues to serve as a director because his or her term has not expired, shall be granted stock options to purchase 2,000 shares of Common Stock; provided that no such automatic grant shall be made to an Outside Director who is first elected to the Board of Directors at the first such meeting or was first elected to the Board of Directors within three months prior to such annual meeting. One-third of the options granted to Outside Directors under the Stock Option Plan vest each year on the first three anniversaries of the grant date. All options granted under the Stock Option Plan to Outside Directors will be exercisable for a period of ten years. The Company does not pay cash compensation to its directors or Advisors for serving in such capacity. All Outside Directors, however, are reimbursed for their reasonable out-of-pocket expenses incurred in attending board and committee meetings. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Mr. Batterson, who is Chairman of the Compensation Committee, is the managing general partner of BJ&W. On the following dates, the Company issued to BJ&W the following number of shares of Series D Preferred at the following prices per share: 202,496 shares at $1.382 per share in March 1994; 163,904 shares at $1.727 per share in October 1994; 38,911 shares at $1.727 per share in April 1995; and 173,700 shares at $1.727 per share in November 1995. Mr. Lazarus, who is a member of the Compensation Committee, is the managing director of ARCH Venture Fund II, L.P. ("AVF II"). On the following dates, the Company issued to AVF II the following number of shares of Series D Preferred at the following prices per share: 294,971 shares at $1.382 per share in March 1994; 251,639 shares at $1.727 per share in October 1994; and 159,225 shares at $1.727 per share in November 1995. Dr. Shaw, who is a member of the Compensation Committee, is the managing general partner of (i) Arete Ventures Management Associates II, L.P., which is the managing general partner of UVCC Fund II ("UVCC II") and (ii) Arete Ventures Limited Partnership III, which is the managing general partner of UVCC II Parallel Fund, L.P. ("UVCC Parallel"). On the following dates, the Company issued to each of UVCC II and UVCC II Parallel the following number of shares of Series D Preferred at the following prices per share: 94,088 shares at $1.382 per share in March 1994; 83,955 shares at $1.727 per share in October 1994; 5,790 shares at $1.727 per share in April 1995; and 66,585 shares at $1.727 per share in November 1995. All of the above described shares of Series D Preferred will be converted into shares of Common Stock on a one-for-one basis upon the consummation of this offering. Pursuant to the Amended and Restated Registration Rights Agreement, dated as of March 16, 1994, as amended (the "Registration Rights Agreement"), BJ&W, AVF II, UVCC II and UVCC Parallel, as holders of shares of Common Stock issuable upon conversion of the shares of Series D Preferred, are entitled to certain demand registration rights. In addition, whenever the Company proposes to register any of its securities under the Securities Act, BJ&W, AVF II, UVCC II and UVCC Parallel may also, subject to certain restrictions, include their shares of Common Stock issuable upon conversion of the shares of Series D Preferred in such registration. See "Description of Capital Stock--Registration Rights." 43 45 EXECUTIVE COMPENSATION The following table sets forth information with respect to all compensation paid by the Company for services rendered during the fiscal year ended December 31, 1996, to its Chief Executive Officer and the other executive officers of the Company whose total annual salary and bonus exceeded $100,000 during the fiscal year ended December 31, 1996 (each, a "Named Executive Officer"). SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION ANNUAL COMPENSATION ------------ -------------------------------------- SECURITIES OTHER ANNUAL UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION OPTIONS COMPENSATION Robert W. Cross,.................. $151,800(1) $10,000(1) $-- 199,755 $4,685(2) President and Chief Executive Officer Donald J. Freed, Ph.D.,........... 105,625 -- -- 104,220 -- Vice President -- Marketing Richard W. Brotzman, Ph.D.,....... 102,615 -- -- 118,695 -- Vice President -- Research
- ------------------------- (1) The salary and bonus were paid to Cross Technologies, Inc., of which Mr. Cross is chief executive officer and the sole employee. (2) Represents the full dollar value of premiums paid by the Company with respect to life insurance for the benefit of Mr. Cross and his beneficiary. EMPLOYMENT AGREEMENTS The Company has entered into an employment agreement dated February 1994 with Robert W. Cross which continues his employment as President and Chief Executive Officer of the Company, which began in February 1993. Mr. Cross' employment agreement provides for an annual base salary of not less than $130,000. The agreement further provides that Mr. Cross is entitled to the reimbursement of expenses relating to commuting between the Company and his out-of-state residence and his lodging expenses in the Chicago area incurred as a result of his employment with the Company. Mr. Cross' employment agreement is automatically renewed for successive one year periods unless 90-day prior written notice of termination is given by the Company or Mr. Cross. If Mr. Cross' employment is terminated other than for "cause" (as such term is defined in Mr. Cross' employment agreement), Mr. Cross will receive severance benefits in an amount equal to Mr. Cross' base salary for 26 weeks. The Company has also entered into an employment agreement with Dennis J. Nowak, pursuant to which Mr. Nowak became Vice President -- Finance and Administration, Chief Financial Officer, Treasurer and Secretary of the Company effective September 1996. Mr. Nowak's employment agreement provides for an annual base salary of $140,000, with increases to be determined by the Company's Board of Directors, at its discretion. In addition, Mr. Nowak was granted options to purchase 57,900 shares of Common Stock at an exercise price of $3.886 per share, with options for one-fifth of such shares becoming exercisable on each of the first five anniversaries of Mr. Nowak's employment. If employed by the Company at such time, the agreement further provides that Mr. Nowak will be entitled to a bonus of $35,000 upon the Company's successful completion of an initial public offering and a bonus of $35,000 which was paid on the first anniversary of his employment. No term has been assigned to Mr. Nowak's employment agreement. If Mr. Nowak's employment is terminated other than for "cause" (as such term is defined in Mr. Nowak's employment agreement), Mr. Nowak will receive severance benefits in an amount equal to Mr. Nowak's base salary for 26 weeks. 44 46 OPTION GRANTS IN LAST FISCAL YEAR The following table contains information regarding the grant of stock options by the Company to the Named Executive Officers during 1996.
PERCENTAGE POTENTIAL REALIZABLE NUMBER OF OF TOTAL VALUE AT ASSUMED SHARES OPTIONS ANNUAL RATES OF STOCK UNDERLYING GRANTED TO PRICE APPRECIATION FOR OPTIONS EMPLOYEES IN EXERCISE OR EXPIRATION OPTION TERM(2) GRANTED FISCAL YEAR BASE PRICE DATE(1) 5% 10% Robert W. Cross................... 69,480 6.0% $1.727 03/01/06(3) $195,467 $ 311,249 130,275 11.3 3.886 11/07/06(4) 824,628 1,313,082 Donald J. Freed, Ph.D............. 46,320 4.0 1.727 03/01/06(3) 130,312 207,499 57,900 5.0 3.886 11/07/06(4) 366,501 583,592 Richard W. Brotzman, Ph.D. ....... 49,215 4.3 1.727 03/01/06(3) 138,456 220,468 69,480 6.0 3.886 11/07/06(4) 439,802 700,310
- ------------------------------ (1) The grant dates are ten years prior to the respective expiration dates. (2) Potential realizable value is calculated assuming that the fair market value on the date of the grant, which equals the exercise price, appreciates at the indicated annual rate (set by the Securities and Exchange Commission (the "Commission")), compounded annually, for the term of the option. Using the assumed initial public offering price of $ for purposes of this calculation (pursuant to the rules of the Commission), the potential realizable values of the options granted in 1996 to Mr. Cross and Drs. Freed and Brotzman is approximately $ , $ and $ , respectively, at a 5% assumed annual appreciation rate, and approximately $ , $ and $ , respectively, at a 10% assumed annual appreciation rate. The 5% and 10% assumed rates of appreciation are mandated by the rules of the Commission and do not represent the Company's estimate or projection of future increases in the price of its Common Stock. (3) Subject to certain restrictions, these options vest pro rata over a five-year period on each of the first five anniversaries of the date of grant. (4) Subject to certain restrictions, these options vest eight years from the date of grant, subject to an earlier five-year period if specified performance targets for 1997 are met. FISCAL YEAR-END OPTION VALUES The following table contains information regarding the Named Executive Officers' unexercised options as of December 31, 1996. None of the Named Executive Officers exercised any options during 1996.
NUMBER OF SHARES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-THE-MONEY OPTIONS AS OF DECEMBER 31, 1996 OPTIONS AS OF DECEMBER 31, 1996(1) NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE Robert W. Cross................. 65,330/256,015 $243,406/$349,733 Donald J. Freed, Ph.D. ......... --/104,220 --/ 100,005 Richard W. Brotzman, Ph.D. ..... 5,790/141,855 19,999/ 186,250
- ------------------------------ (1) The value per option is calculated by subtracting the exercise price of the option from the fair market value of the option shares at December 31, 1996 of $3.886 per share, as determined by the Company's Board of Directors based on the most recent price prior to December 31, 1996 at which the Company had issued or agreed to issue Preferred Stock. 45 47 STOCK OPTION PLAN Effective January 13, 1992 and as amended and restated on April 6, 1997, the Company's Board of Directors adopted the Stock Option Plan, pursuant to which options to acquire up to 2,063,232 shares of Common Stock (1,976,382 of which are reserved for issuance to employees and consultants and 86,850 of which are reserved for issuance to Outside Directors) may be granted to the Company's employees, consultants or Outside Directors, as the Committee may from time to time designate. During any calendar year, stock options for no more than 100,000 shares of Common Stock may be granted to any individual. The stock options expire no more than ten years from the date of grant; provided, however, that in the case of stock options granted to individuals who at the time of such grant own more than 10% of the voting power of the Company's stock, the options shall expire no more than five years from the date of grant. 789,756 of the 1,620,737 currently outstanding options vest eight years following the grant date, subject to accelerated vesting if specified performance targets are met. Of the remaining 830,981 outstanding options, 813,611 vest over a five-year period and 17,370 vest over a three-year period. Exercise prices are determined by the Committee, but may not be less than the fair market value of the Common Stock as determined by the Committee as of the date of issuance of each stock option; provided, however, that exercise prices for options granted to employees who own more than 10% of the Company's Common Stock may not be less than 110% of the fair market value of the Common Stock as determined by the Committee as of the date of issuance of each such stock option. 401(K) PLAN Effective June 30, 1995, the Company adopted the Nanophase Technologies Corporation 401(k) and Profit Sharing Plan (the "401(k) Plan") covering all of the Company's employees who meet prescribed service requirements. Pursuant to the 401(k) Plan, employees may elect to reduce their current compensation by up to fifteen percent, but not to exceed the statutorily prescribed annual limit ($9,500 in 1997), and have the amount of such reduction contributed to the 401(k) Plan. The 401(k) Plan is intended to qualify under Section 401 of the Internal Revenue Code so that employee contributions to the 401(k) Plan, and income earned on such contributions, are not taxable to employees until withdrawn from the 401(k) Plan. Each participant's contributions are fully vested. The Company, at the sole discretion of the Company's Board of Directors, may make additional or "matching" contributions under the 401(k) Plan, which contributions are not to exceed statutorily prescribed limits. The Company has not made any such contributions to the 401(k) Plan since its inception. LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS Pursuant to the provisions of the Delaware General Corporation Law ("DGCL"), the Company, upon its reincorporation in Delaware, will adopt provisions in its Certificate of Incorporation which eliminate the personal liability of its directors to the Company or its stockholders for monetary damages for breach of their fiduciary duty as a director to the fullest extent permitted by the DGCL except for liability (i) for any breach of their duty of loyalty to the Company or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) for unlawful payments of dividends or unlawful stock repurchases or redemptions, or (iv) for any transaction from which the director derived an improper personal benefit. The provisions of the Company's Certificate of Incorporation do not affect a director's responsibilities under any other laws, such as the federal securities laws or state or federal environmental laws. The Certificate of Incorporation will also contain provisions which require the Company to indemnify its directors, and permit the Company to indemnify its officers and employees, to the fullest extent permitted by Delaware law, including those circumstances in which indemnification would otherwise be discretionary, except that the Company shall not be obligated to indemnify any such person (i) with respect to proceedings, claims or actions initiated or brought voluntarily by any such person and not by way of defense, or (ii) for any amounts paid in settlement of an action indemnified against by the Company without the prior written consent of the Company. Prior to consummation of this offering, the Company intends to (a) enter into indemnity agreements with each of its directors providing for such indemnification and (b) obtain directors' and officers' liability insurance. 46 48 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS In addition to transactions described under "Management--Compensation Committee Interlocks and Insider Participation," the following relationships and transactions have been effected involving the Company and its directors, executive officers and principal stockholders. The Company leased its original office space from ARCH Development Corporation, formerly an affiliate of Mr. Lazarus, a director of the Company, under a sublease agreement which expired in November 1996. Monthly lease payments amounted to $3,600. When the Company moved to its Burr Ridge facility in 1995, it entered into a sublease of this office space and received monthly rental payments under the sublease of $2,200 per month through November 1996. The Company entered into a consulting agreement with Dr. Richard W. Siegel, a co-founder and director of the Company, in May 1990. Pursuant to this agreement, Dr. Siegel renders consulting services to the Company with respect to applications for, and commercialization of, nanocrystalline materials. The original term of the agreement was for 5 years, and the agreement is renewable for successive one-year terms unless terminated by Dr. Siegel or the Company. Payment to Dr. Siegel under this agreement currently amounts to $2,500 per month. Prior to joining the Company in September 1996, Dennis J. Nowak, the Company's Vice President--Finance and Administration, Chief Financial Officer, Treasurer and Secretary, was a partner of Ernst & Young LLP, where he was responsible for overseeing the audit of the Company's financial statements. Ernst & Young LLP has been the Company's financial accountants since 1993. Pursuant to a severance benefit agreement with Dr. John C. Parker, the Company's Vice President--Technology, the Company has established a trust in the amount of $80,000, with interest being credited to the trust until the funds held in trust are equal to such amount. Payments from the trust to Dr. Parker will be required in the event the Company terminates his employment, as defined in Dr. Parker's agreement, before November 15, 1999. Upon the occurrence of an initial public offering, the funds in the trust will revert to the Company. The Company intends that any future transactions between the Company and its officers, directors and affiliates will be on terms no less favorable to the Company than can be obtained from unaffiliated third parties, and any transactions with such persons will be approved by a majority of the Company's outside directors or will be consistent with policies approved by such outside directors. 47 49 PRINCIPAL STOCKHOLDERS The following table sets forth certain information with respect to beneficial ownership of the Common Stock, as of September 30, 1997, assuming consummation of the Preferred Stock Conversion, and as adjusted to reflect the sale of Common Stock offered hereby, by (i) each person who is known by the Company to be the beneficial owner of more than 5% of the outstanding shares of Common Stock, (ii) each director of the Company, (iii) each Named Executive Officer and (iv) all directors and executive officers of the Company as a group.
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP PRIOR TO OFFERING(1) AFTER OFFERING(1) ----------------------- ----------------------- NUMBER OF NUMBER OF NAME SHARES PERCENT SHARES PERCENT Batterson Johnson & Wang L.P.................. 1,068,935(2) 12.7% 1,068,935(2) 8.0% Grace Investment, Ltd.(3)..................... 1,042,200 12.7 1,042,200 7.8 ARCH Venture Fund Limited Partnership......... 768,088(4) 9.1 768,088(4) 5.7 ARCH Venture Fund II Limited Partnership(5)... 705,835 8.6 705,835 5.3 Harris & Harris Group, Inc.(6)................ 672,916 8.2 672,916 5.1 UVCC Fund II.................................. 450,842(7) 5.4 450,842(7) 3.4 UVCC II Parallel Fund, L.P.................... 450,842(7) 5.4 450,842(7) 3.4 AMT Associates Ltd. .......................... 450,058(8) 5.4 450,058(8) 3.4 Richard W. Siegel, Ph.D....................... 219,729(9) 2.7 219,729(9) 1.7 Robert W. Cross............................... 103,544(10) 1.2 91,482(10) * Richard W. Brotzman, Ph.D..................... 21,423(10) * 21,423(10) * Donald J. Freed, Ph.D......................... 9,264(10) * 9,264(10) * Leonard A. Batterson.......................... --(11) -- --(11) -- Steven Lazarus................................ --(12) -- --(12) -- Robert W. Shaw, Jr., Ph.D..................... --(13) -- --(13) -- All directors and executive officers as a group (11 persons).......................... 445,442(14) 5.4 445,442(14) 3.4
- ------------------------------ * Less than 1% (1) Beneficial ownership is determined in accordance with the rules of the Commission. Unless otherwise indicated below, the persons in the above table have sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned by them. (2) Includes 178,154 shares of Common Stock issuable upon exercise of warrants presently exercisable. The address of the stockholder is 303 West Madison Street, Suite 1110, Chicago, Illinois 60606. (3) The address of the stockholder is 1560 Sherman Avenue, Suite 900, Evanston, Illinois 60201. (4) Includes 232,491 shares of Common Stock issuable upon exercise of warrants presently exercisable. The address of the stockholder is 135 South LaSalle Street, Suite 3702, Chicago, Illinois 60603. (5) The address of the stockholder is 135 South LaSalle Street, Suite 3702, Chicago, Illinois 60603. (6) The address of the stockholder is One Rockefeller Plaza, New York, New York 10020. (7) Includes 66,808 shares of Common Stock issuable upon exercise of warrants presently exercisable. The address of the stockholder is 6110 Executive Boulevard, Suite 1040, Rockville, Maryland 20852. (footnotes continued on following page) 48 50 (footnotes continued from previous page) (8) Consists of 142,497 shares of Common Stock and 43,981 shares of Common Stock issuable upon exercise of warrants presently exercisable, all of which are beneficially held by Advanced Material Technologies Venture Partner Limited ("AMT Venture"); 197,284 shares of Common Stock and 38,553 shares of Common Stock issuable upon exercise of warrants presently exercisable, all of which are beneficially held by AMT Capital, Ltd. ("AMT Capital"); and 21,200 shares of Common Stock and 6,543 shares of Common Stock issuable upon exercise of warrants presently exercisable, all of which are beneficially held by JHAM Limited Partnership ("JHAM"). AMT Associates Ltd. is general partner of AMT Venture, AMT Capital and JHAM. In such capacity, it shares voting and investment power with respect to the shares of Common Stock held by AMT Venture, AMT Capital and JHAM and, therefore, may be deemed to be the beneficial owner of the shares of Common Stock directly owned by AMT Venture, AMT Capital and JHAM. The address of AMT Associates Ltd. is 8204 Elmbrook, Suite 101, Dallas, Texas 75247. (9) Includes 28,950 shares of Common Stock issuable upon exercise of warrants presently exercisable and 38,098 shares of Common Stock issuable upon exercise of options exercisable currently or within 60 days of September 30, 1997. (10) Consists of shares of Common Stock issuable upon exercise of options exercisable currently or within 60 days of September 30, 1997. (11) Excludes 890,781 shares of Common Stock and 178,154 shares of Common Stock issuable upon exercise of warrants presently exercisable, all of which are beneficially held by BJ&W. Mr. Batterson is the managing general partner of BJ&W and in such capacity he shares voting and investment power with respect to the shares of Common Stock held by BJ&W and, therefore, may be deemed to be the beneficial owner of the shares of Common Stock directly owned by BJ&W. Mr. Batterson disclaims this beneficial ownership. (12) Excludes 535,597 shares of Common Stock and 232,491 shares of Common Stock issuable upon exercise of warrants presently exercisable, all of which are beneficially held by ARCH Venture Fund Limited Partnership ("AVFLP"); 705,835 shares of Common Stock held by ARCH Venture Fund II, L.P. ("AVF II"); and 14,034 shares of Common Stock held by ARCH Fund II Parallel, L.P. ("AFP"). Mr. Lazarus serves as the managing director of ARCH Venture Partners L.P. and has been granted power of attorney to act in the name of and for ARCH Development Corporation ("ADC") with respect to ADC's role as general partner of AVFLP. Mr. Lazarus also serves as managing director of AVF II and AFP. In such capacities, Mr. Lazarus has sole voting and investment power with respect to the shares of Common Stock held by AVFLP, AVF II and AFP and, therefore, may be deemed to be the beneficial owner of the shares of Common Stock directly owned by AVFLP, AVF II and AFP. Mr. Lazarus disclaims this beneficial ownership. (13) Excludes 384,034 shares of Common Stock and 66,808 shares of Common Stock issuable upon exercise of warrants presently exercisable, all of which are beneficially held by UVCC Fund II ("UVCC II"), and 384,034 shares of Common Stock and 66,808 shares of Common Stock issuable upon exercise of warrants presently exercisable, all of which are beneficially held by UVCC II Parallel Fund, L.P. ("UVCC Parallel"). Dr. Shaw serves as the managing general partner of (i) Arete Ventures Management Associates II, L.P., which is the managing general partner of UVCC II and (ii) Arete Ventures Limited Partnership III, which is the managing general partner of UVCC Parallel. In such capacities, he has sole voting power and shares investment power with respect to shares of Common Stock held by UVCC II and UVCC Parallel and, therefore, may be deemed to be the beneficial owner of the shares of Common Stock directly owned by UVCC II and UVCC Parallel. Dr. Shaw disclaims this beneficial ownership. (14) Includes 28,950 shares of Common Stock issuable upon exercise of warrants presently exercisable and 263,811 shares of Common Stock issuable upon exercise of options exercisable currently or within 60 days of September 30, 1997. 49 51 DESCRIPTION OF CAPITAL STOCK The authorized capital stock of the Company consists of 25,000,000 shares of Common Stock, $.01 par value per share, and 13,000,000 shares of preferred stock, $.01 par value per share. The following summary of certain provisions relating to the Common Stock and preferred stock does not purport to be complete and is subject to, and qualified in its entirety by, provisions of applicable law, and by the provisions of the Company's Certificate of Incorporation and Bylaws that are included as exhibits to the Registration Statement of which this Prospectus is a part. COMMON STOCK The Company currently has 77,586 shares of Common Stock outstanding and held by two holders of record. 13,234,029 shares of Common Stock will be outstanding upon consummation of the Preferred Stock Conversion and this offering. Subject to the rights of holders of preferred stock, the holders of outstanding shares of Common Stock are entitled to share ratably in dividends declared out of assets legally available therefor at such time and in such amounts as the Board of Directors may from time to time lawfully determine. Each holder of Common Stock is entitled to one vote for each share held. Subject to the rights of holders of any outstanding preferred stock, upon liquidation, dissolution or winding up of the Company, any assets legally available for distribution to stockholders as such are to be distributed ratably among the holders of the Common Stock at that time outstanding. All shares of Common Stock currently outstanding are, and all shares of Common Stock offered by the Company hereby when duly issued and paid for will be, fully paid and nonassessable, not subject to redemption and assessment and without conversion, preemptive or other rights to subscribe for or purchase any proportionate part of any new or additional issues of any class or of securities convertible into stock of any class. PREFERRED STOCK The Company currently has 8,156,443 shares of Preferred Stock outstanding and held by 176 holders of record. Pursuant to the Preferred Stock Conversion, all of the issued and outstanding shares of Preferred Stock will convert, upon the consummation of this offering, into 8,156,443 shares of Common Stock. Thus, the following information does not pertain to the currently outstanding Preferred Stock, but rather the preferred stock that may be issued in the future as provided in the Company's Certificate of Incorporation. Preferred stock may be issued by the Company in series from time to time with such designations, relative rights, priorities, preferences, qualifications, limitations and restrictions thereof, to the extent that such are not fixed in the Company's Certificate of Incorporation, as the Board of Directors determines. The rights, preferences, limitations and restrictions of different series of preferred stock may differ with respect to dividend rates, amounts payable on liquidation, voting rights, conversion rights, redemption provisions, sinking fund provisions and other matters. The Board of Directors may authorize the issuance of preferred stock which ranks senior to the Common Stock with respect to the payment of dividends and the distribution of assets on liquidation. In addition, the Board of Directors is authorized to fix the limitations and restrictions, if any, upon the payment of dividends on Common Stock to be effective while any shares of preferred stock are outstanding. The Board of Directors, without stockholder approval, may issue preferred stock with voting and conversion rights which could adversely affect the voting power of the holders of Common Stock. The issuance of preferred stock may have the effect of delaying, deferring or preventing a change in control of the Company. The Company has no present intention to issue shares of preferred stock. WARRANTS The Company currently has warrants to purchase a total of 662,287 shares of Common Stock outstanding at an exercise price of $1.123 per share. The warrants expire February 8, 2003 or one year later if at such time the shares of Common Stock underlying the warrants are required to be or are in the process of being registered under the Securities Act. The number of shares issuable upon exercise of the warrants is subject to proportionate adjustment in the event of stock splits, stock dividends and similar events. 50 52 CERTAIN CORPORATE PROVISIONS Upon the consummation of this offering, the Company will be subject to the provisions of Section 203 of the DGCL. In general, this statute prohibits a publicly held Delaware corporation from engaging, under certain circumstances, in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person becomes an interested stockholder, unless either (i) prior to the date at which the stockholder became an interested stockholder the board of directors approved either the business combination or the transaction in which the person becomes an interested stockholder, (ii) the stockholder acquires more than 85% of the outstanding voting stock of the corporation (excluding shares held by directors who are officers or held in certain employee stock plans) upon consummation of the transaction in which the stockholder becomes an interested stockholder or (iii) the business combination is approved by the board of directors and by two-thirds of the outstanding voting stock of the corporation (excluding shares held by the interested stockholder) at a meeting of the stockholders (and not by written consent) held on or subsequent to the date of the business combination. An "interested stockholder" is a person who, together with affiliates and associates, owns (or at any time within the prior three years did own) 15% or more of the corporation's voting stock. Section 203 defines a "business combination" to include, without limitation, mergers, consolidations, stock sales and asset based transactions and other transactions resulting in a financial benefit to the interested stockholder. Upon reincorporation in Delaware, the Company's Certificate of Incorporation and Bylaws will contain a number of provisions relating to corporate governance and to the rights of stockholders. Certain of these provisions may be deemed to have a potential "anti-takeover" effect in that such provisions may delay, defer or prevent a change of control of the Company. These provisions include (i) a requirement that stockholder action may be taken only at stockholder meetings; (ii) the authority of the Board of Directors to issue series of preferred stock with such voting rights and other powers as the Board of Directors may determine; (iii) notice requirements in the Bylaws relating to nominations to the Board of Directors and to the raising of business matters at stockholders meetings; and (iv) the classification of the Board of Directors into three classes, each serving for staggered three year terms. See "Management - -- Executive Officers and Directors." REGISTRATION RIGHTS Pursuant to the Registration Rights Agreement, the holders of shares of Common Stock (including the shares of Common Stock issued pursuant to consummation of the Preferred Stock Conversion) and additional shares of Common Stock issuable upon the exercise of outstanding warrants (collectively, the "Registrable Securities") are entitled to certain demand registration rights. Under the Registration Rights Agreement, subject to certain exceptions, the holders of at least 60% of the Registrable Securities may require the Company to use its best efforts to register such Registrable Securities on one occasion for public resale. If the Company is entitled to register the Registrable Securities on a Form S-2 or Form S-3, one or more holders of the Registrable Securities may request the Company to register such Registrable Securities on one of such forms. In addition, whenever the Company proposes to register any of its securities under the Securities Act, the holders of Registrable Securities are entitled, subject to certain restrictions, to include their Registrable Securities in such registration. Except for a limited circumstance, the Company is required to bear all registration expenses in connection with the registration of Registrable Securities (other than underwriting discounts and commissions). See "Underwriting." TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the Common Stock is LaSalle National Bank, Chicago, Illinois. SHARES ELIGIBLE FOR FUTURE SALE Prior to this offering, there has been no public market for the Common Stock. Sales of substantial amounts of Common Stock in the public market, or the availability of such shares for sale, could adversely affect the market price of the Common Stock. 51 53 Upon completion of this offering, the Company will have an aggregate of 13,234,029 shares of Common Stock outstanding, assuming no exercise of the Underwriters' over-allotment option and no exercise of outstanding options or warrants after the date hereof. Of these shares, the 5,000,000 shares sold in this offering will be freely tradable without restriction or further registration under the Securities Act, unless held by "affiliates" of the Company, as that term is defined in Rule 144 promulgated under the Securities Act. The remaining 8,234,029 shares of Common Stock outstanding upon completion of this offering will be Restricted Shares. All directors and officers of the Company have agreed with the Underwriters that, for a period of 180 days from the date of this Prospectus, they will not offer to sell or otherwise sell, dispose of or grant rights with respect to any shares of Common Stock, now owned or hereafter acquired directly by such holders or with respect to which they have the power of disposition, otherwise than with the prior written consent of DLJ. The stockholders of the Company, pursuant to the lock-up provisions of stock purchase agreements to which they and the Company are a party, and certain optionholders of the Company, pursuant to lock-up agreements, have agreed not to sell, make any short sale of, loan, grant any option for the purchase of, or otherwise dispose of their shares of Common Stock for a period of 180 days from the date of this Prospectus, without the prior written consent of DLJ. As a result of these contractual restrictions, notwithstanding possible earlier eligibility for sale under the provisions of Rules 144, 144(k) and 701 of the Securities Act, shares subject to lock-up provisions or agreements will not be salable until the 180-day lock-up periods expire or unless prior written consent is received from DLJ. Any early waiver of the lock-up period by the underwriters, which, if granted, could permit sales of a substantial number of shares and could adversely affect the trading price of the Company's shares, may not be accompanied by an advance public announcement by the Company. See "Underwriting." Taking into account the lock-up provisions and agreements, the number of shares that will be available for sale in the public market under the provisions of Rules 144 and 144(k), will be as follows: (i) approximately 7,485,940 Restricted Shares will be eligible for sale 180 days from the date of this Prospectus, subject in some cases to the volume limitations and other restrictions of Rule 144, and (ii) the remaining 748,089 Restricted Shares will become eligible for sale under Rule 144 in June, August or September 1998, as the case may be. Beginning 90 days after the effective date of the Registration Statement, certain shares issued or issuable upon exercise of options granted by the Company prior to the effective date of the Registration Statement will also be eligible for sale in the public market pursuant to Rule 701 under the Securities Act, subject to pre-existing lockup agreements. In general, Rule 701 permits resales of shares issued pursuant to certain compensatory benefit plans and contracts commencing 90 days after the issuer becomes subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, in reliance upon Rule 144 but without compliance with certain restrictions, including the holding period requirements, contained in Rule 144. In general, under Rule 144 a person (or persons whose shares are aggregated) who has beneficially owned Restricted Shares for at least one year, including persons who may be deemed "affiliates" of the Company, would be entitled to sell within any three-month period a number of shares that does not exceed the greater of one percent of the number of shares of Common Stock then outstanding or the average weekly trading volume of the Common Stock during the four calendar weeks preceding the filing of a Form 144 with respect to such sale. Sales under Rule 144 are also subject to certain manner of sale provisions and notice requirements and to the availability of current public information about the Company. In addition, a person who is not deemed to have been an affiliate of the Company at any time during the 90 days preceding a sale, and who has beneficially owned for at least two years the shares proposed to be sold, would be entitled to sell such shares under Rule 144(k) without regard to the requirements described above. The Company is unable to estimate accurately the number of Restricted Shares that will be sold under Rule 144 because this will depend in part on the market price for the Common Stock, the personal circumstances of the seller and other factors. Pursuant to Rule 144 and upon expiration of the one-year holding period, an additional 662,287 shares of Common Stock will be available for sale upon the exercise of outstanding warrants. Options to purchase 1,620,737 shares are currently issued and outstanding under the Stock Option Plan (of which 379,113 are currently vested). See "Management--Stock Option Plan." 52 54 UNDERWRITING Subject to the terms and conditions of an Underwriting Agreement dated , 1997 (the "Underwriting Agreement"), the Underwriters named below, who are represented by Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"), Furman Selz LLC and Oppenheimer & Co., Inc. (the "Representatives"), have severally agreed to purchase from the Company the respective number of shares of Common Stock set forth opposite their names below.
NUMBER UNDERWRITER OF SHARES Donaldson, Lufkin & Jenrette Securities Corporation......... Furman Selz LLC............................................. Oppenheimer & Co., Inc. .................................... --------- Total.................................................. 5,000,000 =========
The Underwriting Agreement provides that the obligations of the several Underwriters to purchase and accept delivery of the shares of Common Stock offered hereby are subject to the approval by their counsel of certain legal matters and to certain other conditions. The Underwriters are obligated to purchase and accept delivery all the shares of Common Stock offered hereby (other that those shares covered by the over-allotment describe below) if any are purchased. The Underwriters initially propose to offer the shares of Common Stock in party directly to the public at the initial public offering price set forth on the cover of this Prospectus and in part to certain dealers (including the Underwriters) at such price less a concession of not in excess of $ per share. The Underwriters may allow, and such selected dealers may reallow to certain other dealers, a concession not in excess of $ per share. After the initial offering of the Common Stock, the public offering price and other selling terms may be changed by the Representatives at any time without notice. The Underwriters do not intend to confirm sales to any accounts over which they exercise discretionary authority. The Company has granted to the Underwriters an option, exercisable within 30 days after the date of this Prospectus, to purchase up to 750,000 additional shares of Common Stock at the initial public offering price less underwriting discounts and commissions. The Underwriters may exercise such option solely to cover overallotments, if any, made in connection with this offering. To the extent that the Underwriters exercise such option, each Underwriter will become obligated, subject to certain conditions, to purchase its pro rata portion of such additional shares based on such Underwriter's percentage underwriting commitment as indicated in the preceding table. The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act, or to contribute to payments that the Underwriters may be required to make in respect thereof. The Company, its executive officers and director and certain optionholders of the Company have agreed not to offer, pledge, sell, offer to sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase or otherwise dispose of, directly or indirectly, any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock, or enter into any similar agreement that transfers, in whole or in part, the economic risk of ownership of the Common Stock, for a period of 180 days from the date of this Prospectus, without the prior written consent of DLJ. In addition, during such period, the Company has also agreed not to file any registration agreement with respect to the registration of any shares of Common Stock or any securities convertible into or exchangeable for Common Stock without DLJ's prior written consent. The stockholders of the Company, pursuant to the lock-up provisions of stock purchase agreements to which they and the Company are a party, have also agreed not to sell, make any short sale of, loan, grant any option for the purchase of, or otherwise dispose of their shares of Common Stock for a period of 180 days from the date of this Prospectus, without the prior written consent of DLJ. 53 55 Prior to this offering, there has been no established trading market for the Common Stock. The initial public offering price for the shares of Common Stock will be determined by negotiations among the Company and the Representatives. The factors to be considered in determining the initial public offering price include the history of and the prospects for the industry in which the Company competes, the past and present operations of the Company, the historical results of operations of the Company, the prospects for future earnings of the Company, the recent market prices of securities of generally comparable companies and the general condition of the securities markets at the time of the offering. The Company has applied for listing of the Common Stock on the Nasdaq National Market under the symbol "NTCO." Other than in the United States, no action has been taken by the Company or the Underwriters that would permit a public offering of the shares of Common Stock offered hereby in any jurisdiction where action for that purpose is required. The shares of Common Stock offered hereby may not be offered or sold, directly or indirectly, nor may this Prospectus or any other offering material or advertisements in connection with the offer and sale of any such shares of Common Stock be distributed or published, in any jurisdiction, except under circumstances that will result in compliance with the applicable rules and regulations of such jurisdiction. Persons into whose possession this Prospectus comes are advised to inform themselves about and to observe any restrictions relating to the offering of the Common Stock and the distribution of this Prospectus. This Prospectus does not constitute an offer to sell or a solicitation of an offer to buy any shares of Common Stock offered hereby in any jurisdiction in which such an offer or a solicitation is unlawful. In connection with this offering, the Underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of the Common Stock. Specifically, the Underwriters may overallot the offering, creating a syndicate short position. The Underwriters may bid for and purchase shares of Common Stock in the open market to cover such syndicate short position or to stabilize the price of the Common Stock. In addition, the underwriting syndicate may reclaim selling concessions from syndicate members and selected dealers if they repurchase previously distributed Common Stock in syndicate covering transactions, in stabilizing transactions or otherwise. These activities may stabilize or maintain the market price of the Common Stock above independent market levels. The Underwriters are not required to engage in these activities, and may end any of these activities at any time. Certain employees of DLJ own an aggregate of 97,272 shares of the Series F Preferred, which shares will be converted into shares of Common Stock upon consummation of this offering. None of the shares of Common Stock held by the DLJ employees are being offered hereby. LEGAL MATTERS Certain legal matters with respect to the validity of the Common Stock offered hereby will be passed upon for the Company by Katten Muchin & Zavis, Chicago, Illinois, a partnership including professional corporations. Upon consummation of the Preferred Stock Conversion and this offering, a current partner of Katten Muchin & Zavis will own less than 1% of the outstanding shares of Common Stock. Certain legal matters in connection with United States patents will be passed upon for the Company by McAndrews, Held & Malloy, Ltd. Certain legal matters in connection with this offering will be passed upon for the Underwriters by Latham & Watkins, Chicago, Illinois. EXPERTS The financial statements of the Company at December 31, 1995 and 1996 and for each of the three years in the period ended December 31, 1996 appearing in this Prospectus and the Registration Statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon appearing elsewhere herein and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. 54 56 Certain matters dealing with patents and proprietary rights set forth under "Risk Factors--Dependence on Patents and Protection of Proprietary Information" and "Business--Intellectual Property and Proprietary Rights" have been included in this Prospectus in reliance upon the status of McAndrews, Held & Malloy, Ltd. as experts in such matters. See "Legal Matters." ADDITIONAL INFORMATION The Company has filed with the Commission in Washington, D.C., a Registration Statement on Form S-1 (of which this Prospectus is a part) under the Securities Act with respect to the Common Stock offered hereby. This Prospectus does not contain all the information set forth in the Registration Statement and the exhibits and schedules thereto, certain portions of which have been omitted as permitted by the rules and regulations of the Commission. For further information with respect to the Company and the Common Stock offered hereby, reference is made to the Registration Statement and such exhibits and schedules. Statements contained in this Prospectus regarding the contents of any agreement or other document referred to are not necessarily complete, and in each instance, reference is made to a copy of such agreement or other document filed as an exhibit to the Registration Statement. Each such statement is qualified in all respects by such reference. The Registration Statement and the exhibits and schedules thereto may be inspected without charge at the public reference facilities maintained by the Commission, including at the Commission's Public Reference Room, 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549 and at the Commission's Regional Offices at 7 World Trade Center, Suite 1300, New York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies may be obtained at prescribed rates from the Public Reference Section of the Commission at its principal office in Washington, D.C. Such materials also may be accessed electronically by means of the Commission's home page on the Internet at http://www.sec.gov.com. 55 57 NANOPHASE TECHNOLOGIES CORPORATION INDEX TO FINANCIAL STATEMENTS
PAGE ---- Report of Ernst & Young LLP, Independent Auditors........... F-2 Balance Sheets as of December 31, 1995 and 1996 and June 30, 1997 (unaudited).......................................... F-3 Statements of Operations for the years ended December 31, 1994, 1995 and 1996 and the six months ended June 30, 1996 and 1997 (unaudited)...................................... F-4 Statements of Stockholders' Equity.......................... F-5 Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996 and the six months ended June 30, 1996 and 1997 (unaudited)...................................... F-6 Notes to the Financial Statements........................... F-7
F-1 58 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, 1995 and 1996, and the related statements of operations, stockholders' equity, and cash flows for the each of the years in the three year period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. 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, 1995 and 1996, and the results of its operations and its cash flows for each of the years in the three year period ended December 31, 1996, in conformity with generally accepted accounting principles. Chicago, Illinois Ernst & Young LLP January 31, 1997, except for Notes 11 and 16, as to which the dates are and September 30, 1997, respectively - -------------------------------------------------------------------------------- The foregoing report is in the form that will be signed upon the completion of the restatement of capital accounts described in Note 11 to the financial statements. Chicago, Illinois Ernst & Young LLP October 1, 1997 F-2 59 NANOPHASE TECHNOLOGIES CORPORATION BALANCE SHEETS
AS OF PRO FORMA AS OF DECEMBER 31, JUNE 30, JUNE 30, -------------------------- ------------ ------------ 1995 1996 1997 1997 (UNAUDITED) ASSETS CURRENT ASSETS: Cash and cash equivalents....................... $ 261,902 $ 617,204 $ 2,490,130 $ 4,339,948 Investments..................................... 2,221,401 1,997,788 -- -- Trade accounts receivable....................... 70,845 389,501 880,441 880,441 Subscriptions receivable........................ -- -- 160,200 -- Inventories..................................... 65,280 445,205 420,274 420,274 Prepaid expenses and other current assets....... 67,277 50,275 43,002 43,002 ----------- ------------ ------------ ------------ Total current assets.......................... 2,686,705 3,499,973 3,994,047 5,683,665 Equipment and leasehold improvements, net......... 924,814 1,794,798 1,723,960 1,723,960 OTHER ASSETS: Deferred offering costs......................... -- 79,122 375,103 375,103 Patent costs, less accumulated amortization of $5,156 in 1995, $6,732 in 1996 and $8,794 in 1997.......................................... 52,742 86,892 98,698 98,698 Cash held in trust.............................. 76,867 78,849 80,000 80,000 ----------- ------------ ------------ ------------ $ 3,741,128 $ 5,539,634 $ 6,271,808 $ 7,961,426 =========== ============ ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable................................ $ 219,411 $ 221,936 $ 784,141 $ 784,141 Accrued expenses................................ 15,667 207,248 551,518 551,518 ----------- ------------ ------------ ------------ Total current liabilities..................... 235,078 429,184 1,335,659 1,335,659 STOCKHOLDERS' EQUITY: Series A convertible preferred stock, no par value; 169,490 shares authorized, issued, and outstanding................................... 600,000 600,000 600,000 -- Series B convertible preferred stock, no par value; 758,358 shares authorized, issued, and outstanding................................... 851,351 851,351 851,351 -- Series C convertible preferred stock, no par value; 662,287 shares authorized, issued, and outstanding................................... 743,500 743,500 743,500 -- Series D convertible preferred stock, no par value; 3,896,419 shares authorized; 3,882,385 issued and outstanding at December 31, 1995; 3,896,419 issued and outstanding at December 31, 1996 and June 30, 1997.................... 6,405,262 6,429,500 6,429,500 -- Series E convertible preferred stock, no par value; 2,026,500 shares authorized, no shares authorized, issued and outstanding at December 31, 1995; 1,921,800 shares issued and outstanding at December 31, 1996 and June 30, 1997.......................................... -- 7,157,850 7,157,850 -- Series F convertible preferred stock, no par value; no shares authorized, issued and outstanding at December 31, 1995 and December 31, 1996; 2,316,000 shares authorized and 421,992 shares issued and outstanding at June 30, 1997...................................... -- -- 2,116,487 -- Common stock, no par value at December 31, 1995 and 1996 and June 30, 1997 and $.01 par value at pro forma June 30, 1997; 10,316,158 shares authorized at December 31, 1996, and 12,632,158 shares authorized at June 30, 1997; 77,586 shares issued and outstanding at December 31, 1995 and 1996 and June 30, 1997 and 8,234,029 shares issued and outstanding at pro forma June 30, 1997....................... 450 450 450 82,340 Additional paid-in capital...................... -- -- -- 19,506,416 Accumulated deficit............................. (5,094,513) (10,672,201) (12,962,989) (12,962,989) ----------- ------------ ------------ ------------ Total stockholders' equity.................... 3,506,050 5,110,450 4,936,149 6,625,767 ----------- ------------ ------------ ------------ $ 3,741,128 $ 5,539,634 $ 6,271,808 $ 7,961,426 =========== ============ ============ ============
See Notes to Financial Statements. F-3 60 NANOPHASE TECHNOLOGIES CORPORATION STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30, --------------------------------------- ------------------------- 1994 1995 1996 1996 1997 (UNAUDITED) REVENUE: Commercial revenue............. $ 31,144 $ 93,591 $ 485,036 $ 107,032 $ 1,032,467 Government research contracts................... 64,015 27,995 110,770 20,312 -- ----------- ----------- ----------- ----------- ----------- Total revenue............. 95,159 121,586 595,806 127,344 1,032,467 OPERATING EXPENSES: Cost of revenue................ 164,746 532,124 4,019,484 1,968,546 2,162,081 Research and development expense..................... 456,162 485,059 677,284 327,620 376,532 Selling, general and administrative expense...... 799,558 1,150,853 1,661,504 823,139 816,389 ----------- ----------- ----------- ----------- ----------- Total operating expenses............... 1,420,466 2,168,036 6,358,272 3,119,305 3,355,002 ----------- ----------- ----------- ----------- ----------- Operating expenses in excess of revenues....................... (1,325,307) (2,046,450) (5,762,466) (2,991,961) (2,322,535) Interest income.................. 37,535 86,576 184,778 79,686 31,747 ----------- ----------- ----------- ----------- ----------- Net loss......................... $(1,287,772) $(1,959,874) $(5,577,688) $(2,912,275) $(2,290,788) =========== =========== =========== =========== =========== Pro forma net loss per share (unaudited).................... $ (0.76) $ (0.29) =========== =========== Pro forma weighted average number of common shares outstanding (unaudited).................... 7,370,220 8,022,811 =========== ===========
See Notes to Financial Statements. F-4 61 NANOPHASE TECHNOLOGIES CORPORATION STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK PREFERRED STOCK --------------- ----------------------- ACCUMULATED DESCRIPTION SHARES AMOUNT SHARES AMOUNT DEFICIT TOTAL Balance as of December 31, 1993.......................... 77,586 $450 1,590,135 $ 2,194,851 $ (1,846,867) $ 348,434 Issuance of Series D shares..... -- -- 868,690 1,200,262 -- 1,200,262 Issuance of Series D shares..... -- -- 1,271,248 2,195,592 -- 2,195,592 Net loss for the year ended December 31, 1994............. -- -- -- -- (1,287,772) (1,287,772) ------ ---- --------- ----------- ------------ ----------- Balance as of December 31, 1994.......................... 77,586 450 3,730,073 5,590,705 (3,134,639) 2,456,516 Issuance of Series D shares..... -- -- 1,742,447 3,009,408 -- 3,009,408 Net loss for the year ended December 31, 1995............. -- -- -- -- (1,959,874) (1,959,874) ------ ---- --------- ----------- ------------ ----------- Balance as of December 31, 1995.......................... 77,586 450 5,472,520 8,600,113 (5,094,513) 3,506,050 Issuance of Series D shares..... -- -- 14,034 24,238 -- 24,238 Issuance of Series E shares, net of offering costs............. -- -- 1,921,800 7,157,850 -- 7,157,850 Net loss for the year ended December 31, 1996............. -- -- -- -- (5,577,688) (5,577,688) ------ ---- --------- ----------- ------------ ----------- Balance as of December 31, 1996.......................... 77,586 450 7,408,354 15,782,201 (10,672,201) 5,110,450 Issuance of Series F shares, net of offering costs (unaudited)................... -- -- 421,992 2,116,487 -- 2,116,487 Net loss for the six months ended June 30, 1997 (unaudited)................... -- -- -- -- (2,290,788) (2,290,788) ------ ---- --------- ----------- ------------ ----------- Balance as of June 30, 1997 (unaudited)................... 77,586 $450 7,830,346 $17,898,688 $(12,962,989) $ 4,936,149 ====== ==== ========= =========== ============ ===========
See Notes to Financial Statements. F-5 62 NANOPHASE TECHNOLOGIES CORPORATION STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30, ---------------------------------------- -------------------------- 1994 1995 1996 1996 1997 (UNAUDITED) OPERATING ACTIVITIES: Net loss.......................... $(1,287,772) $(1,959,874) $ (5,577,688) $ (2,912,275) $(2,290,788) Adjustments to reconcile net loss to net cash used in operating activities......... Depreciation.................... 45,334 126,612 303,453 137,592 198,407 Amortization.................... 855 335 6,397 4,694 2,062 Loss on sale of equipment....... -- -- -- -- 29,281 Write off of patents............ -- 19,857 -- -- -- Changes in assets and liabilities related to operations: Trade accounts receivable.... 6,974 (23,573) (318,656) (63,642) (490,940) Inventories.................. -- (65,280) (379,924) (208,761) 24,931 Prepaid expenses and other current assets............. (12,700) (50,261) 17,002 16,893 7,273 Patent costs................. (13,559) (31,072) (40,548) (37,529) (13,868) Accounts payable............. 249 168,643 2,525 159,023 562,205 Accrued liabilities.......... 54,122 (45,740) 191,581 92,294 294,270 Deferred revenue............. -- -- -- -- 50,000 ----------- ----------- ------------ ------------ ----------- Net cash used in operating activities...................... (1,206,497) (1,860,353) (5,795,858) (2,811,711) (1,627,167) INVESTING ACTIVITIES: Acquisition of equipment, furniture, and leasehold improvements.................... (66,303) (937,956) (1,173,437) (862,400) (173,850) Purchases of held-to-maturity investments..................... (2,255,609) (8,512,957) (15,486,131) (13,524,357) (3,965,214) Maturities of held-to-maturity investments..................... -- 8,547,165 15,709,744 9,864,891 5,963,002 Purchase of asset held in trust... (75,000) (1,867) (1,982) (891) (1,151) Proceeds from sale of equipment and furniture................... 787 -- -- -- 17,000 ----------- ----------- ------------ ------------ ----------- Net cash (used in) provided by investing activities............ (2,396,125) (905,615) (951,806) (4,522,757) 1,839,787 FINANCING ACTIVITIES: Proceeds from issuance of preferred stock, net of offering costs........................... 3,395,854 3,009,408 7,182,088 7,188,058 1,956,287 Deferred offering costs........... -- -- (79,122) -- (295,981) ----------- ----------- ------------ ------------ ----------- Net cash provided by financing activities...................... 3,395,854 3,009,408 7,102,966 7,188,058 1,660,306 ----------- ----------- ------------ ------------ ----------- Increase (decrease) in cash....... (206,768) 243,440 355,302 (146,410) 1,872,926 Cash at beginning of period....... 225,230 18,462 261,902 261,902 617,204 ----------- ----------- ------------ ------------ ----------- Cash at end of period............. $ 18,462 $ 261,902 $ 617,204 $ 115,492 $ 2,490,130 =========== =========== ============ ============ ===========
See Notes to Financial Statements. F-6 63 NANOPHASE TECHNOLOGIES CORPORATION NOTES TO FINANCIAL STATEMENTS (INFORMATION WITH RESPECT TO THE SIX MONTH PERIODS ENDED JUNE 30, 1996 AND 1997 AND ALL PRO FORMA DATA ARE UNAUDITED) (1) DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION Nanophase Technologies Corporation (the "Company") was incorporated on November 30, 1989, for the purpose of developing nanocrystalline materials for commercial production and sale in domestic and international markets. The Company was in its development stage for the period from inception through December 31, 1996, primarily engaged in research and development activities, the recruiting of technical, marketing and administrative personnel, and the development of its manufacturing facility. These activities have been funded through the issuance of preferred stock and through cooperative development agreements and government contracts and grants. Although commercial shipments began in late 1995 and continued in 1996, these shipments were limited and primarily related to cooperative development agreements. The Company began full-scale production in early 1997 at which time it no longer was a development stage company. In the course of its corporate development, the Company has experienced net losses and negative cash flows from operations. Historically, the Company has funded its operations primarily through the issuance of equity securities. Export sales approximated $10,300, $51,400 and $256,500 for the years ended December 31, 1994, 1995 and 1996, respectively. Basis of Presentation The financial statements of the Company as of June 30, 1997 and for the six month periods ended June 30, 1996 and 1997 contain all adjustments and accruals (consisting only of normal recurring adjustments) which, in the opinion of management, are necessary for a fair presentation of the financial position and operating results of the Company for the interim periods presented. Pro Forma Presentation (Unaudited) The pro forma balance sheet at June 30, 1997 gives effect to: (1) collection of the subscriptions receivable for preferred stock; (2) proceeds of $1,689,618 from the sale of 326,097 shares of preferred stock issued in August and September 1997; (3) conversion of the convertible preferred stock into common stock which will take place upon the closing of the proposed public offering of common stock; and (4) the change in the par value of the common stock, as described in Note 11. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Cash Equivalents Cash equivalents primarily consist of money market accounts which have a maturity of three months or less from the date of purchase. Investments Investments are classified by the Company at the time of purchase for appropriate designation and such designation is reevaluated as of each balance sheet date. Investments are classified as held-to-maturity when the Company has the positive intent and ability to hold the securities to maturity. Held-to-maturity securities are stated at amortized cost and are adjusted to maturity for the amortization of premiums and accretion of discounts. Such adjustments for amortization and accretion are included in interest income. Inventory Inventory is stated at the lower of cost, maintained on a first in, first out basis, or market. F-7 64 NANOPHASE TECHNOLOGIES CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Equipment and Leasehold Improvements Equipment is stated at cost and is being depreciated over its estimated useful life (5-7 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. Deferred Offering Costs Costs related to the Company's proposed public offering which totaled to $79,122 and $375,103 at December 31, 1996 and June 30, 1997, respectively, have been deferred. Upon successful completion of the Company's proposed public offering, these costs will be offset against the proceeds received and charged to stockholders' equity. Patent Costs Patent costs are being amortized over the life of the respective patent using the straight-line method. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires the Company to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Commercial Revenue Commercial revenue consists of sales of product and revenue from research and development arrangements with non-governmental entities. Sales of product are recorded as shipments are made by the Company. 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. Government Research Contracts The Company accounts for contracts with governmental entities to complete research and development activities using the percentage of completion method measured by the relationship of costs incurred to total estimated costs. Amounts paid to the Company under its cooperative cost-sharing agreement with the U.S. government are accounted for as offsets against cost of revenues. See Note 11. All payments to the Company for work performed on contracts and agreements with agencies of the U.S. government are subject to adjustment upon audit by agencies of the U.S. government. The Company believes that such audits, if any, will not have a significant effect on the financial position or results of operation of the Company. Research and Development Expenses Expenditures for research and development activities are charged to operations as incurred by the Company. 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. F-8 65 NANOPHASE TECHNOLOGIES CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Employee Stock Options 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). The exercise price of the options granted equals the estimated fair value of the underlying stock on the date of grant. As such, no compensation expense has been recognized by the Company for these options. In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 123, "Accounting for Stock-Based Compensation" (FASB No. 123). FASB No. 123, which was adopted by the Company in 1996, establishes an alternative method of accounting for stock-based compensation plans. In 1996, the Company adopted the disclosure alternative for stock-based compensation (Note 12) which provides for the use of APB No. 25 for financial statement purposes with pro forma disclosure of the impact of FASB No. 123. Fair Value of Financial Instruments The Company's financial instruments include investments, accounts receivable, accounts payable and accrued liabilities. The fair values of all financial instruments were not materially different from their carrying values. Net Loss and Pro Forma Net Loss Per Common Share Pro forma net loss per common share and historical net loss per common share are computed based upon the weighted average number of common shares outstanding. Common equivalent shares are not included in the pro forma and historical per share calculations since the effect of their inclusion would be anti-dilutive, except that common and common equivalent shares issued during the twelve month period prior to the proposed public offering have been included in the pro forma calculation as if they were outstanding for all periods presented using the treasury stock method. In addition, for the pro forma calculation, all convertible preferred stock is treated as if converted into common shares at date of issuance. Net loss per common share computed on a historical basis is as follows: $2.10, $3.20 and $9.11 for the years ended December 31, 1994, 1995 and 1996, respectively, and $4.76 and $3.74 for the six month periods ended June 30, 1996 and 1997, respectively. The weighted average number of common shares outstanding used to calculate these net loss per common share amounts are 612,126 for all periods. (3) INVESTMENTS Investments consist of U.S. Treasury bills with an estimated fair value of $2,221,000 and $1,998,000 at December 31, 1995 and 1996, respectively. The Company did not maintain an investment balance at June 30, 1997. All investments have been classified as held-to-maturity and mature in subsequent year. (4) INVENTORIES Inventories consist of the following:
AS OF AS OF DECEMBER 31, JUNE 30, ----------------------- --------- 1995 1996 1997 Raw materials............................................. $ 47,617 $ 332,167 $ 380,336 Finished goods............................................ 31,561 213,259 393,555 -------- --------- --------- 79,178 545,426 773,891 Inventory reserves........................................ (13,898) (100,221) (353,617) -------- --------- --------- $ 65,280 $ 445,205 $ 420,274 ======== ========= =========
F-9 66 NANOPHASE TECHNOLOGIES CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (5) EQUIPMENT AND LEASEHOLD IMPROVEMENTS Equipment and leasehold improvements consist of the following:
AS OF AS OF DECEMBER 31, JUNE 30, ------------------------ ---------- 1995 1996 1997 Machinery and equipment.................................. $ 787,916 $1,662,721 $1,770,355 Office equipment......................................... 101,749 113,959 116,307 Office furniture......................................... 60,020 49,864 49,864 Leasehold improvements................................... 261,915 447,465 454,932 ---------- ---------- ---------- 1,211,600 2,274,009 2,391,458 Less: Accumulated depreciation and amortization.......... (286,786) (479,211) (667,498) ---------- ---------- ---------- $ 924,814 $1,794,798 $1,723,960 ========== ========== ==========
(6) LEASE COMMITMENTS The Company leases manufacturing and office space under an agreement that will expire in September 1999. Monthly minimum lease payments amount to $7,900 for this facility. The Company also leased its original office space from a stockholder under a sublease agreement which expired in November 1996. The Company entered into a sublease of this office space and received monthly rental payments under the sublease through November 1996. Rent expense, net of sublease income, under this lease amounted to $35,903, $26,668 and $19,072 for the years ended December 31, 1994, 1995 and 1996, respectively, and $8,859 for the six month period ended June 30, 1996. Total rent expense, net of sublease income, under these leases amounted to $65,903, $122,422, and $175,538 for the years ended December 31, 1994, 1995, and 1996, respectively, and $84,479 and $80,088 for the six month periods ended June 30, 1996 and 1997, respectively. (7) ACCRUED EXPENSES Accrued expenses consist of the following:
AS OF AS OF DECEMBER 31, JUNE 30, ------------------ -------- 1995 1996 1997 Accrued subcontract costs................................... $ -- $ 40,000 $175,000 Accrued offering costs...................................... -- -- 101,034 Accrued relocation expense.................................. -- 35,000 35,000 Accrued payroll............................................. 9,560 26,290 9,851 Other....................................................... 6,107 105,958 180,633 ------- -------- -------- $15,667 $207,248 $501,518 ======= ======== ========
(8) RESEARCH AND DEVELOPMENT AGREEMENTS In July 1992, the Company entered into a cooperative cost-sharing agreement with the U.S. Government under the Department of Commerce Advanced Technology Program. The three-year agreement ended in 1995. Under the terms of the agreement, the U.S. Government agreed to share costs of the Company's research efforts up to an aggregate of $944,259, including subcontractor costs. The net costs associated with the total research effort amounted to $2,992,130. The difference between these amounts represented indirect costs of $2,047,871 which were absorbed as operating expenses by the Company. For the years ended F-10 67 NANOPHASE TECHNOLOGIES CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) December 31, 1994 and 1995, the Company offset amounts received from the U.S. government of $224,256 and $154,710, respectively, against cost of revenues in the statement of operations. The Company is party to a number of other research and development arrangements with both governmental and commercial entities. These arrangements are generally short-term in nature and provided $31,144, $54,680 and $236,019 of revenues for the years ended December 31, 1994, 1995, and 1996, respectively, and $38,550 and $605,077 of revenues for the six month periods ended June 30, 1996 and 1997, respectively. These arrangements include both cost-plus and fixed-price agreements. (9) PATENT LICENSE AGREEMENT In 1991, the Company was granted an exclusive license by a third party to make, have made, use and sell products of the type claimed in a U.S. patent. In consideration for this license, the Company agreed to pay royalties of 1/2% of net sales of licensed products, as defined. As of December 31, 1996, no royalty payments were due under this agreement. In 1994, 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. As of December 31, 1996, and June 30, 1997, royalties under this agreement amounting to $2,316 and $6,184, respectively, have been offset against the royalty advance. In 1996, 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. As of December 31, 1996 and June 30, 1997, royalties under this agreement approximated to $1,000 and $3,000, respectively. The Company was also granted a remainder-exclusive license by a third party to make, have made, use, import, sell or have sold products of the type claimed in three U.S. patents. In consideration for this license, the Company agreed to pay $5,000 as an initial payment, $5,000 upon reaching the earlier of either defined profitability or the second anniversary of the agreement, and royalties at the rate of 4% of the defined net sales of the related products. As of December 31, 1996, no royalty payments were due to this party under this agreement. (10) INCOME TAXES The Company has net operating loss carryforwards for tax purposes of approximately $1,800,000 at December 31, 1996, which expire between 2005 and 2011. The Company has not paid income taxes since inception. F-11 68 NANOPHASE TECHNOLOGIES CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 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, AS OF -------------------------- JUNE 30, 1995 1996 ----------- ---- ---- 1997 Deferred tax assets: Net operating loss carryforward..................... $ 2,288,000 $ 4,212,000 $ 5,070,000 Start-up costs capitalized for income tax purposes......................................... -- 162,000 142,000 Other accrued costs................................. 2,000 29,000 26,000 ----------- ----------- ----------- Total deferred tax assets........................ 2,290,000 4,403,000 5,238,000 Deferred tax liability: Accelerated tax depreciation........................ (21,000) (53,000) (38,000) ----------- ----------- ----------- Net deferred tax asset................................ 2,269,000 4,350,000 5,200,000 Less: Valuation allowance........................... (2,269,000) (4,350,000) (5,200,000) ----------- ----------- ----------- Deferred income taxes................................. $ -- $ -- $ -- =========== =========== ===========
The valuation allowance increased $2,081,000 and $850,000 for the year ended December 31, 1996 and six months ended June 30, 1997, respectively, 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 this proposed public offering, may subject the Company to annual limitations on the utilization of its net operating loss carryforward. (11) CAPITAL STOCK All capital share and per share amounts in the financial statements and notes to financial statements have been restated to reflect a .579-for-1 reverse stock split effective upon consummation of this proposed public offering. Additionally, the par value has been restated to $0.01 for all common stock. In June 1997, a total of 421,992 shares of Series F convertible preferred stock were issued for cash amounting to $2,116,487 which included subscriptions receivable of $160,200 and is net of financing costs of $70,000. The subscriptions receivable were collected in July 1997. At June 30, 1997, authorized but unissued shares of common stock have been reserved for future issuance as follows: Series A convertible preferred stock........................ 169,490 Series B convertible preferred stock........................ 758,358 Series C convertible preferred stock........................ 662,287 Series D convertible preferred stock........................ 3,896,419 Series E convertible preferred stock........................ 2,026,500 Series F convertible preferred stock........................ 2,316,000 Warrants.................................................... 662,287 Options to employees and service provider................... 1,603,367 ---------- 12,094,708 ==========
All series of convertible preferred stock have the same voting rights as the common stock. The Series A, C, D, E and F convertible preferred stock have the same dividend rights as the common stock. At the holder's option, the preferred stock may be converted into common stock at the conversion ratio, which is one common F-12 69 NANOPHASE TECHNOLOGIES CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) share for each preferred share. Mandatory conversion occurs upon the occurrence of a Qualified Initial Public Offering, as defined, at the conversion ratio. The holders of Series B convertible preferred stock are entitled to receive cumulative cash dividends in the amount of $.090 per share per annum. Dividends began to accumulate on the date of issuance of the first shares of Series B and will be paid to Series B shareholders of record only upon the liquidation of the Company. Accumulated dividends total $167,678 at December 31, 1996. Upon liquidation or dissolution of the Company, the Series F stockholders will be entitled to be paid $5.181 per share, plus all declared but unpaid dividends thereon before any distribution to the Series E, Series D, Series C, Series B, Series A, or common stockholders. The Series E stockholders will be entitled to be paid $3.886 per share, plus all declared but unpaid dividends thereon before any distribution to the Series D, Series C, Series B, Series A, or common stockholders. The Series D and Series C stockholders will be entitled to be paid $1.382 per share (with respect to the Series D purchased prior to October 1, 1994), $1.727 per share (with respect to the Series D purchased on or after October 1, 1994), and $3.368 per share (with respect to the Series C), plus all declared but unpaid dividends thereon before any distribution to the Series B, Series A, or common stockholders. Series B preferred stockholders will be entitled to be paid, before any payment or declaration and setting apart for payment of any amount with respect to the Series A or common stockholders, an amount equal to $1.123 per share, plus all accumulated but unpaid dividends thereon. The Series A preferred stockholders will be entitled to be paid an amount equal to $3.541 per share, after payment to the Series F, Series E, Series D, Series C, and Series B stockholders but before any distribution is made to the common stockholders. (12) STOCK OPTIONS AND WARRANTS The Company has entered into stock option agreements with certain employees and a board member who is also a service provider. At June 30, 1997, the Company had granted options to purchase 1,603,367 shares of common stock. The stock options generally expire ten years from the date of grant. Of the total number of options granted, 792,651 of the outstanding options vest on the eighth anniversary following their grant date, subject to an earlier five-year vesting period if specified performance targets for 1997 are met. The remaining 810,716 outstanding options vest over a five-year period from their respective grant dates. F-13 70 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 June 30, 1997:
WEIGHTED- NUMBER AVERAGE EXERCISE OF OPTIONS EXERCISE PRICE PRICE Outstanding at December 31, 1993.................... 182,035 $.112 $ .112 Options granted during 1994......................... 100,746 .112 .112 Options canceled during 1994........................ (27,442) .112 .112 --------- Outstanding at December 31, 1994.................... 255,339 .112 .112 Options granted during 1995......................... 186,728 .432 .432 Options canceled during 1995........................ (6,948) .112 -- .432 .180 --------- Outstanding at December 31, 1995.................... 435,119 .112 -- .432 .249 Options granted during 1996......................... 1,192,508 1.727 -- 3.886 3.309 Options canceled during 1996........................ (12,101) .112 -- 1.727 1.549 --------- Outstanding at December 31, 1996.................... 1,615,526 .112 -- 3.886 2.499 Options canceled during 1997........................ (12,159) 3.886 3.886 --------- Outstanding at June 30, 1997........................ 1,603,367 .112 -- 3.886 2.489 =========
At December 31, 1996, options for 166,347, 38,793 and 2,606 shares of common stock were exercisable at $.112, $.432 and $.579 per share, respectively. No options have been exercised or have expired to date. 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. These warrants have an exercise price of $1.123 per share and expire upon the tenth anniversary of issuance. All warrants were outstanding at June 30, 1997. 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 weighted-average assumptions for the years ended December 31, 1995 and 1996 and the six month periods ended June 30, 1996 and 1997, respectively: risk-free interest rates of 4.5%, 4.0%, 4.5% and 4.0%; a dividend yield of zero percent; and a weighted-average expected life of the option of 7 years. The volatility factor was assumed to be zero as the Company is privately held and no market existed for its stock in 1995 or 1996. 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 F-14 71 NANOPHASE TECHNOLOGIES CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) pro forma net loss and pro forma net loss per share on a historical basis would be $1,963,974 and $5,607,688 and $3.21 and $9.16 for the years ended December 31, 1995 and 1996, respectively. (13) 401(K) PROFIT-SHARING PLAN Effective June 30, 1995, the Company implemented a 401(k) profit-sharing plan covering substantially all employees who meet defined service requirements. The plan provides for deferred salary contributions by the plan participants and a Company contribution. Company contributions, if any, are at the discretion of the Board of Directors and are not to exceed the amount deductible under applicable income tax laws. No Company contributions have been made since inception of the plan. (14) SEVERANCE BENEFITS AGREEMENT Pursuant to an agreement entered into in 1994, the Company has established a trust for the benefit of an employee. Interest earned will be credited to the trust until the funds held in trust are equal to $80,000. Payments will be required in the event the Company terminates the employment of the individual, as defined, before November 15, 1999. Upon the occurrence of an initial public offering, the funds held in trust will revert to the Company. (15) RELATED PARTY TRANSACTIONS The Company has an ongoing consulting agreement with a director/stockholder. The agreement is on a month-to-month basis. Payments under this agreement amount to $2,500 per month. (16) SUBSEQUENT EVENTS Subsequent to June 30, 1997, 326,097 shares of Series F Convertible Preferred Stock were issued for cash amounting to $1,689,618. F-15 72 [INSIDE BACK COVER PAGE] [Picture of the Company's nanocrystalline materials compared to conventional nanocrystalline materials] In contrast to nanocrystalline materials produced by conventional processes, nanocrystalline materials produced by the Company's patented PVS process are nearly spherical and uniformly small. As a result of these and other properties, the Company is able to engineer the attributes, including strength, flexibility, color and electronic conductivity, of materials to yield products that are superior to conventional materials and to establish new standards for a range of high-performance commercial applications. [Picture of equipment inside the Company's manufacturing facility in Burr Ridge, Illinois] PVS plasma reactors in the Company's production and research facility in Burr Ridge, Illinois. 73 ====================================================== NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE SHARES BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING THE OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. ------------------------ TABLE OF CONTENTS
PAGE Prospectus Summary......................... 3 Risk Factors............................... 7 Use of Proceeds............................ 15 Dividend Policy............................ 15 Capitalization............................. 16 Dilution................................... 17 Selected Financial Data.................... 18 Management's Discussion And Analysis of Financial Condition and Results of Operations............................... 19 Business................................... 23 Management................................. 39 Certain Relationships and Related Transactions............................. 47 Principal Stockholders..................... 48 Description of Capital Stock............... 50 Shares Eligible for Future Sale............ 51 Underwriting............................... 53 Legal Matters.............................. 54 Experts.................................... 54 Additional Information..................... 55 Index to Financial Statements.............. F-1
------------------------ UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. ====================================================== ====================================================== 5,000,000 SHARES [NANOPHASE LOGO] COMMON STOCK ------------------------ PROSPECTUS ------------------------ DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION FURMAN SELZ OPPENHEIMER & CO., INC. , 1997 ====================================================== 74 PART II INFORMATION NOT REQUIRED IN THE PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION Set forth below is an estimate of the approximate amount of fees and expenses (other than underwriting commissions and discounts) payable by the Registrant in connection with the issuance and distribution of the Common Stock pursuant to the Prospectus contained in this Registration Statement. The Registrant will pay all of these expenses.
APPROXIMATE AMOUNT Securities and Exchange Commission registration fee......... $17,425 NASD filing fee............................................. 6,250 Nasdaq National Market application fee...................... * Accountants' fees and expenses.............................. * Blue Sky fees and expenses.................................. * Legal fees and expenses..................................... * Transfer Agent and Registrar fees and expenses.............. * Printing and engraving...................................... * Miscellaneous expenses...................................... * ------- Total.................................................. $ * =======
- ------------------------------ * To be provided by amendment All expenses other than the Securities and Exchange Commission registration fee and NASD filing fee are estimated. ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Upon the Registrant's reincorporation in Delaware, Article VII of the Registrant's Certificate of Incorporation will provide that the Registrant shall indemnify its directors to the full extent permitted by the General Corporation Law of the State of Delaware and may indemnify its officers and employees to such extent, except that the Registrant shall not be obligated to indemnify any such person (i) with respect to proceedings, claims or actions initiated or brought voluntarily by any such person and not by way of defense, or (ii) for any amounts paid in settlement of an action indemnified against by the Registrant without the prior written consent of the Registrant. Prior to consummation of this offering, the Registrant will enter into indemnity agreements with each of its directors. These agreements may require the Registrant, among other things, to indemnify such directors against certain liabilities that may arise by reason of their status or service as directors, to advance expenses to them as they are incurred, provided that they undertake to repay the amount advanced if it is ultimately determined by a court that they are not entitled to indemnification, and to obtain directors' liability insurance if available on reasonable terms. In addition, Article VII of the Registrant's Certificate of Incorporation will also provide that a director of the Registrant shall not be personally liable to the Registrant or its stockholders for monetary damages for breach of his or her fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Registrant or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) for willful or negligent conduct in paying dividends or repurchasing stock out of other than lawfully available funds or (iv) for any transaction from which the director derives an improper personal benefit. Reference is made to Section 145 of the General Corporation Law of the State of Delaware which provides for indemnification of directors and officers in certain circumstances. II-1 75 Prior to the consummation of this offering, the Registrant intends to purchase a directors' and officers' liability insurance policy. Under the terms of the Underwriting Agreement, the Underwriters have agreed to indemnify, under certain conditions, the Registrant, its directors, certain of its officers and persons who control the Company within the meaning of the Securities Act of 1933, as amended (the "Securities Act"), against certain liabilities. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES The following information reflects a 0.579-for-one stock split which will be effected prior to the date of the Prospectus. In March 1994, the Registrant issued an aggregate of 868,690 shares of Series D Convertible Preferred Stock (the "Series D Preferred") at $1.387 per share to nine investors, which included eight venture capital funds and Richard Siegel, a director and consultant of the Company, in exchange for cash in the aggregate amount of $1,200,262. In October 1994, the Registrant issued 1,271,248 shares of Series D Preferred at $1.727 per share to eight investors which are venture capital funds in exchange for cash in the aggregate amount of $2,195,592. In April 1995, the Registrant issued 89,402 shares of Series D Preferred at $1.727 per share to four investors which are venture capital funds in exchange for cash in the aggregate amount of $154,408. In November 1995, the Registrant issued 1,653,045 shares of Series D Preferred at $1.727 per share to nine investors, which included eight venture capital funds and Richard Siegel, a director and consultant of the Company, in exchange for cash in the aggregate amount of $2,855,000. In April 1996, the Registrant issued 14,034 shares of Series D Preferred at $1.727 per share to one investor which is a venture capital fund in exchange for cash in the amount of $24,238. In May 1996, the Registrant issued 1,921,800 shares of Series E Convertible Preferred Stock (the "Series E Preferred") at $3.886 per share to 124 investors, which included various individuals, trusts, partnerships and retirement plans, in exchange for cash in the aggregate amount of $7,468,135. In June 1997, the Registrant issued 421,992 shares of Series F Convertible Preferred Stock at (the "Series F Preferred") at $5.181 per share to 39 investors, which included various individuals, trust partnerships and retirement plans, in exchange for cash in the aggregate amount of $2,186,487. In August 1997, the Registrant issued 183,468 shares of Series F Preferred at $5.181 per share to 10 investors, which included various individuals, trusts, partnerships and retirement plans, in exchange for cash in the aggregate amount of $950,613. In September 1997, the Registrant issued 142,629 shares of Preferred Stock at $5.181 per share to 15 investors, which included employees of DLJ, various individuals and a trust, in exchange for cash in the aggregate amount of $739,005. Each share of Series D Preferred, Series E Preferred and Series F Preferred will be converted into one share of Common Stock upon consummation of this offering. The sales of shares of Series D Preferred, Series E Preferred and Series F Preferred are claimed to be exempt from registration with the Securities and Exchange Commission pursuant to Section 4(2) of the Securities Act, and/or Regulation D promulgated thereunder as transactions by an issuer not involving any public offering, in that the transactions involved the issuance and sale by the Company of its securities to financially sophisticated institutions or individuals who represented that they were aware of the Company's activities as well as its business and financial condition, and who took such securities for investment purposes and understood the ramifications of the same. Each security holder represented that they acquired such securities for investment for their own account and not for distribution. All certificates representing the securities issued in these transactions have been legended. II-2 76 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Exhibits. 1* Form of Underwriting Agreement. 3.1* Form of Certificate of Incorporation of the Registrant. 3.2* Form of Bylaws of the Registrant. 4.1* Specimen stock certificate representing Common Stock. 4.2 Form of Warrants. 5* Opinion of Katten Muchin & Zavis as to the legality of the securities being registered (including consent). 10.1 The Nanophase Technologies Corporation Amended and Restated 1992 Stock Option Plan. 10.2* Form of Directors Indemnification Agreement. 10.3 Amended and Restated Registration Rights Agreements dated as of March 16, 1994, as amended. 10.4 Employment Agreement dated February 3, 1994 between the Registrant and Robert W. Cross. 10.5 Employment Agreement dated as of September 3, 1996 between the Registrant and Dennis J. Nowak. 10.6 Severance Benefits Agreement dated as of November 15, 1994 between the Registrant, Steven Lazarus and John C. Parker. 10.7 License Agreement dated June 1, 1990 between the Registrant and ARCH Development Corporation, as amended. 10.8 License Agreement dated October 12, 1994 between the Registrant and Hitachi. 10.9 License Agreement dated May 31, 1996 between the Registrant and Research Development Corporation of Japan. 10.10 License Agreement dated April 1, 1996 between the Registrant and Cornell Research Foundation. 10.11 Consulting and Stock Purchase Agreement between Richard W. Siegel and the Registrant dated as of May 9, 1990, as amended February 13, 1991, November 21, 1991 and January 1, 1992. 10.12 Lease Agreement between the Village of Burr Ridge and the Registrant, dated September 15, 1994. 10.13 Purchase Order and Purchase and Distribution Agreement dated February 27, 1997 between the Registrant and Moyco Technologies, Incorporated, as amended. 10.14 Marketing and Distribution Agreement between the Registrant and Whittaker, Clark & Daniels, Inc., dated as of November 22, 1995. 10.15 Distribution Agreement between the Registrant and C.I. Kasei, Ltd., (a subsidiary of Itochu) dated as of October 30, 1996. 10.16 Purchase Agreement between Nanophase Technologies Corporation and LWT Instruments, Inc., dated February 1, 1997. 11 Statement regarding computation of per share earnings. 23.1 Consent of Ernst & Young LLP. 23.2* Consent of Katten Muchin & Zavis (contained in its opinion to be filed as Exhibit 5 hereto). 23.3 Consent of McAndrews, Held & Malloy, Ltd. 24 Power of Attorney (included on signature page hereto). 27 Financial Data Schedule
- ------------------------------ * To be filed by amendment. II-3 77 (b) Financial Statement Schedules.
PAGE Schedule II -- Report of Independent Auditors S-1 Valuation and Qualifying Accounts S-2
ITEM 17. UNDERTAKINGS The Registrant hereby undertakes: (1) To provide to the Underwriters at the closing specified in the underwriting agreement, certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. (2) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that, in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. (3) For purposes of determining any liability under the Securities Act, (i) the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective and (ii) each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-4 78 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Chicago, and State of Illinois on the 1st day of October, 1997. NANOPHASE TECHNOLOGIES CORPORATION By: /s/ ROBERT W. CROSS ------------------------------------ Robert W. Cross, President and Chief Executive Officer POWER OF ATTORNEY Each person whose signature appears below hereby constitutes and appoints Robert W. Cross, Dennis J. Nowak and Lawrence D. Levin and each of them his true and lawful attorney-in-fact and agent, with full power of substitution, to sign on his behalf, individually and in each capacity stated below, all amendments and post-effective amendments to this Registration Statement on Form S-1 (including registration statements filed pursuant to Rule 462(b) under the Securities Act of 1933, and all amendments thereto) and to file the same, with all exhibits thereto and any other documents in connection therewith, with the Securities and Exchange Commission under the Securities Act of 1933, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully and to all intents and purposes as each might or could do in person, hereby ratifying and confirming each act that said attorneys-in-fact and agents may lawfully do or cause to be done by virtue thereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons on October 1, 1997 in the capacities indicated.
SIGNATURE TITLE /s/ ROBERT W. CROSS President, Chief Executive Officer (Principal Executive - ------------------------------------------ Officer) and a Director Robert W. Cross /s/ DENNIS J. NOWAK Vice President--Finance and Administration, Chief - ------------------------------------------ Financial Officer, Treasurer and Secretary (Principal Dennis J. Nowak Financial and Accounting Officer) /s/ LEONARD A. BATTERSON Chairman of the Board and Director - ------------------------------------------ Leonard A. Batterson /s/ STEVEN LAZARUS Director - ------------------------------------------ Steven Lazarus /s/ RICHARD W. SIEGEL Director - ------------------------------------------ Richard W. Siegel /s/ ROBERT W. SHAW, JR. Director - ------------------------------------------ Robert W. Shaw. Jr.
II-5 79 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Stockholders Nanophase Technologies Corporation We have audited the financial statements of Nanophase Technologies Corporation as of December 31, 1995 and 1996, and for each of the three years in the period ended December 31, 1996, and have issued our report thereon dated January 31, 1997, except as to Note 16, as to which the date is September 30, 1997 (included elsewhere in this Registration Statement). Our audits also included the financial statement schedule listed in Item 16(b) of this Registration Statement. This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. Chicago, Illinois Ernst & Young LLP January 31, 1997 S-1 80 SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS BALANCE AT ---------------------- BALANCE AT BEGINNING OF COSTS AND OTHER END DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD Year ended December 31, 1994........... Deferred tax asset valuation account... $ 744,300 $ 509,700 $-- $-- $1,254,000 ========== ========== === === ========== Year ended December 31, 1995........... Inventory reserve...................... $ -- $ 13,898 $-- $-- $ 13,898 ========== ========== === === ========== Deferred tax asset valuation account... $1,254,000 $1,015,000 $-- $-- $2,269,000 ========== ========== === === ========== Year ended December 31, 1996........... Inventory reserve...................... $ 13,898 $ 86,323 $-- $-- $ 100,221 ========== ========== === === ========== Deferred tax asset valuation account... $2,269,000 $2,081,000 $-- $-- $4,350,000 ========== ========== === === ==========
S-2 81 EXHIBIT INDEX
EXHIBIT NUMBER EXHIBIT - ------- ------- 4.2 Form of Warrants. 10.1 The Nanophase Technologies Corporation Amended and Restated 1992 Stock Option Plan. 10.3 Amended and Restated Registration Rights Agreements dated as of March 16, 1994, as amended. 10.4 Employment Agreement dated February 3, 1994 between the Registrant and Robert W. Cross. 10.5 Employment Agreement dated as of September 3, 1996 between the Registrant and Dennis J. Nowak. 10.6 Severance Benefits Agreement dated as of November 15, 1994 between the Registrant, Steven Lazarus and John C. Parker. 10.7 License Agreement dated June 1, 1990 between the Registrant and ARCH Development Corporation, as amended. 10.8 License Agreement dated October 12, 1994 between the Registrant and Hitachi. 10.9 License Agreement dated May 31, 1996 between the Registrant and Research Development Corporation of Japan. 10.10 License Agreement dated April 1, 1996 between the Registrant and Cornell Research Foundation. 10.11 Consulting and Stock Purchase Agreement between Richard W. Siegel and the Registrant dated as of May 9, 1990, as amended February 13, 1991, November 21, 1991 and January 1, 1992. 10.12 Lease Agreement between the Village of Burr Ridge and the Registrant, dated September 15, 1994. 10.13 Purchase Order and Purchase and Distribution Agreement dated February 27, 1997 between the Registrant and Moyco Technologies, Incorporated, as amended. 10.14 Marketing and Distribution Agreement between the Registrant and Whittaker, Clark & Daniels, Inc., dated as of November 22, 1995. 10.15 Distribution Agreement between the Registrant and C.I. Kasei, Ltd., (a subsidiary of Itochu) dated as of October 30, 1996. 10.16 Purchase Agreement between Nanophase Technologies Corporation and LWT Instruments, Inc., dated February 1, 1997. 11 Statement regarding computation of per share earnings. 23.1 Consent of Ernst & Young LLP. 23.3 Consent of McAndrews, Held & Malloy, Ltd. 24 Power of Attorney (included on signature page hereto). 27 Financial Data Schedule
EX-4.2 2 FORM OF WARRANTS 1 EXHIBIT 4.2 This Warrant and any shares of Common issuable upon the exercise of this Warrant have not been registered under the Securities Act of 1933, as amended, and may not be transferred unless registered under said Act or an exemption therefrom is available. NANOPHASE TECHNOLOGIES CORPORATION an Illinois corporation Warrant No. W-___ Original Issue Date: February 8, 1993 FOR VALUE RECEIVED, __________________________________, or its assigns, is entitled to purchase from NANOPHASE TECHNOLOGIES CORPORATION, an Illinois corporation (the "Company"), during the period specified in this Warrant, an aggregate of ____________ fully paid and nonassessable shares (subject to adjustment as hereinafter provided) of Common Stock, no par value ("Common), of the Company at the purchase price per share provided in Section 1.2 of this Warrant (the "Warrant Exercise Price"), all subject to the terms and conditions set forth in this Warrant. This Warrant is one of the Warrants referred to and issued pursuant to the terms of that certain Series C Preferred Stock and Warrant Purchase Agreement dated as of February 8, 1993, among the Company and the purchasers referred to therein (the "Purchase Agreement"), pursuant to which the purchasers purchased from the Company shares of the Company's Series C Preferred Stock, no par value (the "Series C Preferred"). Except as otherwise specifically defined in this Warrant, each capitalized term used in this Warrant shall have the meaning ascribed to such term in the Purchase Agreement. Section 1. Period for Exercise and Exercise Price. 1.1 Period for Exercise. The right to purchase shares of Common represented by this Warrant shall accrue on the date of issuance hereof (the "Accrual Date"), and shall expire at 5:00 P.M., Chicago local time, on February 8, 2003 (the "Expiration Date"); provided, however, that if, on the date which would otherwise be the Expiration Date, the Company is then required to effect, or is then in the process of effecting, a registration under the Securities Act in which shares of Common are entitled to be included, then the Expiration Date shall be the 366th day following the day on which such registration shall have become effective. From and after the Expiration Date this Warrant shall be null and void and of no further force or effect. 2 1.2 Warrant Exercise Price. The Warrant Exercise Price shall be $.65 per share (subject to adjustment as hereinafter provided). Section 2. Exercise of Warrant. 2.1 Manner of Exercise. The holder hereof may exercise this Warrant, in whole but not in part, on or after the Accrual Date but not later than the Expiration Date, during normal business hours on any business day by surrendering this Warrant to the Company at the principal office of the Company, accompanied by a subscription in substantially the form annexed hereto duly executed by such holder and by payment of the Warrant Exercise Price for the number of shares of Common for which this Warrant is then exercisable, either (i) in immediately available funds, or (ii) by delivery of instrument(s) evidencing indebtedness owing by the Company to the holder in the appropriate amount (including, without limitation, accrued but unpaid interest with respect to such indebtedness), or (iii) in a combination of (i) or (ii) above, at the option of the holder hereof. If the holder delivers a debt instrument representing the right to receive payment in an amount greater than the applicable Warrant Exercise Price, then the Company shall issue a replacement debt instrument in identical form to the instrument tendered after deducting the amount of the Warrant Exercise Price (exclusive of the amount of such price that is paid with accrued but unpaid interest, which shall be the first amount applied to the Warrant Exercise Price) from the principal amount of the debt instrument. 2.2 Alternate Manner of Exercise. In lieu of payment to the Company as set forth in Section 3 hereof, the holder of this Warrant may convert this Warrant (such right as set forth in this Section 2.2 referred to as the "Conversion Right"), in whole or in part, into the number of shares of Common (less the number of shares of Common which have been previously exercised pursuant to this Warrant or as to which the Conversion Right has been previously exercised) calculated pursuant to the following formula by surrendering this Warrant (together with the subscription referenced in Section 2.1 above) during normal business hours on any business day at the principal office of the Company specifying the number of shares of Common the rights to purchase which the holder desires to convert: Y (A-B) ------- X= A where: X= the number of shares of Common to be issued to the holder; - 2 - 3 Y= the number of shares of Common subject to this warrant for which the Conversion Right is being exercised; A= the fair market value of one share of Common; and B= the Warrant Exercise Price. As used in this Section 2.2, the fair market value of a share of Common shall mean the amount determined in good faith by the Board as of the last day of the quarter ending immediately prior to the date of exercise by a holder of its rights under this Section 2.2; provided, that if the Common is listed or admitted to trading on a national securities exchange or automated quotation system in the United States, then the fair market value of such share shall be the average of the high and low quotations at which shares of Common have been sold on such exchange or quotation system on the date of exercise by the holder of its rights under this Section 2.2, or, if shares of Common are not traded on such date, or such exchange or quotation system are not open for business on such date, then the fair market value shall be determined on the closest date preceding such date on which such exchange or system shall have been open for business and shares of Common shall have traded. 2.3 When Exercise Effective. Each exercise of this Warrant shall be deemed to have been effected on the day on which all requirements of Section 2.1 or 2.2 shall have been met with respect to such exercise. At such time the person in whose name any certificate for shares of Common shall be issuable upon such exercise shall be deemed for all corporate purposes to have become the holder of record of such shares, regardless of the actual delivery of certificates evidencing such shares. 2.4 Delivery of Stock Certificates. As soon as practicable after each exercise of this Warrant, and in any event no later than ten (10) days after such exercise, the Company at its expense will cause to be issued in the name of and delivered to the holder hereof or as such holder may direct, a certificate or certificates for the number of shares of Common to which such holder shall be entitled upon such exercise. 2.5 Notice of Public Offering. The Company will promptly give written notice to the holder hereof if the Company becomes required to effect, or is then in the process of effecting, a registration of any of its securities under the Securities Act. Section 3. Adjustment of Purchase Price and Number of Shares. - 3 - 4 3.1 Subdivision or Combination of Shares. If the Company at any time effects a subdivision or combination of the outstanding Common, the Warrant Exercise Price shall be decreased, in the case of a subdivision, or increased, in the case of a combination, in the same proportions as the Common is subdivided or combined, in each case effective automatically upon, and simultaneously with, the effectiveness of the subdivision or combination which gives rise to the adjustment. 3.2 Stock Dividends. If the Company at any time pays a dividend, or makes any other distribution, to holders of Common payable in shares of Common, or fixes a record date for the determination of holders of Common entitled to receive a dividend or other distribution payable in shares of Common, the Warrant Exercise Price shall be decreased by multiplying it by a fraction: (y) the numerator of which shall be the total number of shares of Common outstanding immediately prior to such dividend or distribution, and (z) the denominator of which shall be the total number of shares of Common outstanding immediately after such dividend or distribution (plus, if the Company paid cash instead of fractional shares otherwise issuable in such dividend or distribution, the number of additional shares which would have been outstanding had the Company issued fractional shares instead of cash), in each case effective automatically as of the date the Company shall take a record of the holders of its Common for the purpose of receiving such dividend or distribution (or if no such record is taken, as of the effectiveness of such dividend or distribution). 3.3 Reclassification, Consolidation or Merger. If at any time, as a result of: (a) a capital reorganization or reclassification (other than a subdivision, combination or dividend which gives rise to adjustment of the Warrant Exercise Price pursuant to Sections 3.1 or 3.2 above); or (b) a merger or consolidation of the Company with another corporation (whether or not the Company is the surviving corporation); the Common issuable upon the exercise of this Warrant shall be changed into or exchanged for the same or a different number of shares of any class or classes of stock of the Company or any - 4 - 5 other corporation, or other securities convertible into such shares, then, as a part of such reorganization, reclassification, merger or consolidation, appropriate adjustments shall be made in the terms of this Warrant) so that: (y) the holder of this Warrant shall thereafter be entitled to receive, upon exercise of this Warrant, the kind and amount of shares of stock, other securities, money and property which such holder would have received at the time of such capital reorganization, reclassification, merger or consolidation, if such holder had exercised its right under this Warrant to purchase Common immediately prior to such capital reorganization, reclassification, merger or consolidation, and (z) this Warrant shall thereafter be adjusted on terms as nearly equivalent as may be practicable to the adjustments theretofore provided in this Section 3. No consolidation or merger in which the Company is not the surviving corporation shall be consummated unless the surviving corporation shall agree, in writing, to the provisions of this Section 3.3. The provision of this Section 3.3 shall similarly apply to successive capital reorganizations, reclassifications, mergers, and consolidations. 3.4 Ratchet. (a) For purposes of this Section 3.4, "Additional Shares of Common" means all shares of Common issued by the Company after the consummation of the transactions contemplated by the "Purchase Agreement" (as defined in Section 3.7 below), whether or not subsequently reacquired or retired by the Company, other than: (1) shares of Common issued in transactions giving rise to adjustments under Sections 3.1 through 3.3 above; (2) shares of Common issued upon conversion of shares of Preferred; (3) up to 500,000 shares of Common which may be issued in the discretion of the Board to employees or directors of, or consultants or advisors to, the Company or any wholly-owned subsidiary of the Company, and options for the purchase of such shares; and (4) shares of Common issued upon exercise of this Warrant. - 5 - 6 (b) Except as otherwise provided in Section 3.5 below, if at any time the Company issues or is deemed to issue Additional Shares of Common for a consideration per share less than the Warrant Exercise Price in effect at such issuance or deemed issuance, then the Warrant Exercise Price shall be reduced to a price per share equal to the consideration per share, if any, for which such Additional Shares of Common are issued or deemed to be issued. 3.5 Convertible Securities. (a) "Convertible Securities" means all rights or options for the purchase of, or stock or other securities convertible into, Additional Shares of Common or other Convertible Securities, whenever and each time issued. (b) The "Effective Price" with respect to any Convertible Securities means the result of dividing: (y) the sum of (a) the total consideration, if any, received by the Company for the issuance of such Convertible Securities, plus (b) the minimum consideration, if any, payable to the Company upon exercise or conversion of such Convertible Securities, plus (c) the minimum consideration, if any, payable to the Company upon exercise or conversion of any Convertible Securities issuable upon exercise or conversion of such Convertible Securities, by (z) the maximum number of Additional Shares of Common issuable upon exercise or conversion of such Convertible Securities or of any Convertible Securities issuable upon exercise or conversion of such Convertible Securities. (c) If at any time the Company issues a Convertible Security with respect to which the Effective Price is less than the Warrant Exercise Price in effect at such issuance, then the Warrant Exercise Price shall be reduced to a price per share equal to the Effective Price with respect to such Convertible Security, effective automatically as of the effectiveness of the issuance of such Convertible Security. (d) If an adjustment has been made under this Section 3.5 as a consequence of any issuance of a Convertible Security, then no further adjustment shall be made under this Section 3.5 upon the actual issuance of Additional Shares of Common upon the exercise or conversion of such Convertible Securities, or upon the issuance of Convertible Securities issuable upon exercise or conversion of the original Convertible Security. - 6 - 7 (e) If an adjustment has been made under this Section 3.5 as a consequence of any issuance of any Convertible Security and the conversion rights, options or privileges represented by such Convertible Security (or by any Convertible Security issued upon exercise or conversion of the original Convertible Security) shall expire without having been exercised, the Warrant Exercise Price shall be re-adjusted, effective upon such expiration, to eliminate the effect of the adjustments previously made as a result of the issuance of the conversion rights, options or privileges which shall have expired (without affecting shares of Common already issued upon the exercise of any Warrants already exercised, and without affecting any other adjustments made under this Section 3). 3.6 Valuation of Consideration. For purposes of the operation of Sections 3.4 and 3.5 above, respectively, the consideration received by the Company for any issue or sale of securities shall: (1) to the extent it consists of cash, be computed as the aggregate amount of cash received by the Company; (2) to the extent it consists of property other than cash, be computed at the fair value of that property as determined in good faith by the Board; and (3) to the extent Additional Shares of Common or Convertible Securities are issued or sold together with other stock or securities or other assets of the Company for a consideration that covers both, be such portion of the consideration so received that may be reasonably determined in good faith by the Board to be allocable to such Additional Shares of Common or Convertible Securities. 3.7 Special Action Affecting Warrant. If (1) a holder of this Warrant is entitled to exercise the "Right Of First Refusal" set forth in Section 6 of the Shareholders' Agreement dated November 21, 1991, as amended, with respect to the issuance of "New Securities" (as defined in said Shareholders' Agreement) by the Corporation at a price per share which is less than the Conversion Price then in effect for such holder's Series C Preferred (the "Equity Financing"), (2) the Corporation has complied with its obligations under the Right of First Refusal with respect to such Equity Financing (each such Equity Financing being referred to in this Section 3.7 as a "Mandatory Offering"), and (c) such holder (a "Non-Participating Holder") does not exercise such holder's Right of First Refusal to acquire at least his "Pro Rata Share" (as defined in said Shareholders' Agreement) offered in such Mandatory Offering, then the provisions of Section 3.4 and 3.5 above shall not, as applicable, be effective - 7 - 8 with respect to such Equity Financing, and no adjustment shall be made to the Warrant Exercise Price or the number of shares of Common purchasable hereunder in connection with such Equity Financing; provided, however, that if pursuant to the request of the Corporation the holders of the Right of First Refusal are requested to purchase on a pro rata basis less than their Pro Rata Share in connection with a particular Equity Financing, the Pro Rata Share of each holder of the Right of First Refusal shall for purposes of the application of this subsection (a) be deemed reduced to such lesser number as the Corporation shall have requested. 3.8 Liquidating Dividends, etc. If the Company, at any time while this Warrant is outstanding, shall make a distribution of its assets to the holders of its Common as a dividend in liquidation or partial liquidation or by way of return of capital or other than as a dividend payable out of funds legally available for dividends under the laws of the State of Delaware, the holder of this Warrant shall, upon exercise of the holder's rights hereunder, be entitled to receive, without payment of any consideration therefor, the assets that would have been payable to the holder as owner of that number of shares of Common of the Company receivable by a holder of Common had the holder been a holder of record of such Common on the record date for such distribution; and an appropriate provision therefor shall be made a part of any such distribution in accordance with the plan for such distribution. 3.9 Other Action Affecting Common. If at any time the Company takes any action affecting its Common, other than an action described in any of Sections 3.1 through 3.5 or 3.7 above which, in the opinion of the Board would have an adverse effect upon the rights of the holder hereof to purchase Common, the Warrant Exercise Price or the kind of securities issuable upon the exercise of this Warrant, or both, shall be adjusted in such manner and at such time as the Board may in good faith determine to be equitable in the circumstances. 3.10 Adjustment of Number of Shares. Upon each adjustment to the Warrant Exercise Price pursuant to any provision of this Section 3, the number of shares of Common purchasable hereunder shall be adjusted (including any fractions of such shares) by multiplying such number by a fraction, the numerator of which shall be the Warrant Exercise Price immediately prior to such adjustment and the denominator of which shall be the Warrant Exercise Price immediately thereafter. 3.11 Notice of Adjustment Events. Whenever the Company contemplates the occurrence of an event which would give rise to adjustments under this Section 3, the Company shall mail - 8 - 9 to the holder of this Warrant, at least 30 days prior to the record date with respect to such event or, if no record date shall be established, at least 30 days prior to such event, a notice specifying (i) the nature of the contemplated event, and (ii) the date on which any such record is to be taken for the purpose of such event, and (iii) the date on which such event is expected to become effective, and (iv) the time, if any is to be fixed, when the holders of record of Common (or other securities) shall be entitled to exchange their shares of Common (or other securities) for securities or other property deliverable in connection with such event. 3.12 Notice of Adjustments. Whenever the Warrant Exercise Price or the kind of securities issuable upon the exercise of this Warrant, or both, shall be adjusted pursuant to this Section 3, the Company shall make a certificate signed by its President or a Vice President and by its Chief Financial Officer, Secretary or Assistant Secretary, setting forth, in reasonable detail, the event requiring the adjustment, the amount of the adjustment, the method by which such adjustment was calculated (including a description of the basis on which the Board made any determination hereunder), and the Warrant Exercise Price and the kind of securities issuable upon the exercise of this Warrant after giving effect to such adjustment, and shall cause copies of such certificate to be mailed (by first class mail postage prepaid) to each holder of any Warrant promptly after each adjustment. Section 4. Reservation of Stock, etc. The Company covenants and agrees that it will at all times have authorized, reserve and keep available, solely for issuance and delivery upon the exercise of this Warrant, the number of shares of Common from time to time issuable upon the exercise of this Warrant. The Company further covenants and agrees that this Warrant is, and any Warrants issued in substitution for or replacement of this Warrant and all Common will upon issuance be, duly authorized, validly issued, fully paid and nonassessable. Section 5. Ownership, Transfer and Substitution of Warrants. 5.1 Ownership of Warrants. The Company may treat the person in whose name any Warrant is registered on the register kept at the principal office of the Company as the owner and holder thereof for all purposes, notwithstanding any notice to the contrary, but in all events recognizing any transfers made in accordance with the terms of this Warrant. 5.2 Transfer and Exchange of Warrants. Upon the surrender of any Warrant, properly endorsed, for registration of - 9 - 10 transfer or for exchange at the principal office of the Company, and subject to the provisions of the Stockholders' Agreement, the Company at its expense will execute and deliver to or upon the order of the holder thereof a new Warrant or Warrants of like tenor, in the name of such holder or as such holder may direct, for such number of shares with respect to each such Warrant, the aggregate number of shares in any event not to exceed the number of shares for which the Warrant so surrendered could have been exercised. Section 6. No Rights or Liabilities as Stockholder. Nothing contained in this Warrant shall be construed as conferring upon the holder hereof any rights as a stockholder of the Company or as imposing any liabilities on such holder to purchase any securities or as a stockholder of the Company, whether such liabilities are asserted by the Company or by creditors of the Company; provided, however, that this provision shall not be construed to limit the rights a holder of this Warrant may have pursuant to other agreements including, without limitation, the Purchase Agreement and the Stockholders' Agreement. Section 7. Miscellaneous. 7.1 Amendment and Waiver. This Warrant may be amended with, and only with, the written consent of the Company and the holder of this Warrant. Any waiver of any term, covenant, agreement or condition contained in this Warrant shall not be deemed a waiver of any other term, covenant, agreement or condition, and any waiver of any default in any such term, covenant, agreement or condition shall not be deemed a waiver of any later default thereof or of any default of any other term, covenant, agreement or condition. 7.2 Representations and Warranties to Survive Closing. All representations, warranties and covenants contained herein shall survive the execution and delivery of this Warrant and the issuance of any Common upon the exercise hereof. 7.3 Severability. In the event that any court or any governmental authority or agency declares all or any part of any Section of this Warrant to be unlawful or invalid, such unlawfulness or invalidity shall not serve to invalidate any other Section of this Warrant, and in the event that only a portion of any Section is so declared to be unlawful or invalid, such unlawfulness or invalidity shall not serve to invalidate the balance of such Section. 7.4 Successors and Assigns. All representations, warranties, covenants and agreements of the parties contained in - 10 - 11 this Warrant or made in writing in connection herewith, shall, except as otherwise provided herein, be binding upon and inure to the benefit of their respective successors and assigns. 7.5 Notices. All communications in connection with this Warrant shall be in writing and shall be deemed properly given if hand delivered or sent by overnight courier with adequate evidence of delivery or sent by registered or certified mail, return receipt requested and, if to a Warrant holder, to the address specified for such Warrant holder in the Purchase Agreement otherwise at such Warrant holder's address as shown on the books of the Company or its transfer agent, and if to the Company, at: Nanophase Technologies Corporation 8205 S. Cass Avenue Suite 105 Darien, IL 60561 Attention: President with a copy to: Mr. Bruce A. Zivian Fitzpatrick Law Offices 20 N. Wacker Drive, Suite 1849 Chicago, Illinois 60606 or such other addresses or persons as the recipient shall have designated to the sender by a written notice given in accordance with this Section. Any notice called for hereunder shall be deemed given when received. 7.6 Governing Law. The validity, meaning and effect of this Warrant shall be determined in accordance with the laws of the State of Illinois applicable to contracts between Illinois residents entered into and to be performed in Illinois. 7.7 Headings. The headings used herein are solely for the convenience of the parties and shall not serve to modify or interpret the text of the Sections at the beginning of which they appear. 7.8 Taxes. The Company covenants and agrees that it will pay when due and payable any and all federal, state and local taxes (other than income taxes) which may be payable in respect of the exercise, surrender or transfer of this Warrant pursuant to the terms of this Warrant or the issuance of any shares of Common as a result thereof. - 11 - 12 END OF WARRANT TEXT ************************ - 12 - 13 IN WITNESS WHEREOF, the Company has caused this Warrant to be executed as of the day first above written. NANOPHASE TECHNOLOGIES CORPORATION, an Illinois corporation By:____________________________ Its ________________________ - 13 - 14 EXERCISE FORM Date:_________________ Nanophase Technologies Corporation _________________________ _________________________ Ladies and Gentlemen: The undersigned, being the registered holder of your Warrant number W-______ accompanying this letter, hereby irrevocably exercises such Warrant for ____ shares of Common (as defined in said Warrant), and herewith makes payment therefor in the amount of $_________, and requests that such shares of Common be issued in the name of, and delivered to (the undersigned) (________________), at the address shown below the signature line hereof. Name of Registered Warrant Holder Signature of Registered Warrant Holder ==================================== ==================================== ==================================== Address - 14 - EX-10.1 3 AMENDED AND RESTATED STOCK OPTION PLAN 1 EXHIBIT 10.1 NANOPHASE TECHNOLOGIES CORPORATION an Illinois corporation Amended and Restated 1992 Stock Option Plan 1. Purpose. The purposes of this Amended and Restated 1992 Stock Option Plan are to attract and retain the best available personnel, to provide additional incentive to the Employees, Consultants and Outside Directors of Nanophase Technologies Corporation, an Illinois corporation (the "Company"), and to promote the success of the Company's business. Options granted hereunder may, consistent with the terms of this Plan, be either Incentive Stock Options or Nonstatutory Stock Options, at the discretion of the Board or the Committee and as reflected in the terms of a written option agreement. 2. Definitions. As used in this Plan, the following definitions shall apply: (a) "Board" means the Board of Directors of the Company. (b) "Code" means the Internal Revenue Code of 1986, as amended from time to time, and the rules and regulations promulgated thereunder. (c) "Committee" means the Committee appointed by the Board or otherwise determined in accordance with Section 4(a) of this Plan. (d) "Common Stock" means the common stock of the Company, no par value per share. (e) "Consultant" means any person who is engaged by the Company or any Parent or Subsidiary to render consulting services and is compensated for such consulting services; provided that the term Consultant excludes directors who are not compensated for their services or are paid only a director's fee by the Company. (f) "Continuous Status as an Employee, Consultant or Outside Director" means the absence of any interruption or termination of service as an Employee, Consultant or Outside Director, as applicable. Continuous Status as an Employee, Consultant or Outside Director shall not be considered interrupted in the case of sick leave or military leave, any other leave provided pursuant to a written policy of the Company in effect at the time of determination, or any other leave of absence approved by the Board or the Committee; provided that such leave is for a period of not more than the greatest of (i) 90 days, (ii) the date of the resumption of such service upon the expiration of such leave which is guaranteed by contract or statute or is provided in a written policy of the Company which was in effect upon the commencement of such leave, or (iii) such period of leave as may be determined by the Board or the Committee in its sole discretion. (g) "Employee" means any person employed by the Company or any Parent or Subsidiary of the Company, including employees who are also officers or directors or both of the Company or any Parent or Subsidiary of the Company. The payment of a director's fee by the Company shall not be sufficient to constitute "employment" by the Company. 2 (h) "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time, and the rules and regulations promulgated thereunder. (i) "Incentive Stock Option" means an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code, and the rules and regulations promulgated thereunder. (j) "Non-Employee Director" shall have the meaning set forth in Rule 16b-3(b)(3)(i), or any successor definition adopted by the Commission, provided the person is also an "outside director" under Section 162(m) of the Code. (k) "Nonstatutory Stock Option" means an Option not intended to qualify as an Incentive Stock Option. (l) "Option" means a stock option granted pursuant to this Plan. (m) "Optioned Stock" means the Common Stock subject to an Option. (n) "Optionee" means an Employee, Consultant or Outside Director who receives an Option. (o) "Outside Director" means any member of the Board of Directors of the Company who is not an Employee or Consultant. (p) "Parent" means a "parent corporation," whether now or hereafter existing, as defined in Section 424(e) of the Code. (q) "Plan" means this Nanophase Technologies Corporation Amended and Restated 1992 Stock Option Plan, as amended from time to time. (r) "Rule 16b-3" means Rule 16b-3, as promulgated by the Securities and Exchange Commission under Section 16(b) of the Exchange Act, as such rule is amended from time to time and as interpreted by the Securities and Exchange Commission. (s) "Share" means a share of the Common Stock, as adjusted in accordance with Section of this Plan. (t) "Subsidiary" means a "subsidiary corporation," whether now or hereafter existing, as defined in Section 424(f) of the Code. 3. Scope of Plan. Subject to Section 10 of this Plan, and unless otherwise amended by the Board and approved by the stockholders of the Company as required by law, the maximum aggregate number of Shares issuable under this Plan is 3,563,440, 3,413,440 of which shall be reserved for issuance to Employees and Consultants and 150,000 of which shall be reserved for issuance to Outside Directors, and such Shares are hereby made available and shall be reserved for issuance under this Plan. The Shares may be authorized but unissued, or reacquired, Common Stock. 2 3 If an Option expires or becomes unexercisable for any reason without having been exercised in full, the unpurchased Shares subject thereto shall (unless this Plan shall have terminated) become available for grants of other Options under this Plan. 4. Administration of Plan. (a) Procedure. Except as otherwise determined by the Board, this Plan shall be administered by the Committee. The Committee shall consist of two or more Outside Directors appointed by the Board, but all Committee members must be Non-Employee Directors. If the Board fails to appoint such persons, the Committee shall consist of all Outside Directors who are Non-Employee Directors. (b) Powers of Committee. Subject to Section 5(b) below and otherwise subject to the provisions of this Plan, the Committee shall have full and final authority in its discretion to: (i) grant Incentive Stock Options and Nonstatutory Stock Options, (ii) determine, upon review of relevant information and in accordance with Section below, the Fair Market Value of the Common Stock; (iii) determine the exercise price per share of Options to be granted, in accordance with this Plan, (iv) determine the Employees and Consultants to whom, and the time or times at which, Options shall be granted, and the number of shares to be represented by each Option; (v) cancel, with the consent of the Optionee, outstanding Options and grant new Options in substitution therefor; (vi) interpret this Plan; (vii) accelerate or defer (with the consent of Optionee) the exercise date of any Option; (viii) prescribe, amend and rescind rules and regulations relating to this Plan; (ix) determine the terms and provisions of each Option granted (which need not be identical) by which Options shall be evidenced and, with the consent of the holder thereof, modify or amend any provisions (including without limitation provisions relating to the exercise price and the obligation of any Optionee to sell purchased Shares to the Company upon specified terms and conditions) of any Option; (x) require withholding from or payment by an Optionee of any federal, state or local taxes; (xi) appoint and compensate agents, counsel, auditors or other specialists as the Committee deems necessary or advisable; (xii) correct any defect or supply any omission or reconcile any inconsistency in this Plan and any agreement relating to any Option, in such manner and to such extent the Committee determines to carry out the purposes of this Plan, and; (xiii) construe and interpret this Plan, any agreement relating to any Option, and make all other determinations deemed by the Committee to be necessary or advisable for the administration of this Plan. A majority of the Committee shall constitute a quorum at any meeting, and the acts of a majority of the members present, or acts unanimously approved in writing by the entire Committee without a meeting, shall be the acts of the Committee. A member of the Committee shall not participate in any decisions with respect to himself under this Plan. (c) Effect of Committee's Decision. All decisions, determinations and interpretations of the Committee shall be final and binding on all Optionees and any other holders of any Options granted under this Plan. 3 4 5. Eligibility. (a) Options may be granted to any Employee, Consultant or Outside Director as the Committee may from time to time designate, provided that (i) Incentive Stock Options may be granted only to Employees, and (ii) Options may be granted to Outside Directors only in accordance with the provisions of Section 5(b) below. In selecting the individuals to whom Options shall be granted, as well as in determining the number of Options granted, the Committee shall take into consideration such factors as it deems relevant in connection with accomplishing the purpose of this Plan. Subject to the provisions of Section above, an Optionee may, if he or she is otherwise eligible, be granted an additional Option or Options if the Committee shall so determine. During any calendar year, Options for no more than 100,000 shares of Common Stock shall be granted to any individual Employee, Consultant or Outside Director. (b) All grants of Options to Outside Directors under this Plan shall be automatic and non-discretionary and shall be made strictly in accordance with the following provisions: (i) No person shall have any discretion to select which Outside Directors shall be granted options or to determine the number of Shares to be covered by options granted to Outside Directors; provided, that nothing in this Plan shall be construed to prevent an Outside Director from declining to receive an Option under this Plan. (ii) Each Outside Director who is first elected to the Board after the adoption of this Plan shall be automatically granted on the date of such election (whether by the stockholders or by the Board of Directors) an Option to purchase 10,000 Shares (subject to adjustment as provided in Section 10 below, following consummation of an initial public offering of the Company's securities). On the date of the Annual Meeting of Stockholders of the Company in each calendar year commencing with the first Annual Meeting of the Stockholders of the Company held after the adoption of this Plan, each Outside Director who is elected or reelected at that meeting, or whose term of office does not expire at that meeting, shall be automatically granted an option to purchase 2,000 Shares (subject to adjustment as provided in Section 10 below, following consummation of an initial public offering of the Company's securities); provided that no such automatic annual grant shall be made to an Outside Director (i) who is first elected to the Board at such Annual Meeting or was first elected to the Board within three months prior to such Annual Meeting, or (ii) if there are not sufficient shares remaining and available to all Outside Directors eligible for an automatic annual grant at the time at which an automatic annual grant would otherwise be made under this Section 5(b). (iii) The terms of each Option granted under this Section 5(b) shall be as follows: (A) the term of the option shall be ten (10) years; (B) the Option shall become exercisable cumulatively with respect to one-third of the Shares on each of the first, second and third anniversaries of the date of grant; provided, however, that in no 4 5 event shall any option be exercisable prior to obtaining stockholder approval of this Plan; and (C) the exercise price per share of Common Stock shall be 100% of the "Fair Market Value" (as defined in Section 7(b) below) on the date of grant of the Option. (c) Each Option granted under Section 5(b) above shall be a Nonstatutory Stock Option. Each other Option shall be designated in the written option agreement as either an Incentive Stock Option or a Nonstatutory Stock Option. Notwithstanding such designations, if and to the extent that the aggregate Fair Market Value of the Shares with respect to which Options designated as Incentive Stock Options are exercisable for the first time by any Optionee during any calendar year (under all plans of the Company) exceeds $100,000, such options shall be treated as Nonstatutory Stock Options. For purposes of this Section 5(c), Options shall be taken into account in the order in which they are granted, and the Fair Market Value of the Shares shall be determined as of the time the Option with respect to such Shares is granted. (d) This Plan shall not confer upon any Optionee any right with respect to continuation of employment by or the rendition of services to the Company or any Parent or Subsidiary, nor shall it interfere in any way with his or her right or the right of the Company or any Parent or Subsidiary to terminate his or her employment or services at any time, with or without cause. The terms of this Plan or any Options granted hereunder shall not be construed to give any Optionee the right to any benefits not specifically provided by this Plan or in any manner modify the Company's right to modify, amend or terminate any of its pension or retirement plans. 6. Term of Plan. This Plan shall become effective upon the later to occur of its adoption by the Board of Directors of the Company (such adoption to include the approval of at least two Outside Directors) or its approval by vote of the holders of a majority of the outstanding shares of the Company entitled to vote on the adoption of this Plan, and shall terminate no later than December 31, 2007. No grants shall be made under this Plan after the date of termination of this Plan. Any termination, either partially or wholly, shall not affect any Options then outstanding under this Plan. 7. Exercise Price and Consideration. (a) Exercise Price. The per Share exercise price for the Shares to be issued pursuant to exercise of an Option shall be determined by the Committee as follows: (i) In the case of an Incentive Stock Option granted to any Employee, the per Share exercise price shall be no less than 100% of the Fair Market Value per Share on the date of grant, but if granted to an Employee who, at the time of the grant of such Incentive Stock Option, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the per Share exercise price shall be no less than 110% of the Fair Market Value per Share on the date of grant. 5 6 (ii) In the case of an Incentive Stock Option granted to any person other than an Outside Director, the per Share exercise price shall be no less than 100% of the Fair Market Value per Share on the date of grant, but if granted to an Employee who, at the time of the grant of such Incentive Stock Option, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the per Share exercise price shall be no less than 110% of the Fair Market Value per Share on the date of grant. The exercise price of Options granted pursuant to Section 5(b) above shall be 100% of the Fair Market Value on the date of grant of the Option. For purposes of this Section 7(a), if an Option is amended to reduce the exercise price, the date of grant of such option shall thereafter be considered to be the date of such amendment. (iii) With respect to (i) or (ii) above, the per Share exercise price is subject to adjustment as provided in Section 10 below. (b) Fair Market Value. The "Fair Market Value" of the Common Stock shall be determined by the Committee in its discretion; provided, that if the Common Stock is listed on a stock exchange, the Fair Market Value per Share shall be the closing price on such exchange on the date of grant of the Option as reported in the Wall Street Journal (or, (i) if not so reported, as otherwise reported by the exchange, and (ii) if not reported on the date of grant, then on the last prior date on which a sale of the Common Stock was reported); or if not listed on an exchange but traded on the National Association of Securities Dealers Automated Quotation National Market System ("NASDAQ"), the Fair Market Value per Share shall be the closing price per share of the Common Stock for the date of grant, as reported in the Wall Street Journal (or, (i) if not so reported, as otherwise reported by NASDAQ, and (ii) if not reported on the date of grant, then on the last prior date on which a sale of the Common Stock was reported); or, if the Common Stock is otherwise publicly traded, the mean of the closing bid price and asked price for the last known sale. (c) Consideration. The consideration to be paid for the Shares to be issued upon exercise of an Option, including the methods of payment described in Section 8(b)(ii) below, shall be determined by the Committee (and in the case of an Incentive Stock Option, shall be determined at the time of grant) to the extent permitted under applicable laws. (d) Withholding. No later than the date as of which an amount first becomes includable in the gross income of the Optionee for Federal income tax purposes with respect to an option, the Optionee shall pay to the Company (or other entity identified by the Committee), or make arrangements satisfactory to the Company or other entity identified by the Committee regarding the payment of, any Federal, state, local or foreign taxes of any kind required by law to be withheld with respect to such amount. Unless otherwise determined by the Committee, withholding obligations may be settled with Common Stock, including Common Stock underlying the subject option, provided that any applicable requirements under Section 16 of the Exchange Act are satisfied so as to avoid 6 7 liability thereunder. The obligations of the Company under this Plan shall be conditional upon such payment or arrangements, and the Company shall, to the extent permitted by law, have the right to deduct any such taxes from any payment otherwise due to the Optionee. 8. Options. (a) Term of Option. The term of each Option granted (other than an Option granted under Section 5(b) above) shall be for a period of no more than ten (10) years from the date of grant thereof or such shorter term as may be provided in the Option agreement. However, in the case of an Option granted to an Optionee who, at the time the Option is granted, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the term of the Option shall be five (5) years from the date of grant thereof or such shorter time as may be provided in the Option Agreement. (b) Exercise of Options. (i) Procedure for Exercise; Rights as a Shareholder. Any Option granted under this Plan (other than an Option granted pursuant to Section 5(b) above) shall be exercisable at such times and under such conditions as determined by the Committee, including performance criteria with respect to the Company and/or the Optionee, and as shall otherwise be permissible under the terms of this Plan. An Option may not be exercised for a fraction of a Share. An Option shall be deemed to be exercised when written notice of such exercise has been given to the Company in accordance with the terms of the Option by the person entitled to exercise the Option and full payment for the Shares with respect to which the Option is exercised has been received by the Company. Full payment may, as authorized by the Committee, consist of any consideration and method of payment allowable under Section 7 of this Plan. Until the issuance (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company) of the stock certificate evidencing such Shares, no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. The Company shall issue (or cause to be issued) such stock certificate promptly upon exercise of the Option. If the exercise of an Option is treated in part as the exercise of an Incentive Stock Option and in part as the exercise of a Nonstatutory Stock Option pursuant to Section 5(b) above, the Company shall issue a separate stock certificate evidencing the Shares treated as acquired upon exercise of an Incentive Stock Option and a separate stock certificate evidencing the Shares treated as acquired upon exercise of a Nonstatutory Stock Option and shall identify each such certificate accordingly in its stock transfer records. No adjustment will be made for a dividend or other right for which the record date is prior to the date the stock certificate is issued, except as provided in Section of this Plan. 7 8 Exercise of an Option in any manner shall result in a decrease in the number of Shares which thereafter may be available, both for purposes of this Plan and for sale under the Option, by the number of Shares as to which the Option is exercised. (ii) Method of Exercise. An Optionee may exercise an Option, in whole or in part, at any time during the option period by the Optionee's giving written notice of exercise on a form provided by the Committee (if available) to the Company specifying the number of shares of Common Stock subject to the Option to be purchased. Such notice shall be accompanied by payment in full of the purchase price by cash or check or such other form of payment as the Company may accept. If approved by the Committee, payment in full or in part may also be made (A) by delivering other Shares of Common Stock which (I) either have been owned by the Optionee for more than six (6) months on the date of surrender or were not acquired directly or indirectly from the Company, and (II) have a Fair Market Value on the date of surrender (determined without regard to any limitations on transferability imposed by securities laws) equal to the aggregate exercise price of the Shares as to which said Option shall be exercised; (B) by the execution and delivery of a note or other evidence of indebtedness (and any security agreement thereunder) satisfactory to the Committee; (C) by authorizing the Company to retain shares of Common Stock which would otherwise be issuable upon exercise of the Option having a total Fair Market Value on the date of delivery equal to the exercise price of the subject Option; (D) by the delivery of cash by a broker-dealer to whom the Optionee has submitted an irrevocable notice of exercise (in accordance with Part 220, Chapter II, Title 12 of the Code of Federal Regulations, so-called "cashless" exercise); or (E) by any combination of the foregoing. In the case of an Incentive Stock Option, the right to make a payment in the form of already owned shares of Common Stock of the same class as the Common Stock subject to the Option may be authorized only at the time the Option is granted. No shares of Common Stock shall be issued until full payment therefor has been made. An Optionee shall have all of the rights of a shareholder of the Company holding the class of Common Stock that is subject to such Option (including, if applicable, the right to vote the shares and the right to receive dividends), when the Optionee has given written notice of exercise, has paid in full for such shares and such shares have been recorded on the Company's official shareholder records as having been issued or transferred. (iii) Termination of Status as an Employee, Consultant or Outside Director. If an Optionee's Continuous Status as an Employee, Consultant or Outside Director (as the case may be) is terminated for any reason whatever, such Optionee may, but only within such period of time as provided in the Option agreement, after the date of such termination (but in no event later than the date of expiration of the term of such Option as set forth in the Option agreement), exercise the Option to the extent that such Employee, Consultant or Outside Director was entitled to exercise it at the date of such termination pursuant to the terms of the Option agreement. To the extent that such Employee, Consultant or Outside Director was not entitled to exercise the Option at the date of such termination, or if such Employee, Consultant or Outside Director does not exercise such Option (which such Employee, Consultant or Outside Director was entitled to exercise) within the time specified in the Option agreement, the Option shall terminate. 8 9 (iv) Company Loan or Guarantee. Upon the exercise of any Option and subject to the pertinent Option agreement and the discretion of the Committee, the Company may at the request of the Optionee; (A) lend to the Optionee, with recourse, an amount equal to such portion of the option exercise price as the Committee may determine; or (B) guarantee a loan obtained by the Optionee from a third-party for the purpose of tendering the option exercise price. 9. Non-transferability of Options. Except as otherwise provided in an Option agreement, an Option granted hereunder shall by its terms not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or the laws of descent and distribution. Except as otherwise provided in an Option agreement, an Option may be exercised during the Optionee's lifetime only by the Optionee. 10. Adjustments Upon Changes in Capitalization or Merger. (a) Capitalization. Subject to any required action by the stockholders of the Company, the number of shares of Common Stock which have been authorized for issuance under this Plan but as to which no Options have yet been granted or which have been returned to this Plan upon cancellation or expiration of an Option, and the number of shares of Common Stock subject to each outstanding Option, as well as the price per share of Common Stock covered by each such outstanding Option, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock of the Company or the payment of a stock dividend with respect to the Common Stock. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an Option. (b) Dissolution or Liquidation. In the event of the proposed dissolution or liquidation of the Company, each Option will terminate immediately prior to the consummation of such proposed action, unless otherwise provided by the Committee. The Committee may, in the exercise of its sole discretion in such instances, declare that any Option shall terminate as of a date fixed by the Committee and give each Optionee the right to exercise his or her Option as to all or any part of the Optioned Stock, including Shares as to which the Option would not otherwise be exercisable. (c) Sale or Merger. "Sale" means: (i) sale (other than a sale by the Company) of securities entitled to more than 75% of the voting power of the Company in a single transaction or a related series of transactions; or (ii) sale of substantially all of the assets of the Company; or (iii) approval by the stockholders of the Company of a reorganization, merger or consolidation of the Company, as a result of which the persons who were the stockholders of the Company immediately prior to such reorganization, merger or consolidation do not own securities immediately after the reorganization, merger or consolidation entitled to more than 25% of the voting power of the reorganized, merged or consolidated company. Immediately prior to a Sale, each Optionee may exercise his or her Option as to all Shares then subject to the Option, regardless of any vesting conditions 9 10 otherwise expressed in the Option. Voting power, as used in this Section 10(c), shall refer to those securities entitled to vote generally in the election of directors, and securities of the Company not entitled to vote but which are convertible into, or exercisable for, securities of the Company entitled to vote generally in the election of directors shall be counted as if converted or exercised, and each unit of voting securities shall be counted in proportion to the number of votes such unit is entitled to cast. (d) Purchased Shares. No adjustment under this Section 10 shall apply to any purchased Shares already deemed issued at the time any adjustment would occur. (e) Notice of Adjustments. Whenever the purchase price or the number or kind of securities issuable upon the exercise of the Option shall be adjusted pursuant to Section 10, the Company shall give each Optionee written notice setting forth, in reasonable detail, the event requiring the adjustment, the amount of the adjustment, and the method by which such adjustment was calculated. (f) Certain Cash Payments. If an Optionee would not be permitted to exercise an Option or any portion thereof (for purposes of this subsection (f) only, each such Option being referred to as a "Subject Option") or dispose of the Shares received upon the exercise thereof without loss or liability (other than a loss or liability for the exercise price, applicable withholding or any associated transactional cost), or if the Board determines that the Optionee may not be permitted to exercise the same rights or receive the same consideration with respect to the Sale of the Company as a shareholder of the Company with respect to any Subject Options or portion thereof or the Shares received upon the exercise thereof, then notwithstanding any other provision of this Plan and unless the Committee shall provide otherwise in an agreement with such Optionee with respect to any Subject Options, such Optionee shall have the right, whether or not the Subject Option is fully exercisable or may be otherwise realized by the Optionee, by giving notice during the 60-day period from and after a Sale to the Company, to elect to surrender all or part of any Subject Options to the Company and to receive cash, within 30 days of such notice, in an amount equal to the amount by which the "Sale Price" (as defined herein) per share of Common Stock on the date of such election shall exceed the amount which the Optionee must pay to exercise the Subject Options per share of Common Stock under such Subject Options (the "Spread") multiplied by the number of shares of Common Stock granted under the Subject Options as to which the right granted hereunder shall be applicable and shall have been exercised; provided, however, that if the end of such 60- day period from and after a Sale is within six months of the date of grant of a Subject Option held by an Optionee (except an Optionee who has deceased during such six month period) who is an officer or director of the Company (within the meaning of Section 16(b) of the Exchange Act), such Subject Option shall be canceled in exchange for a payment to the Optionee, effective on the day which is six months and one day after the date of grant of such Subject Option, equal to the Spread multiplied by the number of shares of Common Stock granted under the Subject Option. With respect to any Optionee who is an officer or director of the Company (within the meaning of Section 16(b) of the Exchange Act), the 60-day period shall be extended, if necessary, to include the "window period" of Rule 16(b)-3 which first commences on or after the date of the Sale, and the Committee shall have sole discretion, if necessary, to approve the Optionee's exercise 10 11 hereunder and the date on which the Spread is calculated may be adjusted, if necessary, to a later date if necessary to avoid liability to such Optionee under Section 16(b). For purposes of the Plan, "Sale Price" means the higher of (a) the highest reported sales price of a share of Common Stock in any transaction reported on the principal exchange on which such shares are listed or on NASDAQ during the 60-day period prior to and including the date of a Sale or (b) if the Sale is the result of a tender or exchange offer or a corporate transaction, the highest price per share of Common Stock paid in such tender or exchange offer or a corporate transaction, except that, in the case of Incentive Stock Options, such price shall be based only on the Fair Market Value of the Common Stock on the date such Incentive Stock Option is exercised. To the extent that the consideration paid in any such transaction described above consists all or in part of securities or other non-cash consideration, the value of such securities or other non-cash consideration shall be determined in the sole discretion of the Committee. (g) Mitigation of Excise Tax. If any payment or right accruing to an Optionee under this Plan (without the application of this Section), either alone or together with other payments or rights accruing to the Optionee from the Company or an affiliate ("Total Payments") would constitute a "parachute payment" (as defined in Section 280G of the Code and regulations thereunder), the Committee may in each particular instance determine to (a) reduce such payment or right to the largest amount or greatest right that will result in no portion of the amount payable or right accruing under the Plan being subject to an excise tax under Section 4999 of the Code or being disallowed as a deduction under Section 280G of the Code, or (b) take such other actions, or make such other arrangements or payments with respect to any such payment or right as the Committee may determine in the circumstances. Any such determination shall be made by the Committee in the exercise of its sole discretion, and such determination shall be conclusive and binding on the Optionee. The Optionee shall cooperate as may be requested by the Committee in connection with the Committee's determination, including providing the Committee with such information concerning such Optionee as the Committee may deem relevant to its determination. 11. Time of Granting Options. The date of grant of an Option shall, for all purposes, be the date on which the Committee makes the determination granting such Option. Notice of the determination shall be given to each Employee, Consultant or Outside Director to whom an Option is so granted within a reasonable time after the date of such grant. If the Committee cancels, with the consent of Optionee, any Option granted under this Plan, and a new Option is substituted therefor, the date that the canceled Option was originally granted shall be the date used to determine the earliest date for exercising the new substituted Option under Section 7 of this Plan so that the Optionee may exercise the substituted Option at the same time as if the Optionee had held the substituted Option since the date the canceled Option was granted. 11 12 12. Amendment and Termination of Plan. (a) Amendment and Termination. The Board or the Committee may amend, waive or terminate this Plan from time to time in such respects as it shall deem advisable; provided that, to the extent necessary to comply with Rule 16b-3 or with Section 422 of the Code (or any other successor or applicable law or regulation), the Company shall obtain shareholder approval of any Plan amendment in such a manner and to such a degree as is required by the applicable law, rule or regulation. (b) Effect of Amendment or Termination. Any such amendment or termination of this Plan shall not affect Options already granted and such Options shall remain in full force and effect as if this Plan had not been amended or terminated, unless mutually agreed otherwise between the Optionee and the Committee, which agreement must be in writing and signed by the Optionee and the Company. 13. Conditions Upon Issuance of Shares. Shares shall not be issued pursuant to the exercise of an Option unless the exercise of such Option and the issuance and delivery of such Shares pursuant thereto shall comply with all relevant provisions of law, including, without limitation, the Securities Act of 1933, as amended, the Exchange Act, and the rules and regulations promulgated thereunder, and the requirements of any stock exchange upon which the Shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. As a condition to the exercise of an Option, the Company may require the person exercising such Option to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required by any of the aforementioned relevant provisions of law. 14. Restrictions on Shares. Shares of Common Stock issued upon exercise of an Option shall be subject to the terms and conditions specified herein and to such other terms, conditions and restrictions as the Committee in its discretion may determine or provide in the grant. The Company shall not be required to issue or deliver any certificates for shares of Common Stock, cash or other property prior to (i) the listing of such shares on any stock exchange (or other public market) on which the Common Stock may then be listed (or regularly traded), (ii) the completion of any registration or qualification of such shares under federal or state law, or any ruling or regulation of any government body which the Committee determines to be necessary or advisable, and (iii) the satisfaction of any applicable withholding obligation in order for the Company or an affiliate to obtain a deduction with respect to the exercise of an Option. The Company may cause any certificate for any share of Common Stock to be delivered to be properly marked with a legend or other notation reflecting the limitations on transfer of such Common Stock as provided in this Plan or as the Committee may otherwise require. The Committee may require any person exercising an Option to make such representations and furnish such information as it may consider appropriate in connection with the issuance or delivery of the shares of Common Stock in compliance with applicable law or otherwise. 12 13 Fractional shares shall not be delivered, but shall be rounded to the next lower whole number of shares. 15. Shareholder Rights. No person shall have any rights of a shareholder as to shares of Common Stock subject to an Option until, after proper exercise of the Option or other action required, such shares shall have been recorded on the Company's official shareholder records as having been issued or transferred. Subject to the preceding Section and upon exercise of the Option or any portion thereof, the Company will have thirty (30) days in which to issue the shares, and the Optionee will not be treated as a shareholder for any purpose whatsoever prior to such issuance. No adjustment shall be made for cash dividends or other rights for which the record date is prior to the date such shares are recorded as issued or transferred in the Company's official shareholder records, except as provided herein or in an agreement. 16. Registration. If there has been a public offering of the Company's Common Stock, the Company may register under the Securities Act the Common Stock delivered or deliverable pursuant to Options on Commission Form S-8 if available to the Company for this purpose (or any successor or alternate form that is substantially similar to that form to the extent available to effect such registration), in accordance with the rules and regulations governing such forms, as soon as such forms are available for registration to the Company for this purpose. The Company will, if it so determines, use its good faith efforts to cause the registration statement to become effective as soon as possible and will file such supplements and amendments to the registration statement as may be necessary to keep the registration statement in effect until the earliest of (a) one year following the expiration of the option period of the last Option outstanding, (b) the date the Company is no longer a reporting company under the Exchange Act and (c) the date all Optionees have disposed of all shares delivered pursuant to any Option. The Company may delay the foregoing actions at any time and from time to time if the Committee determines in its discretion that any such registration would materially and adversely affect the Company's interests or if there is no material benefit to Optionees. 17. Reservation of Shares. The Company, during the term of this Plan, will at all times reserve and keep available such number of Shares as shall be sufficient to permit the exercise of all Options outstanding under this Plan. The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company's counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained for any reason. 18. Option Agreements. Options shall be evidenced by written Option agreements in such form as the Committee shall approve. 19. Information to Optionees. To the extent required by applicable law, the Company shall provide to each Optionee, during the period for which such Optionee has one or more Options outstanding, copies of all annual reports and other information which are provided to all stockholders of the Company. Except as otherwise noted in the 13 14 foregoing sentence, the Company shall have no obligation or duty to affirmatively disclose to any Optionee, and no Optionee shall have any right to be advised of, any material information regarding the Company or any Parent or Subsidiary at any time prior to, upon or otherwise in connection with, the exercise of an Option. 20. Funding. Benefits payable under this Plan to any person shall be paid directly by the Company. The Company shall not be required to fund or otherwise segregate assets to be used for payment of benefits under this Plan. 21. Controlling Law. This Plan shall be governed by the laws of the state of incorporation of the Company at the time of determination of any issues raised with respect to the interpretation or enforcement of this Plan, without application of any conflict of laws principles. 14 EX-10.3 4 AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT 1 Exhibit 10.3 AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT Amended and Restated Registration Rights Agreement ("Agreement") dated March 16, 1994, among Nanophase Technologies Corporation, an Illinois corporation (with its successors and assigns, called the "Company"), and the persons listed as Holders on the signature pages of a counterpart of this Agreement. Capitalized terms used in this Agreement and not otherwise defined are defined in Section 11 of this Agreement. PRELIMINARY STATEMENT The Company and the Holders have previously entered into that certain Registration Rights Agreement dated as of November 21, 1991, as amended by a First Amendment to Registration Rights Agreement dated February 8, 1993 (collectively, the "Original Agreement"). Concurrently with the execution of this Agreement, the Company and certain of the Holders propose to execute a Series D Preferred Stock Purchase Agreement (the "Series D Purchase Agreement") pursuant to which certain of the Holders will purchase additional securities of the Company. To induce such Holders to execute the Series D Purchase Agreement, the Company and the Holders agree to amend and restate the Original Agreement as follows. AGREEMENT Section 1. Required Registrations. 1.1 (a) The Holders of Preferred and Registrable Common equivalent to more than 60% of the Registrable Common may, by a written notice to the Company, request that the Company register any Registrable Common specified in the notice, under the Securities Act on a form other than a Short Form and under other relevant securities laws, for disposition in accordance with methods stated in the notice. Such notice may specify an underwriter for such registration. 1.2 When it receives a registration notice under Section 1.1, the Company shall, within three (3) days, deliver a copy of such registration notice to each Holder of Convertible Securities or Registrable Common who is not a party to the registration notice, each of whom may then specify, by written notice to the Company delivered within fifteen (15) days of receipt of the notice from the Company, a number of shares of Registrable Common held by it which it wishes to include in any registration pursuant to the registration notice under Section 1.1. 2 1.3 When it receives a registration notice under Section 1.1, the Company will expeditiously cause a registration statement to be filed, and use its best efforts to cause such registration statement to become effective under the Securities Act for the Registrable Common specified in the registration notice under Section 1.1 and subsequent notices under Section 1.2 to permit disposition by such Holders in accordance with the methods of disposition described in the registration notice. Section 2. Registrations on Short Forms. 2.1 If at any time the Company is a registrant entitled to use a Short Form to register Registrable Common, one or more Holders may, by a written notice to the Company, request that the Company register Registrable Common specified in the notice on a Short Form. 2.2 When it receives a Short Form registration notice under Section 2.1, the Company shall, within three (3) days, deliver a copy of such registration notice to each Holder of Convertible Securities or Registrable Common, who is not a party to such registration notice, each of whom may then specify, by written notice to the Company delivered within fifteen (15) days of receipt of the notice from the Company, a number of shares of Registrable Common held by it that it wishes to include in any registration pursuant to the registration notice under Section 2.1 hereof. 2.3 When it receives a notice under Section 2.1, and provided that the reasonably anticipated price to the public of the Registrable Common proposed to be registered by all sellers of such Registrable Common would total more than $500,000, the Company will expeditiously cause a registration statement to be filed, and use its best efforts to cause such registration statement to become effective under the Securities Act on the Short Form specified in the notice for the Registrable Common specified in the registration notice under Section 2.1 and subsequent notices under Section 2.2. Section 3. Incidental Registration. Each time the Company proposes to register any of its Securities under the Securities Act, it will give written notice of its intention to do so to each Holder, which notice shall identify the proposed underwriter for such offering. Each Holder may then specify, by written notice to the Company delivered within fifteen (15) days of receipt of notice from the Company, a number of shares of Registrable Common held by it which it wishes to include in the Company's proposed registration. If at least 50% of the shares to be registered in such offering are held by Holders of Preferred or Registrable Common, then such Holders shall have the right to approve the underwriter (voting as a group, based upon the number of shares of Registrable Common held by each to be included in such offering), which approval shall not be unreasonably withheld. Subject to the limitations of Section 8, the Company will use its best efforts to effect the registration under the Securities Act of Registrable Common specified by Holders under this Section 3. Page 2 3 Section 4. Limitations on Registration Rights. Notwithstanding any contrary provision of this Agreement: A. the Company shall not be required to effect more than one registration pursuant to Section 1 (for purposes of this Section 4.A., a registration shall not be deemed "effective" unless the registration statement is declared effective by the Commission); and B. Section 3 shall not apply to a registration effected solely to implement an employee benefit plan or to any other form or type of registration which does not permit inclusion of Registrable Common pursuant to Commission rule or practice; and C. if the registration notice under Section 1 would result in the first offering of the Company's Securities to the public, then the registration specified under Section 1.1 must be for an underwritten public offering to be managed by an underwriter of recognized national standing reasonably acceptable to the Company and shall be for a minimum of $10,000,000, at a price of not less than $3.00 per share, as adjusted for stock splits, stock dividends and other similar events; and D. the Company shall not be obligated to effect a registration pursuant to Section 1 during the period starting with the date thirty days prior to the Company's estimated date of filing of, and ending on a date six months following the effective date of, a registration pertaining to an underwritten public offering of securities for the account of the Company, provided that the Company is actively employing in good faith all reasonable efforts to cause such registration statement to become effective and that the Company's estimates of the date of filing of such registration statement is made in good faith; and E. if (a) there is material non-public information regarding the Company which the Board reasonably determines not to be in the Company's best interest to disclose and which the Company is not otherwise required to disclose, or (b) there is a significant business opportunity available to the Company which the Board reasonably determines not to be in the Company's best interest to disclose, or (c) there is a significant business opportunity available to the Company and the Board reasonably determines that the Company's ability to pursue such opportunity would be materially and adversely affected by a registered public offering of the Company's Securities, then the Company may postpone filing a registration statement requested pursuant to Sections 1 or 2 for a period not to exceed 90 days, provided that the Company may not postpone its obligations as permitted under this Section 4.E. more than once every 12 months. Page 3 4 Section 5. Registration Procedures. 5.1 Whenever the Company is required by the provisions of this Agreement to effect the registration of any Registrable Common under the Securities Act, the Company will, as expeditiously as possible: A. in the case of a registration required under Section 1, engage the underwriters designated by the Holders giving notice under Section 1.1 or in the case of an incidental registration under Section 3, the underwriter specified in the notice given to the Holders and approved by the Holders; B. before filing each registration statement or prospectus or amendment or supplement thereto with the Commission, furnish counsel for the Holders of Registrable Common included in such registration with copies of all such documents proposed to be filed which shall be subject to the reasonable approval of such counsel; C. prepare and file with the Commission a registration statement with respect to such Registrable Common and use its best efforts to cause such registration statement to become and remain effective for such period as may be reasonably necessary to effect the sale of such securities, not to exceed nine months; D. prepare and file with the Commission (and any exchange on which the Company's Securities may be or are proposed to be listed and with the National Association of Securities Dealers, Inc.) such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective for such period and to comply with the provisions of the Securities Act with respect to the sale or other disposition of all Registrable Common covered by such registration statement in accordance with the intended methods of disposition set forth in such registration statement, but only to the extent provided in this Section 5; E. prepare and promptly file with the Commission, and notify each seller of such Registrable Common as expeditiously as possible of the necessity for and the filing of, such amendment or supplement to such registration statement or prospectus as may be necessary to correct any statements or omissions if, during such periods as a prospectus relating to such securities is required to be delivered under the Securities Act, any event shall have occurred as the result of which any such prospectus or any other prospectus as then in effect would include an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances in which they were made, not misleading; F. furnish to the underwriters and each seller of such Registrable Common such numbers of copies of such registration statement, each amendment and supplement thereto, the prospectus included in such registration statement (including Page 4 5 each preliminary prospectus) and such other documents as such underwriters or sellers may reasonably request in order to facilitate the disposition of the Registrable Common subject to such registration statement in accordance with such registration statement; G. use its best efforts to register or qualify any Registrable Common covered by such registration statement under the securities or blue sky laws of such jurisdictions within the United States of America as the seller or the underwriters reasonably request, and to take any other acts which a seller or the underwriters may reasonably request under such securities or blue sky laws to enable the consummation of the disposition in such jurisdictions of such Registrable Common (provided, however, that the Company may not be required under this Agreement (i) to qualify generally to do business as a foreign corporation in any jurisdiction in which it would not otherwise be required to qualify, or (ii) to subject itself to taxation in any such jurisdiction, or (iii) to consent to general service of process in any such jurisdiction); H. provide a transfer agent and registrar for all Registrable Common sold under the registration not later than the effective date of the registration statement; I. cause all Registrable Common sold under the registration to be listed on a recognized securities exchange, if any, or to become eligible for trading on any over-the-counter trading system, on which similar securities issued by the Company are then listed or traded; J. enter into such customary agreements (including underwriting agreements in customary form) and take all such other actions as the underwriters, if any, or the Holders of a Majority of the Registrable Common being sold reasonably request in order to expedite or facilitate the disposition of such Registrable Common (including, without limitation, effecting a stock split or a combination of shares); K. make available for inspection by the sellers of Registrable Common, any underwriter participating in any disposition pursuant to such registration statement, and any attorney, accountant or other agent retained by any such seller or underwriter, all financial and other records, pertinent corporate documents and properties of the Company, and cause the Company's officers, directors, employees and independent accountants to supply all information reasonably requested by any such seller or underwriter in connection with such registration statement, all subject to such limitations as the Company reasonably deems appropriate in order to protect the Company's confidential or proprietary information; and Page 5 6 L. advise each seller of Registrable Common, immediately after it shall receive notice or obtain knowledge thereof, of the issuance of any stop order by the Commission suspending the effectiveness of such registration statement or the initiation or threatening of any proceeding for such purpose and promptly use reasonable efforts to prevent the issuance of any stop order or to obtain its withdrawal if such stop order should be issued. 5.2 It shall be a condition precedent to the inclusion of the Registrable Common of any Holder in a registration effected pursuant to this Agreement that such Holder shall furnish to the Company such information regarding such Holder, the Registrable Common of such Holder to be registered and the intended method of disposition of such Registrable Common, and shall execute such indemnities with respect to such information provided by such Holders, underwriting agreements and other documents, as the Company shall reasonably request in order to satisfy the requirements applicable to such registration. Section 6. Expenses. The Company shall pay all expenses incurred in effecting the registration of Registrable Common provided for in this Agreement, including, without limitation, all registration and filing fees, printing expenses, listing fees, fees and disbursements of counsel for the Company, reasonable fees and disbursements of a single counsel for the sellers selected by the Holders of a majority of the Registrable Common subject to such registration, underwriting expenses other than discounts and commissions, expenses of any audits incident to or required by any such registration and expenses of complying with the securities or blue sky laws of any jurisdictions pursuant to Section 5.1G hereof. Notwithstanding the foregoing, if a registration is requested by a single Holder pursuant to Section 1.1(b), and no other Holder elects to have any shares owned by it included in such registration, then the Holder requesting such registration shall pay all of the expenses incurred in connection with such registration. Section 7. Indemnification. 7.1 In the event of any registration of any of its Registrable Common under the Securities Act pursuant to this Agreement, the Company agrees, to the extent permitted by law, to indemnify and hold harmless each seller of such Registrable Common, each partner in, or director and officer of, each such seller, and each other person, if any, who controls (within the meaning of the Securities Act) such seller against any losses, claims, damages or liabilities, joint or several, arising out of or based upon: (1) any alleged untrue statement of any material fact contained in any registration statement under which such Securities were registered under the Securities Act, any preliminary prospectus or final prospectus contained therein, or any summary prospectus contained therein, or any amendment or supplement to any such registration statement or prospectus, or Page 6 7 (2) any alleged omission to state in any such document a material fact required to be stated therein or necessary to make the statements therein not misleading, except, with respect to any seller, insofar as any such loss, claim, damage or liability is: (a) caused by or contained in any information furnished in writing to the Company by such seller expressly for use in connection with such registration, or (b) caused by such seller's failure to deliver a copy of the registration statement or prospectus or any amendment or supplement thereto as required by the Securities Act or the rules or regulations thereunder, or (c) caused by the use of a prospectus or preliminary prospectus or any amendment or supplement thereto by such seller after receipt of notice from the Company that it should no longer be used. In connection with an underwritten offering, the Company will indemnify such underwriters, their officers and directors and each person who controls (within the meaning of the Securities Act) such underwriters to the same extent as provided above with respect to the sellers of Registrable Common and as to such other matters as such underwriters may reasonably request or which are covered in such underwriters' customary form of underwriters' agreement. The Company shall reimburse each person indemnified pursuant to this Section 7.1 in connection with investigating or defending any loss, claim, damage, liability or action indemnified against. The reimbursements required by this Section 7.1 shall be made by periodic payments during the course of the investigation or defense, as and when bills are received or expenses incurred. The indemnities provided pursuant to this Section 7.1 shall survive transfer of Registrable Common by a seller. 7.2 In the event of any registration of any of its Registrable Common under the Securities Act pursuant to this Agreement, each Holder agrees to furnish to the Company in writing such information and affidavits as the Company reasonably requests for use in connection with any registration statement or prospectus in connection with the registration or any amendment or supplement thereto and, to the extent permitted by law, agrees severally and not jointly to indemnify and hold harmless the Company, its directors and officers, each other seller of securities in such registration, each partner in, or officer or director of, each such seller, and each person who controls (within the meaning of the Securities Act) the Company or such other seller against any losses, claims, damages or liabilities, joint or several, arising out of or based upon: (1) any alleged untrue statement of any material fact contained, on the effective date thereof, in any registration statement under which such Securities were registered under the Securities Act, any preliminary prospectus or final prospectus contained therein, or any summary prospectus contained therein, or any Securities being registered, or any amendment or supplement thereto, or Page 7 8 (2) any alleged omission to state in any such document a material fact required to be stated therein or necessary to make the statements therein not misleading, but only insofar as any such loss, claim, damage or liability is caused by or contained in any information furnished in writing to the Company by the indemnifying seller expressly for use in connection with such registration, and excluding any such loss, claim, damage or liability which is caused by or contained in such statements, or caused by such omissions, based upon the authority of an expert as defined in the Securities Act (but only if the indemnifying seller had no ground to believe, and did not believe, that the statements made on the authority of an expert were untrue or that there was an omission to state a material fact. In connection with an underwritten offering, each seller will indemnify such underwriters, their officers and directors and each person who controls (within the meaning of the Securities Act) such underwriters to the same extent as provided above with respect to the Company and other sellers. Each seller shall reimburse each person indemnified pursuant to this Section 7.2 in connection with investigating or defending any loss, claim, damage, liability or action indemnified against. The indemnities provided pursuant to this Section 7.2 shall survive transfer of Registrable Common by an indemnifying seller, and transfer of other securities by any other indemnified seller. 7.3 Indemnification similar to that specified in Sections 7.1 and 7.2 (with such modifications as shall be appropriate) shall be given by the Company and each Holder of any Registrable Common covered by any registration or other qualification of Securities under any federal or state securities law or regulation other than the Securities Act with respect to any such registration or other qualification effected pursuant to this Agreement. 7.4 In the event the Company or any Holder receives a complaint, claim or other notice of any loss, claim or damage, liability or action, giving rise to claim for indemnification under this Section 7, the person claiming indemnification shall promptly notify the person against whom indemnification is sought (unless such person is also a party to such complaint, notice, claim or action) of such complaint, notice, claim or action, and such indemnifying person shall have the right to investigate and defend any such loss, claim, damage, liability or action, provided that such indemnifying person shall not settle any such claim or action unless (i) such settlement is approved by the person claiming indemnification, or (ii) such settlement provides for a full, general release from all claims against the person claiming indemnification. The person claiming indemnification shall have the right to employ separate counsel in any such action and to participate in the defense thereof but the fees and expenses of such counsel shall not be at the expense of the person against whom indemnification is sought and the indemnifying person shall not be obligated to indemnify any person for any settlement of any claim or action effected without the indemnifying person's consent, which consent will not be unreasonably withheld. Page 8 9 Section 8. Marketing Restrictions. 8.1 If: A. a registration is to be made pursuant to a registration notice under Section 1 or Section 2 of this Agreement, and B. the offering proposed to be made by the Holder or Holders for whom such registration is to be made is to be an underwritten public offering, and C. the managing underwriters of such public offering furnish a written opinion that the total amount of Registrable Common to be included in such offering would exceed the maximum number of shares of Common (as specified in such opinion) which can be marketed at a price reasonably related to the current market value of such Common and without otherwise materially and adversely affecting such offering, then the rights of the Holders, of the holders of other Securities having the right to include Common in such registration and of the Company to participate in such offering shall be in the following order of priority: First: the Holders shall be entitled to participate in such offering to the extent of such maximum number of shares of Common, or of the aggregate number of shares of Registrable Common that all such Holders shall have requested be registered, whichever is less, pro rata among themselves in accordance with the number of shares of Registrable Common which each such Holder shall have requested be registered; and then Second: if such maximum number of shares of Common exceeds the aggregate number of shares of Registrable Common that all such Holders shall have requested be registered, the Company and all holders of other Securities having the right to include such Securities in such registration shall be entitled to participate in accordance with the relative priorities, if any, that shall exist among them and the Company; and no Securities (issued or unissued) other than those registered and included in the underwritten offering shall be offered for sale or other disposition by the Company or any Holder in a transaction which would require registration under the Securities Act for a period beginning thirty (30) days prior to the anticipated effective date of such registration statement and continuing until ninety (90) days after the effective date of the registration statement filed in connection with such registration or such earlier time consented to by the managing underwriter, but in no event shall such period exceed 120 days. In the future, the Company shall require each person to whom the Company grants such rights, as a condition precedent to the effectiveness of such rights, to agree to be bound by the foregoing restriction on distribution after conclusion of the underwritten offering. Page 9 10 8.2 If: A. any Holder of Preferred or Registrable Common requests inclusion of Registrable Common in a registration statement filed by the Company under Section 3 of this Agreement, and B. the offering proposed to be made is to be an underwritten public offering, and C. the managing underwriters of such public offering furnish a written opinion that the total amount of securities to be included in such offering would exceed the maximum amount of Securities (as specified in such opinion) which can be marketed at a price reasonably related to the then current market value of such Securities and without materially and adversely affecting such offering, then the rights of the Holders, of the holders of other Securities having the right to include such Securities in such registration and of the Company to participate in such offering shall be in the following order of priority: First: the Company; and then Second: the Holders shall be entitled to participate in such offering, pro rata among themselves in accordance with the number of shares of Registrable Common which each such Holder shall have requested be registered; and then Third: all other holders (including the Company, if such registration shall have been requested by a person other than the Company) of Securities having the right to include such Securities in such registration shall be entitled to participate in accordance with the relative priorities, if any, that shall exist among them; and no Securities (issued or unissued) other than those registered and included in the underwritten offering shall be offered for sale or other disposition by the Company or any Holder in a transaction which would require registration under the Securities Act for a period beginning thirty (30) days prior to the anticipated effective date of such registration statement and continuing until ninety (90) days after the effective date of the registration statement filed in connection with such registration or such earlier time consented to by the managing underwriter, but in no event shall such period exceed 120 days. 8.3 In connection with any offering involving an underwriting of Registrable Common pursuant to Section 3 of this Agreement, the Company shall not be required to include any of the Registrable Common of a Holder in such offering unless such Holder agrees to the terms of the underwriting agreed to between the Company and the underwriter or underwriters selected by the Company, provided that no such agreement shall add to the indemnities or affect the priorities set forth in this Agreement. Page 10 11 Section 9. Sale of Preferred to Underwriter. Notwithstanding anything in this Agreement to the contrary, in lieu of converting any Preferred to Common prior to or simultaneously with the filing or the effectiveness of any registration statement filed pursuant to this Agreement, the Holder of such Preferred may sell such Preferred to the underwriter of the offering being registered upon the undertaking of such underwriter to (i) convert such Preferred into Common before making any distribution pursuant to such registration statement, and (ii) include such Common among the Securities being offered pursuant to such registration statement. The Company agrees to cause the Common issuable on conversion of such Preferred to be issued within such time as will permit the underwriter to make and complete the distribution contemplated by the underwriting and to register the Preferred in any registration statement so that the Holder may make the sale described in the first sentence of this Section 9. Section 10. Lockup Agreement. Each Holder and the Company agrees in connection with any registration of any of the Company's Securities that, upon the request of the Company or the underwriters managing any underwritten offering of the Company's Securities, he or it will not sell, make any short sale of, loan, grant any option for the purchase of, or otherwise dispose of any Securities of the Company (other than the Securities included in the registration) without the prior written consent of the Company or such underwriters, as the case may be, for such period of time beginning thirty (30) days prior to the anticipated effective date of such registration statement and continuing until ninety (90) days after the effective date of such registration statement, but in no event shall such period exceed one hundred and twenty (120) days. Section 11. Definitions. As used in this Agreement, the following terms shall have the following meanings: "Board" means the Board of Directors of the Company. "Commission" means the Securities and Exchange Commission, and any successor thereto. "Common" means the Company's common stock, no par value. "Convertible Securities" means the Preferred and any other Security of the Company which is convertible or exchangeable for Common. "Holders" means the parties listed on the signature pages hereof, and any subsequent legal or beneficial owner of Preferred or Registrable Common who has become a party to this Agreement in accordance with Section 12 hereof. "Preferred" means, collectively, the Company's Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series C-1 Preferred Stock, Series D Preferred Stock and Series D-1 Preferred Stock, each having no par value. Page 11 12 "Registrable Common" means at any time (i) any shares of Common then outstanding which were issued upon conversion of Preferred; and (ii) any shares of Common then issuable upon conversion of then outstanding Preferred; and (iii) any shares of Common then outstanding which were issued as, or were issued directly or indirectly upon the conversion or exercise of other Securities issued as, a dividend or other distribution with respect to, or in replacement of, Preferred or other Registrable Common; (iv) any shares of Common then issuable directly or indirectly upon the conversion or exercise of other Securities issued as a dividend or other distribution with respect to, or in replacement of, Preferred or other Registrable Common, and (v) any shares of Common then outstanding which were issued upon exercise of any Warrant, and any shares of Common then issuable upon exercise of any Warrant. For purposes of determining the equivalent of a given amount of Registrable Common, a person will be deemed to be the holder of Registrable Common then issuable but not actually issued whenever such person has the then-existing right (by conversion or otherwise) to acquire such Registrable Common, even though such acquisition has not actually been effected. "Securities" means any debt or equity securities of the Company, whether now or hereafter authorized, and any instrument convertible or exchangeable for any such debt or equity securities. "Security" means one of the Securities. "Securities Act" means the Securities Act of 1933, as amended prior to or after the date of this Agreement, or any federal statute or statutes which shall be enacted to take the place of such Act, together with all rules and regulations promulgated thereunder. "Short Form" means Form S-2 or Form S-3 under the Securities Act, and any other form promulgated after the date of this Agreement applicable in circumstances substantially comparable to either of those forms, regardless of its designation. "Warrant" means any one of those certain warrants of the Company previously purchased pursuant to that certain Series C Preferred Stock and Warrant Purchase Agreement dated February 8, 1993, by and among the Company and the other parties thereto. Section 12. Assignability of Registration Rights. The rights set forth in this Agreement shall accrue to each subsequent holder of Preferred or Registrable Common who shall have executed a written consent after becoming the holder of such Securities agreeing to be bound by the terms and conditions of this Agreement as a party to this Agreement. Section 13. Termination of Registration Rights. Notwithstanding any contrary provision of this Agreement, the rights to registration granted under this Agreement shall terminate as to any particular Registrable Common when such Registrable Common shall have been (i) effectively registered under the Securities Act and sold by the holder thereof in accordance with such registration, or (ii) sold to the public pursuant to Rule 144 of the Commission, or any successor rule. Nanophase - Amended and Restated RRA Page 12 13 Section 14. Miscellaneous. 14.1 Amendment. Any provision of this Agreement may be amended by a written agreement signed by all of the following: (a) the Company, and (b) the Holders of Preferred and Registrable Common equivalent to more than 67% of the Registrable Common. Notwithstanding the foregoing, no amendment shall confer any greater rights, or impose any additional restrictions, on any shares of Preferred as compared to any other shares of Preferred, or any shares of Common as compared to any other shares of Common, or any Holder as compared to any other Holder, with the consent of the Holders of Preferred and Registrable Common equivalent to 100% of the Registrable Common. 14.2 Severability. In the event that any court or any governmental authority or agency declares all or any part of any Section of this Agreement to be unlawful or invalid, such unlawfulness or invalidity shall not serve to invalidate any other Section of this Agreement, and in the event that only a portion of any Section is so declared to be unlawful or invalid, such unlawfulness or invalidity shall not serve to invalidate the balance of such Section. 14.3 Notices. All communications in connection with this Agreement shall be in writing and shall be deemed properly given if hand delivered, sent by telecopy or facsimile transmission, with confirmation by the recipient, or sent by registered or certified mail, return receipt requested, and, if to a Holder, addressed to the persons and at such addresses as are set forth below such Holder's name on the signature pages to this Agreement or, if no such person or address appears, at such Holder's address as shown on the books of the Company or its transfer agent, and if to the Company, at: Nanophase Technologies Corporation 8205 S Cass Avenue, Suite 105 Darien, Illinois 60559 Telecopy No. (708) 963-0317 or to such other persons or addresses as the recipient shall have specified by a notice delivered to the Company (if the recipient is a Holder) or by a notice delivered to each Holder (if the recipient is the Company) in accordance with the terms of this Section. Any notice called for hereunder shall be deemed given when received. 14.4 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Illinois applicable to agreements between Illinois residents entered into and to be performed entirely within Illinois. Nanophase - Amended and Restated RRA Page 13 14 14.5 Counterparts. This Agreement may be executed in two or more counterparts, each which shall be deemed an original but all of which shall together constitute one and the same instrument. 14.6 Heading. The headings used herein are solely for the convenience of the parties and shall not serve to modify or interpret the text of the Sections at the beginning of which they appear. 14.7 Remedies. Each of the parties confirms that damages at law may not be an adequate remedy for a breach or threatened breach of this Agreement, and agrees that in the event of a breach or threatened breach of any of the provisions hereof, the respective rights and obligations of the parties hereunder shall be enforceable by specific performance, injunction or other equitable remedy. Nothing contained in this Section 14.7 shall limit any party's right to seek or obtain any and all remedies available to such party, whether at law, by statute or otherwise. END OF TEXT *********************** Nanophase - Amended and Restated RRA Page 14 15 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed on the day first above written. The Company: NANOPHASE TECHNOLOGIES CORPORATION, an Illinois corporation By __________________________________ Its President Holders: ARCH VENTURE FUND LIMITED PARTNERSHIP, a Delaware limited partnership By: ARCH Development Corporation, an Illinois not-for-profit corporation, its General Partner By: __________________________________ Its ___________________ ARCH VENTURE FUND II, L.P., a Delaware limited partnership By: ARCH MANAGEMENT PARTNERS II, L.P. a Delaware limited partnership, its general partner By: ARCH Venture Partners, L.P., a Delaware limited partnership, its general partner By: Lifework, Inc., an Illinois corporation, its general partner By: ______________________ Its Managing Director BATTERSON, JOHNSON & WANG, L.P., a Delaware limited partnership By: _______________________________________ Leonard A. Batterson, its Managing General Partner 16 UVCC FUND II, a Delaware general partnership By: Arete Venture Management Associates II, L.P. its Managing General Partner By: Arete Ventures, Inc., a Maryland corporation, its general partner By: ______________________________ Robert W. Shaw, Jr., President UVCC II PARALLEL FUND, L.P., a Delaware limited partnership By: Arete Ventures L.P. III, General Partner By: Arete Ventures, Inc., a Maryland corporation, its general partner By: ____________________________ Robert W. Shaw, Jr., President THE COLUMBINE VENTURE FUND II, a Delaware partnership By: Columbine Venture Management II, its general partner By: _________________________________ Its General Partner ADVANCE MATERIAL TECHNOLOGIES VENTURE PARTNER LIMITED, a Delaware partnership By: _______________________________________ Tom H. Delimitros, a General Partner 17 JHAM LIMITED PARTNERSHIP, a Delaware partnership By: _______________________________________ Tom H. Delimitros, a General Partner AMT CAPITAL, LTD., a Delaware corporation By: AMT Capital, Inc., its general partner By: ________________________________ Tom H. Delimitros, President ILLINOIS DEPARTMENT OF COMMERCE AND COMMUNITY AFFAIRS By: _________________________________ Its Director ___________________________________________ RICHARD W. SIEGEL 18 FIRST AMENDMENT TO AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT First Amendment to Amended and Restated Registration Rights Agreement dated as of April 22, 1996 (this "Amendment"), among NANOPHASE TECHNOLOGIES CORPORATION, an Illinois corporation (the "Company"), and the persons executing a counterpart of this Amendment listed as holders on the signature pages to this Amendment (the "Holders"). PRELIMINARY STATEMENT The Company and the Holders have previously entered into that certain Amended and Restated Registration Rights Agreement dated as of March 16, 1994 (the "Registration Rights Agreement"). Concurrently with the execution of this Amendment, the Company and certain investors (the "Investors") have executed a Series E Preferred Stock Purchase Agreement (the "Series E Purchase Agreement") pursuant to which the Investors are purchasing securities of the Company. To induce the Investors to execute the Series E Purchase Agreement, the Company and the Holders agree as follows. AGREEMENT 1. Amendments. The Company and the Holders agree that: (a) The definition of "Preferred" in Section 11 of the Registration Rights Agreement is hereby amended and restated in its entirety to read as follows: "Preferred" means, collectively, the Company's Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series C-1 Preferred Stock, Series D Preferred Stock, Series D-1 Preferred Stock, and Series E Preferred Stock, each having no par value; and (b) The address of the Company in Section 14.3 of the Registration Rights Agreement is hereby amended and restated in its entirety to read as follows: Nanophase Technologies Corporation 453 Commerce Street Burr Ridge, Illinois 60521 Telecopy No. (708) 323-1221 19 2. Continuing Effect. Except as otherwise specifically provided in this Amendment, the Registration Rights Agreement shall remain in full force and effect in accordance with its terms. This Amendment may be executed in multiple counterparts, all of which shall constitute one and the same instrument. END OF TEXT ******************* page 2 20 IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to Amended and Restated Registration Rights Agreement to be executed on the day first above written. The Company: NANOPHASE TECHNOLOGIES CORPORATION, an Illinois corporation By _____________________________ Its President Holders: ARCH VENTURE FUND LIMITED PARTNERSHIP, a Delaware limited partnership By: ARCH Development Corporation an Illinois not-for-profit corporation, its General Partner By: ____________________________ Its ________________________ ARCH VENTURE FUND II, L.P., a Delaware limited partnership By: ARCH MANAGEMENT PARTNERS II, L.P. a Delaware limited partnership, its general partner By: ARCH Venture Partners, L.P., a Delaware limited partnership, its general partner By: ARCH Venture Corporation, an Illinois corporation, its general partner By: ______________________ Its Managing Director Page 3 21 ARCH II PARALLEL FUND, L.P., a Delaware limited partnership By: ARCH MANAGEMENT PARTNERS II, L.P. a Delaware limited partnership, its general partner By: ARCH Venture Partners, L.P., a Delaware limited partnership,its general partner By: ARCH Venture Corporation, an Illinois corporation, its general partner By: ______________________ Its Managing Director BATTERSON, JOHNSON & WANG, L.P., a Delaware limited partnership By: __________________________________ Leonard A. Batterson, its Managing General Partner THE COLUMBINE VENTURE FUND II, a Delaware partnership By: Columbine Venture Management II, its General Partner By: _________________________ Its _______________________ UVCC FUND II, a Delaware general partnership By: Arete Venture Management Associates II, L.P., its Managing General Partner By: Arete Ventures, Inc., a Maryland corporation, its general partner By: ______________________________ Robert W. Shaw, Jr., President Page 4 22 UVCC II PARALLEL FUND, L.P., a Delaware limited partnership By: Arete Ventures L.P. III, General Partner By: Arete Ventures, Inc., a Maryland corporation, its general partner By:______________________________ Robert W. Shaw, Jr., President ADVANCE MATERIAL TECHNOLOGIES VENTURE PARTNER LIMITED, a Delaware partnership By: _________________________ A General Partner JHAM LIMITED PARTNERSHIP, a Delaware limited partnership By: _________________________ A General Partner AMT CAPITAL, LTD., a Delaware corporation By: AMT Capital, Inc., its general partner By: ________________________________ Tom H. Delimitros, President ILLINOIS DEPARTMENT OF COMMERCE AND COMMUNITY AFFAIRS By: _________________________________ Its Director ___________________________________ RICHARD W. SIEGEL Nanophase - First Amendment to RRA Page 5 23 HARRIS & HARRIS GROUP, INC., a New York corporation By:________________________________________ Its:_______________________________________ GRACE INVESTMENTS, LTD., an Illinois limited partnership By:________________________________________ Its:_______________________________________ Nanophase - First Amendment to RRA Page 6 24 SECOND AMENDMENT TO AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT Second Amendment to Amended and Restated Registration Rights Agreement dated as of June 30, 1997 (this "AMENDMENT"), among NANOPHASE TECHNOLOGIES CORPORATION, an Illinois corporation (the "COMPANY"), and the persons executing a counterpart of this Amendment listed as holders on the signature pages to this Amendment (the "HOLDERS"). PRELIMINARY STATEMENT The Company and the Holders have previously entered into that certain Amended and Restated Registration Rights Agreement dated as of March 16, 1994 (the "AGREEMENT"), as amended pursuant to that certain First Amendment to Amended and Restated Registration Rights Agreement dated as of April 22, 1996 (the "FIRST AMENDMENT", and together with the Agreement, the "REGISTRATION RIGHTS AGREEMENT"). Concurrently with the execution of this Amendment, the Company and certain investors (the "INVESTORS") have executed a Series F Preferred Stock Purchase Agreement (the "SERIES F PURCHASE AGREEMENT") pursuant to which the Investors are purchasing securities of the Company. To induce the Investors to execute the Series F Purchase Agreement, the Company and the Holders agree as follows. AGREEMENT 1. Amendments. The Company and the Holders agree that: (a) Section 10 of the Registration Rights Agreement is amended and restated in its entirety to read as follows: "Section 10. Lockup Agreement. Each Holder and the Company agrees in connection with any registration of any of the Company's Securities that, upon the request of the Company or the underwriters managing any underwritten offering of the Company's Securities, he or it will not sell, make any short sale of, loan, grant any option for the purchase of, or otherwise dispose of any Securities of the Company (other than the Securities included in the registration) without the prior written consent of the Company or such underwriters, as the case may be, for such period of time beginning thirty (30) days prior to the anticipated effective date of such registration statement and continuing until one hundred eighty (180) days after the effective date of such registration statement, but in no event shall such period exceed one hundred and twenty (180) days." (b) The definition of "Preferred" in Section 11 of the Registration Rights Agreement is hereby amended and restated in its entirety to read as follows: "Preferred" means, collectively, the Company's Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series C-1 Preferred Stock, Series D Preferred Stock, Series D-1 Preferred Stock, Series E Preferred Stock, and Series F Preferred Stock, each having no par value; and 25 (c) The address of the Company in Section 14.3 of the Registration Rights Agreement is hereby amended and restated in its entirety to read as follows: Nanophase Technologies Corporation 453 Commerce Street Burr Ridge, Illinois 60521 Telecopy No. (630) 323-1221 2. Continuing Effect. Except as otherwise specifically provided in this Amendment, the Registration Rights Agreement shall remain in full force and effect in accordance with its terms. This Amendment may be executed in multiple counterparts, all of which shall constitute one and the same instrument. END OF TEXT ******************* 26 IN WITNESS WHEREOF, the parties hereto have caused this Second Amendment to Amended and Restated Registration Rights Agreement to be executed on the day first above written. The Company: NANOPHASE TECHNOLOGIES CORPORATION, an Illinois corporation By _____________________________ Its President Holders: ARCH VENTURE FUND LIMITED PARTNERSHIP, a Delaware limited partnership By: ARCH Development Corporation an Illinois not-for-profit corporation, its General Partner By: ____________________________ Its ________________________ ARCH VENTURE FUND II, L.P., a Delaware limited partnership By: ARCH MANAGEMENT PARTNERS II, L.P. a Delaware limited partnership, its general partner By: ARCH Venture Partners, L.P., a limited partnership, its general partner By: ARCH Venture Corporation, an Illinois corporation, its general partner By: ________________ Its Managing Director ARCH II PARALLEL FUND, L.P., a Delaware limited partnership By: ARCH MANAGEMENT PARTNERS II, L.P. a Delaware limited partnership, its general partner By: ARCH Venture Partners, L.P., a Delaware limited partnership, its general partner By: ARCH Venture Corporation, an Illinois corporation, its general partner By: _________________ Its Managing Director 27 BATTERSON, JOHNSON & WANG, L.P., a Delaware limited partnership By: __________________________________ Leonard A. Batterson, its Managing General Partner THE COLUMBINE VENTURE FUND II, a Delaware partnership By: Columbine Venture Management II, its General Partner By: _________________________ Its _____________________ UVCC FUND II, a Delaware general partnership By: ARETE VENTURE MANAGEMENT ASSOCIATES II, L.P., its Managing General Partner By: ______________________________ Robert W. Shaw, Jr. General Partner UVCC II PARALLEL FUND, L.P., a Delaware limited partnership By: ARETE VENTURES L.P. III, its General Partner By:______________________________ Robert W. Shaw, Jr. General Partner ADVANCE MATERIAL TECHNOLOGIES VENTURE PARTNER LIMITED, a Delaware partnership By: _________________________ A General Partner 28 JHAM LIMITED PARTNERSHIP, a Delaware limited partnership By: _________________________ A General Partner AMT CAPITAL, LTD., a Delaware corporation By: AMT Capital, Inc., its general partner By:_____________________________ Tom H. Delimitros, President ILLINOIS DEPARTMENT OF COMMERCE AND COMMUNITY AFFAIRS By:_________________________________ Its Director ___________________________________ RICHARD W. SIEGEL HARRIS & HARRIS GROUP, INC., a New York corporation By:_____________________________________ Its:____________________________________ GRACE INVESTMENTS, LTD., an Illinois limited partnership By:_____________________________________ Its:____________________________________ EX-10.4 5 EMPLOYMENT AGREEMENT - ROBERT W. CROSS 1 Exhibit 10.4 EMPLOYMENT AGREEMENT Employment Agreement dated and effective as of February 3, 1994 (this "AGREEMENT"), between NANOPHASE TECHNOLOGIES CORPORATION, an Illinois corporation (with its successors and assigns, referred to as the "COMPANY"), and ROBERT CROSS (referred to as "CROSS"). PRELIMINARY STATEMENT Cross is now employed as the president and chief executive officer of the Company. The Company desires to continue to employ Cross, and Cross wishes to continue to be employed by the Company, upon the terms and subject to the conditions set forth in this Agreement. The Company and Cross also wish to enter into the other agreements set forth in this Agreement, all of which are related to Cross's employment under this Agreement. AGREEMENT Cross and the Company therefore agree as follows: 1. EMPLOYMENT FOR TERM. The Company hereby employs Cross and Cross hereby accepts employment with the Company for the period (the "TERM") beginning as of January 1, 1994, and ending on December 31, 1994, or upon the earlier termination of the Term pursuant to Section 6. Unless otherwise terminated as set forth in this Agreement, the Term shall be automatically renewed for successive one (1) calendar year periods after the first calendar year of the Term unless written notice of termination shall be given by the Company or by Cross to the other for any reason or for no reason at least ninety (90) days prior to the end of the then current calendar year. The end of the Term for any reason shall end Cross's employment under this Agreement, but shall not terminate Cross's or the Company's other agreements in this Agreement. 2. POSITION AND DUTIES. During the Term, Cross shall serve as the president and chief executive officer of the Company. During the Term, Cross shall also hold such additional positions and titles as the Board of Directors of the Company (the "BOARD") may determine from time to time. During the Term, Cross shall devote substantially all of his business time and best efforts to his duties as an employee of the Company. 3. COMPENSATION. (a) BASE SALARY. The Company shall pay Cross a base salary, beginning on the first day of the Term and ending on the last day of the Term, of not less than $130,000 per annum, payable on the Company's regular pay cycle for professional employees. (b) BONUS PAYMENT. The Company shall pay Cross a bonus of not less than $26,000 with respect to calendar year 1994 upon a determination by the Board in its sole judgment of the acceptable achievement of milestones set forth on the attached Exhibit A for 2 calendar year 1994 ("MILESTONES"). Such bonus shall be payable in a lump sum payment promptly upon such determination by the Board. (c) STOCK OPTIONS. In connection with the execution of this Agreement, the Company has granted to Cross options to purchase up to 125,000 shares of the Company's common stock (the "INITIAL OPTIONS") under the Company's 1992 Stock Option Plan ("Plan"). The Company further agrees that the Company will grant to Cross the additional options to purchase common stock referred to in the Minutes of the Meeting of the Board held on February 3, 1994, upon a determination by the Board in its sole judgment of the acceptable achievement of Milestones and the other events referred to in such Minutes (the "ADDITIONAL OPTIONS", and together with the Initial Options, the "OPTIONS"), such Options to be granted under and pursuant to the terms of the Plan. (d) OTHER AND ADDITIONAL COMPENSATION. Sections 3(a), 3(b) and 3(c) establish minimum salary and option grant levels for Cross during the Term, and shall not preclude the Board from awarding Cross a higher salary or more stock options at any time, nor shall they preclude the Board from awarding Cross additional bonuses or other compensation in the discretion of the Board. 4. EMPLOYEE BENEFITS. During the Term, Cross shall be entitled to the employee benefits (other than health and medical benefits) made available by the Company generally to any other employee of the Company, including reasonable vacation time in accordance with Company policy. In addition, the Company will purchase and maintain for the benefit of Cross a term life insurance policy payable to Cross of up to $500,000, provided that the Company will not be obligated to pay monthly premiums in excess of $500.00. 5. EXPENSES. The Company shall reimburse Cross for actual out-of-pocket expenses incurred by him in the performance of his services for the Company in accordance with the Company's policy for such reimbursements applicable to employees generally and upon receipt by the Company of appropriate documentation and receipts for such expenses, which expenses shall include without limitation economy rate travel to and from, and economy rate transportation and lodging in, the Chicago area. 6. TERMINATION. (a) GENERAL. The Term shall end immediately upon Cross's death. The Company may end the Term at any time for any reason or no reason, in the absolute discretion of the Board (but subject to the Company's obligations under this Agreement). (b) NOTICE OF TERMINATION. Promptly after it ends the Term, the Company shall give Cross notice of the termination, including a statement of whether the termination was for Cause (as defined in Section 7(a) below). The Company's failure to give notice -2- 3 under this Section 6(b) shall not, however, affect the validity of the Company's termination of the Term. 7. SEVERANCE BENEFITS. (a) "CAUSE" DEFINED. "Cause" means (i) willful and gross malfeasance or willful and gross misconduct by Cross in connection with his employment; (ii) Cross's gross negligence in performing any of his duties under this Agreement; (iii) Cross's conviction of, or entry of a plea of guilty to, or entry of a plea of nolo contendere with respect to, any crime other than a misdemeanor; (iv) Cross's willful and gross breach of any written policy applicable to all employees adopted by the Company concerning conflicts of interest, political contributions, standards of business conduct or fair employment practices, procedures with respect to compliance with securities laws or any similar matters, or adopted pursuant to the requirements of any government contract or regulation; or (v) material breach by Cross of any of his agreements in this Agreement. (b) TERMINATION WITHOUT CAUSE. If the Company ends the Term other than for Cause, the Company shall pay Cross an amount equal in annual amount to his base salary in effect at the time of termination during the period (the "Severance Period") of twenty six (26) full weeks after the effective date of termination, payable in proportionate amounts on the Company's regular pay cycle for professional employees and (if the last day of the Severance Period is not the last day of a pay period) on the last day of the Severance Period. (c) TERMINATION FOR ANY OTHER REASON. If the Company ends the Term for Cause, or if Cross resigns as an employee or officer of the Company, or if Cross dies, then the Company shall have no obligation to pay Cross any amount, whether for salary, benefits, bonuses, or other compensation or expense reimbursements of any kind, accruing after the end of the Term, and such rights shall, except as otherwise required by law (or, with respect to the Options, as set forth in the Plan or the applicable Option Agreements), be forfeited immediately upon the end of the Term. 8. ADDITIONAL COVENANTS. (a) CONFIDENTIALITY. Cross agrees to execute the Company's standard form of Confidentiality and Proprietary Rights Agreement promptly upon execution of this Agreement. (b) "NON-COMPETITION PERIOD" DEFINED. "Non-Competition Period" means the period beginning at the end of the Term and ending either (i) 365 days after the end of the Severance Period, if the Company is obligated to make payments under Section 7(b), or (ii) 365 days after the end of the Term, if the Company is not obligated to make payments under Section 7(b). - 3 - 4 (c) COVENANTS OF NON-COMPETITION AND NON-SOLICITATION. Cross acknowledges that his services pursuant to this Agreement are unique and extraordinary, that the Company will be dependent upon Cross for the development and growth of its business and related functions, and that he will continue to develop personal relationships with significant customers of the Company and to have control of confidential information concerning, and lists of customers of, the Company. Cross further acknowledges that the business of the Company is national in scope and cannot be confined to any particular geographic area of the United States. For the foregoing reasons, Cross covenants and agrees that during the Non-Competition Period Cross shall not, directly or indirectly, engage in, be financially interested in, represent, render any advice or services to, or be employed by, any other business (conducted for profit or not for profit) that is competitive with the nanophase and ultrafine powder production business of the Company within the United States. For the reasons acknowledged by Cross at the beginning of this Section 8(c), Cross additionally acknowledges, covenants, and agrees that, during the Non-Competition Period, Cross shall not, directly or indirectly, whether on his own behalf or on behalf of any other person or entity, in any manner (A) solicit the business of or otherwise contact in any commercial capacity any person or entity that was a customer, supplier, or contractor of the Company for the purpose of obtaining business of the type performed by the Company, or (B) solicit for employment any persons who were officers or employees upon the date of termination of his employment hereunder or at any time during a ninety-day period preceding such date of the Company or aid any competitive business organization in any attempt to hire any such officers or employees of the Company. (d) EQUITABLE REMEDIES. Cross acknowledges, covenants and agrees that, in the event he shall violate any provisions of this Section 8, the Company will not have an adequate remedy at law and will therefore be entitled to enforce each such provision by temporary or permanent injunctive or mandatory relief obtained in an action or proceeding without the necessity of proving damage and without prejudice to any other remedies that may be available at law or in equity. The foregoing restrictions shall not preclude Cross from the ownership of not more than three percent (3%) of the voting securities of any corporation whose voting securities are registered under Section 12(g) of the Securities Exchange Act of 1934, even if its business competes with that of the Company. 9. SUCCESSORS AND ASSIGNS. (a) CROSS. This Agreement is a personal contract, and the rights and interests that the Agreement accords to Cross may not be sold, transferred, assigned, pledged, encumbered, or hypothecated by him. Cross shall not have any power of anticipation, alienation or assignment of the payments contemplated by this Agreement, all rights and benefits of Cross shall be for the sole personal benefit of Cross, and no other person shall acquire any right, title or interest under this Agreement by reason of any sale, assignment, transfer, claim or judgment or bankruptcy proceedings against Cross. Except as - 4 - 5 so provided, this Agreement shall inure to the benefit of and be binding upon Cross and his personal representatives, distributees and legatees. (b) THE COMPANY. This Agreement shall be binding upon the Company and inure to the benefit of the Company and of its successors and assigns, including (but not limited to) any corporation that may acquire all or substantially all of the Company's assets or business or into or with which the Company may be consolidated or merged. This Agreement shall continue in full force and effect in the event that the Company sells all or substantially all of its assets, merges or consolidates, otherwise combines or affiliates with another business, dissolves and liquidates, or otherwise sells or disposes of substantially all of its assets. The Company's obligations under this Agreement shall cease, however, if the successor to, the purchaser or acquiror either of the Company or of all or substantially all of its assets, or the entity with which the Company has affiliated, shall assume in writing the Company's obligations under this Agreement (and deliver an executed copy of such assumption to Cross), in which case such successor or purchaser, but not the Company, shall thereafter be the only party obligated to perform the obligations that remain to be performed on the part of the Company under this Agreement. 10. ENTIRE AGREEMENT. This Agreement represents the entire agreement between the parties concerning Cross's employment with the Company and supersedes all prior negotiations, discussions, understandings and agreements, whether written or oral, between Cross and the Company relating to the subject matter of this Agreement. 11. AMENDMENT OR MODIFICATION, WAIVER. No provision of this Agreement may be amended or waived unless such amendment or waiver is agreed to in writing signed by Cross and by a duly authorized officer of the Company other that Cross. No waiver by any party to this Agreement of any breach by another party of any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of a similar or dissimilar condition or provision at the same time, any prior time or any subsequent time. 12. NOTICES. Any notice to be given under this Agreement shall be in writing and delivered personally or sent by overnight courier or registered or certified mail, postage prepaid, return receipt requested, addressed to the party concerned at the address indicated below, or to such other address of which such party subsequently may give notice in writing: If to Cross: Robert Cross P.O. Box 200 Solebury, Pennsylvania 18963 If to the Company: Nanophase Technologies Corporation 8205 S. Cass Avenue, Suite 105 Darien, Illinois 60561 Attention: President - 5 - 6 with a copy to: Bruce A. Zivian, Esq. Fitzpatrick Law Offices 20 North Wacker Drive, Suite 2200 Chicago, Illinois 60606 Any notice delivered personally or by overnight courier shall be deemed given on the date delivered and any notice sent by registered or certified mail, postage prepaid, return receipt requested, shall be deemed given on the date mailed. 13. SEVERABILITY. If any provision of this Agreement or the application of any such provision to any party or circumstances shall be determined by any court of competent jurisdiction to be invalid and unenforceable to any extent, the remainder of this Agreement or the application of such provision to such person or circumstances other than those to which it is so determined to be invalid and unenforceable shall not be affected, and each provision of this Agreement shall be validated and shall be enforced to the fullest extent permitted by law. If for any reason any provision of this Agreement containing restrictions is held to cover an area or to be for a length of time that is unreasonable or in any other way is construed to be too broad or to any extent invalid, such provision shall not be determined to be entirely null, void and of no effect; instead, it is the intention and desire of both the Company and Cross that, to the extent that the provision is or would be valid or enforceable under applicable law, any court of competent jurisdiction shall construe and interpret or reform this Agreement to provide for a restriction having the maximum enforceable area, time period and such other constraints or conditions (although not greater than those currently contained in this Agreement) as shall be valid and enforceable under the applicable law. 14. SURVIVORSHIP. The respective rights and obligations of the parties hereunder shall survive any termination of this Agreement to the extent necessary to the intended preservation of such rights and obligations. 15. HEADINGS. All descriptive headings of sections and paragraphs in this Agreement are intended solely for convenience of reference, and no provision of this Agreement is to be construed by reference to the heading of any section or paragraph. 16. WITHHOLDING TAXES. All salary, benefits, reimbursements and any other payments to Cross under this Agreement shall be subject to all applicable payroll and withholding taxes and deductions required by any law, rule or regulation of and federal, state or local authority. 17. APPLICABLE LAW: JURISDICTION. The laws of the State of Illinois shall govern the interpretation, validity and performance of the terms of this Agreement, without reference to rules relating to conflicts of law. Any suit, action or proceeding against Cross with respect to this Agreement, or any judgment entered by any court in respect thereof, may be brought in any court of competent jurisdiction in the State of Illinois, as the Company may - 6 - 7 elect in its sole discretion, and Cross hereby submits to the nonexclusive jurisdiction of such courts for the purpose of any such suit, action, proceeding or judgment. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. NANOPHASE TECHNOLOGIES CORPORATION By: ________________________________________ Leonard Batterson, Chairman of the Board __________________________________ ROBERT CROSS - 7 - EX-10.5 6 EMPLOYMENT AGREEMENT - DENNIS J. NOWAK 1 EXHIBIT 10.5 NANOPHASE TECHNOLOGIES CORPORATION 453 Commerce Street Burr Ridge, Illinois 60521 Dated as of September 3, 1996 Mr. Dennis Nowak 10113 Wellington Terrace Munster, Indiana 46321 Dear Dennis: We are delighted you have agreed to join Nanophase Technologies Corporation ("NTC"). In this letter, I would like to present the terms of your employment with NTC. 1. Title and Duties. Subject to (i) confirmation and election by the Board of Directors of NTC, and (ii) the resignation of the current Secretary and Treasurer of NTC, you will serve as Vice President, Chief Financial Officer, Secretary and Treasurer of NTC. In those capacities, you will have such duties as are assigned to you from time to time by the Board or by the President and Chief Executive Officer of NTC. You will report to the President and Chief Executive Officer. During your employment with NTC you agree that you will devote substantially all of your business time and best efforts to your duties as an employee and officer of NTC. 2. Compensation. Your base annual salary upon the commencement of your employment will be $140,000 per year. Thereafter, all increases in your base salary will be as determined by the Board in their discretion. Assuming you are still employed by NTC at that time, you will be entitled to (i) a bonus of $35,000 on the first anniversary of your employment with NTC, and (ii) a bonus of $35,000 upon the successful consummation of an initial public offering of the common stock of NTC. You will also be eligible to receive cash bonuses as determined in the discretion of the Board from time to time. All base salary will be earned and paid in accordance with NTC's regular payroll policies for professional employees in effect from time to time. 3. Other Benefits. You will be entitled to the health, life and other insurance benefits generally made available by NTC to other executive officers of NTC from time to time, which benefits are subject to change. You will be entitled to paid annual vacation in accordance with NTC's policy for executive officers. Further, NTC will reimburse you for actual out-of-pocket expenses incurred by you in the performance of your services for NTC (in accordance with NTC's policy for such reimbursements applicable to NTC's executive officers on the same terms generally offered to such officers), upon the receipt of appropriate documentation of such expenses. 4. Stock Options. Subject to action by the Board of Directors, upon the commencement of your employment and your execution of the stock option agreement we have provided you, you will receive options to purchase 100,000 shares of NTC's common stock at a price of $2.25 per share, subject to the terms of the stock option agreement and the Nanophase Technologies Corporation Stock Option Plan effective January 13, 1992, as it may be amended from time to time. Subsequent grants of options may be 2 Mr. Dennis Nowak September 3, 1996 Page 2 made in the discretion of the Board of NTC on such terms and conditions as it may determine. 5. Severance Payment. If NTC terminates your employment with NTC other than for Cause (as defined below), NTC shall pay to you an amount equal in annual amount to your base salary in effect at the time of termination during the period (the "Severance Period") of twenty six (26) full weeks after the effective date of termination, payable in proportionate amounts on NTC's regular pay cycle for professional employees and (if the last day of the Severance Period is not the last day of a pay period) on the last day of the Severance Period. No severance will be due you if termination occurs for any other reason. For purposes of this letter agreement, "Cause" means (i) willful and gross malfeasance or willful and gross misconduct by you in connection with your employment with NTC, (ii) gross negligence in performing any of your duties with NTC, (iii) your conviction of, or entry of a plea of guilty to, or entry of a plea of nolo contendere with respect to, any crime other than a misdemeanor; (iv) your willful and gross breach of any written policy applicable to all employees adopted by NTC concerning conflicts of interest, political contributions, standards of business conduct or fair employment practices, procedures with respect to compliance with securities laws or any similar matters, or adopted pursuant to the requirements of any government contract or regulation, or (v) the material breach by you of any of your agreements in this letter agreement. 6. Confidentiality. As a NTC employee, you will have access to information about the properties and operations of NTC and third parties which are confidential in nature. Consequently, you have agreed to execute the form of confidentiality and proprietary rights agreement we have provided to you as of the date of the commencement of your employment. 7. Miscellaneous. (a) You acknowledge and agree that (i) your employment with NTC is "at-will", (ii) NTC has not made any agreements concerning the duration of your employment, (iii) no agreement concerning the duration of your employment can be made except in a written agreement executed by you and the President of NTC, and (iii) your employment may be terminated at any time, with or without cause, by either you or NTC at any time. (b) The agreements set forth in this letter are a personal contract, and your rights set forth above may not be sold, transferred, assigned, pledged or encumbered by you. (c) Except as contemplated in Sections 4 and 6 above, this letter agreement represents the entire agreement between you and NTC concerning your employment with NTC and supersedes all prior negotiations and agreements, whether written or oral, relating to your employment with NTC. (d) No provision of this letter agreement may be amended or waived unless pursuant to a writing signed by you and the President of NTC. No waiver by any party to this letter agreement of any breach by another party of any condition or provision to be performed by 3 Mr. Dennis Nowak September 3, 1996 Page 3 such other party shall be deemed a waiver of a similar or dissimilar condition or provision at the same time, any prior time or any subsequent time. (e) All salary, bonuses, benefits, reimbursements and any other payments to you under this agreement shall be subject to all applicable payroll and withholding taxes and deductions required by any law, rule or regulation of any federal, state or local authority. (f) The laws of the State of Illinois shall govern the interpretation, validity and performance of the terms of this agreement, without reference to rules relating to conflicts of law. Any suit, action or proceeding with respect to any matters related to your employment shall be brought in any court of competent jurisdiction in the State of Illinois. To acknowledge your agreement to the terms of your employment set forth above, please sign a copy of this letter where indicated and return it to me at your earliest convenience. Nanophase Technologies Corporation By: ------------------------------------- Robert W. Cross President and Chief Executive Officer Accepted and Agreed the date first written above - ---------------------------------- Dennis Nowak EX-10.6 7 SEVERANCE BENEFITS AGREEMENT 1 EXHIBIT 10.6 SEVERANCE BENEFITS AGREEMENT THIS AGREEMENT made this as of the 15th day of November, 1994, by and between Nanophase Technologies Corporation, an Illinois corporation (the "COMPANY"), Steven Lazarus ("TRUSTEE"), and Dr. John C. Parker ("PARKER"). WHEREAS, the Company desires to provide certain benefits to Parker in the event of the termination of his employment with the Company, and the Company may incur liabilities in connection with such benefits; WHEREAS, the Company wishes to establish a trust (hereinafter called "TRUST") and to contribute to the Trust assets that shall be held therein, not subject to the claims of the Company's creditors, until paid to Parker in such manner and at such times as specified in this Agreement while this Agreement remains in effect; WHEREAS, it is the intention of the Company to make a contribution to the Trust to provide the Trust with a source of funds to assist the Trust in meeting its liabilities under this Agreement. NOW, THEREFORE, the parties do hereby establish the Trust and agree that the Trust shall be comprised, held and disposed of as follows: SECTION 1. ESTABLISHMENT OF TRUST (a) The Company hereby deposits with Trustee in trust the sum of $75,000 to establish the Trust, which sum shall become the principal of the Trust to be held, administered, and disposed of by Trustee as provided in this Agreement. The Company shall have no obligation to deposit any additional sums to the Trust, and neither Trustee nor Parker or his beneficiaries shall have any right to compel such additional deposits. (b) The principal of the Trust, and any earnings thereon shall be held separate and apart from any other funds of the Company or the Trustee and shall except as otherwise set forth in this Agreement be used exclusively for the uses and purposes of satisfying Parker's rights under this Agreement. Any assets held by the Trust will not be subject to the claims of the Company's creditors. (c) The Company, in its sole discretion, may at any time, or from time to time, make additional deposits of cash or other property in trust with Trustee to augment the principal to be held, administered and disposed of by Trustee as provided in this Agreement. SECTION 2. PAYMENTS TO PARKER. (a) Unless sooner terminated pursuant to this Agreement, Parker shall be entitled to receive payments of $3,125 on the first and fifteenth day of each month commencing with the first day of the month following the month in which the Trustee shall have received a "Notice of Termination" (as defined below) from Parker, the Trustee shall have confirmed with the Company that such Notice of Termination has been received by the Company, and the Trustee shall not have received any written notice of protest from the Company as of the first such payment date. All such payments shall be paid by the Trustee by check delivered to Parker by the Trustee at the address set forth in this Agreement below, or to such other address as Parker shall have notified Trustee from time to time after the date of this Agreement. (b) For purposes of this Section 2, a "NOTICE OF TERMINATION" means a written notice delivered by Parker to both the Company and the Trustee in accordance with the notice provisions of this Agreement, stating that in fact one or more of the following events has occurred and is continuing: 2 (i) the Company shall have (A) filed for protection under the federal bankruptcy laws, (B) become insolvent and unable to conduct its business and shall have commenced the liquidation of its assets, or (C) transferred all or substantially all of its assets for the benefit of creditors generally; (ii) sold all or substantially all of its assets, or shall have merged pursuant to an agreement under which the then existing shareholders of the Company own less than 50% of the combined entity following the merger, and the acquiring person or surviving company, as the case may be, shall not offer Parker employment on terms substantially equal to those enjoyed by Parker at the time such event may occur; (iii) Parker shall have been terminated without "cause", as defined below. (c) For purposes of this Section 2, the term "CAUSE" means (i) theft, embezzlement, misappropriation of funds, (ii) other acts which constitute a material violation of Parker's contractual obligations with the Company, and which are directly harmful to the business and affairs of the Company as determined in good faith by the Company's Board of Directors (the "BOARD"), (iii) the continuing failure of Parker to fail to perform his duties with the Company as determined in good faith by the Board for any reason other than those set forth in (i) and (ii) above, which failures have been set forth in writing by the Company and delivered to Parker, and Parker has been given a reasonable opportunity to cure such failures, if appropriate in the circumstances. (d) Notwithstanding the foregoing, Parker shall be entitled to receive the Installment Payments required hereunder from the first date of payment through and including the earlier to occur of (i) the twenty fourth such payment, or (ii) the date on which Parker shall accept employment, whether by direct service with an entity or through a consulting arrangement. (e) The Trustee shall make provision for the reporting and withholding of any federal, state or local taxes that may be required to be withheld with respect to the payment of benefits pursuant to the terms of the Agreement and shall pay amounts withheld to the appropriate taxing authorities or determine that such amounts have been reported, withheld and paid by the Company. (f) The Trustee shall have no duty to inquire whether any facts, circumstances or events alleged in the Notice of Termination or in any notice of response by the Company shall in fact be true or shall have in fact occurred, and shall be entitled to rely on any statement of such facts, circumstances or events stated in any written notice from the Company or Parker for all purposes of performing his obligations under this Agreement. SECTION 3. PAYMENTS TO THE COMPANY. (a) Except as provided in this Section 3, the Company shall have no right or power to direct Trustee to return to the Company or to divert to others any of the Trust assets before all payment of benefits have been made to Parker or this Agreement shall have terminated in accordance with its terms. (b) The Trustee shall pay to the Company (i) all interest earned on the assets of the Trust, at least semi-annually, less any sums expended by the Trustee to meet allowed expenses which have not previously been reimbursed by the Company or which may be necessary to pay tax obligations owing with respect to the income of the Trust, (ii) all principal of the Trust, together with interest due and owing thereon at the time of such principal payment, at such time as this Agreement shall terminate in accordance with Section 9(b) below, or Parker shall no longer be entitled to receive any payments - 2 - 3 from the Trust pursuant to the terms of Section 2 above. The Trustee may reinvest income for the benefit of the Company in between payment dates. SECTION 4. INVESTMENT AUTHORITY. In addition to the powers conferred by law upon trustees, and not by way of limitation thereof, the Trustee is hereby authorized to exercise the following powers for the sole benefit of the beneficiary of the Trust: to invest and reinvest the trust estate wholly or partially in certificates of deposit with a duration of three months or less issued by banks having net assets in excess of $100,000,000, or in money-market funds or money market mutual funds having a constant share price sponsored by a bank having net assets in excess of $100,000,000, as the Trustee may deem advisable. All rights associated with assets of the Trust shall be exercised by Trustee or the person designated by Trustee, and shall in no event be exercisable by or rest with the Company or Parker or his beneficiaries. SECTION 5. ACCOUNTING BY TRUSTEE. Trustee shall keep accurate and detailed records of all investments, receipts, disbursements, and all other transactions required to be made hereunder. Within 30 days following the close of each calendar year and within 30 days after the removal or resignation of Trustee, Trustee shall deliver to the Company and Parker a written account of its administration of the Trust during such year or during the period from the close of the last preceding year to the date of such removal or resignation, setting forth all investments, receipts, disbursements, and other transactions effected by it, including a description of all investments purchased and sold (accrued interest paid or receivable being shown separately), and showing all cash and securities held in the Trust at the end of such year or as of the date of such removal or resignation, as the case may be. SECTION 6. RESPONSIBILITY OF TRUSTEE. (a) Trustee shall act with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person acting in like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims, provided, however, that Trustee shall incur no liability to any person for any action taken pursuant to a direction, request or approval given by the Company or Parker which is contemplated by, and in conformity with, the terms of this Agreement and is given in writing by the Company or Parker. In the event of a dispute between the Company and Parker, Trustee may attempt to resolve the dispute, but in any event the Trustee shall be entitled to apply to a court of competent jurisdiction to resolve the dispute. (b) If Trustee undertakes to resolve any dispute between the Company and Parker, or undertakes or defends any litigation arising in connection with this Agreement, the Company agrees to indemnify Trustee against Trustee's reasonable costs, expenses, and liabilities (including, without limitation, reasonable attorneys' fees and expenses) relating thereto and to be primarily liable for such payments. (c) Trustee may consult with legal counsel (who may also be counsel for the Company generally) with respect to any of its duties or obligations hereunder. (d) Trustee may hire agents, accountants, actuaries, investment advisors, financial consultants or other professionals to assist Trustee in preforming any of his duties or obligations hereunder. (e) Trustee shall have, without exclusion, all powers conferred on Trustees by applicable law, unless expressly provided otherwise herein. (f) Notwithstanding any powers granted to Trustee pursuant to this Agreement or to - 3 - 4 applicable law, Trustee shall not have any power that could give this Trust the objective of carrying on a business and dividing the gains therefrom, within the meaning of section 301.7701-2 of the Procedure and Administrative Regulations promulgated pursuant to the Internal Revenue Code. SECTION 7. COMPENSATION AND EXPENSES OF TRUSTEE. The Company shall pay all administrative and Trustee's fees and expenses. If not so paid, the fees and expenses shall be paid from the income of the Trust. SECTION 8. RESIGNATION AND REMOVAL OF TRUSTEE. (a) Trustee may resign at any time by written notice to the Company and Parker, which shall be effective thirty (30) days after receipt of such notice unless the Company, Parker and Trustee agree otherwise. (b) Upon resignation of Trustee and appointment of a successor Trustee, all assets shall subsequently be transferred to the successor Trustee. The transfer shall be completed within 30 days after receipt of notice of resignation, removal or transfer, unless the Company extends the time limit. The Company and Parker agree that if Steven Lazarus shall resign as Trustee or shall no longer be available to serve as Trustee for any reason, then Keith Crandell shall be an acceptable successor Trustee to both the Company and Parker. If Mr. Crandell is not willing or able to serve as successor Trustee, or shall accept such appointment and thereafter resigns or is no longer available to so serve, the Company and Parker shall mutually agree on an independent third person to serve as successor Trustee. If the parties cannot so agree, the Company may appoint a bank trust department or other party that may be granted corporate trustee powers under state law, as a successor to replace Trustee upon resignation or removal, and shall pay the customary fees of such successor Trustee in such event. (c) The appointment of a successor Trustee shall be effective when accepted in writing by the successor Trustee, who shall have all of the rights and powers of the former Trustee, including ownership rights in the Trust assets. The former Trustee shall if possible execute any instrument necessary or reasonably requested by the Company or the successor Trustee to evidence the transfer. SECTION 9. AMENDMENT OR TERMINATION. (a) The Trust created by this Agreement is intended to be and is irrevocable. Notwithstanding the foregoing, no amendment to this Agreement shall make the Trust revocable. (b) The Trust shall terminate upon notice by the Company to the Trustee of the occurrence of the earliest to occur of the following events: (i) Parker shall voluntarily terminate his employment with the Company, (ii) Parker shall die or shall suffer a long term disability (as determined in accordance with the terms of any disability insurance carried by or for the benefit of Parker at the time of determination, (iii) the Company shall have consummated the initial public offering of its securities, shall have obtained a listing for its securities on a nationally recognized stock exchange (including without limitation a NASDAQ National Market Systems listing), and any underwriter imposed "lock-up" period which bars the purchase or sale of shares of the Company's common stock issued pursuant to previously granted stock options shall have ended, and (iv) the close of business on November 15, 1999. Upon termination, the Trustee shall continue to have such powers provided in this Agreement as are necessary or desirable for the orderly liquidation and distribution of the sums remaining upon termination. SECTION 10. MISCELLANEOUS. - 4 - 5 (a) Any provision of this Agreement prohibited by law shall be ineffective to the extent of any such prohibition, without invalidating the remaining provisions hereof. This Agreement may be signed in multiple counterparts, each of which when taken together shall constitute one and the same Agreement. Headings contained in this Agreement are for convenience only and are not intended to have any substantive effect whatsoever. (b) Any direction or notice authorized or required to be given by the Company, Parker or the Trustee under this Agreement shall be deemed delivered to the party intended to receive such communication if delivered at the address for such recipient set forth below their respective signatures below, or at such other address of which such party shall from time to time notify the other parties to this Agreement in writing in accordance with this paragraph, (i) on the date it is personally delivered, if delivery is by hand, (ii) on the day after deposit for delivery by a nationally recognized overnight courier service, or (iii) three business day following deposit for delivery by certified or registered first class United States mail, postage prepaid. (c) Benefits payable to Parker under this Agreement may not be anticipated, assigned (either at law or in equity), alienated, pledged or encumbered in any way. This Agreement is for the benefit of Parker only, and is not intended to be a benefit payable after death to his heirs, beneficiaries, personal representatives or assigns. (d) This Agreement shall be governed by and construed in accordance with the laws of Illinois. This Agreement may not be amended or modified in any way without the prior written consent of the Company and Parker, and if such amendment or modification would expand or otherwise change the rights, obligations and protections of the Trustee hereunder, the Trustee. - 5 - 6 IN WITNESS WHEREOF, each of the undersigned have executed this Agreement as of the date first written above. "TRUSTEE" "COMPANY" Nanophase Technologies Corporation, an Illinois corporation ___________________________________ By:________________________________ Steven Lazarus Its President Address: c/o ARCH Venture Partners Address: __________________________ 135. S. LaSalle Street Burr Ridge, IL _______ 37th Floor Chicago, Illinois 60603 "PARKER" ____________________________________ John C. Parker Address: 1597 Clemson Drive Naperville, IL 60565 - 6 - EX-10.7 8 LICENSE AGREEMENT - ARCH DEVELOPMENT CORP. 1 Exhibit 10.7 LICENSE AGREEMENT License Agreement dated June 1, 1990, between ARCH DEVELOPMENT CORPORATION, an Illinois not-for-profit corporation ("ARCH"), and NANOPHASE TECHNOLOGIES CORPORATION, an Illinois corporation ("NTC"). PRELIMINARY STATEMENT ARCH holds certain rights, title and interest in and to the technology described below. NTC desires to obtain the right to exploit the technology in commercial settings, on the terms and conditions set forth below. Therefore, in consideration of the mutual obligations set forth herein, ARCH and NTC agree as follows. AGREEMENT I. DEFINITIONS. The following capitalized terms are used in this Agreement with the following meanings: "Affiliate" of any entity means any person or entity which directly or indirectly controls, is controlled by, or is under common control with such entity. "Combination Product" means any product sold as a single unit but which incorporates both (a) one or more Licensed Products and (b) one or more products, not themselves Licensed Products, which the seller of the Combination Product also offers for sale separately from the Combination Product. "Field of Use" means all uses of nanophase processes or materials for structural, electrical, chemical or optical applications. "Improvements" means all modifications, revisions or improvements to the Inventions (i) to which ARCH shall acquire rights during the term of this Agreement, and (ii) which improve the performance of the Inventions or any Licensed Product, reduce the production costs of any Licensed Product, broaden the applicability of any Licensed Product, increase the marketability of any Licensed Product, or replace any Licensed Product in the marketplace. "Invention" means each product, composition, process and use within the scope of any claim contained in any patent application listed on Schedule I attached hereto, and each product or 2 composition made or manufactured by any art, method or process within the scope of any claim of any such patent application, and all Improvements thereof. "Know-How" means the information, technical abilities, know-how, data and designs in the possession or control of ARCH related to the Inventions that is necessary or useful to reduce the Inventions to practice or to manufacture Licensed Products. "Later Developments" means all discoveries, inventions, or other proprietary matters now or hereafter owned or controlled by ARCH within the Field of Use and not constituting Improvements. "Licensed Product" means any product or composition within the scope of any claim of any patent application filed with respect to any of the Inventions or any issued patent within the Patent Rights, or any product or composition made or manufactured by any art, method, or process within the scope of any claim of any patent application filed with respect to any of the Inventions or any issued patent within the Patent Rights, including any Combination Product. "Net Sales" means: (a) with respect to Licensed Products sold for cash other than Licensed Products sold as an element of a Combination Product, the price actually charged by NTC or any sublicensee of NTC in the sale of the Licensed Product, less: (i) customary trade, quantity or cash discounts, rebates, and non-affiliated brokers' or agents' commissions actually allowed and taken; (ii) amounts repaid or credited to customers on account of rejections or returns of specified products subject to royalty hereunder or on account of retroactive price reductions affecting such products; and (iii) freight and other transportation costs, including insurance charges, and duties, tariffs, sales and excise taxes and other governmental charges based directly on sales, turnover or delivery of the specified products and paid or allowed by NTC or a sublicensee; and (b) with respect to Licensed Products sold or otherwise transferred other than for cash, and with respect to Licensed Products sold for cash as an element of a Combination Product, and with respect to Licensed Products used or consumed by NTC or any sublicensee of NTC in the manufacture of another product, - 2 - 3 either (i) an amount per unit of Licensed Product equal to the average sale price of the Licensed Product determined in accordance with clause (a) above for sale to third parties in the same and the preceding quarterly accounting period, or (ii) if no sales of the Licensed Product have occurred in the same and the preceding quarterly accounting period, other than as an element of a Combination Product, an amount equal to (y) the price actually charged in the sale of the Combination Product, less: (i) customary trade, quantity or cash discounts, rebates, and non-affiliated brokers' or agents commissions actually allowed and taken; (ii) amounts repaid or credited to customers on account of rejections or returns of specified products subject to royalty hereunder or on account of retroactive price reductions affecting such products; and (iii) freight and other transportation costs, including insurance charges, and duties, tariffs, sales and excise taxes and other governmental charges based directly on sales, turnover or delivery of the specified products and paid or allowed by NTC or a sublicensee; times (z) a fraction, the numerator of which is the direct manufacturing cost of the Licensed Product, including materials, purchased parts and labor and calculated in the customary manner used in the seller's internal cost accounting, and the denominator of which is the total direct manufacturing cost of the Combination Product, including materials, purchased parts and labor and calculated in the same manner. "Patent Costs" means out-of-pocket expenses incurred in connection with the preparation, filing, prosecution and maintenance of the Patent Rights, including, among other items, the fees and expenses of attorneys and patent agents, filing fees and maintenance fees, but excluding costs involved in any patent infringement claims. "Patent Rights" means all rights arising from any patents issued on (i) patent applications listed on Schedule I attached hereto and made a part hereof, (ii) any other patent applications that may be filed in connection with any of the Inventions, and (iii) all patent applications which are divisions, continuations, continuations-in-part, reissues, renewals, foreign counterparts, substitutions, or extensions of or to such patent applications. - 3 - 4 II. GRANT OF LICENSE. 2.1. Grant. ARCH hereby grants, and agrees to grant, to NTC: (a) the exclusive (except as otherwise specified in Section 2.2) worldwide license to make, have made, use and sell Licensed Products within the Field of Use; and (b) a non-exclusive worldwide license to use Know-How in connection with the manufacture, use and sale of Licensed Products within the Field of Use; and (c) the exclusive (except as otherwise specified in Section 2.2) right and authority to grant sublicenses of the rights granted in clause (a) above, and the non-exclusive right and authority to grant sublicenses of the rights granted in clause (b) above, subject to the provisions of this Agreement. 2.2. Reservations. (a) ARCH reserves for itself and for The University of Chicago (the "University") the irrevocable right to make and use Licensed Products and to use the Patent Rights and Inventions for its own internal educational and research purposes. Neither ARCH nor the University shall have any obligation to pay NTC a royalty or any other fee for the rights reserved in the preceding sentence, which shall not be transferable (except to any Affiliate of or successor to ARCH or the University, in which event such Affiliate shall be bound by the restrictions on transfer set forth herein) or licensable, and shall not include the right to sell Licensed Products or to license the Patent Rights or Inventions. (b) NTC acknowledges that the Inventions were developed at Argonne National Laboratory, which is operated by the University pursuant to its agreement with the United States Department of Energy ("DOE") (such agreement, as it may be amended from time to time, being referred to herein as the "Prime Contract"), and that pursuant to such Prime Contract DOE has reserved certain rights to the Inventions. Such rights include, but are not necessarily limited to, (i) a non-exclusive, nontransferable, irrevocable, paid-up license to practice or have practiced for or on behalf of the United States throughout the world and (ii) march-in rights pursuant to 37 C.F.R. 401.6. In the event DOE attempts to acquire additional rights to any Invention by exercising such march-in rights, ARCH will, upon receiving notice of such attempt promptly notify NTC and will allow NTC, at NTC's expense, to oppose such DOE effort in the name of and on behalf of ARCH. -4- 5 2.3. Sublicenses. NTC shall promptly notify ARCH in writing following the execution by NTC of any sublicense under this Agreement, and shall include a summary of all material terms. The terms of any such sublicense shall be in NTC's sole discretion. Upon the termination of this Agreement for any reason prior to the expiration of the last-to-expire of the Patent Rights, each such sublicense shall be deemed converted to a temporary direct license from ARCH to such sublicensee on the terms of such sublicense agreement, which temporary direct license shall terminate upon the earlier of (i) sixty (60) days after the termination of this Agreement or (ii) the expiration of the last-to-expire of the Patent Rights; provided, however, that ARCH agrees that upon request it will negotiate in good faith with any of the sublicensees under such sublicense agreements to grant such sublicensee a permanent direct license, within such sublicensee's existing field of use, on substantially the same terms as set forth in such sublicense and this Agreement. NTC shall be entitled to collect any amounts due to it under each sublicense agreement for the period prior to the termination of this Agreement, subject to NTC's obligation to pay Royalties to ARCH with respect to such amounts. III. PAYMENTS. 3.1. Royalties and Sublicense Fees. (a) Beginning with the first sale of a Licensed Product sold by NTC or any sublicensee of NTC, NTC shall pay ARCH royalties ("Royalties") equal to five percent (5%) of Net Sales of Licensed Products sold by NTC or any of its sublicensees. In addition, NTC shall pay ARCH 50% of all amounts received from any sublicensees that are not based upon sales for use of Licensed Products, whether such payments are designated as sublicense fees, or otherwise. (b) In the event that NTC is obligated to pay a royalty to a third party to make, have made, use or sell a Licensed Product, NTC may reduce the Royalties payable to ARCH by an amount equal to the royalty paid to such third party, provided, however, that in no event will the Royalties otherwise payable hereunder be reduced by more than 50% for any period. (c) In the event of a substantial infringement of the Patent Rights by a third party, the Royalties payable to ARCH shall be reduced by a percentage equal to the percentage of sales of Licensed Products lost by NTC as a result of such infringer's action (to be determined in good faith by NTC and ARCH, taking into account both historical and projected sales, at the time of such infringement), but in no event by more than 50%, beginning upon the date NTC shall substantiate to ARCH that a substantial infringement of the Patent Rights is occurring, and ending upon -5- 6 the date such infringement shall cease. For purposes of this Section 3.1(c), a "substantial infringement" shall be deemed to occur when a third party shall have sales of products that, if sold by NTC, would constitute Licensed Products, of more than $10,000 per year. (d) The requirement for NTC to pay Royalties to ARCH arising from the manufacture, use or sale of Licensed Products by NTC or any sublicensee of NTC in a particular jurisdiction shall extend only so long as such manufacture, use or sale: (i) is within the scope of any then pending claim of an application in such jurisdiction; and (ii) is covered by any claim (other than a claim which has been determined by a court of competent jurisdiction from which no appeal can be taken to be invalid or unenforceable) of an issued, unexpired and in-force patent within the Patent Rights in such jurisdiction. Only one Royalty shall be due or payable with respect to any single Licensed Product regardless of how many patents or patent applications within the Patent Rights cover the manufacture, use or sale of such Licensed Product. 3.2. Payment of Royalties Accounting. (a) Royalties shall be calculated on a calendar quarter basis for sales occurring in such quarter. Payment of Royalties with respect to each calendar quarter shall be due at the same time that NTC's accounting of sales and receipts with respect to the quarter is due (as provided in Section 3.2(b) hereof), beginning with the calendar quarter in which the first sale of a Licensed Product occurs. (b) Within sixty (60) days after the end of each calendar quarter during the term of this Agreement (and regardless of whether any sales of Licensed Products occurred during such period), NTC shall deliver to ARCH a true and complete accounting of sales of Licensed Products and receipts from those sales by NTC and its sublicensees during such period, with a separate accounting of sales and receipts by country. If no sales of Licensed Products occurred during such period, NTC's accounting shall consist of a statement to that effect. 3.3. Records. NTC shall keep accurate records in sufficient detail to permit the Royalties under this Agreement to be determined, and shall require any sublicensees to do the same. NTC shall permit its books and records regarding Licensed Products to be examined and copied from time to time during the term of this Agreement and for a reasonable period of not less -6- 7 than three years after the date to which such records relate, at the request and sole expense of ARCH, during normal business hours by ARCH or any representative of ARCH reasonably acceptable to NTC or such sublicensee, and shall require each of its sublicensees to do the same. 3.4. Foreign Payments. In the event of Net Sales for which NTC or any sublicensee receives payment in a currency other than currency which is legal tender in the United States of America, all Royalties with respect to such Net Sales shall be computed by converting such payment into United States dollars at the applicable rate of exchange of Citibank, N.A., in New York, New York, on the last day of the quarter in which the Net Sales occurred. All Royalties shall be paid to ARCH in United States dollars. 3.5. Interest on Overdue Payments. Payments provided for in this Agreement shall, when overdue more than thirty (30) days, bear interest at a fluctuating rate equal from time to time to one percent (1%) per annum plus the rate then most recently announced by Citibank, N.A., as its Base Rate, beginning on the thirty-first day after the due date and continuing until payment is received by ARCH. Any interest accruing under this Section shall be due to ARCH without demand to NTC. IV. NO WARRANTIES; INDEMNIFICATION; 4.1. Disclaimer of Warranties. ARCH hereby disclaims all warranties relating to the Inventions, Patent Rights or Know-How, express or implied. Without limiting the generality of the foregoing, ARCH expressly does not warrant (i) the accuracy of the information contained in the Applications, (ii) the patentability of any of the Inventions, or (iii) the accuracy, safety, or usefulness for any purpose, of the Patent Rights, Inventions, or any Know-How made available by ARCH hereunder. Nothing contained in this Agreement shall be construed as either a warranty or representation by ARCH that any Patent Rights will issue or as to the validity or scope of any Patent Rights that may issue. ARCH assumes no liability in respect of any infringement of any patent or other right of third parties due to the activities of NTC or any sublicensee under this Agreement. 4.2. Indemnification and Insurance. (a) Neither ARCH, the University, any Affiliate of either of them, nor any officer, director, trustee, employee, agent or representative of any of them (each an "Indemnified Party") shall have any liability whatsoever to NTC or any other person for or on account of (and NTC and each sublicensee agrees and covenants not to sue any Indemnified Party in connection with) any injury, loss, or -7- 8 damage, of any kind or nature, sustained by, or any damage assessed or asserted against, or any other liability incurred by or imposed upon NTC or any other person, arising out of or in connection with or resulting from (i) the production, use or sale of the Licensed Products by NTC or its sublicensees,(ii) the use of any Invention or Know-How by NTC or its sublicensees, or (iii) any advertising or other promotional activities with respect to either of the foregoing. NTC shall indemnify and hold each Indemnified Party harmless against all claims, demands, losses, damages or penalties (including but not limited to attorney's fees) made against any Indemnified Party with respect to such matters, whether or not such claims are groundless and without merit or basis. (b) Each Indemnified Party agrees to notify NTC in writing as soon as possible and in any event within thirty (30) days after receiving written notice of any claim for which indemnity will be sought by such Indemnified Party hereunder. In such event, NTC shall be entitled to select counsel of its choosing and direct the defense thereof. NTC shall have the right to settle any such claim; provided, however, no such settlement shall involve the surrender by NTC, on behalf of itself or ARCH, of rights under any Patent Rights without the prior written consent of ARCH. ARCH agrees to cooperate with NTC in connection with any such claim, and shall not unreasonably withhold its consent to any settlement to which it has the right to consent. (c) NTC agrees to use its best efforts to list ARCH, at NTC's expense, as an additional insured under any liability insurance policy that NTC shall have or obtain that includes any coverage of claims relating to any of the Inventions, Patent Rights or Licensed Products. At ARCH's request, NTC will supply ARCH from time to time with copies of each such policy, and will notify ARCH in writing at least thirty (30) days prior to any termination of or change in coverage under any such policies. 4.3. Government Indemnification. This license is entered into by ARCH, independent from the Prime Contract with the Department of Energy. ARCH is acting independently from the Government and in its own private capacity and is not acting on behalf of the U.S. Government, nor as its contractor nor its agent. Correspondingly, it is understood and agreed that the U.S. Government is not a party to this Agreement and in no manner shall be liable for nor assume any responsibility or obligation for any claim, cost or damages arising out of or resulting from this Agreement, the subject matter licensed, or any action or lack thereof by ARCH, the University, or NTC with respect thereto. -8- 9 V. PROSECUTION AND MAINTENANCE OF LICENSED PATENTS 5.1. ARCH Prosecution. During the term of this Agreement, and subject to the provisions of Section 5.3 of this Agreement, ARCH shall be responsible for prosecuting and maintaining the Patent Rights in the United States and such other jurisdictions that NTC may elect in writing to ARCH (subject to Section 5.3). Except as otherwise specified in this Agreement, NTC shall pay when due, or in ARCH's option reimburse ARCH for, all Patent Costs accruing after November 30,1989. At NTC's request, ARCH shall provide NTC with copies of all office actions and other communications received by ARCH or its patent counsel with respect to the Patent Rights and, prior to submission to the recipients, copies of all draft filings with governmental agencies from ARCH or its patent counsel with respect to the Patent Rights. 5.2. NTC Cooperation. NTC agrees to cooperate with ARCH in ARCH's preparation, filing, prosecution and maintenance of Patent Rights, by disclosing such information as may be necessary and by promptly executing such documents as ARCH may reasonably request to effect such efforts. NTC shall bear its own costs in connection with its cooperation with ARCH under this Section. All Patent Rights shall be filed, prosecuted and maintained in ARCH's name or as ARCH shall designate. 5.3. NTC Prosecution. (a) In the event that NTC wishes to file a patent application for any of the Inventions in any jurisdiction other than the United States in which a patent application for such Invention has not already been filed, NTC shall identify the jurisdiction and Invention in writing to ARCH, and ARCH shall have ninety (90) days (or such shorter period as provided in the following sentence) after it receives such written notice in which to file such an application. Notwithstanding the foregoing, if NTC reasonably determines that a filing or other action is required in such jurisdiction in order to preserve or protect any Patent Rights in such jurisdiction, it shall so notify ARCH, and ARCH shall have until seven days prior to such date in which to file such an application. If ARCH declines or fails to file such an application within ninety (90) days (or such shorter period) after receiving the written notice, NTC may, in NTC's discretion and at NTC's sole expense but in ARCH's name, file and prosecute such an application. (b) In the event that ARCH determines to abandon any patent application covering the Inventions previously filed by it, ARCH will give NTC at least ninety (90) days prior written notice of its intention to abandon such application. NTC may, by written -9- 10 notice to ARCH, elect to continue the prosecution of such application at NTC's sole expense but in ARCH's name. (c) In the event that NTC determines to abandon any patent application covering the Inventions previously filed by it under Section 5.3(a) hereof, NTC will give ARCH at least ninety (90) days prior written notice of its intention to abandon such application. ARCH may, by written notice to NTC, elect to continue the prosecution of such application at ARCH's sole expense. 5.4. Confidentiality. (a) Both NTC and ARCH agree to treat (and, in the case of NTC, to cause its sublicensees to treat) as confidential all proprietary information made available by ARCH to NTC or by NTC to ARCH, provided that the party disclosing such information marks or otherwise identifies such information as "confidential" or "proprietary" (if such information is disclosed orally, it shall be summarized in writing within 30 days and such summary shall be identified as "confidential" or "proprietary"). ARCH acknowledges that NTC may find it beneficial to disclose such information provided by ARCH during the conduct of NTC's business. Under such circumstances, NTC may make such information available to third parties, provided that NTC shall first obtain from the recipients a fully-executed confidentiality agreement which is at least as restrictive as the confidentiality agreement NTC employs to protect its own secrets of comparable commercial value of the information being disclosed, and shall send a copy of such agreements to ARCH at the time of NTC's next accounting as required by Section 3.2(b) hereof. (b) Neither NTC nor ARCH shall be bound by the provisions of Section 5.4 with respect to information which (i) is known to the recipient at the time of disclosure; or (ii) is in the public domain at the time of disclosure; or (iii) becomes a part of the public domain after the time of disclosure, other than through disclosure by the recipient; or (iv) is required to be disclosed by law or contract. (c) Notwithstanding the provisions of Section 5.4(a), each of ARCH and the University shall, upon thirty (30) days prior written notice to NTC, be entitled to make disclosures of information regarding the Inventions in scholarly journals where in its reasonable judgment such disclosure will not materially compromise any proprietary rights. (d) NTC and ARCH shall each take such actions as the other party may reasonably request from time to time to safeguard the confidentiality of any information subject to the terms of this Section 5.4. - 10 - 11 (e) To the extent that United States Export Control Regulations are applicable, neither NTC nor ARCH shall, without having first fully complied with such regulations, (i) knowingly transfer, directly or indirectly, any unpublished technical data obtained or to be obtained from the other party hereto to a destination outside the United States, or (ii) knowingly ship, directly or indirectly, any product produced using such unpublished technical data to any destination outside the United States. (f) The obligations of NTC and ARCH under this Section 5.4 shall survive the expiration or earlier termination of all or any other part of this Agreement. VI. INFRINGEMENT 6.1. Disclosure. In the event that either ARCH or NTC becomes aware of the infringement of any Patent Rights, each shall inform the other in writing of all details available. 6.2. Rights to Prosecute. ARCH shall have the right, but not the obligation, to enforce the Patent Rights against any infringement. In the event of infringement by a third party of any Patent Rights within the Field of Use which NTC wishes to prosecute, NTC shall first make a written request to ARCH to prosecute such action. If within 90 days of receipt of such request ARCH shall have been unsuccessful in persuading such alleged infringer to desist such infringement, and shall not have brought an infringement action against such alleged infringer, NTC may enforce the Patent Rights by appropriate legal proceedings. 6.3. NTC Prosecution. In the event that NTC shall be prosecuting an alleged infringer pursuant to Section 6.2, it shall employ counsel reasonably satisfactory to ARCH and shall keep ARCH fully informed of all material developments of such proceedings. NTC shall be responsible for all costs and expenses of any enforcement activities, including legal proceedings, against infringers which NTC initiates. ARCH agrees to join in and cooperate with any enforcement proceedings at NTC's request, and at NTC's expense, provided that ARCH may be represented by ARCH's counsel in any such legal proceedings, at ARCH's own expense (subject to reimbursement under Section 6.5(a)), acting in an advisory but not controlling capacity. In addition, NTC may name ARCH as party plaintiff as required by law. No settlement, consent judgment, or other final, voluntary disposition of any suit brought by NTC which waives any rights within the Patent Rights may be entered into without the prior written consent of ARCH. In the event that a declaratory - 11 - 12 judgment action alleging the invalidity or non-infringement of the Patent Rights shall be brought or raised against NTC, ARCH shall have the right, but not the obligation, to intervene and take over the sole defense of such action. Any recoveries in any action brought by NTC under this Section 6.3 shall be allocated as provided in Section 6.5(a) hereof. 6.4. ARCH Prosecution. (a) Any actions brought by ARCH at the request of NTC pursuant to Section 6.2 shall be at the sole cost and expense of NTC, provided that ARCH agrees to consult with NTC and to keep NTC reasonably informed regarding such costs and expenses, and any recoveries shall be allocated as provided in Section 6.5(a) hereof. (b) Any other actions brought by ARCH shall be at the sole cost and expense of ARCH, and any recoveries shall be allocated as provided in Section 6.5(b) hereof, provided that ARCH shall notify NTC of any such action and NTC may, by written notice to ARCH, agree to pay all such costs and expenses, in which event the costs and expenses of such action, and any recoveries, shall be allocated as provided in Section 6.5(a) hereof. (c) NTC agrees to join in and cooperate with any enforcement proceedings at ARCH's request, and at ARCH's expense, provided, however, that NTC may be represented by NTC's counsel in any such legal proceedings, at NTC's own expense (subject to reimbursement under Section 6.5(b)), acting in an advisory but not controlling capacity. ARCH may name NTC as a party plaintiff as required by law. . 6.5. Recoveries. (a) All recoveries by way of royalties, damages, and claims with respect to infringement actions instituted, and claims made (including penalties and interest) (i) prosecuted by NTC pursuant to Section 6.2 hereof, (ii) prosecuted by ARCH pursuant to the request of NTC, or (iii) prosecuted by ARCH and paid for by NTC pursuant to Section 6.4(b) hereof shall belong to NTC. To the extent that NTC's recoveries with respect to an infringement action or claim exceed NTC's expenses with respect to such action or claim, NTC shall reimburse ARCH for ARCH's expenses for separate counsel with respect thereto, as provided in Section 6.3 hereof. After deduction of such costs and expenses, any recoveries shall be considered Net Sales under this Agreement as of the date any such recoveries are paid to NTC, giving rise to royalty obligations under Article III hereof. - 12 - 13 (b) All recoveries by way of royalties, damages and claims with respect to any infringement action prosecuted by ARCH other than those described in Section 6.5(a) shall belong to ARCH. To the extent that ARCH's recoveries with respect to any such infringement action or claim exceed ARCH's expenses with respect to such action or claim, ARCH shall reimburse NTC FOR NTC'S expenses for separate counsel with respect thereto, as provided in Section 6.4(c) hereof. VII. TERMINATION. 7.1. Breach of Obligations. ARCH shall have the right (without prejudice to any of its other rights conferred on it by this Agreement), upon written notice to NTC, to terminate this Agreement upon the material breach by NTC of the obligations or conditions contained in this Agreement, provided that if such breach is susceptible of cure, NTC shall have five (5) business days, with respect to any breach of an obligation to pay money, and sixty (60) days, with respect to a breach not involving a payment of money, after the receipt of such notice to correct such breach. ARCH's right to terminate this Agreement, as hereinabove provided, shall not be affected in any way by its waiver of, or failure to take action with respect to, any previous breach. 7.2. NTC Right to Terminate. NTC may terminate this Agreement at any time by written notice to ARCH, giving at least ninety (90) days prior to the termination date specified in the notice. 7.3. Expiration of Patent Rights. The license granted under this Agreement shall terminate upon the expiration of the last to expire Patent Rights, except that NTC's and ARCH's obligations under Sections 3.3, 4.2, and 5.4 shall continue in effect as provided in such Sections. 7.4. Effect of Termination. Upon the termination of this license for any reason prior to the expiration of the last-to expire of the Patent Rights, all rights granted hereunder shall revert to ARCH for the sole benefit of ARCH, and NTC agrees to return all technical data, related documents and improvements supplied by ARCH specific to the Licensed Products and Inventions to ARCH. If this Agreement shall terminate pursuant to the provisions of Section 7.3 hereof, or shall be terminated by the agreement of the parties prior to the expiration of the last-to expire of the Patent Rights, NTC shall retain the right to possess and use such confidential information, including Know-How, subject to the restrictions in disclosure set forth in section 5.4. - 13 - 14 VIII. ADVERTISING. Each party agrees not to use the name of the other party in any commercial activity, advertising or sales brochures except with the prior written consent of the other party. NTC agrees not to use the name of any of the inventors of the Inventions in any commercial activity, advertising or sales brochures unless it has obtained the prior written consent of the inventor. IX. PERFORMANCE. NTC agrees to use its reasonable best efforts promptly to commence and thereafter maintain commercial sales of Licensed Products. X. LATER DEVELOPMENTS. Subject to any obligations of ARCH in favor of other persons (including the DOE), ARCH hereby grants NTC an option to obtain a license on any Later Developments, which license shall be on the terms set forth in this Agreement except as ARCH and NTC may by mutual agreement otherwise provide. ARCH shall use its best efforts to obtain title, pursuant to the ARCH/University Agreement (as hereinafter defined) or any successor agreement, to all discoveries, inventions, or other proprietary matters within the Field of Use made at ANL or the University, and shall notify NTC of any Later Developments by a writing referring to this provision within ninety (90) days of acquiring rights to such Later Developments, all in sufficient detail to allow NTC to evaluate the commercial potential of such Later Development. NTC shall have thirty (30) days after such disclosure to exercise such option which shall be exercised by written notice to ARCH received within such period. If NTC shall fail to exercise its option within such period, its option for such Later Development shall be void, and NTC shall have no interest in such Later Development. XI. MISCELLANEOUS. 11.1. Assignment. (a) This Agreement may, at any time and without NTC's consent, be assigned by ARCH without such assignment operating to terminate, impair or in any way change the obligations or rights which ARCH would have had, or any of the obligations or rights which NTC would have had (including rights of NTC to Improvements and Later Developments), if such assignment had not occurred. From and after the making of such assignment, the assignee shall be substituted for ARCH as a party hereto, and ARCH shall no longer be bound hereby. (b) This Agreement shall not be assigned by NTC without the prior written consent of ARCH except to a wholly-owned subsidiary of NTC or to the successor or assignee of substantially all of its business related to Licensed Products. -14- 15 11.2. Entire Agreement, Amendment and Waiver. This Agreement (including any schedules and exhibits attached) contains the entire understanding of the parties with respect to the subject matter hereof. This Agreement may be amended, modified or altered only by an instrument in writing duly executed by the parties hereto. The waiver of a provision hereunder may be effected only by a writing signed by the waiving party and shall not constitute a waiver of any other provision. 11.3. Notices. Any notice or report required or permitted to be given or made under this Agreement by one of the parties hereto to the other shall be in writing and shall be given by personal delivery or by United States registered or certified mail, return receipt requested, addressed as follows: If to ARCH: ARCH Development Corporation 1115-25 East 58th Street Chicago, Illinois 60637 Attention: President If to NTC: Nanophase Technologies Corporation 1081 Maple Ave. Evanston, Illinois 60201 Attention: President or to such other address of which the intended recipient shall have notified the sender by a written notice given in accordance with the terms of this Section. Any notice under this Agreement shall be effective when received. 11.4. Severability. In the event that any one or more of the provisions of this Agreement should for any reason be held by any court or authority having jurisdiction over this Agreement, or either of the parties hereto, to be invalid, illegal or unenforceable, such provision or provisions shall be reformed to approximate as nearly as possible the intent of the parties, and the validity of the remaining provisions shall not be affected. 11.5. Governing Law. The interpretation and performance of this Agreement shall be governed by the laws of the State of Illinois applicable to contracts made and to be performed in that state. 11.6. Marking. NTC shall place in a conspicuous location on any Licensed Product (or its packaging where appropriate) made or sold under this Agreement, a patent notice in accordance with the laws concerning the marking of patented articles. -15- 16 11.7. Implementation. Each party shall, at the request of the other party, execute any document reasonably necessary to implement the provision of this Agreement. 11.8. United States Manufacture. Unless DOE shall agree otherwise, NTC agrees that Licensed Products will be manufactured substantially in the United States, and further agrees that it will not grant any exclusive sublicenses under this Agreement to sell Licensed Products in the United States unless the sublicensee agrees that any License Products will be manufactured substantially in the United States. IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the date first above written. ARCH: ARCH DEVELOPMENT CORPORATION, an Illinois not-for-profit corporation By: -------------------------------- Its: President ------------------------------- NTC: NANOPHASE TECHNOLOGIES CORPORATION, an Illinois corporation By: --------------------------------- Its: Vice-President -------------------------------- -16- 17 SCHEDULE I 1. Invention Title: Nanophase Ceramics for Improved Industrial Products Inventors: R.W. Siegel, H. Hahn, J.A. Eastman ANL Case No. ANL-IN-89-80. 2. Invention Title: Industrial Devices from Nanophase Metals Inventors: R.W. Siegel, H. Hahn, J.A. Eastman ANL Case No. ANL-IN-89-81. - 17 - 18 AMENDMENT TO LICENSE AGREEMENT THIS AMENDMENT TO LICENSE AGREEMENT ("Amendment") is made as of the 21st day of November, 1991, by and between ARCH Development Corporation, an Illinois not-for-profit corporation ("ARCH"), and Nanophase Technologies Corporation, an Illinois corporation ("NTC"). WHEREAS, ARCH and NTC have previously entered into that certain License Agreement dated as of June 1, 1990 (the "License"); WHEREAS, as of the execution of this Amendment, ARCH is the controlling shareholder of NTC; WHEREAS, contemporaneously with the execution of this Amendment, ARCH and certain other purchasers (the "Other Purchasers") are purchasing shares of NTC's Series B Preferred Stock (the "Preferred"); and WHEREAS, in order to induce the Other Purchasers to purchase the Preferred for the benefit of NTC and ARCH, ARCH and NTC desire to amend the License as provided below. NOW, THEREFORE, in consideration of the covenants set forth below, ARCH and NTC agree as follows: 1. Section 3.1(a) of the License is hereby amended by deleting the phrase "five percent (5%)" and replacing it with the phrase "two and one-half percent (2 & 1/2%)". 2. Except as otherwise specifically provided above, the License Agreement shall remain in full force and effect in accordance with its terms. IN WITNESS WHEREOF, the parties have cause their respective authorized officers to execute this Agreement as of the day and year first written above. ARCH DEVELOPMENT CORPORATION, an Illinois not-for-profit corporation By:_____________________________ Title________________________ NANOPHASE TECHNOLOGIES CORPORATION, an Illinois corporation By:_____________________________ Title________________________ EX-10.8 9 LICENSE AGREEMENT - HITACHI 1 EXHIBIT 10.8 PATENT LICENSE AGREEMENT This Agreement made and entered into this 12th day of October, 1994 by and between Hitachi, Ltd., having a place of business at 6, Kanda-Surugadai, 4-chome, Chiyoda-ku, Tokyo 101, Japan (hereinafter "HITACHI"), and Nanophase Technologies Corporation, having a principal place of business at 8205 S. Cass Avenue, Suite 105, Darien, Illinois, 60561, U.S.A. (hereinafter "LICENSEE"); WHEREAS, HITACHI owns and controls United States Patent Nos. 4,610,718 and 4,732,369, and has the right to grant a license under said patents; WHEREAS, LICENSEE desires to acquire a nonexclusive license to make, use and sell LICENSED PRODUCT (hereinafter defined) under LICENSED PATENTS (hereinafter defined); NOW, THEREFORE, in consideration of the premises and covenants herein set forth, the parties agree as follows: 1. DEFINITIONS 1.1 The term "LICENSED PRODUCT" shall mean any ultra-fine particles of less than 1 micron in size produced or processed using methods, processes or apparatus of the type claimed in LICENSED PATENTS. 1.2 The term "LICENSED PATENTS" shall mean United States Patent Nos. 4,610,718 and 4,732,369, and any divisional, continuation, continuation-in-part, or reissue application for the foregoing patents, and any renewals, foreign counterparts, substitutions or extensions of any of the foregoing. 1.3 The term "EFFECTIVE DATE" shall mean the date, after the execution of this Agreement by both parties hereto, on which HITACHI receives the amount of Seventeen Thousand Five Hundred United States Dollars (US$17,500) in accordance with Section 3.1(1) of this Agreement, less any taxes withheld for payment to the Government of the United States in accordance with Section 3.5. 1.4 "AFFILIATES" means corporations or other entities of which a party hereto owns or controls directly or indirectly more than fifty percent (50%) of the voting stock entitled to vote for the election of the members of the board of directors or persons performing similar functions, or, in the case of entities not having voting stock, equivalent ownership or control thereof, provided that such entity shall be considered an AFFILIATE for only so long as such ownership or control exists. 2. GRANT OF LICENSE HITACHI hereby grants to LICENSEE a world-wide, nonexclusive license under the LICENSED PATENTS, without the right to sublicense, to produce or "HAVE PRODUCED" LICENSED PRODUCT by a method or apparatus in 1 2 accordance with the LICENSED PATENTS, and to use, sell and otherwise dispose of LICENSED PRODUCT so produced. LICENSEE shall have the right to extend the licenses granted hereunder to LICENSEE's AFFILIATES, provided that LICENSEE provide written notification to HITACHI identifying any such AFFILIATE prior to extending the licenses granted hereunder to such AFFILIATE, and provided further that LICENSEE report and submit royalties on behalf of such AFFILIATES in accordance with Section 3.3 of this Agreement. A license to "HAVE PRODUCED" as used herein shall mean a license granted to LICENSEE to subcontract a third party to produce LICENSED PRODUCT only for the account of, and for use or resale by, LICENSEE or, to the extent appropriate, LICENSEE's AFFILIATES. 3. COMPENSATION, PAYMENT AND REPORT 3.1 In consideration of the licenses granted by HITACHI to LICENSEE under LICENSED PATENTS, LICENSEE shall pay to HITACHI: (1) a lump sum, non-refundable amount of Seventeen Thousand Five Hundred United States Dollars (US$17,500) as an initial fee payable within ten (10) days of the execution of this agreement by both parties hereto, which shall be creditable against running royalties pursuant to Section 3.1(2) hereof, and (2) running royalties at the rate of one percent (1.0%) on NET SALES of LICENSED PRODUCT used, sold or otherwise disposed of by LICENSEE and its AFFILIATES prior to or during the term of this Agreement. 3.2 For the purpose of this section, NET SALES of LICENSED PRODUCT shall be determined as follows: (1) In respect of LICENSED PRODUCT sold or otherwise commercially disposed of in normal, arm's length commercial transactions, NET SALES shall be the total sales of LICENSED PRODUCT based on the actual selling price at which customers are billed in the usual course of business for such LICENSED PRODUCT, without any deductions other than sales or excise taxes, if any, and except for rejections or returns. If billed separately, the selling price of packing material, boxes, cartons and crates in which LICENSED PRODUCT is packed, as well as freight, handling and insurance charges and any duties or tariffs, shall not be included in determining NET SALES. (2) If LICENSED PRODUCT is not separately sold or otherwise commercially disposed of as it is but instead is incorporated in another product which is not itself a LICENSED PRODUCT that is sold or otherwise commercially disposed of in a normal, arm's length commercial transaction, then the NET SALES of LICENSED PRODUCT shall be determined by multiplying the total sales of the product incorporating LICENSED PRODUCT based on the actual selling price at 2 3 which customers are billed in the usual course of business for such product, times the ratio of the manufacturing cost of the LICENSED PRODUCT to the overall manufacturing cost of the product incorporating LICENSED PRODUCT. (3) In the event of sale or other commercial disposition of LICENSED PRODUCT other than in a normal arm's length commercial transaction, or in the event of use or other commercial disposal by LICENSEE or its AFFILIATES of LICENSED PRODUCT (except for LICENSEE's research and development purposes and except for incorporation of LICENSED PRODUCT into another product as set forth in Section 3.2(2) above), then the NET SALES for such LICENSED PRODUCT shall be calculated based on the average selling price of such LICENSED PRODUCT sold in normal, arm's length commercial transactions. 3.3 Royalty reports and payments shall be made in accordance with the following provisions: (1) Within Forty Five (45) days of each semi-annual period ending on June 30 and December 31 (hereinafter "SEMI-ANNUAL PERIOD") during the term of this Agreement, LICENSEE shall furnish to HITACHI a statement of royalty specifying NET SALES and the types of LICENSED PRODUCT sold or otherwise commercially disposed of by LICENSEE or its AFFILIATES during such SEMI-ANNUAL PERIOD and the total amount of royalties accrued under Section 3.1(2) (including any such accrued royalties to be credited against the initial fee pursuant to Section 3.1(1) hereof). At the same time, LICENSEE shall make the payment to HITACHI by telegraphic transfer of the amount of the accrued royalties which exceeds the balance of the initial fee set forth in Section 3.1(1) above, if any. If no royalty is payable or accrued during the SEMI-ANNUAL PERIOD, LICENSEE shall report in the statement that no royalty is due during such SEMI-ANNUAL PERIOD. (2) LICENSEE has conducted a good faith investigation with respect to sales of LICENSED PRODUCT sold or otherwise commercially disposed of prior to October 12, 1994, and LICENSEE has determined based on such good faith investigation that the NET SALES of LICENSED PRODUCT prior to such date is $37,089. The accrued royalty of $370.89 shall not be paid in the form of money to HITACHI, but instead shall reduce the running royalty credit pursuant to Section 3.1(1) by this amount. (3) Within Forty Five (45) days after the date of expiration of this Agreement or the date of the termination in the event of early termination of this Agreement, LICENSEE shall furnish to HITACHI a final statement of royalty and pay the royalty accrued up to the date of such expiration or termination of this Agreement. 3 4 3.4 All payments to be made by LICENSEE to HITACHI hereunder shall be remitted in U.S. dollars by telegraphic transfer to the designated bank account of HITACHI. Any payment once made by LICENSEE to HITACHI shall in no event be refundable. Any bank charges accrued with respect to such payment by LICENSEE's bank in this connection shall be borne and paid by LICENSEE. 3.5 All taxes imposed as a result of the existence of this Agreement or the performance of the parties hereunder shall be borne and paid by the party required to do so by applicable law; provided, however, that If so required by applicable law and relevant income tax treaty, LICENSEE shall withhold the amount of income taxes levied by the Government of the United States on each payment to be made by LICENSEE to HITACHI pursuant to this Agreement, shall promptly effect payment of the income taxes to the appropriate tax authorities of the Government of the United States and shall submit to HITACHI official tax receipts or other evidence issued by said tax authorities to LICENSEE. The parties agree to cooperate in good faith at HITACHI's request regarding any additional documentation or the like that may be required to enable HITACHI to support a claim for any national tax credit in respect of any such taxes so withheld, provided that HITACHI shall be responsible for any material, reasonable, out-of-pocket expense incurred by LICENSEE as a result thereof. 3.6 LICENSEE shall keep complete and accurate records with respect to LICENSED PRODUCT for which royalties are or may be due and payable under this Agreement. Said records shall be kept and available at all reasonable times for a period of (5) years following the end of each SEMI-ANNUAL PERIOD for inspection of an independent certified public accountant or agent selected by HITACHI and reasonably acceptable to LICENSEE for the sole purpose of verifying the statements of royalty submitted by LICENSEE. 3.7 LICENSEE shall pay interest to HITACHI upon any and all amounts overdue and payable under this Agreement at the rate of ten percent (10%) per annum for the period from the due date through the date of payment. 4. TERM AND TERMINATION 4.1 This Agreement shall become effective on the EFFECTIVE DATE and shall remain in full force and effect until the expiration date of the last-to-expire of the LICENSED PATENTS. This Agreement may be terminated at any time by LICENSEE upon sixty (60) days prior written notice to HITACHI, such termination to be without prejudice to the rights and obligations of the parties through the date of termination, and provided that LICENSEE include in such written notice a statement of LICENSEE's reasons for so terminating this Agreement. 4.2 In the event of a material breach of this Agreement by LICENSEE which is not cured within sixty (60) days after written notice thereof is received by LICENSEE, this Agreement may be terminated forthwith by further written notice to that effect from HITACHI. For the purpose of 4 5 this section, "material breach" includes, but is not limited to, a breach the provisions of Article 3 or Article 5 of this Agreement. 4.3 Should LICENSEE become insolvent or be subject to bankruptcy or winding up proceedings, or in the event of a sale or transfer by LICENSEE of all or substantially all of the assets of LICENSEE, or in the event that LICENSEE is merged into or with a third party, then HITACHI may, by written notice, terminate this Agreement forthwith. 5. ASSIGNMENT LICENSEE shall not assign this Agreement or any of its rights or obligations hereunder without the prior written consent of HITACHI. 6. MISCELLANEOUS PROVISIONS 6.1 HITACHI assumes no responsibility whatsoever for the performance, operation, maintenance or manner of use of any products made, used or sold by LICENSEE. HITACHI shall have no liability or obligation to defend, indemnify or hold harmless LICENSEE from any suits, actions or claims by any person or entity arising out of or relating to the performance, operation, maintenance or manner of use of any products or otherwise. In no event shall HITACHI be liable for indirect, Incidental, consequential or special damages of any kind whatsoever. 6.2 HITACHI shall have no liability or obligation to take any action or bring or prosecute any action or suit against any third party or parties even if said third party or parties infringe or allegedly infringe, or illegally or without proper authorization make use of, any of the LICENSED PATENTS. It is specifically agreed between the parties that the existence of such infringing third party, any, shall never be a ground for refusal to pay, or a request for the reduction of, royalties to be paid by LICENSEE pursuant to Section 3.1 hereof. Licensee shall have no right to take any action or bring or prosecute any action or suit against any third party or parties even if said third party or parties infringe or allegedly infringe, or illegally or without proper authorization make use of, any of the LICENSED PATENTS. 6.3 Nothing in this Agreement shall be construed as: a) a warranty or representation by HITACHI as to the validity or scope of any patent or patents; b) a warranty or representation by HITACHI that any manufacture, use, sale of LICENSED PRODUCT or the practice of any method covered by LICENSED PATENTS will be free from infringement of patents, utility models and/or any other rights owned or controlled by any third party or parties; c) an obligation to furnish any technical information or know-how; or 5 6 d) conferring a right with respect to any copyright, trademark, tradename or maskwork rights. 6.4 The parties hereto shall not disclose any of the terms of this Agreement to any third party except: a) with the prior written consent of the other party; b) to any governmental body having jurisdiction and calling therefor; c) as otherwise may be required by law or legal process; or d) to legal counsel representing either party. 6.5 This Agreement sets forth the entire understanding of the parties on the subject matter herein, and no amendment to this Agreement shall be effective unless set forth in writing in a document duly executed by both parties. 6.6 All notices required or permitted to be given hereunder shall be in writing and sent by registered airmail, postage prepaid, or telefax, if promptly confirmed by registered air mail as mentioned above, to the address specified below: IF to HITACHI, Hitachi, Ltd. New Marunouchi Bldg. 5-1, Marunouchi 1 chome Chiyoda-ku, Tokyo 100 Japan Attention: Department Manager Licensing Department I Intellectual Property Office If to LICENSEE, Nanophase Technologies Corporation 8205 S. Cass Avenue Suite 105 Darien, Illinois 60561, U.S.A. Attention: President 6.7 This Agreement and matters connected with the performance thereof shall be construed, interpreted and governed in all respects in accordance with the laws of the State of Illinois. 6.8 Upon written request of HITACHI, LICENSEE agrees to negotiate with HITACHI in good faith with respect to a possible license to HITACHI or its AFFILIATES under patents, patent applications or technology held by LICENSEE on mutually agreeable terms and conditions; provided, however, that it is understood that Licensee is not obligated to Grant such a license if mutually agreeable terms and conditions cannot be obtained through good faith negotiations. 6 7 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed in their respective corporate manner by their duly authorized representatives on the date written below. NANOPHASE TECHNOLOGIES HITACHI, LTD. CORPORATION By: [Signature] By: Ichiro Nagata ------------------------- ------------------------------ Ichiro Nagata Director General Manager Title: Pres/CEO Title: Industrial Processing Division ---------------------- --------------------------- Date: 13 Oct 94 Date: November 2, 1994 ----------------------- ---------------------------- 7 EX-10.9 10 LICENSE AGRMT - RESEARCH DEV. CORP OF JAPAN 1 Exhibit 10.9 LICENSE AGREEMENT This agreement, made and entered into as of the 31st day of May, 1996, by and between RESEARCH DEVELOPMENT CORPORATION OF JAPAN, a corporation organized and existing under the Act of Japanese Parliament entitled Research Development Corporation Act 1961 (established in 1961, amended in 1981, 1989 and 1993) having its principal place of business at 1-8, Honcho 4-chome, Kawaguchi City, Saitama Pref., 332, Japan (hereinafter referred to as LICENSOR) and NANOPHASE TECHNOLOGIES CORPORATION, a corporation organized and existing under the laws of State of Illinois, the United States of America, having its principal place of business at 8205 South Cass Avenue - Suite 105, Darien, Illinois 60561, The United States of America (hereinafter referred to as LICENSEE); WITNESSETH: WHEREAS National Research Institute for Metals, Science and Technology Agency of the Government of Japan (hereinafter referred to as NRIM) is the inventor of Process for Producing Ultrafine Powders of Metal and Ceramics and the owner of the patents thereof stated in Article 1; and WHEREAS LICENSOR has been duly granted by NRIM an exclusive right to license the said patents to any third party non-exclusively; and WHEREAS LICENSEE is desirous of acquiring from LICENSOR a license to produce and sell the ultrafine powders of metal and ceramics by processes and methods which may be subject to such NRIM's patents; and WHEREAS LICENSOR is willing to grant such a license to LICENSEE upon the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the premises and mutual covenants herein contained, the parties hereby agree as follows: 2 1. DEFINITION 1.1 As used in this AGREEMENT and its recital, the following terms shall have the following meaning: (a) "Patent" shall mean the patents to be licensed by this AGREEMENT, and the number, the date of grant and the title (inclusive of all extensions, renewals, continuations, reissues and continuations in part) of which are as follows; 1. U.S.A. Patent No. 4,376,740 granted on March 15, 1983 titled "Process for Production Fine Metal Particles" 2. U.S.A. Patent No. 4,482,134 granted on November 13, 1984 titled "Apparatus for Producing Fine Metal Particles" 3. U.S.A. Patent No. 4,642,207 granted on February 10, 1987 titled "Process for Producing Ultrafine Particles of Ceramics" 4. U.S.A. Patent No. 4,889,665 granted on December 26, 1989 titled "Process for Producing Ultrafine Particles of Ceramics" (b) "Product" shall mean ultrafine powders of metal and ceramics produced using processes or methods within the scope of any valid claim included within any Patent which is to be licensed by this AGREEMENT. (c) "Effective Date of this AGREEMENT" shall mean the date stipulated in Article 9. (d) "Term of this AGREEMENT" shall mean the period during which this AGREEMENT remains in force as defined in Article 9. 3 2. LICENSE 2.1 Upon the terms and conditions hereinafter more specifically set forth, LICENSOR hereby grants to LICENSEE and LICENSEE hereby accepts: A license for Term of this AGREEMENT to employ Patent to non-exclusively manufacture and use for internal research, Product in the facilities of LICENSEE in the United States of America and to non-exclusively use for internal research and sell Product in the United States of America. 3. SUB-LICENSE 3.1 LICENSEE shall have no right to grant any sub-license to a third party under this AGREEMENT. 4. LICENSE FEE 4.1 In consideration of the right and the license granted herein, LICENSEE shall pay the following license fees to LICENSOR: (1) Initial payment: one million and five hundred thousand Japanese Yen (Yen 1,500,000) to be paid within thirty (30) days from Effective Date of this AGREEMENT. (2) Royalty: three (3) percent of the proceeds of sales of Product to be paid within forty-five (45) days from the last day of LICENSEE's each fiscal year through Term of this AGREEMENT. Proceeds of sales shall mean the total of gross proceeds less cost of raw materials of Product, packing cost, transportation cost, handling charge of a dealer, insurance, commodity tax and other trade taxes for Product sold. 4.2 Both parties shall make commercially reasonable efforts to lead this AGREEMENT to a commercial success which should reflect in royalty payments. 5. PAYMENT 5.1 Any and all payments under this agreement shall be made in Japanese Yen by telegraphic transfer to the account of LICENSOR at Head Office of The Fuji 4 Bank LTD. (Ordinary Account No. 2709379), and shall be net without any deduction. Any tax, dues and charges whatsoever imposed in the United States of America from whatever the reason shall be borne by LICENSEE so that LICENSOR shall receive the agreed amount. The day the above mentioned bank receives the money shall be regarded as the day of fulfillment of the respective payment. In case of delay in payment, LICENSOR shall have the right to charge interest at the rate of eight point two five (8.25) percent per annum. 5.2 LICENSEE shall keep true and accurate records, files and books of account in accordance with generally accepted accounting principles consistently applied and containing all the data reasonably required for the full computation and verification of the payments of royalty to be made hereunder. LICENSEE shall permit LICENSOR or its duly authorized representatives, at LICENSOR's expense, adequate access to such records, files and books of account at any time during usual business hours for inspection purposes. 5.3 LICENSEE shall deliver to LICENSOR every twelve (12) months license fee reports that shall show computation of royalty due including reasonably sufficient information on production of Product made hereunder by LICENSEE. Each of such reports shall be delivered to LICENSOR within thirty (30) days after the last day of LICENSEE's each fiscal year. In case no license fee is payable for the period in question, the report shall so state. 5.4 Any money received by LICENSOR as provided in this AGREEMENT shall not be refunded to LICENSEE whatever the reason may be. 6. FORCE MAJEURE 6.1 Neither party shall be liable for failure to perform its part of this AGREEMENT when the failure is due to event beyond its reasonable control. Occurrence of such force majeure shall be notified to the other party in writing within ten (10) days from the day such occurrence started and shall be verified by the respective chamber of commerce or any other respective authority within twenty (20) days at the latest. Should such verification be not possible the party claiming the occurrence of force majeure shall have to present to the other party sufficient proof thereof. Each party undertakes to use commercially 5 reasonable efforts in order to re-establish conditions favorable for the performance of this AGREEMENT, and shall inform the other party of the steps it has taken. If the contractual performance is, as the result of force majeure, delayed by more than six (6) months, the other party will be at liberty to terminate this AGREEMENT. 7. ARBITRATION 7.1 Any disputes between the parties in connection with this AGREEMENT, also those relating to its validity, shall be settled amicably. In default of such settlement, all disputes that may arise under or in relation to this AGREEMENT shall be subject to a final decision of the Japan Commercial Arbitration Association in Tokyo, Japan whose proceedings shall take place in Tokyo, Japan. 8. GOVERNING LAW 8.1 This AGREEMENT shall be governed as to all matters including its validity, construction and performance by the laws of Japan. 9. EFFECTIVE DATE AND TERM 9.1 This AGREEMENT shall become effective on the date on which the AGREEMENT is approved by NRIM and it shall remain in force thereafter for ten (10) years from such date. However, upon expiration of License term, the term of this AGREEMENT shall be extended upon agreement between LICENSEE and LICENSOR. 10. TERMINATION 10.1 In the event of failure or negligence of either party to fulfill any provisions hereof to be performed by it, and if the other party gives written notice of such default, then if such default is not cured within sixty (60) days after giving such notice, the party having given such notice shall reserve the right to terminate this AGREEMENT any time thereafter, by giving written notice of such termination to the receiving party. Such notice of termination shall be effective on the date of the notice unless otherwise designated in the said notice. 6 10.2 Upon expiration or earlier termination of this AGREEMENT as provided in this AGREEMENT, all rights and obligations provided in this AGREEMENT shall forthwith terminate except the obligation concerning any amount payable to LICENSOR by LICENSEE which would have accrued under this AGREEMENT on or prior to such termination. 11. NOTICES 11.1 To be legally effective, any notices which the parties are required or permitted to give to each other pursuant to any of the provisions of this AGREEMENT shall be sent by registered airmail or telex confirmed by registered airmail at the addresses as first set forth above. 12. ENTIRE AGREEMENT 12.1 This AGREEMENT constitutes the entire agreement between the parties relating to the subject matter hereof. No change of, addition to, or waiver of the terms and conditions hereof shall be binding upon either party unless agreed by it in writing. 13. NON-ASSIGNMENT 13.1 Assignment of this AGREEMENT or any part thereof by either party shall not be effective unless agreed by the other party in writing. IN WITNESS WHEREOF, the parties hereto have caused this AGREEMENT in duplicate original to be executed by their duly authorized representatives on the day and year first above written and each party shall keep one copy of original. 7 Date LICENSOR: May 31, 1996 RESEARCH DEVELOPMENT CORPORATION - ------------ OF JAPAN by Hiromichi Matsudaira ------------------------------- Hiromichi Matsudaira President Date LICENSEE: May 31, 1996 NANOPHASE TECHNOLOGIES - ------------ CORPORATION by Robert W. Cross ---------------------------------- Robert W. Cross President 8 APPENDIX Date: -------------------- President Research Development Corporation of Japan 1-8, Honcho 4-chome, Kawaguchi City Saitama Pref. 332, Japan Dear Sir, Re: Report for Fine Metal Powders We are pleased to report to you on our production of Fine Metal Powders and the royalty thereof for our 1st fiscal year basing on the book of account in accordance with the Article 5.3 of License Agreement of the 31st day of May, 1996 as follows: 1. Period: From to -------------------- ------------------------- 2. Production: Carryover from Previous Term: Production Quantity: Quantity Adjusted: Carryover to Next Term: Remarks: 3. Sales: Sales Quantity in pounds: Sales Amount in U.S. Dollar: Amount Adjusted: Amount Deducted: Amount Subject to Royalty: Remarks: 9 4. Royalty: U.S.$ Amount x % = U.S.$ Amount 5. Breakdown of Amount Deducted: Subject: Amount: 6. Estimate for Coming One Year: Sales Quantity: Sales Amount: Royalty: Remarks: 7. Name and Address of Factory: 8. Person in Charge: Department: Name of person: Telephone & Facsimile: 9. Others: The breakdown for monthly production and sales is as per attached. The above amount will be paid to your ordinary account No. 2709379 at the head office of Fuji Bank Ltd. by (date). Yours faithfully, Nanophase Technologies Corporation - ------------------------------------------ EX-10.10 11 LICENSE AGREEMENT - CORNELL RESEARCH FOUNDATION 1 Exhibit 10.10 REMAINDER-EXCLUSIVE LICENSE AGREEMENT THIS AGREEMENT, effective as of the first day of April, 1996, (hereinafter "Effective Date") by and between the CORNELL RESEARCH FOUNDATION, INC., having offices at Cornell Business & Technology Park, 20 Thornwood Drive, Suite 105, Ithaca, New York 14850, hereinafter referred to as "FOUNDATION" and NANOPHASE TECHNOLOGIES CORPORATION, having offices at 453 Commerce Street, Burr Ridge, Illinois 60521, hereinafter referred to as "LICENSEE". W I T N E S S E T H T H A T: WHEREAS, United States Patent No. 4,732,719, (CRF D-638) entitled "Superplastic Forging Nitride Ceramics," was issued on March 22, 1988, a copy of which is appended as Exhibit A; WHEREAS, United States Patent No. 4,849,142, (CRF D-643) entitled "Superplastic Forging Zirconia Ceramics," was issued on July 18, 1989, a copy of which is appended as Exhibit B; WHEREAS, United States Patent No. 4,871,496, (CRF D-639A) entitled "Composites Comprising Silicon Carbide Fibers Dispersed in Magnesia-Aluminate Matrix and Fabrication Thereof and of Other Composites by Sinter Forging," was issued on October 3, 1989, a copy of which is appended as Exhibit C; WHEREAS, the inventions disclosed and claimed in Exhibits A, B, and C are assigned to FOUNDATION and to Jupiter Technologies, Inc., hereinafter referred to as "Jupiter," and FOUNDATION is a 2 wholly owned subsidiary corporation of Cornell University and holds the ownership interests of patents issued on inventions made by Cornell University's staff and administers licenses in a manner consistent with the patent policy of Cornell University, and FOUNDATION has the sole right to issue licenses to the patents disclosed and claimed in Exhibits A, B, and C; WHEREAS, FOUNDATION has previously granted a nonexclusive license with no right to sublicense to Jupiter for the rights to the patents disclosed and claimed in Exhibits A, B, and C in all fields of use and an exclusive license in the field of sputtering and laser ablation targets; WHEREAS, Corning Incorporated has a nonexclusive license with no right to sublicense to make and use products claimed in Exhibit B; WHEREAS, FOUNDATION represents that it is an assignee of the above-identified patents and has the right to grant licenses under said patents; WHEREAS, the work leading to the inventions disclosed and claimed in Exhibits A and C was supported in part by an agency of the U.S. Government, FOUNDATION is obligated to comply with the U.S. Office of Management & Budgets Circular No. A-124, or 37 CFR Part 401; WHEREAS, LICENSEE is desirous of securing a license under the discoveries and invention embodied in said patents to make, have made, use, have used, import, sell and have sold Licensed Products throughout the world; WHEREAS, FOUNDATION is willing to grant a license in said 2 3 patents to LICENSEE upon the terms and conditions hereinafter set forth; NOR, THEREFORE, in consideration of the covenants and obligations hereinafter set forth, the parties hereto hereby agree as follows: I DEFINITIONS The following definitions will apply throughout this agreement: 1. Licensed Patents shall mean U.S. Patent No. 4,732,719, U.S. Patent No. 4,849,142, and U.S. Patent No. 4,871,496, and all reissues and extensions thereof. 2. Licensed Field of Use shall mean the field of net shape formation of ceramic articles. Without limitation or expansion of the foregoing, the parties agree that said field shall not include laser ablation or sputtering targets. 3. Remainder-Exclusive shall mean that FOUNDATION has previously granted nonexclusive licenses to Jupiter and Corning, and their successors in interest, with no right to sublicense, and an exclusive license to Jupiter in the field of sputtering and laser ablation targets, and that from the Effective Date henceforth, FOUNDATION shall not issue a license in the Licensed Field of Use to another throughout the period of 3 4 exclusivity defined hereinbelow. 4. Licensed Products shall mean any product or use claimed in Licensed Patents within the Licensed Field of Use. 5. License Year shall mean each twelve (12) month period beginning on the Effective Date of this Agreement first written above and thereafter on the anniversary date thereof. 6. LICENSEE shall mean the above named company and any of its affiliates in which it owns or controls at least 50% of the voting stock. 7. Net Sales shall mean the gross amount of money billed by LICENSEE to its customers on sale or use of Licensed Products subsequent to the Effective Date where the Licensed Products were either made, used or sold in the United States less: (1) trade and/or quantity discounts, rebates and other sales price reductions; (2) returns and allowances and brokers' and agents commissions actually paid; and (3) retroactive price reductions; and (4) freight and other transportation costs, including insurance charges, and duties, tariffs, sales and excise taxes and other governmental charges based directly on sales, turnover or delivery of the specified Licensed Products and actually paid or allowed by LICENSEE. 8. Profitability Date shall mean the thirtieth (30th) day following the end of LICENSEE's first two consecutive 4 5 profitable quarters in a License Year. A quarter shall be deemed profitable for LICENSEE under this Agreement if LICENSEE recognized revenues from Net Sales of Licensed Products in excess of its costs associated with the production and Sale of Licensed Products on a fully allocated basis as determined pursuant to LICENSEE's normal and customary cost allocation system with respect to the sales of LICENSEE's products generally. II GRANT Subject only to the rights of and obligations to the U.S. Government as set forth in U.S. Office of Management & Budget Circular A-124 or 37 CFR Part 401; FOUNDATION hereby grants to LICENSEE for the term set forth below, and under the royalty basis set forth below, a Remainder-Exclusive license in the Licensed Field of Use to make, have made, use have used, import, sell or have sold Licensed Products in the United States; and said license rights shall include the right to grant sublicenses thereunder. III TO HAVE MADE The right of LICENSEE to make Licensed Products includes the right to have made by contract with third parties. Such 5 6 contractual arrangements with third parties shall be subject to and conditioned upon appropriate supervision and quality assurance and control of the third party by LICENSEE and the third party shall be bound in writing to respect all rights of FOUNDATION and to supply all production of Licensed Products exclusively to LICENSEE. IV PAYMENTS IN CONSIDERATION OF THE EXECUTION OF THIS LICENSE AGREEMENT FOUNDATION and LICENSEE hereby acknowledge and agree that LICENSEE shall make a payment of ten thousand dollars ($10,000) to FOUNDATION, five thousand dollars ($5,000) of which shall be paid upon signing of this Agreement and five thousand dollars ($5,000) of which shall be paid on the earlier of the Profitability Date or the second (2nd) anniversary of the Effective Date. Such payments shall be made as a consideration for entering into this Agreement, which sum is nonrefundable and will not be considered as an advance payment on royalties due hereunder. V RIGHT OF FIRST NEGOTIATION TO RIGHTS IN OTHER FIELDS OF USE. The parties acknowledge a mutual interest in the broadest possible commercial development of the technology described and claimed in the Licensed Patents. In order to fulfill this 6 7 intent, the parties agree that if, in the future, FOUNDATION desires to grant any rights in the Licensed Patents in other than the Licensed Field of Use to any third party, FOUNDATION shall promptly notify LICENSEE and provide LICENSEE with details of the proposed license terms with such third party, and shall further provide LICENSEE with the right of first negotiation, exercisable by LICENSEE within thirty (30) days of receipt of such notice from FOUNDATION. FOUNDATION retains the right to reject LICENSEE's offer and to grant a license to the third party. VI ROYALTIES AND MINIMUM ROYALTIES TO BE PAID DURING THE LICENSE AGREEMENT LICENSEE will pay to FOUNDATION running royalties at the rate of four percent (4%) of Net Sales of Licensed Products made, used or sold by LICENSEE in the United States; LICENSEE's obligation to pay royalties shall begin on the Effective Date and shall be payable thereafter to FOUNDATION in accordance with the payment schedule set forth in Section VII below. LICENSEE'S obligation to pay royalty upon each such Licensed Product shall cease: (i) if the applicable claims covering such Licensed Product in the Licensed Patents in any particular country are held invalid by an unappealed or unappealable decision of a court of competent jurisdiction, in that particular country, or 7 8 (ii) upon expiration of the last Licensed Patent that claims or covers such Licensed Product. Beginning with the fourth (4th) License Year, LICENSEE shall pay FOUNDATION annual minimum royalties of fifteen thousand dollars ($15,000). The amount of such annual minimum royalties shall be reduced to ten thousand dollars ($10,000) for each License Year, including the prior License Years, wherein LICENSEE has engaged in a vigorous development program as evidenced by the existence and reporting of a reasonable number of documented experiments, designs or prototypes as would be appropriate in said development program. The minimum royalty payment, due at the beginning of the License Year, will be considered as a credit for the royalties due for that License Year under this Agreement and the royalty reports should reflect the use of such credit. Such provision is to be construed as an annual minimum royalty payment requirement and none of the minimum royalty payments are refundable or applicable to succeeding License Years. VII ACCOUNTING AND PAYMENT SCHEDULE Payment, reporting and financial accounting shall be on a semi-annual basis and LICENSEE will deliver to FOUNDATION within sixty (60) days after the end of each six (6) month period of a License Year a report in writing setting forth: (i) summary reports of documented experiments, designs or prototypes sufficient to show the progress being made toward the development 8 9 of Licensed Products, and/or (ii) sales of Licensed Products (including a negative report if appropriate). Such reports will be accompanied by an appropriate payment of royalty due for such period. LICENSEE will keep accurate records, certified by it, showing the information by which LICENSEE arrived at a royalty determination and will permit an independent public accountant appointed by FOUNDATION and acceptable to LICENSEE to make such reasonable inspection during business hours of said records as may be necessary to verify royalty reports made by LICENSEE; provided any such inspection shall take place not more often than once every License Year, and provided further that FOUNDATION's accountant shall examine only such information as is required to verify LICENSEE's compliance under this Agreement and shall keep any such information examined confidential and shall not disclose such information except to FOUNDATION in accordance with the terms of this section. Conversion from foreign currencies, if any, shall be based upon the conversion rate on the date that payment is due. Payments which are delayed beyond the sixty (60) days after the end of the six month period in which they become due shall be subject to a fifteen percent (15%) per annum interest charge. VIII TERM This License Agreement shall continue as a Remainder-Exclusive license for the full term of the last to expire 9 10 Licensed Patent so long as LICENSEE'S covenants under the Agreement are being performed and the LICENSEE is in good standing, and provided this Agreement is not earlier terminated as provided for herein. IX DUTY OF DILIGENCE LICENSEE shall exercise commercially reasonable due diligence to effect the introduction of Licensed Product(s) into the commercial market as soon as practical. LICENSEE agrees to develop and exploit Licensed Products with commercially reasonable diligence by development, manufacture and sale of Licensed Products for the duration of the term of this Agreement. LICENSEE further agrees to maintain commercially reasonable quality control over Licensed Products and generally attend to proper, safe, fair, lawful and reasonable development and exploitation of the market for Licensed Products. Upon written request of FOUNDATION, LICENSEE agrees to submit to FOUNDATION within thirty (30) days a written report of progress made against its goals for exploitation of the market and its plans and objectives for future progress. Failure of LICENSEE to comply with the provisions of this Duty of Diligence section shall be considered a material breach of this Agreement. 10 11 X INFRINGEMENT OF LICENSED PATENT RIGHTS BY THIRD PARTIES In the event that any infringement of a Licensed Patent shall come to the attention of FOUNDATION or LICENSEE, then FOUNDATION and LICENSEE shall duly inform each other. FOUNDATION, shall, in its sole discretion, determine whether or not to prosecute a patent infringement action. If FOUNDATION determines and elects not to prosecute a patent infringement action, and such patent infringement is in the Licensed Field of Use, then LICENSEE may cause legal proceedings against the alleged infringer at its own expense. LICENSEE may defray the expenses of any such lawsuit to the extent of 50% of royalties payable by LICENSEE during the course of such legal proceedings. Out of any damages or awards recovered by LICENSEE in such action conducted by LICENSEE, FOUNDATION will first recover all royalties up to the 50% of royalties payable by LICENSEE to FOUNDATION and withheld by LICENSEE to defray costs of such lawsuit. LICENSEE will then recover its expenses for conducting said litigation beyond the costs defrayed by withheld royalties. FOUNDATION will also recover any reasonable expenses which it incurred on behalf of the litigation. Any amount remaining belongs to LICENSEE, if LICENSEE conducts the litigation, provided that on such amount LICENSEE shall pay FOUNDATION a royalty as provided for in VII above. If FOUNDATION conducts the litigation then any amount recovered belongs to FOUNDATION; provided that, to the extent 11 12 that FOUNDATION's recoveries exceed FOUNDATION's reasonable expenses with respect to such action or claim, FOUNDATION shall reimburse LICENSEE for LICENSEE's reasonable costs in connection with cooperating with FOUNDATION in the prosecution of such action or claim. In any proceeding initiated by LICENSEE, LICENSEE shall employ counsel reasonably satisfactory to FOUNDATION and shall inform FOUNDATION of all material developments in such proceedings. The prosecution, settlement, or abandonment of any proceeding initiated by LICENSEE shall be at LICENSEE's reasonable discretion, provided that LICENSEE shall not have any right to surrender any of FOUNDATION's rights to the Licensed Patents or to grant any infringer any rights to the Licensed Patents other than a sublicense subject to the conditions which would apply to the grant of any other sublicense. In any proceedings, FOUNDATION shall be entitled to employ counsel and control the course of litigation if, in FOUNDATION's sole discretion, LICENSEE's defense of patent rights is insufficient, or if LICENSEE fails to carry on vigorous prosecution of said patent rights. In the event LICENSEE seeks, with justifiable cause, to prosecute more than one lawsuit at a time, FOUNDATION will not unreasonably withhold permission where such actions are conducted entirely at LICENSEE's expense including reimbursement of FOUNDATION's expenses incurred on behalf of such action. In any action brought by LICENSEE, LICENSEE undertakes to 12 13 indemnify for and hold FOUNDATION harmless from any damages, costs or expenses incurred by reason of such litigation. XI ASSIGNMENT The rights and obligations of LICENSEE are not assignable but with one exception which is that those rights and obligations may be assigned to its successor in business if such assignment is approved by FOUNDATION. Such approval will not be unreasonably withheld. XII SUBLICENSING LICENSEE may grant sublicenses, within the Licensed Field of Use provided that FOUNDATION finds the sublicensee generally acceptable (such acceptance will not be unreasonably withheld), that royalty payments as above shall be made by sublicensee, that all sublicensees shall be obligated to all the terms and conditions of this Agreement beneficial to or protective of FOUNDATION and that LICENSEE shall guarantee compliance of the sublicensee on all such provisions. LICENSEE and FOUNDATION shall share all sublicensing consideration of any sort, other than royalty payments additive to the amount payable to FOUNDATION, on the basis of fifty percent (50%) to FOUNDATION and fifty percent (50%) to LICENSEE. 13 14 XIII TERMINATION FOUNDATION may terminate this License Agreement for noncompliance by LICENSEE with any of its provisions provided such noncompliance is unremedied after ninety (90) days following written notice to LICENSEE from FOUNDATION thereof, or if such noncompliance is of a nature not susceptible to remedy within such ninety (90) day period, provided LICENSEE has taken all reasonable action to commence remediation of such noncompliance by giving notice of its intentions to do so six (6) months before termination. LICENSEE may terminate this License Agreement by giving notice of its intentions to do so six (6) months before termination. XIV ARBITRATION AND JURISDICTION All disputes arising out of or relating to any provision of this Agreement shall be resolved by conciliation and mediation and if mediation is unsuccessful then disputes shall be finally settled by an Arbitrator selected by FOUNDATION and LICENSEE. If FOUNDATION and LICENSEE cannot agree on an Arbitrator, then disputes shall be resolved by an Arbitration Panel comprising one arbitrator appointed by FOUNDATION, one arbitrator appointed by LICENSEE, and a Chairman of the Arbitration Panel appointed by the first two arbitrators. Any such arbitration proceeding shall 14 15 be conducted in accordance with generally accepted arbitration rules; shall be held in the State of New York, unless otherwise agreed by the parties; and judgment upon the arbitration award may be entered in any court having jurisdiction. Any arbitration hearing shall last no longer than two (2) days. Each party shall pay its own attorneys' fees. The expense of the dispute resolution (other than attorneys' fees) shall be shared equally. In order to initiate procedures for dispute resolution by conciliation, mediation and arbitration either party may give written notice to the other of intention to resolve a dispute, and absent satisfactory resolution, then to arbitrate. Such notice shall contain a statement setting forth the nature of the dispute and the resolution sought. If, within thirty (30) days after such notice a resolution by conciliation between the parties themselves or by mediation has not been achieved to the satisfaction of both parties, and if within sixty (60) days after said written notice an Arbitrator or Arbitration Panel has not been appointed with an arbitration schedule satisfactory to both parties, then either party may proceed with judicial remedies. FOUNDATION reserves the right and power to proceed with direct judicial remedies against LICENSEE without conciliation, mediation or arbitration for breach of the royalty payment and sales reporting provisions of this Agreement after giving written notice of such breach to LICENSEE followed by an opportunity period of thirty (30) days in which to cure, or to proceed with reasonable steps to cure, such breach. In collecting overdue 15 16 royalty payments and securing compliance with reporting obligations, FOUNDATION may use all judicial remedies available. XV OTHER LICENSEE agrees that it will not use the indicia or names FOUNDATION or of Cornell University or any of their personnel in advertising, promotion, or labeling of Licensed Products without prior written approval of FOUNDATION. FOUNDATION makes no representations other than those specified in the WHEREAS clauses. FOUNDATION MAKES NO EXPRESS OR IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. FOUNDATION by this Agreement makes no representation as to the patentability and/or breadth of the inventions and/or discoveries involved in a Licensed Patent. FOUNDATION by this Agreement makes no representation as to patents now held or which will be held by others in the field of the Licensed Products for a particular purpose. LICENSEE agrees to defend, indemnify and hold FOUNDATION harmless from and against all liability, demands, damages, expenses or losses for death, personal injury, illness or property damage (including reasonable attorney's fees) arising (a) out of use by LICENSEE or its transferees of inventions licensed or information furnished under this Agreement, or (b) out of any use, sale or other disposition by LICENSEE or its 16 17 transferees of products made by use of such inventions or information. As used in this clause, FOUNDATION includes its Trustees, Officers, Agents and Employees, and those of Cornell University, and "LICENSEE" includes its Affiliates, Subsidiaries, Contractors and Sub-Contractors. In discharge of the above LICENSEE will maintain general liability insurance in mutually agreed to commercially reasonable amounts with sound insurers and on such term as FOUNDATION approves in writing against damage to or destruction of property and injury to or death of individuals and against such other rinks as FOUNDATION may reasonably request arising out of or in connection with any of the Licensed Products, FOUNDATION, Cornell University and their respective officers, trustees, members of their governing boards, and employees will be named additional insureds under all such insurance. Such insurance will also provide that FOUNDATION will be given notice of any modification thereof and at least thirty (30) days prior written notice of cancellation or termination and the reason therefore. LICENSEE will furnish FOUNDATION upon request, and in any event on execution of this Agreement and on each anniversary of the effective date of this Agreement, written confirmation issued by the insurer or an independent insurance agent confirming that insurance is maintained in accordance with the above requirements. This Agreement shall be interpreted under the Laws of the State of New York. 17 18 Reports, notices and other communications to FOUNDATION shall be addressed to: H. Walter Haeussler, President CORNELL RESEARCH FOUNDATION, INC. Cornell Business & Technology Park 20 Thornwood Drive, Suite 105 Ithaca, New York 14850 and notices and other communications to LICENSEE to: NANOPHASE TECHNOLOGIES CORPORATION 453 Commerce Street Burr Ridge, Illinois 60521 Attention: President with a copy to: FITZPATRICK EILENBERG & ZIVIAN 20 North Wacker Drive Chicago, Illinois 60606 Attention: Bruce A. Zivian 18 19 IN WITNESS WHEREOF, the parties have caused this instrument to be executed in duplicate as of the day and year first above written. ATTEST: CORNELL RESEARCH FOUNDATION, INC. By /s/ H. Walter Haeussler ----------------------- H. Walter Haeussler /s/ Warren R. Danner Title President ----------------- ------------------------------------ Date April 10, 1997 ------------------------------------ ATTEST: NANOPHASE TECHNOLOGIES CORPORATION By /s/ Donald Freed ------------------------------------- Quinlan B. Ford Title Vice President ------------------------------------- Date April 15, 1996 ------------------------------------- 19 EX-10.11 12 CONSULTING AND STOCK PURCHASE AGREEMENT 1 EXHIBIT 10.11 NANOPHASE TECHNOLOGIES CORPORATION CONSULTING AND STOCK PURCHASE AGREEMENT CONSULTING AND STOCK PURCHASE AGREEMENT entered into as of May 9, 1990, between RICHARD W. SIEGEL ("Siegel") and NANOPHASE TECHNOLOGIES CORPORATION, an Illinois corporation (the "Company"). PRELIMINARY STATEMENT A. The Company wishes to retain Siegel to provide consulting services to the Company, on the terms and conditions set forth herein, and in connection therewith desires to sell Siegel certain shares of common stock of the Company. B. Siegel desires to provide consulting services to the Company, on such terms and conditions, and desires to purchase such shares of stock from the Company. C. Certain capitalized terms used herein are defined in Article IV hereof. THEREFORE, the parties agree as follows: AGREEMENT I. CONSULTING SERVICES 1.1 Consulting Services. Siegel hereby agrees to render consulting services to the Company in the areas described on Exhibit A attached hereto (the "Scope of the Work"), and on such other matters as Siegel and the Company may agree from time to time. Siegel agrees to perform his consulting services under this Agreement solely at facilities provided or designated by the Company for such purposes, provided that Siegel shall not be required to perform such services at any location outside of the Chicago area without his consent. Unless Siegel and the Company shall agree otherwise, Siegel agrees to devote an average of twenty-four (24) hours per month for each year during the term hereof to providing consulting services under this Agreement, and the Company agrees to retain Siegel for the same, the exact times to be agreed upon by Siegel and the Company. 1.2 Term. Siegel shall provide consulting services to the Company under this Agreement for a period of five (5) years, unless this Agreement is sooner terminated by either party as hereinafter provided; provided that such term shall be renewed for successive one-year terms thereafter unless terminated by either Siegel or the Company. Siegel may terminate his agreement to provide consulting services to the Company, and the Company 2 may terminate its agreement to retain Siegel to provide consulting services, at any time on ninety (90) days' written notice to the other party. Notwithstanding the foregoing, either Siegel or the Company may terminate this Agreement at any time if the other party shall breach his or its obligations hereunder (provided that the non-breaching party shall give breaching party written notice of such breach, and breaching party shall have thirty (30) days after receipt of such notice to cure such breach). Further, Siegel may terminate his agreement to provide consulting services under this Agreement, and the Company may terminate its agreement to retain Siegel to provide consulting services, at any time if any of Siegel's activities or proposed activities hereunder are disapproved in writing by the University, as operator of ANL, as provided in Section 3.3 hereof. 1.3 Compensation. (a) Basic Compensation. The Company shall pay Siegel $150.00 per hour for providing consulting services hereunder, payable monthly in arrears. The Company shall also reimburse Siegel for all approved out-of-pocket expenses actually incurred by Siegel in the performance of his services hereunder. (b) Stock Purchase and Sale. In addition to the basic compensation described above, the Company agrees to sell Siegel, and Siegel agrees to purchase from the Company, ten thousand (10,000) shares of common stock, no par value, of the Company (the "Stock"), on the terms set forth in Article II hereof. 1.4 Board of Directors. Upon request of the Company, and subject to the approval of the University, as operator of ANL, Siegel agrees to serve on the Board of Directors of the Company. 1.5 Indemnification. The Company hereby agrees to indemnify and hold Siegel harmless from and against any and all claims, liabilities, losses, damages, costs and expenses (including without limitation attorneys' fees and defense costs) relating to or arising directly or indirectly out of Siegel's serving as a consultant to the Company or out of the performance of his obligations hereunder, except in the case of gross negligence or bad faith on the part of Siegel. II. PURCHASE AND SALE OF STOCK 2.1 Purchase Price; Closing. The purchase price for the Stock shall be $.001 per share, payable in cash at Closing. Payment for the Stock, and delivery of the certificates evidencing the Stock, shall be effected at the offices of the Company, 1115-25 East 58th Street, Chicago, Illinois, at 10:00 - 2 - 3 A.M. Central Standard Time on May l0, 1990, or at such other time, date and place upon which the parties shall agree. 2.2 Unvested Shares Repurchase Option. (a) Company Repurchase Right. If at any time Siegel shall no longer be an Associate of the Company, the Company shall have the right (the "Repurchase Option") to purchase all of the shares of stock which are then Unvested Shares (as defined in Section 2.2(b) hereof) on the terms set forth in this Section 2.2. The Company may exercise its Repurchase Option at any time during the one hundred eighty (180) days beginning on the Termination Date. If the Company shall fail to exercise its Repurchase Option for any Unvested Shares during such period, such Unvested Shares shall become Vested Shares. (b) Vesting Schedule. The following number of shares of Stock shall be subject to the Repurchase Option (such shares, together with the shares and other property referred to in Section 2.2(f), called "Unvested Shares"):
Period Unvested Shares ------ --------------- From the date of this Agreement 7 500 through August 31, 1990 From September 1, 1990 5,000 through August 31, 1991 From September 1, 1991 2,500 through August 31, 1992 After September 1, 1992 0
Shares of Stock that are not subject to the Repurchase Option are referred to as "Vested Shares". Notwithstanding the above Vesting Schedule, no Unvested Shares shall become Vested Shares after the Termination Date unless the Company shall fail to exercise its Repurchase Option within the prescribed period, in which event all such Unvested Shares shall become Vested Shares in accordance with Section 2.2(a) hereof. (c) Acceleration of Vesting. Notwithstanding Section 2.2(b) hereof: (i) upon the occurrence of any of the following events, 2,500 Unvested Shares shall become Vested Shares: (A) the Company shall receive a funding grant from the State of Illinois under the State of Illinois Technology Challenge Grant program; - 3 - 4 (B) the Company shall receive a funding grant from either of two SBIR proposals previously submitted by the Company, or the Company shall receive an equivalent funding grant from some other source and Siegel shall have actively participated in the preparation of the application or proposal for such grant, provided that if the Company shall determine not to seek any other grant funding, then upon such other event as the Company and Siegel may agree; and (C) the Company shall receive reasonably satisfactory commitments from three (3) persons satisfactory to the Company's Board of Directors to serve on the Company's Scientific Advisory Board. (For purposes hereof, the Company acknowledges that Bernard Kear, Herbert Gleiter, and Ilhan Aksay are satisfactory to the Board of Directors to serve as members of the Scientific Advisory Board.) For the purposes of this Section 2.2(c)(i), Unvested Shares shall vest in the order such shares would have become Vested Shares had the provisions of this Section 2.2(c)(i) not been satisfied. Therefore, upon the first of the above events to occur, the Unvested Shares that would have become Vested Shares on November 1, 1990, shall become Vested Shares; upon the second of the above events to occur, the Unvested Shares that would have become Vested Shares on September 1, 1991, shall become Vested Shares; and upon the third of the above events to occur, the Unvested Shares that would have become Vested Shares on September 1, 1992, shall become Vested Shares. (ii) If the Company's Initial Public Offering shall occur, then all Unvested Shares shall become Vested Shares. (d) Repurchase Price. The purchase price per share which the Company shall pay for Unvested Shares repurchased under the Repurchase Option shall equal the purchase price per share originally paid by Siegel for the Stock as specified in Section 2.1, adjusted as provided in Section 2.2(f). (e) Method of Exercise; Payment for Shares. The Company may exercise its Repurchase Option by written notice to Siegel or Siegel's legal representative, signed by an officer or director of the Company and delivered within the exercise period specified in Section 2.2(a). The notice shall specify the number of Unvested Shares which the Company has elected to repurchase and the date on which the repurchase shall be effected. Prior to the close of business on the date specified by the Company to effect the repurchase, (a) the Escrow Agent referred to in Section 2.5 shall deliver to the Company stock certificates lodged with the Escrow Agent and evidencing Unvested Shares being repurchased, - 4 - 5 and (b) any holder of Unvested Shares being repurchased which had been released from the escrow referred to in Section 2.5 shall deliver to the Company stock certificates evidencing such Unvested Shares, in either case endorsed for transfer to the Company or accompanied by endorsed blank assignments separate from certificate. Upon receipt of such stock certificates, the Company shall pay the repurchase price therefor to Siegel or Siegel's legal representative or to the holder thereof, as the case may be, in cash or by check. (f) Stock Splits, Etc. (i) If at any time while he holds any Unvested Shares Siegel shall receive, or shall be entitled to receive, any additional shares of common stock of the Company, or any other securities or property, by virtue of his ownership of the Unvested Shares, other than money paid as a regular cash dividend, whether by stock split, stock dividend, or otherwise, then any and all such new, substituted, or additional securities or other property which Siegel receives or is entitled to receive by virtue of his ownership of the Unvested Shares shall be immediately subject to the Repurchase Option and shall be included in the term "Unvested Shares" for all purposes with the same force and effect as the shares of the Stock then subject to the Repurchase Option. Such new, additional or substituted shares of Stock or other property shall be subject to vesting according to the Vesting Schedule described in Section 2.2(b) hereof, pro rata in accordance with the number of shares of Unvested Stock then owned by Siegel. Siegel agrees to accept such new, substituted or additional shares or property in trust for the Company and deliver the certificates for such shares, endorsed for transfer to the Company or accompanied by endorsed blank assignments separate from certificate, or other property, to the Escrow Agent in accordance with the provisions of Section 2.5 hereof. (ii) After each such event, the repurchase price per share shall be adjusted so that the aggregate repurchase price for all Unvested Stock after the adjustment shall equal the aggregate repurchase price for such Unvested Stock before the adjustment. (g) Transfer - Unvested Shares. (i) Except as provided in Section 2.6 hereof, Siegel shall not voluntarily Transfer any interest in the Unvested Shares. If any interest in the Unvested Shares shall be Transferred to any other person or entity (whether by will, devise, operation of law, or otherwise), then the Company's - 5 - 6 Repurchase option shall be immediately exercisable for all then Unvested Shares, on the terms set forth herein. (ii) In addition to any other legends, each certificate evidencing Unvested Shares shall be imprinted with the following legend: "The shares represented by this certificate are subject to a repurchase right in favor of the issuer or its assignee, as set forth in a Consulting and Stock Purchase Agreement between the issuer and the original holder of the shares. The shares shall remain subject to the repurchase right, despite any transfer or attempted transfer. The issuer will furnish a copy of such agreement upon request and free of charge to the registered holder hereof." When any Unvested Shares become Vested Shares, the Company shall upon request issue one or more new certificates evidencing the Vested Shares not bearing the above legend. 2.3 Investment Representations: Tax Effects of Investment. (a) Investment Intent. Siegel represents and warrants that he is acquiring the Stock for his own account for investment and not with a view to, or for sale or other disposition in connection with, any distribution of the Stock, nor with any present intention of selling or otherwise disposing of the Stock. (b) Business of the Company. Siegel acknowledges that the Company has no financial and operating history. Siegel acknowledges that he is familiar with the proposed business and operations of the Company. Siegel acknowledges that he has had the opportunity to discuss the Company and its plans, operations and financial condition with its officers and that he has received all information which he deems necessary to enable him to evaluate the risks, financial and otherwise, inherent in making an investment in the Stock. (c) Economic Risk. Siegel acknowledges that an investment in the Stock is highly speculative, and represents that he is able, without impairing his financial position, to hold the Stock for an indefinite period of time and to suffer a complete loss on his investment in the Stock. (d) Transferability of the Stock. Siegel acknowledges that: (i) no public market now exists for the Stock or any other securities of the Company and the Company has no plans to create a public market for any of its securities; and, - 6 - 7 (ii) the Stock is not registered under the Securities Act of 1933, as amended, or under any state securities laws, and cannot be transferred unless registered under such acts or unless an exemption from registration is available; and (iii) transfer of the Stock is restricted by law and by the terms of this Agreement, and Siegel must therefore hold the Stock indefinitely, and thus bear the economic risk of his investment indefinitely, unless a subsequent disposition of the Stock is permitted under the terms of applicable law and this Agreement. (e) Tax Effects. Siegel acknowledges that it is his sole responsibility, and not the Company's, to determine the tax consequences to him, if any, of the issuance of the Stock, and to file in a timely manner any election which may be available to him in connection with the issuance of the Stock. 2.4 Restrictions on Transfers. (a) Right of First Refusal - Vested Shares. If Siegel desires in good faith to Transfer to any person or entity other than a Permitted Transferee all or any part of the Vested Shares owned by him ("Sale Shares"), he shall do so only for cash, a promissory note, or a combination of cash and a promissory note, and shall deliver written notice thereof to the Company specifying the number of Vested Shares which he desires to Transfer and the purchase price and other terms thereof (a "Transfer Notice"). Upon the delivery of such Transfer Notice, the Company shall have an option, exercisable for thirty (30) days after the date of receipt of such Transfer Notice, to buy all, but not less than all, the Sale Shares from Siegel at the price and on the terms set forth in the Transfer Notice. If the Company does not elect to purchase all of the Sale Shares, then Siegel shall be free, for a period of thirty (30) days thereafter, to consummate the Transfer on terms no less favorable than those set forth in the Transfer Notice. The Company may assign its right of first refusal under this Section 2.4(a) to any other person, including other shareholders of the Company; provided, however, that if the consideration for the Sale Shares includes a promissory note, Siegel's consent shall be required for any such assignment, which consent shall not be unreasonably withheld. In the event of any Transfer (including a Transfer to a Permitted Transferee), the Stock so transferred shall be subject to the provisions of this Agreement, and the persons acquiring the Stock will, as a condition precedent to the acquisition of such shares, execute an agreement containing the provisions of this Section 2.4 and shall agree to be bound thereby, and shall also pay any costs incurred by the Company as a result of such Transfer. Any Transfer made in violation of this Section 2.4(a) shall be void. Notwithstanding the foregoing, the right of first refusal set forth in this Section - 7 - 8 2.4(a) shall not apply to any Transfer to a Permitted Transferee. The right of first refusal set forth in this Section 2.4(a) shall terminate at such time as the Company shall have completed its Initial Public Offering. (b) Market Stand-Off. In connection with any underwritten public offering by the Company of its equity securities pursuant to an effective registration statement filed under the Securities Act of 1933, as amended, Siegel shall not Transfer (except to Permitted Transferees) or otherwise agree to engage in any transactions with respect to any shares of Stock owned by him without the prior written consent of the Company or its underwriters, for such period of time as may be requested by the Company or such underwriter; provided, however, that in no event shall such period exceed 180 days. In order to enforce this Section 2.4(b), the Company may impose stop-transfer instructions with respect to the shares until the end of the applicable standoff period. (c) Legend - All Shares. So long as the shares held by Siegel shall remain subject to the Company's right of first refusal under Section 2.4(a), in addition to any other legends, each certificate evidencing such shares of the Stock shall be imprinted with the following legend: "The shares represented by this certificate are subject to a right of first refusal in favor of the issuer or its assignee, as set forth in a Consulting and Stock Purchase Agreement between the issuer and the original holder of the shares. The shares shall remain subject to the repurchase right and right of first refusal, despite any transfer or attempted transfer. The issuer will furnish a copy of such agreement upon request and free of charge to the registered holder hereof." When the Company's rights under this Section 2.4 shall terminate, the Company shall upon request issue one or more new certificates evidencing the Vested Shares not bearing the above legend. 2.5 Escrow. To ensure the availability for delivery of the Unvested Stock upon exercise of the Repurchase Option, upon the issuance of the Unvested Stock Siegel and the Company shall enter into Joint Escrow Instructions in the form attached as Exhibit B to this Agreement, and shall deposit with the Escrow Agent under those Joint Instructions the certificates evidencing all shares of the Unvested Stock, duly endorsed for transfer to the Company or accompanied by endorsed blank assignments separate from certificate. Upon a transfer of any shares of the Unvested Stock which is permitted under the terms of this Agreement, the transferee shall execute similar Joint Instructions and deposit similar stock assignments with the Escrow Agent. Upon the termination of the Repurchase Option, with respect to any shares - 8 - 9 of Stock, the Escrow Agent shall deliver one or more certificates evidencing those shares of Stock to the holder. 2.6 Repurchase Obligation. In the event that Siegel is required by the University, as operator of ANL, to divest all of his Stock in the Company, the Company agrees, upon written notice from Siegel, (a) to purchase all of Siegel's Vested Shares at a price equal to their Fair Market Value, and (b) to purchase all of Siegel's Unvested Shares at a price equal to the purchase price originally paid by Siegel for such Unvested Shares. To the extent that the Company may not legally purchase Stock from Siegel as required by the preceding sentence, the Company may (i) assign its right and obligation to any person or entity selected by the Company, including without limitation one or more shareholders of the Company, or (ii) defer the consummation of its purchase until the Company may legally effect the purchase. The Company shall pay the purchase price due to Siegel in cash, by delivery of the Company's promissory note bearing interest at 10% per annum and maturing not more than two (2) years after the date of repurchase, or with a combination of the two. 2.7 Right to Purchase Additional Equity Securities. If the Company shall hereafter offer any equity security of the Company or any securities exchangeable for or convertible into equity securities of the Company or any warrants or other instruments evidencing rights to subscribe for, purchase or otherwise acquire any equity securities of the Company ("Equity Securities"), and if the effect of the issuance of such Equity Securities or the exchange, conversion or exercise of such Equity Securities would be to reduce Siegel's equity position in the Company (taking the Company as a whole on a fully diluted basis, assuming the conversion and exchange of all outstanding securities which are convertible or exchangeable into equity securities and the full exercise of all outstanding warrants and other rights to acquire equity securities) below 10%, the Company shall promptly notify Siegel thereof and Siegel shall have the right, by written notice to the Company given within twenty (20) days following receipt of such notice by Siegel, to purchase on the most favorable terms such Equity Securities are offered by the Company to other investors such amount of such Equity Securities which (taking the Company as a whole on a fully diluted basis, assuming the conversion and exchange of all outstanding securities which are convertible or exchangeable into equity securities and the full exercise of all outstanding warrants and other rights to acquire equity securities) would maintain for Siegel an equity position in the Company equal to Siegel's equity position in the Company prior to the issuance of such Equity Securities (but in no event more than 10%). The rights granted to Siegel under this Section 2.7 shall survive the termination for any reason of this Agreement; provided, however, that such rights shall not apply in the event of, and shall terminate immediately prior to, the Initial Public Offering. - 9 - 10 III. CONFIDENTIALITY, PROPRIETARY RIGHTS, AND CONFLICTS OF INTEREST 3.1 Nondisclosure Obligation. Siegel understands and acknowledges that as a shareholder and in the course of performing consulting services under this Agreement he may be exposed to Proprietary Information rightfully belonging to the Company. Siegel will hold in confidence all such Proprietary Information and will not at any time, without the prior written consent of the Company, divulge or disclose to anyone outside the Company, or appropriate for his own use or the use of any third party, such Proprietary Information. For purposes of this Section 3.1, "third parties" shall include each of the University and DOE, and Siegel specifically agrees that he shall not use or disclose such Proprietary Information in the course of his employment at ANL. Siegel's agreements and covenants under this Section 3.1 shall survive the termination of this Agreement and Siegel's termination as a shareholder of the Company. 3.2 Inventions. (a) Assignment of Inventions. Any Inventions conceived by Siegel within the Scope of the Work shall be the property of the Company, and Siegel agrees to execute such assignments or other documents as the Company may reasonably request to evidence the Company's ownership of such Inventions. The Company recognizes the obligation of Siegel pursuant to his employment agreement with the University, and the University with DOE under ANL Prime Contract No. W-31-109-ENG-38, and agrees that Invention ownership conflicts with respect thereto shall be presumed in favor of such obligations and against the present agreement. (b) Laboratory Notebooks. Siegel agrees to maintain laboratory notebooks relating to his work under this Agreement, and to promptly disclose any Invention conceived by him in the performance of his duties hereunder to the Company. (c) Rights in Copyrights. Unless otherwise agreed in writing by the Company, original works of authorship fixed in any tangible form, prepared by Siegel (alone or jointly with others) in performing work under this Agreement shall be deemed a "work made for hire" under the copyright laws (hereinafter called "Copyright Works") and shall be owned by the Company. Siegel understands that any assignment or release of such Copyright Works can only be made by the Company. Siegel shall do everything reasonably necessary to enable the Company or its nominees to protect its rights in such Copyright Works. (d) Return of Documents. All writing, records, and other documents and items of tangible property containing any Inventions, Proprietary Information, or Copyright Works of the - 10 - 11 Company in Siegel's custody or possession shall be the exclusive property of the Company, shall not be copied and/or removed from the premises of the Company, except in pursuit of the business of the Company, and shall be delivered to the Company (i) upon request, or (ii) in any event, upon the termination of this Agreement. 3.3 Conflicts of Interest. (a) ANL and DOE Priority. Company acknowledges that Siegel is employed by the University and therefore Siegel's availability for consulting services under this Agreement will be restricted. Siegel will not be required to perform any services requiring the use of ANL facilities, equipment, materials or time. The University at any time may revoke Siegel's authority to serve as a consultant for the Company, or to perform any specific task for the Company, in which event Siegel shall have the right to decline to perform such task or to terminate this Agreement. Further, Siegel may terminate this Agreement, or decline to perform any specific tasks, if Siegel reasonably determines that his duties hereunder are inconsistent with his obligations to the University. Any conflicts of interest between Siegel's obligations to the Company and to the University shall be resolved in favor of the University. Notwithstanding any other provision of this Agreement, it is understood and agreed that Siegel, by virtue of his employment with the University at ANL, has a prior commitment with respect to Inventions, and that all rights in any Invention of Siegel are subject to the terms and conditions of Siegel's patent agreement with the University and subject to the provisions of ANL Prime Contract No. W-31-109-ENG-38 between the University and DOE. No modification or amendment to Article III of this Agreement, including a modification or amendment to the Scope of the Work, shall be effective without the prior written consent of the University, as operator of ANL for DOE. (b) Absence of Conflicting Agreements. The Company does not desire to acquire from Siegel any trade secret or other information that he may have acquired or may in the future acquire from others with restriction, including the University or DOE. Accordingly, Siegel represents and warrants that to the best of his knowledge he will not divulge to the Company any information, practices or techniques in violation of the rights of other parties. Siegel represents and warrants that, except to the extent he is subject to any of the policies of ANL as a result of his employment thereby, he is not a party to any agreement or arrangement, whether oral or written, which would prevent him from carrying out his obligations to the Company under this Agreement. (c) No Exclusivity. It is understood and agreed that nothing contained in this Agreement shall prevent Siegel from - 11 - 12 performing services within the Scope of the Work for others, either as an employee or as a consultant, so long as the performance of such obligations does not interfere with the performance of his obligations hereunder. IV. DEFINITIONS As used in this Agreement, the following terms shall have the following meanings: "ANL" shall mean Argonne National Laboratory. "Associate" shall mean a person who renders periodic services to the Company, either as an employee, officer or director of the Company, or as an independent non-employee consultant to the Company rendering consulting services pursuant to a written agreement with the Company. "DOE" shall mean the United States Department of Energy. "Fair Market Value" shall mean, as of any date, an amount equal to the fair market value of the Siegel's Vested Shares. If Siegel and the Company cannot agree on such value, each shall appoint one (1) independent appraiser, who shall be a person with expertise in valuing privately held and start-up companies. Such appraisers shall each independently determine the fair market value of such Shares within forty-five (45) days, and the Fair Market Value shall be the mean of such valuations; provided however, that if the higher valuation is more than 50% greater than the lower valuation, then the appraisers appointed by Siegel and the Company shall appoint a third independent appraiser, who shall also be a person with expertise in valuing privately held companies, and such third appraiser shall, within thirty (30) days, determine a value between the two valuations determined by the first appraisals and such value shall be the Fair Market Value. Each party shall bear the cost of the appraiser appointed by it, and the cost of the third appraiser shall be borne equally by Siegel and the Company. "Initial Public Offering" shall mean a public sale of equity securities of the Company pursuant to an effective registration statement under the Securities Act of 1933, as amended. "Invention" shall mean any discoveries, concepts and ideas, whether patentable or not, including but not limited to proprietary or secret processes, designs, computer software, programs, formulae, inventions, developments, modifications, procedures, methods, techniques, processes, adaptations, and applications, as well as improvements thereof, conceived by Siegel (alone or jointly with others) in performing consulting services under this Agreement. - 12 - 13 "Permitted Transferee" shall mean a person's spouse, ancestor or descendant, or a trust created for the primary benefit of such persons (provided that such trust, if it provides for a secondary or contingent beneficiary, shall provide for a secondary or contingent beneficiary who shall be one of the above persons.) "Proprietary Information" shall mean any information not generally known in the relevant trade or industry, which Siegel acquired, learned, discovered, developed, conceived, originated or prepared in performing consulting services under this Agreement for the Company or received by Siegel as a shareholder of the Company, including without limitation the following: (A) all knowledge and information relating to commercialization or development of commercial applications for the Company's technology within the Scope of the Work; (B) financial or business information of the Company or any customer of the Company; (C) information regarding the terms of employment of any of the Company's employees or consultants; and (D) any "trade secrets", as defined in the Illinois Trade Secrets Act in effect on the date hereof, of the Company or any customer of the Company. All Proprietary Information in written or other tangible form shall be marked "Proprietary"; Proprietary Information in an intangible form shall be reduced to writing within thirty (30) days of its disclosure, and such writing shall be so marked. Notwithstanding the foregoing, Proprietary Information does not include (i) information which is or becomes publicly available without any restriction as to confidentiality (except as may be disclosed by Siegel in violation of this Agreement), (ii) information acquired by Siegel from a source other than the Company or any of its employees, which source legally acquired such information without any restriction as to confidentiality, (iii) information of a general nature and information of a specific nature regarding the technology of the Company known to Siegel prior hereto, or (iv) information disclosed by the Company to any third party other than under conditions of confidence. "Termination Date" shall mean the date on which Siegel ceases to be an Associate of the Company. "Transfer" shall mean any sale, assignment, negotiation, pledge, hypothecation, and any other dispositions of the Stock, and all other events or transactions where a lien is created against the Shares. - 13 - 14 "University" shall mean The University Of Chicago. V. MISCELLANEOUS 5.1 Amendment and Waiver. (a) Any term, covenant, agreement or condition contained in this Agreement may be amended with, and only with, the written consent of the Company and Siegel, provided that any amendment to Article III hereof shall require the consent of the University, as set forth in Section 3.3(a) hereof. (b) Any waiver of any term, covenant, agreement or condition contained in this Agreement must be in writing. No such waiver shall be deemed a waiver of any other term, covenant, agreement or condition, and any waiver of any default in any such term, covenant, agreement or condition shall not be deemed a waiver of any later default thereof or of any default of any other term, covenant, agreement or condition. 5.2 Representations and Warranties to Survive Closing. All representations, warranties and covenants contained herein or made in writing by Siegel or the Company in connection herewith shall survive the execution and delivery of this Agreement and the issuance of Stock hereunder. 5.3 Severability. In the event that any court or any governmental authority or agency declares all or any part of any Section of this Agreement to be unlawful or invalid, such unlawfulness or invalidity shall not serve to invalidate any other Section of this Agreement, and in the event that only a portion of any Section is so declared to be unlawful or invalid, such unlawfulness or invalidity shall not serve to invalidate the balance of such Section. 5.4 Successors and Assigns. The Company may from time to time assign its Repurchase Option for any particular Unvested Shares to any person or entity selected by the Company, including without limitation one or more shareholders of the Company. All representations, warranties, covenants and agreements of the parties contained in this Agreement or made in writing in connection herewith, shall, except as otherwise provided herein, be binding upon and inure to the benefit of their respective successors and assigns. 5.5 Shareholder Rights. Until such time as the Company exercises its Repurchase Option as to any particular Unvested Shares, Siegel (or any successor in interest) shall have all the rights of a shareholder (including all voting and dividend rights) with respect to such shares. - 14 - 15 5.6 Notices. All communications provided for hereunder shall be hand delivered or sent by registered mail return receipt requested and, if to Siegel, addressed as follows: Dr. Richard W. Siegel 211 West Hickory Street Hinsdale, Illinois 60521-3309 with a copy to: David E. Grossman, Esq. Burns & Levinson (prior to May 4, 1990) or (after May 4, 1990) 50 Milk Street 125 Summit Street Boston, MA 02109 Boston, MA 02110-1624 and if to the Company, addressed as follows: Nanophase Technologies Corporation c/o ARCH Development Corporation 1115-25 East 58th Street Chicago, Illinois 60637 Attention: President with a copy to: Mr. Thomas M. Fitzpatrick Law Offices of Thomas M. Fitzpatrick 20 North Wacker Drive, Suite 2243 Chicago, Illinois 60606 or such other addresses or recipients as the recipient shall have designated to the sender by a written notice given in accordance with this Section. Any notice called for hereunder shall be deemed given when received. 5.7 Governing Law. Except to the extent federal law is applicable, this Agreement shall be governed by and construed in accordance with the laws of the State of Illinois applicable to agreements between Illinois residents entered into and to be performed entirely within Illinois. 5.8 Headings. The headings used herein are solely for the convenience of the parties and shall not serve to modify or interpret the text of the Articles or Sections at the beginning of which they appear. 5.9 Remedies. The parties expressly agree that each party shall be entitled to injunctive and/or equitable relief, without bond, in any court of competent jurisdiction to prevent or otherwise restrain a breach of this Agreement. - 15 - 16 5.10 Entire Agreement. This Agreement represents the entire agreement and understanding of the parties hereto with respect to the transactions set forth herein and no representations, warranties or covenants have been made in connection with this Agreement except those expressly set forth herein. This Agreement supersedes all prior negotiations, discussions, correspondence, communications, understandings and agreements between the parties relating to the subject matter of this Agreement, and all prior drafts of this Agreement, all of which are merged into this Agreement. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed on the day first above written. Siegel: /s/ RICHARD W. SIEGEL --------------------------------------- RICHARD W. SIEGEL Company: NANOPHASE TECHNOLOGIES CORPORATION, an Illinois corporation By: ------------------------------------ Its -------------------------------- - 16 - 17 Exhibit A SCOPE OF THE WORK Advising and consulting on information in published articles or other previously disseminated information on nanophase materials with regard to their application and commercialization. - 17 - 18 Exhibit B JOINT ESCROW INSTRUCTIONS May 9, 1990 Secretary Nanophase Technologies Corporation c/o ARCH Development Corporation 1115-25 East 58th Street Chicago, Illinois 60637 Dear Sir or Madam: 1. As Escrow Agent for both Nanophase Technologies Corporation, an Illinois corporation (the "Company"), and Richard W. Siegel, as purchaser of stock of the Company ("Siegel"), you are hereby authorized and directed to hold the documents delivered to you pursuant to the terms of that certain Consulting and Stock Purchase Agreement dated May 9, 1990 (the "Stock Agreement"), to which a copy of these Joint Escrow Instructions is attached as Exhibit B, in accordance with these Joint Escrow Instructions (the "Instructions"). Capitalized terms used but not defined in these Instructions are used as defined in the Stock Agreement. 2. In the event that the Company or any assignee of the Company (collectively called the "Option Holder") exercises the Repurchase Option set forth in Article II of the Stock Agreement, the Option Holder shall give you and Siegel written notice specifying the time and place for the consummation of the purchase and sale of Stock pursuant to the Repurchase Option. The Option Holder and Siegel hereby irrevocably authorize and direct you to consummate the purchase and sale of Stock pursuant to the terms of the Stock Agreement and such notice. 3. At the closing, you are directed (a) to date any stock assignments necessary for the transfer in question, (b) to fill in the number of shares of Stock being transferred, and (c) to deliver same, together with any certificates evidencing the shares of Stock being transferred, to the Option Holder against simultaneous delivery to you of the purchase price (by check) for the shares of Stock being transferred. You shall thereupon deliver the purchase price to Siegel or as he directs by written instructions to you. 4. Siegel irrevocably authorizes the Company to deposit with you any certificates evidencing shares of Stock being held - 18 - 19 by you hereunder and any additions to or substitutions for said shares. Siegel irrevocably constitutes and appoints you as his attorney-in-fact and agent for the term of this escrow to execute with respect to such securities all documents necessary or appropriate to make such securities negotiable and complete any transactions contemplated by these Instructions. Subject to the provisions of this Section 4, Siegel shall exercise all rights and privileges of a stockholder of the Company while the Stock is held by you. 5. This escrow shall terminate with respect to particular shares of the Stock upon the purchase of those shares by the option Holder or when, by the terms of the Stock Agreement or as otherwise agreed by the Company in writing, the Repurchase Option does not apply to those shares. 6. This escrow shall terminate upon the termination of the Repurchase Option with respect to all shares of Stock originally issued under the Stock Agreement and all other shares or other property to which the Repurchase Option shall apply, all in accordance with the terms of the Stock Agreement. Upon the termination of this escrow, you shall deliver to Siegel certificates evidencing all shares of Stock not previously purchased by the Company or its assignees, and not otherwise released. Upon the termination of this escrow, if you then have in your possession any other documents, securities or other property belonging to Siegel, you shall deliver all of the same to Siegel and shall be discharged of all further obligations hereunder. 7. Your duties hereunder may be altered, amended, modified, or revoked only by a writing signed by all of the parties hereto. 8. You shall be obligated only for the performance of such parties as are specifically set forth herein and may rely and shall be protected in relying or refraining from acting on any instrument which you reasonably believe to be genuine and to have been signed or presented by the proper party or parties. You shall not be personally liable for any act you may do or omit to do hereunder as escrow agent or as attorney-in-fact for Siegel while acting in good faith and in the exercise of your own good judgment, and any act done or omitted by you pursuant to the advice of your own attorneys shall be conclusive evidence of such good faith. You shall be entitled to rely on any written notice from the duties hereto without any obligation to verify the truth or accuracy of such notices. 9. You are hereby expressly authorized to disregard any and all warnings given by any of the parties hereto or by any other person, excepting only orders or process of courts of law, and are hereby expressly authorized to comply with and obey orders, judgments and decrees of any court. In case you obey or comply - 19 - 20 with any such order, judgment or decree, you shall not be liable to any of the parties hereto or to any other person by reason of such compliance, notwithstanding that such order, judgment or decree may subsequently be modified, reversed, vacated, annulled or found to be without jurisdiction. 10. You shall not be liable in any respect on account of the identity, authorities or rights of the parties executing these Joint Escrow Instructions or any document or paper hereunder. 11. You shall not be liable for the outlawing of any rights under the statute of limitations with respect to these Joint Escrow Instructions or any document or paper hereunder. 12. You shall be entitled to employ such legal counsel and other experts as you may deem necessary properly to advise you in connection with your obligations under these Instructions, may rely upon the advice of such counsel, and may pay such counsel reasonable compensation therefor. 13. Your responsibilities as Escrow Agent hereunder shall terminate if you shall cease to be Secretary of the Company or if you shall resign by written notice to both the Company and Siegel. In the event of any such termination, your successor as Secretary of the Company shall be successor Escrow Agent, provided that if a new Secretary is not appointed or elected, the Company shall designate any officer of the Company as successor Escrow Agent, by a written notice to Siegel, you and the successor Escrow Agent. 14. If you reasonably require other or further instruments in connection with these Instructions, the necessary parties shall join in furnishing such instruments. 15. Siegel and the Company agree that should any dispute arise with respect to the delivery, ownership or right of possession of the securities held by you under these Instructions, you are authorized and directed to retain in your possession without liability to anyone all or any part of such securities until the dispute shall have been settled either by mutual written agreement of the parties concerned or by a final order, decree or judgment of a court of competent jurisdiction after the time for appeal has expired and no appeal has been perfected, but you shall be under no duty whatsoever to institute or defend any such proceedings. 16. All communications provided for hereunder shall be hand delivered or sent by registered mail return receipt requested and, if to Siegel, addressed as follows: - 20 - 21 Dr. Richard W. Siegel 211 West Hickory Street Hinsdale, Illinois 60521-3309 and if to the Company, addressed as follows: Nanophase Technologies Corporation c/o ARCH Development corporation 1115-25 East 58th Street Chicago, Illinois 60637 Attention: President and if to you, addressed as follows: Secretary Nanophase Technologies Corporation c/o ARCH Development corporation 1115-25 East 58th Street Chicago, Illinois 60637 or such other address as the recipient shall have designated to the sender by a written notice given in accordance with this section. Any notice called for hereunder shall be deemed given when received. 17. By signing these Joint Escrow Instructions, you become a party only to these Instructions, and you do not become a party to the Stock Agreement. 18. All reasonable costs, fees and disbursements that you may incur in connection with the performance of your duties as Escrow Agent shall be paid by the Company. 19. These Joint Escrow Instructions shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. - 21 - 22 20. These Joint Escrow Instructions shall be governed by and construed in accordance with the laws of the State of Illinois applicable to agreements between Illinois residents entered into and to be performed entirely within Illinois. Very truly yours, /s/ RICHARD W. SIEGEL --------------------------------------- RICHARD W. SIEGEL NANOPHASE TECHNOLOGIES CORPORATION, an Illinois corporation By: [SIG] ----------------------------------- Its CEO ------------------------------- Accepted and Agreed to: Escrow Agent: - ----------------------------------- Secretary, Nanophase Technologies Corporation, an Illinois corporation - 22 - 23 February 13, 1991 Dr. Richard W. Siegel 211 West Hickory Street Hinsdale, Illinois 60521-3309 Dear Richard: The following will confirm our agreements concerning Sections 2.7 and 2.2(c) of the Consulting and Stock Purchase Agreement (the "Agreement") dated May 9, 1990, between you and Nanophase. All capitalized terms used herein shall have the meanings given them in the Agreement. We agree as follows: 1. The term "Equity Securities" as used in Section 2.7 does not include any Nanophase securities, or options, warrants or other rights to acquire any Nanophase securities, which Nanophase issues to a Nanophase employee or consultant in compensation for his/her services to Nanophase. 2. The term "Equity Securities" does not include any warrants, options or other rights to acquire any Nanophase common or preferred stock at the time any such rights are issued, but any common or preferred stock which is issued upon the exercise of any such rights (except any rights described in paragraph 1 above) will constitute "Equity Securities" under Section 2.7 at the time the common or preferred stock is issued, and that issuance will trigger your rights under Section 2.7. 3. In the event Nanophase merges or combines with another company and any Nanophase securities (or rights to acquire Nanophase securities) are issued as a result of such merger or combination, the 10% benchmark in Section 2.7 will be measured against the Equity Securities held by the persons who were Nanophase stockholders immediately before, and not after, the merger or combination. 24 Dr. Richard W. Siegel February 13, 1991 Page Two 4. The 2,500 Unvested Shares have become Vested Shares pursuant to Section 2.2(c) of the Agreement. Accordingly, the escrow arrangement contemplated by the Joint Escrow Instructions executed in connection with the Agreement is terminated for all purposes, and the Secretary of Nanophase, in his capacity as escrow agent thereunder, is delivering to you herewith the certificate issued in your name for 2,500 shares of Nanophase common stock and the original executed stock assignment relative thereto which were held by him pursuant to said escrow arrangement. 5. It is understood that all Nanophase securities heretofore or hereafter issued to you pursuant to Section 2.7 of the Agreement (including, without limitation, the 2,000 shares accruing to you under said Section 2.7 as a result of the issuance of Nanophase stock to James E. Moore) shall be Vested Shares. If the above confirms your understanding, please signify your agreement by signing this letter where indicated below. Sincerely, NANOPHASE TECHNOLOGIES CORPORATION By: /s/ JAMES E. MOORE ----------------------------------- James E. Moore, President Accepted and agreed this 25th day of February __, 1991, by: /s/ RICHARD W. SIEGEL - ------------------------------------ Dr. Richard W. Siegel 25 November 21, 1991 Dr. Richard W. Sieges 211 West Hickory Street Hinsdale, Illinois 60521-3309 Re: Nanophase Technologies Corporation (the "Company") Dear Dr. Siegel: Reference is made to (i) the Consulting and Stock Purchase Agreement dated as of May 9, 1990, as amended by a letter dated February 13, 1991 (the "Consulting Agreement"), between you and the Company, (ii) the Series B Preferred Stock Purchase Agreement (the "Purchase Agreement") between the Company and the signatories thereto of even date herewith, (iii) the Shareholders' Agreement of even date herewith (the "Shareholders' Agreement") between you and the Company and certain other parties who may be signatories thereto, and (iv) the Registration Rights Agreement of even date therewith (the "Registration Agreements) between you and the Company and certain other parties who may be signatories thereto. You and the Company agree as follows: 1. Conditional upon and subject to the execution of the Series B Purchase Agreement and your execution of the Shareholders' Agreement, the Company agrees to sell you 32,000 shares of the Company's common stock (the "Common"), for the aggregate price of $320.00, payable by check representing good funds against receipt of a certificate representing the Common. Upon such payment, the Common will be fully paid and non-assessable, and will be delivered to you free and clear of all liens, claims and encumbrances whatsoever. 2. You agree that the Common will be deemed to be "Stock" and "Vested Shares" (as those terms are defined in the Consulting Agreement) as if the Common had originally been issued pursuant to the Consulting Agreement, and you agree (subject only to the provisions of paragraphs 4, 5, 6 and 7 below) to hold the Common pursuant to all of the applicable terms of the Consulting Agreement and the Shareholders' Agreement. To induce the Company to sell the common, you hereby remake the representations and warranties to the Company set forth in Section 2.3 of the Consulting Agreement as of the date hereof. 3. Conditional upon and subject to your execution of the Series B Purchase Agreement and the Shareholders' Agreement, and in fu11 satisfaction of your rights under Section 2.7 of the Consulting Agreement for all purposes through and including the 26 date hereof, the Company agrees to sell you no less than 77,627 a shares, and no more than 135,544 shares, of the Company's Series B preferred Stock, no par value (the "Series B Preferred"), for a per share price of $0.65 and pursuant to the terms of, and subject to the limitations contained in, the Series B Purchase Agreement and the Shareholders' Agreement. 4. Section 2.6 of the Consulting Agreement is hereby deleted in its entirety, and shall be of no further force or effect whatsoever. 5. The terms of Section 4 of the Shareholders' Agreement shall supersede all of the provisions of Section 2.4(a) of the Consulting Agreement for so long as the Shareholders' Agreement shall remain in effect, and upon the termination of the Shareholders' Agreement said Section 2.4(a) shall once again be of full force and effect in accordance with its terms and the other terms of the Consulting Agreement. 6. The terms of Section 6 of the Shareholders' Agreement shall supersede all of the provisions of Section 2.7 of the Consulting Agreement for so long as the Shareholders' Agreement shall remain in effect, and upon the termination of the Shareholders' Agreement said Section 2.7 shall once again be of full force and effect in accordance with its terms and the other terms of the Consulting Agreement. 7. The terms of Section 7 of the Shareholders' Agreement shall supersede all of the provisions of Section 2.4(b) of the Consulting Agreement, and said Section 2.4(b) shall no longer be of any further force or effect whatsoever, regardless of the continuing existence or effectiveness of the Shareholders' Agreement from and after the date of this letter agreement. 8. You hereby waive, discharge and forever release the Company from any and all obligations which the Company may have to you for any sums now owing or which may become owing pursuant to the Consulting Agreement at any time through and including November 30, 1991. You agree that you will not bring any action or claim with respect to any sum so waived, discharged and released. Except as otherwise specifically provided above, the Consulting Agreement shall remain in full force and effect in accordance with its terms. 27 Please signify your acceptance of the foregoing by signing the attached copies of this Agreement where indicated below. Sincerely, NANOPHASE TECHNOLOGIES CORPORATION By: /s/ THOMAS L. CHURCHWELL --------------------------------------- Thomas L. Churchwell, President Accepted and agreed as of the date written above: - ----------------------------------- Dr. Richard W. Siegel 28 February 25, 1992 Dr. Richard W. Siegel 211 West Hickory Street Hinsdale, Illinois 60521-3309 Re: Nanophase Technologies Corporation (the "Company") -------------------------------------------------- Dear Dr. Siegel: Reference is made to (i) the Consulting and Stock Purchase Agreement dated as of May 9, 1990, as amended by letters dated February 13, 1991, and November 21, 1991, between you and the Company (collectively, the "Consulting Agreement"). Except as otherwise specifically provided in this letter agreement, the following amendments and waivers shall be deemed effective as of January 1, 1992. You and the Company agree as follows: 1. You waive, discharge and forever release the Company from any obligation which the Company may have to you for any sums owing pursuant to the Consulting Agreement for the month of December, 1991. You agree that you will not bring any action or claim with respect to such sum. 2. The last sentence of Section 1.1 of the Consulting Agreement is deleted in its entirety, and shall be of no further force or effect. 3. The first sentence of Section 1.3(a) of the Consulting Agreement is deleted in its entirety and replaced as follows: "The Company shall pay Siegel a retainer of $2,000.00 per month as full consideration for his services hereunder, which sum shall be payable in the month for which such services are rendered." 4. Except as otherwise specifically provided above, the Consulting Agreement shall remain in full force and effect in accordance with its terms. In consideration of the execution of this letter agreement and in recognition of services previously performed by Siegel for the Company, the Company hereby grants to Siegel (i) an option to purchase 10,000 shares of the Company's common stock, the option to be vested and exercisable immediately upon issuance, and (ii) an additional option to purchase 20,000 shares of the Company's common 29 stock, the option to vest over a five (5) year period in equal proportions commencing January 1, 1993, and ending on January 1, 1997 (such option, together with the option described in (i) above, referred to collectively as the "Options"). The exercise price for all the Options shall be $0.065 per share, and the Options shall be issued under and subject to all of the terms and conditions of the Nanophase Technologies Corporation Stock Option Plan adopted on January 13, 1992, as such Plan may be amended in accordance with its terms. Please signify your acceptance of the foregoing by signing this Agreement and the attached copies where indicated. Sincerely, NANOPHASE TECHNOLOGIES CORPORATION By: /s/ [SIG] ----------------------------------- Its President ------------------------------- Accepted and agreed as of the date written above: [SIG] - ------------------------------------- Dr. Richard W. Siegel 30 Please signify your acceptance of the foregoing by signing the attached copies of this Agreement where indicated below. Sincerely, NANOPHASE TECHNOLOGIES CORPORATION By: ----------------------------------- Thomas L. Churchwell, President Accepted and agreed as of the date written above: [SIG] - ------------------------------------- Dr. Richard W. Siegel EX-10.12 13 LEASE AGREEMENT - VILLAGE OF BURR RIDGE 1 EXHIBIT 10.12 BUILDING LEASE DATE OF LEASE TERM OF LEASE BASE RENT AMOUNT BEGINNING ENDING $90,000.00 for first year September 15, 1994 9/15/94 9/15/99 LOCATION OF PREMISES: 451 Commerce Security Burr Ridge, Illinois Deposit $7,500.00 DESCRIPTION OF PREMISES: The property being leased hereunder is as depicted upon that diagram/site plan attached hereto as Exhibit A, together with those rights of ingress, egress, storage and loading set forth herein. - ----------------------------------------------------------------------------- September 15, 1994 9/15/94 9/15/99 Year - ----------------------------------------------------------------------------- LOCATION OF PREMISES: 451 Commerce Security Burr Ridge, Illinois Deposit: $7,500.00 - ----------------------------------------------------------------------------- DESCRIPTION OF PREMISES: The property being leased hereunder is as depicted upon that diagram/site plan attached hereto as Exhibit A, together with those rights of ingress, egress, storage and loading set forth herein. - ----------------------------------------------------------------------------- LESSEE LESSOR NAME - Nanophase Technologies Corporation NAME - Village of Burr Ridge ADDRESS - 7660 S. County Line Rd. - Burr Ridge, Illinois 60521 ADDRESS - In consideration of the mutual covenants and agreements herein stated, Lessor hereby leases to Lessee and Lessee hereby leases from Lessor, the premises designated above (the "Premises"), together with the appurtenances thereto, for the above Term. RENT 1. Lessee shall pay Lessor the base rent amount of $90,000.00, in twelve (12) equal installments in the amount of Seven Thousand Five Hundred dollars ($7,500.00) as rent for the Premises, at Lessor's address as shown above, payable on or before the 15th of each calendar month. The first monthly payment, and the security deposit in the amount of $7,500.00, shall be due on or before September 15, 1994. Rent shall continue to be due monthly for the term of this Lease to be calculated based upon the following: for each year after the first year of this Lease, the base rental amount of $90,000.00 will increase annually by that percentage equal to the annual percentage increase for the preceding twelve (12) months in the Consumer Price Index, (Chicago-All Items for all Urban Wage Earners and Clerical Workers) (CPI-W) but said amount not to exceed a maximum of 3% annually. IMPROVE- MENTS 2. Lessor agrees to make the following improvements: a proper demising wall for the Premises, and a front employees' entrance/vestibule (double doors) (or, if the Lessee completes said entrance, the reasonable cost equivalent to the Village will be paid by Lessor to Lessee as reimbursement) to the Premise, said improvements to be located generally where shown on the diagram(attached hereto as EXHIBIT A, an entrance for Lessee's employees from the warehouse and manufacturing area to the office area in the Premises (the location to be as reasonably designated by Lessee), and water and sewer service to be delivered to Lessee's side of the demising wall, said service to be located not less than four feet (4'), nor more than eight feet (8') south of the wall in the Premises separating Lessee's office space from the manufacturing and warehouse space. Lessee shall be responsible for all other improvements to the Premises, including, for example, carpeting, lighting and fixtures, partitions or ceiling enhancements, provided that any alteration or addition to the Premises by Lessee requires the prior written consent of Lessor. Said consent will not be unreasonably withheld by Lessor. CONDITION AND UPKEEP OF PREMISES 3. Lessee has examined and knows the condition of the Premises and has received the same in good order and repair, and acknowledges that no representations as to the condition and repair thereof have been made by Lessor, or his agent, prior to or at the execution of this Lease that are not herein expressed; Lessee will keep the Premises including all appurtenances, in good repair, replacing all broken glass and all damaged plumbing fixtures with others of equal quality, and will keep the Premises, including adjoining areas, in a clean and healthful condition according to the applicable municipal ordinances during the term of this Lease at Lessee's expense. Lessor will remove all snow and ice from the roof when necessary, and will be responsible for snow removal, as needed, from the sidewalk abutting the Premises and parking lot serving the Premises. Upon the termination of this Lease, for any reason, Lessee will yield up the Premises to Lessor, in good condition and repair, loss by fire and ordinary wear excepted. Lessor has responsibility for upkeep of all areas on the exterior of building, including, but not limited to the roof, parking area, grass area, sidewalks and exterior walls. Lessee has responsibility for upkeep of all elements on the interior of the space within the Premises, including, but not limited to, plumbing, electric, and H.V.A.C. equipment and facilities. Lessor represents that the plumbing, electric, gas and H.V.A.C. equipment and facilities is in good working order at the commencement of this lease. Lessor shall not be obliged to incur any other expense for repairing any improvements upon said demised premises or connected therewith, and the Lessee at his own expense will keep all improvements in good repair (injury by fire, or other causes beyond Lessee's control accepted) as well as in a good tenantable and wholesome condition and will comply with all local or general regulations, laws and ordinances applicable thereto. If Lessee does not make repairs as required hereunder promptly and adequately, Lessor may, but need not make such repairs and pay the costs thereof, and such costs shall be so much additional rent immediately due from and payable by Lessee to Lessor. Lessee is obligated to provide Lessor prompt notice of any necessary repairs for which Lessor may be responsible. 2 LESSEE'S ACCESS TO PREMISES 4. Lessee shall have rights of reasonable ingress and egress to the Premises over the paved portions and sidewalks on Lessor's property as well as ingress and egress rights over Lessor's property to access Lessee's loading dock and shared use of Lessor's paved parking area. Lessee shall also be entitled to reasonable use of that area needed to the south of the Premises to locate its outside storage tank(s). The storage tank(s) shall be located generally in that area depicted for such use on Exhibit A. Lessee agrees to locate and install said tank(s) in a neat and orderly fashion. Lessee shall petition the Village of Burr Ridge or other applicable governmental entity for any variations(s) or permit(s) that may be needed to lawfully locate, construct and/or operate such tanks, Lessor acknowledges that said storage tanks are an integral part of Lessee's use of the Premises. If such permit, variation or approval as is needed to permit the lawful construction and use of such tanks is denied by the governmental entity with jurisdiction, Lessee shall have the option, within thirty (30) days after such denial, to terminate this Lease. LESSSEE NOT TO MISUSE; SUBLET; ASSIGNMENT 5. Lessee will not allow the Premises to be used for any purpose that will increase the rate of insurance thereon for Lessor, and will not load floors with machinery or goods beyond the floor load rating prescribed by applicable governmental ordinances, and will not allow the Premises to be occupied in whole, or in part, by any other person, and will not sublet the same or any part thereof, nor assign this Lease without in each case the prior written consent of the Lessor first had, and Lessee will not permit any transfer by operation of law, mortgage or other encumbrance of the interest in the Premises acquired through this Lease. Lessee will not permit the Premises to be used for any unlawful purpose, or for any purpose that will injure the reputation of the building or increase the fire hazard of the building, or disturb the neighborhood, provided however, it is understood and acknowledged by Lessor that Lessee will conduct certain warehousing and manufacturing activities on the Premises and such activities shall be permitted if in compliance with applicable federal, state and local law. Lessee will not allow any signs, cards or placards to be posted, or placed thereon, nor permit any alteration of or addition to any part of the Premises, except by written consent of Lessor which consent would not be unreasonably withheld; all alterations and additions to the Premises shall remain for the benefit of Lessor unless otherwise provided in the consent aforesaid. Lessor represents that the Premises are currently zoned for Lessee's manufacturing, warehousing and office uses. MECHANIC'S LIEN 6. Lessee will not permit any mechanic's lien or liens to be placed upon the Premises or any building or improvement thereon during the term hereof, and in case of the filing of such lien Lessee will promptly pay same. If a default in payment shall continue for thirty (30) days after written notice to Lessee from Lessor to the Lessee, the Lessor shall have the right and privilege at Lessor's option of paying the same or any portion of the lien amount without inquiry as to its validity, and any amounts so paid, including expenses and interest, shall be so much additional indebtedness hereunder due from Lessee to Lessor and shall be repaid to Lessor immediately on tender of bill the lien costs. IDEMNIFY FOR ACCIDENTS 7. Lessee covenants and agrees that it will protect and save and keep the Lessor forever harmless and indemnified against and from any penalty or damages or charges imposed for any violation of any laws or ordinances, whether occasioned by the neglect of Lessee or those holding under Lessee, and that Lessee will at all times protect, indemnify and save and keep harmless the Lessor against and from any and all loss, cost, damage or expense, arising out of or from any accident or other occurrences on or about the Premises, causing injury to any person or property whomsoever or whatsoever and will protect, indemnify and save and keep harmless the Lessor against and from any and all claims and against and from any and all loss, cost, damage or expense arising out of any failure of Lessee in any respect to comply with and perform all the requirements and provisions hereof. Lessee agrees to obtain from a responsible insurance company, or companies, at its expense, public liability insurance in an amount not less than ONE MILLION ($1,000,000.00) DOLLARS with respect to any one person, and ONE MILLION ($1,000,000.00) DOLLARS with respect to any one accident and FIVE HUNDRED THOUSAND ($500,000.00) DOLLARS property damage with respect to any one accident, and a certificate as to such insurance shall be deposited with Lessor. -2- 3 WATER, GAS AND ELECTRIC CHARGES 9. Lessee will pay, in addition to the rent above specified, all water rents, gas and electric light and power bills taxed, levied or charged on the Premises, for and during the time for which this Lease is granted, and in case said water rents and bills for gas, electric light and power shall not be paid when due, Lessor shall, upon three days notice to Lessee have the right to pay the same, which amounts so paid are declared to be so much additional rent and payable with the installment of rent next due thereafter. Such services shall be separately metered. LESSOR'S ACCESS TO PREMISES 10. Lessor and its designees shall have the right, upon reasonable notice to Lessee, to enter upon the Premises at all reasonable hours (and in emergencies at all times and without notice): (a) to inspect the same; (b) to make repairs, additions or alterations to the Premises or the building in which the same are located or any property owned or controlled by Lessor; provided, however, if Lessor intends to be reimbursed by Lessee for any such repairs, additions or alterations, it shall so notify Lessee at least fourteen (14) days prior to taking any such action in order for Lessee to determine whether it is responsible for any such repairs, additions or alterations. OPTION PERIOD 11. Lessee has the right to extend the Lease term for five (5) consecutive 12 month periods. The annual rent escalation for each of the five 12 month option periods will be determined by using a factor equal to the average of the Consumer Price Index based on rent escalations over the initial 60 month term of this Lease. Responsibility for real estate taxes will continue to be determined in the manner utilized during the initial 60 month Lease term. ABANDON- MENT AND RELENTTING 12. If Lessee shall abandon or vacate the Premises, or if Lessee's right to occupy the Premises is terminated by Lessor by reason of Lessee's breach of any of the covenants herein, the same may be re-let by Lessor for such rent and upon such terms as Lessor may reasonably deem fit subject to Illinois statute; and if a sufficient sum shall not thus be realized monthly, after paying the out-of-pocket expenses of such re-letting and collecting to satisfy the rent hereby reserved, Lessee agrees to satisfy and pay all deficiencies monthly during the remaining period of this Lease. Lessor shall exercise reasonable efforts to obtain a new lessee to occupy the Premises following abandonment or vacation thereof by Lessee at a rate of rental then prevailing in the Burr Ridge area and upon such other lease terms as are herein contained. Upon abandonment or vacation of the Premises, Lessee's obligation is to restore the Premises to its original condition at the commencement of this Lease and return the Premises to Lessor in good condition and repair, provided, however, Lessee shall not be required to remove any improvements to the Premises approved by Lessor (unless such improvements are special or unique to Lessee's business, as reasonably determined by Lessor, and are so conditioned by Lessor). Lessee shall be solely responsible for the complete removal of any outside storage tank(s) and restoration of the affected location of the tank(s). HAZARDS/ HAZARDOUS SUBSTANCES 13. Lessor hereby represents that no hazardous materials exist on, within, or under the Premises as of the commencement of Lessee's occupancy hereunder in violation of applicable environmental requirements under local, Illinois or Federal law. Lessor hereby consents to Lessee's use and storage of materials which are determined to be hazardous in reasonable quantities on the Premises so long as such materials are necessary or appropriate in connection with Lessee's manufacturing and warehousing uses on the Premises and will be used, kept, and stored and disposed of in a manner that complies with all laws, rules, statutes, and ordinances regulating any such hazardous material so brought upon or used or kept in or about the Premises. Lessee shall not cause or permit any other hazardous material to be brought upon, or kept or used in or about the premises by Lessee, its agents, employees, contractors, or invitees. If Lessee or Lessor breach their respective representations or obligations stated above in this paragraph, or if the presence of hazardous material on or about the Premises caused or permitted by Lessee or Lessor results in contamination of the Premises or Lessor's adjacent property, or if contamination of the Premises or surrounding area by hazardous material otherwise occurs the responsible party (Lessee or Lessor) shall indemnify, defend, and hold harmless the other from any and all claims, judgments damages, penalties, fines, costs, liabilities, or losses (including, without limitation, diminution in value of the -3- 4 present in the soil or ground water on, under or about the Premises of Lessor's adjacent Property. Without limiting the above, if the presence of any hazardous material on or about the Premises caused or permitted by either Lessor or Lessee results in any contamination of the Premises or surrounding area, or causes the Premises or surrounding area to be in violation of any laws, rules, statutes, or ordinances, the responsible party (Lessee or Lessor) shall promptly take all actions at its sole expense as are necessary to return the Premises and surrounding area to the condition existing before the introduction of any such hazardous material; provided that, if Lessee is responsible, Lessor's approval of those actions shall first be obtained, which approval shall not be unreasonably withheld so long as those actions would not potentially have any material adverse long-term or short-term effect on the Premises or surrounding area. As used in this Lease, the term "hazardous material" means any hazardous or toxic substance, material or waste which is or becomes regulated by any local governmental authority, the state of Illinois, or the United States government, including any material which, when present, would require environmental remediation ("clean-up") under any such local, Illinois or Federal law. Lessee shall not allow, keep or use on the Premises any inflammable or explosive liquids or materials save such as may be necessary for use in the business of the Lessee, and in such case, any such substances shall be delivered and stored in amount, and used, in accordance with the rules for the applicable Board of Underwriters and statutes and ordinances now or hereafter in force. Further, no unlawful activities of any kind shall be conducted by Lessee on the Premises. Nothing in this paragraph 13 shall be construed to impose any additional liability whatsoever upon either of the parties hereto as a result of any acts or omissions of any third parties, specifically including any tenants leasing other space from Lessor. DEFAULT BY LESSEE 14. If Lessee shall vacate or abandon the Premises, or in case of the non-payment of the rent reserved hereby, or any part thereof, or of the breach of any covenant in this Lease, Lessee's right to the possession of the Premises thereupon shall terminate upon written notice to Lessee from Lessor and upon Lessee's failure to cure any such default within sixty (60) days of receipt of such notice, and the mere retention of possession thereafter by Lessee shall constitute a forcible detainer of the Premises; and if the Lessor so elects, but not otherwise, and upon written notice of such election to Lessee, this Agreement shall thereupon terminate, and upon the termination of Lessee's right of possession, as aforesaid, whether this Agreement be terminated or not, Lessee agrees to surrender possession of the Premises immediately, without the receipt of any demand for rent, notice to quit or demand for possession of the Premises whatsoever, and hereby grants to Lessor full and free license to enter into and upon the Premises or any part thereof, to take possession thereof after due process of law, and to expel and to remove Lessee or any other person who may be occupying the Premises or any part thereof, and Lessor may repossess itself of the Premises as of its former estate, but such entry of the Premises shall not constitute a trespass or forcible entry or detainer, nor a waiver of any covenants, agreement or promise in this Agreement contained, to be performed by Lessee. The acceptance of rent, whether in a single instance or repeatedly, after if falls due, or after knowledge of any breach hereof by Lessee, or the giving or making of any notice or demand, whether according to any statutory provision or not, or any act or series of acts except as an express written waiver, shall not be construed as a waiver of Lessor's rights hereunder, or as an election not to proceed under the provisions of this Agreement. REAL ESTATE TAXES 15. Lessor is responsible for the base real estate taxes during the Lease term (or pro-rata amount for any year in which the Premises are not taxable for the entire year), base taxes being defined as the real property tax amount generated by the current equalized assessed valuation of the Premises determined as follows. Since the initial real estate tax amount determined by the Assessor/County Clerk should be for only a portion of a tax year (September 15 - December 31), the base tax amount will be established, for use in subsequent years, in an amount to reflect the full tax amount due if the initial real estate tax amount had been a 365-day year, i.e., the base tax amount shall be increased to reflect an amount which would be equivalent to the taxes for the entire 1994 tax year based upon the real estate tax amount set forth in the tax bill to be issued by the County Clerk for September 15, 1994 through December 31, 1994. The value of any improvements to the Premises subsequent to September 15, 1994, shall not be included in the base tax amount. The Village shall establish such base amount in conjunction with the Assessor/County Clerk's office and shall confirm said amount with the Lessee. Once the equalized assessed valuation (EAV) is determined, then the most current tax rate for property within the same taxing districts shall be applied to said EAV and prorated accordingly for (the appropriate portion of this year. However, the base taxes shall be the amount equal to what an entire year's tax bill would be (e.g., if the EAV was $300,000 and (the current tax rate would produce a tax of $1,000 for all taxing districts for the entire year, then the base tax amount would be $1,000 even though the actual 1994 tax bill may be only $250.00). Following the base year of 1994, the Lessor is subsequently responsible for the base real estate taxes plus an amount not to -4- 5 statement by the village showing the calculation by which lessee's share of such tax bill was calculated. The following is an example of the proper application of this formula:
Entire Amount of Real Lessor Share (maximum Tax Estate Taxes on Premises increase, year to year, Year (Hypothetical) is 3% of prior year's share) Lessee Share ---- ------------------------ ---------------------------- ------------ 1994 $1,000.00* $1,000.00 $ 0 1995 $1,100.00 $1,030.00 $ 70.00 1996 $1,200.00 $1,060.90 $140.00 1997 $1,300.00 $1,092.73 $207.27 1998 $1,400.00 $1,125.51 $274.49
* This, of course, would be prorated for purposes of the actual tax bill since the Premises was tax exempt for the portion of the year prior to this Lease being executed, but what would have been the entire year's taxes (if not tax exempt for the entire year) is the base amount used to determine the parties shares of the tax bills for the future. Nothing in this paragraph shall limit Lessor or Lessee in the exercise of any rights afforded by Illinois law to challenge any assessment amount arrived at by the Assessor/County Clerk provided that any such challenge shall not delay or excuse the payment obligations of Lessor and Lessee set forth above. NO RENT DEDUCTION OR SET OFF 16. Lessee's covenant to pay rent is and shall be independent of each and every other covenant of this Lease. Lessee agrees that any claim by Lessee against Lessor shall not be deducted from rent nor set off against any claim for rent in any action. SECURITY DEPOSIT 17. The security deposit required herein shall be available to Lessor for its use or reimbursement to satisfy any of Lessee's obligations hereunder, if Lessee shall fail to meet or abide by such obligations. Lessor shall otherwise be allowed to use such security deposit monies as permitted by law. RENT AFTER NOTICE OR SUIT 18. It is further agreed, by the parties hereto, that after the service of notice, or the commencement of a suit or after final judgment for possession of the Premises, Lessor may receive and collect any rent due, and the payment of said rent shall not waive or affect said notice, said suit, or said judgment. PAYMENT OF COSTS 19. Lessee will pay and discharge all reasonable costs, attorney's fees and expenses that shall be made and incurred by Lessor in enforcing the covenants and agreements of this Lease. RIGHTS CUMULA- TIVE 20. The rights and remedies of Lessor under this Lease are cumulative. The exercise or use of any one or more thereof shall not bar Lessor from exercise or use of any other right or remedy provided herein or otherwise provided by law, nor shall exercise nor use of any right or remedy by Lessor waive any other right or remedy. FIRE AND CASUALTY 21. In the event the Premises are substantially damaged by fire or other casualty, Lessor shall, within sixty (60) days, notify Lessee in writing as to whether said Premises will be rebuilt or repaired, and in the event Lessor fails to so notify Lessee, Lessee may, at its option, terminate this Agreement by giving written notice to Lessor within ten (10) days after the expiration of said sixty (60) days. If Lessor so notifies Lessee that the Premises will be rebuilt or repaired, then this Agreement shall continue in effect upon the same terms and conditions; provided, however, if Lessor fails to rebuild or repair said Premises within sixty (60) days following the expiration of the sixty (60) day period in which Lessor must notify Lessee of such action, then Lessee may terminate this Agreement upon written notice to Lessor; and provided further, if Lessor so notifies Lessee that the Premises will be rebuilt or repaired, Lessee may, at its option, terminate this Agreement by giving written notice to Lessor within sixty (60) days after Lessor has so notified Lessee. If Lessor notifies Lessee that the Premises will not be rebuilt or repaired, and same are, in fact, not rebuilt or repaired within 180 days after the occurrence of the fire or other casualty, then this Agreement shall forthwith terminate. The fixed or basic rent herein reserved shall -5- 6 DEFAULTS 22. If either party shall fail to comply fully with any of its obligations under this Lease including, without limitation, its obligations to make repairs, maintain various policies of insurance, comply with all laws, ordinances and regulations and pay all bills for utilities), then the non-defaulting party shall give notice to the defaulting party regarding the nature and extent of such default and the defaulting party will have sixty (60) days to cure any such default, and if it fails to cure such default, then the non-defaulting party shall have the right, at its option, to cure such breach at the other party's expense. Each party agrees to reimburse the other (as additional rental or otherwise) for all costs and expenses incurred as a result thereof together with interest theron promptly upon demand. SEVERA- BILITY 23. Wherever possible each provision of this Lease shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Lease shall be prohibited by or invalid under applicable law, such provisions shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Lease. RELATION- SHIPS OF PARTIES 24. Nothing contained in this Agreement shall be construed to create the relationship of principal and agent, partnership, joint venture or any other relationship between the parties hereto other than the relationship of Lessor and Lessee. NOTICES 25. Every notice, approval, consent or other communication authorized or required by this Agreement shall not be effective unless served in writing and sent by United States registered or certified mail, return receipt requested, directed, if to Lessee to the Premises, and if to Lessor at the address listed on page 1 hereof or such other address as either party may designate by notice from time to time. WAIVER 26. One or more waivers of any covenant or condition by either party hereto shall not be construed as a wavier of a subsequent breach of the same or any other covenant or condition, and the consent or approval by one party to or of any act by the other party requiring the consenting party's consent or approval shall not be construed to waive or render unnecessary the consenting party's consent or approval to or of any subsequent similar act. ENTIRE AGREEMENT 27. No oral statement or prior written matter shall have any force or effect all of which shall merge herein and be superseded hereby. No waiver of any provision of this Agreement shall be effective unless in writing, signed by the waiving party. The parties agree that they are not relying on any representations or agreements other than those contained in this Agreement. This Agreement shall not be modified except by a writing subscribed by all parties, nor may this Agreement be canceled by either party except with the written consent of the other, unless otherwise specifically provided herein. The invalidity or unenforceability of any provisions of this Agreement shall not affect or impair any other provision. All captions herein are solely for convenience and shall not be given any legal effect. Except as otherwise provided in this Agreement, the covenants, conditions and agreements contained in this Agreement shall bind and inure to the benefit of Lessor and Lessee and their respective successors and permitted assigns. IN WITNESS WHEREOF, the parties hereby set their hands and seals. LESSOR: LESSEE: VILLAGE OF BURR RIDGE NANOPHASE TECHNOLOGIES CORPORATION Cook and DuPage Counties, Illinois Cook County, Illinois - ------------------------------------- ----------------------------------- President, Village of Burr Ridge President -6- 7 - ----------------------------- --------------------------- Clerk, Village of Burr Ridge Secretary Dated: September 8, 1994 Dated: September 8, 1994 ---------------------------- ------------------------- AMV\BURR RIDGE#2\A:\NANOPHASE.LSE -7- 8 [MAP] Truck Loading/Unloading Area Legend (Premises) Paved Parking Area Paved Side Walk Demising Wall Outside Storage Tank Area Exhibit A EX-10.13 14 PURCHASE ORDER 1 EXHIBIT 10.13 BLANKET PURCHASE ORDER -------------- [LOGO] ABOVE NUMBER MUST APPEAR ON PACKAGES, B/L, PACKING SLIPS [MOYCO LOGO] AND INVOICES. Moyco Technologies, Inc. CORPORATE OFFICES 7 Ultralap / Abrasives Div. MOYCO UNION BROACH / Dental Division 200 commerce Drive - Montgomeryville - PA 18936 589 Davies Drive - York - PA 17402 (215) 855-4300 - FAX: (215) 362-3809 (717) 840-9335 - FAX:(717) 840-9347 REQUISITIONER VENDOR NO. P.O. DATE P.O. # DELIVERY DATE Picardi 14090 2/24/97 10517 See Schedule TO NANOPHASE TECHNOLOGIES SHIP TO MOYCO TECHNOLOGIES 453 Commerce Street 200 Commerce Drive Burr Ridge, IL 60521 Montgomeryville, PA 18936 (Or as otherwise directed) FOB: / / CONFIRMATION ONLY - ------------------------------------------------------------------------------------------------------------------------------------ ITEM NO. QTY UNITS DESCRIPTION UNIT COST EXTENDED PRICE - ------------------------------------------------------------------------------------------------------------------------------------ SEE ALL ATTACHED DOCUMENTS WHICH DETAILS THIS PURCHASE ORDER REFER TO ATTACHED PURCHASE PLAN AND ORDER DESCRIPTION POWER MATERIALS AND R&D USED FOR MOYCO CMP SLURRIES PROVIDED ON N/A N/A EXCLUSIVE BASIS $30,000,00 See Documents Incorporated ALL DOCUMENTS, ADDENDUMS AS WELL AS TERMS AND CONDITINOS ON REVERSE SIDE OF THIS PURCHASE ORDER ARE INCORPORATED HEREIN ALL DRAWSINGS, REFERENCE MATERIALS AND INTERRELATED IDEAS ASSOCIATED WITH THIS PROJECT ARE FOR THE SOLE AND EXCLUSIVE USE OF MOYCO INDUSTRIES INC, AND CANNOT BE USED BY OTHERS UNDER ANY CIRCUMSTANCES WHATSOEVER WITHOUT THE WRITTEN CONSENT OF MOYCO TOTAL $30,000,000 - ------------------------------------------------------------------------------------------------------------------------------------ NO PARTIAL SHIPMENTS WITHOUT PRIOR AUTHORIZATION DO NOT SHIP FREIGHT C.O.D. TRAFFIC MANAGER, PLEASE NOTE: SUBJECT TO THE TERMS AND CONDITIONS ON THE BACK HEREOF WHICH ARE INCORPORATED AND MADE A PART THEREOF. MOYCO TECHNOLOGIES, INC. USE SINGLE FACE PALLETS -- DO NOT DOUBLE TIER. /s/ Jerome J. Lipkin Executive Vice President ---------------------------------------------------------------------------- / / PURCHASING MGR. / / SR BUYER - ------------------------------------------------------------------------------------------------------------------------------------ WHEN SHIPPING CHARGES ARE NOT PREPAID OUR ROUTING MUST BE OBSERVED, OTHERWISE DIFFERENCE IN TRANSPORTAION CHARGES WILL BE CHARGED TO SUPPLIER WHEN NO ROUTING IS SPECIFIED. SHIP CHEAPEST STORE DOOR DELIVERY. Page 1 of 5 No Order will be valid unless signed. ORIGINAL
2 MOYCO/NANOPHASE 5 YEAR PURCHASE AND DISTRIBUTION AGREEMENT With reference to the Marketing Agreement between Nanophase Technologies Corporation ("NTC") and Moyco Technologies, Incorporated ("Moyco"), dated August 29, 1996, NTC and Moyco hereby agree to the following: 1. NTC agrees to supply to Moyco, on an exclusive basis and for a period of five years from the date last written below ("Effective Date"), NTC Nanotek Aluminum Oxide, and Cerium Oxide, on a continuing basis, for use by Moyco in the production of proprietary formulations for the use in chemical mechanical planarization (CMP) of metal and di-electric layers in the production of semiconductor devices ("Product") as per the terms of the Moyco 5 year purchase order. 2. THE PARTIES AGREE TO NEGOTIATE IN GOOD FAITH FOR THE DEVELOPMENT OF ADDITIONAL MATERIALS FOR EXCLUSIVE SALE TO MOYCO, IN THE FUTURE, FOR CMP MARKETS. MOYCO RETAINS THE RIGHT OF FIRST REFUSAL REGARDING NEW NTC PRODUCTS DEVELOPED AND APPLICABLE TO CMP (SUBJECT TO THE AFOREMENTIONED GOOD FAITH NEGOTIATIONS). A RESEARCH AND DEVELOPMENT FEE OF $100,000 OVER A 2 YEARS PERIOD WILL BE PAID TO NTC AS PER THE TERMS AND CONDITIONS OF THE MOYCO 5 YEAR PURCHASE ORDER. 3. Moyco agrees that upon the Effective Date, Moyco shall commence the execution of deliveries of Nanophase products as per the terms of the Moyco 5 year purchase order from NTC. (refer to Schedule1/Delivery Objectives*). 4. Moyco and NTC agree that, should Moyco fail to comply with the terms and conditions of the Moyco five year purchase order, this Purchase and Distribution Agreement may be terminated by NTC upon thirty days notice. In the event that NTC terminates this Agreement and Purchase Order, Moyco shall maintain all rights to place orders and purchase the materials indicated herein on a non-exclusive basis for a period of nine (9) months. 5. Moyco and NTC agree that should NTC fail to meet Moyco specifications, terms, delivery, and conditions, that this Purchase and Distribution Agreement may be terminated by Moyco upon 30 days written notice. 6. NTC futher commits that for all product orders drawn in calender years 1997 and 1998 Moyco shall receive a 3% discount from the prices below; thereafter, on all orders exceeding the contract annual minimum requirements, Moyco shall receive a 5% discount from the prices below. 7. Pricing for the sale of the Product by NTC to Moyco shall be determined soley by NTC. NTC commits that through 12/31/98: the price of Nanotek Aluminum Oxide Product to Moyco shall not exceed $55 per kilogram, and, the price of Nanotek Cerium Oxide shall not exceed $70.00 per kilogram, excepting that through 12/31/2000, the price to Moyco for any order of NTC Product shall not increase by more than the actual increase, if any, in the cost to NTC for feedstock(s) used by NTC for production of such order. 8. The Moyco 5 Year Purchase Order is for ($USD) 30,000,000.00 over a 5 year period; and, is subject to standard Moyco purchsae order terms and conditions. *Schedule 1/Delivery Objectives [NTC shipment rate to Moyco (tons)]:
1097 2097 3097 4097 1997 1998 1999 2000 2001 - -------------------------------------------------------------------------------- Aluminum Oxide (1) (2) (6) (14) (23) (50) (80) (140) (200) - -------------------------------------------------------------------------------- Cerium Oxide (0.1) (0.4) (2.0) (2.5) (4) (8) (16) (20) (30)
Cumulative Objective for 1997: (USD) $1,518,150.00 Agreed: NANOPHASE TECHNOLOGIES CORPORATION MOYCO TECHNOLOGIES, INCORPORATED BY: /S/ Robert W. Cross BY: /S/ Marvin E. Sternberg ------------------------------- -------------------------------- ROBERT W. CROSS PRESIDENT - NTC MARVIN E. STERNBERG, PRESIDENT MOYCO dATE: 2/27/97 DATE: 2/25/97 ----------------------------- ------------------------------- Page 2 of 5 3
ITEM QTY UNITS DESCRIPTION UNIT COST - -------------------------------------------------------------------------- N/A N/A N/A NANOPHASE 5 Year Purchase Order* $30,000,000.00 * refer to Moyco/Nanophase 5 Year Purchase and Distribution Agreement attached and in- corporated herein Payment Terms: 2% - 15 days from Invoice Date; Net 10 R&D PAYMENT TERMS: NET % ON 3/31/97 INVOICE; $5,000.00/MONTH ON 1/31/98 INVOICE MOYCO IMMDEIDATE DRAW OFF OF THE PURCHASE ORDER AS FOLLOWS: ITEM QTY UNITS DESCRIPTION UNIT COST - -------------------------------------------------------------------------- POWDER 1 TONS NTC Nanotek Aluminum Oixde $50,000.00 (Target Delivery Date** 3/22/97) POWDER 0.5 TONS NTC Cerium Oxide $31,815.00 (Target Delivery Date** 3/22/97) R&D 1 N/A CERIA DEVELOPMENT R&D FEE $50,000.00 (Invoice Date: 3/31/97) for work performed through 3/31/97 POWDER 2 TONS NTC Nanotek Aluminum Oxide $100,000.00 (Target Delivery Date** 5/30/97) POWDER 0.5 TONS NTC Cerium Oxide $31,815.00 (Target Delivery Date** 5/30/97) R&D 1 N/A 1998 R&D FEES $50,000.00 (Invoice Date 1/31/98) - -------------------------------------------------------------------------- MOYCO DRAW OBJECTIVES: 1997 CALENDAR QUARTER 3 AND QUARTER 4 POWDER 6 TONS NTC Nanotek Alumium Oxide $300,000.00 (Target Delivery Date**: 1/30/97) POWDER 1.5 TONS NTC Cerium Oxide $95,445.00 (Target Delivery Date**: 8/30/97) POWDER 14 TONS NTC Nanotek Alumium Oxide $700,000.00 (Target Delivery Date**: 11/30/97) POWDER 2 TONS NTC Cerium Oxide $127,260.00 (Target Delivery Date**: 11/30/97) ** within 10 day window Total Calender Year 1997 DRAW OBJECTIVE: $1,586,335
Page 3 of 5 4 - ------------------------------------------------------ 30,000,000.00 Cost Break-Out: *Research and Development Fee of $100,000.00 $ 100,000.00 over a two (2) year period. (Item 2 of the Moyco/ Nanophase 5 Year Purchase and Distribution Agree- ment. *NTC Aluminum Oxide as per the Moyco/Nano- $24,650,000.00 phase 5 year Purchase and Distribution Agreement *NTC Cerium Oxide as per the Moyco/Nano- $ 5,250,000.00 phase 5 year Purchase and Distribution Agreement - --------------------------------------------------------------------------------
NOTATIONS AND AMMENDMENTS: It is hereby formally agreed that this Purchase Order is subject to standard Moyco Terms and Conditions of Sale contained on the reverse side of this purchase Order, as well as all other incorporated documents. Page 4 of 5 5 MOYCO INDUSTRIES INC. TERMS AND CONDITIONS OF PURCHASE 1. ACCEPTANCE: This purchase order constitutes a binding contract on the terms set forth herein when it is accepted by Seller either by acknowledgment or by commencement of performance. No addition, change or modification of this purchase order shall be binding unless made in writing and signed by an authorized representative of Buyer. 2. WARRANTY: Seller expressly warrants that all articles, assemblies, parts and materials delivered under this purchase order will be free from defects in labor, materials or fabrication. This warranty shall run to Buyer, its successors, assigns and customers. All warranties shall be construed as conditions as well as warranties and shall not be deemed to be exclusive. 3. PACKING: All items shall be packed by Seller in suitable containers for protection in shipment and storage. All highly polished, highly finished or precision parts are to be properly greased and packed in containers as protection against deterioration. 4. PATENT INDEMNITY: Seller agrees to idemnify and hold harmless the Buyer and its customers against all claims, demands and liability for actual or alleged infringement of any U.S. or foreign patents, trade-marks or similar right by the materials or articles delivered by the Seller, and the Seller will at its own expense defend any action, suit or claim in which such infringement is alleged, provided Seller is duly notified as to suits or claims against Buyer, and provided further that Seller's idemnity as to use shall not apply to articles delivered made to Buyer's drawings or design. 5. COPYRIGHTS: Seller agrees to grant to Buyer and to the Government a royalty-free right to reproduce, use and disclose any and all copyrighted or coyrightable matter required to be delivered by Seller to Buyer under this purchase order. However, it is not deemed to grant a license under any patent now or hereafter issued or employ any right to reproduce anything else called for under this purchase order. 6. MATERIALS FURNISHED: When Buyer furnishes materials to Seller to be worked upon, Seller will be responsible for the care and safe-guarding of materials furnished by Buyer. All such materials not used shall be disposed of as directed by Buyer. 7. TOOLS AND DRAWINGS: Seller agrees that it will use any designs, tools, patents, drawings, Information and equipment furnished by Buyer only in the production of the articles called for in the purchase order and not otherwise unless written consent has been granted by an authorized representative of the Buyer. Buyer does not warrant the accuracy of tools and fixtures furnished and all work must be in strict accordance with specifications. Upon completion or termination, all items shall be returned to Buyer immediately. 8. LABOR DISPUTES: Whenever an actual or potential labor dispute is delaying or threatens to delay performance of this contract, Seller will immediately give notice thereof to the Buyer and further if this order is a Government contract the Seller shall immediately give notice also to the nearest Government Department concerned. Such notice shall include all relevant information with respect to such dispute. 9. DELAYS: Buyer reserves the right to cancel this order in the event shipments are not made within specified time. Seller willl not, however, be liable for damages occassioned by delays in delivery due to causes beyond Seller's control and without his fault or negligence, provided Seller properly notifies Buyer as soon as such delay becomes evident. 11. TERMINATION (NON-GOVERNMENT ORDERS): Buyer may, at its option, terminate this purchase order in whole or in part at any time by written or telegraphic notice to Seller. Upon termination in whole or in part of the work under this purchase order by Buyer, the Seller will stop work immediately, notify sub contractors to stop work and protect property in Seller's possession in which Buyer has or may acquire an interest. If the parties cannot agree by negotiation within a reasonable time upon the amount of fair compensation to the Seller of such termination, Buyer will pay Seller without duplication: (a) The contract price for articles which have been completed. 12. CONFIDENTIAL: Seller agrees to be responsible within its control for the safeguarding of all secret, confidential or restricted matters in connection with the work to be performed by the Seller and to require a similar agreement of third parties to whom any work in this order may be alloted. 13. COMPLIANCE WITH LAWS: Seller agrees that in the performance of this contract that it will comply with all applicable Federal, State and local laws and executive orders and regulations. 16. SUB-CONTRACTING: The Seller may not sub-contract in whole or in part any portion of this purchase order, except with prior written consent of the Buyer. 17. INSURANCE: Seller agrees to be responsible for any bodily injury or property damage resulting from Seller's performance under this purchase order, and Seller warrants that adequate insurance is being carried to cover such liabilities. Seller agrees to carry fire and extended coverage insurance and be responsible for any of Buyer's property while in Seller's possession. Seller agrees to maintain Buyer's property in good condition and not to dispose of said property except in accordance with Buyer's instructions. 20. PRICE QUALITY: If price is not stated on this order, Seller shall invoice at lowest prevailing market price. Material is subject to MOYCO's inspection, and approval within a reasonable time after delivery. If specifications are not met, material may be returned at Seller's expense and risk for all damages incidental to the rejection Payment shall not constitute an acceptance of the material nor impair MOYCO's right to inspect or any of its remedies. NOTATIONS: 1.) Items 10, 14, 15, 18, 19, and 21 are stricken from this Purchase Order. 2.) Item 11, Sections b and c are stricken from this Purchase Order. 3.) Item 11, Section a (Buyer's Right of Termination) shall apply equally to the Seller subject to the terms stated in Item 4 of Moyco Nanophase 5 Year Purchase and Distribution Agreement. AGREED: /s/ Robert Cross /s/ Marvin E. Sternberg ------------------------------ ----------------------------- Mr. Robert Cross-NTC Mr. Marvin E. Sternberg-MOYCO 2-27-97 2-25-97 ---------------- ------------ DATE DATE Page 5 of 5 6 ADDENDUM TO MOYCO/NANOPHASE 5 YEAR PURCHASE AND DISTRIBUTION AGREEMENT Except as modified by the Moyco/Nanophase Purchase and Distribution Agreement effective as of February 27, 1997, the Marketing Agreement dated August 28, 1996 shall remain in effect. In particular, and without limitation, we confirm that: For as long as this agreement remains in effect, or unless the parties otherwise agree in writing, NTC will not directly or indirectly provide or sell any of the Products to anyone other than Moyco knowingly for use in the Applications. For as long as this agreement remains in effect, or unless the parties otherwise agree in writing, Moyco will not directly or indirectly sell or provide formulations containing aluminum oxide or cerium dioxide other than the Products knowingly for use in the Applications. AGREED: Nanophase Technologies Corporation Moyco Technologies, Incorporated By: /s/ Donald J. Freed By: [SIG] -------------------------------- --------------------------- Donald J. Freed Its: Vice President Its: Vice President -------------------------- Date: March 6, 1997 Date: 3/6/97 ----------------------------- ------------------------- 7 MARKETING AGREEMENT Parties: Nanophase Technologies Corporation ("NTC") 453 Commerce Street Burr Ridge, Illinois 60521 Moyco Technologies, Incorporated ("Moyco") 200 Commerce Drive Montgomeryville, Pennsylvania 10036 Appointment: NTC hereby appoints, and Moyco hereby accepts appointment as NTC's globally-exclusive customer of the Products for the Applications defined below. Products: NTC NanoTek(TM) Aluminum Oxide, in any form as determined by NTC and Moyco to be required for use by Moyco's customers in the Applications defined below (the Products). From time to time, upon mutual agreement between NTC and Moyco, additional applications may be added to this agreement. Applications: Chemical mechanical planation (CMP) of metal layers in the production of semiconductor devices (the Applications). From time to time, upon mutual agreement between NTC and Moyco, additional applications may be added to this agreement. Marketing Objectives: To achieve and maintain a dominant market position for the Products based upon superior performance of the Products within the Applications defined above. Colabrative The parties agree that the primary role of NTC under this Relationship: agreement shall be to provide Products and related technology support to Moyco, and the primary role of Moyco shall be to develop and manufacture formulations for the Applications incorporating the Products, perform the marketing functions, and provide the related customer technical support. Nonetheless, the parties agree to actively confer and collaborate with each other concerning significant issues and activities relating to achievement of the marketing objectives. Responsibilities Establish and maintain appropriate production and of NTC: handling facilities to apply the Products on schedules and in quantities adequate to support the marketing objectives. Use its best efforts to achieve and maintain quality (including elimination of aluminum metal contaminants), technological superiority, and competitive costs of the Products. Secure and utilize such chemical analysis equipment as may be required for this purpose. Actively collaborate with Moyco in efforts to further develop and enhance the Products in support of the marketing objectives. This shall include further refinement of particle size distribution. Secure and utilize such electron microscopy equipment as may be required for this purpose. Actively provide technical and marketing assistance to Moyco in support of the marketing objectives. Employ a dedicated abrasive scientist on the NTC staff. Support shall include but not be limited to: Customer technical presentations. Customer technical support activities. Hosting visits by Moyco customer and prospective customers to NTC facilities . On-going strategic patent review. Enforce all patents relevant to NANOTEK Aluminum Oxide. 8 Responsibilities Use the best efforts to achieve and maintain quality, of Moyco: technological superiority, and competitive costs of its formulations for the Applications. Use its best efforts to diligently market and promote its formulations containing the Products for Applications in support of the marketing objectives. Provide NTC with an initial and rolling schedule of confirmed or planned presentations, samplings and evaluations. On-going and on a current basis, provide NTC with empirical feedback from presentations, samplings and evaluations that are arranged or conducted by Moyco, and otherwise provide NTC with all information available to Moyco concerning Product performance, and concerning market requirements relating to Product performance. Secure and utilize such equipment and facilities as may be required to demonstrate and test formulations for the Applications and to quantify performance. This shall include but not be limited to a CMP metal polishing tool, meteorology equipment and a classroom. Employ technical support staff experienced in CMP polishing and expert in the underlying sciences relevant to the Application. Upon execution of this agreement, order and maintain a buffer inventory of no less than 750 pounds of the Products. This quantity shall be above and beyond Moyco's needs for development, sampling, and customer orders. Upon securing customer orders for production purposes, Moyco shall maintain a buffer inventory of the Products of no less than 750 pounds or the total of estimated customer requirements for two months, whichever is greater. Provide NTC monthly with a rolling six-month forecast and every six months provide NTC with a rolling three-year forecast, of Moyco's Product requirements for the Applications defined above. Mutual For as long as the agreement remains in effect, or unless the parties otherwise agree in writing, NTC will not directly or indirectly provide or sell any of the Products to anyone other than Moyco knowingly for use in the Applications. Exclusivity: For as long as this agreement remains in effect, or unless the parties otherwise agree in writing, Moyco will not directly or indirectly sell or provide formulations containing aluminum oxide other than the Products knowingly for use in the Applications. Pricing: Pricing for the sale of Products by NTC to Moyco shall be determined solely by NTC. NTC commits that through 12/31/97 the price to Moyco for NanoTek(TM) Aluminum Oxide shall not exceed $25 per pound for orders in excess of 2000 pounds with a defined delivery schedule. When Moyco's purchases of the Products reach an average of 2000 pounds per month over a four month period, NTC shall rebate that portion of the price paid for purchases since 1/1/96 which exceeded $25 per pound. The rebate shall be in the form of six pounds of Products to be delivered for each five pounds of product ordered. Pricing for the sale of Products by Moyco to Moyco's customers shall be determined solely by Moyco. Shipping: FOB NTC facility. Disclaimers: NTC assumes no risk or liability involved in the use of the Products, including without limitation liability with regard to third-party patent claims. 9 Term of One year, automatic renewal unless terminated as provided below. Agreement: Termination without cause: six-month notice. Termination for failure to deliver, non-payment, or for material breech of this agreement: Option of non-defaulting party to terminate if failure not cured within 30 days following notice of default. Notices: All notices required or desired to be given hereunder shall be given by hand delivery, or by registered or certified mail, return receipt requested, to the addresses listed above, and shall be effective upon receipt. Proprietary The parties agree to the terms of the confidentiality agreement Rights: executed on 2/1/96. The sale of Products by NTC to Moyco shall not constitute a license from NTC to Moyco. Independent Each party is an independent contractor. Neither party is the Contractors: agent of the other, and neither shall have authority to bind the other. Jurisdiction: All disputes arising out of this Agreement shall be decided by a competent court having jurisdiction over the defendant in accordance with the laws of the state of Illinois applicable to contracts made and to be performed in Illinois. Prior This agreement supersedes the prior agreement of the parties Agreements: dated 2/1/96. AGREED: NANOPHASE TECHNOLOGIES CORPORATION MOYCO TECHNOLOGIES, INCORPORATED By: /s/ Robert W. Cross By: /s/ Marvin Sternberg ------------------------------- -------------------------------- Robert W. Cross, President Marvin Sternberg, President Date: 29 August 1996 Date: August 29, 1996 ----------------------------- ----------------------------- EX-10.14 15 WCO MARKETING AND DISTRIBUTION AGREEMENT 1 Exhibit 10.14 MARKETING and DISTRIBUTION AGREEMENT Nanophase Technologies Corporation of Burr Ridge, Illinois ("NTC") and Whittaker, Clark & Daniels, Inc., of South Plainfield, New Jersey ("Whittaker"), effective November 22, 1995, agree as follows: 1. NTC hereby appoints, and Whittaker hereby accepts appointment, as NTC's exclusive global distributor of the Products (as defined below) for the Applications (as defined below). The scope of this appointment and the nature of the products and applications hereunder may be modified or expanded by mutual agreement of the parties from time to time. 2. The products covered by this agreement are NTC TiO(2) and iron oxide in such form (including coated or dispersed) as may be determined by NTC in its discretion, for use by Whittaker's customers in the Applications defined below (the Products). 3. The applications covered by this agreement are cosmetics and skin care (the Applications). 4. The objective of this agreement is to achieve and maintain a dominant market position for the Products based upon superior performance of the Products within the Applications defined above. 5. The parties agree that the primary role of NTC under this agreement shall be to provide Products and related technology support for the Applications defined above, and the primary role of Whittaker shall be to perform the marketing functions and to provide the related customer support. Nonetheless, the parties agree to actively confer and collaborate with each other concerning significant issues and activities relating to achievement of the marketing objectives. 6 To achieve the objectives of this agreement, NTC agrees to: a. Supply the Products to Whittaker on schedules and in quantities adequate to support the marketing objectives. b. Use its best efforts to achieve and maintain quality, technological superiority, and competitive costs of the Products, and actively provide technical and marketing assistance to Whittaker, in support of the marketing objectives. c. Actively collaborate with Whittaker in efforts to further develop and enhance the Products in support of the marketing objectives. d. Assist Whittaker in the training of Whittaker and customer personnel. e. Assist Whittaker in the preparation of appropriate technical literature. f . Assist Whittaker in technical presentations to Whittaker's customers and prospects. g. Assist Whittaker in customer technical support. h. Assist Whittaker in efforts to obtain any regulatory approvals that may be required. 7. To achieve the objectives of this agreement, Whittaker agrees to: a. Use its best efforts to diligently market and promote the Products in support of the marketing objectives. b. Provide NTC with an initial and rolling schedule of confirmed or planned presentations, samplings and evaluations. c. On-going and on a current basis, provide NTC with empirical feedback from presentations, samplings and evaluations that are arranged or conducted by Whittaker, and otherwise provide NTC with all information available to Whittaker concerning Product performance, and concerning market requirements relating to Product performance. d. Purchase and maintain inventories of Products on schedules and in quantities adequate to support the marketing objectives, including sufficient beginning inventories to support initial sampling and early customer orders, and sufficient on-going inventories to serve as a buffer and to accommodate prompt shipment to customers on a day-to-day basis. 2 e. As soon as practicable after the initial market launch of the Products, place on-going orders with NTC at least six months before expected delivery by NTC. f. Provide NTC monthly with a rolling six-month forecast of Whittaker's Product requirements. g. Provide NTC every 6 months with Whittaker's estimates of the current year's tonnage size and three-year forecast of the total relevant markets. 8. For as long as this agreement remains in effect, or unless the parties otherwise agree in writing, NTC will not directly or Indirectly knowingly sell any of the Products to anyone other than Whittaker for use in the Applications defined above. 9. For as long as this agreement remains in effect, or unless the parties otherwise agree in writing, Whittaker will not directly or indirectly knowingly sell any nanometric TiO(two) other than the Products for use in the Applications defined above. 10. Pricing for the sale of Products by NTC to Whittaker shall be detemmined solely by NTC. Pricing for the sale of Products by Whittaker to Whittaker's customers shall be determined solely by Whittaker. Standard pricing of NTC is FOB the NTC facility. 11. NTC warrants that the Products comply with all applicable federal, state and local laws, regulations and rulings. Specifically, the Products are not adulterated or mislabeled within the meaning of the Food, Drug and Cosmetic Act. NTC further warrants that the Products meet the specifications stated in any lot-specific certificate of analysis. NTC provides no performance warranty and no implied warranty of merchantability or fitness for a particular purpose. NTC is not responsible for consequential damages, and assumes no risk or liability involved in the use of the Products, including without limitation liability with regard to third-party patent claims. All warranties are to Whittaker only, and are limited to the purchase price paid to NTC. 12. The term of this agreement is one year, with automatic renewal unless sooner terminated. Either party may terminate this agreement without cause on six-month notice. In the event of any material breach of this agreement, the non-defaulting party may terminate this agreement if the breach is not cured within 30 days following notice of breach. 13. All notices required or desired to be given hereunder shall be given by hand delivery, or by registered or certified mail, return receipt requested, to the addresses stated below, and shall be effective upon receipt. 14. The parties agree to the terms of the confidentiality and non-use agreement attached hereto. The sale of Products by NTC to Whittaker shall not constitute a license from NTC to Whittaker. 15. Each party is an independent contractor. Neither party is the agent of the other, and neither shall have authority to bind the other. AGREED: Nanophase Technologies Corporation Whittaker, Clark & Daniels, Inc. 453 Commerce Street 1000 Coolidge Street Burr Ridge, Illinois 60521 South Plainfield, NJ 07080 By: /s/ Robert W. Cross By: /s/ Michael C. Argyelan ------------------------ ------------------------------- Robert W. Cross, President Michael C. Argylaen, President 3 CONFIDENTIALITY AND NON-USE AGREEMENT Confidentiality and Non-Use Agreement dated as of November 1, 1995, by and between Nanophase Technologies Corporation, an Illinois corporation ("Nanophase"), and Whittaker, Clark & Daniels, Inc., a corporation located in the state of New Jersey ("Recipient"). Nanophase and Recipient may engage in discussions concerning the Purpose (as defined below). As part of their discussions, Nanophase may disclose Nanophase Proprietary Information (as defined below) to Recipient, and Recipient may disclose Recipient Proprietary Information (as defined below) to Nanophase. Nanophase and Recipient therefore agree as follows: 1. Purpose. The purpose is to negotiate and operate a marketing arrangement relating to applications for nanocrystalline materials ("the Purpose"). 2. Information Covered. This Agreement shall apply to all information of a confidential or proprietary nature disclosed by Nanophase to Recipient ("Nanophase Proprietary Information") or disclosed by Recipient to Nanophase ("Recipient Proprietary Information") regarding the Purpose, whether such information is in tangible or intangible form, provided that all information that is in written form or other tangible medium shall prior to delivery be marked as "Confidential" or "Proprietary", and all information disclosed orally or otherwise shall be identified as being "Confidential" or "proprietary" by a memorandum delivered to the recipient within sixty days after the date of disclosure. Nanophase Proprietary Information and Recipient Proprietary Information are sometimes collectively referred to in this Agreement as the "Proprietary Information". Notwithstanding the foregoing, this Agreement shall not apply to Proprietary Information which is: (a) in the public domain at the time it is disclosed under this Agreement; (b) subsequently published or publicly disclosed by persons other than Nanophase or Recipient; (c) acquired by the recipient from a third person having no obligation of confidentiality toward either Nanophase or Recipient; (d) known to the recipient at the time of disclosure, provided that the recipient shall have the burden of establishing such prior knowledge by competent written proof; (e) developed independently by or on behalf of the recipient, without reliance on or use of any Proprietary Information of the disclosing party; or (f) compelled by law to be disclosed, provided that the recipient shall use its best efforts to give disclosing party ten days prior written notice of compelled disclosure. 3. Non-Use of Proprietary Information. Nanophase agrees that during the term of this Agreement it will not use any Recipient Proprietary Information, and Recipient agrees that during the term of this Agreement it will not use any Nanophase Proprietary Information, without the prior written consent of the disclosing party, except for the Purpose. 4. Non-Disclosure of Proprietary, Information. Nanophase and Recipient each agree to hold all Proprietary Information disclosed to it pursuant to this Agreement in confidence and not to disclose such Proprietary Information to any other person or entity. Notwithstanding the foregoing, Nanophase and Recipient each agree that Proprietary Information disclosed pursuant to this Agreement may be disclosed to its employees but only to the extent that such disclosures are necessary to, and the employees to whom such disclosures are made are engaged in, legitimate activities with respect to the Purpose, and only if such employees have executed and delivered prior to disclosure an agreement of such employees to hold such information in confidence and nether to disclose nor to use such information except as permitted by this Agreement. Nanophase and Recipient each agree to take the same measures to preserve the secrecy and confidentiality of all Proprietary Information disclosed hereunder as in the case of the recipient's own most closely guarded trade secrets and proprietary information. 4 5. Ownership: Not a License. All Nanophase Proprietary Information shall remain the sole and exclusive property of Nanophase, and all Recipient Proprietary Information shall remain the sole and exclusive property of Recipient. This Agreement shall not be construed as a license, or an obligation to negotiate a license, permitting the recipient to use the disclosing party's Proprietary Information, except for the Purpose. Nanophase and Recipient each acknowledge that the rights granted under this Agreement do not include any rights under, interest in, or title to any patent applications that may be filed or have been filed by or assigned to the disclosing party in connection with the Proprietary Information, or patents that may issue therefrom. Nanophase and Recipient each further acknowledge and agree that (a) this Agreement shall not be construed as limiting in any way the right of the disclosing party to enter into agreements from time to time which grant the right under patents or patent applications to commercialize technology developed by the disclosing party, and (b) the rights to commercial applications of the Proprietary Information may have been, or may be, granted to another party. 6. Return of Documents. All Nanophase Proprietary Information in the possession of Recipient, and all Recipient Proprietary Information in the possession of Nanophase, including without limitation written materials and other information contained in a tangible medium of expression (including without limitation magnetic or optical recordings), any copies, extracts, summaries, compilations or abridgments thereof, shall be returned to the disclosing party immediately at the request of the disclosing party, and shall in any case be returned immediately in the event that the purpose is no longer being pursued. Notwithstanding the foregoing provision, Recipient's legal counsel may retain one copy of Nanophase Proprietary Information, and Nanophase's legal counsel may retain one copy of Recipient Proprietary Information, in its respective confidential files for archival purposes. 7. Successors and Assigns. This Agreement shall be binding on the parties and their successors and assigns, provided that neither Nanophase nor Recipient shall assign any of its rights under this Agreement to any other party without the prior written consent of the other party. 8. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Illinois applicable to contracts made and to be performed entirely within the State of Illinois. 9. Remedies. Because of the confidential and proprietary nature of the Proprietary Information that is subject to this Agreement, the parties agree that this Agreement may be enforced by injunction, specific performance, or other equitable relief, without prejudice to any other rights and remedies that the parties may have hereunder. 10. Notices. All notices required or desired to be given hereunder shall be deemed delivered when given by hand delivery, or three days after deposit for delivery by United States registered or certified mail, return , receipt requested, to the addresses listed below the parties' signatures, and shall be effective upon delivery. 11. Severability. In the event that any court or any governmental authority or agency declares all or any part of any section of this Agreement to be unlawful or invalid, such unlawfulness or invalidity shall not serve to invalidate any other section of this Agreement, and in the event that only a portion of any section is so declared to be unlawful or invalid, such unlawfulness or invalidity shall not serve to invalidate the balance of such section. 12. Term of Agreement. The obligations of the parties hereunder shall terminate five years from the last disclosure of Proprietary Information under this Agreement. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. Nanophase Technologies Corporation Whittaker, Clark & Daniels, Inc. 453 Commerce Street 1000 Coolidge Street Burr Ridge, Illinois 60521 South Plainfield, NJ 07080 By: /s/ Robert W. Cross By: /s/ Michael C. Argyelan ------------------------------- ------------------------------ Robert W. Cross, President Michael C. Argyelan, President EX-10.15 16 DISTRIBUTION AGREEMENT - C.I. KASEI 1 [NANOPHASE LOGO] EXHIBIT 10.15 DISTRIBUTION AGREEMENT Nanophase Technologies Corporation of Burr Ridge, Illinois (NTC) and C.I. Kasei Co., Ltd., of Tokyo, Japan (CIK) effective October, 30, 1996, agree as follows: WHEREAS, CIK desires to have the exclusive right for one year to explore the opportunity for distributing NTC Products (as defined below) in the Territory (as defined below) upon the terms and conditions set forth in this Agreement; and WHEREAS, for such consideration and upon such terms as hereinafter set forth, NTC is willing to grant such right to CIK; THEREFORE, NTC and CIK hereby agree as follows: 1. For the period of one year from the effective date hereof, NTC hereby appoints, and CIK hereby accepts appointment, as NTC's exclusive distributor in the Territory (as defined below) for the Products (as defined below) for use in the Applications (as defined below). The first half year shall be a period mainly for the preparation of marketing such as sample distribution to the potential customers, obtaining the evaluation results from the customer, narrowing down the range of the Products to each customer, establishing the marketing plan, etc., and the second half year shall be a period for starting regular supply to the potential customers based on the preparation of the marketing during the first half year, provided however, that CIK will make regular supply of the Products to customers during said first half year upon receipt of orders from such customers. The scope of this appointment and the nature of the products hereunder may be modified by mutual agreement of the parties from time to time during the term of this Agreement. 2. For the purpose of protecting the exclusive right and opportunity of CIK hereunder, NTC agrees for one year from the effective date hereof to refrain from appointing or negotiating with any other distributor or potential distributor in such Territory for such Products for use in such Applications. As consideration for the agreement of NTC to so refrain from such appointments and negotiations for such period, CIK agrees to pay NTC the non-refundable sum of $50,000. Such amount shall be fully earned by NTC upon the effective date hereof and shall be paid within two weeks after the effective date hereof. 3. The parties acknowledge that the purpose of distributing such Products in such Territory is to achieve and maintain dominant market positions for such Products based upon superior performance of such Products in such Applications. 4. The Products covered by this Agreement are NTC titanium dioxide, iron oxide, aluminum oxide and zinc oxide, in such forms as may be determined by NTC in its discretion, for use by CIK's customers (the Products). 5. The Territory is Asian countries, including, but not limited to, China, India, Japan, Korea, Malaysia, the Philippines, Singapore and Taiwan (the Territory). 6. The Applications covered by this Agreement are all applications except cosmetics, skin care and aluminum oxide in any form for use in chemical/mechanical planarization (CMP) of metal layers in the production of semiconductor (devices the Applications). 7. The parties agree that the primary role of NTC under this Agreement shall be to provide Products and related technology support for the Products, and the primary role of CIK shall be to perform the marketing functions and to provide the related customer support. Nonetheless, the parties agree to actively confer and collaborate with each other concerning significant issues and activities relating to achievement of the marketing objectives. 8. To achieve the objectives of this Agreement, NTC agrees to: a. Supply the Products to CIK on schedules and in quantities adequate to support the marketing objectives. 2 [NANOPHASE LOGO] b. Use its best efforts to achieve and maintain quality, technological superiority, and competitive costs of the Products, and actively provide technical and marketing assistance to CIK in support of the marketing objectives, including without limitation assisting CIK in the preparation of appropriate technical literature, training of CIK and customer personnel, and technical presentations to CIK customers and prospects. c. Actively collaborate with CIK in efforts to further develop and enhance the Products in support of the marketing objectives. d. Assist CIK in efforts to obtain any regulatory approvals that may be required. 9. To achieve the objectives of this Agreement, CIK agrees to: a. Use its best efforts to diligently market and promote the Products in support of the marketing objectives. b. Provide NTC with an initial and rolling schedule of confirmed or planned presentations, samplings and evaluations. c. On-going and on a current basis, provide NTC with empirical feedback from presentations, samplings and evaluations that are arranged or conducted by CIK, and otherwise provide NTC with all information available to CIK concerning Product performance, and concerning market requirements relying to Product performance. d. Within one month after the effective date of this Agreement, purchase, on a L/C basis, 1500 kgs of the Products for Immediate shipment, selected from aluminum oxide, iron oxide, titanium dioxide and Zinc oxide at the price agreed to by NTC as follows: Price, $/Kg (FOB NTC Plant Burr Ridge, IL) Alumina 55 Iron oxide 53 Titanium dioxide 53 Zinc oxide 47 The assortment of the Products shall be fixed by CIK when it issues its purchase order hereunder. e. Purchase and maintain inventories of Products on schedules and in quantities adequate to support the marketing objectives, including sufficient on-going inventories to serve as a buffer and to accommodate prompt shipment to customers on a day-to-day basis. f. As soon as practicable after initial market launch of the Products, place on-going orders with NTC at least three months before expected delivery by NTC. g. Provide NTC monthly with a rolling six-month forecast of CIK's Product requirements. h. Provide NTC every 3 months with CIK's estimates of the current year's tonnage size and one-year forecast of the total relevant markets. 10. For as long as this Agreement remains in effect, unless the parties otherwise agree in writing, NTC will not directly or indirectly knowingly sell any of the products to anyone other than CIK for use in the Territory, except that NTC shall retain its right to sell any of the Products in the Territory for use in cosmetics, skin care applications or aluminum oxide in any form for use in chemical/mechanical planarization (CMP) of metal layers in the production of semiconductor devices. 11. For as long as this Agreement remains in effect, unless the parties otherwise agree in writing, CIK will not directly or indirectly, knowingly sell any products, including, but not limited to, nanometer-sized products, which could, in NTC's sole opinion, compete with the Products for use in the applications. 3 [NANOPHASE LOGO] 12. Pricing for the sale of Products by NTC to CIK shall be determined solely by NTC. Pricing for the sale of Products by CIK to CIK's customers shall be determined solely by CIK. Standard posing of NTC is FOB the NTC facility. 13. NTC warrants that the Products meet the specifications stated in any lot-specific certificate of analysis. NTC provides no performance warranty and no implied warranty of merchantability or fitness for a particular purpose. NTC is not responsible for consequential damages, and assumes no risk or liability involved in the use of the Products, including without limitation liability with regard to third party patent claims. However, NTC warrants and represents to the best of its knowledge there exists no valid third-party patent which will cover the Products and that NTC will do its best to avoid third-party patent claims against the Products. All warranties by NTC are to CIK only, and are limiteded to the purchase price paid to NTC. 14. In the event of any material breach of this Agreement, the non-defaulting party may terminate this Agreement if the breach is not cured within 30 days following notice of breach. 15. The term of this Agreement shall be automatically extended for one year without additional payment by CIK unless either party shall send to the other party a written notice not to extend this Agreement 30 days prior to the expiration of this Agreement. In the event that the distribution arrangement between the parties is further extended by mutual agreement beyond the term hereof, and in the event that sales of Products in the Territory increase to the point where manufacturing in the Territory becomes appropriate to accommodate customer demand, as determined by mutual agreement between the parties, the parties agree to negotiate in good faith concerning the local production in the form of joint venture or any other form of local production in the Territory, as determined by mutual agreement by the parties. 16. This Agreement shall be governed by and construed in accordance with the laws of the State of Illinois. 17. All notices required or desired to be given hereunder shall be given by hand delivery, or by registered or certified mail, return receipt requested, to the addresses stated below, and shall be effective upon receipt. 18. The parties agree to the terms of the confidentiality and non-use agreement executed on August 13, 1996. The sale of Products by NTC to CIK shall not constitute a license from NTC to CIK. 19. Each party is an independent contractor. Neither party is the agent of the other, and neither shall have authority to bind the other. AGREED: Nanophase Technologies Corporation C. I, Kasei Co., Ltd. 453 Commerce Street 18-1, 1-Chome, Kyobashi, Chuo-ku Burr Ridge, lllinois 60521 Tokyo, Japan By: /s/ Donald J. Freed By /s/ Shigeo Sano - ----------------------------- --------------------------- Donald J. Freed, Vice President Shigeo Sano, Senior Managing Director EX-10.16 17 PURCHASE AGREEMENT 1 EXHIBIT 10.16 PURCHASE AGREEMENT Parties: Nanophase Technologies Corporation ("NTC) 435 Commerece Street Burr Ridge, Illinois 60621 LWT Instruments, Inc ("LWT") #100, 630 - 4 Avenue S.W. Calgary, Alberta T2P0J9 Appointment: NTC hereby appoints,, and LWT hereby accepts appointment, as NTC's globally- exclusive customer of the Product for the Application defined below. Product: Abrasion-resistant composite applied by filament winding comprising Shell 862 resin and NTC NanoTek(R) Aluminum Oxide of at least 20% by weight, having a viscosity of less than 2500 centipoise at application conditions, and capable of providing abrasion resistance equal to, or greater than Armorstone Caratrowel Ceramic Lining Compound in the application, for use by LWT in the production of oil field tubulars and progressive cavity pump/motor stators for use in the Application defined below (the product). Application: Down hole data logging in the oil well industry. Responsibilities Establish and maintain appropriate production and handling facilities to supply the Of NTC: Product on schedules and in quantities adequate to support the rerquirements. Resopnsilities Within four months of the execution of this agreement, execute orders for LWT's of LWT: requirements for the Product, but in no case at a rate of less that 150 gallons of Product per month for a period of no less than 10 months. Mutual For as long as this agreement remains in effect or unless the parties otherwise agree in Exclusivity: writing, NTC will not knowingly, directly or indirectly, provide or sell the Product to anyone other than LWT for use in the Application. Pricing: NTC commits that through 12/31/97, the price to LWT for the Product shall not exceed $250 per gallon, FOB NTC Plant, for orders in excess of 150 gallons with a defined delivery schedule and that Product requiring NTC Nanotek(R) Aluminum Oxide at concentrations greater than 30% by weight shall have the aforementioned price increased by an amount no greater than NTC's actual cost for such additional NTC Nanotek(R) Aluminum Oxide required. Disclaimers: NTC assumes no risk or liability involved in the use of the Products, including without limitation liability with regard to third-party patent claims. Term of Three years unless terminate as provided below with renewal for additional one year Agreement: periods by mutual written agreement, between the parties. Termination or failure to deliver, non-payment, or for material breach of this amendment: Option of non- defaulting party to terminate if failure not cured within 30 days following notice of default. Notices: All notices required or desired to be given hereunder shall be given by hand delivery, or by registered or certified mail, return receipt requested, to the addresses listed above, and shall be effective upon receipt. Proprietary The parties agree to the terms of the confidentiality agreement executed on 12/11/96. Rights: The sale of Product by NTC to LWT shall not constitue a license from NTC to LWT. Independent Each party is an independent contractor. Neither party is the agent of the other, and Contractors: neither shall have authority to bind the other. Jusidiction: All disputes arising out of this Amendment shall be decided by a competent court having jurisdiction over the defendant in accordance with the laws of the state of Ilinois applicable to contracts made and to be performed in Illinois. Agreed:
NANOPHASE TECHNOLOGIES CORPORATION LWT, INCORPORATED By: /s/ Donald J. Freed By: /s/ Dan Fonerieau ----------------------------- ---------------------------- Donald J. Freed, Vice President Dan Fonerieau, Director Date: JANURARY 31, 1997 Date: Feb 3/97 ----------------------------- ---------------------------- Dan Fonerieau, Director EX-11 18 COMPUTATION OF PER SHARE EARNINGS 1 EXHIBIT 11 STATEMENT REGARDING COMPUTATION OF LOSS PER SHARE
YEAR ENDED SIX MONTHS ENDED DECEMBER 31 JUNE 30 ------------------------------------------- --------------------------------- 1994 1995 1996 1996 1997 (Unaudited) HISTORICAL: Weighted average common shares outstanding 77,586 77,586 77,586 77,586 77,586 Net effect of dilutive stock options based on the treasury method 534,540 534,540 534,540 534,540 534,540 ----------- ---------- ----------- ----------- ----------- Total 612,126 612,126 612,126 612,126 612,126 Net loss $(1,287,772) $(1,959,874) $(5,577,688) $(2,912,275) $(2,290,788) Net income (loss) per common share $ (2.10) $ (3.20) $ (9.11) $ (4.76) $ (3.74) YEAR ENDED SIX MONTHS ENDED DECEMBER 31, 1996 JUNE 30,1997 ----------------- ------------------- PRO FORMA: Weighted average common shares outstanding 77,586 77,586 Weighted average preferred shares outstanding 6,758,094 7,410,685 Net effect of dilutive stock options based on the treasury method 534,540 534,540 ----------- ----------- Total 7,370,220 8,022,811 Net income (loss) $(5,577,688) $(2,290,788) Pro forma net loss per share $ (.76) $ (.29)
EX-23.1 19 CONSENT OF ERNST AND YOUNG LLP 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" and to the use of our report dated January 31, 1997, except as to Note 16, as to which the date is September 30, 1997, in the Registration Statement (Form S-1) and related Prospectus of Nanophase Technologies Corporation dated March 13, 1997. /s/ ERNST & YOUNG LLP Ernst & Young LLP Chicago, Illinois October 1, 1997 EX-23.3 20 CONSENT OF MCANDREWS, HELD & MALLOY 1 EXHIBIT 23.3 [LETTERHEAD OF MCANDREWS, HELD & MALLOY, LTD.] October 1, 1997 Robert W. Cross, President and Chief Executive Officer Nanophase Technologies Corporation 453 Commerce Street Burr Ridge, Illinois 60521 Re: Form S-1 Registration Statement Our File Nanophase/71297 We hereby consent to be named as an expert in the "Legal Matters" and "Experts" sections of the Registration Statement on Form S-1 filed with the Securities and Exchange Commission by Nanophase Technologies Corporation. Very truly yours, /s/ ROBERT W. FIESELER --------------------------- Robert W. Fieseler EX-27 21 FINANCIAL DATA SCHEDULE
5 6-MOS DEC-31-1997 JUN-30-1997 2,490,130 0 1,040,641 0 420,274 3,833,847 2,391,458 667,498 6,271,808 1,335,659 0 0 17,898,688 450 12,962,989 6,271,808 1,032,467 1,032,467 2,162,081 3,355,002 0 0 0 (2,290,788) 0 (2,290,788) 0 0 0 (2,290,788) 0 0
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