LZ D. ea r. JUL MART/Al C. l 0 i 2003 FOR THE NORTHERN DISTRICT OF ILLINOI S IN THE UNITED STATES DISTRICT COURT EASTERN DIVISION

Transcription

1 tits' IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOI S GEORGE TATZ, individually and on behal f of all others similarly situated, EASTERN DIVISION Civil Action No. 01 C 8440 ea r l 0 i 2003 LZ D JUL MART/Al C. N UNITED STAr S MAGlSTp 01 A7 A E S DISr RrCT 1c CpURT JUDG E Plaintiff, STIPULATION OF SETTLEMEN T Magistrate Judge Martin C. Ashman vs. NANOPHASE TECHNOLOGIE S CORPORATION, JOSEPH CROSS, JES S JANKOWSKI, DANIEL S. BILICKI, an d GINA KRITCHEVSKY, Defendants. 63

2 This Stipulation of Settlement dated as of July 25, 2003 (the "Stipulation"), is made and entered into by and among : (i) Lead Plaintiff George Tatz ("Lead Plaintiff'), (ii) the Class (as defined herein)(the "Class" and "Lead Plaintiff' are collectively referred to as "Plaintiffs" unless otherwise noted), and (iii) defendants Nanophase Technologies Corporation ("Nanophase" or the "Company"), and Joseph Cross ("Cross"), Jess Jankowski ("Jankowski"), Daniel S. Bilicki ("Bilicki"), and Gina K itchevsky ("Kritchevsky"), Company officers and directors during the Class Period (as herein defined) (the "Individual Defendants" and, collectively with the Company, "Defendants"), by and through their counsel of record in the Litigation. All Parties to this Stipulation, including all Plaintiffs and Defendants, shall collectively be referred to as the "Parties" or the "Settling Parties." The Stipulation is intended by the Settling Parties to fully, finally and forever resolve, discharge and settle the Released Claims and Released Defendants' Claims (as defined herein), upon and subject to the terms and conditions hereof, and subject to the approval of the Court. 1.. THE LITIGATION A. Commen cement of the Action and Preliminary Motion s On November 2, 2001, a putative federal securities class action was filed in the United States District Court for the Northern District of Illinois, Eastern Division, on behalf of a class of persons who purchased the stock of Nanophase between April 5, 2001 and October 24, 2001 (the "Class Period") and were allegedly injured thereby. Following publication in accordance with the Private Securities Litigation Reform Act of 1995 ("PSLRA"), on February 5, 2002, motions for the appointment of Lead Plaintiff and Plaintiffs' Lead Counsel came on for hearing and were taken under advisement. Thereafter, pursuant to 21D(a)(3)(B) of the Securities Exchange Act of 1934 (the "Exchange Act"), (as amended by the PSLRA), the Court appointed George Tatz as Lead Plaintiff. Pursuant to 21(D)(a)(3)(B)(v) of the Exchange Act (as amended by the PSLRA), the Court also appointed Glancy & Binkow LLP as Plaintiffs' Lead Counsel and Pomerantz Haudek Block Grossman & Gross LLP as Liaison Counsel. B. The Claims Asserted By Plaintiffs -1-

3 On March 8, 2002, Lead Plaintiff, on behalf of those persons who purchased the common stock of Nanophase during the Class Period, filed an Amended Class Action Complaint ("ACAC"), naming as defendants Nanophase, Cross, Jankowski, Bilicki and Kritchevsky, and seeking relief for violations of Sections 10(b) and 20(a) of the Exchange Act. The ACAC alleged, inter alia, that just prior to the Class Period, Defendants had allegedly improperly announced a sale in first quarter 2001 to an unnamed customer and, during the Class Period, had allegedly prematurely recorded revenue on the sale in alleged violation of both Generally Accepted Accounting Principles and the Company 's published revenue recognition policy. The Class Period closed when Defendants announced they had reversed the transaction. Plaintiffs allege that they were injured by their purchase of Nanophase shares during the Class Period at prices which were alleged to be artificially inflated not only by the alleged improperly recorded sale, but by Defendants' announcement that the sale represented the first order of a longer-term relationship with the unnamed customer. C. Conduct Of The Litigation Prior To Settlemen t On April 12, 2002, Defendants filed a motion to dismiss the ACAC for failure to state a claim, asserting that the ACAC failed to meet the pleading requirements of Federal Rules of Civil Procedure 9(b) and 12(b)(6) and of the PSLRA. On May 10, 2002, Plaintiffs opposed Defendants' motion. Defendants filed reply papers in support of their motion on May 31, By Memorandum Opinion and Order dated October 9, 2002, the Court denied Defendants' motion. In the following weeks and months the matter was extremely active. Specifically : 1. On October 16, 2002, the Court granted Defendants' motion to enlarge their time to file an answer to the ACAC, granting Defendants leave to file their answer by November 12, 2002 ; 2. On October 17, 2002, Defendants made an Offer of Judgment in an amount deemed sufficient to satisfy Mr. Tatz's individual damages claim; -2-

4 3. On October 22, 2002, the Court ordered that Plaintiff' s motion for class certification be fled no later than one month after Defendants' answer; 4. On November 12, 2002, Defendants filed their Answer to the ACAC, denying all wrongdoing and liability as to both causes of action and asserting a number of affirmative defenses. 5. On December 12, 2002, Lead Plaintiffs motion for class certification was timely filed ; 6. During the month after Lead Plaintiff's class ce rtification motion was filed, the Parties engaged in extensive discovery, to wit : Mr. Tatz, the proposed class representative, produced documents and interrogatory responses and sat for a deposition. While class discovery was proceeding, Plaintiffs began merits discovery, serving an extensive set of document production requests on Defendants and reviewing thousands of pages produced in response ; 7. Defendants moved for, and were granted, on February 11, 2003, the issuance of a Letter of Request to conduct discovery in Great Britain pursuant to the Hague Convention ; 8. On February 12, 2003, Defendants' filed their papers in opposition to class certification ; 9. On March 11, 2003, after receiving an enlargement of time, Plaintiffs filed their reply papers in support of their motion for class certification ; 10. On March 19, 2003, Defendants filed a motion to strike a declaration filed in support of Plaintiffs' class certification motion ; 11. On March 25, 2003, Plaintiffs' motion for class certification and Defendants ' motion to strike came on for hearing before the Honorable Wayne R. Andersen. The Court referred Defendants' motion to the Honorable Martin C. Ashman, Magistrate Judge, and took Plaintiffs' motion for class certification under advisement. -3-

5 12. Following the March 25, 2003 class certification hearing, the Parties initiated settlement discussions. 13. On April 2, 2003, the case was referred to Magistrate Judge Ashman for the purpose of conducting settlement negotiations with the Parties. 14. On April 17, 2003, Magistrate Judge Ashman issued an Order requiring the Parties to exchange settlement position papers in advance of a Settlement Conference to be held on June 11, On June 11, 2003, with the assistance of Magistrate Judge Ashman, the Parties were able to reach an agreement in principle to settle the Litigation for the sum of $2,500, On June 12, 2003, Lead Plaintiffs motion for class certification pursuant to Federal Rule of Civil Procedure 23(b)(3) was granted by the Court. The Parties have agreed to file this Stipulation of Settlement and all other necessary related documents to obtain preliminary and final approval of the Settlement. D. Defendants ' Denials Of Wrongdoing And Liability Defendants expressly deny each and all of the claims and contentions specifically allege d by the Plaintiffs in the litigation, and raise a number of affirmative defenses to Plaintiffs' claims in their Answer. Defendants contend, inter alia, that neither Lead Plaintiff nor the Class has suffered any alleged damage, and that the price of Nanophase common stock was never artificially inflated during the Class Period by reason of alleged material misrepresentations, nondisclosures or otherwise. Defendants also contend that, in any case, their conduct was at all times in good faith and at no time did any of them intentionally or recklessly make misrepresentations or omissions of material fact. Further, Defendants generally deny all charges of wrongdoing or liability against them arising out of any of the conduct, statements, acts or omissions alleged, or that could have been alleged, in the Litigation. Nonetheless, Defendants concluded that further conduct of the Litigation would be distracting, protracted, and expensive, and that it is desirable that the Litigation be fully an d -4-

6 finally settled in the manner and upon the terms and conditions set forth in this Stipulation. Defendants have taken into account the uncertainty and risks inherent in any litigation, especially in complex cases like this Litigation. Defendants have, therefore, determined that it is desirable and beneficial to them that the Litigation be settled in the manner and upon the terms and conditions set forth in this Stipulation. In no event shall this Stipulation, or its related documents, be construed as or deemed to be evidence of or an admission or concession on the part of any Defendant, or any of Defendants' Corresponding Released Parties (defined below), with respect to any claim or any fault or liability or wrongdoing or damage whatsoever. Defendants, and each of them, shall not assert or pursue any action, claim or rights that any other Party hereto or their Related Parties (defined below) violated any provision of Rule 11 of the Federal Rules of Civil Procedure. Further, Defendants, and each of them, will not deny in any statement made to any media representative that the Litigation is being settled voluntarily after consultation with competent counsel. Defendants and their Counsel agree that the Litigation was resolved in good faith, following arms' length bargaining, confers substantial benefits upon the Class and, based upon their evaluation, is in the best interests of the Defendants as well as Lead Plaintiff and the Class. E. Lead Plaintiff's Evaluation Of the Class's Claims And The Benefits Of Settlement Lead Plaintiff believes that the claims asserted in the Litigation have merit and that th e evidence developed to date, including a review of thousands of documents, supports the claims alleged in the ACAC. Additionally, Plaintiffs' Lead Counsel in the Litigation have researched the applicable law with respect to Plaintiffs ' claims and believe they could successfully refute any defenses raised by Defendants. However, both Lead Plaintiff and Plaintiffs' Lead Counsel recognize and acknowledge the expense and length of continued proceedings necessary to prosecute the Litigation against the Defendants through t rial and any subsequent appeals including, but not limited to, the need for the Parties to conduct costly discovery in Great Britain. Lead Plaintiff and Plaintiffs' Lead Counsel have also taken into account the unce rtain outcome and the risk of any litigation, especially in complex actions such as this Litigation, as well as the -5-

7 difficulties and delays inherent in such litigation. Plaintiffs' Lead Counsel are particularly mindful of the inherent problems of proof of both damages and Defendants' state of mind, two of the elements required to establish the underlying federal securities law violations asserted in the Litigation. This Stipulation shall in no event be construed or deemed to be evidence of a concession by Plaintiffs of any infirmity in the claims asserted in the Litigation. Plaintiffs, and each of them, shall not assert or pursue in any action, claim or rights that any other Party hereto or their Related Parties (defined below ) violated any provision of Rule 11 of the Federal Rules of Civi l Procedure. Further, Lead Plaintiff and Plaintiffs' Lead Counsel, and each of them, will not deny in any statement made to any media representative that the Litigation is being settled voluntarily after consultation with competent counsel. Lead Plaintiff and Plaintiffs ' Lead Counsel agree that the Litigation was resolved in good faith, following arms ' length bargaining. Lead Plaintiff and Plaintiffs' Lead Counsel believe that the Settlement set forth in the Stipulation confers substantial bene fits upon the Class and, based on their evaluation, that the Settlement set forth in the Stipulation is fair, reasonable and adequate, and thus in the best interests of the Lead Plaintiff and the Class. it. TERMS OF STIPULATION AND AGREEMENT OF SETTLEMEN T NOW, THEREFORE, IT IS HEREBY STIPULATED AND AGREED by and among Lead Plaintiff and the Class, and each of them, and Defendants, and each of them, by and through their respective undersigned counsel that, subject to approval of the Court pursuant to Rule 23(e) of the Federal Rules of Civil Procedure, in consideration of the benefits flowing to the Settling Parties from the Settlement set forth herein, that the Litigation, the Released Claims and the Released Defendants' Claims shall be finally and fully compromised, settled and released, and the Litigation shall be dismissed with prejudice, as to all Parties, upon and subject to the terms and conditions of this Stipulation. 1. Definitions As used in the Stipulation the following terms have the meanings specified below. -6-

8 1.1 "Authorized Claimant" means any Class Member whose claim for recovery has been allowed pursuant to the terms of the Stipulation. 1.2 "Claimant" means any Class Member who files a Proof of Claim in such form and manner, and within such time, as the Court shall prescribe. 1.3 "Claims Administrator" means the firm of The Garden City Group, Inc. 1.4 "Class" means the class certified by the Court on June 12, 2003, to wit : "All Persons or entities who purchased or acquired Nanophase Technologies Corporation ("Nanophase" or "Corporation") common stock during period from April 5, 2001, through and including October 24, 2001 (the "Class Period"), and were damaged thereby. Excluded from the class are the defendants, their affiliates and any officers or directors of Nanophase or its affiliates, and any members of immediate families and their heirs, successors and assigns (the "Class")." 1.5 "Class Member" or "Member of the Class" means a Person who falls within the definition of the Class, as set forth in 1.4 above, and who has not filed a valid request to be excluded from the Class. 1.6 "Court" means the United States District Court for the Northern District of Illinois, Eastern Division. 1.7 "Defendants" mean Nanophase Technologies Corporation, Joseph Cross, Jess Jankowski, Daniel S. Bilicki and Gina Kritchevsky. 1.8 "Defendants' Counsel" means the law firm of Wildman, Harrold, Allen & Dixon. 1.9 "Effective Date" means the first date by which all of the events and conditions specified in 7.1 of the Stipulation have been met and have occurred "Escrow Agent" means The Garden City Group, Inc "Final" means : (i) The date of final affirmance on any appeal of the Judgment, the expiration of the time for a petition for or a denial of any writ of certiorari to review any appellate determination of the Judgment and, if certiorari is granted, the date of final affirmance of the Judgment following review pursuant to that grant ; or (ii) the date of final dismissal of any appeal from the Judgment or the final dismissal of any proceeding on certiorari to review any appellat e -7-

9 determination of the Judgment; or (iii) if no appeal is filed, the expiration date of the time for the filing or noticing of any appeal from the Court's Judgment approving the Stipulation substantially in the form of Exhibit B attached hereto ; i.e., thirty (30) days after entry of the Judgment. Any proceeding or order, or any appeal or petition for a writ of certiorari pertaining solely to any plan of allocation and/or application for attorneys' fees, costs or expenses and/or application for a class representative award, shall not in any way delay or preclude the Judgment from becoming Final "Judgment" means the final judgment and order of dismissal with prejudice to be rendered by the Court, substantially in the form attached hereto as Exhibit B "Lead Plaintiff' means George Tatz "Notice" means the Notice of Pendency and Proposed Settlement of Class Action and Settlement Hearing Thereon, which is to be sent to members of the Class substantially in the form attached hereto as Exhibit A "Notice Order" or "Order for Notice and Hearing" means the proposed order preliminarily approving the Settlement and directing notice thereof to the Class substantially in the form attached hereto as Exhibit A " Parties" or " Settling Parties" means Lead Plaintiff, the Class and the Defendants "Person" means an individual, corporation, partnership, limited partnership, association, joint stock company, estate, legal representative, trust, unincorporated association, government or any political subdivision or agency thereof, and any business or legal entity and their spouses, heirs, predecessors, successors, representatives, or assignees "Plaintiffs' Counsel" means counsel who have appeared for the plaintiffs in the Litigation "Plaintiffs' Lead Counsel" or " Plaintiffs' Settlement Counsel" means Glancy & Binkow LLP, 1801 Avenue of the Stars, Suite 311, Los Angeles, California 90067, Telephone (310)

10 1.20 "Plan of Allocation" means a plan or formula of allocation of the Settlement Fund whereby the Settlement Fund shall be distributed to Authorized Claimants after payment of expenses of notice and administration of the Settlement, Taxes and Tax Expenses and such attorneys' fees, costs, expenses and interest as may be awarded by the Court. Any Plan of Allocation is not part of the Stipulation and Defendants and their Related Parties shall have no responsibility or liability with respect thereto "Proof of Claim" means the Proof of Claim and Release to be submitted by Claimants, substantially in the form attached as Exhibit A "Publication Notice" means the Summary Notice of Pendency and Proposed Settlement of Action and Settlement Hearing Thereon to be published on the Business Wire, substantially in the form of Exhibit A "Related Parties" means each of the Settling Parties and each of their past or present directors, officers, employees, partners, members, principals, agents, insurers, coinsurers, reinsurers, controlling shareholders, attorneys, associates, personal or legal representatives, predecessors, successors, parents, subsidiaries, divisions, joint ventures, assigns, spouses, heirs, related or affiliated entities, any entity in which a Settling Party has a controlling interest, any members of their immediate families, or any trust of which any Settling Party is the settlor or which is for the benefit of any Settling Party and/or member(s) of his family "Released Claims" shall collectively mean all claims (including "Unknow n Claims" as defined in 1.34 below), demands, rights, liabilities and causes of action in law or in equity, accrued or unaccrued, fixed or contingent, direct, individual or representative, of every nature and description whatsoever, whether based on federal, state, local, statutory or common law or any other law, rule or regulation, including the law of any jurisdiction outside the United States, known or unknown, whether or not concealed or hidden, asserted in the Litigation or that might have been asserted in the Litigation, including, without limitation, claims for negligence, gross negligence, breach of duty of care and/or breach of duty of loyalty, fraud or breach of fiduciary duty, by Lead Plaintiff or any Class Member, or any of their Related Parties, against th e -9-

11 Defendants or any of the Defendants' Related Parties, or any of them, arising out of, based upon or related to both the purchase or acquisition of the shares of Nanophase by any Class Member during the Class Period and the facts, transactions, events, occurrences, acts, disclosures, statements, omissions or failures to act which were or could have been alleged in the Litigation, based upon the facts which were alleged "Released Defendants' Claims" means all claims (including "Unknown Claims " as defined in 1.30 below), demands, rights, liabilities or causes of action, in law or in equity, accrued or unaccrued, fixed or contingent, direct, individual or representative, of every nature and description whatsoever, whether based on federal, state, local, statutory or common law or any other law, rule or regulation, including the law of any jurisdiction outside the United States, known or unknown, whether or not concealed or hidden, asserted in the Litigation or that might have been asserted in the Litigation, against the Lead Plaintiff, the Class, and their Related Parties, or any of them, arising out of, based upon or related to both the purchase and/or sale of Nanophase common stock during the Class Period, and the facts, transactions, events, matters, occurrences, acts, disclosures, statements, misrepresentation, omissions or failures to act which were or could have been asserted or alleged in the Litigation, belonging to Defendants and Related Parties, or any of them, that relate in any way to the Litigation or its institution, prosecution, or Settlement. However, Released Defendants' Claims do not include any claims which have been brought or might be brought by any of the Defendants against Celox Ltd., Oxonica Ltd., Envirox Resources Ltd. or any of their Related Parties related to or arising out of any transactions or agreements between or among Nanophase Technologies Corporation and those persons and entities, whether such occurred prior to, during, or after the Class Period "Released Parties" means Lead Plaintiff, the Class, Defendants, and each of thei r Corresponding Released Parties. "Corresponding Released Parties" shall mean any and all of these Defendants' or Plaintiffs' respective present or past heirs, executors, estates, administrators, predecessors, successors, assigns, parents, subsidiaries, associates, affiliates, employers, employees, agents, consultants, insurers, reinsurers, directors, managing directors, officers, -10-

12 partners, principals, members, attorneys, shareholders, legal representatives, successors in interest, assigns and Persons, firms, trusts, corporations, officers, directors, or other individuals or entities in which any Defendant or Plaintiff has a controlling interest or which is related to or affiliated with any of the Defendants or Plaintiffs and any other representatives of any of these Persons or entities "Settled Claims" means all of the Released Claims and Released Defendants' Claims against the Released Parties and their Corresponding Released Parties "Settlement Fund" means the principal amount of Two Million Five Hundred Thousand Dollars ($2,500,000) paid pursuant to 2.1 of the Stipulation and delivered to the Escrow Agent, plus any interest accrued thereupon after payment "Settling Parties" means, collectively, each of the Defendants and the Lead Plaintiff on behalf of himself and the members of the Class "Unknown Claims" means any Released Claims or Released Defendants' Claim s which any Settling Party, and any or all other Persons and entities whose claims are being released, does not know or suspect to exist in his, her or its favor at the time of the release of the Released Parties which, if known by him, her or it, might have affected his, her or its Settlement with and release of the Released Parties, or might have affected his, her or its decision not to object to this Settlement. Upon the Effective Date, the Settling Parties, and all other Persons and entities whose claims are being released, shall be deemed to have, and shall have, expressly waived and relinquished, to the fullest extent permitted by law, the provisions, rights and benefits of 1542 of the California Civil Code, which provides as follows : A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor. Lead Plaintiff and Defendants have, and each of the Class Members shall be deemed to have and - by operation of the Judgment - shall have, expressly waived any and all provisions, rights and benefits conferred by any law of any state or territory of the United States, or principle of common law, which is similar, comparable and equivalent to California Civil Code The Settling Parties may hereafter discover facts in addition to or different from those which he, -11-

13 she or it now knows or believes to be true with respect to the subject matter of the Released Claims and/or the Released Defendants' Claims, but Lead Plaintiff and each Defendant shall expressly and each Class Member, upon the Effective Date, shall be deemed to have, and - by operation of the Judgment - shall have, fully, finally, and forever settled and released any and all Released Claims and Released Defendants' Claims, known or unknown, suspected or unsuspected, contingent or non-contingent, whether or not concealed or hidden, which now exist, or heretofore have existed upon any theory of law or equity now existing or coming into existence in the future, including, but not limited to, conduct which is negligent, intentional, with or without malice, or a breach of any duty, law or rule, without regard to the subsequent discovery or existence of such different or additional facts. Lead Plaintiff and Defendants acknowledge, and the Class Members shall be deemed by operation of the Judgment to have acknowledged, that the foregoing waiver of Unknown Claims was separately bargained for and a key element of the Settlement of which this release is a part. 2. The Settlement a. The Settlement Fund 2.1 The sum of $2,500,000 in cash (the "Cash Settlement Amount"), will be transferred to the Escrow Agent no later than thirty (30) calendar days following entry of the Preliminary Approval Order by the Court. The Cash Settlement Amount will be deposited into a third-party interest-bearing account, to be held on behalf of the Class, pending disbursement, in the name of the "Nanophase Securities Litigation Settlement Fund" at an institution designated by the Escrow Agent (the "Escrow Account"). The Cash Settlement Amount and any interest earned thereon after transfer of the amount to the Escrow Agent shall be the "Settlement Fund." b. Handling and Disbursement of Funds by the Escrow Agent Date except : 2.2 No monies will be disbursed from the Settlement Fund until after the Effective (a) As provided in 2.7 below, consistent with prior order of the Court ; and -12-

14 (b) To pay Taxes and Tax Expenses (as defined in 2.8 below) on the income earned by the Nanophase Securities Litigation Settlement Fund. Taxes and Tax Expenses shall be paid out of the Settlement Fund, shall be considered to be a cost of administration of the Settlement and shall be timely paid by the Escrow Agent without prior Order of Court. 2.3 The Escrow Agent shall invest the Settlement Fund deposited pursuant to 2. 1 above, in excess of $100,000, in instruments backed by the full faith and credit of the United States Government or fully insured by the United States Government or an agency thereof and shall reinvest the proceeds of these instruments as they mature in similar instruments at their then-current market rates. Any funds held in escrow in an amount of less than $100,000 maybe held in an interest-bearing account insured by the FDIC. The Escrow Agent shall bear all risks related to investment of the Settlement Fund. 2.4 The Escrow Agent shall not disburse the Settlement Fund except as provided in the Stipulation, by an order of the Court, or with the written agreement of counsel for Defendants and Plaintiffs' Lead Counsel. 2.5 Subject to further orders and/or directions as may be made by the Court, the Escrow Agent is authorized to execute such transactions on behalf of the Class Members as are consistent with the terms of the Stipulation. 2.6 All funds held by the Escrow Agent shall be deemed and considered to be in custodia le&is of the Court, and shall remain subject to the jurisdiction of the Court, until such time as such funds shall be distributed pursuant to the Stipulation and/or further order(s) of the Court. 2.7 After transfer of the Settlement Fund to the Escrow Agent pursuant to 2.1 hereof, the Escrow Agent may establish a "Class Notice and Administration Fund," and may deposit up to $62,500 from the Settlement Fund in it. The Class Notice and Administration Fund may be used by Plaintiffs' Lead Counsel to pay costs and expenses reasonably and actually incurred in connection with providing notice to the Class, locating Class Members, soliciting Class claims, assisting with the filing of claims, administering and distributing the Settlement Fund t o -13-

15 Authorized Claimants, processing Proof of Claim and Release forms and paying escrow fees and costs, if any. The Class Notice and Administration Fund may also be invested and earn interest as provided for in 2.3 of this Stipulation. c. Taxes 2.8 Settling Parties and the Escrow Agent agree to treat the Settlement Fund as being at all times a "qualified settlement fund" within the meaning of Treas. Reg. Sec B-1. In addition, the Escrow Agent shall timely make such elections as necessary or advisable to carry out the provisions of this 2.8, including the "relation-back election" (as defined in Treas. Reg. See B-1) back to the earliest permitted date. Such elections shall be made in compliance with the procedures and requirements contained in such regulations. It shall be the responsibility of the Escrow Agent to timely and properly prepare and deliver the necessary documentation for signature by all necessary Parties, and thereafter to cause the appropriate filing to occur. (a) For the purpose of 468B of the Internal Revenue Code of 1986, as amended, and the regulations promulgated thereunder, the "administrator" shall be the Escrow Agent. The Escrow Agent shall timely and properly file all informational and other tax returns necessary or advisable with respect to the Settlement Fund (including without limitation the returns described in Treas. Reg. Sec B-2(k)). Such returns (as well as the election described in 2.8(a) hereof) shall be consistent with this 2.8 and in all events shall reflect that all Taxes (including any estimated Taxes, interest or penalties) on the income earned by the cash portion of the Settlement Fund shall be paid out of the Settlement Fund as provided in 2.8(c) hereof. (b) Defendants, their attorneys and insurers, and all their Related Parties shal l have no liability or responsibility for any taxes (including any estimated Taxes, interest or penalties) arising with respect to the income earned by the Settlement Fund, including any Taxes or tax detriments that may be imposed upon the Defendants or their counsel with respect to any income earned by the Settlement Fund for any period during which the Settlement Fund does not qualify as a "qualified settlement fund" for federal or state income tax purposes ("Taxes"). Al l -14-

16 (a) Taxes and (b) expenses and costs incurred in connection with the operation and implementation of this 2.8 (including, without limitation, expenses of tax attorneys and/or accountants and mailing and distribution costs and expenses relating to filing (or failing to file) the returns described in this 2.8) ("Tax Expenses"), shall be paid out of the Settlement Fund ; in all events the Defendants and their counsel and their Related Parties shall have no liability or responsibility for the Taxes or the Tax Expenses. The Escrow Agent shall indemnify and hold each of the Defendants and Defendants' Counsel, their Related Parties, and person(s) and/or entities paying the Settlement Fund harmless for Taxes and Tax Expenses (including, without limitation, Taxes payable by reason of any such indemnification). Further, Taxes and Tax Expenses shall be treated as, and considered to be, a cost of administration of the Settlement Fund and shall be timely paid by the Escrow Agent out of the Settlement Fund without prior order from the Court, and the Escrow Agent shall be obligated (notwithstanding anything herein to the contrary) to withhold from distribution to Authorized Claimants any funds necessary to pay such amounts including the establishment of adequate reserves for any Taxes and Tax Expenses (as well as any amounts that may be required to be withheld under Treas. Reg. Sec B-2(l)(2)); neither the Defendants nor Defendants' Counsel nor their Related Parties are responsible nor shall they have any liability therefor. The Parties hereto agree to cooperate with the Escrow Agent, each other, and their tax attorneys and accountants to the extent reasonably necessary to carry out the provisions of this 2.8. (c} For the purpose of this 2.8, references to the Settlement Fund shall include both the Settlement Fund and the Class Notice and Administration Fund and shall also include any earnings thereon. d. Termination of Settlement 2.9 Lead Plaintiff, on behalf of the Class, or Defendants, and any of them, shall have the right to terminate the Settlement and this Stipulation by providing written notice of their election to do so ("Termination Notice") to all other Parties hereto within thirty (30) days of (i) the Court's declining to enter the Order Preliminarily Approving Settlement and Providing for -15-

17 Notice and Hearing in any material respect; (ii) the Court's refusal to approve this Stipulation or any material part of it ; (iii) the Court's declining to enter the Final Order and Judgment in any material respect; (iv) the date upon which the Final Order and Judgment is modified or reversed in any material respect by the Court of Appeals or the Supreme Court ; or (v) the date upon which an Alternative Judgment (defined in 7.1(d) below) is modified or reversed in any material respect by the Court of Appeals or the Supreme Court Additionally, each Defendant shall have the option to withdraw from this Stipulation without prejudice on the terms and under the conditions set forth in the Supplemental Stipulation to be filed under seal and referenced in $1 2 and 4 of the Preliminary Approval Order If a case is commenced in respect of any Defendant under Title 11 of the Unite d States Code or a trustee, receiver or conservator is appointed under any similar law, and a court of competent jurisdiction enters a final order determining the transfer of money to the Escrow Account of any portion thereof on behalf of such Defendant to be a preference, voidable transfer, fraudulent transfer or similar transaction and any portion thereof is thus required to be returned, and such amount is not promptly deposited to Settlement Fund by other Defendants, then, at the election of Plaintiffs' Lead Counsel, the Settling Parties shall jointly move the Court to vacate and set aside the releases given and Final Order and Judgment dismissing the Litigation entered pursuant to this Stipulation and Settlement, which releases and Final Order and Judgment shall be null and void, and the Parties shall be restored to their respective positions in the litigation as of June 11, 2003, and any cash amounts in the Escrow Account shall be returned in the manner set forth in 7.4(b) and Notice Order And Settlement Hearin 3.1 Promptly after execution of the Stipulation, Plaintiffs' Lead Counsel shall submi t the Stipulation together with its Exhibits to the Court and shall apply for entry of the Order Preliminarily Approving Settlement and Providing for Notice and Hearing, substantially in the form of Exhibit A attached hereto, requesting, inter alia, preliminary approval of the Settlement set forth in the Stipulation, and approval for the mailing and publication of a settlement notic e -16-

18 (the "Notice"), substantially in the form of Exhibits A-1 and A-3 attached hereto, which shall include the general terms of the Settlement set forth in the Stipulation, the proposed Plan of Allocation, the general terms of the Fee and Expense Application as defined in 6.1 below and the date of the Settlement Hearing as defined below. 3.2 Plaintiffs' Lead Counsel shall request that, after notice is given, the Court hold a hearing (the "Settlement Hearing") and approve settlement of the Litigation as set forth herein. At or after the Settlement Hearing, Plaintiffs' Lead Counsel also will request that the Court approve the proposed Plan of Allocation and the Fee and Expense Application. 4. Releases 4.1 The obligations incurred pursuant to this Stipulation shall be a full and final disposition of the Litigation, any and all Released Claims and any and all Released Defendants' Claims as against all Released Parties and their Corresponding Released Parties. 4.2 Upon the Effective Date, as defined in 1.9 hereof, Lead Plaintiff and the Class, on behalf of themselves and their Corresponding Released Parties, shall be deemed to have, and by operation of the Judgment shall have, fully, finally, and forever released, relinquished and discharged all Released Claims against Defendants, and each of them, and any and all of their Corresponding Released Parties, whether or not any individual Class Member executes and delivers the Proof of Claim. Delivery of a Proof of Claim and Release executed by a Class Member, which is substantially in the form contained in Exhibit A-2 attached hereto, shall release all Released Claims against the Released Defendants and their Corresponding Released Parties. 4.3 Upon the Effective Date, as defined in 1.9, Defendants, and each of them, on behalf of themselves and their Corresponding Released Parties shall be deemed to have, and by operation of the Judgment shall have, fully, finally, and forever released, relinquished and discharged all Released Defendants' Claims against Lead Plaintiff, all Class members, and any of them, and any and all of those Parties' Corresponding Released Parties including, but not limited to, Plaintiffs' Counsel. -17-

19 5. Administration And Calculation Of Claims, Final Awards And Supervision And Distribution Of Settlement Fund 5.1 Under the supervision of Plaintiffs' Lead Counsel, acting on behalf of the Class, and subject to such supervision and direction of the Court as may be necessary or as circumstances may require, the Claims Administrator shall administer and calculate the claims submitted by Class Members and shall oversee distribution of the Net Settlement Fund (defined below) to Authorized Claimants. 5.2 The Settlement Fund shall be applied as follows : (a) To pay the Taxes and Tax Expenses described in 2.8 hereof; (b) To pay all the costs and expenses reasonably and actually incurred in connection with providing notice, locating Class Members, soliciting Class claims, assisting with the filing of claims, administering and distributing the Settlement Fund to Authorized Claimants, processing Proof of Claim and Release forms and paying escrow fees and costs, if any; (c) To pay Plaintiffs' Counsel's attorneys' fees, expenses and costs with interest thereon (the "Fee and Expense Award"), if and to the extent allowed by the Court; and (d) To distribute the balance of the Settlement Fund (the "Net Settlemen t Fund") to Authorized Claimants as allowed by the Stipulation, the Plan of Allocation, or the Court. 5.3 Upon the Effective Date and thereafter, and in accordance with the terms of the Stipulation, the Plan of Allocation, or such further approval and further order(s) of the Court as may be necessary or as circumstances may require, the Net Settlement Fund shall be distributed to Authorized Claimants, subject to and in accordance with the following : (a) Any Person falling within the definition of the Class may be excluded from the Class by submitting to the Claims Administrator a request for exclusion ("Request for Exclusion"), which complies with the requirements set forth in 12 of the Preliminary Approval Order, Exhibit A hereto, and is postmarked no later than October 29, All Persons who submit valid and timely Requests for Exclusion shall have no rights under Stipulation, shall not share in distribution of the Net Settlement Fund, and shall not be bound by the Stipulation or the -18-

20 Judgment. However, a Class member may submit a written revocation of a Request for Exclusion up until the Bar Date (defined below) and receive payments pursuant to this Stipulation and Settlement provided the Class member also submits a valid Proof of Claim, as se t forth in subparagraph 5.3(b), below, prior to the Bar Date. (b) Within 90 days of the mailing of the Notice (or the first business day thereafter if the 90t" day falls on a weekend day or national holiday), or such other time as maybe set by the Court, each Person claiming to be an Authorized Claimant shall be required to submit to the Claims Administrator a completed Proof of Claim and Release, substantially in the form of Exhibit A-2 attached hereto, signed under penalty of perjury and supported by such documents as specified in the Proof of Claim and Release, or such other documents or proof, as are reasonably available to the Authorized Claimant, as Plaintiffs' Lead Counsel, in their discretion, may deem acceptable. (c) Except as otherwise ordered by the Court, all Class Members who fail t o timely submit a Proof of Claim and Release by the Bar Date, or such other period as may be ordered by the Court, or otherwise allowed, or who file a Proof of Claim that is rejected, shall be forever barred from receiving any payments pursuant to this Stipulation and Settlement, but will in all other respects be subject to and bound by the provisions of this Stipulation, the releases contained herein, and the Judgment and will be barred and enjoined from bringing any action against the Released Parties concerning the Settled Claims. (d) Simultaneously herewith, Plaintiffs' Lead Counsel and Defendants ' Counsel are executing a "Supplemental Stipulation," to be filed under seal, setting forth certain conditions under which this Stipulation may be withdrawn or terminated by any of the Defendants if, prior to the Settlement Hearing, Persons beneficially owning an agreed upon percentage of the total publicly-traded stock of Nanophase traded during the Class Period (who otherwise would be Class Members) have submitted valid and timely Requests for Exclusion. For the purposes of determining whether the conditions set forth in the Supplemental Stipulation have occurred, copies of all Requests for Exclusion timely received, together with copies of all -19-

21 written revocations of Requests for Exclusion, shall be delivered to Defendants' counsel within three (3) calendar days of receipt by Plaintiffs' Lead Counsel but in no event later than ten (10) court days before the Settlement Hearing. In the event of a withdrawal from this Stipulation in accordance with the terms of the Supplemental Stipulation, this Stipulation shall become null and void and of no further force and effect and the provisions of 12.9 shall apply. Notwithstanding the foregoing, the Stipulation shall not become null and void as a result of the election by any of the Defendants to exercise their option to withdraw from the Stipulation pursuant to the Supplemental Stipulation until the conditions set forth in the Supplemental Stipulation have been satisfied. 5.4 This is not a claims-made Settlement. Defendants may not recoup any portion o f the Settlement Fund in the event the Court enters the Judgment approving the Settlement, except as provided for in this Stipulation or the terms of the Supplemental Stipulation. The Net Settlement Fund shall be distributed to the Authorized Claimants substantially in accordance with a Plan of Allocation to be described in the Notice and approved by the Court. However, if there is any balance remaining in the Net Settlement Fund after six (6) months from the date of distribution of the Net Settlement Fund (whether by reason of tax refunds, uncashed checks or otherwise), Plaintiffs' Lead Counsel shall reallocate such balance among Authorized Claimants in an equitable and economic fashion. Thereafter, any balance which still remains in the Net Settlement Fund shall be donated to an appropriate non-profit organization approved by the Court. 5.5 Defendants and their counsel and their Related Parties (except as provided in 2.8 and 7.4) shall have no responsibility for, interest in, or liability whatsoever with respect to the investment or distribution of the Net Settlement Fund, the Plan of Allocation, the determination, administration, or calculation of claims, the payment or withholding of Taxes, or any losses incurred in connection therewith. Defendants' Counsel shall cooperate in the administration of the Settlement to the extent necessary to effectuate its terms. -20-

22 5.6 No Person shall have any claim against Plaintiffs' Counsel, the Claims Administrator, or any other agent appointed by Plaintiffs' Lead Counsel, based on the distributions made substantially in accordance with the Stipulation and the Settlement containe d therein, the Plan of Allocation, or further orders of the Court. 5.7 It is understood and agreed by the Settling Parties that any proposed Plan o f Allocation of the Net Settlement Fund including, but not limited to, any adjustments to an Authorized Claimant's claim set forth therein, is not a part of the Stipulation and is to be considered by the Court separately from the Court's consideration of the fairness, reasonableness and adequacy of the Settlement set forth in the Stipulation, and any orders or proceedings relating to the Plan of Allocation shall not operate to terminate or cancel the Stipulation or affect the finality of the Court's Judgment approving the Stipulation and the Settlement set forth therein, or any other orders entered pursuant to the Stipulation. 6.. Plaintiffs ' Counsel's Attorneys' Fees And Reimbursement Of Expenses 6.1 Lead Plaintiff or Plaintiffs' Lead Counsel may submit an application o r applications (the "Fee and Expense Application") for distributions to Plaintiffs' Counsel from the Settlement Fund for: (a) an award of attorneys' fees not to exceed thirty percent (30%) of the Cash Settlement Amount ; plus (b) reimbursement of actual expenses, including the fees and expenses of any experts or consultants, incurred in connection with prosecuting the Litigation (including costs of notice and Settlement administration), plus any interest accrued on such attorneys' fees, costs and expenses while held in the Settlement Fund until disbursement at the same rate as earned by the Settlement Fund as may be awarded by the Court. Plaintiffs' Lead Counsel reserve the right to make additional applications for expenses incurred. 6.2 The attorneys' fees, expenses and costs, including the fees and expenses of experts and consultants, as awarded by the Court, shall be paid to Plaintiffs' Lead Counsel from the Settlement Fund, as ordered, immediately after the Effective Date (as defined in this Stipulation). Plaintiffs' Lead Counsel shall thereafter allocate the attorneys' fees between Plaintiffs' Counsel i n -21-

23 a manner in which they in good faith believe reflects the contributions of such counsel to th e prosecution and settlement of the Litigation. 6.3 Defendants and their Related Parties shall have no responsibility for, and n o liability whatsoever with respect to, any payment to Plaintiffs' Lead Counsel or any other counse l or Person who receives payment from the Settlement Fund. 6.4 Defendants and their Related Parties shall have no responsibility for, and no liability whatsoever with respect to, the allocation among Plaintiffs' Counsel and/or any other Person who may assert some claim thereto, of any Fee and Expense Award that the Court may make in the Litigation. 7. Conditions Of Settlement, Effect Of Disapproval, Cancellation O r Terminatio n 7.1 The Effective Date of the Stipulation shall be conditioned on the occurrence of al l of the following events : (a) Defendants have timely made their contributions to the Settlement Fund a s required by 2.1 hereof; (b) The Court has entered the Notice Order, substantially in the form attached hereto as Exhibit A ; (c) The Court has approved the Settlement, following notice to the Class and a hearing, as provided in Rule 23 of the Federal Rules of Civil Procedure, and the Court ha s entered the Judgment, or a judgment substantially in the form of Exhibit B attached hereto ; and (d) The Judgment has become Final, as defined in 1.11 above, or, in the event that the Court enters a judgment in form other than that provided above ("Alternative Judgment") and which has the consent of the Parties, when such Alternative Judgment become s Final. 7.2 Upon the occurrence of all of the events referenced in 7.1 hereof, any and al l remaining interest or right of Defendants in or to the Settlement Fund, if any, shall be absolutel y and forever extinguished. -22-

24 7.3 If some or all of the conditions specified in 7.1 are not met, or in the event that this Stipulation is not approved by the Court, or the Settlement set forth in the Stipulation is terminated or fails to become effective in accordance with its terms, then this Stipulation shall be canceled and terminated subject to 7.6 hereof unless Plaintiffs' Lead Counsel and counsel for Defendants mutually agree in writing to proceed with the Stipulation. None of the Settling Parties, or any of them, shall have any obligation whatsoever to proceed under any terms other than provided for and agreed herein. If any Party engages in a material breach of the terms hereof, any other Party, provided that it is in substantial compliance with the terms of this Stipulation, may terminate this Stipulation on notice to all of the Settling. Parties. 7.4 Unless otherwise ordered by the Court, if this Stipulation is terminated or fails to become effective for the reasons set forth in 7.1 and 7.3, above, the Settling Parties shall be restored to their respective positions in the Litigation as of June 11, In such event : (a) Any Judgment or other order entered by the Court in accordance with the terms of this Stipulation shall be treated as vacated, nunc pro tune ; (b) The Cash Settlement Amount, less any Taxes or Tax Expenses due with respect to any interest earned by the fund and less expenses actually incurred and disbursed, pursuant to 2.7 or 2.8 hereof, or due and owing in connection with notice costs and administration of the Settlement provided for herein, shall be returned to Defendants by the Escrow Agent within fifteen (15) business days after written notification of such event is sent by counsel for Defendants. At the written request of Defendants' counsel, the Escrow Agent or its designee shall apply for any tax refund owed to the Settlement Fund and pay the proceeds, after deduction of any fees or expenses incurred in connection with such application(s) for refund, to the Defendants. 7.5 No order of the Court or modification or reversal on appeal of any order of the Court concerning the Plan of Allocation or the amount of any attorneys' fees, expenses and interest awarded by the Court to the Lead Plaintiff or to any Plaintiffs' Counsel shall constitute grounds for cancellation or termination of the Stipulation, unless the Court otherwise orders. -23-